A little bit tightening…

Article;
Economy -Report after one-month of Modi government growth looks up inflation cools

Comment;

Boom or bottoms or investment-cycle in a economy moves with the monetary-policy. When the Reserve bank looses interest rates the cycle turns into boom or when it tightens interest-rates cycle converges to bottom. It is still early to expect the economy to bottom-out because we still might have to go through two events which can force the RBI to increase interest rates. Number one is the high-food inflation (expected, too, because of possibility of drought). The RBI again might increase interest rate to control some demand if the supply-side does not improve. And, number-two is slow switch-off of the QE in the US because a capital-flight and weakening of Rupee might again press our RBI Governor to tighten interest rates and money-supply. The stock-market in INDIA and our domestic investors are waiting for the market to correct so that stock-prices become affordable. Experts say that there is an asset-price-bubble in the market because of unsustainable gap between nominal prices and real-prices and expect it to correct with inflation, but the real stock prices will also go up). But for foreign investors things are a little bit different because they might not spent that money in INDIA, where inflation is high, and spend that monies in their home countries where inflation is low. At this point of time the domestic-investors might expect the RBI to tighten so that the market corrects itself a little more affordable to enter the stock-market. We buy socks high low and sell them high…

Now is the time...

Article;
Janet Yellen says economy still needs US Federal Reserves support

Comment;

Generally people talk about law of demand and less generally about law of supply and law of prices, too… Full-employment is the major goal of policy because sometimes the central-banks these days are ready to sacrifice the goal of price-stability for full-employment… The policy makers in the US should decide what they want to do, they want to restore full-employment or they want to fight deflation… Krugman says there is downward pressure on prices, but not negative, but again how prices can go negative, negative prices mean free goods… I think im not wrong… The FED is unnecessarily trying to push inflation and even when there is a downward pressure on prices and that makes the job of pushing inflation higher more difficult… Nevertheless, liquidity-trap is the major logic behind pushing prices higher… I think the FED has the trap in mind… But, the trap can be avoided by following the Pigou-Effect, we have papers on that… Pigou-Effect says lower prices increases real-wages and income… I think the FED has pumped much liquidity in the system and unemployment-rate is also near target… I think this is the right time to let the prices fall, increase real wages and income and demand and achieve full-employment… Attractive wages will help people join the workforce (law of prices)… I hope the US Economy has left the liquidity-trap behind…

Budget 2014…

The Budget our new FM presented on Thursday lacked winner spirit… Politics is the art of making impossible possible… I do not know why our FM felt so constrained, even of words, a good vision of five-years down the line should had let the stock prices rejoice the event… what ever it has proposed to do, fiscal-deficit mainly, was inherited by the past government… He has sought to bring/maintain fiscal deficit at 4.1% for the year 14-15, in 15-16 it will be reduced to 3.6%, 3.3% by 16-17 and by 3 by 17, a straight pick from the past government… But, it is not without reason, the position our FM received from the past government did not present many opportunities… But, a government must always present its plan in advance… It has many advantages… The government must consistently underline its VISION to increase its credibility… However, there was actually no big difference in the style of running the government and, many past events verify the fact, too… The government this year has increased the tax-exemption from 2 lakh to 2.5 lakh whereas tax on income of 2.5-5 lakh maintained at 10%, for 6-9 lakh income group tax rate would be 20%, and for 10 lakh and more income would be taxed at 30%. Moreover, other taxes are almost kept unchanged which does not affect demand much. The government has tried to keep prices lower than to increase income except increase in tax-exemption limit to 2.5 lakh... However, the job of our new FM was not less difficult than walking a tight-rope and he has managed well to keep the tone of rating agencies down. Our FM has impressed everybody with his expertise...

The budget has allocated Rs 100 to Rs 2500 crore on a variety of heads which indicates that our FM has tried to give attention to all important issues. The government looking at the fiscal picture is trying to rationalize subsidies on food and petroleum by better targeting them to the poor. The government will follow path of fiscal-consolidation by curbing wasteful expenditure. The government has set aside Rs 500 crore as Price-Stabilization-Fund to bring stability in the general-price-level by improving the supply-side… But, that is not as straight as it seems… Rupee will help when we have to buy goods and services in the domestic-market, but when it comes to international supply then a foreign exchange reserve will be more helpful… Skill development according to the Industry demand is likely to have a multiplier effect on job creation. Skill-development is more important from the point of view of per-capita income because it increases productivity of the workforce and they receive higher wages and income, demand increases…To improve the savings growth-rate of economy the government has made Fixed-Deposits attractive as compared to debt by increasing taxes on the same… The budget has allocated Rs 1000 crore for irrigation in case of drought under Pradhan Mantri Gram Sichayi Yojna (PMGSY) and many other facilities to agriculture...

The budget has tried to increase tax collection by increasing excise-duty on many items like cigarette and tobacco, and, increase demand by reducing customs-duty on many items like soaps, footwear, mobiles, and cosmetics. In the budget excise-duty on cigarette has been raised between, 11% to 72 %. Moreover, the government has increased excise-duty on pan-masala from 12% to 16%, on manufactured-tobacco excise-duty has been increased from 50-55% and 60-70% on chewing tobacco and gutkha. Moreover, our FM proposed to levy additional excise-duty of 5% on aerated-drinks (cold-drinks)… Custom-duty on imported steel items has been increased from 5% to 7.5%. Cathode TVs which is mainly used by weaker sections has been fully exempted from custom-duty. Precious stones and semi-precious stone are also fully exempted from basic custom-duties. Cosmetic, certain pharma and soaps have become cheaper after custom-duty reduction. Moreover, mobile sim-cards, domestically assembled computers and laptops, certain apparels, cotton-clothes and other products, LEDs and LCDs (below 19 inch), and solar energy equipments have become cheaper after custom duty reductions.  

Recently it was in NEWS that when a former BJP finance minister met Dr Raghuram Rajan, back in the 90s, he advised him to give construction a thrust to give the growth-rate a push… Now it has been a trend in almost all the countries that they try to give growth and employment a push by investing in the real estate sector… Real estate is an employment intensive sector and consumes mostly unskilled labor and in a country like INDIA, where the workforce is largely unskilled, is easiest to give people employment…  Therefore, like his predecessor Chidambaram, our FM tried to give the sector a boost by increasing demand for loans for more homes. The FM presented a road-map for “house for all” by 2022 and with a dream to set-up 100 modern cities with an investment of Rs 7060 crores, he did the same thing, gave the real estate a boost. 100 new high-tech-smart-cities will require more construction. Every-body knew that Modi government will give special attention to infrastructure. Moreover, Rs 37, 000 crore is likely to be spent on National-Highways to improve infrastructure and supply chain. NHs equal to 8,500 km of has been promised and another Rs 14, 000 crore is planned to be spent on roads in rural areas under Pradhan-Mantri-Gram-Sarak-Yojna (PMGSY)… The government looks very liberal as far as investment in infrastructure is concerned...

On the jobs front which is the real sector of the economy the track of the Indian economy has been not bad… Unemployment-rate of the Indian economy was around 5-6% in the past years which is close to equilibrium level… But, with a population growth rate of 17% per-ten-years Indian-Economy must add 12 million jobs a year to keep unemployment-rate near equilibrium… The recent budget is expected to add 5-8 million jobs, multiplier included, in the next 2-3 years which is less than our per year target of 12 million jobs a year… We are under-shooting our target… Unemployment rate for the economy is acceptable but the per-capita-income of INDIA is low… Nevertheless, wages and income have increased in the past few years but inflation has kept real-wages and income low and the RBI and government are trying to improve stability in prices… Therefore, on both, full-employment and price-stability we are going through a transition period and expect that jobs and prices will improve ahead because we are expecting growth rate to improve too… More jobs will be added and inflation will come down… Our Budget this year looks sound on these fronts… Satisfactory jobs growth with low growth-rates and lower inflation due to low fiscal-expenditure… Expected… along the lines…  Hope… the Indian-Economy performs better, near, 7-8%, so that we can add more jobs to close gap between jobs and unemployed…

More investment (in Railways) to increase supply and reduce prices...

Railways in INDIA is as supply constrained as the Indian-Economy itself… It is a developing economy which is still trying to manage its economy’s demand with supply and still shies away from foreign-dependence, imports and/or investment in domestic supply-chains… Any country generally disapproves foreign-hands because it can crowd-out employment creation within the economy and price competition can drive-out the domestic producers… We should be more concerned with the employment it generates within the economy and the stability in prices it restores in the market … For example, FDI in the multi-brand-retail sector should be weighed according to the jobs it creates and destroys in the sector within the economy. The number of jobs it creates within the economy must outnumber the jobs it destroys to prove it fruitful… Wherever there is a problem of low supply and high prices and there is demand, we need to scale up investment so that supply catches demand and reduce prices… Indian-Railways is a government-run organization and the number of players in the market points lack of investment and supply… Although we have a number of other transport facilities available within the economy, but nothing World-class, except Airways, but charges are high… who will pay? So the way out is to increase supply of these facilities and reduce prices… More investment, not less is needed… Setting-up of railway-lines is equivalent to setting-up lines for development… The demand for (almost) everything goes-up… As far as Indian-Railways is concerned we have the base, but we need investment in capacity expansion and modernization… which remained the theme of the Indian-Rail-Budget 2014…

The scale of consumers of Railways, as everywhere in INDIA because of high population, is so high that it is really not impossible to lower the prices and provide world-class service as we have done in the telecom. More investment is needed to increase supply… 

Value of money must increase...

Just like loose monetary-policy, loose Fiscal-Policy too is responsible for currency de-debasing... If we are going to follow China then we will have to go through currency re-denomination every-time inflation is too high... Too much inflation debases the currency and people start carrying large volumes of money which is unnecessary, therefore, countries apply currency-re-denomination which reduces the volumes of notes and makes the new currency re-denomination stronger, the new currency will be stronger. Higher re-denomination indicates loss in the value of money… But, the logic is, if everything’s’ value grows as time passes and investments we make also grow, then why the value of money decreases as the time passes… The trend across the developed countries is that their population rate of growth are contracting which means less demand for their products and they are now too much dependent on exports for growth, therefore, we can conclude that as the time will pass supply will eventually outstrip demand and prices will start falling, in one word- deflation, as we have experienced in Japan, the US and many parts of Europe… Therefore, the pattern we are observing is that prices will fall as the economy will grow and supply improves… But, prices can not fall below the lowest denomination of any currency and in this situation if we want more demand we can choose to increase the real value of money, a rise in real wages, incomes and profits… by applying a lower re-denomination of the currency... But, in lower re-denomination the old currency becomes stronger and the value of money increases… 

How to control inflation?

Article;
How to keep food prices down.

Comment;

In a supply constrained economy like INDIA where employment levels are near full and people are over-employed, production can not be increased, but in such a condition the external economy can help reducing /increasing demand/supply and reduce prices... This can be done in many ways, either we reduce import-duty on the items in which prices are volatile or/and increase export duty on the same items, or allow FDI in multi-brand-retail... The government so far has refrained from increasing export-tariff on food-products because that might make the domestic prices crash and cause loss to domestic investor who have invested in those products, farmers too. The government's attempt to crack-hoarding may be supplemented with the above measures... Decrease in import duty on selected items which are important from the point of view of inflation is likely to increase supply in the domestic market and prices will go down and increase in export tariff on same selected items will also increase domestic supply and prices will go down... Moreover, hoarders will be forced to sell their stock if they expect or see such an action from the government to reduce inflation... Cutting the middle man chain is equally important… FDI in multi-brand-retail will directly affect farmers’ income by cutting the middle-man chain... The government is concerned about domestic retail players but how we can forget that 60% (the majority) of INDIA’s population is dependent on agriculture for livelihood which is also good from the point of view of votes compared to the population engaged in the multi-brand sector... The Congress voted to power the second time because of MGNREGS for the rural area and the present government at the center should also seize the opportunity to increase their chances of wining next-time by allowing FDI in multi-brand retail which is expected to boost the rural economy. Improve in farmers income will increase demand and investment for other things and will push the economy’s growth-rate…