"Truth
is so generic."
—Iris
Murdoch (Irish, 1919-1999)
Word for the day
Nixie
(n)
A
letter or parcel that is undeliverable by the post office because of a faulty
or illegible address.
Malice towards none
Historically, many bull markets in India
have ended with a hugely successful mega IPO.
Do ICICI Pru life or Vodafone qualify to
be the killjoy?
First random thought
this morning
The recently released manifesto of the Republican
Party of USA, may sound music to many Indian ears.
The 58 page documents clearly acknowledges India as
geopolitical ally and strategic trading partner, while expressing concern over
Pakistan's nuclear arsenal.
The moot point is "are we ready to be the
strategic ally of the USA for few more dollars?" Especially if it involves
providing a base to US forces for launching attacks in South Asia and pacific;
supporting US stance on contentious global issues; and increased incursions at
our borders.
That is the precise point! Sir - 2
I am sure the government, planning administration and
the monetary regulator all fully appreciate the skewed structure of the
inflation. These must also have realized that the impact of inflation is not
uniform for different segments of the society. Unfortunately, this knowledge
and understanding is not adequately reflected in their actions. This could be
one of the primary reasons behind the inefficacy of the entire price control
and stabilization effort.
For example, consider the following:
(a) The bottom
of the pyramid (~35% population that is below poverty line) may be more or less
insulated from inflation. This segment mostly consumes cereals and obtains
their staple ration through PDS or sustenance farming; avails subsidized public
transport, education and primary healthcare; lives in mud houses, footpath,
urban slums, workplace; usually does not have paid electricity and water
connections; and does not borrow much from organized sector.
Secondary
& tertiary healthcare, agri input, and to some extent transportation
inflation is a matter of serious concern for them. Effective implementation of
food security, better connectivity, drinking water, sanitation and secondary
healthcare close to home would provide material comfort to this section of the
society.
Lower
interest rate along with adequate financial inclusion will only make their life
easier through more employment opportunities for them, and provide greater
fiscal leverage to government for increasing social sector spending.
(b) Mid and
small level famers (~15% of the population) love food inflation as it augments
their income. Since, they share many traits of the consumption pattern of BPL
families, food and household inflation may not bother them much in routine
life. Though the aspirations are hurt and growth is impacted. Lower interest
rates will serve them materially even if it means higher inflation.
(c) Urban,
semi-urban households suffer from a variety of inflation. Prominent amongst
these are education, health, energy, transportation, communication, rental,
protein, fruit and vegetable. The political rhetoric and central banker's focus
exclude many of these critical elements in their fight against inflation.
Better public health, public education and public transport services,
affordable housing with employment opportunities closer to home would be a more
suitable solution here.
The
subsidy program for LED lights and fans is an illustrative example of a perfect
solution as it improves energy efficiency & sustainability for the economy
and lowers energy cost for the household with minimal fiscal implications.
(d) The upper
echelons of the society (~3% of the population) cares least about consumer
inflation as their consumption vs. income ratio is extremely low.
This
sections of the society cares least about consumer inflation as their
consumption vs. income ratio is extremely low. On the other hand the
deflationary trend in producers' prices is hurting them badly. Most producers
are struggling with poor pricing power and lack of demand. Lower interest rate
and higher manufactured price inflation will help these producers. Thus
investment and employment will grow.
Debt laden
infra and realty developers are more concerned with inflated cost of capital
and wage inflation. Energy and transportation cost also bothers them. Better
execution standards, simpler administrative procedures, automation, good
corporate governance structure, stricter compliance norms and vibrant retail
debt market could alleviate many problems for this sector.
(e) The upper
middle class (~10% of the population) again is not bothered about food
inflation as much as it is about higher rates. Staples' consumption may not
constitute more than 10% of their household income. Lower rates may however
help them grow faster in their own enterprises, and invest more in real estate,
and capital markets.
(f) The
non-farming middle class and lower middle class (~35% of the population) bears
the most of the brunt of consumer inflation. Food, health, education, travel,
etc. partake material part of their household income. This is the section that
needs maximum protection from inflation. Unfortunately, this is the section
that gets least attention in the whole exercise.
They are
often suppressed through imposition of inflation tax (negative real rates
through household inflation minus term deposit rate). This tax, paid mostly by
poor and middle class savers for cheaper financing of “crony socialism” and
unscrupulous businessmen, has caused serious damage to the basic fundamentals
of the Indian economy.
The moot point here is "how the higher lending
rates are helping this segment?"
In my view, the focus of policy should be on providing
escape velocity to the middle and lower middle class households. Moving this
tremendous mass of people to a higher economic strata will provide Indian
economy the critical demand base that is necessary for higher growth on
sustainable basis.
Once this mass enters the virtuous cycle of "more
income-more saving-more consumption-more investment-more income", the
potency to address the upliftment of the bottom of the pyramid may increase
exponentially.
In post independence period the policy focus has
always been away from this most potent section of the society.
...to continue tomorrow
