Thursday, May 17, 2012

Beware, inflation could get much worse!

Indian economy really is in dire straits. Its currency is in a freefall. Its accounts are bent out of shape. And there no strong reforms worth their name anywhere close on the horizon. It is no surprise then that foreign investors are exiting in droves from the Indian market, leaving a huge wreckage of wealth destruction behind them.

After all this, one would certainly expect India's policymakers to wake up and smell the coffee. And to introspect as to what exactly is going wrong with the once fancied India growth story. Unfortunately though, this does not seem to be the case. If the latest rhetoric out of Delhi is any indication, we seem to going down the wrong path on yet another occasion. So, what exactly is the Government's plan to fix the economic muddle that we are in? Well, the solution answers to the name of austerity measures. In other words, there will either be a cut in spending and/or an attempt to raise revenues, more likely the latter than the former.

It certainly goes without saying that in the absence of reforms, the Government's efforts to boost its revenues could eventually mean higher taxes on goods and services and would thus lead to an increase in inflation. In fact, the other option of cutting the spending also has inflationary connotations to it. As we all know oil subsidies account for one of the biggest chunk for Government spending. And if the axe falls on the same, higher fuel prices will be the outcome, thus opening up another avenue for inflation to seep in. To make matters worse, we have not even considered another potentially inflationary outcome like increased prices of goods and services made largely from imported raw materials.

Thus, it appears as if the Government wants to do nothing more than rob Peter to pay Paul. Rather than expand the current economic pie by introducing meaningful reforms, the Government just wants to redistribute the existing pie through the stealth tax of inflation. Certainly not expected from the Government that held great pride in its reformist outlook.

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