Tuesday, August 26, 2008

Economy? Go to hell !

“The battle against inflation will likely come at the expense of economic growth, which looks set to decelerate in the second half of 2008 amid cooling domestic demand and persistent external weakness,” says Sherman Chan, an economist with Moody's. The recent decline in global oil prices will not lower India's rate of inflation, which will remain "stubbornly strong" in the coming days despite monetary tightening by the central bank. Until next June, energy prices will also remain notably higher on a year-ago basis because of the cut in subsidies two months ago. The rise in global commodity and food prices is still a major driver of inflation in India. The retreat of oil will only help ease the pressure on the government to further raise domestic energy prices, according to Ms.Chan.

Makes sense. Now read what the Deputy Chairman of Planning commission Montek Singh Ahluwalia has to say. The fiscal deficit target set at 2.5% of GDP for 2008-09 is set to be higher by a significant margin. It is estimated the deficit will be breached by almost twice the budgeted target due to high oil prices and a whopping fertiliser subsidy bill. There had been a substantial increase in off-budget numbers and there were good reasons for this. He said the fiscal deficit is not a long-term problem as, next year, some of the increases would not be repeated and a significant revenue buoyancy would help ease the situation.

All hopes. On the ground inflation remains the growth killer. RBI can raise interest rates, mop up dollars to arrest a falling Rupee (that inflates oil bill) and introduce monetary measures like hiking CRR and Repo rates. Now the key element is augmenting commodity supplies. Who controls that? Commerce and Industry Ministry? It’s just a toothless caricature of its once powerful self (when quotas prevailed and licence raj was full on). Now I conjure up its icon Kamal Nath only as our emissary at WTO to make sure the talks fail!

Enough drama. Getting back to reality. Raw material costs are up 26% while interest charges are substantially higher at 34%. But instead of passing on these higher costs through price hikes, companies have retained them on their accounts so that growth is not compromised. Is this compromise sustainable at such low net margin growth? But then, there are more important issues to resolve!

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