Inflation defies monetary and fiscal measures, uptick continues
The annual wholesale price index-based inflation continued its upward march, touching 6.73 per cent for the week ended February 3, up from the previous week's 6.58 per cent. The contributory factors remain the same - pulses, cereals, vegetables and non-vegetarian food articles within primary articles, besides Manufactured Products including cement, steel and machinery items. The inflation estimate for the week ended Dec. 9 has also been revised to 5.63 percent from 5.32 percent. The government revises the inflation rate with a lag of two months on additional price data.
The continued 'pincer movement' - the strategy adopted by the government and monetary authorities to fight inflation from both supply side and demand side - has so far not delivered desired results and we may be approaching a stage where all the weapons in the armoury are exhausted.
To tackle the demand side (i.e. inflation arising from rapid growth and credit expansion), the central bank has been tightening the monetary policy. The most recent monetary policy measures include hike in repo rate and cash reserve ratio in quick succession. The Indian economy is expected to expand at a record 9.2 percent in the year ending March 31, following a 9 percent growth last year. Bank loans increased more than 30 percent in each of the past two fiscal years, outpacing the 23 percent growth in deposits.
The central govenrment, on the other hand, has taken a series of steps to address the supply side constraints. These include ban on export of items wheat and milk powder, lifting restrictions on import, reduction in customs duties, invoking restrictive storage laws and delisting a couple of essential commodities from the futures trading exchanges. The latest one is a cut in petrol and diesel prices.
Though all these fiscal and monetary measures will act with a time lag and may help contain the spiralling prices, these may be 'too late, too little' - especially the fiscal measures, monetary tightening measures beyond a point are not desirable as they will hurt the economic growth. On fiscal side, more needs to be done in the immediate term. And, much more on a long-term basis to improve the farm output.
Business Line editorials on the suject
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4 comments:
Well, they have addressed the demand and supply side policies.
The main causes, i believe, are mainly the 'distributional factors'. There is no dearth of food production and there isn't any increased consumption of food articles. [A consumption boom is visible in the luxury sector market.]
When there are problems in distribution like hoarding, then the policies currently undertaken by the RBI and the Government tend to have no effect on the current rising prices whatsoever.
Thanks Alex for sharing your views. Yes, I agree the inefficiency of the distribution network is a major factor. More so in case of agriculture commodities. This must be addressed as a structural issue.
But in the immediate term, what RBI and the central government are doing should have some impact. The current rise in inflation is owing to a combination of factors and probably things would have been worse without these.
Thanks again for bringing in this important aspect of 'distributional factors' here.
Thank you.
Moreover, the WPI needs to be reconstructed.
And because of the huge impact of the media on the Indian populace, inflationary expectations are considerably affected, and they are an important cause of the current rise in inflation.
I had written about the issues relating to the WPI here.
http://alexmthomas.wordpress.com/2006/08/03/inflation-is-wpi-fallible-2/
Petrol Price Rise and how to Tackle it
REQUEST ALL LEADING NEWSPAPERS TO PUBLISH IT ON FRONT PAGE.
Nice Logic It May Work
A man eats two eggs each morning for breakfast. When he goes to the Kirana store he pays Rs. 12 a dozen. Since a dozen eggs won’t last a week he normally buys two dozens at a time. One day while buying eggs he notices that the price has risen to Rs. 16. The next time he buys groceries, eggs are Rs. 22 a dozen.
When asked to explain the price of eggs the store owner says The price has gone up and I have to raise my price accordingly. This store buys 100 dozen eggs a day. He checked around for a better price and all the distributors have raised their prices. The distributors have begun to buy from the huge egg farms. The small egg farms have been driven out of business. The huge egg farms sell 100000 dozen eggs a day to distributors. With no competition, they can set the price as they see fit. The distributors then have to raise their prices to the grocery stores. And on and on and on.
As the man kept buying eggs the price kept going up. He saw the big egg trucks delivering 100 dozen eggs each day. Nothing changed there. He checked out the huge egg farms and found they were selling 100,000 dozen eggs to the distributors daily. Nothing had changed but the price of eggs.
Then week before Diwali the price of eggs shot up to Rs. 40 a dozen. Again he asked the grocery owner why and was told, Cakes and baking for the holiday. The huge egg farmers know there will be a lot of baking going on and more eggs will be used. Hence, the price of eggs goes up. Expect the same thing at Christmas and other times when family cooking, baking, etc. happen.
This pattern continues until the price of eggs is Rs. 60 a dozen. The man says,There must be something we can do about the price of eggs.
He starts talking to all the people in his town and they decide to stop buying eggs. This didn’t work because everyone needed eggs.
Finally, the man suggested only buying what you need. He ate 2 eggs a day. On the way home from work he would stop at the grocery and buy two eggs. Everyone in town started buying 2 or 3 eggs a day.
The grocery store owner began complaining that he had too many eggs in his cooler. He told the distributor that he didn’t need any eggs.
Maybe wouldn’t need any all week.
The distributor had eggs piling up at his warehouse. He told the huge egg farms that he didnt have any room for eggs would not need any for at least two weeks.
At the egg farm, the chickens just kept on laying eggs. To relieve the pressure, the huge egg farm told the distributor that they could buy the eggs at a lower price.
The distributor said, I don’t have the room for the eggs even if they were free. The distributor told the grocery store owner that he would lower the price of the eggs if the store would start buying
again.
The grocery store owner said, I don’t have room for more eggs. The customers are only buying 2 or 3 eggs at a time. Now if you were to drop the price of eggs back down to the original price, the customers
would start buying by the dozen again.
The distributors sent that proposal to the huge egg farmers but the egg farmers liked the price they were getting for their eggs but, those chickens just kept on laying. Finally, the egg farmers lowered the
price of their eggs. But only a few paisa.
The customers still bought 2 or 3 eggs at a time. They said, when the price of eggs gets down to where it was before, we will start buying by the dozen.
Slowly the price of eggs started dropping. The distributors had to slash their prices to make room for the eggs coming from the egg farmers.
The egg farmers cut their prices because the distributors wouldn’t buy at a higher price than they were selling eggs for. Anyway, they had full warehouses and wouldn’t need eggs for quite a while.
And those chickens kept on laying.
Eventually, the egg farmers cut their prices because they were throwing away eggs they couldn’t sell.
The distributors started buying again because the eggs were priced to where the stores could afford to sell them at the lower price.
And the customers starting buying by the dozen again.
Now, transpose this analogy to the gasoline industry.
What if everyone only bought Rs 200.00 worth of Petrol each time they pulled to the pump? The dealer’s tanks would stay semi full all the time. The dealers wouldn’t have room for the gas coming from the huge tanks. The tank farms wouldn’t have room for the petrol coming from the refining plants. And the refining plants wouldn’t have room for the oil being off loaded from the huge tankers coming from the oil fiends.
Just Rs. 200.00 each time you buy gas. Don’t fill up the tank of your car. You may have to stop for gas twice a week, but the price should come down.
Think about it.
Also, don’t buy anything else at the fuel station don’t give them any more of your hard earned money than what you spend on gas, until the prices come down…
…just think of this concept for a while.
………………please pass this concept around….reaching out to
the masses …the world …..
Urge the population at large to follow this principle through your website blogs.Thousands of mails can be sent tand the strategy implemented to bring down price of oil.
Ameet Desai
avd369@yahoo.com
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