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Inflation - Who is responsible?? (Page 3)

ramshing Newbie

Joined: 21 June 2008
Posts: 1

Posted: 21 June 2008 at 1:03am | IP Logged

Financial year 2008-09 began on a somber note with industrial growth in April dropping to seven per cent compared to 11.3 per cent in the same month a year ago, reflecting the impact of higher interest rates and rising input costs.
Industry chambers blamed higher input and borrowing costs coupled with global slowdown for the fall in industrial production. Attributing the reason for slowdown to high interest rates and increasing input costs, CRISIL principal economist Mr DK Joshi said the average industrial growth during 2008-09 is likely to be around seven per cent.
The performance in April, however, was much better than the 3.9 per cent growth rate witnessed during March, the last month of the previous fiscal, according to the Index of Industrial Production (IIP) data released today. The stock markets seemed charged up after the IIP data was released with the benchmark Sensex, which was down by over 400 points in morning trade, recovered to end the day higher by over 60 points at 15,250.
It's more bad news for the United Progressive Alliance (UPA) government on the economic front, even as it looks forward to the general election in 2009. Industrial growth has dipped to a six-year-low of three percent in March this year. Coupled with raging inflation, the economic outlook is far from satisfactory at a time when both Prime Minister Manmohan Singh and Finance Minister P. Chidambaram were expecting to pat themselves on the back for a great five-year performance.

After having achieved consistent eight to nine percent growth, along with buoyant industrial output and a soaring Sensex, it looked as if the economic duo could do little wrong, despite the weak spot of low farm output and farmers' suicides.

Things seem to have gone horribly gone wrong lately, as inflation has reared its ugly head, probably the worst thing that can happen in an election year. The gloom continues with the latest news about the dip in industrial growth in March, the last month of fiscal 2007-08. This is a significant indicator as it can drag down the overall growth rate for the year. It also points to a continuing slowdown for industry in the current fiscal, which must be extremely disappointing as the corporate sector has virtually been on a roll for the last few years. At the same time, it is the galloping industrial growth in recent years that seems to have been one of the reasons for the sudden dip in March. The low three percent growth for the month came on the back of a phenomenally high 14.8 percent growth at the same time last year. It would have been difficult to top that level of increase this year.

The fact is that the government is in the proverbial cleft stick. The Reserve Bank of India (RBI) has been raising interest rates to combat inflation but this in turn has affected the growth story that could conceivably wind down in the next few months. For the UPA, of course, inflation is the priority as this can have potentially deadly consequences in next year's elections. But by putting the focus on prices, it has to hope that economic growth does not slow down. The latest data, however, shows that the RBI's moves to combat inflation by raising interest rates have begun to take their toll on industry, including the crucial manufacturing sector. There is a school of thought that has been arguing for a cut in interest rates to boost growth, but the RBI has decided to tackle the menace of high inflation and worry about growth later.

Clearly, it is time for both the RBI and the government to pause and reflect on their strategy to deal with inflation and growth. High interest rates have begun to hurt industry and are showing up in the slower growth data. Such high rates will not only give a push to inflation in the medium term but ultimately hit the common man in various ways, including rising cost of home loans. Besides, both the RBI and the government have repeatedly been emphasising that the major issue on the inflation front is the need to deal with supply side problems. So it is for the government to continue its efforts to improve availability of food products as well as critical raw materials like cement and steel to douse the flames of inflation.

Also one must not forget that a main reason for rising prices is globalisation and the fact that the entire planet is facing a crisis with regard to food and oil. Food prices are soaring all over the world and, to add to the problem, international crude oil prices have hit the roof. These are not issues that can be dealt with by the central bank.

Industry is already clamouring for a cut in interest rates to boost growth, especially in the manufacturing sector. It may be wise for the RBI to consider such demands favourably over the next few months, especially if the fiscal and monetary measures already taken yield positive results and bring inflation below the high seven percent mark.

On the plus side, consumer electronics associations are reported to be contesting the data on consumer durables in the Index of Industrial Production (IIP), pointing out that new products like LCDs and laptops are not included in the index and older items like black and white TVs are still forming part of the data. There is in fact a feeling in the consumer durables industry that sales have been buoyant in contrast to the data released by the government. On the two-wheeler front, however, manufacturers are agreed that there has been a definite slowdown as sales have fallen largely due to higher interest rates on consumer loans. Capital goods have grown by a dismal 2.3 percent.

Most agencies are already revising their growth estimates for 2008-09. The expectation is that it will not reach the target of 8.5 percent and could be significantly lower. The overall growth for industry during 2007-08 is now pegged at around 8.1 percent, far lower than the double digit 11 percent growth recorded in the previous year. In the manufacturing sector, the situation is even worse with 2.9 percent recorded during March as against 16 percent a year ago. The government will clearly have to act fast to ensure that the slump in the manufacturing sector does not extend well into 2008-09. In case industrial growth does not pick up in the current fiscal, hopes of having consistently high growth over the next 10 years could well be dashed. This is clearly not the legacy that either Manmohan Singh or Chidambaram want to leave behind; so now is the time for them to revise their strategies to deal with the many ailments plaguing the economy.

missmasakalli Goldie

Joined: 17 January 2008
Posts: 1618

Posted: 21 June 2008 at 1:30am | IP Logged

 Hi  x.ganga.x.

Only and only crude oil is the ultimate cause...
Here is the proof... -India-China-lose-sheen--investors--9676-3.html

Dont we need diesel for irrigation purposes,...& to run machinery,tractors et al...& for transportation purposes.....

Edited by jinniezz - 21 June 2008 at 1:34am
Sara_DONT_ASK IF-Stunnerz

Joined: 15 August 2005
Posts: 27477

Posted: 21 June 2008 at 3:44am | IP Logged
Originally posted by jinniezz

Only and only crude oil is the ultimate cause...

There is never one sole cause for inflation. A lot of factors combined together lead to it.

Yes you can say that the rise in the price of crude oil can be 'one major' reason, but it cannot be the sole reason for the rapid rise in rate of inflation.
x.sunayna.x IF-Dazzler

Joined: 27 May 2008
Posts: 3720

Posted: 21 June 2008 at 5:11am | IP Logged
Originally posted by jinniezz

 Hi  x.ganga.x.

Only and only crude oil is the ultimate cause...
Here is the proof... -India-China-lose-sheen--investors--9676-3.html

Dont we need diesel for irrigation purposes,...& to run machinery,tractors et al...& for transportation purposes.....


I still stick to my theory of it being caused by the ecnomic slow down, which has caused oil prices to rise. Inflation is just a sign of this happening. As i said earlier it happens every 8 years or so and can't be changed. And we do need it, but it is not the ultimate cause to inflation. On the June 27th we will find out if we are in a Global Recession or not!


sorry that was just a random fact.

AmritaRao-Nina IF-Sizzlerz

Joined: 27 September 2006
Posts: 24166

Posted: 21 June 2008 at 5:16am | IP Logged

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kabhi_21 IF-Rockerz

Joined: 25 January 2006
Posts: 9909

Posted: 21 June 2008 at 8:54am | IP Logged

Originally posted by Anuradha

Hi All

Today the inflation has gone upto 11.05 Ouch For the past few months inflation has been too high and the public is suffering a lot... Today it was shown in one of the news channel that one KG of tomato costs 100 Rs Confused Petrol, Diesel, LPG, Oil prices have been increased.. Not only that, due to all this, the day to day grocery prices have also been increased and all this is affecting the sensex.. The sensex has dropped to 350 points Ouch  The worst sufferers are the daily wages workers..

So, who do you think is responsible for this inflation?? Do you think it is just temporary problem and that everything will be back to normal??

The government of India has almost given it up.. The Prime Minister is the former governor of RBI, yet nothing is working in order.. Is it the fault of the government?? If so, what do you think the people must take as an immediate step?? Can we as normal public do something to reduce the inflation??

Please do share your views too on this...

To an extent yes the government is responsible. A strong economy is always followed with boom and then with inflation. The government failed to read the situation early until it was too late.

Now the government is not able to see the future consequences of this inflation. The demand is going to slow down bringing in fears of reduction of wages or labour force and overall economin slowdown. It will affect the manufacturing sector the most and service sector the least.  Hence the government along with curbing the inflationary damage, shall look to also reduce the aftereffects of the same.

I feel the government shall take a few steps:

1. Go ahead with nuclear deal

2. Get a strategic tour to OPEC countries

3. Reduce taxation on Oil products

4. If taxes are not reduced, Give subsidies for manufacturing industry in india, which will make them competitive and help them keep their prices in check, reducing the inflationery pressures.

5. Rather than waiting for monsoon, the government shall take immediate efforts for water conservation, that they are not able to do in last 60 years.

6. Increase network of railways and frequency for material transport, that can reduce transport cost. Change all coal based material carrying railways to the ones operating on electricity

7. Most important, All parties shall come together to get th solutions to this situation rather than doing politicsConfused

Edited by kabhi_21 - 21 June 2008 at 9:04am
ABCD Groupbie

Joined: 16 June 2004
Posts: 117

Posted: 21 June 2008 at 11:51am | IP Logged
As long as inflation in concerned, government should step in somehow, i don't know how.
but i just wanna comment on price hike in petrol, diesel, gas.
common guys, lets face the fact. this world is using it up n there is no way u can produce in that big amount to satisfy everyone's need. it is obvious that you cant really do nothing about it. If govt. steps in then there will be economic imbalance, as govt. would lose money, oil companies will go in loss. here in Canada, its rising every weekend, n all u do is just drive less or earn more to fill the tank up.

i think technology should step in for new development all over the world to invent something that saves us gas. n then there should be some incentive by govt. so that people buy those new costly cars as there is for hybrid cars in Canada.

This is just my opinion on gas price hike. I don't know what others think about it. But, I recommend everyone to start using cycle for short distance which is a lot easier and faster way to go in traffic, especially in India.
Yosh Goldie

Joined: 16 March 2007
Posts: 1951

Posted: 21 June 2008 at 2:24pm | IP Logged
Originally posted by Ektas_Angel

Originally posted by Yosh

Nina. LMAO. Just finished with Economics for the year, and you had to bring back the memories. (Tutor2u is an amazing website for any Economists in the making though btw LOL)

LOL i did business management at university as well but i miss using my brain hehe LOLLOLthats why...ohh economics is hard!

Lool. Thanks for the advance warning. I start my degree in Economics this September. *worries even more* Stern SmileLOLLOL!

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