Ask the common man on the street about rising prices and there are chances that he will get into a nonstop tirade of how things were good five years ago and how bad things are now. There has always been a disparity between what the man suffers as inflation and what the Govt shows as inflation figures. And now, after a long time, looks like the Govt inflation figure is also catching up with reality.
For the week ended 15th March 2008, the inflation touched a record 59-week high of 6.68%, the highest since February 2007. Vegetable prices are up 2.5%, iron and steel prices are up 5.3% and prices of basic metals for foundry and castings are up by a whopping 10.9%.
We all know that prices are rising and this is going to be one of the biggest concerns of not just India but all around the globe, stemming growth rates. Infact Japan also today reported its highest ever inflation at 1%, which is its fastest increase recorded in a decade.
This is an issue which is core to the Indian Government right now as it knows that the soaring inflation, if not curbed will eat away the entire success story which it has woven since the past five years, certainly something it does not need when it is going to the polls. Today, the Govt suspended export subsidy under the duty entitlement pass book scheme (DEPB) on some steel products temporarily to control inflation and boost domestic supplies. The Govt has also withdrawn DEPB on cement, manganese, chrome and ferrous metals.
The net savings on account of DEPB withdrawal is estimated at around Rs.593 crore and the main aim of this withdrawal is to make exports look less attractive. Steelmakers currently enjoy DEPB benefits of 5% on galvanised products, 4% on billets, 6% on TMT bars and 4% on hot rolled coils. Since the past one month, steel makers have been increasing their prices consistently by Rs.3,000 – Rs.4,000 per tonne.
It has also completely withdrawn the benefits on overseas sales of non-basmati rice. Govt raised the minimum price for non-basmati rice exports to $1,000 per tonne from $650 per tonne free-on-board, in a move to slow down overseas sales. The Govt had earlier banned exports of all non-basmati rice but later gave way to protests from traders and allowed sales at a floor price of $425 a tonne. Now that price has since then been raised.
So what is the benefit of this move?
1: The Govt will save Rs.593 crore. Naturally after having doled out so many largesses, it will have to cut corners somewhere and generate some sources of revenues, however paltry they might be. Now this is one subsidy withdrawal, which the Left will not protest against.
2: Prices are most certainly expected to cool off in the domestic markets, though how far this will help cool the prices of foodgrains is doubtful.
3: Prices of steel and cement, which directly affects most of the infrastructure projects, which in turn affects the overall cost structure, will see some correction. This is what will ultimately lead to some cooling off of prices.
4: Naturally, if moves are made to cull exports and imports continue to soar, the current account deficit is expected to go for a complete toss. So this gap in the current account deficit is expected to further widen.
5: Corporate bottomlines will most certainly take a hit. One man’s gain is other's loss. So if the prices are reduced, naturally, the profits of the companies will take a hit.
6: Industrial production, which has been low is not expected to get any boost due to these moves. 9% economic growth rate is a myth now, we are looking at a more realistic figure of anywhere between 7-7.5% growth rate. But look at it like this – when we had an inflation of 4% and growth rates were 8.5%, then we are looking at a nominal GDP of 12.5%. Now the inflation rate is 6.68% and the growth rate of 8 or 7.5% is expected, that means we are looking at a nominal of over 14%. So actually, what is better? (real GDP measures the increase in the volume of economic activity. When inflation is added, nominal GDP is an estimate of national income, which is divided between government, individuals and corporations – with the bulk of the latter representing profit)
Well, the Govt has no alternative but to now hone all its skills and focus all its attention on bringing down the rising prices. It is always the real GDP which matters the most. And now we all have reset our minds to a lower growth rate, the Govt has to work on reining-in the prices. Otherwise no amount of pay hikes and waiver of loans will help it win the votes!
