Why is solving India's inflation crisis important?

All of us are aware of India's inflation crisis. It is very disappointing, how we lost our grip on stable 4-to-5 per cent inflation which was prevailing earlier. From February 2006 onwards, in every single month, the y-o-y CPI-IW inflation has exceeded the upper bound of 5 per cent.

All of us agree that there is something insiduous when 10% inflation effectively steals 10% of the value of my wallet or fixed income investments. In India, however, we often hear the argument "Yes, this is bad, but if high inflation is the way to get to high GDP growth, let's get on with it". It is, then, important to ask: Why is low inflation valuable?

Nominal contracting is very important

Complex organisation of economic life involves myriad written and unwritten contracts involving households and firms. The vast majority of these contracts are written in nominal terms, i.e. in rupee values that are not adjusted for inflation.

Every society needs to adjust all the time, in response to changes in tastes and technology. When tastes or technology change, the structure of production needs to change, which involves renegotiation of (written or unwritten) contracts. These adjustments are costly. Contracting is costly, and renegotiating contracts is costly.

It is useful to think of a finite supply of adjustment as being available in the country. We should devote that full power of adjustment to the beneficial adjustments associated with changes in tastes and technology. In a place like India, where GDP doubles every decade, the requirement for adjustment is (in any case) large.

Inflation is an acid that corrodes all nominal contracts. Two people may have agreed on a contract two years ago at Rs.100, but that contract is thrown out of whack because of 10% inflation per annum. That contract has to be renegotiated. Bigger values of inflation corrode personal relationships also, given that there are many financial ties within friends and family.

Contracting is costly. Almost everything that senior managers do is to arrive at complex deals that create and sustain complex structures of production. This work is continually torn down by high inflation which makes the deals of last year break down today. Managers are able to build sophisticated edifices of contractual arrangements under low and stable inflation. These webs of contracting are harder to build and hold up when the acid rain of inflation is continually tearing these down.

Inflation messes up information processing

To continue on the theme of adjustment, the essence of a market economy is adjustments to relative prices, reflecting changes in tastes and technology. Firms learn about the viability of alternative investments by watching relative prices change. Inflation messes up this information processing. It increases the `background noise' by making a large number of prices change at once. This makes it harder to discern which price change is fundamentally driven, and merits a response in terms of increased or decreased production.

Building a sophisticated market economy is all about making long-term plans. When a firm decides to build an airport or a highway, this involves making NPVs over the next 20-40 years. This requires having a fair idea about future inflation. If inflation will fluctuate in the future, then firms will err on the side of caution when making plans about the future, i.e. investment will be reduced. I will stress that long-term investment, in projects such as infrastructure or heavy industry, relies critically not just on a long-term bond market (which, in turn, critically requires low and stable inflation) but also on the calculations happening in a spreadsheet about the NPV of the investment project, which involves projecting all revenues and all expenses for the next 20-40 years (which also critically requires low and stable inflation).

Impact upon pre-existing nominal savings

For a person at age 60 who expects to live to age 85 or 95, fixed income investments are absolutely crucial in the financial planning of these 25-35 years. These calculations can be destroyed by a short bout of inflation.

A civilised society is one in which people can make plans for the deep future, and trust in financial instruments. It is simply cruel on the elderly to inflate away their nominal assets. The possibility of even one bout of high inflation over the coming 25-35 years forces people to drop back to other mechanisms of protecting themselves in old age. What is needed is not just inflation control right now. What is needed is the environment of mature market economies, where outbursts of inflation are fully ruled out for decades to come.

Impact upon relationship with banks

In India, banks pay very low interest rates. While many interest rates have been deregulated, the interest rates paid by banks are held back by factors such as low competition and financial repression (i.e. forced purchases of government bonds).

When households expect inflation will be 12%, they will see a 4% interest rate paid by the bank as yielding -8%. This has many consequences. On one hand, households and firms expend excessive (wasteful) effort on minimising their holdings of low-yield cash. In addition, households tend to shift away from fixed income contracting with the formal financial system. Both these distortions are caused by inflation, and exacerbated by flaws in the financial system.

If the financial system were regulated sensibly, then with high inflation we would immediately get higher nominal interest rates since buyers of 90 day treasury bills would demand higher interest rates to pay for inflation. This would reduce the damage caused by high inflation. In India, we suffer from bigger negative effects because of a faulty financial system.

These may seem to be small things but they actually are fairly large effects. Towards an understanding of the costs of inflation -- II, by Stan Fischer, 1981, argues that perfectly anticipated 10% inflation induces a cost of 0.3% of GDP on account of only one factor : excessive efforts by households and firms to hold less cash.

The rising prominence of gold

Gold is a barbarous relic; it is the investment strategy of choice for uneducated people. It is also a vote of no confidence in fiat money. Our failures in creating a capable central bank, which delivers sound fiat money, are taking Indian households back to their old ways. Many decades of progress in getting households to engage with the modern financial system is being undone in this inflation crisis.

A classic quotation

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become `profiteers', who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. 

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.

From Chapter 6 of The Economic Consequences of the Peace, by John Maynard Keynes. Source: Who said ``Debauch the Currency'': Keynes or Lenin? by Michael V. White and Kurt Schuler, Journal of Economic Perspectives, Spring 2009.

But is there not a tradeoff between growth and inflation?

For a brief period, the empirical evidence in the US suggested that there was a tradeoff between inflation and unemployment. Here's the classic picture, for the 1960s in the US:

which shows a nice relationship where higher inflation has gone with lower unemployment. This evidence has led many people, particularly those concerned with the plight of the unemployed, to advocate higher inflation.

A look at the same evidence for the US, over a longer time period, shows no such tradeoff:

The idea that there is a tradeoff between inflation and unemployment is thus an artifact found in the minds of people who studied economics in the 1970s. This proposition was pretty much dead by the late 1970s. One by one, as central banks moved to inflation targeting, aiming and delivering 2% inflation, unemployment went down, not up. Hawkish central banks are the central story about how the stagflation of the 1970s was broken.

In the empirical literature, it is quite clear that by the time we get to double digit inflation, this has a discernable and negative impact on growth. This generally means that at a 95 per cent level of significance, you can reject the null of no effect, in conventional datasets. The conceptual reasoning above gives no reason for believing that there should be a threshold effect, that inflation above 10% should hurt growth but below 10% things should be fine. It could well be the case that when you get to smaller values for inflation (e.g. 9%) this effect size is not detected with conventional datasets at the 95 per cent level of significance.

It is interesting to look at the target inflation rate set in the numerous countries which have setup either de facto or de jure inflation targeting. The median value chosen has been: 2%. If people were convinced that inflation below 10% is not damaging to growth, inflation targets may have been higher. But instead, the typical inflation target in the world is 2%. This underlines the universal consensus in favour of targeting low inflation -- more like 2% and far below the 10% that we've got stuck with in India.

In the West, some people with a weak grip of economics, and strong sympathy for the unemployed, have argued that high inflation is a good thing because it helps reduce unemployment. In contrast, in India, economists have consistently found that the poor are adversely affected by inflation. There has not been a left-of-centre lobby that is soft on inflation, here.

Conclusion

There is no tradeoff between inflation and growth.

High inflation damages growth.

One element of India's growth crisis is India's inflation crisis.

It is important to think carefully about the accountability of the central bank. RBI is not in charge of India's welfare. RBI is in charge of India's fiat money. The one thing that RBI should be held accountable for is delivering low and stable inflation, i.e. for holding CPI-IW inflation within the 4 to 5 per cent range.

Low and stable inflation is an essential ingredient of the foundations of high economic growth in India. RBI can lay that platform. They can do no more. If they try to reach into other objectives, they damage this core.

WB: Prices of key commodities to remain under pressure in 2012

New Delhi: Global prices of some key commodities will likely fall by up to 26.4% in 2012 and may dip further in 2013 on economic slowdown, according to a World Bank forecast, although spot crude oil and gold may still gain this year. Coal (Australian) prices will likely decline 16.4% to $101 per tonne, and may fall further to touch $100 next year. Aluminium prices are forecast to shed 10.4% to $2,150 per tonne this year but may again rise to $2,350 in 2013. Copper may slid 7.9% to $8,100 a tonne in 2012 before rising to $8,500 next year. Silver may shed more than 9% to $32 per troy ounce and may continue the downward movement to $30.
Coffee (arabica) will likely lose 26.4% to $4.40 a kilogram this year and may ease further to $4.30 in 2013. US wheat is expected to dip 11.4% to $280 per tonne and may fall further to $275 next year.
Coal, which lost 6.8% in May in its fourth straight monthly decline, may continue to be under pressure due to weak demand in main consuming regions—Europe, the US and China—and rising production from major suppliers, World Bank said in a separate report.
Copper prices have fallen due to “weak import demand in Europe and China, rising LME (London Metals Exchange) inventories, and de-stocking in China following a large supply build-up”. A drop in Chinese demand will likely weigh on key metal prices. A better-than-expected crop in Brazil has affected arabica coffee prices.
However, spot crude oil prices may gain 2.5% to $106.6 a barrel this year, although the rate may fall to $103 next year. Gold, the investor’s haven asset, may retain some lustre amid a macro-economic gloom and gain 6.8% to $1,675 per troy ounce this year, although the bull run may bottom out with a fall to $1,600 next year.
“Oil demand growth remains weak, and crude stocks are high, especially in the US. However, product inventories are low and should begin to build with a seasonal upturn in refining runs,” the World Bank said in a separate note. “The Brent/WTI spread remains at $15/barrel, despite oil now flowing through the reversed Seaway pipeline, as production continues to climb in Canada and the US,” it added.

Brent crude, gold recover slightly, further fall looms

New Delhi: After hitting an 18-month low, crude oil prices bounced back on Friday to edge past $90 a barrel, but still stayed on course to record their biggest weekly loss in a year. Gold regained some lustre after the sharpest slide since February, although copper slipped into a a six-month low. Fears of a deepening macro-economic crisis after rating agency Moody’s downgraded the credit ratings of 15 of the world's largest banks had weighed on commodities on Thursday. Dismal data—US factory production grew at its slowest pace in 11 months in June, business activity across Europe contracted for a fifth consecutive month and Chinese manufacturing shrank for an eighth month--intensified the possibility of sustained slowdown.
Brent crude dropped to $88.49 a barrel, the lowest since December 2010, before inching up again to $90.23 in the intraday trade. US crude, after tumbling by 4% on Thursday, gained $0.55 to $78.75. The sovereign debt crisis in Europe and weak Chinese demand have adversely affected commodity prices. The brent price has shed more than 8% so far this week, in its biggest weekly drop since the middle of 2012, and has crashed 30% from this year’s high of $128.40 achieved in March.
The relative strength index, a closely watched technical indicator, for brent has dropped to 18, suggesting prices are oversold and a rebound may be due, but in general, the technical picture contains only few bright spots, Reuters quoted an analyst as saying.
Gold firmed in Europe on Friday after posting its biggest single-day drop since February 29, as lower prices attracted some investors back to the market. Spot gold rose 0.3% to $1,569.39 an ounce in the intraday trade, while US futures for the August delivery gained $4.60 an ounce at $1,570.10. Gold had crashed on Thursday as the Federal Reserve refrained from announcing a new round of quantitative easing to prop up US growth. At the moment, analysts see some solid support at $1,560, and below that at $1,530.
Copper prices hit their lowest levels in six months on Friday on concerns that the macro-economic crisis in China, Europe and the U.S will drag down demand for raw materials. Three-month copper on the London Metal Exchange dropped 0.7% to $7,289 a tonne in the intraday trade. It hit a session low of $7,219.50, its lowest since December. Copper has crashed by more than 14% in the past three months and analysts see a further reduction.
A stronger dollar, which makes dollar-denominated assets more expensive for users of other currencies, also drove up copper and other base metals. Aluminium gained 0.3% at $1,875 a tonne, after touching a two-year low of $1,854.
It settled at $1,870 per tonne on Thursday.
Palm oil futures for September delivery on the Bursa Malaysia Derivatives Exchange fell 1.6% to 2,953 ringgit ($928) per tonne. Prices rose to its highest level this month of 3,062 ringgit on Thursday. Despite Friday’s fall, palm oil still ended the week with a 3.7% gain, mainly due to earlier rallies on fears dry weather in the US may tighten global oilseed supplies.

Inflation to move up on rupee fall: CMIE

Mumbai: The continuing depreciation of the rupee is expected to fuel inflation and push the headline number to 7.3 per cent for FY13, making a reduction in interest rates for borrowers unlikely in the near term, an economic think-tank has said.
The Centre for Monitoring Indian Economy (CMIE) has upped its fiscal-end inflation target to 7.3 percent from the 6.7 per cent and Reserve Bank's 6.5 percent, due to the slide in the rupee.
"Driven by the rupee depreciation, headline inflation is expected to go up to 7.3 per cent in FY13 from our previous forecast of 6.7 per cent," the CMIE said in a briefing.
Such a scenario reduces the possibility of a cut in interest rates anytime soon and hence, we cannot have easing in interest rates before the second half of the fiscal, it said.
"A CRR cut would be more effective (in transmission)," the agency recommended to the RBI.
In its mid-quarter policy review last week, RBI sounded hawkish, going back to its inflation management role after giving signals of easing due to the sharp dent in growth in its earlier policy announcements.
The rupee has been one of the worst performing currencies at present, having lost nearly 30 per cent since last August due to a variety of reasons like fall in capital flows on concerns over the current account deficit.
It touched an all time low of 57.37 to the dollar during trading last Friday.
The CMIE forecasts the rupee to continue to trade in the 55-56 range versus the US dollar till the first fortnight of July, after which the fate of the currency hinges on the capital flows situation.
On consumer inflation, which found a mention in the recent RBI communication as an important indicator and also as a concern, CMIE said it will continue to remain at elevated levels due to rising food prices.
"We expect CPI inflation for industrial workers to rise by 8.1 per cent in 2012-13. It was 8.5 per cent in 2011-12," it said, adding the government is unlikely to meets its target of containing fiscal deficit at Rs 5.1 lakh crore or 5.1 per cent of the GDP, and rise up to 5.4 per cent on higher than-estimated-subsidy burden.
As against a stated objective to cap the subsidy burden to Rs 1.9 lakh crore, CMIE expects recent delays in diesel and petroleum products deregulation to push it up to Rs 2.3 lakh crore, hurting the fiscal deficit.
Against the budget estimate of Rs 43,580 crore, the subsidies on petroleum products alone will shoot up to Rs 65,000 crore, it said.
Political difficulties have been resulting in the continual delay of a rise, if not completely deregulation, in diesel and other petroleum products like LPG and kerosene.

India 5th most attractive retail mkt'

New Delhi: India has been ranked the fifth most attractive destination for retail investment among 30 emerging markets because of rising disposable incomes and rapid urbanisation. Even though its ranking slipped from the fourth spot in 2011, India has been placed ahead of the UAE, Saudi Arabia, Indonesia and Russia.
"India (5th) remains a high-potential market with accelerated retail market growth of 15 to 20 per cent expected over the next five years, supported by GDP growth of 6 to 7 percent, rising disposable income, and rapid urbanisation," US-based global management consulting firm A T Kearney.
Changes in FDI regulations were a major story in India last year. The changing FDI climate has provided an interesting dynamic to several international retailers' entry and expansion plans for India, it added.
According to the entity's Global Retail Development Index (GRDI) 2012, Brazil is the most alluring market for investment in the retail sector, followed by Chile (second), China (third), Uruguay (fourth) and India (fifth).
Noting that Europe faced another year of economic turmoil in 2011, developing countries forged full speed ahead.
"With consumer confidence improving and spending increasing, global retailers continued their expansion in to these markets. In the past five years, US-based WalMart, France-based Carrefour, UK-based Tesco and Germany based Metro Group saw revenues in developing countries grow 2.5 times faster than revenues in their home markets," the report said.
It added that technology is transforming the way retailers operate in developing markets. Shopper's expectation and behaviours are evolving, driven by both economic climate and increased access to information through technology.
Some of the smaller countries with attractive retail markets include Georgia, Oman, and Mongolia, all of which did not find a place in last year's ranking, are in the top 10 list this year.
The GRDI ranking is based on various factors including economic and political risks, retail market attractiveness, retail saturation levels, and the difference between gross domestic product growth and retail growth.
Meanwhile, A T Kearney's has re-introduced – Retail Talent Index-- which is based on a country's performance in three areas- talent availability, labour regulations and cost of labour this year.
India bagged the sixth place in the retail talent index. Overall, the index is led by Malaysia, whose low-cost labour and favourable regulations, and a well-educated population support the operations of international retailers that enter and expand in the market.
Among others, in the top five are China, Chile, Indonesia and Azerbaijan.

Oil cos put off petrol price cut due to weak rupee

New Delhi: State-owned oil firms have decided to "wait-and-watch" the international scenario and the rupee-dollar rate before deciding to cut petrol prices.
"The Greece vote is behind us now. But the Fitch rating downgrade has led to a sharp fall in rupee against the US dollar. There is high volatility in the market. For now we will watch the situation," said a top official at one of the three state-owned oil firms.
Indian Oil, Bharat Petroleum and Hindustan, as per practice, were to revise petrol price from June 15 but put off the decision by a couple of days. Today they decided to wait and watch for some more time.
"There is no revision in petrol rates today or even tomorrow. We will watch the situation for next couple of days before taking any decision," he said.
Oil firms had last cut petrol rats by Rs 2.02 a litre with effect from June 3 in a partial rollback of the steep Rs 7.54 per litre hike effected last month.
Petrol at present costs Rs 70.24 a litre in Delhi.
Sources said the last revision was done keeping in mind an average of USD 115.77 per barrel rate of gasoline, against which domestic petrol prices are benchmarked. Gasoline rates have since fallen to USD 106.93 per barrel. But the rupee has devalued to Rs 55.69 to a US dollar from Rs 54.96 to a US dollar.
There was a scope to reduce petrol price by up to Rs 1.60 per litre but with rupee falling further, the cost of imports has again risen.
"Today, rupee dropped 53 paise to close at Rs 55.93," the official said. "There is excessive volatility".

Gold price extends golden run to hit new all-time high; silver too spurts

Mumbai: Gold prices hardened further to hit another life-time highs at the bullion market here today on consistent speculative off-take from investors and stockists following a rally in international markets. Silver also tracked the yellow metal and spurted on heavy demand on the back of good industrial buying.
Standard gold (99.5 purity) rose by Rs 195 to end at Rs 30,295 per 10 grams from Monday's closing level of Rs 30,100.
Pure gold (99.9 purity) surged by Rs 205 to close at Rs 30,445 per 10 gm from Rs 30,240 yesterday.
Silver ready (.999 fineness) climbed up by Rs 470 per kg to end at Rs 55,530 as compared to Rs 55,060 previously.
"Traders are taking positions on the basis of overseas market, where gold has charmed it way to safe-haven appeal.
All eyes now are on the outcome of US Federal Reserve's policy meeting," dealers said.
In Europe, gold rallied for an eighth consecutive session hoping of further stimulus in the backdrop of US Fed meeting as well as safe haven buying.
Spot gold was bid up at USD 1,630.55 an ounce in early trade.

Brent hits 6 months low at $94 a barrel

London/Singapore: Oil fell after a rally fuelled by victory of pro-bailout parties in Greece lost steam Brent crude futures hit a fresh 16-month low at $94.44 a barrel on Tuesday on slack demand due to fears about the slowing the euro zone economy ahead of Spanish bond sales.
Brent extended losses after falling $1 to $95.05 a barrel. At 0814 GMT, Brent was down $1.18 at $94.87 a barrel.
Oil, along with other commodities, fell on Monday after an initial rally fuelled by the victory of pro-bailout parties in Greece lost steam, as Spain’s surging bond yields raised concern the country may need a full-blown bailout.
“The Greek election result gave the market a brief respite, that was it, now investors are clearly focused on Spanish government bond yields,” said Michael Creed, an economist at National Australia Bank.
Brent crude, which is down around 25% since hitting a peak above $128 in early March, was up 8 cents at $96.13 per barrel by 0404 GMT.
It hit a session low of $95.80, not far from Monday’s low of $95.38 — its weakest since January 2011.
US July crude, which expires on Wednesday, slipped 7 cents to $83.20 per barrel.
Uncertainty in the market, with Spain's borrowing costs taking centrestage now, will likely keep volatility high.
Yield on Spanish 10-year bonds hit a fresh high above the unsustainable 7% mark on Monday. Greece, Ireland and Portugal were forced to seek international bailouts soon after their 10-year bond yields rose above 7%.
“More expensive Spanish debt costs potentially bring forward the time when the government will need to seek help and draw down firewall buffers to meet ongoing commitments,” Ric Spooner, chief market analyst with CMC Markets, said in a note to clients.
Investors are now looking for fresh trading cues from the US Federal Reserve’s policy meeting and the China flash manufacturing PMI from HSBC this week.
The US central bank’s two-day policy meeting, which kicks off later in the day, will be watched closely for any indication that the Fed will roll out another round of monetary easing to combat a slowing recovery.
That would be good news for commodities, as it boosts market liquidity in the short term, and also builds fuel demand as the stimulus works its way into the economy.
Six world powers and Iran resumed talks in Moscow on Tuesday after making little headway on their first day of talks on Monday on how to end the dispute over Tehran's nuclear program me.

In a first, BPCL pays for Iranian oil in rupees
New Delhi: Bharat Petroleum Corp has made its first payment for Iranian oil in rupees, two industry sources said on Tuesday, becoming the first refiner to use a payment channel that skirts tightening Western sanctions on Iran’s trade.
India is Iran’s second-largest oil buyer, but has struggled to find ways to pay for the oil as Western sanctions curb international financial payments destined for Tehran’s coffers. Since December 2010, refiners in India have been using Turkey’s Halkbank to pay their annual oil import bill of more than $10 billion, after a previous payment channel was blocked.

diesel tax won;t cut subsidy...

New Delhi: Additional taxes on diesel cars and utility vehicles will not help bring down petroleum subsidy significantly and the government will rather have to hike diesel prices to lessen the burden, according to market research firm Crisil.
"To bring about a sustainable reduction in the subsidy burden, the government will have to hike diesel prices, and ensure that in future also, diesel prices move in accordance with crude oil prices," Crisil Research said in a report.
In the 2012-13 Union Budget, the government had set stringent targets to contain its subsidy bill, of which petroleum subsidies form a third, it said.
The options being considered include imposition of a one-time tax on new diesel cars and utility vehicles (UVs) sold or an annual usage-based levy on existing diesel cars and UVs, which are aimed at reducing the preference for these vehicles and thereby bringing down diesel consumption.
"...These options will not bring down the subsidy significantly or will be difficult to implement. Furthermore, diesel cars and UVs account for just over a tenth of the diesel consumption," the report added.
The report further pointed out that other vehicles like trucks and buses, which consume more diesel, remain untaxed.
"Of the total diesel consumed in 2011-12, cars and UVs used up only 12 per cent, a third of what trucks and buses consumed," it said.
The research firm said it had derived the share of diesel used by cars and UVs, based on an estimated population of 3.6 million diesel cars in India as of March 2012.
This formed about 23 per cent of the total population of cars and utility vehicles. Of this, it has been estimated that 47 per cent of the cars are for personal use and the remaining for commercial use.
The report said the recent Rs 5-plus hike in petrol prices has again turned the spotlight on petroleum subsidy, which accounted for nearly a third of the Rs 2,20,000 crore
subsidy bill in 2011-12.
It pointed out that in 2011-12 petroleum subsidies shot up by almost 80 per cent to Rs 6,80,00 crore as crude oil prices rose and the rupee weakened.
In the Budget 2012-13, the government had targeted to contain its petroleum subsidy bill at Rs 43,600 crore, about 40 per cent lower than in 2011-12, it added.
"Within petroleum subsidies, diesel alone takes up about 60 per cent. Under-recoveries on diesel are at an all-time high of Rs 14 per litre at current diesel prices. Thus, hiking petrol prices alone would not make any difference to the petroleum subsidy burden of the government," it said.
Calling for a hike in diesel prices, the report said: "To contain under-recoveries on diesel at last year's level of Rs 9 per litre, the government would need to hike diesel prices by at least 10-15 per cent."
Increasing diesel fuel prices by 10-15 per cent would reduce petroleum subsidies by about 25 per cent in 2012-13, and also curb the rising share of diesel in petroleum subsidies, Crisil said, however, adding such a hike in diesel prices would also stoke inflation.
Stating that deregulating diesel prices is the only long-term solution to cut subsidy burden, the Crisil report said globally petrol and diesel prices do not vary much.
In most countries within the EU and in the US, diesel and petrol prices are similar ¿ the difference between the two is not more than 15 per cent.
By contrast, in India today, petrol prices are close to 2 times higher than diesel, reflecting both higher subsidies and higher taxes on petrol, the report said.
"...biting the deregulation bullet and ensuring that diesel prices moves in line with crude oil prices would bring about a sustainable reduction in the subsidy burden, which will also provide the government funds for other development activities," it added.
Discouraging diesel consumption by imposing additional taxes on private and luxury diesel vehicles would only minimally cut down petroleum subsidies, the report said.

Gold futures up on firm global cues

Tracking a firming global trend, gold prices rose by R116 to R30,010 per 10 grams in futures trade on Monday as speculators enlarged their positions. Sentiment bolstered after gold advanced in global markets as the euro rallied against the dollar after Spain asked for a bailout and on speculation that demand from China will be sustained. At the Multi Commodity Exchange, gold for delivery in October rose by R116, or 0.25%, to R30,010 per 10 grams, with a business turnover of 214 lots.

Veg oil imports to rise by 9% in ’11-’12
India’s vegetable oil imports are expected to rise by 9% to 9.48 million tonnes (MT) in the current oil year, an industry expert has said. The country had imported 8.67 mt of vegetable oils in the 2010-11 oil year (November-October). “I feel confident that India will import about 9.475 mt as outlined by me at POC in March for the oil year November 2011 to October 2012,” Godrej International director Dorab E Mistry said in a statement.

Natural rubber May output declines 3%
Natural rubber production has declined by 3% to 58,000 tonnes in May 2012, compared to 59,700 tonnes in the same month last year. The consumption of the commodity rose by 4% to 83,000 tonnes in May this year as against 80,120 tonnes in May 2011, Rubber Board data said. Imports of natural rubber rose by 13% to 18,419 tonnes last month from 16,293 tonnes in the year-ago period.

weakening of rupee impact on four metros

The weakening rupee has made four Indian cities including New Delhi and Mumbai cheaper for expatriates to live in, even as many Asian cities have turned expensive, says a Mercer survey.
Global HR services firm Mercer's survey of 214 cities worldwide has ranked Tokyo as the most expensive, while Karachi is the least costly place for expatriates.
In the Mercer 'Worldwide Cost of Living Survey 2012', New Delhi has slipped to 113th position (from 85 last year), while Mumbai is at 114th place (from 95).
Bangalore and Kolkata dropped to 187th and 208th spots, respectively. These two cities were at 180th and 203rd positions, respectively, last year.
However, Chennai became more expensive to live in and climbed to 190th rank from 194th place in 2011 list.
"The reason why Indian cities are going down in rankings when compared to last year (except Chennai) is due to the weakening of the rupee against the USD by more than 8.5 per cent in one year. We use New York as the base city and all cities are compared against it," Mercer Director (Information Products Solution) Muninder Anand said.
Tokyo has emerged as the most costly city for expatriates, pushing Luanda (in Angola) to the second spot. At the third place is Osaka, followed by Moscow and Geneva.
Other cities in the top ten are Zurich and Singapore (both ranked 6th), N'Djamena (8), Hong Kong (9) and Nagoya (10). N'Djamena is in Chad.
There are five Asian cities in the top ten most expensive places to live in for expatriates.
"In Asia, more than six in ten cities moved up in the rankings, including all surveyed cities in Australia, China, Japan and New Zealand.
"Cities in Australia and New Zealand witnessed some of the biggest jumps, as their currencies strengthened significantly against US dollar," Nathalie Constantin-Metral, Principal at Mercer, said.
She is responsible for compiling the ranking each year.
Compared to New York, most European cities have witnessed a decline in the cost of living.
The annual rankings measure the comparative cost of living for expatriates in 214 major cities. It focuses on comparing the cost of over 200 items in each location, including housing, transport, food, clothing, household goods and entertainment.
The ranking depends on the relative strength of a currency against the US dollar during March 2011 to March 2012. Further, price movements over the 12 month-period compared to those in New York City as the base, is also taken into account.

world oil price fall not of use for india

New Delhi: India is not able to get the benefit of drop in global crude oil prices due to depreciating rupee, industry body Assocham has said.
"The benefits of lower international prices were offset by a faster depreciating rupee and thereby resulting in a higher import bill," Assocham said.
Global oil prices were hovering near USD 85 per barrel in global markets yesterday against nearly USD 125 a barrel in recent months. However, the rupee has depreciated to 55 levels against the dollar against the 49 level few months ago.
India imports about 83 per cent of its oil requirement and this increase has widened the trade deficit to USD 185 billion in 2011-12, Assocham said.
"Both the international prices and exchange rate are difficult to regulate so therefore, given the runaway import bill the only policy option left is to curb the demand," it said.
It said reduction in oil consumption "will address a plethora of problems such as rising trade deficit, a bulging fuel subsidy bill and other macro imbalances".
The chamber said the crude oil imports and its impact on government finances is dependent on the import quantity, the international price of crude oil and the exchange rate.
It said, India's crude oil import bill in rupee terms shows a whopping 500 per cent increase in the last eight to nine years.
These imports have also been acting as a drag on the foreign exchange reserves, it said, adding in 2002-03, petroleum imports accounted for 23.18 per cent of the country's foreign exchange reserves.
The proportion has gone up to 34.80 per cent in 2010-11, it said.
"This situation calls for drastic measures and the government has to bite the bullet of either asking states to cut taxes or deregulate the oil sector completely", Assocham said.

How prices are fixed , barrel to barrel of oil..........

New Delhi: The Indian basket of crudes shed more than $5 a barrel last week but has since been stuck at $98.49 for the last three trading days. Here is a look at the baskets for pricing crude in India and China, and how significant these are to the retail prices of petroleum products in either country.

What is crude oil like?
It can be light or heavy, and sweet or sour. Light crudes yield more gasoline, naphtha and kerosene while heavy ones give more diesel, fuel oil and residue. Refineries the world over process a mix based on regional demand.
Any crude with more than with 2.5 per cent sulphur is classified as sour, which has actually to do with taste. It started when kerosene from Pennsylvania crude was displacing whale oil for indoor lighting. On burning, it gave out an acrid smell. To decide if the kerosene could be shipped to the New York and Philadelphia markets, a taster was hired to classify the kerosene. That started the sweet/sour distinction.
What kind of crude do Indian refineries process?
They are compelled to use a mix of sweet and sour. Though indigenous crudes from Assam and Mumbai High are sweet, they accounts for only 17 per cent of the total processed. India has to import the rest, largely from the Middle East and Africa where crude oils are cheaper and involve smaller tanker voyage than from, say, the US. Indian imports comprise nearly 80 per cent of sour crudes of which 82 per cent are from the Middle East. Of the 20 per cent imports that are sweet, Africa sends 99 per cent.

How is crude priced?
The Indian Basket of Crude oil is based on the weighted average of Middle East sour grades (the markers being Dubai and Oman crudes) and the North Sea Brent sweet grade of London. The ratio of actual sour and sweet consumption (domestic and imports) by all Indian refiners in the previous year is used as weights in calculating the current price of the Indian basket. The current weights are sour 65.2 per cent, sweet 34.8 per cent (see box).

Are retail prices based on this?
This calculation is only indicative and is not used even to work out the ex-refinery prices. Unlike in China, it has no bearing on product prices in India, which are fixed at the refinery gate depending on each product’s average monthly or fortnightly price in the international market and on government pricing rules for various products.

How are retail prices fixed?
Diesel and petrol prices are linked to international gas oil and gasoline prices respectively but with a rider: the ex-refinery price is to be calculated on a trade parity basis. The weights given are 80 per cent to import parity (including customs duty, freight, insurance) and 20 per cent to export parity (Singapore free-on-board basis). This was introduced as an incentive to private refiners who helped the country gain self-sufficiency in refining and stop petrol and diesel imports from Singapore.
The other two controlled products, LPG and kerosene, do not attract customs duty and are priced solely on export parity, which is calculated on the first of each month. The rest are freely-priced products.

How far does China’s crude pricing reflect in retail?
China uses a crude basket comprising Dubai, Brent and Indonesia’s Cinta grades and has used this indicator since late 2005 for arriving at products’ retail prices. Under this model, formally rolled out in December 2008, China’s National Development and Reform Commission takes into account costs of procurement, refinery operations, insurance and freight costs, in addition to refiners’ margins. To this basic ex-refinery cost is added a consumption tax and a value-added tax.
Theoretically, China could revise domestic fuel prices when the moving average of the Dubai, Brent and Cinta pricing basket changes by more than 4 per cent over a minimum 22 working days. However, NDRC has the option not to adjust prices even when the 4-per-cent mark is breached on grounds of social, economic and political factors.

What is the maths involved?
Secrecy shrouds the pricing system as NDRC has never disclosed daily calculations or given the specific types of crude oils its uses, or their weightage, since introducing the pricing formula in 2008. This fans a lot of speculation and NDRC’s refusal to raise petrol and diesel prices has put its refiners PetroChina Co and China Petroleum & Chemical Corp with major losses. China has indicated that it plans to change the types of crude oil in the pricing system, shorten the review period and narrow the trigger range under a revised scheme.

oil price up in Asia

Singapore: Crude prices rose in Asian trade today amid speculation of further monetary easing in the US and as France pledged speedy eurozone mobilisation should debt-straddled Spain require its aid. New York's main contract, light sweet crude for delivery in July, was up 20 cents to USD 85.22 a barrel and Brent North Sea crude for July delivery gained 20 cents to USD 100.84.
"Crude oil futures rallied... on growing hopes for a rescue of Spain's troubled banks to ease the eurozone debt crisis, and as a US Federal Reserve official hinted at more monetary easing," Phillip Futures said in a report.
French Finance Minister Pierre Moscovici yesterday said the eurozone was ready to "mobilise very rapidly" to assist Spain if Madrid requested it, tempering fears of a worsening crisis in the region's fourth largest economy.
In the US, Atlanta Federal Reserve President Dennis Lockhart said the Fed might need to consider more monetary easing if economic growth in the world's largest oil consumer hit more road blocks.
Stating that monetary policy was "appropriate" for the moment, Lockhart said in a speech posted on the bank's website that the Fed would likely consider more action if growth stalled.
"Should it become clear that something resembling my baseline scenario of continued, though modest, growth is no longer realistic, further monetary actions to support the recovery will certainly need to be considered," he said.

Industrial output dips

New Delhi: India's industrial production expanded just 0.1% in April as manufacturing slowed and mining shrank, reinforcing fears of a sustained slowdown and piling up pressure on the central bank to further ease key policy rates at its review meeting on Monday to stimulate the economy.
Tell us: How badly has the slowing economy affected you?
The index of industrial production (IIP) had advanced 5.3% in April last year.The output had contracted by 3.5% in March.
The unexpected slowdown in industrial output is the latest in a series of bad news for the economy after the gross domestic product grew at its lowest pace in nine years, at 5.3% in the quarter through March, and inflation jumped to 7.23% in April. Rating agency Standard & Poor's said on Monday that India could become the first of the BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.
Growth in manufacturing output, which accounts for about 76% of industrial production, remained almost flat at 0.1% in April, compared with 5.7% a year earlier, showed the data released by the industry ministry on Tuesday. As many as 10 out of 22 industry groups in manufacturing slumped in April.
Mining shrank by 3.1%--its second straight contraction after recording its first growth in February following sixth consecutive slump, as against 1.6% growth a year earlier, the data showed. Power generation gained 4.6% from 6.5% a year before.
Capital goods output, an indicator of investment in the economy, slumped 16.3%, compared with a 6.6% expansion during the review period.
Consumer goods grew faster at 5.2% in April, compared with 3.2% a year before. Similarly, consumer durables output gained 5% against 1.6% in the same month last year.
Citing "upside risk" to inflation, the the Reserve Bank Of India (RBI) in April warned about limited scope for further monetary easing after pruning the main lending rate — the repo rate — after three years by a sharper-than-expected 50 basis points to 8% to boost sagging growth. Headline inflation showed signs of moderation since December before rising in April beyond the comfort level of the RBI and the government.
However, falling global oil prices and declining core inflation as well as growth offered the RBI room to adjust interest rates, RBI deputy governor Subir Gokarn said last week.
COMMENTARY (Agencies)
ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI
The data clearly points to industrial growth being extremely weak, and it is in clear need of monetary as well as fiscal support. I think industrial growth needs monetary stimulus irrespective of what the headline inflation number shows day after tomorrow.
There is a case for a sharp move from the Reserve Bank of India, and I would not be surprised if RBI goes for a 50 basis points repo rate cut or a combination of 25 basis points cut in both repo rate and the cash reserve ratio.
The industrial growth is looking very weak irrespective of legitimate skepticism on the veracity of IIP data. We are seeing sustained slower growth in industry, which is becoming broad-based.
A lot of what Standard & Poor's said was valid, but the timing was misguided and misplaced. The rating agency could have avoided this in the middle of turmoil that India and other economies are going through; it just added to the negative sentiment. Some degree of caution from the rating agencies is called for.
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
There was absolutely no reason for any improvement in the data given the ongoing investment slowdown and imported inflation due to the rupee depreciation. The RBI has no alternative but to reduce policy rates by 50 basis points, as there is no space left for any fiscal stimulus.
SUJAN HAZRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
I think the RBI needs to boost liquidity at this point, otherwise rate cuts will remain symbolic. The central bank should cut the cash reserve ratio by 50 basis points along with a 25 basis points cut in repo rate.
We were expecting the main weakness to come in from the services sector in FY13. But today's manufacturing print shows that it may also be a cause of concern.
RAMYA SURYANARAYANAN, ECONOMIST, DBS, SINGAPORE
On a sequential basis output expanded by 5 percent but this is too little as it comes after a generally weak past 9 months. This is why the YoY growth rate is flat. In particular in April, weakness in mining and capital goods has dragged industrial output lower. Meanwhile, consumption demand is also moderating possibly as the uncertain global outlook and domestic challenges combine to cast a shadow on the job market.
SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI
It is a very disappointing number. While consumption is barely holding up, the worrying factor is a 10-month consecutive contraction in intermediate goods. Capital goods being an unpredictable data series continues to surprise us on the negative. We have penciled in a 25 basis points repo rate cut at the policy.
Current liquidity conditions do not warrant a cut in CRR as OMO (open market operation) is expected to be the preferred route though we expect a cut in CRR by 100 bps in the second half of FY13.
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI
The lower data is largely a reflection of seasonal adjustment in the beginning of the fiscal year & partially a weak print in the core output. However, the surge in indirect tax collection figures coupled with Q1 advance tax collection would give a clear picture of uptick in the production activities.
A fiscal action would count more productive in reviving the growth sentiment in the current phase rather than a temporary sweetener in terms of a further rate cut. This is totally a year beginning adjustment not indicating any concrete picture.
SONAL VARMA, ECONOMIST, NOMURA, MUMBAI
The momentum is very weak and the investment side is seeing deceleration. This reading increases the probability of a 50 basis points cut in the repo rate, but our base case is of a 25 basis points cut.
What S&P has done is a warning shot, because even a month after the downgrade, we have not yet seen concrete action from the government.
UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI
The IIP figures reaffirm the weak activity as high interest burden and uncertain regulatory environment continues to shelve investment plans. With sharp deceleration in the growth momentum, we expect RBI to cut the repo rate by 25 bps in the forthcoming meeting.
DEVEN CHOKSEY, MANAGING DIRECTOR, K.R. CHOKSEY SECURITIES, MUMBAI
Tightening of rates earlier have impacted GDP and IIP numbers. Inflation may not come down, but rate cut is a must now because we are really lagging action.
I wouldn't be surprised if RBI cuts rates and CRR (cash reserve ratio) by 50 basis points each at the policy next week.
A PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI
I think this data will call for a policy response from the RBI as this eventually also has an impact on GDP. Given core inflation is well behaved, I now expect RBI to cut rates by 25 basis points in June. Looking at the rupee, equity markets, things are pretty bad irrespective of any downgrade by S&P. Downgrade is just a cosmetic change.
But I think this data is distorted. The GDP and IIP data shows exaggerated slowdown. If this kind of data continues, it will have an impact on sentiment and will be self-fulfilling.
MARKET REACTION
Markets barely reacted to the industrial output data, given widespread expectations for a weak expansion.
The rupee was in range at 56 to the dollar, little changed from before the data. The benchmark 10-year bond yield was also flat at 8.31 percent from beforehand.
Stocks pared mild losses to trade flat, with the benchmark BSE index unchanged on the day.
BACKGROUND
- Standard & Poor's said on Monday that India could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.
- The Reserve Bank of India is widely expected to lower its main lending rate by 25 basis points (bps) to 7.75 percent on June 18 when it reviews its policy for the first time after cutting rates by a sharper-than-expected 50 bps in April.
- Falling global oil prices as well as declining core inflation and growth in India give the central bank room to adjust interest rates, a deputy governor said last week.
- India's economy expanded 5.3 percent in the March quarter, its slowest pace in nine years, on a combination of mounting global uncertainty.
Mutual Funds Check for top funds
FACTBOX-Key political risks to watch in India
India's economy grew at its slowest pace in nine years in the first three months of 2012, dragged by an extended euro zone crisis and policy paralysis at home, while the coalition government is under tremendous strain from scandals and rebellious coalition partners.
Some economists warn that unless the government acts to reverse the growth slump, India's sovereign ratings may be jeopardised.
The risk of Prime Minister Manmohan Singh's second term being cut short before a general election due in 2014 is low, but cannot be ruled out.
The failure of Singh's Congress party in state elections in early March have put him and the party under even more pressure.
RATINGS (Unchanged unless stated):
S&P: BBB-
MOODY'S: Baa3
FITCH: BBB-
The cost of insuring against default on 5-year sovereign debt traded at 106 basis points in mid-June, having risen around 30 points since late March.
Following is a summary of key political risks in India:
POLICY PARALYSIS
After lurching from crisis to crisis for more than a year, the policy paralysis of Prime Minister Singh's government and its failure to pass significant reforms to sustain growth are blamed by economists for the slump in GDP growth. The figure fell to 5.3 percent in the first three months of this year from 9.2 percent in the same quarter of 2011.
Since it won a second term in 2009, the government led by Singh's Congress party has taken no major policy initiatives to further the economic liberalisation he pioneered.
Instead, a seemingly endless series of corruption scandals, and coalition allies that block unpopular bills, have frozen the government into inaction.
Rahul Gandhi, son of current party leader Sonia Gandhi, utterly failed to deliver a promised comeback for the Congress party in crucial state elections in early March, casting fresh doubt on his capacity to become the next member of a dynasty to lead the country.
The party's flop in Uttar Pradesh has reduced Singh's scope to relaunch reforms and reverse a slowdown in economic growth.
Anger at Singh's poor performance is rising, with some talk in the Indian media that he will not survive as prime minister until 2014 elections.
That is unlikely, and the government could probably also muster the support to survive a no-confidence vote. Also helping the government is the lack of appetite among the opposition Bharatiya Janata Party (BJP) for a general election before 2014. Despite Singh's woes, it is by no means clear the BJP has won over sufficient voters to its Hindu nationalist cause.
Top government advisors are publicly calling for the leadership to tackle politically unpopular reforms between the July presidential selection and key state elections later in the year.
India's president must be chosen by parliament before a July 24 deadline. Although the president does wield some power, the head of state is a largely ceremonial figure. Finance Minister Pranab Mukherjee is a leading candidate for the presidency, opening the possibility of a major cabinet reshuffle in coming weeks that could be the last chance for Singh to bring his floundering government back on track.
What to watch:
- Protests against Singh and the Congress, and the progress of attempts to pass laws through parliament.
- Economic data, especially any signs that GDP growth as slowing further, which would exert even more pressure on the government.
FAILURE TO REFORM
Investors says the government's priorities should be cutting subsidies for fuel, fertiliser and food to fix the country's fiscal credibility, tackling regulatory uncertainty, and reducing the high cost of doing business.
In May, state oil companies said they would raise the price of petrol by about 11 percent, the first increase in six months, in an effort to recover losses inflicted by higher global oil prices and a plunging rupee.
Only days later, the refiners agreed to a partial rollback of the increase as the government responded to a public outcry that included the burning of effigies of Singh and Gandhi, a policy reversal that suggests the government is highly unlikely to pass the tough reforms India needs to speed up its pace of growth again.
Asia's third-largest economy is struggling to contain its fiscal deficit, which widened to 5.097 trillion rupees ($90.86 billion), or equivalent to 5.76 percent of its gross domestic product, in the 2011/12 fiscal year.
India announced a series of austerity measures in May, including a 10 percent cut in non-plan spending for this fiscal year, but analysts dismissed them as insufficient unlikely have much impact on the country's overall expenditure.
India is sitting on a comfortable cushion of $300 billion in foreign reserves, so comparisons with India's 1991 payments crisis are premature, but confidence is waning.
As ever, India's dependence on imported, subsidised energy is a weakness, with high prices adding to pressure both on the current account and fiscal deficits. A long financial crisis in Europe could exacerbate capital outflows and further trim demand for Indian exports.
What to watch:
- The Reserve Bank of India's mid-quarter policy review on June 18. The central bank has some room to reduce policy rates following moderate core inflation and softer global oil prices, a deputy central banker said in early June.
- Any more moves to roll back - or to press ahead with -subsidy reform, and how the public responds.