The issue of rising inflation has engulfed many economies in the world including the US and the UK, China, West Asia, and India. The symptoms were in the making for some years.
The Iraq war marked the onset of high and higher oil prices. There was a steady rise in the commodity prices in the global markets over the last three years for various reasons including substantially high consumption across new markets such as India, China, Russia, and West Asia. So far, most economies were managing price escalations through classic macro-economic tools. However, something has fundamentally changed over the past 12 months, which has triggered frantic interventions from most of the central banks across the globe ineffective. To make matter worse, the onset the impending recession in the US and the perennial decline of the US dollar, has put even more pressure on the other economies of the world, both developed as well as developing.
Mounting inflation has now become the single most important issue in India as well. In the backdrop of the upcoming elections, this issue is gaining traction with most of the opposition parties. To make matter worse for the UPA, the root cause of the current inflationary spiral lies outside India and UPA has its task cut out in curbing the inflationary pressures in the near term. Increasing Imports is certainly not an option as the prevailing global commodities prices are sky-high and hence even lowered import duty will have minimal impact on prices. Subsidies might be an option, but with the inefficiently public distribution system, its efficacy is doubtful. The initial data on inflation indicate a much higher rise in food prices. A 10 per cent increase in prices of food and grocery reduces the available discretionary incomes by almost 5 per cent for most other than the rich and the affluent. Of course, with the inflation rate now above 7% , the decrease in spending power will be much more than 5%. The immediate fall out will be reflected in a reduced spending on non-food categories, especially those catering to lower and mid income segment. In some product categories, consumption will be lowered while in others, the consumers are might defer purchase. High ticket investment categories such as new housing are likely to be impacted even more as bandwidth to avail additional EMIs for middle class Indian households will be under pressure. For most businesses, the prescription is unpalatable but unavoidable. Wherever possible, they have to resort to more cost-effective options to keep afloat with their sales volumes.
It is going to be at least a year or more before the global and Indian inflationary trends are tamed. Till then, if business has to go on, then appropriate action has to be taken. It cannot be 'business as usual' for most.
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