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Is Inflation a part of growth strategy? Bookmark and Share  
 
  Author Name : K Ramesh Babu Posted on : July-7-2009 Total Hits: 1465
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India after attaining freedom made hectic planning strategies to gain progress and prosperity with in a stipulated but short period.

 

However, though the nation was forex surplus in 1946-47, lagged in later periods to keep the momentum due to various reasons. That includes concentration on internal growth through planned models. Export lead economic growth gained little or no attention since mass poverty and destruction left with partition and WWII ramification.

 

Even though the colonial rule benefited with vast infrastructure to suit their own commercial ends, it never propagated mass industrialization which according to them a threat for their economic interests. They restricted native Indian participation as just suppliers of raw and semi-finished manufacturers to the European factories.

 

In this background inflation was a phenomena while the first five year plan inaugurated by the socialist ideologue prime minister J Nehru. There are protests with in the ranks of the ruling party against spiraling price rise in food and other essential commodities and lack of government action to tackle widespread shortage of food supply and drought conditions prevailed across the nation.

 

Comparatively the production level of food grains increased in due course of time, but increasing demand from expanding urban agglomerations impact on price fluctuations. The price rise was continuous irritation to the ruling Congress Party. Since it was the lone contender for power all over the nation it did not heed much interest towards the price rise issue.

 

In the post Nehru era Shastri and Indira faced the ire of depleting standard of life among the mass caused not alone by inflation but also repeated drought and wars with neighbours.

 

In the early 70’s Oil shock from the oil producing countries adversely affected already worsening economic problems with subsequent price rise.

 

India’s consistent monetary policy become obsolete once the liberalization process started and left with new policy measures to contain inflationary tendencies. With higher disposable income and fast increasing employment across the sectors, government caught under the dilemma of containing inflation in between tightening fiscal measures and expanding monetary circulation.

 

This was the situation which also reflected in all the pre-poll surveys conducted by various agencies every while there is an election. Succeeding governments took temporary solutions to keep the public pleased.

 

After the take over of the NDA in the reins of power they attempted to do different things by restoring some order in movement of food grains with in the states. It also encouraged food grains export while production superseded domestic requirement. However, it lost power in two states after sudden increase of Onion and Tomato prices. This bitter lesson kept them to postpone as far as possible of increase of Oil prices till they were holding the regime.

 

By taking into account of ten years of data we could see the increasing trend in the inflation.

Year Inflation
1997 7.2

1998 13.2

1999 4.7

2000 4.0

2001 3.8

2002 4.3

2003 3.8

2004 3.8

2005 4.2

2006 4.8

2007 4.9

 

Since the UPA took the reins of power there is a continuous increase in the price rise. In fact it is tripled from 2004 till to date.

 

India’s GDP is also expanding during the last twenty years at abundant after certain corrections in the exchange rate. Though carrying on the deficit side the BOP position is strengthened by flowing foreign direct investments in large amount.

 

Year Gross Domestic Product US Dollar Exchange in (Rs.)

1980 1,380,334  7.86
1985 2,729,350 12.36
1990 5,542,706 17.50
1995 11,571,882 32.42
2000 20,791,898 44.94

The dollar exchange rate exploded as disadvantage to India by increasing pressure to pay more for imports and receive less for exports as competition increases. Now we feel a trend of weaken dollar but any time there will be a revise to set a turn-up in the issue.

Recent information says that foreign remittances exceed FII and FDI inflows into the country. This is one of the interesting issues that have to be seen as a future potential fiscal feature that has to be taken into account before making any decisions. Because of it has a potent to boost up money circulation that is without any productive action/function with in the economy.

 

The price hike in fuels expected to inject more M3 circulation and therefore overriding any chances for anti-inflationary trend.

Table 1 : Macroeconomic Indicators at a Glance
(Per cent)
1950s* 1960s 1970s 1980s 1990-91 1991/92
to
1996-97 1997/98
to
2002/03 2003/04
To
2006/07 2007-08 (AE)
1 2 3 4 5 6 7 8 9 10
1. Real GDP Growth 3.6 4.0 2.9 5.6 5.3 5.7 5.2 8.7 8.7
Agriculture and Allied 2.7 2.5 1.3 4.4 4.0 3.7 0.9 4.9 2.6
Industry 5.8 6.2 4.4 6.4 5.7 7.0 4.1 8.3 8.6
Manufacturing 5.8 5.9 4.3 5.8 4.8 7.5 3.9 9.1 9.4
Services 4.2 5.2 4.0 6.3 5.9 6.4 7.8 10.2 10.6
2. Real GDCF/GDP 12.5 16.9 19.4 20.2 24.4 22.5 24.1 31.4 NA
3. ICOR 3.5 4.3 6.6 3.6 4.6 4.0 4.6 3.6 NA
4. Nominal GDCF/GDP 10.8 14.3 17.3 20.8 26.0 23.9 24.5 33.0 NA
5. GDS / GDP 9.6 12.3 17.2 19.0 22.8 22.7 24.1 32.7 NA
6. Saving-Investment Gap/GDP (5-4) -1.2 -2.0 -0.1 -1.8 -3.2 -1.2 -0.4 -0.3 NA
7. M3 Growth 5.9 9.6 17.3 17.2 15.1 17.5 15.9 16.8@ 23.8 #
8. SCB’s Non-food Credit Growth - - 17.5 17.8 12.4 16.2 15.3 26.5@ 23.1#
9. Growth in investments in Govt. Securities 12.4^ 5.6 20.8 19.4 18.2 21.5 22.0 10.2@ 26.7#
10. WPI Inflation (Average) 1.2 6.4 9.0 8.0 10.3 9.6 4.6 5.5 4.1 ##
AE: Advance Estimates.

 

We could see that M3 is fast expanding with in just four years compared with earlier periods. This is in result with expanding services sector growth correspondingly. The real GDP is also increasing rapidly but kept at below 30% till 2003. However during the last five years witnessed consistent increase that is caused by both public and private investments.

 

Though the GDP growth stands at 8.7 % for the last five years, agricultural contribution to the economy has to meager 2.6% in the same period. This has more pressured the inflation and lead to imbalances in the widening gap between urban-rural divide. Rural India experiences unemployment and poverty and urban India is left with inflation and financial crisis.

 

Decreasing production level in agriculture, fuel cost, more money flowing in speculative sectors like real estate and dependence on foreign jobs which provide high disposable income(in urban regions), FII and FDI investment and unused foreign exchange would keep the inflationary trend for the time being as the government continuous with same fiscal and monetary measures.

 
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