Its been a long time since i posted in my blog. May be because am too idle these days, i just decided to come back and post.
This article, is completely based on my own analysis and i request all of you to comment/ correct me.
Till 2007-08 or i could say even now, India and Growth were synonymous. But now, thanks to renewed uncertainties in Europe and USA, the growing economies like India, Brazil have become victims of Inflation. The RBI in a bid to contain the rising rate(Inflation Rate), increased interest rates almost 12 times i
n the last 18 months. But nothing has gone in the way expected by the Central Bank. Prices are still increasing and loans have become costlier crippling growth.
How does raising interest rates help reduce inflation???
Inflation simply means rise in the cost of anything compared to the same period in the last year. This simply means people have to spend more to buy a commodity which was actually cheaper last year. One of the main reasons for inflation is surge in demand. So RBI increased interest rates in an attempt to decrease the money which is readily available. So people will have less money to spend and the cost of the commodities comes down. But this time, inspite of increasing rates, prices haven't come down. Instead growth is also slowing down. In a bid to prevent growth from coming down to alarming rates, the Central Govt recently allowed companies from borrowing loan overseas. And its obvious that the demand will grow because the festival season has begun in India. The crisis is USA and Europe is adding fuel to the fire. P-I-G-S nations are destabilizing Euro Zone and cracks are developing between Merkel and Sarkozy on issues such as EU bailout. We all know USA's problems and the growing public discontent. Rating agencies are playing their part by downgrading banks, governments etc. Recently FITCH downgraded Italy & Spain. BoE is adopting quantitative easing(QE) to inject money into the economy. You would be wondering why am quoting all these. All these factors play vital role in shaping a growing economy like India's. Anyways coming back to India. What can be done to control this deadly inflation that too during the festival season when the demand is normally high???? First and foremost price is the growing fuel prices. I happened to read that Indians pay the most for fuel and that lakhs of crores have been spent on fuel alone in the past 4-5 yrs. Increasing fuel prices has a cascading effect. It increases the prices of goods and daily needs. One more important fact is that almost 50% of what we pay for fuel goes to the govt as tax. The govt imposes excise duty, import duty, sales tax, entry duty etc etc on petrol. All these add up and increase the fuel cost. Next factor is food wastage. A world bank report says that Indians should reduce food wastage to control inflation. We all know how food grains were wasted due to poor storage facilities at FCI(Food Corporation of India) godowns and that Supreme Court intervened and slammed the govt for the poor maintenance of the godowns. When the production is less, demand grows resulting in inflation. So is the production really less?? The answer is 'no'. A report by the Ministry of Agriculture says we have had record harvest last year. So if that's true we shouldn't have such huge % of inflation. Fuel prices will surely increase the price but not to the extent present now. The real problem is hoarding. Middle men play a vital role in fixing the prices. The authorities don't take any action because they have political cover. One of my friends got a bag of rice(25kg) for INR 600 in his hometown. The same brand of rice i buy for INR 975 in Chennai. So where is the extra 375 going?? Transportation might take a maximum of 50 or 100 but not surely 300. And i strongly feel Govt should consider giving minimum support price for vegetables and other such perishable goods. This will encourage framers to cultivate more vegetables than cultivating paddy or wheat alone. Last year, the govt increased the MSP(Minimum Support Price) of pulses in a bid to encourage farmers to cultivate pulses.
It is very obvious that the developing economies like India will be the first to get affected due to the crisis in EU and USA. So its the duty of the local Govt to take preventive measures. We can all be proud of one fact- most of the produce of our country is consumed by the local population unlike our neighbor China which depends more on exports. Before i finish this post i would like to say this- Govt measures alone will not help contain inflation. We people also should act responsibly and support the steps taken by the govt to had a peaceful life.
Will be contd.....
This article, is completely based on my own analysis and i request all of you to comment/ correct me.
Till 2007-08 or i could say even now, India and Growth were synonymous. But now, thanks to renewed uncertainties in Europe and USA, the growing economies like India, Brazil have become victims of Inflation. The RBI in a bid to contain the rising rate(Inflation Rate), increased interest rates almost 12 times i
n the last 18 months. But nothing has gone in the way expected by the Central Bank. Prices are still increasing and loans have become costlier crippling growth.How does raising interest rates help reduce inflation???
Inflation simply means rise in the cost of anything compared to the same period in the last year. This simply means people have to spend more to buy a commodity which was actually cheaper last year. One of the main reasons for inflation is surge in demand. So RBI increased interest rates in an attempt to decrease the money which is readily available. So people will have less money to spend and the cost of the commodities comes down. But this time, inspite of increasing rates, prices haven't come down. Instead growth is also slowing down. In a bid to prevent growth from coming down to alarming rates, the Central Govt recently allowed companies from borrowing loan overseas. And its obvious that the demand will grow because the festival season has begun in India. The crisis is USA and Europe is adding fuel to the fire. P-I-G-S nations are destabilizing Euro Zone and cracks are developing between Merkel and Sarkozy on issues such as EU bailout. We all know USA's problems and the growing public discontent. Rating agencies are playing their part by downgrading banks, governments etc. Recently FITCH downgraded Italy & Spain. BoE is adopting quantitative easing(QE) to inject money into the economy. You would be wondering why am quoting all these. All these factors play vital role in shaping a growing economy like India's. Anyways coming back to India. What can be done to control this deadly inflation that too during the festival season when the demand is normally high???? First and foremost price is the growing fuel prices. I happened to read that Indians pay the most for fuel and that lakhs of crores have been spent on fuel alone in the past 4-5 yrs. Increasing fuel prices has a cascading effect. It increases the prices of goods and daily needs. One more important fact is that almost 50% of what we pay for fuel goes to the govt as tax. The govt imposes excise duty, import duty, sales tax, entry duty etc etc on petrol. All these add up and increase the fuel cost. Next factor is food wastage. A world bank report says that Indians should reduce food wastage to control inflation. We all know how food grains were wasted due to poor storage facilities at FCI(Food Corporation of India) godowns and that Supreme Court intervened and slammed the govt for the poor maintenance of the godowns. When the production is less, demand grows resulting in inflation. So is the production really less?? The answer is 'no'. A report by the Ministry of Agriculture says we have had record harvest last year. So if that's true we shouldn't have such huge % of inflation. Fuel prices will surely increase the price but not to the extent present now. The real problem is hoarding. Middle men play a vital role in fixing the prices. The authorities don't take any action because they have political cover. One of my friends got a bag of rice(25kg) for INR 600 in his hometown. The same brand of rice i buy for INR 975 in Chennai. So where is the extra 375 going?? Transportation might take a maximum of 50 or 100 but not surely 300. And i strongly feel Govt should consider giving minimum support price for vegetables and other such perishable goods. This will encourage framers to cultivate more vegetables than cultivating paddy or wheat alone. Last year, the govt increased the MSP(Minimum Support Price) of pulses in a bid to encourage farmers to cultivate pulses.
It is very obvious that the developing economies like India will be the first to get affected due to the crisis in EU and USA. So its the duty of the local Govt to take preventive measures. We can all be proud of one fact- most of the produce of our country is consumed by the local population unlike our neighbor China which depends more on exports. Before i finish this post i would like to say this- Govt measures alone will not help contain inflation. We people also should act responsibly and support the steps taken by the govt to had a peaceful life.
Will be contd.....
2 comments:
a nice insight as to what is happening in our country da .. :)
Good write-up. Hoarding is not the only problem. The betting (aka 'futures trading') leads to a distorted picture of what is actual demand in the market which jacks up the prices. The central govt. is unwilling to stop this dangerous practice of betting on food.
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