Raging inflation: a serious threat in the middle of a sweet dream
Posted by dipanksaha on February 2, 2007
Undoubtedly the most annoying problem for Indian economy at this juncture is ever rising prices of goods and services. Economists term such incident as inflation. Price of any marketable moves depending on supply-demand situation-it may rise and fall as well. But when price keeps on increasing over periods it becomes inflation.
Reason behind inflation is very structural, seasonal fluctuation can create sudden surge in price but that do not effect inflationary in much way. It’s the basic or structural changes in supply and demand scenario that change inflationary outlook. Inflation is more like a baggage an economy has to carry if it’s willing to grow. It gives impetus to the manufacturers to produce more. But it also impregnates impedance to growth. Higher inflation worsen real value of money and that again adversely affect demand. So an economy has to keep on managing this issue to have a safe and easy growth ride.
In the middle of a long Bull Run, Indian economy is suffering from similar growth related inflationary problem. Physical production capacity for many commodities are at resistance level and gestation period for most of the commodities is considerably long. So, outward shift of short-term aggregate supply curve is difficult, while demand is robust. Increasing salary slip, rise in middle class and “increasing asset price” related wealth effects are inducing domestic urge for consumption. Ambience is heating up and RBI’s target of 5.5% for inflation is looking quite unachievable. Throughout the January, inflation stayed above 6% mark with exception of 5.95% for week ended on 13th January. If we consider the production outlook for kharif and ravi crop, then situation aggravates further since both of south-west and north-east monsoon were uneven across the region. Only breather can be higher acreage under ravi crop.
As usual RBI is active with all its effects to save economy from a bumpy ride. It’s nurturing all means to strike back over raging inflation and majority of them are meant for cutting the demand down in short term. Basic target set for central bank is to make short-term money expensive, so that, speculative hoarding stops. But this can potentially make working capital financing expensive for companies, which may restrict them from continuing their stunning performance. Again ahead of harvest season, building up non-speculative stock for traders will be costlier. That can interrupt agricultural supply.
So as a whole job is pretty delicate and 25 basis point hike in repo rate may not be effective enough for present situation. If scenario does not change dramatically in coming days, we are going to swallow some bitter pill and hardly there is any way out.
