GST, Real-Estate and the Monetary Policy...

There might be three tax rates for the three classes rich, salaried and poor... 28%, 12% and 0%, respectively... The government has said that tax slabs of 12% and 18% could be 15% keeping revenue neutral in the mind...

Zero rate on things bought with wages by poor is quite encouraging, 15% for the salaried is not discouraging too... 28% for rich only on lux and sin goods would help revenue and would improve health outcomes for all...

Flexibility to deal with demand/supply shocks by adjusting prices to the economy would help the policy makers to increase investment/employment and growth during slowdown...

A lower tax would incentivize businesses and consumers and increase demand for investment and employment...

A low and single tax rate would neither incentivize nor disincentivize the subjects... and thus neutral...

Over supply in the real estate has resulted in low demand relatively, therefore there is a downward pressure on the prices and price expectations also for investment which is holding back the recovery...

Builders are rich people who can hold in the expectation of higher prices ahead, but it may not materialize soon due to limited income of the people in the short run and lower price and expectations by investors and buyers due to higher supply...

Therefore, to increase real income of the people the builders might lower prices that increase demand in the short run...

INDIA has a huge demand for its population which increase higher price and price expectation in the medium to long run...

The builders might invest the profits at other profitable locations to increase returns... At lower prices more people could afford buying and investment...

If prices fall 4% builders could earn that money from bank deposits...

Why the government should bear the burden of recap when it was a fault of the Monetary Policy, due to whatever reason, government pressure too, more populism, more public spending at the cost of the private sector...

Resources are limited, when we divert them, labour and capital, it should be more productive or lead to lower prices, demand and growth...

But, this was not the case... Nonetheless, it ultimately goes to the RBI to solve the problem again leading to lower prices, higher demand and growth...

Again diverting resources from their current use might increase interest rate and create uncertainty which could be solved by printing more currency which could be used effectively, more productivity uses and lower prices, demand and growth...

If it reduces cost and prices there could not be much argument against it... Printing more money if it leads to lower prices seems right...

A resolution to dilute government debt every year would help improve the finances if the government helps increase productivity and reduce the price-level or inflation and expectations seems justified...

The public debt of the sovereign is the result of profligacy in the past, fiscal deficit of 3% (inflation adjusted) should be allowed... not over it in any case... It would help all...

INDIA,s long term growth is supported by fundamentals... Higher rate of the population growth, employment and demand and higher investment and supply and higher growth...

Higher unemployment, lower wages and lower interest rate and lower prices and cost are signals for more investment due to higher prices or inflation and inflation expectations due to higher demand and supply in the medium to long run...

Higher fiscal deficit if it increases productivity, lowers prices and interest rate would increase demand and growth…

Nonetheless, INDIA’s growth has reached 6.3% in the current quarter (July-September) which could easily go up due to lower interest rate and higher investment and employment and supply which could lead to lower prices and higher demand and growth…   

Demand-Supply the same economic-activity...

Though Monetary Policy is said to be a tool to control demand during high inflation and full employment, but it also decreases supply due to higher borrowing cost lower investment and higher unemployment which reduce supply.

During high inflation it is best to cut rates to increase supply due to higher prices which would contain demand and prices. For businesses higher prices, lower interest rates are good for investment and increase employment and profits.

If we have reached full employment higher wages would help contain employment and demand and a zero interest rate would help increase investment and supply and growth.

Demand and supply are different names of the economic activity when both increase prices, interest rate and wages increase and when both fall prices, wages and interest rate fall.

Laissez faire or free market or the invisible hand philosophy or ideology is true in the long run, few years, even Keynes proposed government intervention to increase employment during underinvestment by the private sector, lower prices, wages and interest rate and liquidity trap in which interest rate cannot go below zero.

In this situation inflation could lower real interest rate but would also reduce real wages and demand which together means lower demand and inflation further, however lower prices due to zero interest rate would help increase employment and demand and investment and supply and inflation faster, Pigou. Public investment/employment might help recover fast.

Bitcoin may rise and fall too...

Demand for the Bitcoin, its use apart from just investment to share profit on of its price or nominal value... to enter the market for exchange of something buy/sell or increase investment/supply/demand/prices/employment in the economy (or world economy) and further increase the all the above variables and profits, would decide its actual value...

 Till now it’s used largely for investment which depends on the demand and supply of the coin itself and not on the actual demand and supply conditions of the people, the investors or firm including the coin itself or industry or economy or globe which mainly affect real profits ie inflation adjusted after consumption and the price level which increases all kind of risks...

Its value is only little backed even by inflation, other prices have not increased much which is a perfect bubble in the short run and long run too...

To much higher prices could anytime trigger selling... higher price higher supply... at least risk is there... lack of data on the demand and supply of Bitcoin could make it difficult to manage its value... but who will manage volatility... s/he or it must be able to manage demand and supply, both, which could help minimize risk and make rational decisions...

People would supply more if they see price fall at higher value to buy at lower prices again to sell higher... an intelligent investor would do the same... buy low, sell high...

Bitcoin prices too might definitely rise and fall with demand and supply of people...

Lower prices and borrowing cost are more obvious...

Lower prices and real wages are important not the inflation and nominal wages and incomes because it is the actual (real) purchasing power which is important for spending, government would also have to spend less if prices are low, deficit would be low. Lower prices would also increase real savings and investment spending...

If policy makers commit lower prices in the long run it could increase spending even if income is fixed due to wage rigidity and lower borrowing cost would help increase supply and lower prices further...

They should let demand/supply/price/unemployment/employment/investment increase-fall upto zero real interest rate and zero nominal interest rate 0=0 which is the limit for full investment employment or full employment of capital and labour, too, it would help demand/supply adjustments at a higher level, at which we could achieve full-employment and price stability and full growth...

If they want to achieve growth they might commit lower prices, interest rate cuts and/or tax cuts...

We cannot deny that higher prices also increase supply and in the absence of exact data on demand investment and employment might increase demand and supply and help keep price stable would help equalize demand and supply...

There is a constant adjustment in demand/supply/prices/unemployment/investment/employment to achieve the natural real rate of interest at which there is neither inflation nor deflation and there are price stability and full employment and full investment and full growth based on automation/innovation and the population growth rate which might further reduce price-level and increase demand and supply and the economic growth rate and the global growth rate...

****If foreign investment is allowed despite inflation and expectations, why domestic investors hold? There are no external capital controls... INDIA has enough foreign exchange reserves; currency is going strong hurting exports... A rate cut would boost both domestic investment and depreciation and exports... Monetary Policy is not consistent to achieve the underlying objective, growth...

The Model...

Demand and inflation would increase when (real) wages/income/savings/investment will increase and that would happen when prices would fall because in the short run income is fixed or is lower due to unemployment.

The neutral or natural or zero real rate of interest would neither increase/ decrease demand/supply/price at full employment with neither inflation nor deflation Wicksell...

In this situation nominal interest should also converge to zero, zero real interest rate and zero nominal interest rate...

When it is the time to expect inflation through real wages build up (after full employment) amid low oil prices (lower transport cost) which was a key for inflation the Fed has increased interest rate and interest rate expectations which would lower demand/supply/investment/employment/inflation and demand/supply/investment/employment/inflation expectations leading to lower price level or inflation and inflation expectation.

At full employment and full investment supply would be highest which would tail or converge to (highest) demand with more investment/employment and trade and would increase the economic rate of growth.

Prices might rise or fall depending on demand and supply.... which increases first..., in trade cycle... but in the short run there is a limit in which price can move on demand or supply.

Due to lack of data on demand/supply for whole economy the Fed might miss the inflation target, but it is easier to gauge inflation in the short run through the consolidated data on demand and supply in the economy.

Exuberance is common… higher demand-higher supply and lower demand-lower supply and price changes or volatility or inflation deflation.

The stock market is an ideal market place or model of the economy...

NPA's Bidders and the two-Zeroes...

The NPA’s Bidders must have a credible plan otherwise they will fail too, only lower cost could not make them profitable because cost may increase with inflation, wages and interest rate could increase...

They should be judged on the basis that they have innovation and space to increase productivity and reduce price and increase demand to withstand change...

The stock market is a model market with demand and supply...

But the price level is volatile therefore there is little risk in the short run but if you can hold it would increase investment if you have invested at the right time or lowest price...

There is a limit in the short run in which price can move - between low price and high price - buy lowest and sell highest...

Price is lowest when there is no demand or zero demand and supply is highest and it is highest (stock price) when the demand is highest and there is no supply...

Price moves between these two zeroes, zero demand and zero supply...

Individual stock cycle is different from the market cycle...

Wait for the last...

The Insolvency and Bankruptcy Code (IBC)...

The process should be wary of diluting assets which are likely to revive with demand and growth...

If refinancing or restructuring could make them working it should be the priority...

We should not forget that the economy is yet to fully recover from the previous downturn and disruptions which might turn the investment with growth in the economy...

The attempt to resolve bad debt in a hurry for recovery in banks might negatively affect the medium term demand and growth...

Restructuring of loans for which could revive with growth and become viable should be given time...

Like fiscal austerity during slowdown would further deffect growth, harsh austerity of banks would destroke jobs and growth...

Bank cleaning might sell assets which might still have some scope...

Banks should clean the longer term bad loans first or older bad loans... They have also a responsibility to save jobs too...

Recapitalisation was urgent because it would increase banks'' capacity to deal with bad loans and lending capacity...

Even to refinance and finance at lower interest rate to already sick units that could recover...

Long run is uncertain but still could have some probability to make the bad, the profitable...

Let the growth bring back that would separate good from bad...

More resources during high growth would help consolidation too...

GST and Oil importing countries...

Ideally everybody should pay equal taxes... Increase in taxes to restrict either production or consumption in unlikely to give result unless prices increase above a certain threshold, as per the price elasticity of demand for which tax should be levied according to the same, which would help achieve the objective, discourage encourage demand supply, sometimes which could be inelastic...

However, a single tax rate would neither promote demote demand supply and would be neutral to value added to GDP, a single low rate would incentivize value addition and should move within a band to adjust to demand and supply shocks to the economy...

If somebody is earning higher he would pay higher tax in the nominal money terms eventhough he is paying the same rate... Many other countries levy low and single GST...

The rally in the oil market is the result of supply cuts and not explicitly due to demand... However, the advent of other energy resources like renewable energy has eroded the competitiveness of the oil leading to surplus capacity in oil...

Oil is losing its competitive advantage... However, higher oil prices have been traditionally associated with booms and inflation... But, this is not the case now...

Prices have increased due to supply cuts and little for demand... Oil countries are exporting inflation to the importer countries... Importing countries might object...

It reduces real wages and demand... also for the former countries... Actually higher oil price are cutting demand and supply and profits too...

They lose economies of scale... and market share among each other... Cheap oil would help avert competition increase demand and share...

Moody's upgrade, first in 14 years...

The Moody Credit Rating Investors Service Agency upgraded INDIA’s sovereign rating from Baa3 stable to Baa2 positive after a span of 14 years during the Atal Bihar Vajpaye – BJP term to again in the Narendra Modi term for the same party which might mean that the BJP style of functioning the economic machine has been viewed as superior to the rash style of the Congress.

However, this could be the first credit rating upgrade by any agency followed by others to confirm the pattern that INDIA has succeeded well in unclogging business and investment domestic and external by maintaining stability in the economic parameters since it acceded to power few years back amid gross mismanagement and dwindling growth which recovered during the current government even after the experimental demonetization and the GST with more room to changes according to the evolving situation and the required flexibility to arrive at the objective.   

All the economic indices improved during this government including the growth rate despite change in the methodology which the World Bank attributed as per the latest one to arrive at real-GDP and GVA with inflation, current account deficit and fiscal health under control coupled with burgeoning foreign investment and stock market.

Foreign investment has increased record during the BJP rule despite low domestic investment due to debt hangover and commercial banks’ bad assets.

The recapitalisation of the public sector ban was taken by Moody in the right spirit even though it could put some pressure on the government finances going ahead, but it saw it as helpful for domestic credit scene, both the banks capacity to resolve NPAs and push for loan growth.  

Nonetheless, the formalisation of the informal sector through cashless economy and digitisation would improve the transparency and public revenue.

Both, demonetisation and the GST moves have been viewed as important reforms which the rating agency praised.

Nevertheless, the upgrade in INDIA’s rating would further bolster credit and investment in the economy.  

DeMo Anniversary...

Taxes are a tool of redistribution of income to factors of production, mainly labour and capital, and reduce inequality which have a far and long reaching effects on demand and economy and is the scope of economics...

The governments have already tried to unearth black money by politely asking the rich to declare untaxed income, but it did not change their behaviour...

Even noted economists agree that DeMo is a short term pain for the long term gain... 

DeMo was to end shadow economy or black money economy which do not pay taxes by curbing the cash use and bring money to banks, interest rates have gone down after the note ban...

People understand that it is good for the government revenue and spending on schemes like MGNREGA and direct benefit transfers...

DeMo has been a success when viewed from the point of view of limiting corruption and it has almost full people support...

The purpose of demonetisation was to bring unaccounted income or black money to the banking and increase tax compliance... what is wrong with that?

People must pay income taxes, wouldn''t opposition agree with that...? By limiting transactions in Rs 500 and Rs 1000 notes the government tried to stop black money transactions and bring money to accounts...

Demonetisation to digitalsation were not a hit on all the black money, everybody knew people would not give up easily, black money in cash was just the tip of the ice-berg... But, would restrict the generation of black money...

It was a signal that the government won''t tolerate corruption and black money and the move was the end generation of the black money...

The government showed that it would not deter take strict action if it is in the favour of image of the government and of the common-man despite criticism... which showed results in the UP elections...

World Bank Rank...

Recently in a World Bank report on the ease of doing business INDIA moved unprecedentedly 30 places up from 130 last year to 100 this year which revived the optimism after several quarters of low growth and the government still aspires to be in the top 50 in the next two years on the back of reforms it has been pursuing in the last few years and on the promise to continue to do so in the future.

The government has introduced reforms which helped INDIA improve the perception on the ease of investing money in the country which has a direct link with employment in the economy and the economic growth rate. Businesses employ people which increases demand in the economy. Full-employment is the secondary objective of the economic policies after the primary objective of controlling inflation. The supply side reforms which the government achieved during its term resulted in low inflation and interest rate and expectations and helped improve stability in the economy that could be another factor that might help business and investment.

The bankruptcy and insolvency reforms brought last year are seen to give businesses more flexibility to move out of a business which is as important as the ease of starting a business. The World Bank see this reform as vital for doing business in INDIA and help resolve the problem of NPAs which has been holding businesses from investment and the timely solution would give businesses a boost. Moreover, NPAs are negative on the commercial banks balance sheets which could impair credit to other businesses.