Wednesday, November 18, 2009

Inflation in Indian Economy 2009

Price Rise. It started with the poultry products & sugar nearly an year back & now the malady has spread even to basic food commodities like rice, pulse,vegetables, bread, milk etc.. The price rise has been near about 30% based on market price although the Consumer Price Index (CPI) reflects around 11 %. Even the Wholesale Price Index (WPI) of minerals,metals & fuel reflect a largely deflated figure of 3% whereas the market prices of certain commodities like zinc etc. has risen by nearly 30% in last nine months alone.
The Indian economy is going through quite uncharted waters. With a projected GDP growth of 6% in 2009-10 & inflation rate (based on WPI) around 6% , one can not only expect market inflation rate to be sustained around 25-30% but this inflation may also be a handy tool for the RBI to increase the interest rate . The stock market is showing typical irrational volatility (although only punters seem to notice a method in the madness). An example would be the rapid appreciation of IT stocks in spite of the rupee appreciating vis-a-vis the dollar.
It is a question in every body's mind as to when, if at all, the dollar would strengthen. From the posturing of the US administration, it does appear that US-China ties are now purely focused on restraining the Chinese from making the Yuan fully convertible as well as on continuation of Chinese investment in US treasury bills .
Does that mean the market has factored in the expected depreciation of rupee in the next 4-6 months? Is the stock market always right? Internationally, operations of large-scale rapid-entry-and-exit type investors have started significantly affecting the stock market in emerging markets like India, Brazil etc. Even in commodity exchanges, this tendency is visible.
The Indian industry do seem to fulfill the growth expectations of the stock market as its operating on a low base on an year-to-year basis but the effect should die down in the next two quarters. With consumer demand of automobiles, white & brown goods still not showing any signs of dramatic recovery, it kind of appears contrived that traders & retailers are focusing on profiteering in the essential commodity market of food . The silence of the finance minister on the price rise is definitely intriguing. The absence of any confidence building measure undertaken by the government to arrest the price rise is that much more painful.
The 1 Rupee coin in the extreme right hand of the picture is marked 2009 at the back. In an economy where demand side is ruling (as opposed to supply-side economy in 2002-05) & inflation is hardening ; focus should be made to generate more & more domestic demand by exploring all possibilities of employment. Without it, the economy is bound to suffer as shrinkage of demand in essential commodities will shrink the economy even further. It may not take long ,then ,for the 1 rupee coin to attain the same size & mass of the other two coins in the picture (the first one is a 1 paisa bronze coin of 1957 & the second one a 10 paisa coin of 1988).

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