Tuesday, August 16, 2011

It is too early to say we will change our stance!

It is too early to say we will change our stance.. well it's RBI Governor D. Subbarao who said this recently.  The context - inflation.  Deputy Governor Subir Gokarn says going soft on inflation could involve huge risk.   With food inflation scorching ahead at around 10%, the fight against inflation is only going to intensify.

Inflation being a cruel tax on poor, unless something dramatic happens, it is quite possible that RBI is going to increase the rate(s) further leading to cascading effect on the economy.  It is equally possible that growth may slow down as expansion plans are delayed by the corporates and credit off-take also reduces, though it would might happen after a time-lag.

It is in this context, Hummingbird found the article - "India's inflation mystery" by Arvind Subramanian (Business Standard, July 27, 2011) interesting. While traditionally an inflation rate above 5% has been considered unacceptable (to the middle classes), why have they remained quiet this time when inflation is persistently above 5%? Could it be due to one or more of the following reasons:
  • Protection of the interests of the poor by the NREGA with inflation indexed wages.
  • Food expenditure as a % of the consumer's total expenditure is going down compared to the past.
  • Decline in fixed income earners.
  • Rise of debt financed consumerism.
  • Middle class worries more about growth (than about inflation)
  • Consumers don't notice small changes across the board.
  • Anger of consumers against corruption overshadows anger against inflation.
One can argue convincingly against each of the points listed above.  Arvind Subramanian concludes by arguing that since higher inflation tolerance is still just a possibility, its causes unclear, and its reversal not improbable (as in 2008), RBI should not relax its guard, with which Hummingbird agrees.  Hummingbird has a somewhat alternate take on the last point viz., anger of consumers against corruption overshadowing the anger against inflation.  It is possible, somewhere in the middle, both corruption and inflation issues will merge, and the anger against those responsible for both these issues might multiply.  At that point, we may have people on the streets agitating against lack of responsible action on both the grounds.

The only sad part of the whole story is that RBI's hard stance on inflation would mean increased EMIs which will reduce the disposable income in the hands of Hummingbird.  Well, for the sake of the nation, Hummingbird has to sacrifice!