Double-Digit Growth...

Article;

http://economictimes.indiatimes.com/news/economy/indicators/indias-double-digit-growth-ambitions-fade/articleshow/8070292.cms

Comment;

Double-digit growth without food security would also increase inflation to double digits. Another way of ensuring food security to the poor is increase in his income, at-least he has a choice then. He can go and buy whatever he likes from the shop if what he consumes is not available. If the Government does not have money the central bank can print some money to make way for poor by deciding minimum (JUST) wages. Of-course this will increase inflation some more and the process can be repeated again. And, when inflation is unbearable, although it may not happen because poor have option to buy other things, the Government can introduce a re-denomination of the Indian currency. It has happened in China, in France etc..etc..

Independent Micro-finance...

Article;

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/iba-backs-icicis-micro-loans-recast-proposal/articleshow/8043281.cms

Comment;

As far as micro-finance is concerned it should be independent of regular baking. Since the situation is getting same as shadow banks (banks that borrow from regular banks and lend on higher interest rates) this is getting complex. We need some stabilizers to prevent a situation like this. Micro-finance should be run on its own deposits and should adjust lending rates to their own deposit rates. That would be fair and should never extend loan for agriculture because there risk is maximum, depending on monsoon and you are risking poor depositors’ money. Extending repayment period is a good option and would de-motivate excessive risk taking in future. Micro-finance group can also opt for extending loans against silver since it is also getting high and should not be creating debt bubbles for the rest of the economy. The aim of micro-finance should be to remove poverty and not to add to it.

Money…

Money has many functions but the pattern we are seeing through decades, underlying money, help us to concentrate on just one, for now, function money as a medium of exchange. To be more clear let us define what medium of exchange means; in our day to day life we exchange money for goods and services and in the international arena we also exchange money for goods and services but there we also exchange money for money, means we exchange dollar for rupee and sometimes rupee for dollar, given certain conditions.

For example, if we anticipate that dollar is going to depreciate we make up our mind to buy rupees because in the future we are going to profit ourselves from such a move. To be clearer, suppose that the present exchange ratio of dollar and rupee is 1:40 and we anticipate that dollar will depreciate. Actually, in economics appreciation is depreciation and depreciation is appreciation. For a common man, if we say him that dollar is going to depreciate he will understand that that ratio will come down but actually it increases. Therefore, he will think that the ratio will become either .75:40, but, no… actually depreciation will mean that the ratio will become 1.25:40. This is what depreciation means when we deal in foreign exchange… the latter one 1.25:40. And, the former is an example of appreciation.

Nevertheless, a man can only benefit himself from such a move if s/he spends the profit he gained in INDIA. Since, appreciation and depreciation are also a function of money supply. If money supply decreases in the US, which is controlled by its central bank, it means inflation has gone down and if money supply increases in the US it means inflation has gone up. Therefore, during increase in money supply it is always profitable to spend money at the home-country. The above explanation is just a simple version of the quantity theory of money. But that also depends on many factors.

However, money supply and actually the money in circulation also increase when people start spending their savings. But, since the government and central bank does not have any direct control over this supply of money it sometimes does not help from a policy point-of-view and may help through lower prices since the consumer has a incentives to spend now and if the economy is in uncertainty they may hold their savings some-more which sometimes result in liquidity-trap kind of situation.

But, money has more than one function and the next important function is its store-value. Central bank often keeps an amount of dollar as reserve and release rupees of equivalent value depending on the rate of exchange. This can also be helpful on a micro or local or state level. Means, the state can decide a value of a rupee too. Read this thing happening in the Western WORLD, many regions have their local currencies. Let us explain with an example.

Suppose our local currency is biscuit (of-course made of wheat) and a local bank controls its supply. The other way to control it is market. When market controls it, it produces trade cycles, and, inflation and deflation, as it normally happens, and the price of wheat will go up and down as in case of gold biscuits and currency prices. But, if local bank and government controls it simultaneously it will keep the real value of wheat-biscuit somewhat intact…

Gambling with the planet by Joseph Stiglitz (to share...)

The consequences of the Japanese earthquake - especially the ongoing crisis at the Fukushima nuclear power plant - resonate grimly for observers of the American financial crash that precipitated the Great Recession. Both events provide stark lessons about risks, and about how badly markets and societies can manage them.

Of course, in one sense, there is no comparison between the tragedy of the earthquake - which has left more than 25,000 people dead or missing - and the financial crisis, to which no such acute physical suffering can be attributed. But when it comes to the nuclear meltdown at Fukushima, there is a common theme in the two events.

Experts in both the nuclear and finance industries assured us that new technology had all but eliminated the risk of catastrophe. Events proved them wrong: not only did the risks exist, but their consequences were so enormous that they easily erased all the supposed benefits of the systems that industry leaders promoted.

Before the Great Recession , America's economic gurus - from the head of the Federal Reserve to the titans of finance - boasted that we had learned to master risk. "Innovative" financial instruments such as derivatives and credit-default swaps enabled the distribution of risk throughout the economy. We now know that they deluded not only the rest of society, but even themselves.

These wizards of finance, it turned out, didn't understand the intricacies of risk, let alone the dangers posed by "fat-tail distributions"- a statistical term for rare events with huge consequences, sometimes called "black swans." Events that were supposed to happen once in a century - or even once in the lifetime of the universe - seemed to happen every ten years. Worse, not only was the frequency of these events vastly underestimated; so was the astronomical damage they would cause - something like the meltdowns that keep dogging the nuclear industry.

Research in economics and psychology helps us understand why we do such a bad job in managing these risks. We have little empirical basis for judging rare events, so it is difficult to arrive at good estimates. In such circumstances, more than wishful thinking can come into play: we might have few incentives to think hard at all. On the contrary, when others bear the costs of mistakes, the incentives favor self-delusion. A system that socialises losses and privatises gains is doomed to mismanage risk.

Indeed, the entire financial sector was rife with agency problems and externalities. Ratings agencies had incentives to give good ratings to the high-risk securities produced by the investment banks that were paying them. Mortgage originators bore no consequences for their irresponsibility, and even those who engaged in predatory lending or created and marketed securities that were designed to lose did so in ways that insulated them from civil and criminal prosecution.

Too-big-to fail banks, and the markets in which they participate, now know that they can expect to be bailed out if they get into trouble. As a result of this "moral hazard," these banks can borrow on favorable terms, giving them a competitive advantage based not on superior performance but on political strength. While some of the excesses in risk-taking have been curbed, predatory lending and unregulated trading in obscure over-the-counter derivatives continue. Incentive structures that encourage excess risk-taking remain virtually unchanged.

So, too, while Germany has shut down its older nuclear reactors, in the US and elsewhere, even plants that have the same flawed design as Fukushima continue to operate. The nuclear industry's very existence is dependent on hidden public subsidies - costs borne by society in the event of nuclear disaster, as well as the costs of the still-unmanaged disposal of nuclear waste. So much for unfettered capitalism!

For the planet, there is one more risk, which, like the other two, is almost a certainty: global warming and climate change. If there were other planets to which we could move at low cost in the event of the almost certain outcome predicted by scientists, one could argue that this is a risk worth taking. But there aren't, so it isn't.

The costs of reducing emissions pale in comparison to the possible risks the world faces. And that is true even if we rule out the nuclear option (the costs of which were always underestimated). To be sure, coal and oil companies would suffer, and big polluting countries - like the US - would obviously pay a higher price than those with a less profligate lifestyle.

In the end, those gambling in Las Vegas lose more than they gain. As a society, we are gambling - with our big banks, with our nuclear power facilities, with our planet. As in Las Vegas, the lucky few - the bankers that put our economy at risk and the owners of energy companies that put our planet at risk - may walk off with a mint. But on average and almost certainly, we as a society, like all gamblers, will lose. That, unfortunately, is a lesson of Japan's disaster that we continue to ignore at our peril.

If by Rudyard Kipling (to share...)

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don't deal in lies,
Or, being hated, don't give way to hating,
And yet don't look too good, nor talk too wise;

If you can dream - and not make dreams your master;
If you can think - and not make thoughts your aim;
If you can meet with triumph and disaster
And treat those two imposters just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build 'em up with wornout tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on";

If you can talk with crowds and keep your virtue,
Or walk with kings - nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run -
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man my son!

Education, Skills, and, Employment Opportunity Symmetry…

Despite of all education and skills asymmetry, like information asymmetry, the real problem also lies in asymmetry of employment opportunities and lack of initiative on the part of the job-seeker, too. Deregulation of banks and especially bank deposits (savings) would increase the availability of loan-able funds. The idea has appeal from the point of view of micro finance, too. Deregulation would increase rate of saving since it would induce the consumer to save, and, to save, even on the cost of consumption. And, most importantly education, skills, and, employment opportunity symmetry makes one independent, and, help you to avoid extremism. Moreover, it also fosters positive self-acceptance.

As far as micro-finance is concerned it constrains the amount the investors are seeking for investment. The borrower can borrow, but, with a limit, say 20,000. Micro-finance with it shortcomings is now available to be exploited by group rather than individual. For example, if individual can borrow 20,000, group of investors, say, five individuals, jointly, can borrow (5*20,000) 1, 00,000 or more. This increases the chances of doing business on a scale larger than the usual and the risk remains the same. Even if the borrower borrows less than the upper limit say 10, 000 they can share the risk on investment. Nevertheless, if 10 borrow 10, 000 each, the risk becomes shared and reduced, but, the amount remains the same (10*10,000) 1, 00, 000.

Besides drafting a manufacturing policy we need to create awareness for how to do business. This would release the risk associated with, both, the lender and the borrower. Providing assistance to do business is the other way around, meaning they can also employ graduates from B-schools and do business under their assistance. This would create employment manifold and will pave way to entrepreneurship in India.

Education and skills asymmetry is also responsible for extremism like terrorism because it is easier to learn how to do with a gun rather than with money and investment opportunities. Once entered in such a territory it is very difficult to walk away with your-self and it becomes a burden. Culture is important in shaping one’s mind and i’am proud to be an Indian and a follower of the Indian culture. India has embraced everybody with an open heart and mind with the challenge to transform their heart and soul to conquer the part of ego that is a not acceptable. We all have heard stories of dacoit who completely transformed themselves and became saints and have also created legends.

Be proud to be a good man of your country…

Why being partial...

Inflation rates/targets has something to do with the stage of development and growth of an economy. Normally, underdeveloped, developing, and developed economies have different conditions and targets for the rate of inflation ranging from 11-12, 8-9, and 5-6 percent, respectively, for each type of country. Since, underdeveloped economies have high unexploited opportunities for investment and resources utilization, high level of unemployment and low level of savings; it is good for the economy to set high inflation targets for the sake of motivation. Similarly, in a developing economy like India where investment opportunities and the level of resource utilization is higher than an underdeveloped economy but lower than a developed economy inflation target are set also set lower than developing but higher than a developed economy. And, in developed economy inflation targets are lower than underdeveloped and developing economies because of high level of investment and low levels of unemployment.

When A. W. Phillips discussed the trade-off between inflation and unemployment, back in 1957 in the UK, the country was considered a developed economy, high rate of capital accumulation/formation, besides high rate of investment and employment.

Mrs. Joan Robinson who is famous for her model ‘the accumulation of capital’ has visualized a ‘golden age’ for her economy. Her economy believes in ‘the capitalist rule of game’ in a completely independent economy, closed economy with zero imports and exports, capitalist produce and households consume. Firms are free to adopt a price policy and distribute profits among shareholders. But, later in her model she assumes price-level unchanged or constant and here the real problem arises. If we assume price level unchanged and constant we should also assume that the level of output and population will also be constant, if it is not deflation will set in. Nevertheless, her model is read and taught with great vigor in classrooms. Here comes the main point; instead of capitalist, government can set prices to suit the economy’s needs, but this does not mean that we are moving away from the market rather it is to supplement the market. Capitalist should be free to set prices for their product (non-farm) and the government should be free to set prices for farm products. Why being partial? Both, government and capitalists are responsible for taking economy ahead.

Moreover, Don Patinkin presented his model in the context of the Great-Depression and liquidity trap, and, found that capitalism is no solution to mass unemployment. His model moves between neutrality and non-neutrality of money which lacks rational expectations and a proper definition of it. He found that an increase in money supply has a real-effect on individual and a nominal-effect on the general price-level, and, concluded that real balances foster dynamic-stability.

Long live reforms!

Industry’s Concern…

FY 2010 ends on March, 31, 2011 and our industry captains look concerned about the next FY, 2011. Nevertheless, the issue that caught attention is Foreign-Direct-Investment (FDI) because of changing policies and lingering reforms, whatsoever.

When it comes to reforms the first thing that comes to mind, from the point of view of demand and economy, is labor reforms, since demand for our industry products are destined to come form bottom of the pyramid, means lower class.

However, as far as FDI is concerned the climate of the economy is conducive to it. For the Indian currency is not so strong and in the course of time it has only one way to go and that is to go up (appreciate). And, from a foreign investors point of view they have every reason to gain, since when you pull back your investment you take your home currency back to your market and as has mentioned above Indian currency has every reason to appreciate if we rely on market fundamentals and long-run growth, 5-10 years ahead. Therefore, investment opportunities for Indian currency and economy, too, look great.

As far as, reforms are concerned reform of labor-market and retail are important. When we talk about reforms the first thing that concerns a concerned mind is whether the specific market is organized or not? Organized, because whether it follows a pattern and decision taken regarding its betterment affects all alike, bottom to top and top to bottom. To sum up, Indian labor market is not organized in this particular sense. Top is going more on top and bottom is stuck to the bottom. The only class that has seen some transformation is the Indian middle-class.

Even in retail-market any pattern is not visible cities, actually big cities have plenty of supply in form of local-stores and malls, even if people prefer to go to malls for shopping. Local-stores take care of local consumers or they go to malls one a week or once a month. Actually, shops and malls are not a problem but the stock of goods they maintain and maintain with uncertainty creates uncertainty somewherelse in small places. Nevertheless, stocks are also maintained for black marketing and difference in prices, whatever little, plays an important role in diverting consumers from shops to malls and every kind of shop under a single roof is a good opportunity to exploit from the point of view of transport facilities.

Strong currency also means higher purchasing power and opening of the import sector is another way to increase Indian welfare in form of low prices and availability of goods and services…

Long live reforms!!!