Alongwith Reforms...

Article;

No Room for Pessimism Govt Moving Ahead With Reforms-Finance Minister P Chidambaram 

Comment;

You know Mr Minister reforms can not be done completely unless you have time and support of your allies and i do not think the government has these two... There are many other things the government should consider along with economic reforms. First of all is Food Security Bill without which we cannot conceive economic growth/development because high inflation will result in higher interest rates. Secondly projects worth 7.5 lakh-crore are stuck in red-tape and are not helping the falling growth rate. Thirdly, distribution of coal blocks which is increasing CAD because we are importing coal even when we have enough coal to satisfy demand for decades and many more fronts on which government has failed to deliver its promises…

Unemployment Figures INDIA...

Income is a nominal measure of employment activity, the real measure of economic activity, and, i think INDIA is doing a good job as far as level of unemployment is concerned. Many say that data on unemployment is not dependable because 90% of the market is unorganized and we do not have actual data, but the usage of figures, quiet frequent, in analyses lends some credibility to those figures, at some places 2.2% for the year 2012 and at other 3.8% for the same year. At best i expect it to be around 5% close to frictional unemployment. If it is below 5% it is a sign of overheating. That’s why inflation is so persistent, above 10 % in 20 years out of the 30 years since 1980s. We only find inflation subdued below 5% during period starting 1999 to 2004. But inflation increased because of rise in fiscal spending after the period 2004-05 because of stringent supply conditions. It remained above 10% after that period. On unemployment front the rate was 2.3% during the same period. To sum up, we can say that the economy is generating enough jobs and is adding more people to the workforce every year, but that is true as far as jobs in public sector through MNREGA is concerned. In the private sector wages are increasing more than public sector which means public sector is crowding out investment and employment in the private sector…

Increase Demand for the Indian-Currency...

Article;
CAD falls to 3.6 per-cent of GDP but fails to lift rupee

Comment;

Can't we make a pact with our trading partners that when we will supply goods and services we will accept only Indian-Currency, because, that will increase the demand and value of the Indian-Rupee. Strong and more stable. If we will not accept Indian rupee who else will? We have to accept Indian currency instead of US $. It will decrease the demand for dollar and will depreciate it and will increase demand for Indian rupees and it will appreciate. The Indian rupee is getting cheap and unstable and an increase in its demand will make it stronger. Moreover it will help in moderating CAD. There should be a balance between the demand for dollars and demand for Indian rupee to keep the value of currencies at reasonable levels….

Unreasonable to Compare INDIA and South-Africa...

Article;
Stiff Wage-Laws Hold INDIA from Tackling High Unemployment And Low Manufacturing Base

Comment;

If there is unemployment in the economy wages should fall to achieve full- employment but if the economy is close to full employment wages will rise because the market then will compete for labor. Comparing INDIA where unemployment is 2.2% and South Africa where unemployment is 25% is not reasonable because in South Africa the pressure on wages is to go down to absorb all the labor but in INDIA the pressure on wages is to go up because of full-employment...

INDIA and Full-Employment...

Article;
Fall of Rupee Does Not Benefit Much for exports

Comment;

Higher interest is affecting the export sector in the same way it is affecting the whole economy. Both CAD and Fiscal deficit has turned inflationary... which the RBI is alone managing and which the government is literally scoffing by saying it will push growth itself. The RBI is under pressure from different groups to lower interest-rates so that businesses can employ more, produce more and earn more (higher income). The government through its fiscal policy has depressed wages and income. The private sector is paying more per labor…The government has put a restrain on wages and the fund with which the wages are being paid competes with the same private sector. It means if private sector in spending more and increasing more employment and wages, more relative to the public sector then why the government should enter the scene. The governments cost is high. To cut short, the government is simply less efficient, although is it efficient. Another problem is that this is funded out off taxes. The government taxes and spends. It reduces private demand somewhere. People will demand less and spend less, less employment will be created and our goal is full employment. In the long run we need to achieve full employment. By exports, too.

The unemployment rate in INDIA was recorded 2.2 % in 2011-12, almost full employment and since our wages and per-capita income should converge to the wages in the developed economies, they should go-up; in real terms upto level of full-employment and after full-employment they will increase in nominal terms. As I said wages should converge to the developed levels. But, the central bank’s job is to make this transition smooth by making inflation grow less than the rise in income. Best assumption will be a constant and same figure…

Pursue Lose Monetary Policy at Home...

Article;
World-Bank Watchful as Fed Signals Tighter Policy

Comment;

If emerging markets fear tight monetary policy by the Fed, then, they should use loose monetary policy at home as is expected by the RBI... Why we are making it an issue? Can’t we help ourselves? In INDIA, especially, the real problem is inflation. Many argued, including Joseph Stiglitz, that we should use capital controls, when the Fed started QE, to avoid bubbles and inflation in the economy but we did not follow and now inflation is still a problem… Moreover CAD is a concern and all the capital inflows, in the past, could not make the Indian-Currency strong because of loose fiscal policy in the past. Fiscal policy in INDIA has crowded-out monetary policy from action and, now, when the RBI is not ready to come-down and we hear the government saying it will take charge of growth. Monetary policy is a signal how the fiscal policy should work and not the other way around, just how we did when the Great-Recession began. Both the monetary and fiscal policies aimed at improving growth during recession. Their target was and should be same. The government, too, should take low and stable inflation seriously…

Income Gap...

i think this was the right time in the US to complement monetary policy with fiscal policy. The government should come up with a plan that can raise wages and income, and, demand. There has been a productivity and wages/income gap within the economy since 1970. The US tried to devalue its currency in an attempt to cash foreign demand by putting more money in the other country’s people’s pockets with out any labor (at least, there is no binding) in the form of exchange rate, especially when the currency depreciates. Then why not the US government is putting more money in people’s pocket in its own country… The government has to simply take care of people below poverty… i mean the government should increase spending on the poorest but then I see that the people are already covered with food and health insurance. But this spending has made the government budget bloated by crowding out private businesses. The timing was not right. Keyes has advocated fiscal policy in the face of recession and liquidity trap. But Classicals advocated supply side (production) to push wages and demand. Any policy ultimately, if it is good, affects income positively in any form from any side, monetary and fiscal. When government spends and taxes it is fiscal and when the Reserve- Bank moves its monetary because it affects money supply. Interest rates are already zero and QE is an unconventional tool. But both monetary and fiscal policy can boost incomes and demand…

Demographic Dividend...

Article;
Demographic Dividend Gets Postponed as Agriculture Workforce Falls

Comment;

Demographic dividend makes the Indian story fundamentally strong. Foreign inflows are influenced by this strong potential growth rate. They are celebrating it. But with an uneducated and unskilled population we are not going reap a huge dividend without increase in productivity and wages/per-capita. The long term goal is to achieve a higher per-capita income and consumption; everybody is heading in that direction. To cut short, a decent lifestyle... Many argue that we need to make people learn how to fish instead of giving them fish. Education and skill development is so crucial for an emerging economy that its long term goals can not be achieved without these two. They make people independent who are dependent on the State for their livelihood. The unemployment figures, 2.2, for the year 2011-12 says that employment is not a problem in INDIA but lack of skills are, which increases the productivity and wages/income. INDIA is stuck with subsistence wages without proper skills for its masses that can raise their incomes and reduces their exploitation. It is hard to deceive an educated population on matters of what the State has to offer for a good-life. The State should focus on making them independent and not dependent…

Inflation is Sticky...

RBI once again has disappointed the market by not improving the liquidity in any form. It is just kicking the can down the road. Here is the CPI inflation data for past 12 years and we see that CPI climbed to 10% since 2004 where it remained until 2008 and fell to 9% in 2009. And after that it is moving between 9-11% till 2013.

Keynes said that wages and prices are flexible upwards and they are rigid downwards. In the above graph we see that CPI is elevated at 10% since 2004 and has not come down below 9 % since 2009 which supports the Keynesian view that the CPI is now very sticky around 9-11%.

If we take a longer period view, say 50-60 years, then again we find that CPI inflation in INDIA has remained near 10% since 1977 as shown in the graph below;

Inflation in INDIA is a deep structural problem and the supply side hardly supports the demand scene of a billion people economy…

Exports Must Increase...

Article;
RBI-may-cut-CRR-on-Jun-17-policy-rates-on-Jul-30-BofA-ML

Comment;

Our export sector needs a push in the form of a depreciating currency and lower interest rates. The RBI is battling inflation CPI, both food and fuel which is nearly their current levels (10%) since 2004. We can not deny that this inflation is sticky and rigid down wards. I think we should let the people witness what happens when the RBI changes its base period for inflation and what happens to the prices… If we accept prices as sticky and rigid downwards then I think we can increase the liquidity to the market in any form- CRR or repo-rates in favor of the export sector of the economy when our currency is depreciating. I think high interest rates are affecting the export sector in the same way it is affecting the whole economy, less investment, and we want more investment. But, why we want more investment is because we have to reduce unemployment and poverty. And, moreover, CAD is a heavy concern. To eliminate the deficit exports must increase…

Exchange Rate...

Article;
RBI to Intervene in Forex Market Only to Curb Volatility-D Subbarao

Comment;

I think Subbarao is right when he says he is not targeting the exchange rate. I agree that it is futile because exchange rate tells, unlike before what i used to to think, about the stage of development. It tells us nothing.... For an exmaple i would mention the exchange rate of Japan which is above 100 Yen and now today i read that the value of Indonesian rupaiyah at 10 000 i mean it is so cheap, the currencies, and cheaper than INDIA. So why target a level? Cheap Goods and Services increase welfare through trade (better income) but it is an irony that the government bets on another people (foreign) income to increase demand for their products and internally we fight in deflation...

A Stronger Rupee Will Attract More Investment...

Article;
RBI Gold Curbs Seek to Keep Rupee in 52-56 Band

Comment;
If the RBI buys dollar it will depreciate the domestic currency and will not help the currency to trade within limit, 52-56. The Indian currency which is still near 56.50 will depreciate further and will worsen the CAD. We know that when we buy a currency its demand goes up and it becomes stronger and when we sell its supply increases and it depreciates. The current scene points that the Indian rupee is depreciating therefore it is worsening the CAD. We are paying more rupees for every dollar, we are sacrificing more rupees every dollar, our condition is getting worse, we are getting poor. If the RBI really wants to keep rupee trading 56 or less then it will have to sell dollars and not buying it.

Only a stronger rupee will attract foreign investments. If we are getting more inflows by spending on a stronger rupee we should spend. The current situation is that foreign exchange is flowing out of the economy due to a weak rupee...

Gold Demand And Prices Will Go-Down...

Article;
Poke-Me Government is responsible for India's Craze for Gold

My Comment;

Gold does not depreciate like iron, it rusts, which makes gold a top choice for backing steel coins and paper currency, it is an ultimate investment which even during recession pays well. Every government has some gold for bad times; even IMF accepts gold as security for a loan. People feel secure near gold and nominal prices can not go below zero because its demand as an investment may decrease but gold and gold-rings are very popular during marriages. Therefore there is no doubt that gold is not completely useless. But as an investment they are not safe when the banking has made paper-gold and other better paying instruments. Therefore, its physical quantity in not a restriction, now, because nobody wants their gold now so that we can manage the demand. What will happen when every body wants to redeem the same day because they are expecting a 20% decrease in prices and they need the money now because government has banned trade in gold except jewellery for an unlimited period of time. I think which is the case now and demand for gold and its prices will become less volatile and become constant, which could be the best assumption. The price of gold can not go above but can go down because its demand as an investment has become zero. We have reduced its usage, its use. Its demand will go down; its price will go down too (expectation)….

Gold (Consolidated)...

All the prices, including gold and stocks, depend upon the level of employment in the economy. The main reason for fall in gold prices is the recovery of the countries form recession, especially the US. The stocks market in the US is showing signs of recovery and people are diverting their resources from gold to stocks, which (gold) was a good investment during recession. Recently the stock market in the US has achieved the heights seen in 2007 just before the sub-prime-crisis which is responsible for the recent gold price crash. Moreover a strong dollar has kept the demand under check. But in INDIA gold prices are going down because the economy has touched its limits of expansion. The unemployment rate in INDIA fell to 3.8% in 2012 and the economy is still handling the hangover. The CPI is still around 10% which has made gold unattractive because real prices are way below the nominal prices which is expected to fall with inflation because of the RBI's commitment of low and stable inflation. Nominal prices (real prices plus inflation) depend upon inflation and when inflation falls nominal prices fall too. The nominal prices diverge from real prices because of the objective of FULL-EMPLOYMENT. Both nominal and real prices increase upto the level of full-employment but after that only nominal prices increase because production can not be increased. And when real prices do not increase people prefer selling instead of buying because inflation is too high.

To elaborate I would like to take, those who disagree, to a situation. “Other things remaining constant, level of employment and income constant. A bubble, say in gold, bursts with a government decision that it will never put its money in gold in any form, directly or indirectly. Or simply the government will never buy or sell gold in any form. And I think this situation will have a devastating effect on gold prices. Nominal prices are very much higher than real prices. And in the long run nominal prices tend or converge to the real prices which is always lower than nominal prices, it’s an expectation not a prophecy, may be just mine. And everybody will try to sell gold at the same time. Prices will start moving down unless everybody who wants that gold gets it, and market will undergo a correction, a downward spiral. And at lot of wealth will go down the drain. But people who have a job and lot of cash will gain from this situation because prices will come down because, again, due to low economic activity. Luckily not that low as in a housing collapse because that is a labor intensive industry and generate a lot of employment. People will go through a loss because of gold and will save more this time. Consumption will lag behind. Prices will come down definitely. And, if in this situation prices come down that will mean that we can, now, buy more than before. And, if we have a lot of cash then we can buy a lot more.”

The level of unemployment can tell us how much gold-prices can rise in future if we are thinking as an investor. Unemployment at 5% and employment near 95% because it is the capacity we have, to expand. Our unemployment rate in 2012 was 3.8% I mean full-employment because after that production can not be increased because labor is fully employed. International trade, apart. Gold prices rise and fall in conjunction with other prices and wages. It moves with demand. If they rise gold prices rise and they fall too. Atleast the recent unfoldings suggest that gold prices fell almost 20% and then WPI fell 4.5 %.

C Rangarajan said the gold demand may go down which is contrary to my view. With decline in inflation real returns on gold will increase because inflation is going down. We can purchase more by selling gold than before. Lower prices will attract more buyers on the expectation that prices will go-up one-day. Lower prices are an attraction to the buyer. This is what an expectation does. It should be a gain. He says that we need to reduce gold demand. But low inflation will make gold more attractive and affordable than before because real returns (inflation adjusted) will be high. It is strange that gold demand increases when inflation is low and decreases when inflation is high. High inflation will make it unattractive because prices will rise more than the price of gold.

Credibility of the central banks is more important than backing your economy by gold. The purpose of the gold is to hedge against inflation and price rise. But that is from an investor’s point of view, the central bank needs only to make credible promises regarding inflation. Their words are more important. In today’s world where recessions are frequent and have been accepted as part of trade cycles and common we constantly need to infuse money and demand. And, in this period of crisis even if the central bank has too much gold pumping more money will erode the value of gold too as in case of money. It makes no difference whether we have gold or not. Pumping more money in the economy will only mean less value for our gold and money. It is inevitable. These days gold has a value only in the eyes of common investors. But that is a myth too. Gold can never restore the value of money once lost. It only compensates in form of the amount of money but that is subject to decrease in value of money also because inflation rises every year. The inflation we see at 2% or 3% is a gauge of increase not a constant value. It also means that gold is losing value with the same rate unless you increase your investment. It is same as depreciating currency, amount increases but value decreases if other prices rise too much. In times of high inflation central banks increase interest rates and economic activity declines and gold prices fall too and therefore it is good to put your money in inflation indexed assets that are paying higher interest rates. Any investment is just a myth as long as inflation and inflationary expectations are not properly anchored. In this world only words have value and gold has a value as long as there is a buyer.

Our Policies and CAD...

The RBI infuses liquidity but they say CAD is a concern.

The economy is in expansion mode... Interest rates are coming down and the central bank infusing liquidity through open-market-operation (OMO) and cash reserve ratio (CRR). We are going see an uptick in demand and prices, especially stocks, in the next six-months. I think we have accepted inflation as sticky especially CPI. It is still near around 10% (CPI). Moreover CAD is deteriorating but it opens room for exports. I do not think we need to worry too much about imports because rising prices will itself put break on demand if demand and prices rise too much. Why the government and the central bank is worried about worsening trade and current account deficit, they are not paying for it. They are only concerned about the foreign exchange which they actually do not have. They should concentrate on exports and foreign exchange. I think high interest rates are hampering growth of exports. The central bank should give a boost to the export sector in form of lower interest rates and the government should reduce export-tariffs. The government has a huge stock of food-grains therefore it should sell it and earn foreign exchange. This is a short-run approach to our problems in the long-run everything becomes constant…

My Aggregate-Supply-Aggregate-Demand (AS-AD) Model...

**This one i wrote back in 2004 but never had an opportunity to revise. Now, everybody is talking about AS-AD models....

The classical denies the possibility of a deficiency of aggregate-demand and of equilibrium below full-employment which is true. But after that if demand increases it can not be fulfilled without raising the cost of production and consequently prices.

But if at the same time government maintains a reserve capacity for labour and capital within the economy through means of taxation, together, they can help the economy raising output without a rise in cost of production and inflation. Taking the globe, as one whole, there would be much reserve capacity to offset an increase in demand in some region of the globe. In short, the role of modern government and institutions is the one which provides stability of prices, as have been emphasized. Generally, the government and other institutions are not included in discussions in prior models. But under disequilibrium government and other institutions should intervene and its role must be the one which stabilizes the market and price-level.

Price-stability after full-employment can only be achieved if government and its institutions maintain a reserve capacity for labor and capital.

In the Classical theory, aggregate-demand is determined by the supply of money and changes in money supply can be assumed constant if the economy is in equilibrium. In the Classical-Theory the level of output is determined solely by the aggregate supply of labor.

In the figure below, the intersection of the aggregate demand, which slopes downward towards right, where the supply curve becomes perfectly elastic, determines full-employment, which is actually not, since a reserve capacity is maintained by the government and its institutions and at this the total quantity of goods and services produced is completely sold-off. The equilibrium established will be as follows;

Op* is the price level, Oq* quantity produced and q* and qg is the reserve capacity maintained by the government.

To make it a dynamic model we can assume that in the next period when population increases and money supply is expanded it would shift the demand curve to the right and the new equilibrium will be as follows;

Op* is the price level (same), Oq** quantity produced (more than before) and q** and qg (less than before) is the reserve capacity maintained by the government.

We see that if the government maintains a reserve capacity and uses it in times of crisis it can boost output and employment without increasing prices…

Our Rate of Growth of Power-Consumption Coincides with Our Growth-Rate...

Article;

Growth Calls for Proactive Policy GDP Numbers Challenge the Government

Comment;

In the last three decades our rate of growth of power consumption has coincided with our growth rate. Both are around 6%. The growth-rate of power consumption is an important indicator of our growth rate- the rate with which the economy is growing. To cut short, the rate of growth of power consumption rightly reflects the rate with which the economy is growing because it is the speed with which we are producing goods and services using power. Therefore if we really want to know our actual growth rate we should refer to our rate of growth of power consumption. It is an important index if we want to know about the growth rate of our economy…

INDIA Should Specialize in Labor-Intensive Products...

Article;

Big Trade-Deficit with China Excellent

Comment;

India is labor rich and wages are low compared to China therefore India should specialize in labor intensive products. But, since people do not have skills and the economy technology, our productivity levels and per capita income is low. The writer says we need to export surplus… Therefore from this point of view we have a surplus of food grain stock and we can export the surplus. Indian economy is good as far as production of food grains is concerned. Since India is land and labor rich it should specialize in agricultural products and export the surplus. Skills development is another area where the Indian economy can cash increasing productivity of the masses but needs investment…