Jan 1, 2014

Inflation in India - Is it driven by easy money ?

Last month,  I was in India for a week. One of the aspects that I couldn't look away from was inflation.. Maybe some of the figures that I quote may seem to be quite normal for resident Indians. However for someone like me, who has moved abroad from 2011 end, there was a marked difference in the level of prices..

Observation 1 - I picked up a tooth paste - some colgate variety - from a reliance fresh outlet. Normally when I pick up any house-hold item like that, I don't pay much attention to the prices individually.. When the bill came, this item had a price tag of 200/- .. Not really sure if Reliance was jacking up the price or Colgate.

Observation 2 - Place : Guruvayur.. A roadside restaurant near the hotel where we stayed.. Price of few items - Masala Dosa (45/-) , Meals (105/-) ..  This is just a normal eatery with minimum facilities.. Inspite of the price range, this place is swarming with people - middle & lower middle class range.

Observation 3 -  Railway station cafetaria - No lunch item priced less than 100/-.

Observation 4 - A prominent political party worker came to collect donation for an upcoming election rally of a National level political reader. As per him no donation less than 500/- will be given a receipt and they don't require it :)

And much more.. In any decent textile shop, most of the items start at 300/- plus.. Any normal purchase of bakery items cost 150 plus.. No manual labourer can be hired at a rate less than 500/- per day..

All this gave me a feeling that there is too much money floating in the economy atleast in certain pockets.. Otherwise, FMCG companies cannot charge such rates and survive.. Roadside hotels cannot  charge that much unless people are willing to pay that high.  Our lose monetary policy has infused such a high amount of liquidity into the system so that people have started losing faith in rupee.

Markets have different ways to react to all this.  In our locality, inspite of the presence of  2 or 3 supermarkets,  there is a  - Nadan Pachakkarichantha - or local market to sell locally grown vegetables and fruits.. And, apparently it is at this place where you get cheapest vegetables.. Not any of the supermarkets.

I heard that in some of the property transactions, people have started using gold instead of cash to negotiate and pay ( can't vouch for the authenticity ) - partly to dodge taxes, partly because there is no guarantee on the value of rupee. It made me recall one of the documentaries that I had seen about the great depression.. The idea conveyed in that is that when currency becomes too weak, alternate items start functioning as currency - or  in extreme cases,  certain elements of economy start following barter system ( Haven't observed such instances so far fortunately )

All this points to the fact that abundant doles , subsidies, loands, pay hikes and all lose monetary elements have rendered rupee much weaker. Not commenting on the political side, however economically we should keep interest rates high to bring sanity to the economy.