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Jun 19, 2012, 02.50 PM IST
In an interview with CNBC-TV18, Mahesh Vyas, MD & CEO of CMIE said that he expects inflation to remain high. There are no reasons to believe that inflation will significantly come down as the demand is quite high and supply is quite low, explains Vyas.
Citing concerns over the growing inflation, the Reserve Bank of India (RBI) had kept repo rates unchanged in its mid-quarter policy review . In an interview with CNBC-TV18, Mahesh Vyas, MD & CEO of CMIE said that he expects inflation to remain high. There are no reasons to believe that inflation will significantly come down as the demand is quite high and supply is quite low, explains Vyas.
Vyas further stated, it is difficult to gauge the level of inflationary expectation because there is no sufficient data to find out household expectations. Moreover, the demand for a different kind of a living standard has given rise to a supply shortfall which needs to be resolved urgently, feels Vyas.
Besides, Vyas is also hopeful about agricultural production and believes the monsoon is not going to affect crop production to a large extent. Although, he expects a small decline of around 0.2% in major crop production, he expects a 2.4% increase in overall agricultural output.
Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: Yesterday the crux of what the Reserve Bank spoke about was their concerns on inflation and a big flashback over there. Are you concerned as well that the second half may see a resurgence of inflation, particularly because of what's happening with the monsoon?
A: Nothing has changed over the past several months, maybe even over the past one year. The fact is the impact on inflation. Nothing suggests that inflation will come down significantly. Demand is quite high and the rate at which new capacities are getting created is quite low. Add to that deprecation of rupee which has happened in the recent past, I think inflation pressures are going to remain high.
Q: What about inflationary expectations because the RBI seemed to put an accent away from core inflation to the consumer price index (CPI) this time around and also the wholesale price index (WPI). An urban CPI is 11% plus right now, do you think RBI is right in being worried about what this is doing to deeply entrench inflationary expectations amongst households?
A: Well that's a lot more difficult to describe because we don't have sufficient data on what the expectations of inflation amongst households is. That is clearly a kind of a survey that I think the RBI does but that's not public information, not researched enough, not crunched enough. One cannot say anything about this.
I wonder if this expectation of inflation is merely a conjecture or is there some good statistics behind it which tells us that households are expecting a lot of inflation. What are the dynamics of this, how does this steer into real inflation over the short term or the medium term, what are the impacts of this on the wage rate, that's what should worry is if there is a relationship. These things are not well researched.
I don't think I can comment on that with the confidence that I have on other data. All I can say is that this is a statement that usually one makes.
Q: Is it too early to start worrying about the monsoons in this shaky inflation scenario or do you think you would be worried?
A: Not yet. I don't think the monsoon is yet a source of worry. The reservoir levels are quite good so the expectation of a rabi crop is still quite good. We are anyway expecting a fall in the cotton crop and the sugarcane crop and that's got nothing to do with the rains.
The food grain crop is expected to be good. Monsoon has an impact essentially on rice. Even if the rainfall is a little lower than what the IMD has stated, I would still not worry in so far as the agricultural production is concerned. Unless the rains really fail miserably on timing and on spread, I don't think there is still any cause for concern right now.
Q: Just to go back to that inflation issue though, a lot of what the RBI said also seemed to indicate that it looks back to a supply side problem. Any statistics to support what's happening on that end, how much that is contributing to inflation pressures, what exactly its doing to clamp down private investment or growth of any kind?
A: Well there certainly is an increase in demand compared to supply and supplies are behind the curve. As far as demand is concerned, there has been a huge increase in capacity since 2005 and this has led to a substantial increase in employment and in wages.
All this has obviously increased the demand for very different kind of living standards and therefore, the demand for everything from not simple cereals and pulses kind of diet to a more protein rich, to a maybe a more fat rich diet and all the way to consumer durables has increased. Demand has increased a lot and I think supplies are still falling way behind the expectations.
The constraint for the growth of many consumer durables is essentially because of a lack of electricity in the interiors. So you see two wheelers growing, cars growing but refrigerator sales are not growing as much. These are bottlenecks which suggest that there is really a problem on the supply front. We should make supplies a lot more easier, for capacities to grow a lot faster than what we seem to be doing.
Tags: inflation, Reserve Bank of India, RBI, Mahesh Vyas, CMIE , WPI, CPI, agriculture, agricultural production, rabi crops, rabi, monsoon, IMD
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