INFLATION IS RISING
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While you were busy counting your stock gains, you probably did not notice the signals of a global shortfall in commodity and food supplies. One fine morning last week people woke up in Kolkata to find Tomatoes cost Rs.50/kg! Thankfuly it was only Rs.16/kg in Bangalore but soon the prices will even out. The prices of wheat, pulses and oil are all touching the sky. While people are struggling to make both ends meet, industry is crying foul over rising steel prices. Some hypocrites are even expecting the stock markets to rise! They would surely rise if they were commodities but unfortunately they aren't.
THE BULLS CAUSED THIS
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When the process of economic liberalisation started in India, Harshad Mehta and his bunch of bull market operators applied so much pressure on the Government that the Government's first steps were focused on money markets. FIIs were allowed entry, banking and monetary reforms were introduced. The bulls wanted lower input costs, so duties began to be reduced, companies began to operate with more freedom and stock markets went crazy. No one bothered about the farmer. In a nation of farmers, no one thought of introducing agricultural reforms.
CHIDAMBARAM'S CHALLANGE
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Finance Minister Mr. Chidambaram faces a tough task to control inflation and that too in a year when elections are likely. High food prices are highly unlikely to win votes. On one hand he has the industry and on the other the "aam aadmi". The "aam aadmi" wants lower food prices. The industry is more bothered about commodity prices and monetary policies. So far Mr. Chidambaram has been very creative. He has removed import duties on select products and reduced the duties on some other products. He has also forced steel producers to roll back price rises. He has also so far managed to avoid an increase in CRR and repo rates. But can he control global price rise? I don't think so.
THE MARKETS AND REALITY
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As soon as the farmer loan waiver was announced the foolish analysts and ignorant investors began blaming the Government of populism and election politics. As it turned out the banks had nothing to lose except a small potential income. However, it became increasingly clear after ICICI Bank's MTM loss disclosure that something was wrong. Soon we had L&T report Forex losses and a company in Chennai filed a lawsuit against ICICI Bank. Now we are waking up to reality. We are realising that India Inc. was speculating in the Forex markets to an extent that it could wipe off some of the companies' entire annual profits! One can't blame the Government for that now, can they? Weren't bulls asking for a very liberal monetary policy and more freedom for companies? Now with all that freedom we seem to have made a mess of our earnings. Any Government action related to liquidity will be bad for the markets but they should have no complaints, markets move on earnings and if the earnings decline then we cannot blame the Government.
THE GLOBAL GRAMMAR
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Mr. Chidambaram recently said, "We cannot change the global grammar". Very true. If globaly there is a slowdown in Industrial growth we cannot do much. In the past we have seen some economies collapse in such situations. We have seen Thailand, we have seen Argentina. Let us see who faces trouble this time around.
AMERICA'S DEBT
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America's debt is going largely unnoticed. In 1998, reeling under heavy external debt, USSR defaulted sending global markets into a crisis. Though such a situation may not arise again, one cannot discount the possibility of a devaluation in US Dollar to balance the situation. It will mean lower earnings for Indian IT firms and a possible Rupee appreciation to curb price rises.
THE ROMANCE OF SOCIALISM
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We must not forget that we are a socialist nation. We have to think about the "aam aadmi" first. There are many options to curb price rises including the possibility of the Government taking almost total control by determining prices. However, the only long term solution is to increase supply. If you are running short of steel, increase steel production. If you are running short of food, increase food production. Implement agricultural reforms to attract people to agriculture. Make farming more attractive than an IT job. Strengthening the Rupee will reduce import costs but it will punish the IT sector. Increase in CRR will slow industrial growth. It does not matter what the Government does, there will always be a negative side to it. So we can as well go ahead and take some strong steps. We must not forget that we are for the good of the common man and not for the IT and Banking sector. If some policies can help the common man even at the cost of exporters we should not hesitate in using them. Bring back the romance of socialism.
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