{"id":2321,"date":"2013-10-14T15:09:19","date_gmt":"2013-10-14T09:39:19","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=2321"},"modified":"2013-10-14T15:09:19","modified_gmt":"2013-10-14T09:39:19","slug":"inflation-at-8-month-high-is-a-sure-spoiler-to-fms-all-is-well-party","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2013\/10\/14\/inflation-at-8-month-high-is-a-sure-spoiler-to-fms-all-is-well-party\/","title":{"rendered":"Inflation at 8 month high is a sure spoiler to FM\u2019s \u2018all is well\u2019 party"},"content":{"rendered":"

\"Inflation\"<\/a>Vivek Kaul\u00a0<\/span><\/span><\/span>\u00a0<\/span>
\nAll is well, again.
\nOr so the government of India has been trying to tell us over the last few weeks.
\nBut some spoilers have come in lately.
\nThe wholesale price inflation (WPI) for the month of September 2013 has come in at an eight month high of 6.46%. It was at 6.1% in August and 5.85% in July.
\nA massive increase in food prices has been a major driver of wholesale price inflation. Onion prices rose by a massive 323% in September in comparison to the same period last year. Vegetable prices went up by 89.37%. Fruits were up at 13.54%. And all in all food prices were up by 18.4% in comparison to the same period last year.
\nHalf of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011). Given this, the massive rise in food prices, hits what the Congress led UPA calls the\u00a0<\/span><\/span><\/span>aam aadmi,\u00a0<\/i><\/span><\/span><\/span>the most.
\nIn this scenario it is more than likely that the\u00a0<\/span><\/span><\/span>aam aadmi\u00a0<\/i><\/span><\/span><\/span>has been cutting down on expenditure on non essential items like consumer durables, in order to ensure that he has enough money in his pocket to pay for food.
\nHence, it is not surprising the index for industrial production, a measure of the industrial activity in the country, rose by just 0.6% in August 2013, after rising by 2.8% in July.
\nAs Sonal Varma of Nomura writes in a research note dated October 11, 2013 \u201c<\/span><\/span><\/span>consumer\u00a0durables output growth remained in the negative, possibly due to a sharper slowdown in white goods production.\u201d Consumer durables output fell by 7.6% in August 2013. This after falling by 8.9% in July.
\nWhat this tells us clearly is that as people are spending more money on food, they are postponing other expenditure. This postponement of consumption is reflected in companies not increasing the production of goods, which in turn is reflected in the overall index of industrial production rising at a very slow pace and the consumer durables output falling by a whopping 7.6% in August 2013.
\nThe government of India wants to tackle this by increasing the capital of public sector banks in the hope that they give out loans to people to buy consumer durables and two wheelers at lower interest rates. (Why that is a bad idea<\/span><\/span><\/span>\u00a0is explained here<\/span><\/span><\/span><\/a>).
\nBut the trouble is that people are not in the mood to buy stuff because\u00a0<\/span><\/span><\/span>they do not feel confident enough of their job prospects in the days to come. As Varma put it in a note dated October 3, 2011 \u201cThe job market and income growth \u2013 the key drivers of consumption \u2013 remain lacklustre.\u201d
\nOver and above that there is high food inflation to contend with.
\nOne reason that the inflation will continue to remain high is the fact that the government of India has been running a high fiscal deficit. In the first five months of the year (i.e. the period between April-August 2013) the fiscal deficit stood at 8.7% of the GDP. The government is targeting a fiscal deficit of 4.8% of the GDP during the course of the financial year. Fiscal deficit is the difference between what a government earns and what it spends.
\nAs economist Shankar Acharya put it\u00a0<\/span><\/span><\/span>in a recent column in the Business Standard<\/span><\/span><\/span><\/a>\u00a0\u201c<\/span><\/span><\/span>In the first five months of 2013-14, the Centre’s fiscal deficit ratio has been running at a whopping 8.7 per cent of GDP. Bringing it down to 4.8 per cent in the remaining seven months looks impossibly difficult, without recourse to seriously creative accounting ploys. In any case, it is worth pointing out that a deficit that stays high through most of the year imposes the associated costs of higher inflation, higher interest rates, more crowding out of private investment<\/span><\/span><\/span>.\u201d
\nWith the government running a higher fiscal deficit it needs to borrow more money to finance the deficit. This means that the private sector will have lesser money to borrow(i.e. it will be crowded out by the government) and hence, will have to offer higher interest rates to borrow money. Hence, the interest rates will continue to remain high.
\nAlso, a higher fiscal deficit means increased government spending in some areas of the economy. This leads to more money chasing the same amount of goods and services and hence, higher prices i.e. inflation.
\nWhen interest rates as well as inflation remain high, people are likely to concentrate on consuming things that they need the most, like food and avoiding other expenditure. This will have an impact on economic growth. Hence, the only way to revive economic growth is to weed out inflation. And that’s easier said than done.
\n<\/span><\/span><\/span>This recent confidence of the government has come from the fact that the rupee which had almost touched 70 to a dollar, is now quoting at around 61.2 to a dollar.
\nThis has happened because the government has taken steps to squeeze out gold import totally. In the month of September the gold imports fell to around $0.8 billion. In August, the gold imports were at $0.65 million.
\nGold is bought and sold internationally in dollars. Hence, any gold importer needs dollars to buy gold. To buy these dollars the importer needs to sell rupees. And this pushes the value of the rupee down against the dollar.
\nBut with the government making it very difficult to buy gold, the importers are not buying dollars and selling rupees. And this has helped the rupee to recover partially, given that the demand for dollars in the official foreign exchange market has gone down.
\nOf course these numbers do not include the gold that is now being smuggled into India. While there is no specific data available for this, there is enough anecdotal evidence going around. As Dan Smith and Anubhuti Sahay of Standard Chartered write in a report titled\u00a0<\/span><\/span><\/span>Gold \u2013 India’s government gets tough<\/i><\/span><\/span><\/span>\u00a0\u201c<\/span><\/span><\/span>Pakistan temporarily suspended a duty-free gold import arrangement in August, when gold imports doubled. According to media reports, much of this was crossing the border into India. Dubai has seen a steady pick-up in the number of passengers being arrested at airports for smuggling. Nepal has seen an eight-fold rise in smuggling \u2013 69kg of smuggled gold was seized by customs in the first half of this year, versus 18kg for the whole of 2012.\u201d
\nThis does not reflect in the official numbers and there are other social consequences of smuggling. It is worth remembering that Dawood Ibrahim started out primarily as a gold smuggler, until he moved onto other bigger things.
\nThe other factor that has helped control the value of the rupee against the dollar is the fact that oil companies are buying dollars directly from the Reserve Bank of India and not from the market. Hence, the two major buyers of dollars in the foreign exchange market have been taken out of the equation totally. This has skewed the equation in favour of the rupee.
\nOf course this cannot continue forever. Some demand for gold is likely to return in the months of October and November, because of the marriage season as well as Diwali. The other decision that has helped the rupee is the fact that the Federal Reserve of United States has decided to continue printing money.
\nWhile it is widely expected that the Federal Reserve will continue to print money in the months to come, this is something that is not under the control of the Indian government. Also, it is worth remembering that given the high fiscal deficit, the threat of India being downgraded to \u201cjunk\u201d status by an international rating agency remains very high. If this were to happen, many investors will exit India in a hurry, putting pressure on the rupee, and undoing all the work that has been done to get it back to a level of 61 against the dollar.
\nIn short, the macroeconomic conditions of India continue to remain weak, despite the government trying to project otherwise.
\nThe article originally appeared on www.firstpost.com<\/a> on October 14, 2013
\n<\/span><\/span><\/span>(Vivek Kaul is a writer. He tweets @kaul_vivek)\u00a0<\/b><\/i><\/span><\/span><\/span>
\n <\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul\u00a0\u00a0 All is well, again. Or so the government of India has been trying to tell us over the last few weeks. But some spoilers have come in lately. The wholesale price inflation (WPI) for the month of September 2013 has come in at an eight month high of 6.46%. It was at 6.1% … <\/p>\n

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