Don't wait for the market.

The Index of Industrial Production fell by 0.6% in December, compared to the year before, when a growth of 0.8% had been expected. Manufacturing fell by 0.7% while capital goods fell by 0.9% showing that as sales have dropped so companies have cut production and reduced investment. The fall in demand is reflected by the fall in the Wholesale Price Index in January to 6.62% from 7.2% in December. To keep their profit margins from going down companies are increasing prices which is reflected in the Consumer Price Index which was 10.79% in January compared to 10.56% in December and 9.75% in November. As retail prices increase consumers are likely to reduce domestic expenditure further resulting in a further fall in consumer demand. The other loser in this cycle of rising prices and falling demand is the government as indirect tax collections will fall or remain static when the government desperately needs to raise revenue to reduce fiscal deficit. New taxes have been created on services and charges on electricity,water and fuel increased substantially. While some of these were probably necessary the timing, when growth is falling, was lousy. Politicians were dazzled by 8% growth in 2007 and 08 not realising that this was due to very low interest rates abroad and foreign money coming to emerging markets. Instead of taking advantage of high growth to balance the budget the Congress chose to give away money to win the elections in 2009 resulting in huge increase of spending. This coincided with the sudden collapse of the sub-prime mortgage bubble in the west and suddenly growth started to drop while inflation and deficit shot up. The rupee fell, adding to inflation and consumer spending dropped. It is impossible to understand why the government was taken by surprise and keeps blaming foreign markets for the dire state of the economy when there are clear examples in other countries. Venezuela has one of the largest oil reserves in the world. Its exports are around $57 billion dollars per year with a population of just 28 million. It should have low inflation with a strong currency supported by so much foreign exchange earnings. But President Hugo Chavez is a socialist and has embarked on enormous spending giving free education, health care and houses to the poor. The result was inflation at 30% and the Bolivar has just been devalued by 50% from 4.3 to 6.3 to the dollar. The black market rate is 18.39 Bolivars to the dollar. In Japan there has been deflation for a decade with prices falling and the Yen reached 76 to the dollar. The present Prime Minister has decided to induce inflation by massive spending and the Yen has fallen to 94. If the market decides that enough is enough the rupee could fall to 65 or 70 to the dollar. Does the Congress want the market to decide? The result could be brutal.