Tuesday, April 29, 2008

Inflation, Growth and other Structural Problems in India

I am sure it was a well deserved pay hike for the millions of PSU employees in India.  The sixth pay commission proposed sweeping changes to pay scales of government employees and as a result many would be given an arrears to account for the raises over the past two years.

Reports are trickling in that inflation in India is on the rise and that both the Finance Ministry and the RBI are taking all steps to somehow counter it.  Obviously, the ideal situation for a growing economy for India is to consistently achieve high growth rates coupled with medium to low inflation.  Now, that can only be achieved if the growth comes not merely from demand but also from supply.  India has done a reasonable job of doing this in the past decade or so.  However, the pay commission's report could not have come at a worse situation.  There are fears of global economic recession and it is not clear to what extent India is decoupled from US particularly.  Second, and more importantly, the millions of PSU and other government employees with huge amounts of disposable cash in their hands will be demanding and consuming more "goods" and "services".  The supply side will be slow to catch up for obvious reasons.  This will only fuel the already raging fires of inflation. 

There are big differences between farm growth rates, industrial growth rates and IT growth rates in India. These differences play a pivotal role in how increase in disposable incomes would contribute to further inflation in India.  And, I have not even touched upon the real estate bubble waiting to burst in many cities.

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