Friday, December 19, 2008

The Sudden Drop Of The Inflation

It is a great relief to the Indian economy that the inflation devil really cooled off from its peak phase. The high prices of oil followed with increase of price of other important commodities impacted too much on the economic revenues. The price of Crude around $147 increased the import bill of India creating pressure on the banks to reduce liquidity by increasing the CRR and Reverse ratio followed with other stringent measures. One time India's basket of import bill surged by 40% due to import of crude. The fiscal deficit was widened due to the high import bill of crude. In fact in every $1 rise in crude prices inflates the import bill by $1.7 million a day or $620 million a year.

But the main point which is pinching now that along with the reduction of Inflation the manufacturing sector is also getting slowed off. Retail sales have taken a major set back particularly in the real estate sector, auto mobile, textiles and capital goods. If inflation is coming down in such a high speed it cannot be taken that its is getting reduced for low crude prices. It is also due to the slow manufacturing growth with the problems shrouding the prime sectors of the economy. Industrial production fell 0.4%, while exports dropped over 12%. Exports have taken a set back due to low demand in US and Europe followed with other emerging economies.

The SME segment is the major affected by the credit crisis and high borrowing cost. Consumers have become skeptical regarding spending and encouraged more to save for further turbulent times. India's foreign exchange reserves have fell below $250 billion from over $300 billion at the start of 2008-09.drop in the indirect tax collection is also an indication regarding the outlook of the manufacturing and industrial segment excise duty collections fell by 8.7 per cent in the month of October, while customs duty collection fell by 0.9 per cent. Many companies even did not file indirect tax due to negligible production or no production.

Industry is already in asking for more credit facility followed with reduced interest rate which will reduce the pressure of high borrowing cost. Even if the loans are reduced this will take some time for the manufacturing industry like textiles, automobile and capital goods to average out their cost of raw material as earlier they have high cost of borrowing on the raw material cost(Procured earlier).Inflation reduction is obviously an jubilant matter but proper measures and utilization of this reduced inflation should made beneficial to make alive the sagging industrial segment.

The conclusion is this that inflation is not cooling off at such a high speed due to crude but actually due to the slow growth and sales of the prime sectors. This low inflation will give space to the RBI and to the government to take and provide some financial packages which will reduce the cost of raw material, reduces export duties followed with hike in import duty enabling a competitive market at home (INDIA).Easer credit terms for the sectors like real estates capital goods automobile and textiles.
Consumers should get easy terms of credit without affecting the balance sheet of the Banks so that sales can take place and the manufacturing gets into process again. The government must utilize this low inflation as an opportunity to save the prime sectors from the verge of death. At the same it is a big challenge for the banks to meet the liquidity demand in parallel to without affecting the balance sheets.

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