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On This Day - 19 SEPTEMBER 2011
The hottest sector in this raging inflation scenario is..
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Rising food inflation has brought to light the increasing demand for food. As a result the agriculture sector faces the daunting task of feeding a larger base of population. And that too with limited resources (agriculture land cannot be increased at will). This in turn has brought about a major change in which agricultural activity is carried out. Use of new technologies, technologically enhanced seeds, use of fertilizers, etc has now become a common thing. And all this has led to an increase in demand for companies that engage in providing these services or that rely on agriculture for their growth.
But the Indian government has tried to do its bit here by imposing price controls on the agricultural inputs like seeds, fertilizers, etc. The reason - the government feels that higher prices would hurt the farmers. Considering the fact that this sector is the probably the only one that is doing well, this approach of the government may just be another populist approach. Such controls discourage companies from entering the sector. This in turn hampers the overall future growth of the sector. Therefore, it is important for the government to adopt liberalized policies that would be to the benefit of all - the farmers as well as the companies.
Is that really the case? We certainly don't think so. Looking at it from a 'glass half full' point of view, one would realise that although inflation has not gone down, it would have run up even more had the central bank not intervened. Also, from a long term perspective what we need is low inflation and more equitable growth rather than have a strong growth that is fuelled by cheap money. As the US has found out, a growth fuelled by cheap money looks good while it lasts but wrecks tremendous damage when the bubble bursts. Thus, it is always better to grow relatively slower if that growth has a great deal of stability and low inflation. And this is exactly what the RBI is trying to accomplish and hence, should be fully supported in its endeavour we believe.
Utilization of Rs 250 bn of government savings, cut down of expenditure on other welfare schemes and rollover of part of the burden to next year are some of the options being looked into. Cutting down outlay on rural development, healthcare and HRD schemes need to be handled with much care as this too can backfire. Rolling over subsidy burden to subsequent years is certainly not a wise or a long term solution as the high oil prices may prevail. Hence, we believe that the government should instead take a more sustainable approach and invest in building the country's own energy resources to make the economy more self sufficient.
Electricity regulators keep tariffs unchanged for a number of years; despite rising power costs. They do not raise tariffs mainly due to political pressure. Recently Delhi was given the go ahead to raise tariffs, after almost a decade! An efficient mechanism is needed to make power regulators more accountable and tariff revision needs to take place on a regular basis. The Prime Minister has called for such reforms, however when this will fall in place is a different story altogether.
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