Another run-away-red-hot topic for my blog! (Wonder why my blog readership is still limited to me and my family). Inflation is something that I have been planning to write about for a long time. But I was worried about the increasing prices.
The official explanation for the run-away inflation in India is that of the increasing crude oil prices. And in response, the RBI and the Finance minister are furiously working the interest rates to reduce money supply. Thus reducing demand (so they say) to match supply. But to no effect!
Haha. Well, I don’t think that is not responsible for the situation, but there is an underlying disease that is causing these symptoms. Tinkering with the interest rates and duties will not help. It helps only in text books with a lot of other variables remaining constant. In real life it is not a money supply problem. Common sense says, people are not consuming greater and greater amounts just because they have money to burn. The reason behind inflation is not increased demand but reduced supply of food and other basic necessities. And the reason behind the reduced supply is an infrastructure which is crumbling faster than a damp chocolate cookie. Nudging repo rates and levies will not help.
And as the Congress government goes into election stupor do not expect any more of those infrastructure investments either. Part of the reason why it is going to be difficult to catch up to China in terms of development is because the Congress governments over half a century of their soporific rule have denied India the vary basic infrastructure that is needed to support real economic growth. Mumbai will never become Shanghai as early as 2020. Sorry it ain’t happening.
To avoid going the Zimbabwe-way, India needs to invest more in roads (Thus reducing precious fuel wasted in traffic jams), alternate sources of energy, domestic sources of gas and petroleum, nuclear and hydro-electricity. That won’t happen because there is a conflict of interest here. Sunset politicians will never remove infrastructure woes, because that is their election plank. They much rather hunt Chinkaras and make merry in their opulent farmhouses.
2 comments:
Shubhs , I think the point you made about Infrastructure is a very pertinent one... and surely politicians are one good cause of the lack of infra ...but then again on the flip side ...investment in infra would mean spending by government ...which could again push the inflation up in the short term ....guess its a question of tradeoffs...
Yes. Investment in infrastructure will increase inflation further in the short term.
However I feel that is the route that needs to be taken. Our current inflation is worsened by the fact that investment in infrastructure has not taken place in the last 20 years when it should have. Only this will help reduce the chances of an overheating economy in the future.
Eg: China. Uses more energy than us. Has a better economic growth rate. Yet inflation is at ~ 7%. Difference = Better infrastructure.
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