Prakash Kumar

Recent spike in commodity price is just mind blowing. Metal Index on the Indian stock is virtually adding a percentage or two every day. This augurs mixed for the Indian growth story. Secondary market (read stock market) will welcome such sustained bounce of commodity prices, as it signifies that growth story has kicked in after 2-3 quarters of sustained recessionary symptoms. However, northward movement of commodity prices esp. Steel, Copper and Oil can be very inflationary and does not really augur well for a developing country like India, which just cannot have enough of these commodity at affordable prices.

So many Infrastructure and construction projects are on anvil in India, that it is worse time for oil and commodity price to gallop. It would result in severe cost over-runs and delay in already delayed power, port, bridge, dams and housing projects. Many premier cities which are lined up for Metro transit will be impacted as well. Some cities are on verge of collapse in terms of their transit system and cannot afford delay of these constructions.

Inflation hits the core sector in multiple ways – it shrinks demand in short term and shrinks supply in medium to long term. This predicament is old – but it is something which needs to be avoided in the modern era as well. Global economy, thanks to Federal largesse by all leading economies, has limped back to show some sign of normalcy. A commodity price upward gyration will peg this recovery. Where will the employment numbers come from if, the projects are delayed and where with be the service Industry which will support the infrastructure of these completed projects.

Industries went slow in production during year long recession and thus inventory situation is not good, so this sudden influx of demand for commodity is creating havoc. Even the workforce which was trimmed during recession cannot be replaced overnight. Result, is that we have a Demand – Supply mismatch in commodity which is leading to this inflation. Demand is way to high for the supply to meet.

Federal intervention is required to address the duty structure (excise, counter veiling, ad valorem and cess) and thereby encourage import of Iron ore, copper and other construction related commodities. It is high time; Oil has to be handled well by Indian administration. We cannot afford to miss the chance of recovery – we are at cusp of history and we have to arrest this inflationary pressure on commodity pricing before it hits the growth story.

Little bit of Inflation is good because it keeps a tab on liquidity, but inflation of commodities at the expense of growth is un-acceptable.