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Rising food prices to propel yields

Dec 9, 2009

All is not hunky dory for the Indian economy. Yes, that the Indian GDP has grown by 7.9% in the September quarter is certainly something to cheer about. But the looming threat of inflation persists. What is worrying really is the rising food prices which was reflected in the wholesale food-price index that climbed to an 11-month high in November.

As a result, the government yesterday sought an approval to spend an extra US$ 6.6 bn, partly to subsidize food and fertilizers so as to douse rising inflation. Infact, plans on the anvil include spending Rs 34.6 bn on subsidizing food prices for the poor and Rs 30 bn for subsidizing fertilizers. The interesting thing to note is that the government's fiscal deficit had soared to 6.2% in FY09 and is expected to remain high at around 6.8% in FY10. With the added borrowings that the government is going in for, it appears that the deficit is set to exceed the estimate for this year. While the Finance Minister Pranab Mukherjee opines that government borrowings will be within the target estimated, investors are not likely to be enthused. And so, bond yields are also expected to soar to 8% putting added pressure on government finances.

It is obvious that the only other way for the government to contain the deficit is by increasing revenues. Its proposed plan to auction third-generation telecommunications network that allows high-speed Indian connections is one way of doing so. As reported on Bloomberg, this is because the plan will bring in Rs 250 bn to the government coffers. But so often in the past, the problem for the government has always been effective execution of plans and it remains to be seen whether this will witness a sea of change this time around.

Japan fails to deliver yet again
It has been called the country with the 'lost decade' and the recent GDP figures released for the third quarter of 2009 do not paint a rosy picture either. Yes, we are talking about Japan. As reported on Bloomberg, Japan's GDP rose at an annual rate of 1.3% lower than what had been estimated by experts and economists alike. Japan has yet to shake off the crippling effects of the global financial crisis and the data shows that Japanese companies are cutting down on capex for building plant and machinery as they want to protect earnings. As a result there are concerns that the economy is already under threat of deflation. To make matters worse, the country which is dependent on exports is already reeling by the impact of a rising yen. While consumer spending which accounts for 60% of the economy rose by 0.9%, exports rose by a meager 6.5%.

Since the Japanese economy is dependent on how its developed peers of the US and Europe are doing, it seems unlikely that there will be much headway in terms of growth unless the US and Europe comes out from the slump. It is expected that the scenario is likely to be much better in 2010. But whether that actually turns out to be the case is anybody's guess.

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