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A nine-letter word shrinks

Finance Minister Palaniappan Chidambaram thinks inflation is a four-letter word, and so should be subservient to growth, writes J Mulraj.

india Updated: Feb 19, 2007 03:10 IST
J Mulraj

Finance Minister Palaniappan Chidambaram thinks inflation is a four-letter word, and so should be subservient to growth, which is a six-letter one!

The RBI Governor, Yaga Venugopal Reddy, holding the mandate over the country’s  monetary policy, does not agree, and has, last week, raised CRR (cash reserve ratio) by 0.5  per cent to 6 per cent, in a bid to control inflation.  For politicians, paying lip service to the common man, inflation remains a nine-letter word until an ensuing election shrinks it to a four-letter one.

The Uttar Pradesh elections, coming soon to a political theatre near you, have caused the government to suddenly take steps to control inflation. The government is also contemplating a reduction in peak import tariff by 5  per cent, to bring tariffs in line with ASEAN levels, and has brought down prices of petrol and diesel by simply passing the burden onto the public sector oil companies.

Had it taken the subsidy burden on its books, it would reflect in a higher budget and fiscal deficit thus reducing Palaniappan’s grade point average.  As important elections approach, policy decision making will veer more towards political expediency and away from commonsensical planning for a future. These will  make stockmarkets  react, providing buying opportunities since, once the vote bank induced foolish behaviour becomes unnecessary, policy making will revert to the norm!

Last week, the market opened weak, with the sensex losing 429 points in the first three days.  It was reacting adversely to large acquisitions such as those of Corus by Tata Steel and, last week, of Novalis by Hindalco.  The market also reacted adversely (for a day) to the CRR hike, which will raise interest rates.

The other big takeover was that of a 67 per cent stake in Hutchison Telecom from Lee Ka Shing, by Vodafone, with the Essar group opting to retain their 33 per cent. Investors would do well to read a book by Peter Tertzakian, A Thousand Barrels a Second, which talks of a break point coming soon in the oil sector.

As the easy-to-obtain light sweet crude becomes ever more difficult to find, we will have to face tough choices. The United States, which consumes the most fossil fuel, is unable to make required policy changes because of the lifestyle changes these would require.

India ought to learn from this and not build up dependency on private transport. Investment opportunities would arise for those who can anticipate movements of alternative energy sources such as LPG, hydrogen, biofuels and, more lately, coal to liquid.

Email J Mulraj: jmulraj@hathway.com