A new financial year (FY 2008-09) dawned today, in India. There are hopes as well as fears about the same. How will the new FY pan itself out? Even if one goes by the trend as in previous years, this time around, the scene is a bit confounding and confusing for all stakeholders. The beginning of an FY is important to me on a personal front too, given my job.
The thing that is foremost on everyone's mind is inflation. The WPI-based inflation rate is far above RBI's (as well as common man's) comfort levels. And, it is a politician's nightmare, especially when elections are round the corner. For the time being, let us not think about the response - it is most likely to be a rate hike. What could have led to this sort of an inflation?
Basically, it's the primary food articles including wheat, rice and pulses whose prices have risen. As a World Bank study put it, the price rise is a global phenomenon and is due to a variety of factors, including higher demand from India and China...
What is ailing India's agri-sector? Everyone knows it and it has been very well-documented too.....but no action has been forthcoming from any quarter to reform India's 'core business'. The latest example of inept handling of agri-sector issues is the banning of exports of rice, except the basmati variety. Yes, to rein in domestic inflation, such a measure would be necessary, only as a last resort. Think for a moment about the farmer as a businessman. Would it be fair to dictate to a businessman not to sell his produce at a price it commands, wherever it is?
Even more ridiculous happenings are unfolding in Kerala. There is a bumper crop, but there are not enough farm workers available to harvest the same. The CPI-M- affiliated farm workers' union is opposing and resisting usage of harvesting machines. An unexpected and heavy summer rain came and the crop is literally in the water!! Bumper crop is now 'no crop'!!! A few farmers have taken their lives, but again, there are only empty promises. Blaming the summer rain, all ministers are happily attending the CPI-M party congress in Coimbatore and are proudly showing off to the media their latest member - director Mani Ratnam's son!! These are the real Neros of today........
The measures announced by the government, ostensibly to combat inflation, seem more like knee-jerk reactions. More concrete measures to set the supply side alright, or rather, to ease the supply-side constraints need to be there - till then, the problem of inflation will surely not go away.
When you look at the monetary policy response that is going to be out soon, as I said before, it may be a rate hike and some associated measures; whether it is going to solve it all, one needs to wait and watch. A rate hike will widen the interest-rate arbitrage and put more pressure on the INR. The problem may be compounded due to lack of a developed bond market. More curbs on ECBs are likely and it will affect the corporates adversely. Though the 'India Growth Story' is intact, it may drive down the stock prices.
As for financial reforms, it is best forgotten in the new FY. Those opposing reforms now have a 'point' - the reckless lending, complex financial engineering stuff and the consequent slowdown / crisis in the US are now a potent weapon in their hands. Also, elections are coming up and so, reforms, RIP for a year!!
The bottom-line is that strong fiscal measures are needed to avert a real slowdown in Indian economy; will they be forthcoming in an election year?