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Monday, March 29, 2010

Inflation in India

Inflation is defined as an overall increase in general price levels of goods and services within the economy. In other words, it is an increase in cost of living. Inflation is still the most neglected concept by the common man while building a retirement plan. Factoring the effects of inflation on your financial portfolio is extremely important as an unanticipated inflation can erode the purchasing power of your personal wealth.

In India, inflation is calculated as an annualized change in Wholesale Price Index (WPI) which includes a set of around 435 goods, unlike the Consumer Price Index (CPI) used by the rest of the world. Inflation figures based on WPI is considered to be understated as consumers pay prices higher that the wholesale prices.

Inflation results when too much money ends up purchasing too few goods. This happens when either the money supply flowing in the economy increases, or there is some supply constraint. The most common reason of inflation during modern times has been the increase in money supply. For the purpose of stimulating GDP growth in times of economic slowdown, the Indian government maintained loose monetary policies. Interest rates were maintained at low levels which increases disposable income in the hands of the citizens. Moreover, soaring crude oil prices also fueled inflationary pressure.

At the same time, mounting deficits and manufacturing overcapacity and threats of real estate bubbles cannot overrule the hyperinflationary trends in the future. Another crucial factor which continues to be ignored by policy makers in India is ‘Food Inflation’. Fast rising population coupled with slowing production capacity of cultivable land in the country could leas to hyperinflationary trends. Poor yield owing to water shortage and lack of adequate irrigation infrastructure has forced many farmers to quit agriculture and shift to other occupations. Without a credible and long-term strategy to boost land productivity, inflation over the long term cannot be avoided.


Tuesday, March 2, 2010

India's Power Sector



Power industry plays a very crucial role in an economy’s progress. Despite being the second fastest growing economy in the world, almost one-third of India’s population has no access to electricity. Several initiatives of several governments have failed to encourage private investments in power sector. India desperately needs to increase electricity generation to meet the drastically growing energy demands from growing middle class and industrial base. Opening up of Ultra Mega Power Projects (UMPP) is expected to attract private and even overseas capital into this sector.

India is a net importer of energy and 35% of its primary energy needed is met through imports. Its ironic that despite being rich in coal and gifted with abundant sources of renewable energy like solar, wind, hydro and bio-energy, the country has only 0.4% of the world’s hydrocarbon reverses. Lack of government support has forced several solar PV cell and module manufactures to focus on European markets which are supported by government subsidies.


Inflation: How it affects you?

We all know the importance of investing. But what your investment advisers and investment gurus will not tell you is: how inflation is slowly eating up your investment returns!

But first, what is inflation? Inflation is the increase in general price level of goods and services produced in a country. It does not imply that prices of all goods and services are increasing in same proportion. While Prices of some goods may rise relative to other goods and some may fall, but on an average, inflation can still be positive.

Inflation affects us in two important ways. First, it reduces the purchasing power of your income and second, it wipes out the real return you gain from your investments. Just take a look at a simple example. If average inflation this year was 5%, it means that a product that was worth Re.1 last year, can be bought for Rs.1.05 this year. This also means that the purchasing power of your rupee is reduced by 5%.

Effect of inflation gets worse when it impacts the real return on your investment. This can be best explained with a much simplified example. Assume your investment earned a 10% return this year. But if the annual inflation this year was 4%, then the real return that your investment generated was only 8% (i.e. nominal return less annual inflation). This is primarily because during the year, your money has lost some purchasing power due to inflation and a part of the nominal return will be for recovering that lost purchasing power.

It is therefore important to factor in the inflation trends in your investment decisions. Read more for investment options that can help you to protect your wealth from eroding due to inflation.

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