India's economy (
EPI
,
quote
) took another turn for the worse this week when data released
yesterday
indicated a rise in consumer prices
, bucking a trend of decreasing inflation.
[caption id="attachment_59479" align="alignright" width="300"
caption="Mumbai, gateway of India"]
[/caption]
Combined with slowing growth,
political gridlock
, and a harsh climate for foreign investment, inflationary pressure
renders India's short-term outlook increasingly bleak.
As the Indian economy (
INDY
,
quote
) has slowed recently, dissipating inflation had been something of
a silver lining. Because it is a net importer of fuel and its lower
and middle classes are particularly sensitive to food inflation
increases, India's economic breather may not have been all doom and
gloom.
However, in light of this most recent uptick in inflation,
Indian observers are rightly wary, especially because it appears as
if the Reserve Bank of India will
continue to employ measures to promote growth
at the risk of stoking inflation. The new development puts India's
central bank in a policy bind.
While high inflation can be problematic in any economy, food
inflation can be especially deleterious to Indian society. Recent
instances of high food prices led to destabilizing food riots.
Sustained inflation would be disastrous for the country's emerging
middle class.
Also troubling are the potential ramifications of high inflation
on politics. India is already suffering from bouts of
populism with the rise of non-traditional political
parties
. This has led to increased gridlock in New Delhi which has
prevented meaningful reform from being accomplished. Were inflation
to continue to rise and have a material affect on the food prices
of the lower and middle class, such populist entities would very
likely see an increase in support which would, in turn, further
decrease the efficacy of policy-making bodies in New Delhi.
Now is not the time to go long Indian companies that derive most
of their income from India's domestic market in rupees such as
ICICI Bank (
IBN
,
quote
) and HDFC Bank (
HDB
,
quote
). However, Indian firms
whose revenues are mostly international
and foreign currency-denominated should not be avoided just because
of Indian domestic concerns. These include Tata Motors (
TTM
,
quote
), Infosys (
INFY
,
quote
), and Wipro (
WIT
,
quote
).
Disclosure: Author's immediate family is long TTM and remains
inexplicably long EPI
