Sunday, April 13, 2008

Indian economy & the rising cost of development in a globalised world:- some unanswered questions

As oil prices stay over $100 a barrel thanks to the members of OECD ;who do not face any qualms about cutting off oil supply , when needed and profiteering at the cost of the common good; India is forced to step into an economic crisis.

For about two years, the oil ministry has been resisting pressure in raising the domestic price of petrol and petroleum products. But it has to raise it now as absorbing it further would only weaken the fundamental structure of the economy beyond fiscal repair. The recent hike in petrol prices only partially covers the rise in crude prices with the subsdies for LPG, Kerosene remaining enormously high.

Coupled with this is the worry of rising food prices as inflation cross 7%, a three-year high. The global food & commodity prices are also up. It is being said that due to increasing search for alternative fuel , more agricultural land is being allocated to production of bio-fuel thereby restricting the supply of food .The prime minister, Dr. Manmohan Singh in a public function recently commented that the food and the oil market is getting increasingly linked.
If oil prices go up in India , the inflation figure will refuse to come down in the next two quarters. That will not only hurt the common man badly but might also affect the fortunes of the ruling government. Possibly the only way government will react in the short term is to reduce money supply by hiking CRR and/or interest rate. That will surely hurt growth figures in the medium term and the projection of the finance minister of achieving 8.4% growth in the year 2008-09 will have to be revised to a lower figure.

In the long term, the pressure will be on increasing yield per acreage figures in the farm sector as well in the non-farm sector . Automation of processes, delivery of higher output at a lower cost , consolidation & scaling up of land for farm production will have to be achieved to keep the inflation monster within check. All these will require considerable investment both in the state-controlled organisations as well as in the corporate. But if the interest rate is hiked , investors will find it hard to justify the increasing cost of borrowings to fund these activities. Automation will also mean job losses & rising unemployment . The farmers will need high-yield seeds, better fertilisers, availability of power for irrigation but will find it difficult to cope with the increasing cost of borrowing & inflation. The outsourcing industry will also be under pressure to deliver the same service at a lower cost , thereby hurting its margins.

Internationally, the American market appears to be a heading for a deep recession and the European & American manufacturers will surely look at Asian markets to offset the loss in revenue. Pressures will be on India to reduce tariff barriers thereby hurting its indirect tax revenue. Secondly, the interest rate differential with developed countries is too high for India to ignore and not lower the interest rate.

What will the Indian government & RBI do in an election year ?
Will it raise the oil prices to refelct the actual increase in crude?
Will it increase the interest rate or will it lower it ?
Will the RBI buy up useless low-valued dollars from the market to arrest the falling exchange rate ( rupee to a dollar) and enhance competitiveness of exporters?
Will it put the pressure back on the developed countries and ask for reduction of trade barriers of Indian farm goods and services?

Will the Indian stock market finally show the true worth of companies by factoring in the correct growth figures for the FY0809 & FY0910 instead of the hyped-up figures currently being circulated by the brokers?

Time will surely give the answers but what seems certain, this way or the other, is that the “aam junta” will have to endure more hardships for reasons beyond their control.


Anonymous said...

If we grow with a higher inflation, it is like the BJP's highly publicised "India Shining " campaign. It is like growing with a deep sense of unhappiness and suffering. Common man is hurt the most, by inflation and the economic growth and all other stats means nothing to him. My view is that the economic growth can be slow, but it should not be at the expense of the sufferings of the poor people.

Salty said...

Hi Ark,

I see your point. But then inflation could be a sustained longterm problem if growth is arrested now. India's main problem is demand of a huge population. If we slow down building our capacity to supply then we are in for a bigger menace. But since politics rules over economics , in India and elsewehere too, I guess we can expect a hike in interest rate in an election year.