Economic Highlights

New Delhi, 31 May 2013 

Runaway Inflation

INDEGENOUS AGENDA CRUCIAL

By Shivaji Sarkar

France sells presidential national heritage with an auction of 1200 of bottles of fine wine from the cellars of presidential abode Elysee Palace. The headlines are symbolic of the cash-strapped government’s austerity drive. It also sums up the extent of Euro zone crisis. Is India far behind? Not really. The warning of RBI Governor D Subba Rao on inflation has rattled the market. Runaway inflation – over 36 per cent in a little over three years is affecting India in all sectors. Even inflation is stated to be reason for high 5 per cent fiscal deficit.

Its current account deficit has become a record at 6.7 per cent. It’s not just about the growing trade deficit –higher imports and falling exports – but creating unprecedented demands for the dollar. Rupee is becoming an international pariah at around Rs 56.39 to a dollar – a ten-month low and likely to go up to Rs 60.

India does not have fine wine to auction but all other parameters indicate that was it so it may have also put in on the block. The falling corporate profits of some of the giants only indicate this. Tata Motors could manage to refurbish its balance sheet because of Jaguar Land Rover sales in China. Its India operations continued to perform below par due to high operational costs and slowing economic growth, now set to touch decades lowest at less than 5 per cent.

Public sector Steel Authority of India Limited (SAIL) profits sink 72 per cent. Arcelor Mittal is closing down on Belgian steel operations. Infotech leader Infosys is seeing contraction. Many others too are having rough times.

The Government’s prescription for fighting inflation is apparently one-track – give higher wages to its employees (Sixth Pay Commission) and propose a Seventh! How? By levying more taxes these past few years.

It only forgets that beyond it, there are sectors, which are also compelled to either raise wages or cut down employees. The corporate opt for the latter and in extreme cases give paltry hikes. This upsets their balance sheets. The ONGC profit tanks 40 per cent to Rs 3387 crore from Rs 5644 crore, as it has suffered not only because of fall in gas and oil output but also high statutory levies (taxes).

SAIL is a testimony to the impact of inflation and its business, including wage, expenses. Its income came down to Rs 12,330 crore from Rs 13,885 crore, whereas expenses accounted for Rs 11,600 crore-- almost 94 per cent of its total income. These are set to increase by about 4 per cent in the present fiscal.

Being a public sector SAIL could not unethically cut down on expenses, as others are doing. This speaks volume in terms of the pressures the business community is facing. Even banks same similar fate as large borrowers are withholding repayment. Mounting operational costs and losses (non-performing assets) and populist moves to open branches in remote areas to serve MNREGA and other cash transfer programmes are gradually turning them sick. Public sector banks are subsisting on heavy Government reinvestment and those in private sector are increasing charges to remain afloat. International rating agencies are considering downgrading State Bank of India for its growing NPA.

Standards and Poors and Moodies are repeatedly threatening downgrading for pressurizing the international agenda for opening up sectors like insurance and pension, which was responsible for the US and Euro economies fall. Instead of fighting inflation, the Government is playing the blame game, saying Opposition is blocking its moves.

While it is trying to revamp key clauses in the foreign direct investment (FDI) policy to pave way for higher inflow of overseas capita, FDI has high costs. It may be good election propaganda but whatever little has come in so far has not solved the nation’s problem. It needs to be seen whether this curbs or boosts inflation.

All FDI companies have raised prices, their products have become expensive and repatriation of profits is high. Even their retail shops are no exception. Often they sell products at two to three times higher prices than they do in their countries, by taking advantage of lax regulatory provisions and social control, which they are subjected to in theirs.

It reiterates need for an open discussion on FDI’s merits and demerits and contribution to inflation, as it is now established that food inflation is almost directly  a result of foreign money being used for speculation and hoarding.

Sadly, inflation has become a phenomenon since June 2004, when UPA-I took over the reins. It is mostly abetted by the Government, either for its unwillingness to tackle it or allow policy prescriptions that hike it further. This suits a political party facing election as it rakes in higher political funding. It is worth establishing the link corruption and inflation have. At least this country has seen prices of all commodities and services rising with unfolding of each scam.

The latest cash scam in the Railways saw an immediate increase, almost 30 per cent in cancellation charges. Freight charges are being continuously raised through “dynamic mechanism”. The Government also allows subterfuges to increase air fares and road travel cost by imposing unaffordable high toll tax. Don’t such Government-sponsored moves add to inflation?

It is politically convenient to express concern over inflation, as both Prime Minister Manmohan Singh and Finance Minister P Chidambaram have repeatedly done. But inflation has only skyrocketed instead of being controlled.  

Unless and until the nation takes steps to control inflation, its problems are bound to multiply.

Indeed, the Indian economy needs a new prescription. The 1991 Manmohanomics has not succeeded--from day one the rupee has plummeted against dollar. In the days of controlled exchange rate regime, the rupee exchange rate hovered around Rs 4 in the 1950s, Rs 5 in the 60s, Rs 7 in the 70s, and Rs 8 in the 80s. The liberalized era of 90s was different, the rupee moved in the Rs 20s (the rupee was also partly decontrolled in early 90s) and Rs 40 in the decade of 2000 and Rs 50 in 2010.

The reasons for the two devaluations in 1966 and 1990 were not too dissimilar; twin deficit (current account and fiscal), soaring inflation, insufficient foreign exchange reserves, and the developed world demanding decontrol and liberalization to allow them to do business in India. The continuous downhill hasn’t helped. Exports and earnings in terms of dollar have not risen and imports have become dearer, leading to higher prices of commodities in the domestic market.

Policy review is required. India is being guided by developed nations, which may them not us. For a stable domestic economic regime, the rupee value has to be priority, and cannot be allowed to be on a continuous roll. All other parameters that are increasing inflation like betting on food items, high taxes, tolls, fares, land prices need to be checked.

Indian economy has strength but policies are marring it. India needs to show its political will and not succumb to the crumbs thrown by the developed world to subvert interests. Yes, in short it calls for a break from Manmohanomics and set a new indigenous agenda, unless it wants to emulate France. -- INFA

(Copyright, India News and Feature Alliance)