South West Gujrat Travelogue : Inflation is all around

 

Last week, I was extensively travelling through South West Gujrat and the common thread running across the horizon was worries about ever increasing vicious circle of inflation. There were instances which shows clearly how much well entrenched this inflationary phenomenon is across the strata:

 

• As highlighted in earlier blogs that New Normal for pricing for India is multiple of INR 10.00 for whatever service/ goods used. Government has already pricing railway tickets in multiple of INR 5.00, which lends credence to this phenomenon and thereby on the hindsight proclaiming that we do not have coins/ currency notes below INR 5.00. This is playing havoc in the society. This New Normal practice is now well established and one can shudder to think its impact in the coming years.
• Vegetable prices which have reached all time high and firm and now rivaling with the fruit prices, looks like also standardized irrespective of the place of origin and sale. We have witnessed a weekly Sunday Farmer's market close to Reliance Oil Refinery (the world's largest) in Jamnagar. The prices were as good as any other metropolitan city of India barring few items which were cheaper. The buyers looks like working executive's of Reliance Oil Refinery as city is distant away. The puzzling question was how come fresh farm produces are selling at such a high price, which is produce locally?? I guess as farmer also consume other goods and services where they would be subjected to ever increasing spiral of prices for last so many years and thus it has made it clear to them how to price there produce in line with similar produce selling across the country.  One can check prices of Onion, Tomato and  Potato to find stark similarity in prices across the country. 
• A village having a cluster of no more than 100 homes near Sasan Gir, where a sweet shop was selling Indian sweet made of Milk. The price was INR 240.00/ kg. It was delicious yet intrigued to see such a high price. The vendor was aware of the price of same sweet in metropolitan city, where it would be selling at least double of what they are selling here. Top it all he knew logic of higher prices in metropolitan cities, Viz. high cost of rental, labor and raw material prices etc.

The point here is Rural / Semi Urban India is now catching up with Urban India in terms of prices and try to price goods and services at par with any other place. This is another source of Inflation. It is high time that our policymakers and economist should take note of the drivers of the persistent inflation to deliver sustainable growth at reasonable stable inflation.

 

 

India : A Nonfunctional Anarchy...

 

The only best thing in Indian economic and political environment is very low tolerance to deteriorating macro indicators like Inflation, external imbalances, fiscal deficit and so on for last two decades. However, off late these resolves are getting diluted to band -aid approach. Earlier government used to loose elections on the basis of high and volatile onion prices. Now, consumers are taking things in stride and unwilling to come out on street.

 

Gone are the days when spiraling food prices would attract government to act decisively against speculators and hoarders or to resort to import or open market sales. None of the such events are  visible now a days to control prices of the ever increasing food prices for last 5 years. Top it all, Government has even failed to acknowledge the severity of this issue and yet to launch any decisive program to improve sustainable increase in the productivity and supply chain.

 

The best thing happened in terms of to control inflation & inflationary expectations is that RBI has included CPI as an anchor point along with WPI to decide interest rates. This is a welcome sign so that savers will be getting, let us hope, real positive return going forward. So far we have been ignoring persistent high consumer inflation under the guise of lack of proper consumer price time series. Kudos to RBI, that they have recognized that it is high time to recognize general spiraling of prices and consequently raised policy rates twice.

 

India is also facing music on account of all time high Current Account Deficit (CAD). High CAD was persisting for very long period of time, however, we chose to ignore it. Come May 2013 and when US - Federal Reserve ( FED)  has made its intention to reduce quantitative easing, all hell broke loose in the Fragile Five countries, which were running high CAD, Viz.. India, Turkey, Indonesia, South Africa & Brazil. These countries experiences high interest rates, multi / all time low local currencies against USD and flight of foreign capital during last five months.  Again India could not envisage to reduce the high CAD to manageable levels within time. Ultimately we have to resort to old practice of reaching to our Non Resident Indians (NRI) to bail us out. The key point here is that are we ready to face reduction in quantitative easing as and when it starts? The answer is very difficult.  We have just bought breathing time to put in place to improve our exports, control unwanted imports and to make India as a preferred destination for foreign capital. Alas, there are hardly any attempts to act on any of them. Thus, there is a possibility that India would be facing music again in short to medium term. 

 

 The key point is that quality of decision making as well as response time has deteriorated in our society at all levels in last so many years. Thus we would be living hand to mouth, in case, we choose to tread the current path.