The Indian Economy…

In growth theories we equate mathematical-growth-figure with others, out of 100%. If the RBI sets its inflation target at 5-6% it is likely that economy will also grow at 5-6%, which are not bad figures at all. The same inflation-rate suggests that the rate of growth of goods and services (G&S) and rate of growth of money supply will remain at the same level (quantity theory of money), fiscal spending being zero. But, if in the next period fiscal spending increases to 3% it going to add another 3% to inflation and growth figures to 9%. After all it is increasing money-supply, fiscal deficit being zero. But, if fiscal deficit also increases to 3% it will catapult inflation and growth to 12% which is very high and needs RBI and Government intervention not to push inflation targets further beyond 9%.

Let us see its effect on distribution of national income between capital and wage investment in case of organized labor and capital organizations.

Assuming that the central-bank has shifted its inflation target to 9% with government spending at 3% and fiscal deficit/debt at zero, since, the government has created a spare capacity during booms (assume).

It is a requisite to give conclusions on the present scenario of the Indian-economy.

These days RBI has underscored it inflation target at 5-6% and Government spends with the rate of 6% without any spare capacity. Therefore in the first instance we get inflation figures at 12%. Lack of strong labor organization can not force the investors to increase wages by 12%. But, if the organization (strong) is present and organized it is going to add further to inflation, and if the retail chain is also not organized it will add to inflation somemore. By the way capital market is more organized than labor market under RBI’s supervision and it responds almost every month since US’ recession.

The point is if RBI sets an inflation target every body should follow it even those in the government. Or, the chain of spending, deficit, and debt without a reserve capacity would push inflation between our shoulders and nose.

The preset government spending around 6% of GDP and RBI’s inflation target is likely to produce an overall inflation of 12%.

Therefore wage-increase should not be less or more than 5-6%. It is another way to increase money supply although through wages.

Nevertheless, every body is applauding national rural employment guarantee schemes…

Case for stronger currency…

The speed with which inflation goes up and down it will almost take more than a year to get it at the targeted level of 5-6%. The expectation arising out of this situation says that the RBI will take further steps to take inflation at the level, desired. It is, now, at 10%.

The government can help RBI if it facilitates supply of real goods and services (G&S).

One possible action could be the opening of the imports with a stronger Indian currency.

RBI's moves (decreased money-supply) could be supplemented by reducing import duties and a stronger rupee. After-all, it is the real availability of G&S that adds to real WELFARE and some times a stronger currency also works.

Government should increase tariff on inflow of funds and should decrease duties on imports of goods.

INDIA imports more than it exports and in international- trade deficit in Balance of Payment (BOP) is always disequilibrium. Therefore, the case is for a stronger currency…

US’ Capitalism …

Prices play an important role in planning our present and future.
The US believes in capitalism, i mean it is a market economy and prices are determined according to market (demand and supply) therefore part of flexible prices in the utility basket is bound to be higher than the sticky ones. In INDIA the government controls prices of oil and gas so it is considered to be stickier than normal goods and services, but in case of labor, market determines the price, it is almost unorganized. Just opposite of the US, where stock market in case of oil and strong labor organizations take care of the factor rewards.

A paper by James D. Hamilton, Department of Economics University of California, San Diego at http://dss.ucsd.edu/~jhamilto/oil_history.pdf says, “...All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes listed in Table 1 were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War…”

The point is, if oil prices are an indicator of recessions in the US why not the government takes care of oil-prices instead of market dealing with it. Since, we have an insufficient capacity around the world to absorb the rising demand for fossil fuels. We need a big-push so that the fear of peaking oil prices and the expectation it is generating through inflation could be reduced. Since transport-costs are important in international trade, according to “Purchasing-Power Parity,” it is going to spiral all over. Emerging economies are already experiencing high levels of inflation.

But, expectations may not work if the person does not act and to act you must have information and money. Like, cause and effect, and, stimulus and response it is not as spontaneous as it is assumed in ECO-NO-MICS. Information works differently for different people, therefore you can not blindly reject the above hypothesis that it can generate all the three expectations at the same time. The only thing certain is that it will move and people who have access to information and resources will act. I mean not fixed at its current level forever.

Here, we mainly concentrate on Keynes’ precautionary demand for money which can go either way, for consumption or for investment, accelerator or multiplier. It is the money of our use. Since the US economy is recovering from a liquidity-trap and people have maintained an excess capacity during that period.

For simplicity we assume that income is constant and people are going to manage their excess reserves. They are feeling insecure about their future and are trying to anticipate the next policy moves, and, have to make choices. There are two types of people, relevant, from the point of view of policy. People who just profit themselves by anticipating the move and then there are others who will profit themselves by that particular move.

A price rise generally indicates that people will buy more of a good if they have information and resources, and it is only possible if it is available, or there is a chance to increase supply in the next-period. So it means somebody is selling it. But the opposite may also be true, it may not be available. And, there is a need to give the market a push, means policy intervention either by government or central bank(s) and the market is inefficient in giving results, employment at the targeted level.
But the irony is that all the three can not happen at the same time and in our stream someone’s loss is others profit, i mean a zero-sum game.
If fiscal deficit is so large that the government can not commit to generate additional income without increasing tax burden by using fiscal policy and the central-bank clueless to what to do when interest rates are already near zero.


Suppose the central bank commits to buy bonds of a certain value in successive periods. But, the pressure on prices sharpens due to increase in oil and transport cost, and oil companies are hiring new labor which increases wage rate although increase in the price of core commodities remains constrained, but not zero, due to increase in money supply by purchase of bonds. And the bank’s commitment to let the inflation and employment float to the targeted level is yet far and can not be realized without further increase in the general price-level.

After-all it is creating uncertainty for the growth of world economy and the US' recovery also depends on the demand generating outside it, although not solely. But, we can say a major part on the basis of previous recoveries.

INFLATION

...The rate of growth involves the rate of un/employment of resources, both that are scarce and that which are not. To keep it simple, we can take only labor and capital, where capital is scarce and labor is not that scarce, at all, in an economy like India. And, when the level of investment decreases the worst thing that comes into play is the fall in the level of employment and in India to a greater extent. Any change in the prevailing rate of interest results in a corresponding change in the supply of credited along the length and breadth of the economy, which is a very direct kind of control and gives result in just a matter of days since it is just a matter of liquidity, upward movements may be sticky because organizing business takes more time. The situation is more or less just like a stock-market, and changes in variables are very prompt. But, when it comes to control wages and consumption and thereby prices, all these variables are flexible upwards and their downward movement is often painful - unemployment and decreased wages, except prices (food-inflation) when they go down it is a moment of relief for the majority, but that seldom happens, moreover the case remains the same, when prices reach a level they provide a floor, itself, for future upward movements, which provides an important insight for long-run trend of prices and their control, for essential commodities. But, in case of wages, even though they are flexible upwards they are also sticky to their current level. However, its control is not that direct and is only through credit-control and investment. Therefore, results, to obtain, like lowering wages, consumption, and prices- which has to be actually affected, in the very short-period of time with an indirect mechanism is a difficult task and can be obtained easily and in lesser time by more direct price controls, price-control, itself...

Full explanation is at the following link...

Central-Bank, and, Inflation and Employment

RBI must follow its inflation target…

INDIA Inc’s plea to not increase interest rates is not a solution to the rising cost of living. Nevertheless, even if RBI considers not to do the same INDIA Inc is going to face demand to raise wages from the bottom at the end of the financial year in March.

The issues involved, actually there is only one, rise in the cost of living. Since INDIA is relying on domestic demand, imports over exports, is a sign, it is not that hard to decide between who’s actually in need, though the need may not be dire and exploitation of the more in need may be other way around. But since our economy’s vision is to mitigate poverty and improve living conditions of the more dependent ones RBI may consider their demand or i think confrontation is the another way.
And, to avoid this one RBI and Government, in tandem, should start working on the issue, high-inflation

The speed with which inflation goes up and down it will almost take more than a year to get it at the targeted level of 5-6%. The expectation arising out of this situation says that the RBI will take further steps to take inflation at the level, desired.

The government can help RBI if it facilitates supply of real goods and services (G&S).

One possible action could be the opening of the import with a stronger Indian currency.

RBI's moves (decreased money-supply) could be supplemented by reducing import duties and a stronger rupee. After-all, it is the real availability of G&S that adds to real WELFARE and some times a stronger currency also works.

INDIA imports more than it exports and in international- trade deficit in Balance of Payment (BOP) is always disequilibrium.

Any central bank does not work for a class it works for the economy and especially for the poor in the economy, the dependent ones. Wages and prices are flexible upwards and are relatively rigid downwards.

This kind of behavior is best explained in ECONOMICS by Duesenberry-Doctorine or the Ratchet-effect.
According to the Deusenberry-Hypothesis, “…in the matter of consumption, an individual is not merely influenced by current consumption, but also by the standard of living he has enjoyed in the past…”