Wednesday, August 27, 2014

Gold and Inflation

Two leaders are on war of words on Gold Economics. Whether buying Gold causes Inflation or worsen Current Account Deficit (CAD), a question to be answered by the economists. But Gold does form part of Indian households and play major role in Indian politics. Finance Minister late Morarji Desai was criticised for imposing a "Gold Control Order". It was called "bad old days". Present President HE Pranav Mukerji, restrained himself from increasing duties on import of Gold when he was FM. The present FM increased the duty to reduce Gold import to control CAD. 

Gold is one of the most reliable hedges against inflation. Gold price went up to $ 1889 in 2011 has come down to $ 1252 today in the international market. But in India price of Gold reached around ₹30000 in 2011 and the same now. The depreciation of Gold price depreciated the ₹ and appreciated $ in last two years. Exporters have "सोना सोना" and importers have "रोना रोना". India inflation rate averaged 7.7% since 1969 to until date. For Government, it is changes in the "Wholesale Price Index (WPI)" for all commodities {Primary Articles (20.1%, Fuel and Power (14.9%), Manufactured Products (65%)}. Food articles accounts for 14.3% of Primary Articles. India don't follow method of "Current Price Index (CPI)" to measure inflation due to local constraints.

One of the major reasons of Inflation in India in last decade is inflow of money supply in the economy. 

Money supply (growing faster than the rate of economic growth) and circulation increased in the economy in last decade due to: 6th pay commission salary rises of "Babus", debt relief to farmers, Mnrega wages payment, USA recession and investments by NRIs, growth of industries and services, growth of informal sector, urbanisation, elections and its expenditures by all, money withdrawals from foreign banks and it's investments in India, etc. have caused inflation. It has reduced purchasing power per unit of money.

For "common men" of India, the "current price" increases of essential goods and services matter more than economics understandings. The price difference between wholesale and retail is too big. The growers/producers don't get suitable price from the wholesale buyers and the common men pay very high price to the end seller. The inflation has inflamed the "middle men" the highest.

The quality of life is getting improved in India with increase and improvement in housing, water supply, power supply, communications, transport, health care, education, roads, etc. But it has increased the cost of living simultaneously. People are paying more on cost of goods and services and Governments (Centre and State) taxes. While maintaining pace of growth, the Governments are taxing more for meeting two ends of revenue and expenditures, for fulfilling desires of the people with available resources after paying non plan expenditures. A household wants his two ends of income and expenditure to meet fulfilling his family requirement of food, health, housing, education, water, electricity, transport, mobile, customary expenditures. He demands employment opportunities and basic minimum infrastructure of water supply, power supply, education, health care, roads and transport.

Whosoever has convinced the people more, will win; either the ruling: "did well and will do well", OR the opposition: "present ruling failed but they do well if powered". Time will tell. Immediate answer on 8 December 2013.

1 December 2013


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