Thought for the day
“There are some ideas so wrong that only a very intelligent person
could believe in them.”
—George Orwell (British, 1903-1950)
Word for the day
Coterie (n)
A group of people who associate closely.
(Source: Dictionary.com)
Teaser for the day
What if NDA gets 255 and all non-NDA parties get together and
plead with Sonia Gandhi to become PM?
Inflation will hurt more, 20yrs later
In past few years both the major drivers of economic growth,
viz., investment and consumption, have suffered in India.
High consumer inflation has materially eroded the purchasing
power and savings of household consumers. Consequently, demand growth for both
discretionary items as well as staples has declined to lowest levels in a
decade. Persistently negative real rates for savers (interest on term deposit
less consumer inflation) have made life of retired miserable.
It may be argued that this is an immaterial segment of the
population given the young demography of India. But this argument, to my mind,
is seriously flawed. During my recent visit to some smaller town in north and
central India I discovered that the cost of living at these places has risen
substantially in past one decade primarily due to (a) inflation and (b) change
in consumption patterns. Spend on education, mobility, communication, health
and discretionary consumption has risen substantially leading to structural
erosion in savings and rise in household debt.
Rising household expenditure & debt and falling savings is
an ominous trend to my mind. Middle age people (a substantial number) who will
retire in next two decades will find it extremely difficult to survive without
adequate savings. I see a structural rise in dependency ratio in couple of
decades. Therefore tremendous pressure on political establishment for higher
subsidies will likely continue.
Mr. Rahul Gandhi should understand that at this point in time he
can bring 700mn people in the “middle class” category by giving them just
Rs1000 pm. But keeping them there is going to cost much more for much longer.
Given the serious supply-demand mismatch, the pressure on
prices, especially consumer and energy is more structural in nature. To bridge
this supply-demand gap India needs huge investments. But persistently negative
real rates have widened the chasm between demand (investment) and supply
(savings) of capital. To minimize this gap (a) interest rates have to be kept
high (for domestic savings) and (b) INR exchange rates have to be kept
favorable to foreign investors.
Both of these higher rates and weaker currency put further
pressure on prices as higher cost of capital and imported inputs makes the cost
of production higher. Higher inflation also pressurizes wages, further adding
to the cost of production.
India imports more than it exports and therefore runs a trade
deficit with most of the trade partners. Weaker currency therefore harms the
domestic economy more than it benefits the exporters.
The new government will have to urgently and strongly focus on
inflation that is widely acknowledged. But “how” could be a matter of debate.
Printing money (QE) and cutting rates to bridge capital gap may unleash
inflation and weaken INR thus structurally weaken the economy, at least in the
short term. Fiscal tightening (higher taxes, lower subsidies and higher cost
for state controlled natural resources) could cause tremendous pain to already
struggling industry but may lead to more intrinsic strength for the economy.
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