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Wednesday, August 14, 2013

We are now in a Catch-22

Just two weeks ago I wrote (read here) that with the depreciation of rupee, we are having a bigger risk of retail inflation (and also core inflation) moving up again at an unabated speed. There were people who privately wrote to me and criticized me for negativity. I am sure that after reading below details they will understand that the negativity was justified.

Today, we have got the July inflation numbers. The inflation surges to 4-month high. July Primary Articles inflation at 8.99% vs 8.14% in June. July fuel & power inflation at 11.31% vs 7.12% in June. July manufactured products (will be a part of the core inflation) inflation at 2.8% vs 2.73% in June. July WPI Inflation at 5.79 % vs 4.86% in June.

In other words, we are in a stagflation economy now. In simple words, we have inflation without growth. This is extremely difficult situation for any central bank (RBI) to control. Remember that the primary job of the central bank is to control the inflation. The central bank does this by giving away growth (RBI did this by increasing interest rates during last almost two years). But now we have already compromised the growth without any impact on inflation. RBI can not reduce the interest rates as inflation is still there and growth will not return unless the easy money is provided. We are now in a classic Catch-22.

God bless us!!!

Look forward to receiving your response/feedback/criticism/praise.

Niteen S Dharmawat

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Unknown said...

The Indian economy is sure in Catch 22 situation. The recent RBI intervention where it raised the Bank Rate to 10.25% and set limit under LAF to Rs.75,000 cr had only minimal impact, not seeing the desired result.
Things which were unheard of like NAV of liquid and liquid plus funds dropping (on marked to market basis) has certainly created a concern. I would say there should be strong majors taken to promote Exports, attract NRI's to bring in $$'s to reduce the impact of mounting CAD. It is high time and understanding the gravity of the situation, the PM, FM should come forward and make some important announcements to taper down the CAD and the resultant impact on the inflation.

Niteen S Dharmawat said...

Thanks Rajesh for your comments. Totally agree with your views. But it gives an impression that everyone is now waiting for the elections and no one wants to work now.

Korakagaz said...

I feel that the economy will remain in this state till the time we don't bring petrol, diesel and LPG prices to international parity. This may create a spike in the economy for a short period but would result in wiping out the deficit in the long run. Once we have free market in the true sense then we can compete at the international level.

Niteen S Dharmawat said...

Thanks Girish. You are right. But need to understand that not only petrol prices but there are many leakages in the economy that we have to close at a faster pace now. The problem is that we have elections due next year. Instead of closing the leakages, we will be taking actions to open new. Also there are many areas where by just bringing in the discipline and management, we may improve considerably. These actions may not require further burdening the society. e.g. we require coal for the power plants. Need someone to take a stern decision of giving coal to these power plants. But as they say once beaten twice shy. Simple and period.

Shankar Narayan said...

Rather than focussing on creating jobs in labour-intensive manufacturing sector and food-processing sectors, we are spending on schemes like MGNREGS and now another ticking bomb called the Food Security Bill! Happily we are hurtling down the Valley of Death! God save us!!!

Niteen S Dharmawat said...

Shankar, Absolutely agree with you. We need to be more transparent in our deals/deeds and more efficient in utilizing our resources (limited).