Jobs and Bihar...

Jobs are the yardstick to measure growth in real terms. How many jobs an economy creates to keep its labor force fully employed by the use of policy has become the new norm. Both monetary and fiscal polices are aimed at minimizing unemployment and maximize employment. Monetary policy is the role of the central-bank and fiscal-policy is with government… Any government can affect the creation of jobs by managing its expenditure but it should avoid overheating (high inflation). When the economy reaches its limits, close to full-employment, prices start rising because labor is fully employed and production can not be increased, therefore only prices increase not the real-supply. Therefore it is not rational to apply a loose money-policy, more expenditure. But as long as there is unemployment in the economy we need to push employment in the face of a weak private sector. There are both types of issues involved with expenditure crowd in of investment and crowd-out of investment. For a developing region crowd-in is more relevant, initial government expenditure kicks investment cycle, government spending becomes important. As an example, skills development is important for industry and for creating more jobs. When a government spends to create jobs it creates many more jobs in other places. Demand for a teacher will demand more things and people in job to satisfy its teacher’s demand, who will be the maid, who will be the house-keeper, accountant, many more too. We need appropriate spending to keep the work-force and work match each-other. In other words, more jobs to absorb the labor force. Therefore unemployment-rate is a major determinant of the success or failure of a government. Our rate of population growth rate decides our growth rate. Higher rate of population growth rate can create higher growth rates.

Bihar’s population growth-rate is 25%, per ten year and GDP growth rate is 9 % which shows that that the region is performing well below its potential. If population is growing 25% then the economy can easily achieve 20% growth after deducting frictional and natural unemployment-rate. Natural rate of unemployment is the level of unemployment which remains all time in the economy. It moves around 5%. If we calculate the average growth rate to achieve in ten years we will get 20%. The economy consistently needs to grow 20% every year to maintain long-run potential growth rate at 20%. Unemployment rate in Bihar is 8.5% which is much above the natural-rate of 5% which raises questions against the government policy in an economic perspective. Why Bihar can not achieve 20% growth rate? And, why the unemployment rate is high? How we can overcome this shortcoming and what are the factors?

Recently it was in news from Bihar that the government has no plans to use funds from the Centre and most of them have returned back to the centre. MPs do not spend their funds too. There were too many irregularities in MGREGS and corruption charges too. Money allotted under Mid-day meal remained unspent and was returned too. Money provided for the Naxal-hit area was barely spent and the government was accused of being soft on Naxalism. Corruption has been a rampant theme of daily life. Most of the funds under various welfare programmes were appropriated by the politicians.

There from an economic perspective Bihar is underperforming in terms of unemployment, behind Gujarat... Low expenditure has resulted of high unemployment and to increase employment and growth we need to spend judiciously and right. Funds are there to be used for growth and development, and, unspent funds would indicate neglect of distress a common man is facing in his life and if we are given funds to improve the quality of life of the region’s people we should spend. Politicians elsewhere demand more funds and spend more funds but here politicians do not know where to spend. All the MPs who have unspent funds should invest in education and skill development. MPs do not know what to do with the money they are provided. They have no idea where to spend productively and how to contribute to development.

Bihar’s high unemployment rate indicates that the government expenditure is not enough to maintain the population and jobs match each other. To keep the population independent and not dependent on the State the government should create as much jobs it can by spending on the targeted population. But inconsistency in the use of funds under welfare schemes has given rise to the idea that politicians are not competent as they ideally should be. They have no idea how to realize goals of unemployment and poverty reduction. Bihar has a high population growth rate and to meet the demands of growing and young population it needs to create employment opportunities and to achieve this end the politician must well know in advance which things they should cater. Bihar desperately needs a good manifesto…   

A little ban on exports…

Article;
High rates to make things better -Raghuram Rajan

Comment;

Rajan is right when he says high minimum support prices (MSP) are hindering disinflation. But why the government increase minimum support prices? Is it legitimate in the Indian context? The answer for the former is to woo agricultural income but, again, the question is why? Is there any need to support farm prices or is a total vote-bank politics or sheer populism. For the latter, higher MSP is against the economy. The government is trying support farmers because agriculture is not very profitable, it is not receiving enough investment. But, now, we have become a net exporter of food-grains… But is it really fair to export when the domestic demand goes unmet and prices of food grains are a problem for lower interest rates for the industry, for agriculture, too. You see there are many questions the government needs to answer… The government has artificially made the prices overshoot the common man’s budget because of bad policy. The government banned exports of onions when there was scarcity and prices crossed all barriers, but it did not ban export of cereals when their prices are hovering above 10% because prices at home would crash and the stock of food-grains in the government coffers would suffer a loss and farmers would lose… a little ban on exports… It is a case of populism just before elections… agriculture in INDIA is a great constituency… Higher MSP when actually we can reduce prices, bring down inflation and interest rate is not doubt against the economy…

Fight inflation in all ways...

Article;
Rich nations must think about EMs while framing policy.

Comment;

I think INDIA’s problem is inflation and not unemployment as in the US. Much of the money that Fed printed took the route of developing countries like INDIA… INDIA soon was among the best investment destination which means a lot of investment fled to its shores… The money we are seeing in the Indian stock market is the result of too much foreign-investment… domestic investors are keeping their hands-off investment because they think prices will go down and that would be appropriate for buying… The monetary easing in much developed world is responsible for high inflation in countries like INDIA… Economists warned the emerging world of the hot money, back in 2011, flowing out of the developed world’s central bank and pressed for credit control because that might result in bubble… But we ignored them because CAD was a concern… But now we are in different position we have reduced the CAD to around 2%, now sustainable... We are in a better position as far as foreign currency reserves are concerned and we too have a good reserve of gold… The need to run after foreign currency has gone down and this time we need to think of lower prices when the money flowing out of QE is going down… I think Rajan should concentrate on the inflation front… a lot money went into construction through foreign investment and has probably created a bubble there… Outflow of some foreign money is good from the point of inflation because demand will go down… I think Rajan should fight inflation in all ways…

Outflow's good...

Article;
US federal reserve must provide guidance on tapering stimulus.

Comment;

It is really important how we deal with tapering because it has many consequences…no doubt we have managed to bring the CAD down but we should not forget that we have unsuccessfully subdued demand of imports because of smuggling; especially gold… the government levied an import-duty of 10% to compress demand for gold that kept imports down… nevertheless exports too showed improvement due to depreciation… So we have to weigh positives contrast negatives... If we increase interest rates it will help the economy from many sides… It will make the currency strong… others will demand a strong currency foreign inflows would improve… due to interest rate differential, too… The real effective exchange rate, adjusted for inflation is 58-60 which says the currency is overvalued at 62-63. The monetary-policy too is showing an upward trajectory given the inflation levels, especially CPI… And, if we go for a depreciation exports will kick and would keep demand for imports in check due to a weak currency good for CAD… But, if inflation had not the main problem we would be able to push for more jobs… But we also have monetary policy in the foreign exchange market, buying and selling of foreign exchange… Every country which faces some unemployment tries to push growth through depreciation. In other words inflation because loose monetary policy results in inflation and depreciation too…But INDIA is already suffering from high inflation…Outflows will bring prices down…   

The interim-budget...

Today our Finance Minister presented the interim budget for the interim period the government has left in the office. Our FM lacked enthusiasm… and this was reflected in the stock and gold market. The gold market gained more value than the stock market which is a sign that given the fiscal picture and inflation we can not hope too much from our stock-market… RBI’s stance too…

 But, this time too our FM managed to bring fiscal deficit down by 2 bps to 4.6% from the targeted 4.8% of GDP. To achieve this end he has cut plan expenditure by 79 k crore which is good from the point of view of lower expenditure and lower inflation… It’s like a feather in our FM’s cap… from the point of view of a good rating too… For the year 2014-15 he has set a target of 4.1% which does not worth a comment because it may change as the full-budget may change the goal post…

The FM continues 10% surcharge on super rich, income more than 1 crore. However, he said he would like to see higher income tax for the super-rich in the full budget...

There are no sops for common-man except reduction in excise duty in the automobiles which is expected to boost demand in the sector and growth for the economy... Excise duty cut is a positive for the consumers… lower prices… However, excise duty on mobiles has gone up…

Skill development gets same as the previous year 1000 crore and has been underlined as the priority with other basic facilities like education and sanitation…

The government has kept fertilizer subsidy unchanged as the previous year…. Good for food inflation… The FM has increased interest subsidy on educational loans…

But, Petroleum subsidy will go down and prices will increase which will result in higher transportation cost… bad from inflation point of view… But good for petroleum industry prices and profits will go-up…

Our FM has repeated the RBI’s words that inflation is still a problem and especially the food inflation but no indication how to tackle the problem…

Nevertheless it was an interim-budget and is liable for changes in the due course… like the next government may increase the outlay in skill-development…

Let us hope the full-budget comes with a better targeted expenditure because too much spending in a supply constrained economy stokes demand resulting in inflation… The budget has a scope to target better expenditure…

Jobs are most important because they make life easier. Good paying jobs are also good from a revenue perspective. They make a person independent… not dependent on the State. The government should push the economy into income tax zones…

Correction...

Article;
The worst isnt over for emerging mkts .

Comment;

Keeping in mind the monetary-policy and interest-rate trajectory (of the US too) correction in the stock-market makes sense... the glimmer of market, so far, was due to foreign investment, the liquidity flowing out of developed countries Central-Banks, of actually, Japan, the US and UK, Europe and China, too, actually, all the major regions. But some are some are now retreating… especially China and the US… China due to a debt hangover is expected to put breaks on easy liquidity… the US, too, is reducing the stimulus as unemployment levels come near the target, And, if it is INDIA how we can neglect the RBI’s role to stimulate growth by affecting the real-economy by lowering prices and increasing savings by offering higher real interest-rates… Therefore demand is going to be deterred by a less loose monetary policy regime… But, we still have loose money-policy in Japan and Europe. Nevertheless, the US will have (about) zero interest-rate as long as unemployment falls to 5.5%... Our domestic investors in INDIA are keeping their hands-off investment because they expect prices to go down due to restrictive money-policies in the major part o the world, and in INDIA, itself; including China and the US… three major economies… they are tightening the money… Investor will wait for more correction in the stock-market… because it will be most profitable for the investor to buy at lowest price and sell at the highest price… CPI is still above the comfort zone and the RBI will tighten till it falls 6%... The market probably will see a major correction…

Wait for more correction in gold-prices...

Article;
Time to focus back on gold and silver.

Comment;

Gold is in demand because it is a safe-haven investment asset, which means its demand increases when other instruments are not performing well in terms of returns… but, that does not mean that it is dumb in other seasons... Buy and selling of gold goes uninhibitedly in the market… Gold is also in demand because of protection against inflation... Combining the above two from a value perspective we get the conclusion that inflation is high during booms so gold gives low real-returns, nominal prices minus inflation... its value in terms of quantity of purchasing... its purchasing power... decreases… but, nominal prices increase, therefore it is wise to sell gold, also to pay for expenses because of high inflation... But, during a slowdown when demand, inflation and prices are low but, again, real return is high, it makes more sense to buy/invest (in) gold because it is cheap... Moreover, monetary-policy is also responsible for changes in the price of gold… when demand and inflation is too high the central-bank increases interest-rate which also brings the demand and price of gold down and vice-versa… All prices in the economy move in the same direction, therefore when we expect demand and prices of other things to go up we can also expect the same for gold prices… Therefore, during booms it is good to sell gold and in busts it is good to accumulate gold. Other-things also work on the same principle… we buy when prices are low and sell when prices are high… Let us wait for some more time for action from the Reserve bank to reduce demand and inflation which will bring the price of gold down, too. Demand for gold will go up… due to recession and lack of good investment opportunities, also… Same for silver, too…

Higher interest-rates also stoke demand and growth...

Article;
You cannot control inflation by hoping to choke demand.

Comment;

Controlling inflation through higher interest-rates has many positives too... Not one but many… Firstly, it encourages people to save more and reduces the pressure on lending rates to go-up, we need to match deposit growth rate with the lending growth rate to maintain stability, and, Secondly, it reduces prices and increases real wages. We can not underestimate these two effects because it does the same thing lower interest rate will do, stoke demand, increase employment and generate growth… Higher interest-rate will increase interest income and, as have been said, real wages/income will also increase... in both ways demand is going up; employment and growth will follow… We have to choose which-way we want to go… We want to appreciate in the nominal terms or in real terms… Generally we make the argument that inflation and wages/income should increase with the same rate to keep the purchasing power intact… Everything appreciates in the long-run, but the value of currencies in going down in real-terms; we need to pay more every next-year for the same things… the value of our coins are going down… If gold is a metal and is appreciating in value then why not the value of our coins… We can say that metals used in the coins are not scarce relative to gold, but they are scarce they must also grow in value and buy more things every next year… In real appreciation the value of money increases with time and in nominal appreciation it goes down… 

'Mighty' dollar...

Article;
How the almighty dollar has tightened its grip on global finance.

Comment;

Dollar has an exorbitant demand due to its four main functions- as the currency of the United States (most powerful country), as a reserve-currency, as international-trade currency and as an investment asset. Therefore, if there is a crisis in some part of the world the demand for the US dollar is likely to remain robust in the other regions. For example, when the US and Europe fell in recession, 2008 and after, the demand for dollars in Asia remained high. Dollar has a high demand because it is the currency to invest in the US, considered safest, no risk of default. Every country which has a considerable reserve has invested in the US. China has invested a lot in the US government securities… The dollar is WORLD’s reserve-currency, every country is accumulating reserves, even after paying for its imports and there is no upper limit for it. China has accumulated trillions of dollars…  It is the currency of international trade; every country needs dollar to pay for its imports, especially oil (fuel). But, that is changing slowly… recently INDIA and Iran agreed to settle a part of oil-trade in the rupees… It is also used as an investment asset… People also use to demand dollars for investment because other currencies may devalue (depreciate) and dollar may appreciate. They will gain…We can’t imagine how with so much of the QE the value dollar emerged unscathed… The WORLD absorbed all the dollars…

The CPI as nominal anchor...

Article;
Junk the Urjit Patel report.

Comment;

Urjit Patel’s Committee Report, especially the CPI as nominal anchor for targeting inflation is based on experience of the US, UK, Europe, and Japan… These countries have adopted the CPI as proper index of loss in the standard of living because we generally buy in the retail market and rarely in the wholesale market... In all the above four regions they have adopted complete price stability and full-employment as the objective of monetary-policy. Full-employment is an indicator of demand in the economy… Full-employment is more revered because of tax gains… They have sacrificed complete price stability in favor of full employment, except Japan. Nevertheless, all the above four regions, including Japan, are targeting inflation by pursuing loose monetary at home… Their inflation target is 2% and the Patel Committee is recommending a 4% inflation target with a band of 2% which means the actual target is 2% to 6%... In this range the RBI will not be bothered to raise interest rates, and, above and below the RBI will increase and decrease interest-rates, respectively, to control demand and prices. Indian target is much liberal… Inflation is a sign of economic activity which all the four regions are trying to achieve and they are targeting the CPI which has become a standard practice… But inflation, the CPI, especially in INDIA is much above the comfort zone because unemployment rate fell below the natural-rate due to aggressive monetary and fiscal policies during the recession… Everybody is targeting inflation some from up and others from down. Inflation-targeting in not new to INDIA… We have always heard that the RBI comfort zone is 4-6%, even if it is the WPI... The only issue is the CPI v/s WPI… Updated unemployment-rate data is not available for the Indian-Economy and that which is available indicates overheating… How we can ignore the unemployment rate… even if we consider the WPI we have a case for tightening… a 25 bps rate-hike is not going anyways…

Imbalance...

Article;
Revise pay under minimum wages act MNREGA every 5-years.

Comment;

MGNREGS has created shortage of unskilled labor in the construction which has pushed up wages and prices in the realty sector... Both the construction and MGNREGS mostly consume unskilled labor… But, MGNREGS provide minimum wages and the private construction sector has no such limitation… The construction sector is giving higher wages to lure labor which has created a wage-price spiral resulting in higher inflation; moreover rural wages too saw an increase, and, is too responsible for higher demand and inflation due to supply-mismanagement… This year too we had a good monsoon which may will result in higher rural demand, especially for food and fuel and prices will increase, and, wages will follow, in the construction too… Therefore constrained by the supply side we have no rescue against prices rise until we control demand in the short-run and improve supply side in the long-run… We know prices in the construction in INDIA too have seen the higher side… why…? …because wage cost has increased… Therefore we need to constrain demand in the construction which is creating wages, demand, and, inflation… To control inflation we need to discourage demand for houses, not much… but only to discourage too much divergence between the nominal and real prices which is also to say in an indirect way to reduce inflation… I think the RBI needs to reduce demand to supply in the construction by increasing interest rate… Over-supply in one sector and under-supply in the second (imbalance)…