The Dead Elephant

Raghuram Rajan recently referred to to the poor Q4 corporate earnings and remarked that if inflation has to fall, the short-term effect of this would show up in corporate earnings, implying that Indian corporate profitability is dependent on the redistribution of wealth from inflation. Inflation has been the elephant in the room for the Indian economy right since Independence. First, it was outright deficit financing, driven by government profligacy. Those who were closest to the government were the biggest beneficiaries of this largesse. This and crony capitalism allowed them to sit atop the 'commanding heights of the Indian economy'. They monopolised the money doled out of government banks, made something with licenses given by the government and sold it back to the government to get some of that freshly minted cash by Alipore Mint. How many of us believe that this current deflationary cloud over the world is a long-term phenomena? Driven first by the oil price collapse (which was driven by a structural change in world oil markets, where an erstwhile cartel lost its teeth and a new swing producer took over pricing) and a broader commodities bust (because of the China slowdown), falling currency values (both Japan and Europe, two of the world's biggest exporting economies) and a global food glut, you saw deflationary pressures everywhere you looked. Locally in India, two factors - the oil price drop and the food glut - helped put disinflationary pressures on India, but the Chinese slowdown and the European/Japanese currency declines led to an export slowdown and deflationary pressures on Indian imports. As far as markets go, the short-term effects were deleterious. The oil savings were mostly distributed a

This article was originally published on July 24, 2015.