Inflation is it really on Govt.'s mind??

For the week ended February 24, inflation stood at 6.10% versus 6.05% the previous week. The market estimate was at 6%.

Surjit Bhalla of Principal Oxus Investments and N Jayakumar, MD of Prime Securities express their concerns on inflation.

Bhalla is shocked at the way the government is handling inflation. He feels that none of the moves by the government to curb inflation make sense. In his view, the government move on wheat and cement is irrelevant.

According to N Jayakumar, history has shown that excise cut has led to lower prices. He feels that talks like curbing profiteering is similar to Licence Raj. He also adds that commodity companies are facing uncertainties of not getting full upside.

Excerpts of CNBC-TV18's exclusive interview with Surjit Bhalla and N Jayakumar:

Q: What’s your sense of how the government should approach inflation because it seems to be targeting one sector after another and trying to cool prices directly with intervention?

Surjit Bhalla: I have been rather surprised, or shall we say, shocked at the way the government has talked about handling inflation. Afterall, this was a dream team - they had the best and the brightest, the Prime Minister is a very famous and very distinguished economist. So none of these, what they have said about - and I literary mean none - make any sense, whatsoever, to fight inflation.

The second point, which I think the government knows, is that inflation is already a happened event, that is we had the inflation and if you will, certainly according to our calculations, inflation is on its way down, back to the 4.5-5% level. So why make rather stupid noises and stupid policies ostensibly to fight inflation. I think we have to move away from markets and economics into the realm of psychology to try and explain what the government has tried to do and said, including starting off from the Budget speech and afterwards; there is no economic content.

Banning wheat and rice futures has nothing whatsoever to bring down inflation especially since wheat prices are already on the way down, not to say that they would have had anything to do with when the wheat prices are going up. Internationally wheat prices went up, so you couldn’t have done anything. So that has nothing to do with it.

Then, we have the whole fiasco on cement pricing, where you are telling firms to hold the prices. We all know that prices maybe held for a day or two maybe a month, two months and then finally it pops. So that doesn’t make any sense. But these are the two major policy initiatives, outside of the monetary policy, which is not ostensively in the domain of the Finance Ministry. But even then, the Finance Minister had felt compelled to talk about how interest rates should be held at a certain level.

So I think all in all, none of the measures have had anything to do and will have anything to do with inflation, when and if, in our view, it will come down.

Q: What are your thoughts on what the government has been trying to do with a few specific sectors to cool prices by intervening directly?

N Jayakumar: To begin with, the disclaimer is I am not a psychologist. So if it has meant to come from this part of the country, the solution isn’t coming here. But I go slightly differently which is that there is the age-old adage of KISS principle, Keep It Simple Stupid. While that applies to many situations in many walks of life, I think the simplest most direct measure

to communicate a lowering of price is cutting input prices or cutting excise duties; and that comes from not today, not yesterday but 50 years of empirical evidence.

If one goes back to Budgets of a few years ago, you had direct communication with customers saying prices have come down of A, B, C, D, literally price tags being put on the newspaper to indicate how they had passed on the benefit because the underlying logic is when you cut prices, a higher demand at a lower price is probably significantly better than companies trying to maximize by selling it at a higher price. That’s one of the KISS principle that we should have taken.

The second is, cutting corporate taxes. In some sense, I think corporates are becoming extremely responsible citizens in the overall framework of what we are trying to achieve, which is that I do not believe in words like profiteering etc. Therefore this entire approach of a company trying to profiteer and we must stop literally goes back to almost the License Raj where pricing and distribution curbs become rampant in an economy, which today, is breaking loose in a free end economically liberalized world.

So from that perspective, I think taxes whether direct taxes or excise duties, indirect taxes, would have been and should be the only way to do it in addition to the RBI, which you may not always agree with in terms of being ahead of the curve and cutting money supply.

So from that perspective there are economic measures that are available but I believe there is bit of the schoolmaster teaching his school children errand school children what to do. Just look at the kind of pronouncements that have happened, shocking, absolutely shocking.

The cement industry has been told to learn from the steel industry on the way they have cut prices. I am quoting these are economic snippets, which we have taken off from the last few days. We will continue to talk and bring them to reduced prices or in the Budget saying I saw Rs 190 per bag, is a good price to sell cement. Are we sitting and talking about controlling balance sheets of individual corporates? Where have we gone back to?

It is almost because you feel you have the power that you can almost dictate pricing and distribution curbs and some of these pronouncements seem to be from that mindset rather than from an economic mindset, which says let’s make the conditions conducive. So from a psychological perspective, I have been probably uncharitable in one-two pronouncements earlier where I say there is a bit of socialism in terms of hurting or leveling out people who are making extraordinary profits.