Do not compromise on food...

RBI last time reduced key-rates on a off date which was also a signal that it has made up his mind to pass on over the effect of low oil and low transport cost to the price structure of G&S... The government has also contributed towards low prices through fiscal consolidation commitments... Both have worked-out to take the economy to the next level... Even though the government has done little to the revenue side but by targeting its spending better through cash transfer has reduced the cost of public-distribution... Both, the RBI and the GoI was determined to bring inflation down... For instance the rationale behind a different base-year is yet remain unexplained that what did the country achieve from just a mathematical-manipulation? Both have worked a lot to reduce inflation and improve the supply side... In a country like INDIA 10% inflation is consistent with 10% growth rate... It is a supply-constrained economy... but income must also grow more than inflation to contain the purchasing power and demand, actually full-employment... So definitely, probably the case for a rate is high due to advocates of a low interest rate regime... Inflation definitely again is not a problem if real wages increase, or at least remain constant... That would also contain the negative effect on demand and growth... Demand is actually the money... more money-supply increases the volume of money in hand...  The GoI advisors also underscore investment in infrastructure... to remove one of the major road block to investment, because without affordable transport products will find it difficult to create demand... We are restricted to the urban areas, but with a 60% population residing in the rural areas, need retailing facilities... Centre of development nearby villages should be promoted to create job opportunities for youth... We are inviting so much of capital investment but if our supply side does not improve especially food... it will result in inflation and high interest rates too soon... between periods of short trade-cycles... more cycles relative to peers... too much frequent changes in expectations... Supply-side will keep the INDIAN growth-rate volatile... too much fluctuations... If we import good food it will have a positive effect on human-capital... Low interest rates are a good opportunity to invest in food...  

Agricultural demand...

More competition, more supply, even from imports and simple FDI too should keep prices in check for a larger set of consumers compared to producers subset... farmers are also consumers... And, a good thing is that a farmer does not buy grain, they are sellers... it is the excess of what he can consume so his food problems are partly solved... if any farmer does it he is making a mistake, because he is then buying it from the market at a higher price... not wise... food problems are for the rest of us... Villages are full of good and nutritious food... most farming is done in small villages... but it is devoid of good education and close markets... The long-run trend found in the west that as money-supply has increased more supply of goods and services has kept prices in check except oil... is opposite of what the quantity theory of money says... In short, lower prices ahead and the region is also ahead in terms of jobs (quality too) and the standard of living... I do not know about Europe but as far US is concerned, after Paul Volcker (a former fed chief) inflation remained under control within the comfort levels below 10 % even after increases in oil prices... so to reduce subsidy market is the best strategy...  Food is problem for those who is not growing it... it is a problem for others... So food prices rise or fall it does not impact the rural-population nutrition charts... Extreme poverty is a partial condition... Not a general observation... mostly attached to cities... More farmer income will directly benefit the industry... And when 50% population of INDIA is seasonal occupied by the agriculture... it is major source of income... a big sector... a lot of population is dependent on agriculture... alot of demand will be generated... This will work in through the multipliers (actually accelerator)... The more industry will pay the more it will reap... The government is increasing cost in the middle... Agricultural subsidies will be paid by the market... They would invest in storage... Market is competitive it would cut the costs... When it will become profitable more investment would follow... INDIA is populated... Scale is too big for investors... Just like a cheap and volatile share... Volatility increases the risk for investors and returns high... The more you can buy the more you can sell... more profits... Very good investment...

INDIA, China.. on the same page...

China wants to avoid capital-outflow and real-estate bubble... No doubt, it has reduced the bubble-fear by a consistent monetary-policy since 2010, which deflated it, but high interest-rates, later, choked demand which is the reason behind falling growth-rate... If China wants to increase its growth-rate it must reduce interest rates, but capital outflow, in search of higher returns would reduce investment in the economy, more in favour of the US dollar, but Chinese have already overinvested in the US and US dollars... More, Chinese money in the US will not reward them because the US is already capital rich... The desire for higher interest-rates in the US (probably) would not materialise because the US interest-rates are already rock-bottom and the economy is going through the liquidity-trap, means interest-rates will remain where they are for an indefinite period... So, Chinese money-flowing in US may not be rewarded as expected anytime soon... Moreover, when Chinese money flows to the US, it means more money-supply, lower interest-rates and a depreciating US dollar... The whole point is that the time is not right for investment in the US economy or Chinese money will have to wait longer for better dollar and interest-rates...  China is falling in to inflation again and again, means it also needs to improve supply-side (like INDIA) so that inflation remains under control and bubbles deflated... INDIA and China are almost on the same page as far inflation is concerned...

Liberal leanings...

Everybody needs a hike... capital and labor ... even the government... we need an institution to decide for returns... the central banks are run by economists...  then why we have wages and income to be decided by. the market, which works with a lag and sometimes the market rejoices beyond the resources... creating inflation in the middle... If Fed can print more money (QE) and the governments has had a coin idea...  Then why not during the slump the government reduced the stress on households during low demand and low wages/income by postponing its taxes to a later-date for households... except jobs... austerity is a bitter pill... Why we use a contractionary-policy when we need more spending (more employment) more demand and again more wages/incomes... He (Obama) should have used the trillion dollar platinum coins (much alike) for his expenditure, public-expenditure, and should have waived taxes which was a positive for the economy when he reduced taxes on the middle-class, few years back... economists backed it up...  Ricardian equivalence says the public internalises the taxes by government and that it would not affect public spending...  But, when government reduces taxes it increases demand... (the US example middle-class stimulus)... The government, in Europe, should post pone taxes, example is same... The ECB, too, should give the economy an interval... More emphasis on spending, inverse of taxes... public-private too...

Railway's privatization...

No organisation can survive without right skills to produce and market its product... Even our PM believes in the skills-shortage and economists under-scores his vision... Firms, especially the Indian one’s, have not much scope but to employ unskilled and give them on job training... That is how they are running since inception... but, now firms are demanding skill-ready employees from the government so that they do not have to spend time and money to get them job ready... Skills are also important for productivity, wages/incomes, demand, production, employment and growth... Therefore, any policy, even FDI, if leads to these conditions within the domestic economy should be promoted... Moreover, the long-run assumption that labour-supply is fully elastic on the natural or subsistence-wages/incomes is not valid and the evidence of the Indian-economy points that the economy easily starts overheating which is actually very good for wages and income... Weak bargaining power of labour and inflation is responsible for the natural-rate or the subsistence theory...  Moreover, more firms relative to the labour-supply will certainly push wages and income, and will lead to more demand and growth... Therefore, if we have to breach the subsistence-wages-trap, either Unions should be empowered to bargain or at best inflation or prices must go down...

Cash lower-oil-prices...

Today the RBI surprised everybody, from the corners of Industry to the corridors of the politics... The sudden rate cut from our Governor, on an off-date of the official-review, is also a signal of a pro-business, pro-growth mindset of the RBI chief which was first manifested in his avtar as Chief-Economic-Advisors in the last government, before... In short, a signal that he (Rajan) is not against the government agenda... His flexibility also shows that he will go a long-way with the government in fulfilling its objectives... I’m sure Narendra Modi has a very good plan to take INDIA to the “original-position”...  Nonetheless, the real cause of so much confidence in the inflation glide-path of the economy (beside Modi) is so much dramatic fall in the oil-prices after the exploration of Shale (a kind of fuel) in the US which is a major contributor to the downfall of the Oil-Empire and as more wells will be found all over the world prices are further likely to go down... It has also other reasons like that cost for oil-producing countries are much below its market price and they will converge to their true-value, close to its cost, because more and more investment will flow to earn margins... So, as more players will enter-market price competition will follow... Even now we have countries like Venezuela and Argentina who have their cost high, as compared to the Middle-East, are facing current-account losses... mainly exporters, importers as well-off because of their current-account gain... and it likely to continue for a longer-time... INDIA is among its beneficiaries, it is mainly an importer... Nevertheless, oil directly contributes to the transport-cost and a 50% fall in the oil-prices should bring in 50% relief in the household fuel-budget... It will atleast put Rs 1000-1500 extra which could be spent any where... In addition prices of other articles will also come in line, more money in our consumers’ hands, and ultimately more demand and growth... It is going to reduce prices all-over... Times is right for the government to target-subsidies better and pass on the fullest benefit of the global fall in the crude-prices to the public... We have a very-good paper by Paul Krugman on Economic Geography and Increasing Returns which concludes that lower transport prices help reduce prices and prosper industries within a geographical-region... Lower transport-costs are very good for expansion of demand and growth... Once more, thumbs-up to the Indian policy-making...

QE in Europe will delay recovery...

Europe should learn from Japan that as far as unemployment is concerned QE will help, but, deflation may persist long... The rate of inflation tells that there is a downward-bias... which either might be a demand problem, because unemployment is high, but, again, it may also depend on the eagerness of firms to hire because they have unsold inventories, or, means, oversupply, a supply-side-problem... Inflation tells the true story... But, when the QE will start, firms will expect higher demand and they will, with the help of QE – labour is cheap, capital is cheap, demand more with reduction in the unemployment-rate... But, more supply when already there is a glut will keep on reinforcing lower-price expectation among the agents, they will delay consumer-spending till QE is over and firms fear-rate hike, again US is a good example... Therefore, if somehow firms start fearing (actually expect) that interest-rates will, now, go up soon, they will resume spending, but, since higher rates also affect the public-debt, the European central bank is in no mood to hurt the austerity-drive, because that would increase the burden on the government (i think)... on the public, too... QE will put the economy, when interest-rates are rock-bottom, in the famous Keynesian-liquidity-trap because of people’s expectation, they will post-pone spending... Even, now, we can not deny that Europe is in the trap because, again, interest –rates are at their institutional minimum since a long-time...

Reserve-requirements, the CRR...

The case for maintaining 30% of the CRR in foreign-exchange and gold will ultimately improve liquidity and money supply to the economy because we (banks) are, now, less required to maintain domestic currency... It will increase domestic liquidity, by the same, 30%... (And, with supply-constraints it is likely to increase inflation)... When money-supply-improves it affects the long-run-rates which ultimately guide short-run-changes... Thus, a 30% increase in money-supply will also reduce market rates around 30% in the medium-term... For-example, if interest-rates are near 10%, a 30% increase in money-supply, will reduce rates by atleast 3%, to 7%... So, it is almost equivalent to reducing interest-rates... RBI (i think) in a good-spirit does not want sacrifice macro-economic stability at this cross-road... However, RBI’s fear that a strong-rupee will deteriorate the situation is baseless... Because, when your currency becomes strong it also depreciates the reserve-currency which is actually a again, actually it is a kind of speculation, gold (too)... But, again, when you have so much big presence in the market, protected by tariffs, you can actually affect the prices or real-prices... By just moving the threshold (30%)( up-and-down) it can affect demand and supply and ultimately the price of our reserve-currency and gold as per the RBI’s requirements to shape expectations... No central-bank is run for private business... it is run for price-stability and full-employment...   

Avoid overheating...

Public-spending... when inflation has an upside-risk under all the supply-side constraints, including infrastructure-deficit... it is also a supply-side-problem... no doubt... and will lower inflation after the gestation-lag... But, why the government wants to stoke growth by putting pressure on the level of natural-unemployment which increases pressure on wage-growth-demand, wage-cost-push-inflation... Nonetheless, recent data on unemployment-rate in INDIA shows it is close to that level... The government’s argument is that it wants to increase revenue by expending more... So there is a lot of trade-off that will take place... At one place it (the government) is increasing expenditure, means money is going-out and when it will crowd-in investment and growth, money will come in... So, it depends how much money is going-out and how much money is coming-in and what is the productivity because economist oppose deficit which is not good for any type of productivity (increase in the ability to produce more as per demand)... No doubt, more government expenditure will help increase wages/income, demand, growth and revenue and more profits due to supply- clot which is due to industry’s clamour for less competition... Less competition because they do want to be bogged-down by price-competition (read imports), especially retailers in the food-segment, higher exports in few categories is also responsible for higher domestic prices... The high population growth rate of the region has been traditionally criticised, because with so much of skills and productivity gap, a large part of population is still dependent on the State for jobs and livelihood which is mainly responsible for higher deficit and debt...  When unemployment-rate is close to NAIRU and supply-side is still choked by inconsistent policy, public expenditure will increase inflation... The time is not ripe for public-spending... Economists favour public-spending when there are supply-side problems and the economy is below full-employment... Supply-side problems are not difficult to identify and the government should commit to the target set by the RBI... If the government does do it, it will repeat the mistake of the last government of overheating the economy...  Nonetheless, if the government delays its employment-guarantee scheme or make it more infrastructure and human-capital oriented that would help... Atleast, there would be less pressure on resources especially labour... Market will compete less for labour means less wage-push inflation... And, lower-inflation will lower interest-rate, on government-debt, too....

Germany should not fear QE..

Europe is almost on the verge of using the unconventional method the Fed (US’ central-bank) used to increase income and demand, but Germany is objecting for its own reasons... Germany’s way of increasing exports is different from the regular practice... currency depreciation... also because it is unavailable... It is member of the European Union and uses the Euro to increase the German living-standard... Yet, it has carved a way-out to give its exports a thrust... Internal devaluation, opposite of the external-devaluation... When there is more money-supply, there is more inflation and more depreciation... It depreciates the home currency which people buy with their own currencies... they can buy more local-currency and demand more local products...  prices fall relative to the quantity of money... they get cheaper... But, prices can also fall when money-supply and exchange –rate remain constant with a consistent policy regime... called internal-devaluation...  Germany have cut-down on wages and prices... which made its exports competitive... Germany has a trade surplus... Nevertheless, QE means more supply and inflation which the Germans object... But, i think that fear is baseless because even if we go through the evidences the US present, even after so much of the QE, inflation barely reached 2%, even Japan is a very good example... when bank-deposits and currency notes become substitutes at the Zero-Lower-Bound (liquidity-trap)... Europe is close to that area... It is hard to achieve inflation because people expect lower-prices during a slowdown and any stimulus would make them expect that prices will fall because of more production and already unsold inventories... It will keep on reinforcing lower price expectation... when people are already feeling low inflation... The old quantity theory of money is no longer valid in the case of developed-world, far from supply-side constraints... Germany should not worry QE, inflation would not rise and ultimately when QE is over, all the other members will recover by letting the prices go down... the German way... If everybody can pursue depreciation to come out of depression, after the end of the Gold-standard, and were successful, why they all cannot practice internal-devaluation... Because it is no longer between Germany, France, Italy...  It is now between the Euro-area and rest of the World, the competitors are changed... I’am sure when everybody will try to cut wages and prices as per the needs there still must remain minor differences in price and wages across the Union... They even exist within any industry (differences...)... The Euro-area is a big cartel (now)... But, in a democratic world people are more powerful...  And, in Economics Perfect-Competition is the ideal market which maximizes welfare “of the people”... People consume more, save more and the economy invests more... But, hardly observable anywhere... Perfect-Competition also means highest possible competition... In any market price competition is the father of all competitions... And, German’s have learnt it right... There is actually no reason to think the paper currency as scarce when the Central bank can print them to reduce unemployment and misery... But, Germans have mastered the art of increasing real money-supply and real wages and income, means lower-prices... QE will actually help Germany... It will increase its people's income through increased money-supply in the Euro-area...

Hmm... Does it matter...

 

 

Hmm...  FD (fiscal-deficit) the question is “how much it should increase?” So... straight away equal to the rate of growth of population and labour-force... My point is that if population increases 10% per-year-ten-year, then the economy’s needs should be met with 10% FD every-year and to keep all the labour-force absorbed in the economic-activity, and with the same reasoning, one more FD (fiscal-debt) should match that pace too, even monetary-policy should increase money supply with the same speed, because people needs, again, are increasing, the same rate... These are all in one way or other are expenditure from all the (above sides)... and the velocity of inflation should also be of the same magnitude... Because nobody actually knows what should be the right mass of money we need to get to the potential growth-rate... which is also affected by the rate of technological progress.... In that case we might have an unemployment-rate above the natural-rate... Like many Western countries... the rate of innovation in the society has slowed down and the population rate of growth is also below par... Their money has power too... But that is a different stage... INDIA is not that developed so that people have to work longer, good skills can increase the productivity (invest)... I know you must not have read something like this anywhere else... But, full-employment is the real objective and good employment with good income... People need more money...  Apart, from the text-book... Does it matter... Why we are delaying in supplying the demand... The government has a greater role... Long working hours too...