Deep-Insight

Reality Bites, that’s what Indian economy is experiencing right now, after a dream run since 1991 introduction of LPG (Liberalization, Privatization and Globalization) policy India has enjoyed a fairytale run. It even managed to bypass the Asian Crisis in 1997 and was largely insulated from the dot com bubble burst of 2000. However after a run of 17 beautiful years India has tasted sour for the first time.

Opening up of its markets has integrated India with the world economy and it no longer enjoys the insulation it found so handy during the earlier crisis. Ongoing US recession which has triggered a global financial situation resulting in revision of growth rates across the globe and India is no exception. 9% growth rates are no longer expected this year as a direct consequence of this. On top of this the only hope, domestic consumption has been affected by the high inflation rates. Concentrating on domestic markets might have helped economy out not only by compensating for decrease in US demand but also providing depth to our markets. Now inflation is at a three year high of 7% and the bad news is that this time it is not demand driven instead it is due to supply side constraints. Normally this would result in increased production but coming on the back of a major financial crisis the companies are not too eager to add capacity so quickly, thus resulting in higher inflation. Besides that the anti inflationary measures taken on monetary policy side will hamper growth further by reducing liquidity.

With elections on the horizon the government is leaving no leaf unturned reducing duties, cutting tariffs, imposing export duties and bans, government is on war footing to handle this crisis. The difficult part about supply side driven inflation is that this monetary problem can’t be controlled effectively with the monetary policy. There might be talks about raising the CRR (Cash Reserve Ratio) by RBI, but the thing is raising CRR will suck liquidity out of the system which won’t help checking the rising inflation. The reason behind the rising rates is not too much money with people but the low supply of the essential goods like staple food grains, edible oil and fuel prices is the reason behind the rising inflation. This is major cause of concern as this is affecting “aaam aadmi” (the common man) and poor people who find their daily needs getting costlier day by day.

Indian Government is ready to go any length to correct this situation as rising costs may erode all the good work done by this government in last 4 years and that too just before elections. Duty cuts and export tariffs have already been brought in action next few weeks may see a rise in CRR rates and govt using special powers to control prices and states checking hoarding under the commodities act. Coming few months are going to be very crucial as government walks a tight edged rope balancing growth and inflation control.

K.V.S.