some food for thought !

The growth fanatics say that high inflation is a temporary phenomenon and Indian Inc will be back on growth path few quarters down the road. They blame the current high rate of inflation on higher food and fuel prices and thus support the current regime of a loose monetary policy, which has resulted in negative real rate of interest . But how can they explain high double-digit inflation in counties such as Saudi Arabia, Russia and UAE, which are oil exporters and in Argentina, which prides itself on being one of the largest exporters of wheat, soya and meat in the world. Obviously, the reason for high global inflation levels lies elsewhere. And, the longer the central banks of the world and their bosses (politicians) stay wedded to economic growth, the greater will be the pain to the real economy. At least, that’s what historical evidence suggests. For the same reason that higher inflation hammers down stock market, the bull run is preceded by a period of low inflation , which is a precursor of sustained economic growth. The current bull run, which began in the second quarter of ’03, was preceded by a six years of low and declining rate of inflation. During 1999-2003 , the consumer price index in India hovered between 4% and 5%, the lowest in nearly a generation. Similarly, the high inflation period of mid-1990 s was followed by a lean patch in corporate earnings and a bear run in equities. By the time inflation began to decline from early 1999, it had damaged the basic fabric of growth . India Inc was saddled with surplus production capacity as a legacy of aggressive capacity expansion in mid-1990 s. So, even as inflation cooled subsequently, corporate earnings remained more or less flat for the next half a decade. The result was a flat stock market. What’s the assurance that history will not repeat itself this time?

Numerology may have little to do with macroeconomics, but the eighth year of every decade appears to bring with it bad news for the consumer. Over the past three decades, years 1988, 1998, and now 2008, have seen one of the biggest bites on the consumer’s wallet, with inflation in all these years touching double-digit figures. Incidentally, 2008 also brings to an end a period of unprecedented low consumer inflation, which started in 1999. The updated inflation figures for consumer price indices, CPI(IW), CPI(AL) and CPI(UNME), representing the index for industrial workers, agricultural labourers and urban non-manual employees, respectively, for June are yet to be compiled. However, these indices assign a higher weightage to food products, and there has been a sharp rise in the prices of food, especially cereals, milk and milk products, besides cooking oil. This is likely to push consumer inflation to the double-digit bracket exactly after a decade. If this were to happen, it would be in line with the trend seen since the 80s, where inflation during the eighth year of every decade figures in the 10%-plus range

Let’s consider CPI(UNME), which is largely a proxy for inflation faced by urban white-collared employees. The last time urban India faced high inflation was in 1998, when the annual average was 11.1%. Incidentally, CPI(UNME) crossed 10% in June 1998, something which is expected to happen this year as well. In 1998, seven months reported double-digit inflation, touching a high of 15.5% in November. Same is the case with consumer inflation for industrial workers and agricultural labourers. Inflation for agricultural labourers averaged 13% in 1998, touching a high of 19.6% in November. While inflation for industrial workers marginally fell short of the double-digit mark, averaging 9.5% for the year, it also hit a high of 18.3% in November, with six months reporting 10%-plus inflation. In 1988, consumer inflation for agricultural labourers and urban India hovered in the 8-9% range, crossing the 10%-mark in April. However, consumer inflation for industrial workers was not so modest and averaged 13.5% for the year, touching 15.5% in April. Interestingly, high inflation in the eighth year of each decade since 1980s came on the back of an opposite trend in the 1970s, when consumer inflation was low. For industrial workers, 1978 actually was a year of deflation when the price index dropped. Inflation for agricultural labourers and urbanites also averaged a modest 2.5% and 4% in 1978, one of the lowest annual consumer inflation that the country has witnessed since then. Moreover, the eighth year did not record the highest inflation in any decade, including the 1980s and 1990s. However, consumers can hardly take solace from this, as this could mean there is more pain that could become apparent in the next couple of years.


Small retail investors have lost a whopping over Rs 2 trillion(close to $50 billion) in market meltdown that began early this year.The overall market capitalisation has plunged by nearly a third or about Rs 24 trillion during this year from a peak of over Rs 72 trillion, in the bear run srarted after the Sensex peaked to 21,000 points mark on January 11.Out of this close to 60% loss has been in the promoters kitty themselves, with their holding depreciating by about Rs 15 trillion !