Macro supporting the rural heart land of India
Some points to note
1. At the moment country faces cyclical headwinds against structural tailwinds
a. These are growth moderation, higher inflation, monetary tightening and twin deficits
b. Rate sensitive parts of the economy are being affected by monetary tightening against the resilient rural consumption due to structural tailwinds
c. After the global crisis – the growth in Indian economy has been primarily driven by domestic consumption and relatively lesser by the investments – thus industrys’ contribution needs to rise
d. This growth was supported by the government through various policies during 2008 period
2. India’s high inflation is the outcome of governments policy to offer favorable terms of trade to rural india via Minimum support prices and social programs
a. Hence these are income transfer from urban middle class to rural india
b. Thus in the last 5 years the food prices/ inflation has outstripped the non food manufactured prices by a wide margin. Morover infrastructre bottlenecks still exist.
3. Inflation in India is due to a mix of demand side and supply side factors along with monetary expansion
a. CRB index is in a representative of structural upward swing in global commodity prices – a new normal high for commodity prices
b. But after 2009 – monetary expansion has not been a major component of responsible of inflation
c. Absence of pulling back of initiatives rolled out during 2008 has been a major reason
d. FY05 onwards MSP for Rice and wheat has risen by 75% and 72% respectively against 14% and 10% in 6 years to FY05 – an such policies will set to continue to function
Source - CLSA report
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