Slowdown and the Central Bank...

Big corrections are an oppourtunity to increase profits by lowering the rupee average cost and increase investment, lower prices shall increase demand and price expectations...

The stock market people yet need to grow up and not respond to every bad news and stay invested till the market reaches high price... They should invest slowly at least till a stock price reaches its high price and buy when the stock price is lowest possible or the gap between current price and the high price is higher...

If everybody sets a same limit price for buy and sell, everybody would gain... bid price should be low and the offer price should be a high price... It is like giving some bargaining power to the investors if investors bid and offer at same prices...

Moreover, if the nominal gdp growth is 11-12% then the real gdp must be 8-9% if we have deflator or inlation of 3-4%...

Indian businesses should think of increasing capacity and economies of scale to increase growth (of sales) by increase in exports, since inflation is low and wages (labour) are cheap in INDIA it could increase demand by increasing productivity and competitiveness... Lower real interest rate could further reinforce demand and growth...

Flexible labour laws pertaining to hiring and firing of labourers require a good social security system or unemployment benefits or claims system as in the US to support during no work, otherwise lower demand and employment could reinforce lower growth and slowdown during crisis.

Both food and fuel affect real wages and the cost of living because, higher prices of food would lower real wages and demand and higher fuel prices are translated into higher transport prices thus again lower real wages and incomes and profits because of pricier goods and services and lower demand... Lower real wages lower demand and growth...

The central bank must match nominal interest rate equal to inflation or loss in the value of money savings to contain the value of money and demand and growth and savings and investment...

At too much higher interest rate savings would increase and then lower the interest rate and at too much lower interest rate people would save less and then increase interest rate, therefore the goal is to neutralize interest rate at zero real interest rate and balance savings and investment...

Since money could be printed we cannot say that it is scarce, but it is scarce because of less production or productivity, therefore the real interest rate on money should be neutral or zero and nominal interest rate must be equal to inflation to contain price and demand and supply and quantity of money...

Oversupply of real estate has been further aggravated by higher interest rate on home loans and lower demand, a price correction is all due which could increase demand and price expectations due to slowdown in the economy and slow recovery from the last trough... This has resemblance with the shadow banking crisis in the US and China...

The RBI must better regulate the shadow banks... If home loan rates are lowered that could also help increase demand... There could be a real estate bubble in the economy which should be controlled to help maintain demand and price expectations...

The most important reform Trump may bring to the US and the emerging markets is to unload some of the weight behind the dollars status as a reserve currency and settlement of oil exports in the dollars... The US has done extremely well as far as oil production is considered which has lower price expectation in the US...

The US imports are higher because of the US dollars and a strong currency means cheaper imports... To increase exports the US must increase supply of dollars to increase devaluation and exports... Lower inflation in US has been offset by a strong dollar and has not turned exports... Cheaper dollar would help in terms of oil prices to the emerging markets...

People would buy more dollars at dips which could keep the dollar stable... US dollar is the world's reserve currency because it is more stable than others... The dollar kept its stable nature despite the three rounds of QE...

Competitiveness, Foreign-Debt, Liquidity, GDP and the Fed...

Businesses are always run on the borrowed money that is why lower borrowing cost is very important for competitiveness and demand, it directly adds to the cost and prices, like transport prices which are the key costs for investment, it can reduce the cost of business investment...

It is unimaginable that imports are increasing due to lower domestic production and more competitive imports, due to lower borrowing cost from countries where capital cost is low... How domestic player could compete with foreign players?

Domestic lower prices through increased capital productivity could lower prices and increase demand... INDIAn businesses have been unable to compete with foreign companies... INDIA's low foreign debt and more expected inflows are likely to push domestic interest rates down…

And, the private companies could also borrow abroad like the Govt which could do the same; lower capital cost... and increase competitiveness and demand and growth expectations... Though hedging through derivatives would be important... Savings import could further facilitate interest rate transmission...

The government has tried to involve savings of Europe, Japan and US where interest rate are close to zero... which could lower borrowing cost in INDIA and increase supply or productivity and lower prices and increase real wages and incomes and demand and growth and expectations...

If the Govt borrows abroad in the domestic currency and/or hedge the currency risk and the interest rate risk it could help lower prices, especially the interest rate and increase productivity, capital, too and demand and growth expectations... means higher demand/supply {and growth (EXPECTATIONS)}...

And, by opening FDI in banking the Govt could further openup channels for foreign money flowing in, more inflows would make the rupee strong further reinforcing foreign capital inflows...

Nonetheless, the commitment for fiscal prudence has further lowered borrowing cost expectations for the private sector investment... The stock markets have been slow to recognise it... Moreover, Rs 100 Lakh-Crore infrastructure investment and boost to affordable housing through bank recap and liquidity assurance to NBFCs and HFCs are great cursor for investment demand spending... The Govt has tried to double the size of the economy to $5 Trillion form currently $2.7 Trillion which also means that wages and incomes would also increase to double which would increase demand and growth...

India Inc. thinks that liquidity is a major problem for the economy, but, RBI Gov thinks that there is adequate liquidity... To revive spending reviving earning expectations are important by cutting cost and prices to increase productivity, demand and price expectations... Lower prices increase demand and price expectations, overdemand and higher prices are common after lower prices and higher demand...

'The government had changed base year from 2004-05 to 2011-12 for prices or inflation which is responsible for a lower GDP deflator and higher real-GDP in the subsequent numbers... Nonetheless the Govt supplyside reforms have also kept inflation undercheck increasing real GDP by lowering interest rate… 

Though, there are claims that the economy has not completely bottomed out form the last interest rate hikecycle and still reflecting some slack amidst the renewed rate cut cycle... Changing base year has definitely increased real-GDP to some extent...'

INDIA's population growth rate, as in every other case, decides its potential growth rate which is 120 Crore/tenyear or 12% pertenyear, therefore to get everyone employed the economy must grow 8%, after accounting for the natural rate of unemployment at 4%, on an average basis... INDIA's potential growth rate is 8% and the economy should add 80 million jobs a year to achieve the potential growth rate... The growth in labourforce decides the potential growth rate...

A 2% inflation target (by the Fed) has lowered the economywide prices expectations below to an average of 2%... The policymakers have set a price increase of 2% on each product in CPI, including food and fuel, and whenever average inflation (CPI) reaches over 2% investors would start selling stocks/inventories, because of tightmoney by the Fed and lower demand and price expectations... which could further reinforce lower price and interest rate expectations and delay in demand and growth (expectations)...

Probably the Fed would like a fast recovery in the prices and growth by avoiding lower interest rate or interest price/cost expectations that could delay demand and growth, people would hold spending in expectation of lower cost/price... Either the Fed could reject market rate cut expectations to revive growth or it should deliver a rate cut soon to increase demand and price and growth and expectations...

Moreover, recovery could take 2 to 3 quarters... It(the Fed) and, everybodyelse would like a quick recovery to potential or full employment growth... The Fed could probably try to neutralize real interest rate at 0% that would bring balance in savings and investment and price and growth expectations... means 1.6% inflation and 1.6% interest rate... 1.6% interest rate is to compensate 1.6% loss due to inflation...

Incentivising or inducing the subjects/agents have been popular in Economics for a longtime, now... Actually, any economicpolicy either induces or deduces or disincentivises or incentivises the agents in the economy for a particular outcome...

We should probably cut glaciers to get fresh water and export; water could be costlier than oil in the future... Rain harvest is difficult, but snow harvest is easy, for water...

Bank Recap, Export Model, Price Expectations, Taxes, Foreign Debt and Stocks...

We have close to $ 500 billion in Foreign Exchange Reserves, if the RBI infuses $ 100 billion to capitalize PSBs which would be close to Rs 7, 00, 000 Crore it could help transmission of interest rate cuts and credit take-off...

NBFCs would also be benefitted due to credit flows... Liquidity is also important for the stockprices... People have also delayed spending in hindsight of Budget announcements...

Internal devaluation pursued by Germany is another model, except China''s external devaluation model which looks inferior when considered from the point of view of domestic real wages which increases in the internal devaluation as inflation goes down... and also reduces the domestic exchange rate and increase exports...

Since, the RBI has set an inflation target of 6% (max side) it has restricted the average movement of prices or inflation in the economy which also means atleast 7% wages and incomes growth would be necessary to sustain real wages/incomes and demand and growth...

Nonetheless, price expectations are the major determinant for investment decisions in the economy... The 6% inflation target binds price expectations at 6% on an average basis... and returns/profits... The inflation in core-manufactured items or CPI has also been restricted at 5-6%... except stockprices...

Both, low CPI and core-CPI tells that price and expectations are low (due to inflation targeting) and people have delayed spending due to lower price and interest rate expectations... Higher inventories and low demand have also resulted in lower price expectation...

To increase demand and spending the govt should try to reinforce higher price expectations, but not so much to reduce demand and growth...

Rate cuts by the RBI could be the appropriate response for lower price expectations..

As some claim... revenue is also dependent on the demand and growth and may increase as the economy bounces back... Lower tax and a big base or scale might be possible going ahead... Taxes also add to competitiveness domestic demand, exports and growth...

The government has reduced the corporate tax rate just like the US, but imposed tax on the buyback of shares... Paul Krugman says companies would increase buyback of shares instead of passing tax benefits to the consumers...

But, INDIA has tried to disincentivise shares buyback... Lower prices to consumers might increase real balances with the public and demand and growth...

INDIA should borrow foreign only in its own currency... dollar denominated foreign debt would increase the demand for dollars, resulting in strong dollar and higher imported inflation... and depreciation in the exchange rate and outflow of dollars...

To attract foreign capital a strong rupee is must... rupee denominated foreign loans would increase demand for rupee...

If people set same buy price, a lowest (low price) to buy and a sell price, a highest (high price) to sell, it is possible to make markets more predictable... All should buy at lowest price and sell at highest price... PEOPLE SHOULD QUOTE SAME PRICES, BUY OR SELL...

Niveshkon ko ek daam par kharidna aur bechna chahiye... nuntam par buy aur adhiktam par sell... demat mein pehle se set kar dein...

Also, the people (investors) who have money need not to worry much because they can always buy more to reduce the average money cost and add to sell capacity in terms of time horizon...

But, equities or shares are also a popular form of getting investable funds by companies... Lower investment in the stock market would mobilise less funds for investment... Budget has discouraged equity investment...

What is the rationale after increasing tax during a slowdown? Slowdown is not the right time to increase tax, it is the fastup or the upcycle, then it would also lengthen the expansion by stabilising expectations... by avoiding exuberance... or too much volatility in prices on the either side...

Higher taxes could lower demand and prices during higher prices... and help stabilise prices... and vice versa...

One cannot directly compare a millionaire in the Rupee in INDIA and that of a millionaire in the Dollar terms in the US... INDIA has less rich than the developed countries... Like poverty defining wealthiness is also difficult... 

Budget Highlights 19-20...

The Budget our FM outlined in her speech was one of the commitment for fiscal prudence, besides ensuring liquidity to continue investment and demand especially for the real estate and affordable housing, it has reduced corporate tax on 99% of the business form a turnover of Rs 250 Crore to Rs 400 Crore to 25%, the aim was gaon, garib, kisan…

NBFCs would be regulated by the RBI to reduce the risk of excesses and given lending assurance to genuine NBFCs… But, it lacked on popular expectations like less LTCG burden and increase investment and tax exemptions… The budget has targeted the fiscal deficit of 3.3 % of GDP…

The government has reiterated its plan to upskill youth in language, automation, artificial intelligence, internet of things…

The budget has sought to increase demand for affordable housing by providing interest rate benefits upto Rs 7 Lakh on a loan of Rs 45 lakh for 15 years…

The govt has pledged Rs 100 Lakh Crore for the infrastructure in the next five years which is likely to give investment and employment a big push, though construction has been saddled with NPAs…

Both, investment in real estate and infrastructure could crowd in private investment and employment…

The govt has promised to connect every household with piped water, water has been among the most pressing problem facing the INDIA economy and also for irrigation purposes…

The budget has failed to attest its interest to follow public’s expectations without pushing harder for growth, inflation and interest rate expectations, through limited borrowing plans and more space for the RBI to reduce cost of capital and increase productivity of capital and competitiveness, demand and growth…

Factors Affecting Growth, Budget and Beyond... (rev.)...

Managing or stabilising prices and expectations would be crucial for spending and growth... People''s consumption and especially investment decisions rely on growth and price expectations...

Lower prices increase investment and demand/supply and price and growth expectations and higher prices reduce demand/supply and price and growth expectations...

Budget may help reduce volatility and exuberance in the economy by stabilising price or inflation and growth and expectations close to its potential...

There is a slowdown in housing that employs mostly unskilled labour in large quantities which could go down leading to lower demand and prices, housing, too, but that would increase demand and price expectations...

Any price forecasting should entail that though price is volatile, but the situation can change in the medium to the long run...

Prices follow a cycle where prices move between high and low and lower prices mean higher demand/supply and price expectations and higher prices mean lower demand/supply and price expectations...

When prices fall people delay spending which further reinforce lower price and expectations and vice versa... Lower prices of housing could increase demand and price expectations...

Foreign debt has risk of exchange rate or depreciation in the currency... Borrowing in domestic currency may hedge against the risk of default...

The US borrows in its own currency that is why loans are free of the risk since it can mint money and pay loans...

Trump has imposed tariff on himself (US)... The goal is to increase productivity and lower prices and increase demand, at lower prices suppliers increase supply to increase profits...

Expecting or forecasting prices is risky... Even Fed's forecast of inflation has failed... Even after the best of equations there is always a stochastic or error variable or term....

LTCGT (INDIA) could be negative for big longterm investors... For small traders it is not a big stroke... but, it has definitely affected invest and sell off... Budget could think of increasing investment...

LTCG (Tax) is discouraging longrun and big investments which directly affect the stockprices... The corrections and recoveries we have seen during the past one and a half year could be attributed to LTCGT, people are booking profits and are trying to save 10% in tax...

LTCGT prompt investors to increase profits by selling stocks...

There is a vast service sector of hourly or daily or monthly or workly wages earners who do not pay direct taxes, but indirect taxes or gst, gst revenue may help gauge demand and growth... GST is paid by all...

Lower inflation has increased real interest rate on savings which has lowered investment and real interest rate expectations to revive growth...

If savings do not increase investment, return on savings would be low because people would borrow less and would pay less premium plus inflation plus expectations and risks in the long run, short run is safer and more certain than the long run, more uncertain, which runs counter to the argument that save/invest for the longrun...

This is also the reason that the longrun real interest rates are higher than the shortrun real interest rates...

When the central bank increases moneysupply it first reduces longrun rates and bond yields then the shortrun rates... If shortrun rates are higher than the longrun interest rates it means people expect low inflation expectations in the longrun...

Little deficit in rains could help increase food prices and farmers'' income and demand and growth... If they (farmers) expect lower prices they may increase supply, but on the contrary they decrease supply which increases prices and reduce demand...

On the otherhand, if they expect higher prices they may reduce supply to increase returns, but they increase supply which lowers prices and income and demand increases...

Any attempt, to increase/decrease prices through expectations either reduce demand and increase supply or increase demand and reduce supply and could reinforce lower/higher price expectation ... We need to balance demand and supply on the production frontier to keep prices stable...

Since the govt has given 10% reservation to upper cast earning less than 8 Lakh yearly it should tax less that group... probably in the lowest tax bracket...

MGNRES has just provided unskilled-unproductive-low paid jobs, but how long we could keep it going, the govt has artificially created jobs in the rural areas, urban locations still lack even that kind of job guarantee programme...

Skilling could create jobs according to demand and could help reduce fiscal spending... and would make people independent and not dependent on the State... NREGA should be a skill oriented on job training and job oppourtunity, thereafter...

The govt must encourage rural population to invest in food processing and exports...

Is it feasible that the govt run job guarantee programme with unskilled and low paid jobs which hurt income and demand... creating jobs would crowd out investment and employment by the private sector... ?

Low paid jobs are a form of exploitation for political mileage... MGNREGS is not sustainable because it is a load on the govt finance which is increasing and increasing... It is increasing demand after reducing demand at other places...

Automation skills could further increase productivity of labour and lower public borrowing could also increase productivity of capital by lowering interest rates...