Thursday, November 12, 2009

INFLATION: Govt. Figure v/s Reality

Dont we feel that how can inflation be so low or even go negative when we find the prices of all the commodities moving but only upwards...So are the figures released by the Govt. manipulated?? Well now that cannot be possible then why are the figures not representing the actuals... This is what we would like to discuss in this post.

Well Inflation is measured by Price Indices which could be either Wholesale Price Index(WPI), Consumer Price Index(CPI), or Producer Price Index(PPI). What we follow in India is WPI. This WPI is based on the price changes as compared to the base year which in case of India is 1993-94. We take into account the price changes of 435 commodities which are classified under three heads:
  1. Primary Articles- it consist 98 commodities divided into Food items, Non Food Items and Minerals.
  2. Fuel, Power, Light & Lubricant- It has 19 commodities.
  3. Manufactured Products- It consists of 318 commodities.
Each of these commodities are assigned weights so that realtive contribution of each factor is given due importance. The price change is then multiplied with the weights to get the inflation figure. So where does the problem lie??

The first problem is the selection of the base year. The base year has never changed from the time WPI-as a measure of Inflation, was introduced. So it means that the changing dynamics of the economy is not being taken into consideration and therefore this needs to be changed to give a more accurate figure.

The second problem is the weight assigned to each commodites. The weights of the commodities were fixed way back in 1999-00 and has not been touched after that. Now with so many changes in the economy, the weights assigned during those times do not give a true picture in the current scenario. At present Primary articles are assigned 22.025% (of which Food Items consists of 15.4%, Non Food items-6.10% and Minerals- 1.5%), Fuel,Power etc.- 14.226% and Manufactured Products- 63.749%. On the other hand the weight assigned in other measures like CPI is quite different. For example CPI gives Food articles weight between 46%-63% thus giving a more accurate figure of inflation. This explains why in first week of June the inflation as per WPI method was negative while that as per CPI was around 8-10%. Simarily on July 12, 2009 when the infaltion was -1.2% , we never did experience any price decrease, rather we found prices rising. At that time the price change in Food articles were 8.2%, Non Food items -2.7% , Fuel, power etc. -10% & manufactured products -0.05% and as the weight assigned to food items were only 15.4% so it resulted in a negative infaltion though we never experienced any fall in prices. So isnt it clear why in the last three months when the food grains prices soar up by 15-20%, Pulses-60%, Sugar-40%, Tea-25% etc., still the inflation hovered around 1.52%.

So what is the solution to it. Well one of the solutions would be to use CPI as a measure of inflation. According to IMF statistics 24 countries uses WPI and 157 uses CPI. But again we have a problem with it. India had 4 CPIs- Industrial Worker CPI, Agricultural Labourer CPI, Urban Non Manual Employees CPI & Rural Labor CPI and the data is avaliable on monthly and not weekly basis (unlike WPI). So to solve this problem the Govt. needs to adopt the suggestion of National Statistical Org. to streamline the 4 CPIs into a composite CPI like that of the developed countries. This would help in bridging the gap between the Figure quoted by the Govt. and the reality and thereby giving a more genuine picture of the state of our economy.

Sunday, March 22, 2009

Are we fueling the so called Recession…?

Most of the Newspaper’s headline read like this “Has our deep recession turned into a not-so-Great Depression?”…

“Recession worse than predicted...”

A major thought which runs in my mind is this.

“Are we fueling this recession?”…

Nowadays wherever we go, read, discuss any topic or news, knowingly or unknowingly the discussion is centered on recession.

Even technology is at its best, using online polls they are sowing the pessimism seed by asking, “Will this recession be over by this year end?”

I voted yes in one such online poll and checked the percentage of optimist; we were cruelly beaten by the pessimist.

Now, Cost cutting is a buzz word in all the major companies. When everything was going fine, no one talked about cost cutting, zero defects, leave cuts.
When the financial crisis happened, everywhere the voice of pessimism followed.

... pink slips, salary cuts, and sales down.

It’s just reminds me of Mumbai terror attack. After the gruesome attack, all the major railway station was put under the scanner. All the baggage’s was checked. Is it happening even today?

I would like to share a story, which I came across a few days back.

Santa and Banta were friends. Banta is a MBA graduate, employed. He has fair knowledge about current affairs. Santa is different not so great, and has little knowledge on current affairs.

Santa runs a Restaurant in a city’s prime location. Santa ensures quality and variety in his cuisine and flavored it with attractive discounts, which fetched him a good customer base. Every evening, his shop would overflow with customers.

One fine day, Banta meet his friend and discussed with him the current trend in recession and layoffs. Banta advised his friend to adopt ‘price cutting measures’, by stopping discounts and by initiating layoffs as well. The first few days passed well when Santa implemented the business plans - cutting costs and layoffs as well.

The first few days the profit remained the same; he was earning the same profit and he was happy about the cost cutting measures. Slowly, however the profits started to shrink. As a result, Santa struggled to cover the running cost.

Santa pondered on the wisdom of his friend’s words and he believed that they were indeed in the middle of the recession. Santa was glad and ebullient that his friend had warned him just in time. What a good friend he was? Wonderful learning lessons, shall we call it?

…It’s all in our MIND! And we actually FUEL this recession much more than we think…

Saturday, December 13, 2008

Fall of Three Auto major's, US

The fall of the Detroit’s Three Auto major’s General Motors, Ford and Chrysler could well be interpreted by fall of industrial base in US. That’s not necessarily the case.
First, we will head out our search for the reasons behind this failure.

During the recession time, companies customarily try to give discounts to draw customers. As per US National Bureau of Economic Research recession starts from Dec, 2007 in US. These three auto majors don’t have much option, other than slowdown their production or sell higher margin vehicles like SUV’s which carry 20 to 30 percent margin. But where are the Buyers?

First cause we found out is that, auto major’s annual spending on health insurance. Every business small and large has struggled with paying the health insurance costs of their employees. A mega-corporation like General Motors sees those problems amplified. GM spends $5 billion annually on health care for 1.2 million people of which only 150,000 of whom work for the company. GM, Ford, and Chrysler have a combined unfunded retiree health care obligation of more than $90 billion. Health care adds $1,500 to the cost of each vehicle. This facts shows us that successful economic models for these three auto major’s is virtually impossible and it is not something they can fix.

As it apparent from sub crime crisis, stock market fumbled to its lowest possible values, and Three Auto major’s stock price has ceased up to 70%.
The second major cause of the current auto industry crisis is the crash of the credit markets. It has made getting auto loan a difficult task, results in substantial drop in automobile purchase. The U.S. auto market fell 15% through the first 10 months of 2008 and sales in October plunged 32%. Why? The lack of available credit for potential car buyers and on the other end, the industry cannot get loans to cover the dramatic loss in car sales, Second cause.

These three auto majors concentrated more on lucrative cars rather than building cost effective and environmental friendly cars. Even though, there is no hard rule to do so, they failed miserably to predict the Future communal needs. The foreign players like Toyota utilized this opportunity and confined the market.

The above mentioned facts have the same source: corporate controlled government. The health insurance industry did not want the more efficient single payer national health insurance. The finance industry wanted to be free to treat the stock market like a casino and did not want to be regulated. And, the auto industry did not want to be told to build more efficient cars. Corporate-government is the root of the problems we face today.