If we believe Economists - higher inflation lowers the value of debt - more investment spending could further fuel demand and prices which could reinforce inflation which could be hard to control with rate hikes because it is more profitable to invest when the cost of capital is low or there are high real interest rate expectations... Higher price expectations or real interest rates could also reduce supply... Rate hikes and higher real interest rate expectations from a low real interest rate base could increase investment spending and could further reinforce rate hikes...
According to the Fed's model, higher interest rates are likely to lower demand, due to high unemployment, and increase supply lowering prices and expectations. But, higher borrowing costs could also lower supply, due to high unemployment, and increase demand and prices or inflation and expectations. According to the former model, prices would go down and, in the latter, they would go up. We have both views. Expectations could be factored into the current prices or inflation if the near-term price expectations are high/low.
Rate Hikes and expectations are likely to lower spending. People would be rewarded if they delay spending and buy/invest at lower prices since there are lower price expectations due to rate hikes and expectations. Lower demand and higher supply could reinforce low prices, and lower price expectations could be self-perpetuating.
Any interpretation of a Recession would normally involve a base year (=100), generally the last quarter and the same quarter of last year's GDP growth rates, it is the growth rate calculated over the last quarter/same quarter of last year's growth rate which may show a negative growth rate, but the money or nominal growth could be quite positive... It depends upon the low or high base year's growth rate. A high base year shows low current prices and vice versa. People shall take investment decisions based on the money or nominal values of GDP. It is important because it helps form expectations and shapes investment decisions. A low current price and growth rates mean higher price and growth expectations and vice versa.
A large part of inflation is due to the low base effect last year which is going to correct as the base year normalizes. Monetary Policy is more of a supply-side tool that affects supply directly through the borrowing cost. Higher borrowing cost means lower supply and higher prices, it reduces the productivity of capital which means further higher prices and could also be self-fulfilling. This is supply-side induced inflation which could not be controlled by rate hikes or higher borrowing costs because that would lower the supply and further increase demand which could reinforce higher prices. Higher borrowing costs could be self-fulfilling.
A neutral rate or neutral real rate means zero real or inflation-adjusted interest rate at full employment, at which there is neither inflation nor disinflation. A higher neutral real rate could restrict the expansion and growth itself; interest rate and growth have a direct and significant relationship. The objective is to balance the economy at a neutral rate at full employment.
There is no mention of the unemployment or jobless rate in the RBI policy, though rate hikes may further increase joblessness. Due to rate hike expectations, the GDP growth expectations are likely to go down. All rating agencies have reduced growth forecasts... Lower price expectations would further delay spending and growth... INDIA's growth is going to take a hit after the rate hike spree. As long as the discussion on unemployment (rate) is not done it is difficult to predict inflation and inflation expectations. The Phillips curve shows that an economy faces a tradeoff between inflation and unemployment.
Higher interest rates and lower prices or business cost is good for the margins and earnings of the companies. It would make them more productive and competitive and increase demand. Many people do not understand economics which is why 75% of businesses fail. People invest when prices or inflation are high and then prices start falling when the supply increases, law of supply, when they shall invest when prices or inflation are significantly low, bottom fishing could increase low price expectations could reinforce low prices, and vice versa. People should invest or buy when prices are low and expectations of price are high because low prices increase demand and price expectations, the law of demand. If people follow the law of demand and supply and keep expectations in mind while investing it would help stabilize the markets and would help everyone. Low prices would be bought and higher prices would increase supply which would help stabilize the markets.
Higher inflation means higher Margins and Earnings. Like investors factor in higher wages in Prices and Margins, the same is true for interest rates, they are factored in Prices and Margins, too, when demand is high. Businesses have an excuse to raise Prices. Higher Margins and earnings are good for stock prices.
The Russia-Ukraine war is more responsible for the current situation and policy. Inflation and inflation expectations due to war have shot up. Inflation expectations in INDIA are higher than in the US and Europe which could keep inflation ticking up in a supply-constrained perspective. Prior to the War, the inflation was due to the low base effect when the Covid hit which the war only aggravated.
GDP at constant prices has decreased from Q1 to Q2, but the rate of growth of GDP in Q2 has increased by 13.5% because of a low base last year. The real GDP after accounting for prices or deflators has shown a downtrend. GDP Constant Prices in India decreased to 36851.25 INR Billion in the second quarter of 2022 from 40780.25 INR Billion in the first quarter of 2022.
This is a short-term view of the economy which is unlikely to create rational expectations for which we need to take a long-term view and a more holistic view for the sake of relativity. These are absolute numbers with little significance for creating expectations.
INDIA's banking sector is constrained by foreign capital, as it is protected by a lower FDI limit, which further constrains the lending rate which is the highest among major economies. FDI in banking must be liberalized further to bring in foreign capital and lower the lending rate. It would add to the productivity of capital, and lower borrowing cost is sine-quo-non for improving the supply side. Exports are competing with countries where borrowing cost is very low compared to INDIA. Indian bond markets must be mature enough to attract foreign capital inflows.
No matter what the RBI does, inflation is increasing by 10% every year and 80% in the last 8 years. GDP Deflator in India increased to 160.10 points in 2022 from 146.10 points in 2021
INDIA is already a superpower with the most populous country tag. Human capital precedes every other form of capital. Developed countries' population is aging and slowing down, but INDIA has the youngest population. But this could get wasted if not provided with education and skills, and jobs.
The labor-force participation rate has gone down from 64% during UPA to 46% under BJP. Unemployment has increased during BJP. LFPR has reduced by 50% during BJP.
India scored 40 points out of 100 on the 2021 Corruption Perceptions Index reported by Transparency International. India is the 85 least corrupt nation out of 180 countries, according to the 2021 Corruption Perceptions Index reported by Transparency International. The above figures remain more or less the same as under the UPA regime. INDIA remains one of the most corrupt countries.
What about wealth distribution? As per the latest World Inequality Report 2022, India is a “poor and very unequal country, with an affluent elite,” where 57 percent of the national income is held by the top 10 percent, while the share of the bottom 50 percent is merely 13 percent in 2021.08-Dec-2021. The govt shall distribute some shares of PSUs to the poor people and make them shareholders in PSUs for better wealth distribution.
A sufficient and constant supply of electricity is indispensable for the economic development of highly developed industrialized countries. This applies to all areas of a modern economy, beginning with the production sector and including transportation and the service sector all the way down to private households. INDIA's electricity production has hit an all-time low in the past two years and is too costly for families and businesses. How a nation could grow without electricity?
The Happiness Index of the World Happiness Report (WHR) indicates that India's rank has deteriorated over the years. In the 2022 World Happiness Report, India ranked 136th among 146 countries, while in 2021, it ranked 139th among 149 countries. In 2020, India's rank was 144th, while in 2019, India was ranked 140th. In the 2018 report, it ranked 133rd and in 2017, it ranked 122nd. India was ranked 118th and 117th out of 157 and 158 countries respectively in the 2016 and 2015 reports. The happiness of the people must increase. INDIA is deteriorating on the happiness index... The average tax rate on Indians has gone up and real wages are down. Why not worry about ourselves?
High public deficit and the resulting debt to GDP ratio and higher inflation and higher interest rate and interest rate payments pose a threat to macro-stability. Higher inflation and expectations point to reckless public spending. INDIA is among the world's worst inflation expectations nations. Debt and then more debt and taxes to pay the debt could kick off a virtuous cycle of low private sector demand.
The opposition shall shun polarisation, appeasement, and vote bank politics and work for the Welfare of all. Shall bring policies that uplift everybody without dividing the economy and society. This approach must replace the politics of hate and violence. At least this appears coherent and is close to the truth that we must realize. Work for All...
Opposition must ask the common man what change he feels Modiji has brought to their lives and come up with ideas that could make people happy. What has happened to their economic health and what has happened to the taxes, are they better-off or worse-off...? It's time to let the common man speak and politicians listen to their ideas... and provide solutions...
Cong shall adopt a scientific approach to convince the Public to vote for the Party... A Data-driven approach... During the Pad-Yatra they must also talk to people to know about their expectations... This time let people speak and the govt provide feedback.
Modi govt did not think of productivity and competitiveness when it reaped a windfall from excise duty and transport costs swelled for business and people. The credit for lower excise duty goes to the opposition.
Congress must demand the inclusion of fuel in GST. In INDIA prices are rising faster than wages and incomes. An increase in prices and expectations is self-fulfilling - higher wages result in a wage-price spiral - in face of supply-side constraints like oil/fuel and food inflation. Real wages would increase when prices or inflation would down with an increase in supply or productivity or competitiveness due to low cost and higher standard of living.
Modiji Pledged to reduce middlemen from the food supply to double Farmers' income which has been delayed by many years, and higher prices are not reaching the Farmers. Higher prices of other goods and services have resulted in poor Farm Real-Incomes. Food inflation could help increase wages and incomes in the Farm Sector, and demand and growth, it is the biggest provider of jobs in the country but is vastly unorganized. Too much labor force in the agriculture sector has depressed Farm Incomes. Though its share in GDP has been low compared to the past. Some food inflation is good for the Farmers.
