Inflation shoots up to 7.83% and troubles increase further for Economy!

Inflation data released on 16.05.2008 has shown further raise, surprising every one, to 7.83%, the expectation on street and from analysts and economists was flat level at 7.59%. The effect of measures initiated by RBI and Government in the past one month are yet to show their effect so far on these provisional figures released as on week ended 03.05.2008. While one can analyse each component of the factors contributing to such steady raise, it is more disheartening to note that the actual figures for the week ended 08.03.2008, came at a nasty surprise of 7.78% (provisional figure was 5.92%) thus, difference shooting to whopping 186 basis points. This should be more worrisome for regulators, and everyone, as the same difference if adjusted to current provisional figures released recently, the inflation might be 9.69% which almost is touching double digit levels.

Under these circumstances, what is in store for our economy in the coming months to come is the question haunting everyone's mind. Crude running unabated like a Olympian and surpassing all technical levels , now stabilizing above US $ 127, already more than doubled compared to the price a year back. It directly impacts our economy, as most of our demand is being met through imports. The subsidy burden on the fiscal position of the country is quite precariously positioned, as the Indian crude basket has already touched US $ 112 and Goldman Sachs prediction that at the current raising demand and supply concerns Crude can touch US $ 150 initially and then even US $200 in a year's time, cannot be taken lightly.

While appreciating rupee, and raising stock markets in the past 4 years invited quite substantial flows into India, to some extent helped containing inflation during that time. Now, FIIs are withdrawing money from our markets since January' 2008, due to higher valuations, and rupee depreciating in the last month, due to all importers rushing for US dollar, shall add to the raise in inflation, as always weakening of currency contributes to inflation. Under these circumstances, growth would naturally suffer, and higher interest rates are already hurting the investment planning of corporates.

Are we going to have higher growth in GDP and higher inflation from now on? May be so? The actual forecasting can be done after watching the performance of economy by Sept'2008 and the corporate performance, monsoon etc., to some extent. No doubt the incomes are raising with indian public, consumption pattern also changing from 'save for the future' to "borrow and enjoy the present" gradually, should keep domestic economy performing with an average growth of 7% certainly.

Next week inflation data should throw some relief from raising trend, which might give some breather for government and regulators; otherwise, we should be prepared for some sudden, drastic, panic measures too, as tolerable level of inflation was way below 5.5% for this year as per RBI estimates.