Monetary activism

To douse the inflationary fire,the recommendation by the high level RBI committee must be worked upon with urgency and earnestness. 

India’s central bank, the Reserve Bank of India (RBI) is up with yet another concerted effort to combat the notoriously high inflation. A committee headed by RBI Deputy Governor Urjit Patel has recommended pegging monetary management with the Consumer Price Index (CPI) instead of the current practice of the Wholesale Price Index (WPI). Observers believe that the move is commendable since it is the CPI which directly affects the consumers, unlike the WPI. The recommendation, if accepted, will line the RBI in tune with the global central banks which target CPI as a nominal anchor.

However, there are reservations against this proposed step. Food and fuel inflation constitutes more than 50 per cent of the CPI. It is being pointed out that food and fuel price volatility will be difficult to accommodate in the policy decisions once CPI becomes the reference point of monetary policy. This seems a valid point. Nevertheless, instead of taking this into account what causes frequent variations in food and fuel prices in the first place is what one should look at.

Let’s first discuss the food prices. Though weather conditions have a role to play, government policies and supply side bottlenecks are the principle protagonists in the big picture. Without specifying how it would generate enough foodgrain to run, for instance, the Right to Food Security programme, the government chose to go ahead and implement it. Disregarding how it would meet the revved up demand due to increase in rural wages by MNEREGS on the ground, it is still choosing to run it. Also, no justification has been given as to why the Food Corporation of India (FCI) continues to hoard massive quantities of foodgrain, much of it is often left to rot and consumed by rats. Nor is there a grip on opportunist intermediaries either who hoard and block the food chain supply to inflate prices for purely vested interests driven by profit and greed. No legal action seems to follow in these cases of organised horading. Fluctuation in onion prices late last year is the best example of such deliberately manipulated price inflation. 

Coming to fuel prices, no government anywhere in the world can foresee fluctuation in international crude oil prices. The internal mechanism of setting up prices factors in such fluctuations. Unfortunately, India’s internal mechanism itself is faulty. There is no clarity on fuel prices which have been highly subsidized by government. Whether the benefits of subsidy reaches the needy or is enjoyed by the consumerist rich is a chronic debate. The case of subsidising diesel for swanky SUVs etc, is a glaring example.

That said, the food and fuel prices fluctuate due to the non visionary approach of the government. The failing of government should not be imputed as a hurdle on the progressive path of treating CPI inflation as the nominal anchor.

CPI inflation stood at 9.9 per cent in December. If it becomes the nominal anchor, it is feared that interest rates will have to be hiked dramatically to bring it under control. This is not something the government would like to hear at in the current phase since all it wants is to spur growth while an apparent economic slow-down stalks it relentlessly. It is true that the war against inflation is fought on the cost of growth. But, before citing this inflation-growth debate as a criticism, it is important to read the Urjit Patel committee report in-depth. The committee recommends targeting CPI at 4 per cent within the two years with the wiggle room of 2 per cent in either direction. It does not make a case to raise the repo rate in the next monetary policy review.  What the RBI panel is really looking at is to bring CPI inflation down to 8 per cent over the “next 12 months” and to 6 per cent the following year. Going by the Patel committee’s formula, a repo rate hike is therefore not in order at least until early 2015.

India’s Economic Affairs Secretary Arvind Mayaram has called the focus on CPI a “premature step” but there is a strong case for India’s monetary policy to be steered by CPI inflation. It is this inflationary trend which really impacts domestic households and influences their investment decisions. There has been much dispute between a government demanding growth and ‘inflation warrior’ RBI. It is high time to bring a decisive end to it.

Taming inflation is important even at the cost of growth because the virtuous cycle wheeled by a controlled inflation will spontaneously infuse growth in the economy; but the vice versa is not possible. Therefore, the recommendation by the high level RBI committee must be worked upon with urgency and earnestness without losing time.

Double Trouble

To maintain forex stability at the time of QE withdrawal and maturation of external debt is going to be a tough call for Government.

Reserve Bank of India recently reported that India’s external debt i.e. loans borrowed from foreign lenders has reached to as much as 21.2% of the GDP ($390bn) as of March end. The news has come in the backdrop of depreciating rupee which has already crossed the psychological 60 due to dearth of dollars in the country and might even go up given the series of internal and external structural challenges. Though the recent Current Account Deficit data standing at 3.6% of GDP for Jan-Mar quarter as compared to 6.7% of the previous quarter has rekindled the hope of strengthening rupee but rising external debt and their soon-to-come maturation period certainly spills water on this hope as repayment of these debts has to be made in dollars, thus causing upward pressure on rupee.

External debt mainly consists of External Commercial Borrowings (ECBs), NRI deposits and short-term credit. Worryingly, the share of short-term debt stands at 44.2% of the total debt which has to be repaid in the next one year. By the same time American Federal Reserve will also be tapering off quantitative easing (QE) as announced by Fed Chief Ben Bernanke few days ago. During American recession, under its QE policy, Fed was pumping $85 bn dollars in the economy on monthly basis which is going to be rolled back as American economy is back on the recovery path. India being the biggest beneficiary of American QE will now turn out to be the biggest loser as its major source of capital inflows i.e. Foreign Institutional Investment (FII) is likely to be ended by mid 2014. In fact, impact of this announcement is already palpable given the free fall of rupee for the past few weeks as many foreign investors have been selling out their bonds and stocks from Indian market. To maintain forex stability at the time of QE withdrawal and maturation of external debt is going to be a tough call for Government.

While Govt. has no say in decreasing or increasing FIIs inflow but it must try to control external borrowings. Cheaper foreign money prompts India Inc to borrow funds from other countries while lending rates in India are skyrocketing with no sign of coming down due to high inflation. Although external borrowings has a positive side too as it stimulates dollar inflow in the economy but relying on ECBs, short-term credit or NRI deposits etc. for forex stability is dangerous due to its being highly volatile. Now that the value of rupee against dollar has been sharply falling, it might lead Indian companies to pay their foreign debts sooner than later as their repayment amount in dollar terms is piling up due to exchange rate vulnerability towards rupee. Their dollar-demand for repayment will further cause rupee to weaken against dollar. Considering this, RBI along with Finance Ministry would better adopt measures to maintain internal stability rather than becoming victim to external sector vulnerability. Yet RBI recently eased ECB norms in order to attract dollar-inflows. It can be temporarily acceptable for short-term boost to rupee but certainly not a viable option given the risk factor associated with it.

India’s heavy dependence on imports is the root cause of its weak currency which is also the bedrock of rising inflation i.e. the prime cause of economic slowdown. India stands at fifth position among countries having largest coal reserves yet it is one of the biggest importer of coal due to poor coal-mining in the country. Also more than 80% of India’s oil demand is met via imports. It is also the biggest importer of gold which had raised India’s CAD to unprecedented level. However, gold import could be curbed by bumping up import duty on the same but it is difficult to divert people’s attention from this yellow metal for its being a sure hedge against inflation. Stringent measures have to be taken by Finance Ministry and RBI to mitigate India’s heavy reliance on imports as direct and indirect impact of rising commodity prices and services chargers not only surge inflation but also raise production cost thus making export products costlier leading India to lose in competitive export market from other countries offering cheaper products.

India is stuck in a gruesome vicious cycle. Solution of one problem works as the catalyst for another. In this backdrop, finding a balanced solution and thus shifting to virtuous cycle is a herculean task for Government. Tough times for Indian economy and the lesson must be learnt that heavy dependence on precarious global economy while being in throes of weak domestic economy is not prudent. A robust, domestically sustained economy can only bear the brunt of sudden emergence of internal and external turbulence.

Rupee's Rout

Rupee meltdown has now become a structural problem and has put the country in a danger zone, coming out of which anytime soon is a herculean rather near-impossible task. 

Rupee-meltdown against dollar reached to its 10-month low this week, extinguishing every glimmer of economic-revival-hope emerging out of recent green shoots. In an import-driven country having skyrocketing inflation, rupee-depreciation brings multi-pronged negative outcomes with very little or no means to roll back to tolerant level of INR against USD. Recent GDP data, released by Central Statistical Organization, coming at a decade’s low of 5% for the last fiscal year i.e. 2012-13 has aggravated the disturbing repercussions of falling rupee denting the hope of Reserve Bank of India (RBI) going for policy rate cuts during its next monetary review. The current economic sentiment has led the rupee to fall in a vicious-cycle trap, coming out of which demands rigorous policy measures.

Though global factors like Eurozone recession, Euro weakness, monetary easing in Japan etc. , to some extent, led to rupee-deflation but failure at home to revive exports and to control its headlong inflation are primarily responsible why the value of rupee is going down. Immediate impact of this value-erosion resulted into petrol and diesel price rise by 75 paise and 50 paise respectively though global crude oil price is less than 100 Barrel. In the aftermath, inflation will certainly move upward which has been taking a downward route for last three months.

It is peculiar that 1.3 billion dollar has come to Indian shores via portfolio investment since the beginning of this calendar year yet the imports are rising unabatedly due to Indians’ lure of gold and oil import which results into ballooning Current Account Deficit and imbalance of payment.  Economy cannot rely on this so-called ‘hot money’ which can anytime be drawn out of the market. India requires huge amount of foreign capital which is invested in its core economy weeding out the prospect of capital flight. Foreign Direct Investment on sustained basis can very well serve the purpose. India has already allowed FDI in multi-brand retail and aviation yet attracting foreign investors is a pipe-dream given the domestic uncertainties like lowering growth, higher interest rates, policy-paralysis, archaic laws, political logjam and upcoming Lok-Sabha election etc. Also, global rating agency Standard and Poor’s retaining its negative outlook for India has added into the misery of beleaguered Government trying to impress foreign investors to invest in Indian Economy. Adequate foreign investment seems impossible in near future as domestic investors themselves are shying away from investing in India something which foreign investors will surely pay heed to.

Thus, if INR is perceived as a depreciating currency amidst high inflation and low growth, it will dry up Foreign Institutional Investment and Foreign Direct Investment at a time when India’s exports are not up to the required level and imports are rising with no sign of decrement, leading to severe balance of payment crisis. This currency meltdown has now become a structural problem and has put the country in a danger zone, coming out of which anytime soon is a herculean rather near-impossible task.

Silver lining

it’s merely the prospect of a strong green shoot spontaneously fuelling the virtuous cycle of growth which  can lead to a revived economy, certainly not legislative insight of legislatures. 

In the vein of International Monetary Fund, recently Prime Minister’s Economic Advisory Council has also forecasted that Indian economy is bottoming out and getting back on the growth trajectory.  The emergence of green shoots in domestic and global economy like easing out inflation, increased factory output, gold and oil price fall etc. also gives the same sentiment. While global economies are trying to make the most of current green shoots, India is not being able to, due to constantly getting crippled with acute political-paralysis having been already in throes of policy-paralysis.

March Index of Industrial Production print at 2.5% has provided some relief to a beleaguered Government and Reserve Bank of India who were constantly troubled with sluggish industrial activity and sputtering growth. Reeling under the huge pressure of massive gold and oil exports, recent steep fall in gold price and decreased crude oil price has sparked the hope that India’s forex reserve will boost leading to a declined Current Account Deficit. In addition, the most significant green shoot favoring Indian economy is its assuaging inflation. Not only wholesale Price Index lowered down to 5.6% in March from 6.2% a month earlier, Consumer Price Index (CPI) has also dropped for the first time in six months, though it remained in two digits at 10.4% in March against 10.9% in Feb. Core inflation has fallen under the RBI’s tolerance limit being at 3.4% and food inflation has also somewhat alleviated. However, RBI is still cautious and refrained from adopting eased monetary stance in its Monetary Policy released back on 3^rd May 13. Going against the expectations of industry and stock market, RBI cut the key interest rate by just 0.25% to 7.25% and kept the liquidity enhancing cash reserve requirement untouched.

RBI not relenting upon policy rates is justified as India’s data computation system is not robust enough to produce micro-economic data and doesn’t give the clear picture of how small industries are faring at any given time. Therefore, it would be pertinent to wait for few more months in order to let the green shoots keep shining and solidify. It must also be noted that it is not economic constraints but escalating political-logjam that has bound the RBI to shower enthuse in the market. In the words of RBI-Chief D. Subbarao “the effectiveness of monetary policy in bringing down inflation pressures and anchoring inflation expectations could be undermined by supply constraints in the economy, particularly in the food and infrastructure sectors. Without policy efforts to unlock the tightening supply constraints and bring enduring improvements in productivity and competitiveness, growth could weaken even further and inflationary strains could re-emerge.”

Considering a Government dogged by scandals and corruption and an opposition hell-bent to spew venom against former, it appears that India has landed into a permanent crisis. It’s unfortunate that just because of petty political brinkmanship resulting into precluded parliamentary proceedings hindered the discussion on many important policy-decisions. Land acquisition bill, Foreign Direct Investment in insurance bill etc have been languishing from one session to another without getting tabled.

Economic recovery indicators are surely palpable. Having been in the throes of slow growth for long, this is exactly the time that India gears up to push reform agendas ahead and make the most of what global and domestic buoyant sentiments are offering. It must understand that economic slowdown is not as gruesome as the political slowdown resulting into policy stalemate. Expecting prudence on the part of Govt. and opposition at this time when general elections are round the corner is definitely like nurturing a false hope. Nothing is going to be done by these revered parliamentarians, it’s merely the prospect of a strong green shoot spontaneously fuelling the virtuous cycle of growth which  can lead to a revived economy, certainly not legislative insight of legislatures. 

Dirty data

It is high time that those responsible for maintaining economic statistics sincerely maneuvers to restore people’s confidence in official economic data.

The fundamentals of Indian policy making is under deep suspicion now with an ever increasing erosion of authenticity and quality of India's economic data. It is unfortunate that even macro economy data such as inflation, GDP figure, and IIP or export rate, which are the backbone of the economy, have been misreported in India, let alone micro economy data. Whole data quality in the country is dubious and is being put under serious question by various corners. Finance Ministry itself questioned the veracity of statistical data given by one of its own arms i.e. Central Statistical Organization (CSO). Such incidents strengthens the roots of unreliability in the minds of investors, economists, policy-makers or researchers who find themselves confounded with whether to trust on India’s officially acclaimed economic data or not.

As above mentioned, inflation, GDP, Export data and IIP are four major key determinants of monetary policy and surprisingly statistics of all these significant data have been wrongly reported time and again. To discuss recent examples, the IIP growth figures for January 2012 were scaled down sharply to 1.1 per cent from earlier estimates of 6.8 per cent. The reason given was wrong reporting of sugar data, which stood at 58.09 lakh tonnes, not the earlier reported 134.08 lakh tonnes.  It is surprising that no statistician could notice unprecedented surge in sugar production data. Apart from this, GDP data for the first quarter of 2010-11 was also miscalculated because the price deflator was incorrectly used. A similar error was reported in country’s export data in 2011 which was erroneously inflated by $9 billion due to some software glitch. Besides, it seems that inflation miscalculation in India has become somewhat a norm. Last year within a span of six months inflation data was revised two times first in April (March inflation data) then in July (April inflation data). All these glaring errors are suggestive of lackadaisical attitude of Govt. that it cannot even ensure to provide authentic statistical data of the country.

It is paradoxical that India who trumpets its being IT-power could not even manage to develop an efficient quality of data-estimation. Not only does it faulty, but also incomprehensive. Many commodities and services are left in data aggregation. Sometimes when prices on certain products come too late to be included in the data release, the missing quotations are repeated or estimated depending on commodity nature which certainly not gives a clear but notional picture of reality. Given creaky data collection system in the country, it is grossly pathetic on the part of Govt. if even data computation falls prey to languid system. Getting data estimates wrong bears sweeping repercussions on policy-making. Socio-economic welfare of the country rests on acquiring correct socio-economic data such as education, health, poverty, unemployment, birth rate, death rate etc., collection of which is worse than macro economy data and which is a major factor that impedes the crafting of policies that can strengthen the links between growth, poverty reduction, and development.

Robust and authentic economic data is the least that a Govt. is supposed to provide transparently. It is pertinent to recall the repercussions European Union faced due to data-fizzing executed by Greek Govt. just to avail EU’s membership. Highly significant it is for Govt. worldwide not to fiddle with statistical data because sooner or later harsh and hidden economic reality does bare itself resulting in to disastrous aftermath. It is high time that those responsible for maintaining economic statistics sincerely maneuvers to restore people’s confidence in official data which is the grist of each policy-formulation and economic decisions. 

Bond against Inflation

With an ever increasing import of gold and nose-diving Rupee, government is forced to reckon with the idea of providing a hedge  to investors against  the return eating monster i.e. inflation.  Gold has become  only solace for investors to park their surplus as every other financial instrument has surrendered before the might of stubborn double digit Inflation. Reserve bank of India is now seriously considering to open the window of Inflation Index bonds- a  debt instrument  offering protection against high inflation.

India’s fresh lure of gold is predominantly driven by financial investment needs. Gold imports in India have risen to its peak and resulted in a panicky level of current account deficit and weak rupee resultantly. Apart form making gold imports costlier govt wants to divert the gold buying frenzy towards a befitting investment alternative. Inflation Indexed bond comes as an appropriate option in this context.

Inflation indexed bonds are those overall return on which is adjusted against increasing inflation. Inflation indexed bonds are popular and successful in USA, UK, Australia, Sweden and many other developed countries.  India introduced a derivative of the same i.e. capital indexed bonds earlier in 1997, then again in 2004 but the bond failed to garner attention as only principal amount was indexed against inflation not the coupon rate, consequently the real returns remained unprotected from inflation. RBI is again considering for a new avatar of IIB amid a couple of ifs and buts.

A robust inflation index is the most important pre-requisite for IIBs. India has several inflation measuring indices, ranging from wholesale to retail Inflation. It is still not clear which one would be used for pegging return on IIB . That IIB may disrupt the G-sec market is also a prevailing concern for the central bank. Government securities are the major source of govt  borrowings.  Fixed interest of G-sec will surely make the former i.e. IIBs a preferable investment option over the latter.

The timing of issuing IIBs is also a point to ponder.  Govt or issuer has to shell out  more money during the high inflation period. Considerate thought must also be given to defining tax rate on IIBs returns. Higher taxation on the same will eat into the vitals of returns.  It would be ideally prudent that IIBs are left tax-exempted otherwise it will be of no significance to investors.

IIBs are a welcome concept but the current challenge is to tame the lure of gold to contain higher gold imports. Given the policy bottlenecks of IIBs, it seems doubtful if it can provide equivalent benefit as gold does. Returns on gold is already three times higher than inflation rate with the prospect of spurring further. Gold-indexed bonds , yielding similar returns as this metal does in physical form, could become a better idea in the short run. A cornucopia of IIB and GIB  may do a lot better in the given situation of Indian economy.

If inflation……!!

Inflation is all set to become the single most significant number for Indian economy in coming three months. The consumer spending, interest rate, overall economic growth and trend of investment will anchor on the inflation data of weeks to come. With the ensuing festive season, the shopping spree of Indian consumers will be guided by the level of retail prices and companies smartness to woo them despite pressure on margins.  While RBI will keep a hawk eye on inflation and take the future course about interest rates for the busy season of bank credit. Consumer spending will be an indicator of demand while interest rates will be a pointer for the status of industrial investments during the second half of the current fiscal.

India’s shopping season is all set to begin as winter festivals are setting in. Marketers are keeping fingers crossed as inflation has already spoiled the shopping party. For the first time customers are not showered with the offers which they were habitual of during this season. This is probably the first festive season when almost all of the automobile, home-appliance or electronics companies have increased the prices to factor in the increased costs of production, energy and borrowings. Food basket of consumers is already costly with the ever rising prices of wheat flour biscuits, sugar and oil.

Indians may not spend much during this festival season owing to the high inflation in the country, according to the 'Mood of the Nation Survey' conducted by global research firm IPSOS. A newspaper reports state that more than a third (78%) Indians claimed that their planned expenditure during this festival season was less than Rs 10,000. Among the respondents, about 43% individuals said that their spend during this Diwali was less than Rs 5,000. These people were mostly from middle and lower middle income families. The IPSOS survey was conducted between September 24-27, 2012 among the men and women in Delhi, Mumbai, Kolkata, Chennai, Bangalore and Lucknow.

Meek festival demand is significantly risky for the economy. Companies won’t be motivated enough to start fresh investment for the enhancement of their capacities in a timid demand scenario.  Hence if inflation is not checked, less shopping by consumers will add woes to the economic downturn.

Indian industry is crying for low interest rate on bank borrowings.  Reduction in interest rates is directly related to reduction in the level of inflation. India's annual consumer price inflation (CPI) fell in September to 9.73% from 10.03% in August, driven by a marginal fall in fuel and food prices. But it is still high on Reserve Bank of India’s parameters to reduce interest rates. In the last policy meeting RBI remained hawkish on the stance as the WPI refused to budge below 7%, the RBI’s comfort zone. Indian interest rates are the highest among the major economies .With the pass-through of diesel price likely to take effect soon, CPI inflation would head back to double digits in the next month. Inflation data will shape up the RBI's policy review, scheduled on October 30. RBI’s stance towards interest rates will set the tone for fresh investment by private companies in the economy.

Global oil prices will be the key detriment for the inflation in coming months. Global commodity prices will also be cardinal for the behavior of inflation in Indian market. Although an unprecedented fall in the growth of China is a bad news for global economy but it will still help reduce the crude and commodity prices.  A renewed strength of Indian Rupee is likely to help in keeping imports cheaper and inflation under control.

The stubbornly high Inflation is one of the major factors behind the India’s latest economic hardships. It is now going to be crucial policy guide for the government’s renewed efforts to rehabilitate economy. Pick up in the demand and cheap credit is must to bring back the feel good factor among investors and industry.  This is the most opportune time for government to take inflation control as supreme ‘reform agenda’ for the good of the economy in general and aam adami in particular.

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Savings – Bigad gai aadat !!

Thrift conscious Indians are fast becoming spendthrift and vague saver. Robust savings, an internationally acclaimed Indian phenomenon is taking a disturbing trend of slide owing to the uncertain and suspicious economic ambience around. It is just not that Gross domestic savings as the ratio of GDP is declining but composition of Indian savings has also become somewhat alarming. Financial savings instruments are losing their sheen   while non-liquid assets like gold, land or home are catching up quickly. This trend is not at all favorable for the growth of Indian economy as it reduces the stock of savings available for development expenditure.

Indian savings are registering a consistent decline since last few years.  As per the Economic Survey of 2011-12 the gross domestic savings have declined from 33.8 per cent of GDP in 2009-10 to 32.8 per cent in 2010-11. This decline is accounted for by a reduction in household savings in financial assets.  It is clearly evident that households have been putting less money in financial savings. Two more recent reports on the macro economy have drawn attention to this development, which has deep implications for the economy. The Economic Outlook, of the Economic Advisory Council of the Prime Minister (PMEAC), headed by C. Rangarajan, and the Reserve Bank of India’s  Annual Report (2011-12).  According to the Economic Outlook, gross financial savings which were at 15.4 per cent of gross domestic product (GDP) in 2007-08, fell to 13.6 per cent in 2010-11, and could have possibly fallen to below 12 per cent in the next year (2011-12). The RBI’s estimate is even less upbeat: household financial savings fell to 7.8 per cent (of GDP) in 2011-12, the lowest since 1989-90. During the preceding three years, it averaged 11 per cent.

Indian’s lure for gold not a new phenomenon but recent development is a bit more serious. Indian households have withdrawn from financial savings to put more money into gold. Indian investors are now more aware about the investment potential of gold. Even ordinary investors buy gold, hoping it would protect them from inflation. Gold investment is ranging from physical gold to exchange traded gold funds. Spurt in gold import is clearly a confirmation of the investment led gold buying. Real estate is the next asset class catching up to investor fancy. With rising income levels and bank credit support, real estate has become a high profile destination of Indian household savings. Gold and property savings are not available for economy as both are non-liquid assets. The non-transparent market of these assets also results in a huge tax loss to the govt

Rising inflation pinches from all the directions. Not only does it reduces the consumption on account of low income but also increases the expenditure. Consequently very less amount remains for savings. Inflation is one of the major factors behind a mass disenchantment from financial savings. Inflation is robbing return on savings while interest rate on bank deposits no way a cushion for common investor. Recent spate of reduction on saving banks interest rate has resulted in an all-time low growth in bank deposits. Present tax policies on insurance and MFs are also a dampener to the investment spirit.

Household savings are major source of investment for the nation. Reduction in common man’s thrift is a loss to economy as it forces govt to borrow to meet investment needs. That results in higher deficits.  It is very important to bring Indian savers back to the financial savings as the tendency to invest in non-liquid asset will surely fabricate grave repercussions in near future. 

Inflation : An urban cry

A stubborn high Inflation has become a perpetual phenomenon of India’s daily life. Prices of essential commodities have been rolling high since last four years. Partially failed monsoon is just the latest trigger to it , although prices have been high for last few years despite robust crops repeatedly. Government efforts don’t seem to be taming it in near future and supply side constraints are making it harder to contain its persistence.

Inflation is a complex pro-poverty portent. A sustained rise in the prices of commodities leads to a fall in the purchasing power which in turn increases poverty. It is severely affecting the already grave situation of destitute living in rural as well as in urban areas.

Indian poverty discourses are bit over focused towards rural poverty while urban poverty is catching up fast and it has become a more intricate challenge to fathom with. The intensity of poverty is more severe in urban milieu due to high-cost of living up there. Some 81 million people live in urban areas on incomes that are below the poverty line. At the national level, rural poverty remains higher than urban poverty, but the gap is closing. Urban poverty is over 25 percent and it is projected to reach 50 percent by the end of 2030.

Indian cities have become magnet for internal migration thanks to high economic growth and job opportunities. Rising education is making rural youth inspire for greener pastures in urban markets as rural job market is confined to unskilled labor.  Heavy influx of population in urban areas is a major cause behind the changing levels of urban poverty.

High inflation seems to have a more severe impact on urban poverty levels due to majority of factors exclusive to urban living. Lesser prices of basic food stuff and subsidies make life somewhat easier for rural populace comparatively. Urban living has a host of other factors directly adding to inflation woos. Rented housing and public transport are basic features of city life. House rents are skyrocketing in urban areas while fuel price rises have made commuting highly expensive. Urban masses have to bear the direct brunt services inflation because of their consumption profiles.  

Inflation is increasing misery of urban poor, already  lack access to basic services like clean water, sanitation and health care facilities. Some 54 percent among urban slum dwellers don’t even have toilets and public facilities are unusable due to lack of maintenance. All this result into health hazard which requires them to avail medical-aid and rising medical expenses worsens the situation deeper.

Standards of living are changing rapidly in India with stark variance in income levels. Inflation has increasingly become an urban crisis as city populace has no direct protection from the market vagaries and absence of social security. Urban living has also sans direct government intervention like MNERGS to fight with poverty in cities. India will witness an explosion of urban poverty few years from now If Inflation is not contained. 

Joblessness : Pain refreshed

India’s perennial scare of unemployment is looming large as economic growth is going to a tailspin.   GDP growth was the slowest in nine years during the first quarter of FY 2012 and the second quarter is likely to witness a similar fate. Index of Industrial production again contracted for the third time in last four months creating the fear of job cuts in Indian industries. This slowdown comes at a time when the country already faces job loss in rural area due to rainfall-deficit. Services sector, India’s new job engine is also slowing down due to lack of demand and rising cost.   

Slump in industrial growth thus can be taken as the worst in the decade. It shrank 1.8 percent due to a deep dip in manufacturing which constitutes about 76% of the industrial production. This slowdown in manufacturing is further aggravated by shrinking exports to recession-hit Europe and slowing U.S. Apart from this the capital goods which has shown growth only once in 10 months also slumped 27.9 percent. Consumer goods industry is also lackluster because of shrinking demand and price rise. Slowdown in manufacturing sector has already dried up potential for higher jobs in industries. The blue collar jobs are now at stake with an increasing pressure of production cuts.  Collapse in industrial production indicates that corporate investment is going to dry up more hence new job creation is just impossible for next six months to one year.

Reserve Bank of India and Central Bank are in deadlock whether or not cut down the interest rates. India’s interest rates are among the highest in major economies. It is very important to ease the rates in order to stimulate demand and encourage investment. RBI is pressurized to make rate-cut but high inflation is playing a spoilsport. Inflation is a notorious demand dampener. Price rise is now gripping the services sector and resulting less demand, lesser investment and reduction is jobs.

India has witnessed a remarkable improvement in jobs market with the help of rapid economic growth of recent years. Unemployment rate has significantly reduced during the last decade. This is the first serious blow to the job market after many years. Economic slowdown is just not taking its toll from potential of jobs creation but it is also forcing industries for painful job cuts.  Joblessness, India’s perpetual socio economic riddle has become a more complex ordeal now.