Tackling the Weapons of Financial Terrorism….Runaway Food Inflation and Fear of Oil Prices surging yet again….India’s Twin Challenges

We keep waving our High GDP growth rate,Infrastructure and Domestic Consumption Stories like a Magic Wand that will solve all our Economic Woes

Ofcourse they do hold out great hope…but pause to think of critical economic challenges that India faces…atleast on two major fronts…Runaway Food Inflation and Fear of Oil Prices surging yet again…these are weapons of Financial Terrorism

Inflation has touched 8.56% in January 2010…driven by Food Inflation of 17.4%…prices of agri commodities have surged dramatically in 2009/10…Clearly some, like Sugar,were motivated and the Villians can be found managing,rather mismanaging, our economy !

India remains an Oil Intense Nation,requiring close to 150 million tonnes of crude annually to process,with ONGC and Oil India providing just 30 Million tonnes.Any surge in Oil Prices will add to our burden as over 100 million tonnes are imported…Currently Prices are revolving around US $ 70/barrel…in 2008 they had zoomed to US $ 140+/barrel and India recorded record fiscal deficits that has even rolled onto FY 2009/10…6.8 % of GDP !

….so a Fiscal deficit over Rs 4 lakh Crores and Government Borrowings of over Rs 5 lakh crs to fund this weighs down heavily on India….so it’s a Houdini Act for our Finance Ministry Mandarins…you need to raise Interest Rates to combat rising Inflation and contain liquidity…but this would have limited impact unless Government Borrowings reduce substantially…unlikely….as long as Fiscal Defict remains so high and the Finance and Petroleum  Ministries remain at loggerheads to increase Prices of Petroleum Products…Non Plan Expenditure of Food,Fuel and Fertiliser Subsidies remain our Bogeys…In 2008/9 the Fertiliser Subsidy was a record Rs 1.17 lakh crs of which Rs 96000 crs was paid…In 2009/10 the Fertliser Subsidy has halved to Rs 60000 crs as Oil Prices too have halved from all times highs…all will not be paid as the Fiscal deficit needs to be contained to target set of 6.8%..Rs 15000 crs + will roll over…..God Help us if Oil surges past US $ 100 in 2010/11…likely…so what will our Government do !?…No alternative but to continuing to borrow heavily,print some more currency  and disinvest some more !…..This is much easier than Reducing Expenditure or Raising Revenues ! 

So what will our Finance Minister Pranab Mukherjee roll out in his Union Budget on February 26,2010 ?…..Corporate Performance has been very encouraging with IIP figures at record levels…clearly the Stimulus is working and demand has picked up….but will this mean phasing out the Stimulus and raising Taxes ,to tackle continuing funds constraints? read more