inflation in india 2012

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Inflation in India 2012

Indias inflation rate has grown more than expectations in May 2012 with increase in fuel and foodprices. It is being assumed that this decrease will not be enough to stop the interest rate deduction,which is due to be effected in order to address the present situation of slow growth.

The benchmark wholesale price index has increased by 7.55% compared to the 2011-12 fiscal. In

April 2012 it had increased by 7.23%. 37 estimates done by a survey conducted by BloombergNews had produced a median figure of 7.5 percent. Other reports have also shown that Indiasimports and exports have been going down in May 2012.

In the previous quarter Indias economic growth rate decreased to its lowest in the last ten years. Amajor reason for this was the lack of success of the initiatives for economic liberalization. Theinternational sales prospects of India also took a beating thanks to the situation involving the debtcrisis of Europe.

The RBI is expected, as a result of the slowdown, to decrease borrowing expenses - the Indianeconomy, which is one of the largest emerging markets globally, is struggling with one of itsquickest inflations.

Meghna Patel works as a fixed income analyst with Emkay Financial Services Ltd., which is basedin Mumbai. She opines that the core inflation rate of less than 5% and slowdown in economicgrowth are giving RBI the room to decrease rates.

However, according to her, it is not a question of only monetary policies she feels that thegovernment has to increase the speed of its reforms so that the economy could stand back on itsfeet.

The rate of increase in the prices of non-food manufactured goods is a proper indicator of coreinflation. In April 2012 this rate was calculated at 4.77 percent, only to go up to 4.86 percent in May2012. This information has been collected by Bloomberg, which also reveals that vegetable priceshave increased by 49% compared to 2011, and power and fuel expenses have increased by11.5%.

Condition of the INR

In the year gone by, the value of the INR with regards to the US Dollar has gone down byapproximately. This has affected the share market negatively as well. Duvvuri Subbarao, the RBI

Governor, is expected to bring down the benchmark repurchase rate by 7.75% and this is going tobe a decrease of 0.25%.

Experts at Bloomberg also feel that the rate could come down to 7.5 percent, which will represent adecrease of 50%. Amol Agarwal, an economist from Mumbai, and working with STCI PrimaryDealer Ltd feels that the decline of the INR means the food prices and fiscal deficit could increasefurther. He also opines that the RBI needs to take some growth oriented steps to address thesituation.

Condition of Export and Import

The global economy is going through its worst phase after the previous meltdown ended in 2009and this has forced the authorities to take some steps. For example, China and Australia havereduced their benchmark rates.

In Ma 2012 India ex orted oods and services worth 25.68 billion US dollars this was a


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delayed rains and its effects on the agricultural sector and reduction of production by companies tobring down its level of stocks.

Some experts have calculated that in between 2010-11 and 2011-12, Indias economic growth ratecame down to 6.6 percent from 8.3%. In case of the first quarters of 2012 and 2011, the growth ratecame down to 6.5% from 8.4%.

The decline rate varies between 1.9 percent and 1.7% on an annual basis, and 3.9% and 1.9% on a

quarterly basis. Experts opine that a major reason for the present economic slowdown and resultantinflation are problems being faced by critical industrial sectors such as mining and manufacturing.

As per experts calculation the manufacturing sector growth in the first quarter of 2012 was 2.5percent compared to the 7.6% in the 1st quarter of 2011. The mining sector actually shrank by 0.9%in the first 3 months of 2012 as opposed to a 5% growth in the corresponding period a year back.

The agriculture sector too witnessed lesser growth in the aforementioned period with the 2012figures being 2.8% and the 2011 statistics reading 2.8%. In the construction sector there was adownfall to 5.3% from 8%. Statistically speaking, the above mentioned sectors can be heldresponsible for the slowdown but the base cause is seriously an industrial recession.

One of the major reasons behind the present condition of the Indian industrial sector is thecontinued decline in the machinery sectors growth. At the start of 2010 this sector had beengrowing at excess of 40% but has now almost stopped growing.

The electrical equipment segment never grew at a stable rate. It was only for short periods that itsgrowth rate was near 40% but its production has decreased of late. The metal products segment isstill doing fairly well though in terms of growth.

The plastic products have come down to 5 percent previously from the 25% of the first few monthsof 2010 with regards to growth. The growth rate of chemicals was never really commendable, asper analysts, but now even that sector is seeing lesser growth.

To sum it up, experts feel that capital goods are at the forefront of the economic slowdown. Theinvestment in this sector was pretty good during 2005 to 2009. When the period ended it had anobvious impact on the growth as well.

Analysts opine that the present situation has not resulted due to a lack of demand or capacity, whichhad been ensured by the 4 year investment boom. The continued increase in oil prices was a majorissue and with it the surfeit in salaries and costs of living.

They also feel that the present administration is more inclined to go for deficit financing that isinflationary in nature and increase the prices of food grains. The textiles sector performedcommendably in 2011 when Pakistan was plagued by floods but the good time has concluded. Theythink that investment is a major issue in this context.

Factors like the relative lack of growth in investments and the gradual decrease of investmentgoods prices have contrived to bring about the present situation. According to experts, the presentsituation can be termed a real investment slump. With reduction in domestic demand, imports havealso reduced and the export sector has started performing better.

Now the question that comes up inevitably is when will this situation come to an end? The whole

situation, as per the analysts, started with restrictions on industry margins and cost inflation. It wasfurther exacerbated by the demand crisis.

Experts say that such situations conclude when the economic growth is sufficient to soak up theadditional capacity. They think that it can be another 2-3 years for this process to be completed as a


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result of the high rates of investment during the time when the economy was doing well.

April 20035.12% April 20042.23% April 2005 4.96% April 20064.65% April 20076.67% April20087.81% April 20098.70% April 201013.33% April 20119.41%

If there is an earthquake in a particular region, then all individual in that region will get affected bythe earthquake in some way or the other. No one will be able to escape it, whether he is male orfemale, rich or poor, child or old. This is because the impact of earthquake is in the system. Someother examples of risks that exist in the system are political situations, war etc. Similarly sinceinflation exists in the system, everyone will be affected in some way or the other and there is no wayone can avoid inflation.

Economic meaning of inflation is general and progressive rise in prices. However more aptexplanation for inflation would be to state that it is a phenomenon which exists in the system andslowly affects all parameters of finance. We can say it is a silent killer. Further since inflation existsin the system there is no way to escape it.

Secondly, inflation is always prevalent in the system and therefore it continuously affects us.Sometimes the impact of inflation is high and sometimes it is less. However it is never absentunless economy is contracting. Cost of a masala dosa in 1987 was Rs 3.50. Same masala dosa in1997 costed Rs 14.00. If the rise in prices continues at same rate then in year 2017 masala dosawill cost Rs 224.00. Similarly cost of Colgate toothpaste in 1987 was Rs 8.05. It increased to Rs18.90 in 1997. If it keeps progressing at same rate in 2017 we will have to pay Rs 104.00. All of uswitnessed the rise in prices of masala dosa and Colgate toothpaste. However since it was slow wedid not realize how large its impact is in the long run.

There are four pillars of finance (i) Assets (investments) (ii) Liabilities (Borrowings) (iii) Income (iv)Expenses.

Since inflation exists in the system, it affects all our investments. Assume we are generating 8%,20%, 12% and 25% returns from debt, equity, gold and real estate respectively. If rate of inflation inthe system is 11% than our real rate of return from debt will be 8% - 11% = -3%, equity returns willbe 20%-11%%=9%, Gold returns will be 12%-11%=1% and real rate of return from real estate willbe 25%-11%=14%. Thus inflation affects all our investments.

During inflation, rate of interest in the economy rises. Therefore invariably our rate of interest onborrowing will rise. We will have to pay higher rate of interest on our borrowings. Cost of home loan,car loan etc. will go up. As far as possible avoid borrowings and if there is loan, get out of it as soonas possible.

Since value of rupee depreciates due to inflation, our income can buy lesser goods and services.Thus inflation indirectly reduces value of our earning.


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Lastly inflation has direct impact on expenses. Since inflation increase general rate of prices, allgoods and services become expensive.

While we cannot escape inflation we can try and reduce its impact on us.From investment perspective we should invest in assets which can generatereturns higher than rate of inflation. These are equity, Gold and real estate.However these asset classes are highly volatile in near term.

Sure shot way to beat inflation, is to increase our level of income. Howeverit is not possible for individuals to increase level income immediately.Therefore during higher inflation period if possible find out avenues to

increase income level. This is easier said then done.

Learn to control your expenses..

Expenses are something that can be tackled. Before discussing strategies to control expense firstlet us try and understand categories of expenses. Broadly there are two categories of expenses (i)Mandatory (ii) Voluntary. Within each of these categories there are fixed and variable expenses e.g.Mandatory fixed expenses e.g. school fees, house rent etc. Next these are Mandatory variableexpenses like grocery, medical and health care expense etc. There is absolutely no one way canavoid mandatory expenses.

In case of voluntary expenses again there are two categories e.g. Voluntary fixed expenses e.g.Gymnasium fees, club membership etc. Voluntary variable expenses include eating out, vacationsetc. While the inflation is rising we should cut down on voluntary variable expenses at once. Also asand when renewal for voluntary fixed expenses come up same can be reduced or stoppedcompletely.

Even after controlling voluntary expenses if we are struggling to make two ends meet, then weshould follow step down process. Let us consider example of cost of transport to work, a mandatoryvariable expense. Using a chauffer driven car is the upper most step and walking is lower moststep. After deciding on these two find our other options by lowering one step. After chauffer drivencar next lower step could be to self drive car to work. Step lower than that could be car pool andstep lower than car pool could be to use public transport. Once the ladder is constructed we shouldfind out optimal suited option.

Invariably we focus too much on risks which are transparent like volatility of equity market, illness in

family etc. Unfortunately a non-transparent risk like inflation gets ignored. However, just because wecannot see impact of inflation on our finances, it does not mean inflation does not exist. Inflation is asilent killer and if we ignore it, one day it will kill us.


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inflation in india 2012

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