IED - Final Draft

8/6/2019 IED - Final Draft

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1

Indian Economic Development

Project,

IndiasDelicateDance -Containing

Inflation whileEnsuring Growth


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CONTENTS1. INTRODUCTION What is inflation?

How is inflation measured?

What does economic growth imply?

2. GROWTH INFLATION DYNAMICS How does inflation affect growth? Comparing data on inflation and growth

3. CAUSES OF INFLATION

Various factors which account for inflation

4. EFFECTS OF INFLATION Why is high inflation rate unbearable? How inflation affects various sectors

5. POLICY RESPONSES Policies undertaken by the Reserve Bank of India Policy responses by the Government Future actions by the Government-CII Prescriptions

6. EVALUATING POLICIES The growth-inflation balance: Negative impact of the policymeasures on growth

7. FUTURE PERSPECTIVES8. RECENT ARTICLES9. REFERENCES


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The Indian growth rate is impressive growing at arate of 8.20% (Q4 of 2010) it is considered to be one of the fastest growing economies of the world. But thisgrowth story is confronted by major macroeconomicconcerns. At a soaring rate of 8.30% (Q4 of 2010),Inflation haunts India and most emerging marketeconomies due to large output gaps and highunemployment rates.

The most important question now raised by the topeconomists of the nation is,

Is this price rise going to be a permanent fixturebecause of India's high growth rate?

Most of the empirical data suggests that consumerprices increase faster in countries going through a fastgrowth phase compared to those with slower growthrates.

What is Inflation?At its simplest, Inflation is an increase ( an upwardmovement, it should be positive) in the general level of prices (measured by WPI Wholesale Price Index or CPI Consumer Price Index) of goods and services in aparticular economy (Indian, US, Chinese and so on..)over a defined period of time (Monthly/Weekly/Annual).

In more laymen terms it can be understood as erosion inthe purchasing power of money. With an increase in therate of inflation, the purchasing power of money isreduced further.


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This graph taken from Indian Ministry of Labour shows the Inflation rate in Indiafrom July 2008 i.e. just before the Global Recession of 2008 to January 2011.This also indicates that from mid-2009, Inflation started to pose as a mjor macroeconomic problem for the nation.

How is Inflation measured?o

Inflation in India is calculated as per Wholesale PriceIndex

o 435 commodities are used for the WPI based inflationcalculation and base year for the WPI calculation is1993-94

o WPI is available at the end of every week (generally Saturdays), for aperiod of one year ended that day

o There's a time lag of 2 weeks

o After several years of rapid growth, 2009 proves to be a testing year forIndia.

Looking at the past trendsSince Independence, India has had a much more stable record with respect toinflation than most other developing countries. Though inflation was alwayspresent in the economy since 1950s, as is expected out of any growingeconomy, it always remained in single digits for most of the years.Between 1950-1960

The inflation on an average was at 2.00%

Inflation can make every citizen a billionaire, but in terms of a currency, that is worthless!


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Between 1960-1970 The inflation on an average was at 7.2%Between 1970-1980

The inflation on an average was at 8.5%.

But it has started showing its prominently harmful symptoms and ill effectssince 1991, post liberalization. Instigated by the fiscal crisis of 1991, marked bydeficits in government finances and devaluation of the rupee, a whopping

inflation of 13.66 per cent took its toll on the Indian economy. Though latercontrolled, average inflation rate has been stubborn at a 9.3 per cent per yeartill the end of the 20th century.

India is deeply intolerant of high inflation. Its either because we have veryconservative policymakers or because the political elite know that theelectorate explodes in anger whenever inflation crosses the middle teens. Thisis a comforting thought as the current inflation rate is very close to doubledigits. History suggests that the chances of inflation running completely amokare quite low; but then history can be misleading.

The current inflation scenario is a cause of concern, as the inflation rate persistswell above the upper bound of the comfort zone. The fact that these inflationarypressures emerged rather quickly in a situation in which the economy was justbeginning to recover from the significant slowdown of 2008-09 made the policychallenges more complicated. The monetary policy response to thesepressures has been a calibrated one, seeking a balance between sustaining therecovery and reining in inflation, while being mindful of the risks that stillremain in the global environment.

This graph shows the Long term WPI trends of India since 1954. This alsoindicates that the volatility of inflation has decreased considerably from the last two decades of the 20 th century.

What does economic growth imply?


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Economic growth is the increase of per capita gross domestic product (GDP) orother measure of aggregate income, typically reported as the annual rate of change in real GDP. It is a positive change in the level of production of goods and services by a country over a period of time.

Nominal growth is defined as economic growth including inflation , while real growth is nominal growth minus inflation. Economic growth is usually broughtabout by technological innovation and positive external forces .
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How does inflation affect growth?In short term the relationship between growth and inflation is usually positive.Policies that raise output (for example, expansionary fiscal and monetarypolicies) also raise prices. Therefore, in the short-term inflation in India dependson the supply bottlenecks. As growth picks up, inflation might pick up as wellbecause of these supply bottlenecks.

In long term however things are different. As investment picks up and supplyconstraints are eased, overall inflation trends are in line. If investment isassumed to be the engine of growth, an adverse impact of inflation oninvestment implies an inverse relationship between inflation and growth.Empirical evidence supports the hypothesis of an inverse relationship betweeninflation and long-term growth. This is in contrast to the short-term experience,where inflation and output growth occur together Moreover it is important thatthe inflation rate be kept stable even when it is low, as evidence indicates thatthe adverse effect of inflation variability on investment is higher then.

This negative long term relationship between Growth and Inflation is proved bythe growth pattern of the Indian economy. It clearly shows that over the pastsix decades accelerating growth has been accompanied by declining inflation.As high growth has led to more investments, this has eased cost pressures onthe economy.

Thus, there is a trade-off involved between inflation and growth. So, bothcannot be achieved together. Even though higher short-term growth may beachieved by allowing high inflation, economists now suggest that lower inflationmay be chosen, even if accompanied by lower growth, because it creates anenvironment conducive to higher long-term growth.


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Comparing data on inflation and growth

This graph clearly shows that,

From 1956-60 to 1971-75, Inflation is rising and growth is virtuallyconstant at a low level and the volatility of inflation increases steeply.

From 1971-75 to 1991-95 i.e. the period between the global oil shock andthe economic crisis of India, inflation fell till 1981 and shot up after thatwhereas growth was low till the 1980s and started rising thereafter. Andthe inflation volatility fell considerably.

From 1991-95 till 2006-10, inflation was comparatively low and growthwas on constant increase. And volatility of inflation remained virtuallyunchanged. In 2000s however, inflation is lower than growth.

Recovering from the Global Recession, faced by severe droughts in 2009 and further aggravated by the soaring fuel prices due to the disturbed Middle East,Inflation is now a major macroeconomic concern for India.


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Graph 1

This graph shows the relationship between the WPI and Real GDP Growth fromthe 1980s to 2010.

Graph 2

This graph shows the relationship between the CPI and GDP growth from the1980s to 2010 .


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There are a few different reasons that can account for theinflation in our goods and services. These are:

Demand-pull inflationrefers to the idea that theeconomy actual demands more goods and services

than available. This shortage of supply enablessellers to raise prices until an equilibrium is put inplace between supply and demand.

The cost-push theory , also known as "supplyshock inflation", suggests that shortages or shocksto the available supply of a certain good or productwill cause a ripple effect through the economy byraising prices through the supply chain from theproducer to the consumer. You can readily see thisin oil markets.

Money supply plays a large role in inflationary pressure as well.Monetarist economists believe that if the Federal Reserve does notcontrol the money supply adequately, it may actually grow at a ratefaster than that of the potential output in the economy, or real GDP. Thiswill drive up prices and hence, inflation. Low interest rates correspondwith high levels of money supply and allow for more investment in bigbusiness and new ideas which eventually leads to unsustainable levels of

inflation as cheap money is available.

Wage-Price Spiral - Inflation can artificially be created through acircular increase in wage earners demands and then the subsequentincrease in producer costs which will drive up the prices of their goodsand services. This will then translate back into higher prices for the wageearners or consumers. As demands go higher from each side, inflationwill continue to rise.

Taxation Indirect taxation, such as VAT, sales tax, excise tax etc, hasthe effect of increasing the cost of goods for the eventual consumers,leading to increased inflation. On the other hand, a decrease in Income

Tax rate will mean more disposable income for consumers againleading to higher inflation.

Increase in Price of Imported Raw Materials The best example forIndia would be petroleum almost our entire requirement in petroleum isimported. An increase in prices of petroleum can really accelerateinflation in India.

Depreciation of Exchange Rate s This increases the price of imports

into the country, and decreases the in price of exports abroad.
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When inflation becomes very acute,hyperinflation may result a very dangerous situation for the economy.

How is inflation affecting the varioussectors? INFLATION IN AIRLINE INDUSTRY

One major issue is cost of Aviation Turbine Fuel

Companies prefer to ground flights

Job cuts in airline industries on a rise

INFLATION IN BANK

The RBI may go for further monetary tightening in the light of risinginflation

Yields are rising, compelling the banks to raise interest rates, which willhamper their business growth

EFFECTS ON INFLATION ON AUTOMOBILE COMPANIES IN INDIA

There is a twist in the tail inflation has some positive effects too.Here they are:

Relief from Debt If a loan is taken at a fixed rate of interest, we willcontinue to pay the same interest to our creditor, with the result that the realrate of interest, that is, the nominal rate minus the inflation rate, willdecrease

Increase in Investments Also known as the Tobin Effect when peoplerealize that money decreases in value, and it would be better if it is invested in an asset which can yield higher income such as real capital assets
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The automobile sector is also suffering because of soaring raw materialprices

The two-wheeler sector is especially suffering, as banks are not willing tolend fearing delinquency.

EFFECT ON STEEL AND RUBBER INDUSTRIES

Steel prices have hardened.

Rubber and plastic prices have also gone up substantially

INFLATION IN CEMENT INDUSTRY

Higher input costs, low market valuations and scaled up capacity amidstreduced demand is likely to take its toll on the cement industry.

The growth rate of the industry is projected to drop.

High inflation and home loan rates have slowed down the growthtrajectory of the real estate sector, which accounts for 60 % of the totalcement demand.

SMALL SHOPS AFFECTED

Kirana stores have started feeling the heat.Some small shops have shut and others are considering getting into newbusinesses

Inflation has hit low income group which has taken its toll on small retailstores and businesses

EFFECT ON OIL PRICES

India is among the most expensive places for oil

Middle class have started using public transportation

Rising oil prices is a concern especially with the growth in sales of automobiles

More people have started using one mode of transportation examplesharing of a car to go to office

Sensex

Investors confidence is dented by the rising inflation.


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With most of Indias vast population living close to or below the poverty line, inflation acts as a Poor Mans Tax

The ultimate policy objective is a higher level of well-being for thepopulation, but a conflict arises in the means of achieving itbyhigher growth or by lower inflation?

Policies undertaken by the ReserveBank of India (RBI)

The RBI has certain weapons which it wields every time and in all situations tocounter any form of inflationary situation in the economy. These weapons aregenerally the mechanisms and the policies through which the Central Bankseeks to control the amount of credit flowingin the market.

The steps generally taken by the RBI totackle inflation include:

a rise in repo rates (the rates at which banks borrow from the RBI)

The present repo rate is 6.75% ( w.e.f.

17/03/2011) showing a 25 basis pointincrease from the previous quarter

a rise in Cash Reserve Ratio The CRR remained unchanged at 6%(w.e.f. 24/04/2010)

a rise in the reverse repo rate (rate at which RBI borrows from banks) The present reverse repo rate is 5.75% ( w.e.f. 17/03/2011) showing a25 basis point increase from the previous quarter


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These are intended to spur banks to raise lending rates and to reduce theamount of credit disbursed. The RBI's measures are expected to suck out asubstantial sum from the banks. In effect, while the economy is booming andthe credit needs grow, the central bank is tightening the availability of credit.

The RBI also buys dollars from banks and exporters, partly to prevent thedollars from flooding the market and depressing the dollar indirectly raisingthe rupee. In other words, the central bank's interactions have a desirable

objective to keep the rupee devalued which will make India's exports morecompetitive, but they increase liquidity.

Thus the policy stance of the RBI is as follows:

1. Contain the spill-over of high food and fuel inflation into generalized inflationand anchor inflationary expectations, while being prepared to respond to anyfurther build-up of inflationary pressures.

2. Maintain an interest rate regime consistent with price, output and financialstability.

3. Manage liquidity to ensure that it remains broadly in balance, with neither asurplus diluting monetary transmission nor a deficit choking off fund flows.

Policy Responses by the Government

Pressed from all corners on a rising food inflation rate, the Indiangovernment has announced a bunch of measures, including setting upan inter-ministerial group (IMG) to review the situation.

Headed by Chief Economic Adviser Kaushik Basu, the IMG will review theoverall inflation situation, with particular reference to primary foodarticles.

The panel will review production and rainfall trends and build aninstitutional machinery to read warning signals, assess internationaltrends, recommend action on a number of fronts to prevent price spikes,and suggest measures to strengthen collection and analysis of data andforecasting.

The Government is also about to tighten exports and loosen imports of essential commodities and might undertake tariff reduction where

necessary. Public Sector Undertakings are set to intensify purchases of essential

commodities, particularly edible oils and pulses, for distribution throughtheir retail network and also through the Public Distribution Systemoperated by the State Governments.

Exports of edible oils and pulses, as well as non-basmati rice, will remainbanned.

The government is also stepping up its crackdown against hoarders andblack marketers and said that it will be taking up strict measures againstcartelisation.

Among long term measures, the government is looking at strengthening

the existing Public Distribution System (PDS) and setting up farmers'mandis (wholesale markets) and mobile bazaars.

The Committee of Secretaries under the Cabinet Secretary will review theprices situation with individual States, and advise the Departmentsconcerned of the Central Government to maintain close coordination with


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State agencies to get direct feedback with a view to taking suitableremedial measures.

Future actions by the government CIIPrescriptions

Not ignoring the fact that theaverage food inflation (about 11%)over the last five years has beentwice as high as general inflationrate (5.5%), monitoring high foodinflation is a serious cause of concern. According to Confederationof Indian Industry (CII), thegovernment should take somestrong measures to ease the foodprice pressure as well as benefit thesmallest stake holder in the

agriculture sector. CII has given thefollowing prescriptions in thisdirection:

New Delhi, Feb 28: Finance Minister PranabMukherjee presented the federal budget for2011-12, promising to address the twin issueof curbing inflation and pushing economicgrowth of India.


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India has comfortable levels of food grain stocks. The release of thesestocks together with faster distribution can help contain rise in price of food grains.

State government should take effective action against hoarders andblack marketers

India having comfortable Foreign Exchange Reserves, a part of it can beused for bulk import of essential commodities like pulses, fruits andvegetables etc.

Improving food production and productivity: There is urgent need tofocus on research as well as better agricultural practices to ensure thatproductivity levels are increased in the shortest possible time. Specialattention should be given to the states with relatively low productivity.

Though the country has been able to build up strategic reserves of wheatand rice in the last few years the issue of storage, efficient food stockmanagement, and offloading of stocks in time needs urgent attention.

The government should revamp the MSP policy and make it more marketoriented.

Promoting Private sector Participation in Food-grain Management:Private marketing should be strengthened through reforming theAgricultural Produce Marketing Committees (APMC) Act, abolishing theEssential Commodities Act (ECA), abolishing rice levies, permitting directpurchases from farmers, eliminating movement and storage controls,facilitating warehouse receipts, strengthening futures markets, andopening imports and exports to the private sector.

Pulses should be a part of the buffer stock maintained by Government asis the case of Rice and Wheat. Need for a New Green Revolution inPulses and Oilseeds

Taking Policy initiatives to enhance food grain availability by broadeningthe base of procurement.

Improving the overall investment climate for Promoting agribusiness,

agro-industry and overall rural non-farm sector growth. In the long term,measures to improve the functioning of markets and value-additioncould offer more efficient and cost-effective methods of relievingseasonal gluts.

Stepping up investments: In the long run, India will have to invest morein agriculture to be able to meet the objective of food security of agrowing population.

Creating an enabling environment for PPP: Considering the largeinvestment requirements, the private sector participation is crucial forcreating the necessary marketing infrastructure.

Reformulating tenancy legislations to encourage advancedcommercialization of agriculture.

To encourage vertical coordination between farms, firms andsupermarkets, marketing and trade policies should be liberalized.


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According to RBIs governor, Mr. Subbarao, The RBI is doing a good joband not worse than any other country. They certainly are watching like hawksand they have tightened up monetary policy. It is a balancing act. But too muchtightening can have an adverse impact on investment. So care needs to betaken. The RBI may have faced a tougher call than its counterparts in othercountries facing inflation. Even though RBI was one of the first central banks inthe emerging economies to roll back the monetary stimulus, India was the first

to see inflation rise very sharply. Inflation raced at above 10% between Apriland August 2010. The monetary tightening began after June-July 2010, whenthe RBI took advantage of the deficit in the market -- the 2G telecom spectrumauctions had caused a liquidity crunch -- and effectively tightened interest ratesby 150 basis points.

The governments handling of foodinflation is poor. The Governmentpossesses 60 million tons of food

grains yet the food grain prices arerising very rapidly. Even India'sSupreme Court recently came downheavily on the government forallowing food grains to rot inwarehouses, and prodded it todistribute them for free or atsubsidized prices to the poor. Also,in India, responses to food supplyshocks depend upon the states to an extent.

The Growth-Inflation Balance: Negative impact of the policy measures on Growth

The major drawback of the country's inflation control strategy is thatit always considers inflation as a seasonal and temporary problem.

We are struggling with growth-inflationdynamics. For inflation management, wehave to raise policy rates. For protecting,promoting and preserving recovery, weneed to keep rates low. So there istension between raising interest ratesand keeping them low.


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The economy is growing at a high rate, second only to China worldwide.However, this growth rate is being choked by the anti-inflationary policies of theRBI. If the CRR and REPO rate are hiked frequently, the economy may take a U -turn, as most commercial banks religiously increase their lending rates, withoutactually studying the impact. This would lead to,

Reduction in the level of investment activity in the economy, particularly

in the infrastructure sector Difficulty in access to funds for the bulk of small and medium

entrepreneurs (SME) Housing activity will suffer an impact because most loanees are on

floating rates and will face increased equated installments

The RBI is undertaking such policies with the belief that by reducing the moneyflow in the economy inflation can be curtailed. The demand must be effectivelypushed down which the current policies are aimed at and are trying to achieve.But, Inflation is a consequence of increasing demand vis a vis the supply inthe economy. Hence, the RBI should also aim at bolstering the supply forces to

meet the requirements of consumers and therefore combat inflation.Economists admit that while RBIs efforts to contain inflation will reduceborrowings, prices would continue to rise as Inflation is a function of risingexpectations and going by that, we have some amount of inflationary steam leftin the economy.

While the central banks efforts may have achieved part of their objective, of slowing down credit growth, it clearly may not have done enough to curbinflation. These measures generally taken by the RBI do not effectively tackleinflation but on the other hand effectively stunts the growth pattern of theeconomy.

Major Drawbacks of the CRR-Repo Policy adopted bythe RBI,

1. Monetary tools have proved more effective in economies withgreater financial inclusion.

For countries like India, where the majority of the population still has no accessto banks, and those with access barely have the resources to open bankaccounts, the monetary policies are not very effective. The increasing cost of funds and rising interest rates are of little consequence in the economic life of afinancially excluded population. Much more remains to be achieved on thefinancial inclusion front. In India, the ratio of deposit accounts to total adultpopulation is only 59 per cent. Most account holders are urban-centric, leavinglarge segments of the rural population with no access to banks or the means tosave or borrow.

2. The impact of the CRR and Repo rates hike will not distinguish asbetween productive credit and credit meant for consumption.This will hurt growth and the creation of assets in the economy.

These policies do impact the level of money supply in the economy and play animportant role in the fight against inflation . But, Farmers today keep several acres of land uncultivated as the financial returns are not commensurate withthe expenses incurred for cultivation. Irrespective of the increasing cost of funds, large segments of the borrowing public, especially the small, mediumand large farmers, have no option but to approach the commercial and


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cooperative banks, or the multitude of unregulated moneylenders at thebeginning of every crop cycle. As a result, lendable resources of the system willbe reduced to that extent and bank credit will be dearer. This hike will result inincrease of the lending rates, whether for production or consumption. The RBIcan address only the demand side through such an approach. The need of thehour is to curb only consumption credit and not production. On the other handthere is urgent need to increase supplies of food products and manufacturedgoods, for which credit flow to the farm sector and industry must increase.

Thus, Right now, the RBI seems to be concentrating only on the Demand end of inflation, as a result the entire perspective of supply is completely ignored.Inflation may also be curtailed if the supply is bolstered to meet the demands of the people. With the increase in supply, prices would inevitably come down andthus inflation may be controlled. Granted, the supply side would not bestrengthened so easily, as it would require infrastructure development,planning, large scale investments etc. However, this is where the RBI could playan extremely important role.

For the purpose of bolstering supplies, the RBI can

lay down regulations to direct money either directly or indirectly withspecial importance to the agriculture sector

direct foreign capital in these fields

This should be done with the purpose of meeting the ever risingdemand.

This would serve a twin purpose,

Firstly , with the RBI increasing the CRR and other interest rates, itbecomes difficult for the farmers to get their loans before their projectsand it also becomes difficult for SME to obtain loans to fulfill their targets.

Through this carefully routed capital, there may be an access to therequired finance for these groups of people notwithstanding the highinterest rate.

Secondly and most importantly this would also enable the governmentto lay down measures to utilize this money to develop the infrastructurewhich would bolster supply and thus would be a huge boost in the fightagainst inflation in the long run.

The government would also have to play an important role in controllinginflation without harming the economic growth by ensuring greatertransparency in the RBI's sterilisation operations. The Governments at theCentre and the States should take urgent action to make available adequatecredit at competitive interest rates and offer other incentives.

Inflation can be contained only if supply-side and demand issues are effectivelyaddressed, apart from initiating appropriate fiscal and monetary measures.

But, surprisingly, instead of giving any attention to the supply factors, by simplylowering money and credit in the market, the demand is being artificially

pushed down. It is stifling the needs and requirements of the consumers and isattempting to create an illusion that there is no demand.


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Short-term policies to curb inflation harmful: FAO

New Delhi , 28 th feb2011: Warning against high inflationary trends, UnitedNations Food and Agriculture Organization (FAO) has asked developingcountries not to take short-term policy measures like export curbs to containfood prices.

Emerging economies should carefully examine the implications of high foodprices and not to take any policy action that might appear useful in the short-term but could have harmful, longer-term effects or even aggravate thesituation, the UN body said, while releasing the latest policy guide forcountries to tame food inflation.

The FAO guide will assist policy makers in developing countries in addressingthe negative impacts of high food prices, it said.

Food inflation in India still continues to rule high at 15.57%. To tame the risinginflation, the government has taken measures such as ban on export of onions,non-basmati rice, wheat, besides withdrawing duty benefits on export of milkproducts.

The guide addresses the conditions under which policies and programmes arebest adapted. It also cautions against measures that might appear useful in theshort term but which could have harmful longer-term effects, it added.

The FAO Food Price Index, a measure of basic food prices at international level,peaked in December 2010.

Sharing the experience of the food crisis of 2007-08, FAOs Policy andProgramme Development Support Division Director Richard China said, ...insome cases, hastily taken decisions by governments to mitigate the impact of crisis have aggravated its impact on food security.

He also pointed out that export restrictions applied by some surplus food-producing countries exacerbated the global food market situation during the2007-08 crisis.

FAO strongly advises against such measures (export curbs), as they oftenprovoke more uncertainty and disruption on world markets and drive prices up


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further globally, while depressing prices domestically and hence curtailingincentives to produce more food, he noted.

Economic Survey 2011: India food inflation second lowestamong emerging economies

NEW DELHI: India did fairly well on the food inflation front in 2010, as per the Economic Survey tabledin Parliament today, recording a lower rate of price rise in essential items than other major emergingeconomies of the world, barring the Philippines.

India's food inflation was the second lowest among all emerging economies in the 2010 calender year andthe country also witnessed one of the steepest declines in overall inflation, the Survey said.

It said India's average food inflation in November, 2010, was 5.4 per cent, far lower than 15.8 per cent inArgentina, 9.2 per cent in Brazil and 11.7 per cent in China, as per data on 15 emerging nations from theInternational Labour Organisation for the month.

The Philippines recorded food inflation of 3.2 per cent in September, the month for which its data wasconsidered. Citing data from the International Labour Organisation, the Survey said that while headlineinflation showed a rise in other emerging economies, the overall rate of price rise went down in India.

This was more so in the case of food inflation, where India was among the handful of emerging economiesto have witnessed an easing in the rate of price rise.

Giving example from individual months taken at random, it showed that overall inflation in India was 8.3 per cent in November, as against 13.5 per cent in the same month of 2009.

During the same month, inflation in China soared to 5.1 per cent from 0.6 per cent in November, 2009,and it went up to 11 per cent in Argentina from 7.1 per cent a year-ago. In the case of Brazil, inflationstood at 5.9 per cent in December, as against 4.3 per cent in the same month of 2009.

In contrast, food inflation in India stood at 5.4 per cent in November, 2010, down from 17.6 per cent in theyear-ago period. Other major emerging economies, including Argentina, Brazil, China, Egypt, Iran,Pakistan, Uruguay, Ukraine and Indonesia saw prices of food products spiralling upward at a much higher rate.

The Survey also blamed currency competition for creating inflationary pressure in emerging economies.

Talking about the issue, it said each country's central bank is taking steps according to their own views.

"This has given rise to destabilising currency competitions and may be a factor behind the recent increasein inflation in emerging economies," the Survey said.


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Is India's economic growth story of 8%-9%growth in GDP about to get derailed?

According to Arvind Panagariya, professor of economics and the JagdishBhagwati professor of Indian political economy at Columbia University, theanswer is NO. In their views the growth story is going to continue. India hasseen high inflation in the first half of the 1990s and in the 1980s. "I get lessperturbed by inflation; I would be [perturbed] if it goes beyond 15%. Obviously,hyper inflation will impact growth, but we are nowhere near that." Panagariyasays that India's growth is determined by other factors, such as the country'srelatively high savings rate of about 35% and a more productive and globallyopen economy. He has no worries on those fronts, and looks beyond "short-term bumps" for comfort. "If industrial growth goes to 12%-13% for threemonths, we feel we have broken the barrier, and if it goes down to 2%-3%, weget upset," he says. "But look at the long-term trend: Industrial growth haspicked up at 8%-9% [and] services are growing faster."

A long-standing policy should be committedtowards maintaining a balance betweengrowth and inflation in the short run, while

fostering faster growth with lower inflationover long periods of time. This is primarilybecause growth has been driven by expandingcapacities across the board as well as, inrecent years, by increasing global linkages.Both these factors have helped to achieve astrong supply response to growing demand,

thus keeping inflation in check.

This does not mean that the Indian economy is now invulnerable to inflationshocks. Food and energy price shocks have been a regular part of the economiclandscape and may continue to be so in the future. Food prices are being drivenby some structural imbalances between demand and supply. There has alsobeen a diversification in the dietary patterns away from cereals and towardsprotein sources. This requires an effort to quickly increase the availability of these items, on which the longer term outlook for food price inflation lies.

Solutions to combat high food inflation lie in sprucing up the procurementsystem to enable sales of food stocks in smaller quantities than now permitted,and by allowing farmers to strike deals in the open market.

Experts say that things may have turned out better if politicians had a vestedinterest in ensuring low food prices. An election year (the next general electionsare scheduled to be held in 2014) would have seen more efficient and quickersupply-side management and administrative measures.
http://www.columbia.edu/~ap2231/cvbio.htmlhttp://www.columbia.edu/~ap2231/cvbio.html


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The practice adopted by the RBI right now does notseem adequate. It is clear that the economic statusand mindsets of the people of India are advancing.

The Indian consumer is no longer afraid to spendtomorrows money today. The average Indianconsumer has reached a comfortable economicposition where he now starts to demand productsand services which were earlier not available tohim. This is an indicator of an improved standardof living. Why should this be considered adisadvantage? The problem here is that thecountrys infrastructure is not capable of meetingthese requirements.

The long-term growth prospects of the Indian economy provide an enormouslyattractive investment environment for a range of businesses and, consequently,for the people who would finance them. But, there is the risk of macroeconomicinstability is to be focused on, with particular emphasis on the issue of Inflation:what drives it and whether it threatens to get out of control. An unavoidableconsequence of runaway inflation is that drastic action by RBI and thegovernment is needed to rein it in, which is bound to disrupt the growth

process. Therefore, it is required to keep inflation in check over long periods of time, allowing the economy to grow at its potential rate with minimaldisruptions and deviations. This is the best way in which the macroeconomicenvironment can contribute to a positive business climate and hence, sustaingrowth.


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Ease supply constraints to curb inflation, saysRobert ZoellickAs opposed to necessarily tightening monetary policy or restricting some of thedemand from the government side, I think the focus has to be on what aresome of the things India need, said Robert Zoellick, president of the World Bank

New Delhi: The global economic recovery has held up thus far, but severalthreats still remain, according to Robert Zoellick, president of the World Bank. Ihope that we will have a sustainable recovery, but I think we need to recognizethat there are danger points that we are going to need to face this year just aswe faced last year. It is going to require the key economies in the internationalsystem to try to work together and manage the differences, because if theyspin out of control, that increases the anxiety in the markets and that will hurteverybody, he said. Edited excerpts:

The overall economic situation in India is one of high growth, alongwith a challenge of high inflation. What are your views on this?

First off, I think its been very good that India has been able to recover verystrong growth so quickly. Its been good for India, and its part of the generaltrend we have seen in the economy around the world, where a number of thedeveloping countries have had sound programmes to return to growth. Iestimate that India is back at about 9% growth, which is very significant. I amtrying to get a better sense of some of the causes of inflation myself, but mypreliminary reading of that situation is that its caused more by bottlenecks onthe supply side than it is by overly strong demand. So the causes of inflationare very often importantin trying to understandhow to deal with it.


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Way forward: World Banks Robert Zoellick says India can offer ways tocapture some of the increased supply globally to benefit consumers as opposedto trying to control prices or impeding the market. So, as opposed tonecessarily tightening monetary policy or restricting some of the demand fromthe government side, I think the focus has to be on what are some of the thingsyou need.

For example, the increased production and productivity of agricultural products;how to try to make the markets work more effectively; and for the medium- andlong-term growth for India. These will be even more importantissues likeinfrastructure.

So, this is actually a good sign. Its a sign that the growth potential is verystrong, but a combination of public and private policies and our support fromthe World Bank needs to focus on some of those bottlenecks.

Do you think that the current spike in inflation threatens to undo muchof the good work that India has undertaken, especially in the contextof the global slowdown?

I hope not, but the nature of my own work, and I am sure for the Indian officials,is never to take any of these issues for granted. Some of the factors that led tosome of the increases in agricultural prices should come down over the courseof coming months. I know they are very difficult for people today. But it alsodepends somewhat on the government policies that are taken. So, everything

from some of the trade policies, to open up some of these markets for importsof agricultural goods, to try and overcome some of the impediments toincreased agricultural production.

I dont believe this is a phenomenon of necessarily too much money chasing toofew goods. And, of course, it cant be divorced from whats happening in theoverall international economy as well. Thats one of the reasons why I alsocame to talk to India about, say, the G20 (Group of Twenty) process.

One of the things that you mentioned in the context of inflation isperhaps for India to open up its agricultural markets a little more.

Could you expand on that?

I think over the course of the past five or six or seven years, India has loweredsome of the barriers to trade in agricultural goods. Some of these were quotas.Some of these were tariffs. So it has already taken various steps.

But as I understand, the Indian agriculture system, its quite complex. Theresthe different role of different states and reserves versus the nationalgovernment, and so it really can be more of a safety valve. I was saying it moreas a positive, so in a sense thatand it depends on the overall globalproduction. But in some areas the prices are moving very high. As opposed totrying to control prices or trying to in some way impede the market, you canoffer ways to capture some of the increased supply globally.


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Now this will vary by product. In the case of India, some of the increased pricesin agriculture have been primarily onions, some vegetables and milk. Whethertheres opportunity for imports, I know the government has already looked at itin the onions area, but perhaps in milk and others there may be additionalopportunities. So this is an issue not only for India; its for all in the globaleconomy.

Would you go to the extent of advocating higher foreign directinvestment in retail?

When I was talking about some of the basic primary goods, I wasnt jumping tothe retail sector. But over time, what many economies have found, not onlydeveloped economies like the US, but I have seen this in Mexico, Brazil andChina, that some of those large distributors can capture the benefits of theirsupply chains with better, effective logistics.

So, I think that would obviously create additional opportunities to benefit theIndian consumer.

Now, I know theres been resistance to this from some of the retail operatorswithin India. And so the question with many changes like this one would be if Indians decide they want to move in this direction how do you transition, so youdeal with the current structure while making a more efficient future structure.

References: www.rbi.org.in

www.economictimes.com

www.timesofindia.com

www.mostlyeconomics.wordpress.com

www.livemint.com

www.economywatch.com

India Knowledge@Wharton

www.en.wikipedia.org

www.tradechakra.com

www.articles.economictimes.indiatimes.com

www.commodityonline.com

www.gulzar05.blogspot.com

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