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BUSINESS
Surging inflation likely to affect flow of investment
By
Devajit Mahanta
Inflation has already hit over 11% causing a major concern for the
common people. While double digit inflation was widely expected, no one was
ready for a rise to 11.05 percent in June itself. In fact, till the early
nineties, Indians were used to double-digit inflation and its attendant
consequences. But, since the mid-nineties controlling inflation became a
priority for policy framers. High inflation will invite tightening measures
from the RBI, which would have an adverse impact on investment and
consumption in the country. The Union Finance Minister P Chidambaram,
recently said that the rising price of crude oil at the international level
was causing inflationary pressures in the country. The prices in most
countries have been on an upward spiral. While the Government has taken a
number of steps to bring the rates down, people should be patient as it
will take time to get productive results.
Forces behind rising of inflation are – First, there is the impact of high
oil prices, which affects agricultural costs directly because of the
significance of energy as an input in the cultivation process itself
(through fertilizer and irrigation costs) as well as in transporting food.
Across the world, governments have reduced protection and subsidies on
agriculture, which means that high costs of energy directly translate into
higher costs of cultivation, and therefore higher prices of output.
Second, there is the impact of both oil prices and government policies in
the US, Europe, Brazil and
elsewhere that have promoted bio-fuels as an alternative to petroleum. This
has led to significant shifts in acreage as well as use of certain grains.
Third, the impact of policy neglect of agriculture over the past two
decades is finally being felt. The prolonged agrarian crisis in many parts
of the developing world; the shifts in acreage from food crops to cash
crops relying on purchased inputs; the excessive use of groundwater and
inadequate attention to preserving or regenerating land and soil quality
The Government’s response to the domestic price rise, which is already
creating panic in official corridors in an election year, has been to
reduce or eliminate import duties on several food items such as edible
oils, so as to allow imports to bring the price down.
But that is a short-sighted and probably ineffective strategy. It provides
direct competition to Indian farmers producing oilseeds, even as they
suffer rapidly rising costs. It sends confused signals not only to farmers
for the next sowing season, but also to consumers, and leaves the field
open for domestic speculators as well because the imports are not under
public supervision but left to private traders.
Most of all, given the tendency of international commodity prices noted
here, it will not solve the basic problem of rising inflation in such
commodities. Instead, it will make the Indian economy even more prone to
the volatility and inflationary pressure of world markets. In fact, the
increase in prices in India
have not been as sharp for some commodities largely because of the vestiges
of the intervention era.
However, though the investment scenario seems gloomy, it is important to
remainder that inflation also depends on the investment horizon. We should
not look at individual inflation figures but at the average inflation rate
over the period of investment and then look at beating it.
Readers can send their feedback at devajitmahanta@gmail.com
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