INFLATION

What is Inflation

Inflation rate is the rate at which prices of goods and services increases in its economy it’s an indication of the rise in the general level of prices over time. Since its practically impossible to find out the average change in prices of all the goods and services traded in an economy due to the sheer number of goods and services present, a sample set or a basket of goods and services is used to get an indicative figure of the change in prices, which we call the inflation rate. Mathematically, inflation rate is calculated as the percentage rate of change of certain price index.

How does India Calculate Inflation

In India inflation is calculated on weekly basis. It uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. WPI was first published in 1902 and was one of the most reliable economic indicator available to policy makers until it was replaced by most developed countries by the Consumer Price Index(CPI) in the 1970s.

     WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in price of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only 2 weeks. The Indian Government has taken WPI as an indicator of the rate of inflation in the economy.  

 According to research paper of prominent economist the CPI is official barometer in many countries such as USA, UK, Japan, France, Canada, Singapore and China. The Government there review the commodity basket of CPI once in every 4-5 years to factor in changes in consumption pattern.

  The various research papers say the main problem with WPI calculation is more than 100 out of 435 commodities included in the index have ceased to be important from the consumption point of view. India constitutes the last WPI series of commodities in 1993-1994 but has not updated it till now due to this economist argue the index has lost relevance and cannot be a barometer to calculate inflation. 

  WPI is supposed to measure impact of price on business. But India uses it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the Index and it does not factor in services which has assumed so much importance in the economy. 

Why India is not switching to CPI Method of calculating inflation

There are many intricate problem from shifting from WPI to CPI model. India there are 4 different types of CPI indices  which makes switching over to CPI from WPI fairly "Risky and Unwieldy"the 4 CPI series are

1. CPI Industrial Workers

2. CPI Urban and Non Manual Employees

3. CPI Agricultural Labour

4. CPI Rural Labour 

The CPI cannot be used in India because there is too much time lag in reporting CPI numbers. The WPI is published on weekly basis and CPI on monthly basis.

What is Consumer Price Index

A Consumer Price Index (CPI) is a measure estimating the average price of consumer goods and services purchased by household. CPI measures a price change for a constant market basket of goods and services from one period to the next within same area (City, Region or Nation). Its a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer. its one of several price indices calculated by most national agencies. The percent change in the CPI is a measure estimating Inflation. The CPI can be used to index wages, salaries, pension and regulated or contracted prices.
What are Myths of Inflation In India
Economist are of the view that there are 8 myths of inflation in India they are:-
1. Its all about Food Prices
2. The pick up in inflation is all due to base effects from last year's low inflation
3. Inflation will fall back to normal range on its own
4. Fresh capacity will come on-stream soon and alleviate constraints
5. Monetary tightening will kill the expansion
6. Administrative measures are as good as - or better than - monetary tightening to control  
    inflation
7. A stronger rupee does nothing to control inflation
8. Policy tightening will deny credit to small business and the common man as well as poor.

NEW TAKE OVER CODE

Till now take over of company was not so expensive.Companies can merely acquiring 15% stake and then make open offer for next 20% to remaining shareholders and due to this small share holder were biggest losers, but now a potential acquirer will have to pick up the entire quantum of remaining shares once the threshold limit of 25% is triggered. This will make take over much more expensive from current level. But before analyzing new takeover code its worth knowing following fact.

• In last 5 years more than 100 take over has been done only in less than  15% of the open offers did the acquirer offer to buy more than the mandatory 20%. 
• As per international standards the acquirer agrees to buyout all remaining shares
• The takeover code was amended many times before 1997 it was 10% then it was changed to 15% and now its proposed to 25%
• Today, the mean and median of promoter shareholdings in listed companies are at 48.9% and 50.5% of the total equity capital and the number of companies that are controlled by promoters holding 15% or less is less than 8.4%.
• Internationally countries like UK, European Union, Singapore and Hong Kong threshold limit ranges between 30-35%

 Based on above facts it  was expected that this trigger limit may be higher but what the committee has done is to allow promoters who already have a stake of 25% to continue to make a creeping acquisition of up to 5% a year, without making an open offer up to the maximum permissible non-public shareholding limit or 75%. That gives the promoters the flexibility to beef up their stake in the company, over a period of time.

Ideally, the market price should not form part of the criteria to decide the open offer price since the price negotiated between the buyer and the seller is the best indicator. However, the committee has decided that although the market price may not always be relevant, it should be retained for some more time as one of the criteria used to determine the offer price. The committee has, however, tweaked the rules to try and ensure that the market price of the shares in question cannot be manipulated by suggesting the use of a volume-weighted average price for the last 60 days, instead of the average of the weekly highs and lows for 26 weeks. Clearly, it would be more expensive to tamper with prices because the volume will now be taken into consideration. All in all, any buyout will become more expensive for acquirers now because the open offer will also have to take into account any non-compete fee that they pay to the seller.

But in my opinion this takeover code can be misused by the company at times though now trigger point is 25% but what happens when a company offers share to acquirer up to 25% making it equal partner in the company for example like case of United Breweries Ltd were the Indian and foreign partner holds equal share and they manage the company. This type of activity will make teasing effect on small investors with only cash coming in the company but not to investor.

Though looking at mean and median we say that 25% is good but one should not forget that this percentage is substantial and one can block resolution of company etc. so I feel that this code would have given a rider that

If acquirer is Indian Company then
25% of equity capital
                 or
25% of promoter’s holding which ever is Higher
If acquirer is foreigner etc.
25% of equity capital
           or
Promoter’s shareholding which ever is higher

This would have resulted in more clear picture and would have not resulted in teasing of small share holders, because if any foreigner acquiring shares of 25% or less they cannot sit on the board which would have resulted in takeover with out any benefit of share holders. by above recommendation they would have to make open offer and this code would not be misused by them. further its pertinent to mention that going forward China and Indian market will be be drivers of growth and consumption driven market so many foreign companies, PE funds will take over Indian companies this will result in part by part selling so cap should be give in this regard. otherwise this amendment is better compare to old one.