Fwd: Inflation to force rate hikes

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From: Indicus Analytics <indic@indicus.net>
Date: Wed, Mar 10, 2010 at 2:36 PM
Subject: Inflation to force rate hikes
To: palashbiswaskl@gmail.com

March 2010 Indian Economy Next Quarter   Budget to feed inflation – expect more news on price rise Food prices not falling enough despite claims by government Inflation spreading to manufacturing sector Rate hike expected by April by 50 basis points Banks pre-empt RBI - loan rates have already begun their hike, deposit rates better follow FII flows to rise following government roadmap of fiscal deficit reduction, lower borrowings, FDI moves etc. Indian growth on track but blips from the West will continue over the year India: Kal, aaj aur kal The budget desired to please all, did not try any new antics, and was perhaps the safest budget ever presented. In the process the role of the government in the economy continues its upward movement – greater subsidies impacting all segments and sectors. The tax bracket re-allocation will make the durable makers and the middle class quite happy and similar breaks across the budget economy have something for everyone. This will impact inflation but that does not seem to bother them too much. The objectives of the Budget are the same as last year: to restore 9% growth, inclusive development, and 'to fix the weaknesses in government systems, structures and institutions at different levels of governance'. Economic Survey points out, the first two objectives will fall in line without any problems if the third is achieved. In fact, the largest impact of this Budget that will accrue to all households and firms, across the board, will come through if the government manages to meet the challenge of reform in governance. But this budget does not do anything to improve internal systems, controls, checks balances. We do believe that an index for change would be a better indicator to track than the economic growth figure. Why? Because, we now know that growth in India is not affected that much either by the government's expenditures or subsidies or international markets (it would have been far higher if the stimulus package had really made an impact, and much lower if the economy was more sensitive to international markets). For instance, going ahead, the auto sector does not expect to see much of a dip in the recent soaring sales, even with the excise hike or auto prices hike. The growth in telecom has been exploding, with highest growth in the smaller towns, even without the 3G allocation. In other words, rapid growth is now within the DNA of the Indian economy. In such an environment, the government could have cleaned up its act so much more. But for that you cannot have play-it-safe politics. The farce enacted by the Opposition after the announcement of the fuel price hike is one such reflection of a larger phenomenon. Do not take any decision that will make anyone unhappy today, even if it makes everyone unhappy tomorrow. For instance, we have known about the fuel price problem for so long but play-it-safe politicians on all sides did little, and we are having to now increase prices amid already high inflation. Actually things are going to get worse and we are looking at higher inflationary pressures ahead. Fertilizer prices are set to rise, inputs like steel and cement are already on the high, healthcare costs are going to increase dramatically, government administration costs will also shoot up, globally oil and commodity prices will rise further, inflation will spread to the rest of the economy. It's not enough to keep blaming supply side factors for rising prices - raising productivity and efficiency are imperatives, but for that the government has to get out of fiddling in every little part of the economy. Sumita Kale & Laveesh Bhandari 7th March 2010, Indicus Analytics  Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can be contacted at sumita@indicus.net and laveesh@indicus.net. 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