Indian Economy: News and Discussion (June 8 2008)

Prem · Post by **Prem** » 26 Jun 2008 00:45

Despite price rise, 9% growth can be maintained: Montek
NEW DELHI: Even with inflation hitting double digits, Planning Commission deputy chairman Montek Singh Ahluwalia on Tuesday said India would be able to maintain 9% growth in the medium-term. "I believe the 9% growth rate that we are talking about for the Indian economy can be maintained even with present level of oil prices though some added measures will be needed," he said
http://timesofindia.indiatimes.com/Indi ... 162140.cms

Ananth · Post by **Ananth** » 26 Jun 2008 00:59

Acharya wrote:This ICICI bank is part owned by the Rockefellers and the Abu Dhabi Bank.

Can you defend your assertion? Define "part". If a rat is going to take a crap, you will see Rockefeller's hand in it also.

svinayak · Post by **svinayak** » 26 Jun 2008 01:21

Port of Antwerp Considering Investment in Indian Ports
Europe's second-biggest port, Port of Antwerp, said last week that it is considering investing in Indian ports and offering consulting services as well.

China's Li & Fung Expected to More than Double India Sourcing
Chinese conglomerate Li & Fung Group said it is studying India's logistics and retail sectors to expand its presence in the country. The company, engaged in distribution, retail, logistics, private equity and properties businesses, added that it expects to more than double its sourcing from India in the next three years.

Trade Restrictions Give India Poor Ranking on World Bank Survey
The World Bank has termed New Delhi's trade regime as "much more restrictive" than its peer emerging economies like Brazil, China, and Russia, and ranked the country 117 out of 125 countries surveyed in a recent poll.

Indian SMEs Optimistic About Growth in 2008
A new study by UPS finds that small and medium-sized enterprises (SMEs) in India are more optimistic about global trade and growth than other business leaders in the Asia Pacific region.

Suraj · Post by **Suraj** » 26 Jun 2008 01:39

Folks, please continue the emphasis on solid discussions on this thread. Talk about the Rockefellers, Rothschilds etc do not contribute much.

Forcing a slowdown

The decision by the Reserve Bank of India (RBI) to hike both the repo rate and the cash reserve ratio (CRR) by 50 basis points on Tuesday would have come as a surprise to most people, not because the RBI did something but because of the strength of the move. This is because it apparently contradicted the RBI Governor, Y. V. Reddy's, indications on Monday that he was inclined to a cautious, calibrated approach to the inflation problem, ruling out sharp and sudden moves.

That the inflation rate crossed the 11 per cent level indicated that something more was going on. Part of the explanation lies in the fact that the rupee has depreciated sharply in recent months, causing the domestic price of imports to increase. This has virtually neutralised the impact of the duty cuts announced in April, and which in any case have put an additional burden on the fisc, already beleaguered by mounting subsidy bills. The question now is whether intensifying the monetary response will work to deal with inflation, and at what cost.

The demand-supply equation in the money market was in balance till now. Sucking out Rs 38,000 crore over the next month, through the imposition of a higher CRR, will therefore tighten money supply noticeably. That would have sent up interest rates, even without the hike in the repo rate. This is also a time when the demand for credit has been strong, in part because companies have switched funding from the stock market (now cool to IPOs) to the debt market. The RBI has now said that the debt market too is going to be more expensive. In short, the pressure on companies to slow down borrowing, and therefore economic activity, will be clearly felt.

Even in the absence of monetary measures, the rising costs of energy and other inputs were taking their toll of corporate margins, causing many of them to defer or scale down their investment plans. Consumers hit by rising prices are also likely to re-allocate their household budgets to reduce spending on discretionary goods and services, and to delay the purchase (say) of that new car. While the monetary tightening and higher cost of credit will intensify these adjustments in the immediate future, thereby causing growth to slow even further, they are justified by two considerations. One, they serve to persuade companies, workers and consumers that the government will do whatever it takes to fight inflation, favourably influencing perceptions about the future state of the economy. Two, they neutralise the potential expansionary impact of a widening fiscal deficit caused by the government's reluctance to rein in its subsidy bill by passing on price increases to consumers. Ironically, even though greater price adjustments will increase the inflation rate for a while, their macro-economic impact would also be to slow down growth, eventually leading to lower inflation. The quicker these adjustments are made, the less the pressure on the RBI to respond. However, an additional benefit of higher interest rates should be to slow down, even stop, rupee depreciation, which will also contribute to easing the inflationary pressure.

Katare · Post by **Katare** » 26 Jun 2008 02:08

vina wrote:
John Snow wrote:. Now this chap paid all that six lakhs to get a seat in Engg college which did not even give him a recipt. I am told today the seats are being sold at Dus Lakh.
No way!.. I think your cousin has been had. I am not the authority on this, but from what I hear ,the Engg college seats are not even getting filled in the Mgmt /payment seats quota. The prices are nowwhere as high as you mention and all the decent ones give a receipt.. Anyone with first hand info. please fill in.

I think my information is same as Vina's. Kahin chacha ko bhatije ne 6 lakh ka chuna to nahi laga diya

In other words the economy of engineering colleges has been comoditized. Anyone with Rs40K/year to spare can get an admission in an engineering college these days.

Back to economy -
It seems there still is enough elasticity in Bank's NIM's that they might absorb majority of the increase. Also interesting to see how 50% of loans are fixed and for other 50% they can simply add few more EMI's by increasing the duration of loan.

Chandra Kochhar

svinayak · Post by **svinayak** » 26 Jun 2008 03:15

Ananth wrote:

Can you defend your assertion? Define "part". If a rat is going to take a crap, you will see Rockefeller's hand in it also.

HOLDINGS

CAPITAL WORLD INVESTORS

GILDER GAGNON HOWE & CO LLC

MARSICO CAPITAL MANAGEMENT LLC

JANUS CAPITAL MANAGEMENT LLC

OPPENHEIMER FUNDS INC

UBS GLOBAL ASSET MANAGEMENT AMERICAS INC

DEUTSCHE BANK AG

TEMASEK HOLDINGS (PRIVATE) LTD

TPG-AXON CAPITAL MANAGEMENT LP

ABERDEEN ASSET MANAGEMENT PLC/UK

DIMENSIONAL FUND ADVISORS INC

HORIZON ASSET MANAGEMENT INC/NY

NATIXIS

MARVIN & PALMER ASSOCIATES INC

SENECA CAPITAL ADVISORS LLC

FRANKLIN RESOURCES INC

CITIGROUP INC

MORGAN STANLEY

FEDERATED INVESTORS INC /PA/

GLENHILL ADVISORS LLC

RENAISSANCE TECHNOLOGIES LLC

HSBC HOLDINGS PLC

CULLEN CAPITAL MANAGEMENT LLC

MERRILL LYNCH & CO INC

TRAFELET & CO UK LLP

VANGUARD GROUP INC

LEHMAN BROTHERS HOLDINGS INC

AMERIPRISE FINANCIAL INC

SANSAR CAPITAL MANAGEMENT LLC

CREDIT AGRICOLE S A

ING INVESTMENTS LLC

GOODMAN & COMPANY INVESTMENT COUNSEL LTD.

D E SHAW & CO INC

GOLDMAN SACHS GROUP INC/

JOHNSTON ASSET MANAGEMENT CORP

NEWGATE CAPITAL MANAGEMENT LLC

BANK OF NEW YORK MELLON CORP

ROYAL BANK OF SCOTLAND GROUP PLC

CLAYMORE ADVISORS LLC

OZ MANAGEMENT LP

RUSSELL FRANK CO/

GLG PARTNERS LP

BARCLAYS PLC

KINETICS ASSET MANAGEMENT INC

AVIVA PLC

INVESCO LTD

BNP PARIBAS ARBITRAGE SA

CAPITAL GUARDIAN TRUST CO

BANK OF AMERICA CORP /DE/

LEGAL & GENERAL GROUP PLC

PRUDENTIAL CORP PLC

CAPITAL RESEARCH GLOBAL INVESTORS

STRS OHIO

STATE STREET CORP

UBS AG

EMERGING MARKETS MANAGEMENT LLC

HARVARD MANAGEMENT CO INC

MOORE CAPITAL MANAGEMENT LLC

FISHER ASSET MANAGEMENT LLC

NORDEA INVESTMENT MANAGEMENT AB

BAM CAPITAL LLC

ARDSLEY ADVISORY PARTNERS

FORTIS INVESTMENTS MANAGEMENT USA, INC.

AMERICAN CENTURY COMPANIES INC

J P MORGAN CHASE & CO

BAILLIE GIFFORD & CO

WADDELL & REED FINANCIAL INC

JANE STREET HOLDING LLC

NORTHERN TRUST CORP

PEAK6 INVESTMENTS LP

US BANCORP

GEOSPHERE CAPITAL MANAGEMENT

CREDIT SUISSE

BLACKROCK INVESTMENT MANAGEMENT LLC

STARK OFFSHORE MANAGEMENT LLC

WACHOVIA CORP NEW

SWISS RE ASSET MANAGEMENT AMERICAS INC

KLINGENSTEIN FIELDS & CO LLC

TIAA CREF INVESTMENT MANAGEMENT LLC

KLEINHEINZ CAPITAL PARTNERS INC

GRANTHAM MAYO VAN OTTERLOO & CO LLC

CLOUGH CAPITAL PARTNERS L P

WEXFORD CAPITAL LLC

GENERAL ELECTRIC CO

LOCKHEED MARTIN INVESTMENT MANAGEMENT CO

RBC DAIN RAUSCHER INC

TUDOR INVESTMENT CORP ET AL

LEVY HARKINS & CO INC/

PICTET ASSET MANAGEMENT LTD

PRUDENTIAL FINANCIAL INC

ANDOR CAPITAL MANAGEMENT LLC

HENDERSON GROUP PLC

NORGES BANK

LLOYDS TSB BANK PLC

JULIUS BAER INVESTMENT MANAGEMENT LLC

EARNEST PARTNERS LLC

DELTEC ASSET MANAGEMENT LLC

HILLMAN CAPITAL MANAGEMENT INC

HARDING LOEVNER MANAGEMENT L P/NJ/

BALDWIN BROTHERS INC/MA

Anabhaya · Post by **Anabhaya** » 26 Jun 2008 05:52

This ICICI bank is part owned by the Rockefellers and the Abu Dhabi Bank.

No Abu Dhabi or Rockefeller in the list you put up. Besides being one of the 30 holders maketh not a conspiracy.

Sanjay M · Post by **Sanjay M** » 26 Jun 2008 09:43

http://www.businessweek.com/globalbiz/c ... 461564.htm

Rishi · Post by **Rishi** » 26 Jun 2008 09:47

Sanjay M wrote:http://www.businessweek.com/globalbiz/c ... 461564.htm

Hi Sanjay,

Can you post a brief precis of what exactly you are linking to and why? This will let forum members know why you think a particular link is important/relevant to the discussion.

Thanks

Vipul · Post by **Vipul** » 26 Jun 2008 19:02

FDI inflow up 127 per cent in April'08 to 3.73 billion dollars.

Singha · Post by **Singha** » 26 Jun 2008 19:34

SBI raised lending rate today by 0.50%

the herd will follow next week.

also:

In a surprising and sudden move, State Bank of India has issued a circular stopping all loans for tractors and farm machinery with immediate effect. “This is bound to impact farm machinery sales, farm productivity and food grain production. SBI is the leading financier of the farm machinery business and this move during the peak agricultural season when farmers need these loans most, will adversely affect the agriculture and economic growth” said Mr L D Mittal, President Tractor Manufacturers Association (TMA)

Tractorisation and farm equipment are the key to productivity at the farm level to increase the disposable income level of the farmer. In a scenario of rising inflation particularly with respect to input costs to farmers and food prices, productivity is critical to income for the farmer and control on food prices. This move will adversely affect both, Mr Mittal added.

Katare · Post by **Katare** » 27 Jun 2008 01:09

Vipul wrote:FDI inflow up 127 per cent in April'08 to 3.73 billion dollars.

Just 3 years back we use to get this kind of money in a whole year

Vipul · Post by **Vipul** » 27 Jun 2008 01:54

Mumbai 'number 1' for employment creation.

Mumbai has topped a list of ten Indian cities with strong employment potential, which was compiled by Assocham.
The report looked at the first quarter of 2008 and found that Mumbai generated 18.52 per cent of employment, followed by the National Capital Region (15.41 per cent), the Economic Times reports.

Delhi and Bangalore came in third and fourth place, providing 11.55 per cent and ten per cent of employment opportunities respectively.The West Bengal capital of Kolkata came in last with 6.49 per cent, just below Chennai and Hyderabad.

In terms of industries, the IT sector was found to have created the most amount of jobs, followed by financial services, education and management.According to a recent study by Grant Thornton, Mumbai and Delhi saw employment growth of nine per cent in 2007, while Bangalore demonstrated the highest growth at 16 per cent.

Suraj · Post by **Suraj** » 27 Jun 2008 21:07

Inflation at 11.42%

Inflation based on the Wholesale Price Index stood at 11.42% for the week ended June 14. A week earlier it was 11.05%. The rise has been primarily on account of higher prices of food items like tea, milk and cereals. The other commodities, whose prices went up during the week were lubricants and manufactured items.

Interesting critique of inflation management:
Macroeconomic Mess 101

Yes, we have a global inflation problem because world demand, especially for commodities, is running ahead of world capacity. The phenomenon is global but policy responses will be national.

So, which countries are going to act decisively to curtail demand? Of the three economically significant global players — the US, EU, and China — it is only the EU that has kept demand in check through relatively tight monetary policy. The US and China have not. The US, in order to preserve its financial system and avoid a slow-down, has followed expansionary monetary and fiscal policies, aggravating global price pressures, and while China has tightened, it has been small in magnitude and done with reluctance because any serious slow down to the Chinese growth juggernaut is anathema to the Party.

First, these external inflationary impulses are not going to be corrected externally: for reasons described above, neither the US nor China is going to act forcefully and quickly enough to provide relief for the average Indian consumer. Moreover, we have moved to the second round, where the initial external supply shock has started affecting domestic prices across the board. In other words, we now have a domestic inflation problem which requires domestic policy action.

And yet, what have we seen? Leave aside the obligatory and unhelpful tampering (trade and price controls) at the microeconomic level. On the macro front, apart from the relatively modest hike in petroleum prices, the Indian policy response has been, well, somewhere between poor and awful, meriting a grade of about 2 out of 10.

The fiscal position is deteriorating, and substantially, at a time of accelerating inflation. One estimate is that the true central government fiscal deficit could deteriorate this year by a whopping 2.5-3 (at a minimum) percentage points of GDP thanks to a combination of the loan waivers, pay hikes, fertilizer subsidies, and above all, our automatic destabilizers. By fixing retail prices for petroleum, government spending and the deficit automatically increase when oil prices rise, aggravating inflationary pressures. How sensible is that?

A lot has been written about petroleum pricing policy. Three points, however, bear repetition. Our petroleum pricing, like that of China, and the US, acts to maintain high world oil prices, and to turn the terms-of-trade against us. This is self-inflicted harm, made worse by the fact that the beneficiaries of our policy are countries whose direct and indirect influence on us is far from benign. Second, fixed retail prices are implemented in the name of equity and end up being bad not just for efficiency but also equity: petroleum consumers are richer than the average Indian, who pays for the consumption of the rich through a combination of higher taxes and/or inflation caused by oil subsidies. But a third, and possibly important point as we look ahead relates to climate change. India, like other developing countries, justifiably rails against the rich world for having caused global warming. But we will simply not be a credible or cooperative global partner in the fight against this problem, and our legitimate complaints against the rich risk being dismissed as hypocrisy, if our policy contribution is to encourage rather than discourage fuel consumption.

Monetary and exchange rate policies in these last few months have both been mystifyingly inadequate. In late February, a chorus of respected voices in India unanimously rounded upon the RBI for not lowering interest rates when the golden opportunity of US rate-cutting presented itself. The RBI added considerably to its sheen by presciently citing the threat of inflationary pressures as the reason for its inaction. It was right and the commentators wrong.

Having displayed its anti-inflationary mettle then, it came as a surprise when in the period since mid-April, the RBI countenanced an exchange rate depreciation at a time of imported inflationary pressures. To be fair, there has been some tightening of the CRR and repo rates, especially in the last few days. But: (i) these have been small and delayed; (ii) the key reverse repo rate, which is arguably the real lever for the RBI to manipulate monetary conditions under conditions of excess liquidity, has remained unchanged at 6 percent compared to current inflation of 11 percent; and (iii) above all, combining the tepid monetary actions with the sizable rupee depreciation yields the conclusion that overall monetary conditions far from having tightened may actually be looser at a time of accelerating inflationary pressures.

Thus, from an inflation perspective, we have destabilising rather than stabilising fiscal and monetary policies. There is a real mystery here because electoral populism cannot easily explain these policies; after all, high, especially double-digit, inflation is considered electorally fatal for incumbent politicians, and RBI policy-making has always reflected that political reality.

It is true that tightening will slow growth, but at 11 percent inflation and 9 percent growth, the politically expedient trade-off would have been to sacrifice some growth for lower inflation, especially since there is a plausible case that at 9 percent growth we are testing the limits of the economy's capacity. Why aren't politicians behaving like politicians? Why is the RBI not being true to its inflation hawk credentials?

abhischekcc · Post by **abhischekcc** » 27 Jun 2008 21:35

We are forgetting that inflation in India started rising some months before the commodity price inflation began to bite.

That was because of the rise in wholesale food prices because of the retailers - especially Reliance.

Some of our inflation is Made in India.

Suraj · Post by **Suraj** » 27 Jun 2008 21:57

Blaming one or more corporate entities for broad inflation is conspiracy theoretizing. Please don't make such suggestions unless you have significant data to back it up. A handful of local anecdotes are not sufficient proof.

Part of the inflation seen in the last 2 years is because production capacities have peaked, and additional investments are not going to come onstream until later this year. Several core sectors (e.g. steel, cement) have been operating at near maximum capacity, or are constrained by other restrictions from increasing supply. Agricultural production itself has been robust for the last 2-3 years.

vina · Post by **vina** » 27 Jun 2008 23:35

Suraj wrote: Interesting critique of inflation management:
Macroeconomic Mess 101

I fully agree with this article. It is not for nothing I say that the RBI forgot that it was a central bank and started acting like a Finance Ministry and a cheerleader for growth or bust and inflation be damned. Now we are paying the consequences . The govt too has been incredibly stupid. Starting with Mani Shakar Aiyar as petroleum minister, they have been loudly proclaiming about how oil prices are "unsustainable" above $40 (at MSA's tenure) and liked hearing their own soothing prophesies and acted on it.. Yeah.. For 3 years in a row, the stars lined up for the UPA in terms of economy. Now they dont and we have 13% inflation.. only 400 bps away from the records of 17.. nearly the VP Singh regime nos.. MM Singh will be in the august company of VP Singh if that happens and that too for the same reasons.. oil shock, fiscal profligacy from loan write offs and massive subsidies and lack of structural reforms. ..We have all the reasons. including write offs and NREGA subsidies, babu salary rises and lack of reforms in many crucial areas.. No surprise we are back to VP Singh like days in terms of economy.

Just like VP Singh's govt, MM Singh's govt too is going to get slaughtered in the upcoming elections.

abhischekcc · Post by **abhischekcc** » 27 Jun 2008 23:45

I for one will not shed tears for MMS.
I am also glad that his image as the 'reformer' of the Indian economy will be shattered by his proven incompetence as an economist.

People forget that it was PVN Rao who jumped at the chance to reform the economy, protected this MMS from the wolf pack within politics, etc.

Another person who was a reformer was Madhavrao Scindia, his name is also never mentioned in this context.

------------

Blaming one or more corporate entities for broad inflation is conspiracy theoretizing.

I am now a conspiracy theorist!!!

Well, it was not just Reliance. Another two big companies mentioned inthis context are Adani and ITC. Both export agricultural produce. And their names were mentioned even earlier during the tension caused by the commodities futures trading thingy.

abhischekcc · Post by **abhischekcc** » 27 Jun 2008 23:47

Part of the inflation seen in the last 2 years is because production capacities have peaked, and additional investments are not going to come onstream until later this year. Several core sectors (e.g. steel, cement) have been operating at near maximum capacity, or are constrained by other restrictions from increasing supply.

Well, this does support my actual contention that India's inflation is partly Made in India, and no point blaming high oil/commodity prices for that.

Katare · Post by **Katare** » 27 Jun 2008 23:59

There are big differences between then and now, that was time of scarcity and this is the time of plenty. Unfortunately inflation can happen in both situations. This time we have torrential growth with inflation those days it was inflation with-out growth.

Public finances (even after including extra budgetary subsidies) and external sector has never been better before, so it is not correct IMO to compare those two fundamentally different eras

What matters is the average inflation for a time period, I am still sure we'll end current financial year with reasonable growth and inflation. Just couple of months back inflation was below 4% if it can rise so quickly it can drop that quickly too.

The issue is momentum of growth, everyone forecasted that growth would slowdown to 8% but it didn't it still managed 9+%. Gradual tightening is what's needed; pushing panic button would be like committing suicide (killing both growth and inflation).

Katare · Post by **Katare** » 28 Jun 2008 00:12

http://www.business-standard.com/common ... =0&chkFlg=
RBI still keeps buying $ from open market while Rupee has become worst performing currency in the world. RBI and GoI needs to coordinate their moves, they are almost nullifying each other's move.

First RBI raised Repo rates early this year finance minister told PSU banks not to raise interest rates, effectively canceling RBI's efforts.

Govt reduces duties on several products to make imports cheaper, RBI let's Rupee depreciates like there is no tomorrow, effectively canceling all of the price advantage. Govt let go thousands of corer of tax revenue for nothing.

Unless they work as a team and respect each other's autonomy and realize that they are working for the same goal of having a sustainable growth trajectory it ain't gonna work. It almost seems like Reddy and PC is trying to teach each other a lesson.

Suraj · Post by **Suraj** » 28 Jun 2008 00:32

Vina: part of the reason the RBI has been 'acting line the Finance Ministry', as you put it, is that the Finance Ministry and the rest of the administration has not been driving legislative measures to free up economic activity, and the FinMin has instead become a bean counter department, imposing some absurd taxation measures.

However, I'm getting tured of repeating the government's shortcomings. It is meaningless to just state the standard gotcha and be done with it. It has nothing to do with the truth of the assertion, just that it causes us to not look around and learn more. Do you have any ideas what we can do to break fresh ground on the subject ?

abhishekcc: I just requested that you provide data to support your statements. That includes data on exports and corporate activity. Exporting foodstuffs by themselves does not result in inflation, unless you have data to indicate there was a domestic scarcity driven by exports. Without such substance, it amounts to nothing more than a conspiracy theory. But if you're willing to take the effort to obtain the data and present your case, you'd do yourself enormous credit in the process.

abhischekcc · Post by **abhischekcc** » 28 Jun 2008 02:46

Suraj, will do.

vina · Post by **vina** » 28 Jun 2008 16:01

Suraj wrote: Do you have any ideas what we can do to break fresh ground on the subject ?

The current inflation is a fait accompli. As finance guys , and not accounting guys ( standard saying.. Accountants are painstakingly exact about a lot of history , which is basically irrelevant! Finance forward looking, accounting backward looking etc) , we need to see what it is that needs to be done ,especially since we are headed towards an election sooner than later.

The clock is ticking and the election is less than 6 months away. The govt doesn't have the luxury of waiting for 6 months for inflation numbers to come down. The elections will be truly lost. Public memory is short. No one remembers prices 6 months ago, but everyone remembers last month's price.. The govt will need to kill the inflation monster NOW.

First.. We need to get out of the macro/fiscal subsidy trap. Keeping aside the price increase in Kerosene and domestic LPG, the govt should simply free up the "Administered Pricing" on all other products . This will immediately bring down subsidy bill and reduce govt borrowings .. This will be a one time shock.. The inflation numbers might well shoot up to 15 or 16. But this needs to be done. Once the "shock" is administered , the money supply needs to be tightened to step firmly on inflation and break it's back. The rupee will rise, and also within 3 months, you can bring inflation to a standstill.. The corollary is that runway demand growth for petrol products will come to a screeching halt and drive efficiency. ..Yes.. Growth will be a casualty, and we will see it crashing from 9% to 5% or so in the short term.. But it is far prefereable to have 5% growth with 0.5% inflation than 9% growth and 14% inflation.

Growth benefits are "unequal" .. they don't benefit everyone equally and they disproportionately benefit the rich and better off than the weaker sections.

Inflation is also "unequal" .. it hurts the poor, far far more than it hurts the rich!.. It is not for nothing that central banks prize inflation stability over growth , sometimes even making inflation control their single point agenda!.

Once inflation is killed and global oil prices and inflation start slowing, we will get into the next growth cycle , by lowering interest rates .. But now is the time for consolidation on inflation and not growth.

This way, atleast you can face the electorate with one to two months of dead inflation and have a fighting chance, rather than a disastrous situation of going into the election with a double digit headline inflation number.

The harvest, capacity and all the other things you talk about will help with inflation. But those things alone will take time.But that is something the Congress doesnt have. It needs inflation killed ASAP.

As a Congress supporter, i hope the govt gets it's act together on this. Otherwise, I fear that the next election is a lost cause.

Raju · Post by **Raju** » 28 Jun 2008 16:11

Rupee's downward move when dollar was depreciating was one suspiscious event to say the least.

Politicsparty has an article in this regard. It can be taken for what it's worth.

Singha · Post by **Singha** » 28 Jun 2008 16:12

the fair value of diesel even in India with its non market linked price would be 60Rs/liter almost 40%
more than today if Govt removes that subsidy.

it will have an impact on transport of all products and commodities with no exception

how will that help the inflation number ?

Patni · Post by **Patni** » 28 Jun 2008 16:25

vinaji your proposed medicine is too bitter for congress! they will never ever ever cut the subsidy! entire congress culture always has been about not allowing free enterprise to flourish beyond their control and socialistic mindset strongly leaning towards left. As i see it, urban India has got a taste of high growth and now the gene is out of the bottle! I think we are in for huge turmoil ahead and we need a near breaking crisis for anyone to be able to cut the subsidies effectively.

Raju · Post by **Raju** » 28 Jun 2008 16:30

Singha wrote:the fair value of diesel even in India with its non market linked price would be 60Rs/liter almost 40%
more than today if Govt removes that subsidy.

it will have an impact on transport of all products and commodities with no exception

how will that help the inflation number ?

this Govt should completely eradicate this fraud being perpetrated in name of subsidy for Kerosene.
how many poor are getting Kerosene ?
Even if they que up in the ration shop most of the times Kerosene is unavailable or it is absolutely short supply and thus does not meet any demand or serve any purpose.

Remove subsidy on Kerosene entirely and credit the subsidy directly into the accounts of BPL ration card holder.
this will be a great favor on the entire economy and also the cars running on Petrol.

Diesel is used in Generators, and alternate power generation purposes. Raising its price will be calamitous.

Singha · Post by **Singha** » 28 Jun 2008 16:53

I will start stockpiling food for the calamities that lie ahead. bags of wheat, rice,
dal, salt, countrymade guns and pistols, a sword or two, gas masks, tasers,
dried fish, maggi, battery power radios, sugar, tea, ropes for animal traps,
medicines...I even have a forest next door to disappear into should the
zombies take over the world and infect everyone alive.

when it all ends and the rescue mission scours the desolate cities for survivors
please do pick me up from behind the HAL airport - emaciated and weak but
still alive.

vina · Post by **vina** » 28 Jun 2008 19:11

Raju wrote:Rupee's downward move when dollar was depreciating was one suspiscious event to say the least.

No magic there. The inflation in India is far higher than in the US!.. In real terms the rupee is losing value and the exchange rate movement is reflecting that!...

Politicsparty has an article in this regard. It can be taken for what it's worth.

Yeah.. right.. Come on Raju.. This is a serious thread!.. If we want some light hearted entertainment, we can take the politics party stuff to the Nukkad thread.

vina · Post by **vina** » 28 Jun 2008 19:15

Katare wrote:There are big differences between then and now, that was time of scarcity and this is the time of plenty. Unfortunately inflation can happen in both situations. This time we have torrential growth with inflation those days it was inflation with-out growth.

I agree that this is a different situation from before. But please look at one of my earlier replies on why 5% growth with 0.5% inflation is far better than 9% growth with 12% inflation.. The poor are hammered disproportionately with higher inflation and dont share growth on a equal basis as the well off. India is a poor country and the vast majority of voters ARE poor. So that will absolutely reflect in their voting. No questions about it. This is real bread and butter stuff.

What matters is the average inflation for a time period, I am still sure we'll end current financial year with reasonable growth and inflation. Just couple of months back inflation was below 4% if it can rise so quickly it can drop that quickly too.

Some amount of psychology in order here. You dont care about stuff 6 months ago. You care only about stuff you remember. You would be hard pressed to rememeber what you paid for rice 3 months ago.. All that matters is the last 3 months nos!. Avg is good on an excel spread sheet. But in real world perceptions, it doesnt matter. Perception after all is reality!.

vina · Post by **vina** » 28 Jun 2008 19:21

Singha wrote:the fair value of diesel even in India with its non market linked price would be 60Rs/liter almost 40%
more than today if Govt removes that subsidy.

On a landed cost basis 60Rs / liter is not the correct value. The taxes are what will bring it to that number. Fact is all over the world, where free pricing operates, Diesel is MORE expensive that petrol .. In India due to tax differentials on petrol over diesel, we are accelerating the shift towards diesel.. !

And no , removing price cap on diesel will not be "calamitous" .. There is no free lunches overall. You are paying for lower diesel prices for gensets /others by paying more on petrol /ATF etc and also in higher fiscal deficit , which in turn feeds inflation. What will happen if you remove the caps is that there will be an inflation shock, but then the prices will actually start reflecting economic reality .. Distortions due to babu driven pricing will be removed and we can make rational economic decisions based on real prices..

vina · Post by **vina** » 28 Jun 2008 19:25

Another instance of distortion.. Diesel because of subsidies (kerosene, lpg, petrol and diesel are under APM, all other products are freely priced) and tax distortions is actually cheaper than the lowest fractions that come out of a refinery such as Naptha and Furnace Oil!.. The CEO of Shell India came on TV and said that.. The sheer ridiculousness of that hit me like a ton of bricks.. Imagine.. Guys who would be burning naptha, furnace oil and other very low fractions such as bunker oil (because of low cost) are now switching over to Diesel (a higher refined product) and diesel demand is going through the roof!...

The sheer economic costs of such stupidity is staggering.

pradeepe · Post by **pradeepe** » 28 Jun 2008 21:07

I am not sure it was stupid when it was implemented. But India being squeeze central once folks realized how it could be exploited, started milking it for all it was worth. It will probably get curtailed in some way given that 1 out of every 5 cars/vans/trucks on the road seem to be running on deisel.

Suraj · Post by **Suraj** » 28 Jun 2008 23:43

vina wrote:
Raju wrote:Rupee's downward move when dollar was depreciating was one suspiscious event to say the least.
No magic there. The inflation in India is far higher than in the US!.. In real terms the rupee is losing value and the exchange rate movement is reflecting that!...

I don't think it's so straightforward. Inflation in India has historically pretty much always exceeded US inflation, including during the last 3-4 years when the Rupee appreciated, so the inflation dynamic is not the sole reason. Capital flows were a significant reason why India could both maintain higher inflation than US and see significant Rupee appreciation (from ~49/$ to nearly ~39/$). The outflows on account of the oil bill are more at fault for the present depreciation, since they deplete dollars while the subsidized fuel costs imply a greater number of rupees in the market, pushing down the exchange rate.

As for the rest of the prescriptions, I agree with what another person posted - besides the subsidy culture being entrenched, the current administration simply lacks the will or the political capital to do that. Instead, as a I asked earlier, what is it we can learn from this. Sometime ago we had a very interesting debate where we tried to understand what various political parties can do within their historical culture. For example, Congress was in more capable of effecting retail sector reforms, while BJP is more capable of acting on labour laws. Kakkaji had some very interesting posts on this subject, and I'd welcome more of the kind - from anyone - they make more sense than wishing a particular administration would do whats against their known culture.

Neshant · Post by **Neshant** » 29 Jun 2008 00:31

> No magic there. The inflation in India is far higher than in the US!..

Govt inflation numbers in the US are bogus. They claim 3.5% inflation when oil prices have gone through the roof. Its more like 8 or 9% inflation. This is then offset by the collapsing housing prices which is used to lower inflation figures but how can that be a positive if majority of people are losing equity in their homes!

Sorry but just saying 'inflation is higher here than there' without delving into the individual circumstances makes no sense.

svinayak · Post by **svinayak** » 29 Jun 2008 02:09

Suraj wrote:
As for the rest of the prescriptions, I agree with what another person posted - besides the subsidy culture being entrenched, the current administration simply lacks the will or the political capital to do that. Instead, as a I asked earlier, what is it we can learn from this. Sometime ago we had a very interesting debate where we tried to understand what various political parties can do within their historical culture. For example, Congress was in more capable of effecting retail sector reforms, while BJP is more capable of acting on labour laws. Kakkaji had some very interesting posts on this subject, and I'd welcome more of the kind - from anyone - they make more sense than wishing a particular administration would do whats against their known culture.

There was and still is only one culture for the last 50 years. There has been no real shift from that culture if one looks at it deeply. Most of this is from only one party and the change it has brought is only superficial. Large manufacturing phase of growth in India has been skipped entirely.

Suraj · Post by **Suraj** » 29 Jun 2008 02:29

Acharya wrote:There was and still is only one culture for the last 50 years. There has been no real shift from that culture if one looks at it deeply. Most of this is from only one party and the change it has brought is only superficial. Large manufacturing phase of growth in India has been skipped entirely.

So you're saying there's no difference between a Congress and BJP regime from a political economy perspective ? If so, please elaborate. If you're just referring to Congress, well, you're not really saying anything particularly new, and that is precisely why I requested an effort to see what economic policies work within a specific party's political constraints.

Also, I would really appreciate your being less cryptic and terse - your style of posting frequently does not convey much.

svinayak · Post by **svinayak** » 29 Jun 2008 04:09

Suraj wrote:
So you're saying there's no difference between a Congress and BJP regime from a political economy perspective ? If so, please elaborate. If you're just referring to Congress, well, you're not really saying anything particularly new, and that is precisely why I requested an effort to see what economic policies work within a specific party's political constraints.

Also, I would really appreciate your being less cryptic and terse - your style of posting frequently does not convey much.

Six years of rule does not convey much. It has to be more than that (2-3 terms) to understand the real difference. This is like comparing 6 years with 50 years of another party. So trying to find the difference is moot without much data available.
Verbose without any content in the post is waste of bandwidth.

Katare · Post by **Katare** » 29 Jun 2008 04:15

vina wrote:
Katare wrote:There are big differences between then and now, that was time of scarcity and this is the time of plenty. Unfortunately inflation can happen in both situations. This time we have torrential growth with inflation those days it was inflation with-out growth.
I agree that this is a different situation from before. But please look at one of my earlier replies on why 5% growth with 0.5% inflation is far better than 9% growth with 12% inflation.. The poor are hammered disproportionately with higher inflation and dont share growth on a equal basis as the well off. India is a poor country and the vast majority of voters ARE poor. So that will absolutely reflect in their voting. No questions about it. This is real bread and butter stuff.

Vina,

We have'n had 12% inflation with 9+% growth yet, it may just be a spike. ~4.5% inflation is atleast minimum for an fast growing economy like ours. It is almost impossible to achieve 0.5% inflation with 5% growth. Inflation has a relationship with growth but it's not only driving factor for inflation. You could have a lot of inflation with little growth (Pakistan -5% growth with 15+% inflation) and killing that growth may not yield any releif on inflation front.

In a nut-shell you have to figure out what kind of inflation are you experiencing to be able to use right kind of tools to kill/tame it. There would be little gains in taming inflation in India by killing growth, some even argue it would only perpetuate inflation, which is mainly result of a sever supply constraints and global factors.

Still there is huge scope for RBI to tighten money supply and cool some of the excess growth in over heating sectors. But it would not bring down prices of milk, Dal, cement and steel all of which are in short supplies in domestic and global market.

vina wrote:
What matters is the average inflation for a time period, I am still sure we'll end current financial year with reasonable growth and inflation. Just couple of months back inflation was below 4% if it can rise so quickly it can drop that quickly too.
Some amount of psychology in order here. You dont care about stuff 6 months ago. You care only about stuff you remember. You would be hard pressed to rememeber what you paid for rice 3 months ago.. All that matters is the last 3 months nos!. Avg is good on an excel spread sheet. But in real world perceptions, it doesnt matter. Perception after all is reality!.

Prices 3 months back is what matters to politicians and voters which is a perception. You seems to prescribing inflation taming prescription to Sonia Gandhi for winning the next election. If I were her I would jump on your advise

. We should look at the reality which is average inflation over a time period. The economy, nation building and people's well being would reflect real long term avgerage inflation. Weekely Headline WPI numbers have little utility except as an early indicators for policy makers.