A Blanket Interest rate Hike will have The Worst Economic Impact in order to Curb Supply-side Inflation. It’s time The Finance Ministry took Micro and Macro Economics Revision Lessons from us
Honest! Perhaps there’s no other leader we appreciate more for energy filled speeches and excitement laden activities than Pranabda. From spunky bridge-building exercises with opposition parties to spinning off cocky rib-tickling humour at just the right moment, the dada from the Sabha has more energy jam-packed in him than a man doing triple doses of the thirty-plus concoction. But given that Pranabda has been excruciatingly busy fire-fighting all the ills that his party had conveniently refused to acknowledge for such a long time – from the telecom tangle to the Commonwealth calumny – his focus has clearly reduced on what the RBI is conjuring up quarter after quarter as an alleged solution for solving and resolving the inflation issue! Dada, it’s time you hired us, as what the RBI is peddling as the solution for inflation could surely be the final nail in the coffin for the party.
But more of that later; first, the facts. The overall inflation rate has fluctuated wildly in the last three months of 2010 at rates of 8.58%, 7.48% and 8.43% respectively. Food inflation reached 18.32% in December and 18.91% during the first week of January, 2011. While inflation in the manufacturing sector came down from 4.56% to 4.46% in December, prices of vegetables rose by 22.90% in December over the previous month. Onions became more expensive by 34.86% and potatoes became dearer by 16.29%. Fuel and power inflation, in turn, rose by 11.19%. And how has the RBI handled such stubborn price increases? Through an evidently contractionary monetary policy – RBI raised the interest rates (the repo – rate at which banks borrow from RBI – being key; currently at 6.25%) by six times last year. It plans to hike the rates further on January 25, 2011 (possibly by 25 basis points).
It’s clear that RBI, in its love for capitalist theory and ways American, continues toeing the exact line that drove US into an economic disaster. US has gone through inflation many times. Excessive government expenditure, oil price shock, and a contractionary monetary policy followed by Bernanke in the mid 2000s pushed the world into recession.
Coming back to India, the problem starts with the RBI data itself. Our country still considers the Wholesale Price Index (WPI) instead of the Consumer Price Index (CPI) to calculate the overall inflation rate. This means that inflation doesn’t reflect the consumer price of commodities at market rates. In essence, the general use of WPI is to measure the impact of price on businesses; yet, India uses the same to calculate the impact of prices on consumers. Also, WPI incorporates about 435 commodities with different individual weights, out of which many (like coarse grains) are not of much daily use today. Consider this: while general inflation rate was around 8%, food inflation touched 18% in December.
But more of that later; first, the facts. The overall inflation rate has fluctuated wildly in the last three months of 2010 at rates of 8.58%, 7.48% and 8.43% respectively. Food inflation reached 18.32% in December and 18.91% during the first week of January, 2011. While inflation in the manufacturing sector came down from 4.56% to 4.46% in December, prices of vegetables rose by 22.90% in December over the previous month. Onions became more expensive by 34.86% and potatoes became dearer by 16.29%. Fuel and power inflation, in turn, rose by 11.19%. And how has the RBI handled such stubborn price increases? Through an evidently contractionary monetary policy – RBI raised the interest rates (the repo – rate at which banks borrow from RBI – being key; currently at 6.25%) by six times last year. It plans to hike the rates further on January 25, 2011 (possibly by 25 basis points).
It’s clear that RBI, in its love for capitalist theory and ways American, continues toeing the exact line that drove US into an economic disaster. US has gone through inflation many times. Excessive government expenditure, oil price shock, and a contractionary monetary policy followed by Bernanke in the mid 2000s pushed the world into recession.
Coming back to India, the problem starts with the RBI data itself. Our country still considers the Wholesale Price Index (WPI) instead of the Consumer Price Index (CPI) to calculate the overall inflation rate. This means that inflation doesn’t reflect the consumer price of commodities at market rates. In essence, the general use of WPI is to measure the impact of price on businesses; yet, India uses the same to calculate the impact of prices on consumers. Also, WPI incorporates about 435 commodities with different individual weights, out of which many (like coarse grains) are not of much daily use today. Consider this: while general inflation rate was around 8%, food inflation touched 18% in December.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
