Financial Daily from THE HINDU group of publications
Wednesday, Sep 08, 2004
Financial Daily from THE HINDU group of publications Wednesday, Sep 08, 2004 |
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Money & Banking
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Insight Industry & Economy - Economy Columns - Financial Scan Inflation: Emerging economies different S. Balakrishnan
WHEN it comes to reporting inflation, we are better off than the US. Our price indices are updated weekly, whereas there they do it only once a month. Thus, Indian bond traders have the luxury (if one could call it that) of chewing inflation data four times as often compared to their US counterparts. Does it help? Weekly reporting perhaps enables a more gradual portfolio adjustment to changing conditions and outlook. As of now, on the fundamental point that inflation is rising, there is universal agreement. But when it comes to causes, differences surface. One school argues that it is almost entirely because of the soaring cost of importing oil. Some others put the blame on excessive liquidity. A third group thinks the fiscal deficit is the culprit. On the fringe is the view that inflation is well under control: witness the CPI measure running at less than half of the WPI. All this means policy prescriptions to tackle inflation vary. The monetary crowd wants the benchmark interest rate (the RBI's repo rate) to go up. Believers in imported inflation feel it will collapse once crude prices fall. Fiscal discipline is another mantra advocated to stem the northward march of prices. Revamp the composition of the WPI in line with the Producer Price Index (PPI) of the US, say several. (These surely must be the "reformers"). The loudest demands to control inflation have come from the tiny community of bankers. Their investments have depreciated because of rising bond yields. And who is responsible for this? Why, the banks themselves. They started selling bonds as they watched, with growing alarm, inflation pushing higher week-after-week. It is more than enough to confuse any one. Try telling all this to the man on the street. But a conspicuous and significant thing is the absence of morchas on rising prices by the ubiquitous Left parties. Does it mean the common man is not (yet) touched by inflation? The severe cutback in new projects, both in the public and private sectors, in the late nineties and later, as well as the erosion in global consumer and business confidence post-September 11, kept inflation very low. Now that capex in infrastructure and industry is picking up smartly, there is bound to be some upward pressure on commodity and manufactured prices. A growth rate of 7-8 per cent in an emerging economy will be accompanied by higher inflation than in mature economies growing only 3-4 per cent. Thus, even if crude prices decline significantly, it is unlikely that our inflation rate will fall much below 5-6 per cent. Nor will an increase of say 50 basis points - justified though it may be - in the repo rate make a big impact on inflation. And getting it down to 2-3 per cent may require punitive interest rates and a recession. Any takers?
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