India's Obsession with Inflation is Set to Grow...

Fri, 5 Aug Pre-Open

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Bill Gross, accredited as the nation's most prominent bond investor by the New York Times, could be in the middle of a crisis of faith. This we say is because the bond king is directing his sails to different shores. Recently, Bill favored buying gold instead of bonds and stocks. The rationale, that Bill states the former can act as a hedge against inflation and during the lower interest rate regime.

And this is no news. Many of the world's most intelligent and successful investors have recommended owning gold. The list includes David Einhorn, Seth Klarman, George Soros, and Stanley Druckenmiller. The prime reason is but one - they want to protect their purchasing power and prepare for hyperinflation. And what is true for these investors is also true for most of the market participants. Everyone wants to protect themselves from the ever-growing inflation monster.

Let us limit our focus on the Indian inflation story today. For Indians, inflation has become the same old. And the situation is said to remain the same; or even get worse maybe. One of the reason to this is recent development with respect to Goods and Service Tax or GST.

An article from the Huffington Post opines that the passage of GST Bill will mean a lot of things becoming more expensive. Some of the arguments in this favour can be noted as follows-

The Bill has been passed in the Rajya Sabha and most of the states have shown their inclination towards a GST rate of 18%. However, even an 18% rate will make a lot of things expensive.

Presently, the tax on phone bills, eating out, movies, and a host of services stands at 15%. Hence, a tax rate of 18% would mean more taxes on the above items. The effect of this would be felt for the upper middle class. Also, it would mean an increase in the overall inflation.

Moving ahead, the argument in the room is that GST-related inflation won't be much painful because raw foods aren't taxed anyway. This is true. However, the other side to this is that GST covers the services sector. And this would lead to an all-round inflationary impact as services sector now contributes to 61% of India's GDP. As former finance minister P Chidambaram recently noted, "Let me go on record that it is hugely inflationary and will lead to a backlash if you jack up the service tax rate from the current 14.5% to around 23 or 24%."

Further, the real test of GST and its impact on inflation rests upon the way it is implemented. As one of the leading financial dailies highlighted that the countries which failed proper implementation of GST ended with little or no benefit in terms of higher economic growth and lower inflation. To go by history, Malaysia, Australia and Singapore saw sharp rise in inflation after the implementation of the GST.

Last to state, GST is also said to reduce the flow of black money in India. The tax regime will make it difficult for traders to evade tax evasion. While this is a great step forward, it will also raise effective prices at which people buy these goods, thereby contributing its share in inflation.

What one shall also note is that apart from the above factors, there still remain many causes of inflation in India. And many of these causes haven't been resolved. Take agriculture for instance. The sector, despite its importance to the Indian economy, is largely untouched by change. There are many middlemen in the process of marketing. These middlemen have become monopoly buyers and are the real cause behind the food inflation that is witnessed every now and then in India. Vivek Kaul, editor, Vivek Kaul's Diary, has explained this issue in detail in one of his recent articles.

So going by the above issues, one can say that the inflation in India is here to stay. The real question comes as what can be the best bet to protect your wealth from these inflationary pressures?

For the common man, the inflation problem in India does not necessarily mean going back to gold. We will continue to weigh the potential returns from the Sensex versus the yellow metal. As far as stocks are concerned, one of our editions of The 5 Minute WrapUp explains how buying solid stocks can help in beating inflation.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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