Progressive budget...

Any budget is judged in terms of its effect on demand and supply in order to achieve investment, employment and growth... There has been a push by our FM in the budget to increase investment in the economy especially by the crowd-in-effect of infrastructure, including railways... A lot is dependent on good infrastructure when the private-sector is overleveraged and facing problem of bad-debt... To improve the condition of infrastructure in the economy the government has proposed to bring tax free bonds along with a Rs 70, 000 crore investment which is good... However, how the government works-out the complete plan is yet to be seen... It has ideas, like PF funds and oversees bonds, but it needs to be implemented.... Rs 10,.000 crore has also been allocated to the railways... The government has decided to change excise duty on petrol as Road-cess and invest the money in the rail and road infrastructure... The money we will get selling gold coins could also be channelled to infrastructure... In the power sector we need more companies in production and distribution to increase supply and reduce prices... According to our Railway minister rail-fuel-cost remains high despite of lower diesel prices but high power bill... Power should be made affordable for consumption and production, too... FM has given money for many big power projects... The RBI has around $ 20 billion in gold reserves which it can put in circulation for investment... Infrastructure is a must for rapid development and will create alot of demand within the economy; demand for other things will go up...

The government’s focus on infrastructure is indeed a brightest-spot in the budget and after that corporate tax reduction from current 30% to 25% in the four-years which is also expansionary in terms of income and demand... It will get translated in lower prices of goods and services in the years to come... For this year, corporate-tax reduction should be around 1%... Moreover, reduction in duties of several products will increase their demand by becoming more affordable... However increase in surcharge by 2% on super-rich will improve the revenue... Hike in service tax to 14% will affect consumer, but will increase revenues... All the small increases in taxes here and there seem justified as long as fiscal-deficit target of the following years are concerned... The government will have less and less fiscal-space as we go ahead every year even when the economy is yet entangled in the supply-side constraints... roads, storage and marketing policies... The government is likely to find out more ways (more resources) to bridge the gap between the public needs and means...

In order to give rural population a demand boost the minister has allocated Rs 5, 000 core additional resources to MGREGA... But the budget was not very vocal about its direction, its orientation to make it more human-capital and infrastructure based... The government has given Rs 1500 crore for the skill-development of the rural youth to get them placed according to industry demand... The FM has underscored the need to match skills with job-opportunities...

The government has tried to cover all in universal healthcare and pension under the social security system...

Allocation to a number of schemes which will directly affect poor-people in terms of cash transfer... As far as demand and multiplier is concerned it is highest for poor because they spend all of the cash and save little... It will also give room to divergence of funds to other goods and services... it will increase demand...  

The government has used all levers to increase demand and investment in the economy with a push to increase infrastructure facilities...

Whenever you decrease tax it means you have given extra purchasing power to agents and they will spend-off the money on other heads... it is an incentive in terms of savings and demand... it goes viral...  

 

Greece can refinance the debt at lower rates...

One thing notable about Greece’s is that interest-rate on government-bonds is exceptionally high compared to its euro-zone peers, but, debt is not too much high in comparison. Others yields are closer to the ECB rates which leaves a lot of room to refinance the debt at much lower rates... Greece government can sell bonds at yields little higher than peers, but much below their current rates... it will find the buyers easily... Debt to repay debt, but at much lower rates ... Greece’s debt, probably, is not so much burdensome, if we adjust the interest-payments... They are sky-high... Not, sure who decides bond-yields in Greece, but it must be the treasury of the government, but, again, there is no central-bank to run QE to reduce overall rates... Government bond-yields decide direction of other assets in the economy... and hope other rates are also high... This could be a factor responsible for high unemployment and deflationary bias... Interest-rates are very high during recession... How does it will help the economy in recovery? Moreover deflation is high... High interest-rate and deflation points that real-interest rates are too high which is deteriorating the investment and employment... There are clear reasons why investment is not picking up within the country and unemployment is high... Internal-devaluation to increase competitiveness and employment at a time when the country can go for domestic demand will even hurt the domestic income and consumption...     

Oil prices will help...

Inflation is closer to the upside-target even when we have used a higher price base-year and also a change in methodology. A change to a higher-price base-year for inflation will reduce inflation relative to the low base-year. A low price base will show higher inflation... All these changes in the base-year and methodology have made our inflation target achievable... And, if we will retreat to original base year, definitely the inflation rate would be higher... more than 5.11% and hopefully less than 6%... A rate cut is warranted only when our inflation-rate is lower than 5%... and, probably the effect of lower oil prices is yet to show-up in the latest inflation data for the last quarter or later... We are definitely on a glide-path... an all around lower prices because of low transport cost/prices... But, no doubt economists and policy makers need data to decide and justify the course, for more informed decisions, too... It is not always necessary for the RBI to keep the inflation rate lowest, also because of price-rigidity, but it is important to keep it low and try to stabilize at that level... means more consistency in policy, not too much frequent changes... INDIA is a supply-constrained economy, not only in terms fuel and energy like the developed countries, but also due to bad marketing of other essentials of life, mainly food... A rate cut would help exports competitiveness. More money-supply, more depreciation... Good time to build-reserve, too, more depreciation...

Land-acquisition...

No doubt Land is scarcest factor among all factors of production and without which no single production process can take-off because you need land to set up machinery or a place to start any process... But, there is a difference between land used for setting up infrastructure (transport and education units) and setting up factories... There is a natural question that beyond land, capital and labor both are scarce too and we cannot borrow internally too much without reducing or crowding-out capital for the private sector, that which investment is our priority or which can be delayed and ofcourse the crowd-in effect? The use of land to improve transport and schools and colleges are our immediate priority because without an educated workforce (the income and demand factors) and a good transport-system it is very difficult for the goods and services, and people to reach eachother (supply creates demand)... and INDIA’s supply-side is very weak... The government should bring the land-acquisition-bill only for transport and education centers and should leave the land-acquiring for companies/factories, between the buyer and seller and moreover fertile lands should be protected by bridges, least possible usage... Government should only be concerned with land acquisition which is most important. And, if the government is expecting demand then it must be ceased as an opportunity to increase revenues. Just like oil and hike in its duty...   

 

Also, delay the nightmare (EU)...

Negative nominal interest rate also means people are discouraged to save and are encouraged to borrow... but, when even high money supply does not stoke investment and demand... precisely means in the liquidity-trap when people expect prices to go down because of very-low interest-rate cost and low prices, beyond inventories, hamper new investment and also because of uncertainty over unexpected-lag or delay in rate-hike...  Instead of saying negative interest rate in EU, i would like it to call a zero-lower-bound, or liquidity-trap in the union... It is good for investment but bad for savings... People do not prefer savings in banks in the trap... And, to improve commercial banks balance-sheet the central-bank prints-money... the Fed never accepted, but, the QE was started only when savings in bank because of liquidity-trap went down and they had few monies to lend... QE meant we cannot reduce rates more and to increase inflation and reduce real interest rates more money is needed... Most of the money went off-shore in expectation of higher yield that’s right... Lower saving and higher spending is not consistent when unemployment reached historic-highs, means low income and demand for the economy and could only be achieved higher by more money-supply (QE...)... It was, and is, all manifested in low consumer-spending and inflation... People and firms were delaying purchases... because debt was too high... The economy was overleveraged but interest-rate remained low even when capital became scarce... Nobody tried to boost savings and everybody tried to increase investment... The EU has done almost the same mistakes the US did... Except differences in private and public debt levels... different hues across Europe ... But, debt is debt when it goes up too much interest-rate should follow to curb bubble, a smooth transition... a bypass to price-stability and full-employment... means more upward-pressure on incomes to create demand even for exports through depreciation and internal-devaluation... It has now been in fashion to give domestic employment and income a boost through competitive-devaluation, external and internal... More money-supply will increase more money in the importers hands... he will import more domestic products... Income should be a very important variable in all the models... It increases demand... and more importantly real incomes... As the economy approaches to full employment wages and incomes start rising which is also good for the fiscal picture... It is sad but the EU has to be dependent on tax-payers money like every other government for public-debt-relief... It is sad because high debt-now will force the government to increase tax later... Austerity in this situation will fast-forward us to that high-tax regime nightmare... We are almost trying to pay debt in the same period, the recession-period... Apart from genuine austerity as per this period, an equitable distribution of interest-payments over next generation, a kind of delay in correcting the debt-picture, will definitely help reduce the hardships of unemployment in this period... More employment means more income and demand... Taxes, too... Ofcourse the Government can delay longer...

Reduce indirect-taxes to boost growth...

Lower taxes will help contain the purchasing power inflation erodes... more income in one’s hands when inflationary expectations are receding will help either improve demand for goods or will reach (savings and) investments... In the short-run it might be a solution to secure supply, but it will hurt poor-people... those whose incomes are  not affected by taxes, but, again, indirect taxes are paid by all and to lower prices, increase demand and growth we should also consider a cut in indirect taxes... demand is a crucial driver of growth, it will benefit all.. Much of the Indian-population does not pay taxes... it will include all... industry (in the form of income –tax) and others in the form of lower indirect taxes... Everybody is benefiting... However, the government needs to rationalize taxes on the very-poor... The minimum-wage earners... But, no doubt the solution must either come from the government or the RBI... How the economic-policy helps contribute to contain the purchasing power of minimum wages... more specifically the subsistence-wage (trap)... shows its credibility... We have unconsciously created a labour-class at the bottom... who cannot demand wages more than inflation and devoid of other benefits too, good-food, and education and health... a true human-capital... The government should aim at increasing living standard of this section because they are being exploited in case they did not get education and skills to get employed and pay-taxes...  Good revenue...

Greece's troubles...

Greece’s debt is not in its currency which is risky... possibility of a default... If the ECB has not bought all the G-secs (which is too risky) itself then it can give the domestic creditor a relief by buying the bonds... The point of discord between the new government and the ECB is that the government wants its debt to be forgiven in the name of employment, growth and Greece’s people... This is one of the condition which can make life easier in the country without a central-bank to run QE to increase inflation and reduce real-interest-rates for businesses and a cash strapped government which cannot use fiscal policy to reduce unemployment... Unemployment is unusually high above 25%...  And, inflation is in negative territory, means deflation...  Unemployment high and deflation means demand has been severely affected first by overleveraging, and then by the austerity, spending cuts and taxes... Spending cuts means lower employment and taxes, even less employment... It is definitely a demand problem... The supply-of money, either from monetary-policy or fiscal-policy, to the economy has choked... Or, the other condition to make life easier is have their own central-bank and mint, to correct misadventures... (a euro-exit...) and to improve money-supply...  Look at the US, UK... and other country with own currencies... It is troubling the public.. If EU wants to be successful fiscal union, too is required... is right way to do it... Not blackmailing... The deed is done...

Industry, must try to lower real-interest rates...

Government-spending on infrastructure is concerned because without transport, roads and railways, producers will find it difficult to create demand for their products, they cannot reach each other....” if they are unable to supply, they would be unable to create demand.... Moreover another factor which creates demand is wages/income, beside supply... But, both culminate in higher growth-rate...   education and skills, intangible infrastructure, are also a sine-quo-non for a sound industry and a sound life... The more educated and skilled you are, the more the ways you can make your life good with others equally productive which is measured in numbers, the number of zeros in your pay-check... The more you earn the more you pay taxes... And this is the raar between capitalists and the government that if they pay higher taxes they should be given priority in benefits.... the government should favour rich... a long-time battle... They have a indirect control over the monetary and fiscal-policies... But, the capitalists in INDIA are unaware of the real gains, real-interest-rate in this scenario... They are even lower in case in savings... Inflation has kept the value of debt low in real terms and if the industry increases its expenditure, now, it will stoke more inflation; means lower value of debt... Industry has the (this) power...  The industry can always offset the effect of higher interest-rate by investing more and generating more inflation... We must try...

Infrastructure...

Public spending in times of fiscal-consolidation from a rating point of view may be not so good but we have also ample reasons not to believe the rating agencies. The last recession we saw in 2008 is largely attributed to banks misconduct and wrong ratings in the US... They painted a good scene of the economy while debt and inflation soared at risky levels (the sub-prime-crisis)... Economist criticized rating-agencies for this. Therefore, if we think that rating agencies have a credibility-problem that might be true... Public-spending on infrastructure when the private sector is constrained of capital and infrastructure, itself... will help pick the economy steam, growth, because we are supplying what the economy really needs to increase quality of life... We want inclusive development of all people and regions and that should be best gained when we increase knowledge and skills, a productive work-force, a true human-capital... he will also pay taxes, revenue will increase... The government is exploring ways to finance the infrastructure-deficit... This best way to finance this is to borrow from the West for long-term where interest rates are record low or allow near complete FDI... That would also help improving foreign-reserves, meanwhile... The RBI too can contribute through lending its gold which lying idle in the reserves, and corporate should be included to bring in private capital... The GoI is considering PF funds to finance infrastructure in the long-run, good-idea...

Agriculture, again...

INDIA is a big exporter of cereals... a big part is going out of the country and prices can go down if we reverse the situation... if everybody else's expenditure on food will go down other prices will follow... food inflation in cereals was always high... but does this price reach the poor farmers pocket... grains are bought at an earlier date and is sold (by the government) after months... Prices go up every month, but this gain does not reach to the farmers... our poor farmers are not very speculative... beside big fishes... those who have control-over storage and release of food grains to the markets... i do not think the farmers have all the control to market his produce... the difference between the farmers price, the storage price, the whole sale market-price and the retailers price... with-out much value-addition... only increasing the market cost... The GoI should help farmer store without cost and sell to the whole-sale market when he thinks prices are right to run the cost and earn profits, not the middle-man... Our 60% of population live in villages and dependent on agriculture for a living... The middle-man chain has depressed agricultural income... The profits are not reaching the farmers and also cost the GoI subsidies and MSP determination... All these have made agricultural unattractive to other professions... Land is most scarce... for housing too... agriculturalists low income is against demand and growth... Everybody else’s income is increasing faster...   

RBI action signals expansion of balance-sheets...

Yes, Rajan this time too made everyone surprise when he did not move interest-rate as per the popular expectation... a rate cut... But, he was right that he had no reason to cut-down except oil-prices... Inflation data is awaited... Governor’s job as it seems does not enjoy complete independence in stoking employment and growth and the public-side is always under pressure to perform in the face of formidable opponents... Who just say the opposite... always try to get limelight by making burning comments... to get space in the voters memory... Issues are very important in political-economy... and most importantly the majority issue since resources are scarce....  Here the government who does all the public-spending need more followers... Politics runs on populism... But, the work of a RBI governer whois responsible for money-supply, inflation, and employment directly through its monetary-policy is again a tough job... It needs reconciliation... Anybody has noticed or not the RBI has always, in most occasions has tried to improve liquidity in the market under expectations... Even Subbaro under pressure from government tried to cut down the cycle by easing rates earlier than required... Food prices started coming down but the rate cut pushed them again to 10% and then again he started tightening which the governor continued when he joined the bank... Even today the RBI has reduced SLR to release more funds for the industry... Banks can now lend more at current rates... kind of expansion... Many at economic-times noticed... Few injections through open market operations... whenever injection of money to commercial banks increases in any form... it affect interest rates... bonds offer a good guidance... Even today bonds yields decreased... money-supply make the commercial banks and bond traders adjust their margins... Since money-supply has been increased through a reduction in SLR bond yields have gone down... Recently, both the RBI and the GoI tried to give infrastructure a push through many relaxations... Even the RBI has announced reduced CRR requirements for banks lending to the infrastructure sector...