Tuesday, November 8, 2011

Its getting worse by the day

The Govt. of India's or rather India's problems are getting worse by the day. One of them being inflation.
If it was not enough that inflation has been high in double digits for so long is not enough and all the economic govt. authorities (Mr.Kaushik Basu, Chief economic adviser; Mr.Rangarajan, head, Prime Minister Economic Advisory Committee; Mr.Subbarao, Governor, RBI; and Mr.Montek, Planning Commission Deputy Chairman) have been shooting arrows in the dark about when the inflation would come even close to the target rate. They have (including Pranab da, Finance Minister) have been directly and indirectly saying that inflation will come down in the next few months for over a year. And yet, they have all been wrong or have been lying.
To make matters worse, they continue to say the same without looking at the ground realities.
1. Everybody says food inflation is due to supply side problems. Yet. there has been no major policy changes to increase production of goods that are needed. In an ironical step, Minimum Support Prices(MSP) have been raised drastically over the last two years which has increased the overall cost of buying all the grains for everyone. Whats very depressing is that some of the policies that have traditionally caused farmers to increase wheat/rice/pulses by having MSPs, have caused more grains to be grown than can be stored in warehouses leading to huge losses of grains. This subsidies/incentives are skewed in such a way that even if there is demand for vegetables/fruits, many farmers will continue to grow certain grains as it is more profitable because of the subsidies/incentives. Why is the govt. sleeping?
2. There is also a case that the MGNERA has given a lot of money to the villagers and this is increasing demand for goods which previously did not exist. A report I read says that there have been hardly any  productivity changes due to the scheme. Meaning, that most work is namesake and no real useful work has been accomplished with so much money being given.
3. Petrol prices are going up continuously and there are indications that even diesel prices may rise. If diesel price rise, the whole of India will undergo another level of price rise as most things in India are transported by trucks. A multiplier effect will increase inflation more.
4. Many coal power plants are running on 4 to 7 day stock of coal (norm:21 days) and are lacking coal. Many power plants in India were designed and viability studies assumed that they would import Indonesia's coal which used to sell it at a discount to international market at large. The recent law in Indonesia to sell its coal at an international rates has made the power plants unviable and the companies are asking the govt. to increase the rate at which they sell the power to the govts. 
5. The state electricity boards(SEBs) have run up losses of Rs.80,000 crore (and counting) as they have been inefficient and many have not increased electricity prices for years together. With the power ministry proposing to ask the state govts. to write off all the losses and start the SEBs with a clean slate, where are the state govts. to get so much money? Also, even after this is done, unless the SEBs increase the rates of electricity substantially (many times over in some states), the SEBs will again start going into losses.
6. There is a proposal of a food subsidy bill to be introduced. Where is the money for it? Unless the govt. starts saying things like 2 grains of rice per person per day is enough to fill hunger (like the Rs.32 a day is the Below Poverty Line), where is the money?
7. With the downgrade of the State Bank of India by Moody's, the govt. has shown some hurry to infuse ~8,000 crore into SBI with an overall of ~14,000 crore into all public sector banks, within this year. (Increased from the budgeted 6,000 Cr)
8. Oil prices are still high and any number of reports in the global arena do not predict oil prices to fall to any meaningful lower level in a permanent way. This means India's import bill is only going to rise in the coming years. And the govt. will need more money to buy the imports.
9. Some specific national liabilities like the Air India are contingent liabilities which will need more money in the future from the govt.
All the above imply only two things directly: Prices are going to stay up/rise and govt. is in need for a lot of unplanned money. If the govt. starts borrowing more, rates are further going to go up and would make further investments in new projects unviable (which are supposed to increase supply). The second would only reinforce the price inflation permanently.
Oh, and there is one more thing. Inflation measures prices year-on-year and even if the govt. claims victory over inflation once it reaches a target rate of say 5%, inflation has remained high for so long that these rates are year-on-year. Meaning that the price rises have become permanently embedded. Unless there is a price deflation, things are bad and permanently.
You don't need to be an economist of calibre to predict (wrongly again and again) that inflation is going down. The truth is prices are going to remain high and may further rise, irrespective of whatever the above  economists mentioned say/lie. In effect, the Govt. is screwing all its citizens very well.
P.S: The high impact of inflation is given here: http://www.firstpost.com/investing/govt-is-ruining-your-savings-and-the-rbi-shouldnt-let-it-124932.html

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