Inflation in India 2012 Indias inflation rate has grown more than expectations in May 2012 with increase

in fuel and food prices. It is being assumed that this decrease will not be enough to stop the interest rate deduction, which is due to be effected in order to address the present situation of slow growth. The benchmark wholesale price index has increased by 7.55% compared to the 2011-12 fiscal. In April 2012 it had increased by 7.23%. 37 estimates done by a survey conducted by Bloomberg News had produced a median figure of 7.5 percent. Other reports have also shown that Indias imports and exports have been going down in May 2012. In the previous quarter Indias economic growth rate decreased to its lowest in the last ten years. A major reason for this was the lack of success of the initiatives for economic liberalization. The international sales prospects of India also took a beating thanks to the situation involving the debt crisis of Europe. The RBI is expected, as a result of the slowdown, to decrease borrowing expenses - the Indian economy, which is one of the largest emerging markets globally, is struggling with one of its quickest inflations. Meghna Patel works as a fixed income analyst with Emkay Financial Services Ltd., which is based in Mumbai. She opines that the core inflation rate of less than 5% and slowdown in economic growth are giving RBI the room to decrease rates. However, according to her, it is not a question of only monetary policies she feels that the government has to increase the speed of its reforms so that the economy could stand back on its feet. The rate of increase in the prices of non-food manufactured goods is a proper indicator of core inflation. In April 2012 this rate was calculated at 4.77 percent, only to go up to 4.86 percent in May 2012. This information has been collected by Bloomberg, which also reveals that vegetable prices have increased by 49% compared to 2011, and power and fuel expenses have increased by 11.5%. Condition of the INR In the year gone by, the value of the INR with regards to the US Dollar has gone down by approximately. This has affected the share market negatively as well. Duvvuri Subbarao, the RBI Governor, is expected to bring down the benchmark repurchase rate by 7.75% and this is going to be a decrease of 0.25%. Experts at Bloomberg also feel that the rate could come down to 7.5 percent, which will represent a decrease of 50%. Amol Agarwal, an economist from Mumbai, and working with STCI Primary Dealer Ltd feels that the decline of the INR means the food prices and fiscal deficit could increase further. He also opines that the RBI needs to take some growth oriented steps to address the situation. Condition of Export and Import The global economy is going through its worst phase after the previous meltdown ended in 2009 and this has forced the authorities to take some steps. For example, China and Australia have reduced their benchmark rates. In May 2012, India exported goods and services worth 25.68 billion US dollars this was a

In May 2012, India exported goods and services worth 25.68 billion US dollars this was a reduction of 4.16 percent compared to May 2011. Anup Pujari, the Director General for Foreign Trade of India, provided provisional statistics at a media briefing session held in New Delhi. According to the information, imports have come down to 41.9 billion US dollars, which is a decrease of 7.36 percent. The trade deficit has been calculated at $16.3 billion. Anubhuti Sahay, who works as an economist for Standard Chartered PLC, and is based in Mumbai feels that lower demand for Indias exports have held back its industrial sector. The Indian government plans to achieve a growth rate of 20 percent in the 12 month period starting from April 1, 2012 but Sahay thinks this is an optimistic aim in context of the present global financial scenario. Subir Gokarn, an RBI Deputy Governor, feels that the rate can be decreased even further with the decrease in oil prices and overall recession. On April 17, 2012 the apex fiscal body of India brought down borrowing rates from 8.5 percent to 8%. The amount to be reserved by lenders has also been reduced twice in 2012. This has been done to deal with liquidity concerns plaguing the national economy. India Economic Growth In the quarter that ended in March 2012, Indias GDP saw a growth rate of 5.3 percent compared to the quarter that ended in March 2011. This was the slowest rate after 2003. India is the 3rd biggest economy in Asia but its economic growth, of late, has been rather modest and, even, this rate has been achieved after the RBI Governor increased the rates by 3.75 percentage points, which was an unprecedented figure. The change took place from mid March in 2010 till October 2011 and its major aim was to restrict the inflation. For majority of 2011, Indias inflation rate was more than 9 percent. At a speech in Hyderabad, Subbarao has stated that some of his critics feel that his methods to reduce inflation only ended up diminishing the growth. He has tried to defend his decisions saying that inflation cannot be tied down without letting go off some growth. Indias current account deficit has a very worrisome structure at present, according to experts, but Subbarao has also stated that there are no chances that India will suffer a balance of payments crisis like 1991. In the BRIC group, which also includes Brazil, China, and Russia, India has the quickest rate in terms of price increase. Standard & Poors has already notified on June 11 that India could be the first country in this group to not have an investment grade credit rating. Several Indian companies have been on the receiving end of less-than-desirable economic growth and high price pressure. Maruti Suzuki India Ltd has witnessed a fall in its car sales during May 2012. The Indian units owned by General Motors and Ford have found the going tough due to high gasoline prices. Factors for Inflation Rate A newly released press note from the Central Statistical Office reveals that in 2011-12 Indias GDP has grown by 6.5 percent compared to 8.4% in 2010-11. In the first quarter of 2011-12 fiscal the growth had been estimated at 5.3% while in the final fiscal of 2010-11 the growth rate was 9.2%. There are several possibilities that could be attributed as the major reasons for this scenario

delayed rains and its effects on the agricultural sector and reduction of production by companies to bring down its level of stocks. Some experts have calculated that in between 2010-11 and 2011-12, Indias economic growth rate came down to 6.6 percent from 8.3%. In case of the first quarters of 2012 and 2011, the growth rate came down to 6.5% from 8.4%. The decline rate varies between 1.9 percent and 1.7% on an annual basis, and 3.9% and 1.9% on a quarterly basis. Experts opine that a major reason for the present economic slowdown and resultant inflation are problems being faced by critical industrial sectors such as mining and manufacturing. As per experts calculation the manufacturing sector growth in the first quarter of 2012 was 2.5 percent compared to the 7.6% in the 1st quarter of 2011. The mining sector actually shrank by 0.9% in the first 3 months of 2012 as opposed to a 5% growth in the corresponding period a year back. The agriculture sector too witnessed lesser growth in the aforementioned period with the 2012 figures being 2.8% and the 2011 statistics reading 2.8%. In the construction sector there was a downfall to 5.3% from 8%. Statistically speaking, the above mentioned sectors can be held responsible for the slowdown but the base cause is seriously an industrial recession. One of the major reasons behind the present condition of the Indian industrial sector is the continued decline in the machinery sectors growth. At the start of 2010 this sector had been growing at excess of 40% but has now almost stopped growing. The electrical equipment segment never grew at a stable rate. It was only for short periods that its growth rate was near 40% but its production has decreased of late. The metal products segment is still doing fairly well though in terms of growth. The plastic products have come down to 5 percent previously from the 25% of the first few months of 2010 with regards to growth. The growth rate of chemicals was never really commendable, as per analysts, but now even that sector is seeing lesser growth. To sum it up, experts feel that capital goods are at the forefront of the economic slowdown. The investment in this sector was pretty good during 2005 to 2009. When the period ended it had an obvious impact on the growth as well. Analysts opine that the present situation has not resulted due to a lack of demand or capacity, which had been ensured by the 4 year investment boom. The continued increase in oil prices was a major issue and with it the surfeit in salaries and costs of living. They also feel that the present administration is more inclined to go for deficit financing that is inflationary in nature and increase the prices of food grains. The textiles sector performed commendably in 2011 when Pakistan was plagued by floods but the good time has concluded. They think that investment is a major issue in this context. Factors like the relative lack of growth in investments and the gradual decrease of investment goods prices have contrived to bring about the present situation. According to experts, the present situation can be termed a real investment slump. With reduction in domestic demand, imports have also reduced and the export sector has started performing better. Now the question that comes up inevitably is when will this situation come to an end? The whole situation, as per the analysts, started with restrictions on industry margins and cost inflation. It was further exacerbated by the demand crisis. Experts say that such situations conclude when the economic growth is sufficient to soak up the additional capacity. They think that it can be another 2-3 years for this process to be completed as a

result of the high rates of investment during the time when the economy was doing well. April 20035.12% April 20042.23% April 2005 4.96% April 20064.65% April 20076.67% April 20087.81% April 20098.70% April 201013.33% April 20119.41%

If there is an earthquake in a particular region, then all individual in that region will get affected by the earthquake in some way or the other. No one will be able to escape it, whether he is male or female, rich or poor, child or old. This is because the impact of earthquake is in the system. Some other examples of risks that exist in the system are political situations, war etc. Similarly since inflation exists in the system, everyone will be affected in some way or the other and there is no way one can avoid inflation.

Economic meaning of inflation is general and progressive rise in prices. However more apt explanation for inflation would be to state that it is a phenomenon which exists in the system and slowly affects all parameters of finance. We can say it is a silent killer. Further since inflation exists in the system there is no way to escape it.

Secondly, inflation is always prevalent in the system and therefore it continuously affects us. Sometimes the impact of inflation is high and sometimes it is less. However it is never absent unless economy is contracting. Cost of a masala dosa in 1987 was Rs 3.50. Same masala dosa in 1997 costed Rs 14.00. If the rise in prices continues at same rate then in year 2017 masala dosa will cost Rs 224.00. Similarly cost of Colgate toothpaste in 1987 was Rs 8.05. It increased to Rs 18.90 in 1997. If it keeps progressing at same rate in 2017 we will have to pay Rs 104.00. All of us witnessed the rise in prices of masala dosa and Colgate toothpaste. However since it was slow we did not realize how large its impact is in the long run.

There are four pillars of finance (i) Assets (investments) (ii) Liabilities (Borrowings) (iii) Income (iv) Expenses.

Since inflation exists in the system, it affects all our investments. Assume we are generating 8%, 20%, 12% and 25% returns from debt, equity, gold and real estate respectively. If rate of inflation in the system is 11% than our real rate of return from debt will be 8% - 11% = -3%, equity returns will be 20%-11%%=9%, Gold returns will be 12%-11%=1% and real rate of return from real estate will be 25%-11%=14%. Thus inflation affects all our investments.

During inflation, rate of interest in the economy rises. Therefore invariably our rate of interest on borrowing will rise. We will have to pay higher rate of interest on our borrowings. Cost of home loan, car loan etc. will go up. As far as possible avoid borrowings and if there is loan, get out of it as soon as possible.

Since value of rupee depreciates due to inflation, our income can buy lesser goods and services. Thus inflation indirectly reduces value of our earning.

Lastly inflation has direct impact on expenses. Since inflation increase general rate of prices, all goods and services become expensive.

While we cannot escape inflation we can try and reduce its impact on us. From investment perspective we should invest in assets which can generate returns higher than rate of inflation. These are equity, Gold and real estate. However these asset classes are highly volatile in near term.

Sure shot way to beat inflation, is to increase our level of income. However it is not possible for individuals to increase level income immediately. Therefore during higher inflation period if possible find out avenues to increase income level. This is easier said then done.

Learn to control your expenses..

Expenses are something that can be tackled. Before discussing strategies to control expense first let us try and understand categories of expenses. Broadly there are two categories of expenses (i) Mandatory (ii) Voluntary. Within each of these categories there are fixed and variable expenses e.g. Mandatory fixed expenses e.g. school fees, house rent etc. Next these are Mandatory variable expenses like grocery, medical and health care expense etc. There is absolutely no one way can avoid mandatory expenses.

In case of voluntary expenses again there are two categories e.g. Voluntary fixed expenses e.g. Gymnasium fees, club membership etc. Voluntary variable expenses include eating out, vacations etc. While the inflation is rising we should cut down on voluntary variable expenses at once. Also as and when renewal for voluntary fixed expenses come up same can be reduced or stopped completely.

Even after controlling voluntary expenses if we are struggling to make two ends meet, then we should follow step down process. Let us consider example of cost of transport to work, a mandatory variable expense. Using a chauffer driven car is the upper most step and walking is lower most step. After deciding on these two find our other options by lowering one step. After chauffer driven car next lower step could be to self drive car to work. Step lower than that could be car pool and step lower than car pool could be to use public transport. Once the ladder is constructed we should find out optimal suited option.

Invariably we focus too much on risks which are transparent like volatility of equity market, illness in family etc. Unfortunately a non-transparent risk like inflation gets ignored. However, just because we cannot see impact of inflation on our finances, it does not mean inflation does not exist. Inflation is a silent killer and if we ignore it, one day it will kill us.