08-26-2008, 01:53 AM
<!--QuoteBegin-->QUOTE<!--QuoteEBegin--><b>India heading for stagflation </b>
PIoneer.com
Shivaji Sarkar
RBI's annual policy statement suggests a grim future
Is India heading for stagflation? Reserve Bank Governor YV Reddy says it has never happened in India but his Annual Policy Statement for the current fiscal is not sure of what he is saying. It hints at global stagflation.
The RBI statement is replete with scepticism about the economic scenario. The scepticism is linked to the inflationary tendencies. When the statement was released, inflation was at seven plus percentage. Now it is touching 13 per cent. Coupled with this the last quarter industrial growth has slipped to an alarming three per cent.
The RBI is too scared of "overall uncertainties". It states, "It is useful to recognise the anticipated global slowdown and heightened uncertainties into mounting pressures. Whether the slowdown would have a moderating effect on inflationary pressures or whether the global economy would slip into stagflation is not clear." This does not mean RBI rules the possibility out.
With regard to interaction between global and national economies, RBI sees some revival of protectionism globally. RBI says this makes the assessment of the impact of the global economy on India "extremely difficult".
The RBI indirectly calls for putting a halt to the process of global integration of the economy. In reality, it wants that more protectionist measures should be taken because it's finding difficult to maintain the level of rupee against the US dollar, depreciating since 2006.
Mr Reddy says there is greater inflationary pressure than expected. He says that economic integration and inflation is global. "There are unprecedented dilemmas and response of market not assessed. It is an extraordinary global situation".
In a grim scenario like this the statement is not clear on the sustained growth path. "Growth forecasts have been moderated in the face of the financial turbulence and the anticipated slowdown in the US economy." It simply means that RBI has views that are different from the Finance Ministry<b>. It also means it foresees a slowdown at national level. The RBI is silent on domestic recession but is eloquent about increasing dangers of global recession. </b>
It also expresses concern over the "demand driven economy and supply side pressures." It simply means that the demand for goods -- particularly food and other commodities -- are more than it could be supplied in the market. The prediction is, "Supply side pressures are expected to persist in the coming months with considerable uncertainties surrounding the evolution of key commodity prices and second order effects."
The RBI analysis means that relief to the people is not in sight in the near future. It enlists the reasons as pressures from international food and energy prices as also risks from financial markets -- leading to enhanced vulnerability of the financial system. It apprehends withdrawal of liquidity and that would "impact economies like India".
<b>The rupee's fall against dollar has its impact on the growing trade deficit as exports have become expensive in dollar terms. It is also affecting the BPO sector. The real income has come down. It has translated into lower pay packets and near closure of many smaller BPO units. Even the manufacturing units are not functioning to their capacity, owing to fall in demand. </b>
The situation is likely to turn grimmer as International Monetary Fund's World Economic Outlook forecasts a slowdown in global GDP to 3.7 per cent in 2008 from 4.9 per cent in 2007. It says food price inflation would remain a key-risk to global stability.
In the global foodgrains market, prices of major crops such as corn, soyabean and wheat have increased by 58.2 per cent, 86.3 per cent and 56.5 per cent respectively over a year.
Agriculture has been ignored since 1991 and food production has fallen in India. Coupled with the poor global credit scenario, there are no sunny days in sight in the near future. Any relief is unlikely from the pressures the economy is suffering. At the national level, lack of political will to deal with the situation is complicating the process. As a result, economic growth is likely to be skewed, if not stymied.
-- The writer is a senior economic journalist
<!--QuoteEnd--><!--QuoteEEnd-->
Thank you Moron Singh.
PIoneer.com
Shivaji Sarkar
RBI's annual policy statement suggests a grim future
Is India heading for stagflation? Reserve Bank Governor YV Reddy says it has never happened in India but his Annual Policy Statement for the current fiscal is not sure of what he is saying. It hints at global stagflation.
The RBI statement is replete with scepticism about the economic scenario. The scepticism is linked to the inflationary tendencies. When the statement was released, inflation was at seven plus percentage. Now it is touching 13 per cent. Coupled with this the last quarter industrial growth has slipped to an alarming three per cent.
The RBI is too scared of "overall uncertainties". It states, "It is useful to recognise the anticipated global slowdown and heightened uncertainties into mounting pressures. Whether the slowdown would have a moderating effect on inflationary pressures or whether the global economy would slip into stagflation is not clear." This does not mean RBI rules the possibility out.
With regard to interaction between global and national economies, RBI sees some revival of protectionism globally. RBI says this makes the assessment of the impact of the global economy on India "extremely difficult".
The RBI indirectly calls for putting a halt to the process of global integration of the economy. In reality, it wants that more protectionist measures should be taken because it's finding difficult to maintain the level of rupee against the US dollar, depreciating since 2006.
Mr Reddy says there is greater inflationary pressure than expected. He says that economic integration and inflation is global. "There are unprecedented dilemmas and response of market not assessed. It is an extraordinary global situation".
In a grim scenario like this the statement is not clear on the sustained growth path. "Growth forecasts have been moderated in the face of the financial turbulence and the anticipated slowdown in the US economy." It simply means that RBI has views that are different from the Finance Ministry<b>. It also means it foresees a slowdown at national level. The RBI is silent on domestic recession but is eloquent about increasing dangers of global recession. </b>
It also expresses concern over the "demand driven economy and supply side pressures." It simply means that the demand for goods -- particularly food and other commodities -- are more than it could be supplied in the market. The prediction is, "Supply side pressures are expected to persist in the coming months with considerable uncertainties surrounding the evolution of key commodity prices and second order effects."
The RBI analysis means that relief to the people is not in sight in the near future. It enlists the reasons as pressures from international food and energy prices as also risks from financial markets -- leading to enhanced vulnerability of the financial system. It apprehends withdrawal of liquidity and that would "impact economies like India".
<b>The rupee's fall against dollar has its impact on the growing trade deficit as exports have become expensive in dollar terms. It is also affecting the BPO sector. The real income has come down. It has translated into lower pay packets and near closure of many smaller BPO units. Even the manufacturing units are not functioning to their capacity, owing to fall in demand. </b>
The situation is likely to turn grimmer as International Monetary Fund's World Economic Outlook forecasts a slowdown in global GDP to 3.7 per cent in 2008 from 4.9 per cent in 2007. It says food price inflation would remain a key-risk to global stability.
In the global foodgrains market, prices of major crops such as corn, soyabean and wheat have increased by 58.2 per cent, 86.3 per cent and 56.5 per cent respectively over a year.
Agriculture has been ignored since 1991 and food production has fallen in India. Coupled with the poor global credit scenario, there are no sunny days in sight in the near future. Any relief is unlikely from the pressures the economy is suffering. At the national level, lack of political will to deal with the situation is complicating the process. As a result, economic growth is likely to be skewed, if not stymied.
-- The writer is a senior economic journalist
<!--QuoteEnd--><!--QuoteEEnd-->
Thank you Moron Singh.