When will the policymakers blink? - Views on News from Equitymaster

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When will the policymakers blink?

Dec 15, 2009

The government has been under severe political pressure in the past few weeks. The economy is now joining in. The government has so far maintained an easy monetary policy to counter the economic slowdown. And the low interest rates have certainly worked. The economy has grown by 7.9% in 1QFY10. Sales numbers of automobiles and consumer durables are robust.

But it seems like the government will have to blink again, given how rapidly prices are rising. Wholesale Price Index based inflation has climbed to 4.8% for November. That's a ten-month high. The main culprit is price of food. Cereals, pulses and vegetables - especially the humble potato and onion are witnessing runaway inflation. Of course, much of it is due to the poor monsoons this year. The leaky public distribution system doesn't help. The policymakers are pinning their hopes on a better winter harvest. In our view, they will have to act sooner rather than later. Not because monetary policy necessarily has much impact on food prices. Instead it is because high food prices have a political fallout. That always gets governments to act.

Life insurance sector takes a breather
The recent economic slowdown seems to have taken a toll on the life insurance sector in India. True, the industry saw a 13% increase in premium income from new policies. But most of it is due to the Life Insurance Corporation. Keep the big boy aside, and most other players saw their premium income decline. That also shows up in other operating data. As per a leading business daily, during 1HFY10, the 22 licensed life insurers hired 91,000 agents. The number was 200,000 agents in the corresponding period last year.

Similarly, only 86 new branches were opened during 1HFY10 as compared to 1,806 in the corresponding period last year. Now, insurance companies need capital to write new business and open branches. Since the performance has been slow in these two areas, the sector has witnessed a 66% decline in capital deployed during the period. In our opinion, this fits the pattern that every new promising industry that opens up for competition must go through. There is the initial rush of new players and aggressive expansion. But soon it is time to settle down and consolidate. This is where the industry finds itself now.

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