Unemployment and price rise are going to be national poll issues for decades... Economic policy is judged on these two critical parameters... Maintaining a balance is crucial since this involves considerable trade-offs... When unemployment increases or employment decreases it lowers prices and vice versa... Inflation coupled with unemployment, like the previous UPA2 regime, price rise, has been proven a colossal policy mistake... Though BJP has won elections demonetization, oil prices, farm policies, covid, and Russia-Ukraine War did not let the regime's economic policies work with a full demand multiplier and held it back unfortunately lower than potential... In the face of price rises controlling employment and demand and increasing supply through imports at costly exchange rates meanwhile has made INDIA a king in the WORLD of blinds...
The RBI, under former governor Raghuram Rajan, had suggested the introduction of Rs 5,000 and Rs 10,000 notes. Information provided by the RBI to the Public Accounts Committee had revealed that the central bank had made the recommendation in October 2014, TOI had reported in 2017. The reason behind this idea was that the value of the Rs 1,000 note was being eroded by inflation.
There is no need to introduce different denominations in the cashless age. I-RR-elevant... When a person faces a problem due to impatience and information asymmetry creates new problems and it becomes self-reinforcing..... For example, when inflation becomes a problem higher inflation reduces production and supply, and vice versa, which means further inflation, supply goes down more than demand... Had the RBI target black money and adjusted / demonetised 2000 Rs without increasing the money supply a lot of illegal demand and higher prices, had come down.....
The ultimate relief would be to end deals in cash then only notes culture would be put to an end and the menace of black money ends... Formalization of the economy entails bank accounts and data of the black money... If the govt wants to know data on black money it could consider the money supply just before the demonetization and after, it could get some black money... at least in bank accounts... It is not very difficult to know the magnitude of black money... since all the mathematics is there... what comes in, what goes or goes out... It could be done by a 10th grade...
Reserve Bank of India (RBI) governor Shaktikanta Das said the monetary policy committee (MPC) will be guided by “what’s happening on the ground” at its June meeting and added that he expects retail inflation to ease further in May from April’s 4.7%.
It is now a misconception that Monetary Policy works with a lag, in this age of information at the speed of light, demand and the actual price of anything depend upon its price expectations, it is the factor that decides its current demand coupled with investment demand, not only its consumption demand. The actual interest rate and demand plus investment demand, in the same way, depend upon interest rate expectations. Lower price expectations delay demand and increase supply which actually lowers prices and vice versa. Expectations are self-fulfilling, when people expect something they work on it if they have money, they tend to speculate on the outcome with the best available information which are the underlying factors in determining prices (Of inventories and stocks too) which includes the interest rate, wages, and exchange rate. Through expectations future prices are factored into current and actual prices, we often hear this in terms of prices that the expectations are already factored into the prices. The whole stock market workS on this principle...
Inflation and interest rate changes are self-reinforcing, higher inflation means people would demand more and supply would go down and prices would go up again and a higher interest rate means lower employment and demand and supply, too, which further increases prices. Demand and supply are not two, the person who supplies, demands, too. Our ability to supply depends upon how much we demand, what we demand is what we supply, and if demand goes down supply goes down, too. Demand could not be met without supply. Maintaining stability proactively fosters the central bank's credibility and for stability a top and bottom of inflation and interest rates are assigned to manage demand and supply. At the bottom, everybody would increase demand and at the top everybody could supply which would help stabilize demand and supply and prices and interest rates. Prices and interest rates would move around the Mean or Average of the demand price and the supply prices. It would help reduce uncertainty about prices and demand and supply. Everybody would demand and supply at the same price or interest rates and maximize returns. Excess demand and supply determine future prices. Prices and interest rate expectations could increase volatility, but the central bank's job is to curb this volatility.
Other things remaining constant the current real rate is 1.5% and if prices go down due to past rate hikes the real rates would rise and we would be able to architect a rate cut. A 1.25 - 1.50% real rate is good for saving purposes has been foretold by past RBI governors. Food inflation is out of the ambit of rate hikes, we can't control food inflation through rate hikes... Agriculture is not an interest rate-sensitive sector...
Demand for the rupee is derived from the demand for its exports and if INDIA makes it clear that it would accept only a rupee settlement the demand for dollars would go down which could be self-reinforcing since strong rupee expectations would pour in more dollars, and its debt in foreign currency could pose less trouble. Every country shall do it to increase investment in the country and currency... Lower depreciation or higher appreciation and/or higher real exchange rate expectations would also increase demand for exports and imports..... It is called internal devaluation in which productivity and competitiveness are gained by lowering and containing inflation and real interest rate, wages, and the exchange rate when others are depreciating.
While debate surrounds the impact of flagship schemes, we believe it is more meaningful to delve deeper.
The rate of growth of inflation has been 1% per month and every year 10%-12% which means that in the past 8 yrs inflation has increased by 80% which means that the value of the rupee 100 bill is now only 20 rupees. Creating inflation to cut real wages, interest rates, and exchange rates to make the economy competitive has backfired in terms of domestic demand... Inflation expectations for "achche-din" are not in line with the objective of creating value for the rupee and INDIANs... On one side we have the US and Germany where low and stable inflation has increased the value of the country and currency... The value of money must increase over time... 100 rupees shall buy more...
On the other, we have China whose policy is criticized regularly...
It may make sense to continue moving rates higher in the coming months, but at a more moderate pace, Powell said in response to lawmakers' questions about the Fed's plans. The timing of additional hikes will be based on incoming data, he said in his opening statement.
I could easily remember the continuous argument to increase the inflation target to 4% since it constrained prices and demand and growth. According to the Phillips Curve, the relationship between inflation and unemployment. 4% inflation and 4% unemployment seem consistent with the curve theory which was missing during 2% inflation, the relationship broke down. We have full employment and falling price expectations, 4% inflation and 5.25% interest rate, and positive real rates. Lower price expectations mean that real rates may rise as a consequence of low prices. The central bank shall specify the short-run real rates/targets to shape expectations and spending. What real rates the Fed has in its mind and where the economy would go? All businesses are run on borrowed money. Interest rate expectations are quite significant for spending decisions. The Fed shall also avoid lower interest rate expectations to avoid delay in spending, lower price expectations could delay demand and price expectations.
We need to work on skills multipliers how many skills have been multiplied and how and how much they could contribute to increasing productivity and real wages and demand and supply and growth. Income and investment increase the supply, of skills, too, and supply increases demand and income, in the broader economy too... INDIA is labor abundant it shall specialise in labour intensive sectors which could increase productivity too...
Data for Unemployment is a must for inflation expectation, the shadow Economy of which we have no account, of the less formalized economy. INDIA is dependent on Unemployment data for better policy outcomes. Higher unemployment expectations and lower inflation expectations could delay demand and increase supply begetting lower (actual) prices and vice versa... Labour Demand expectations are critical for Price expectations and investment. Higher price expectations are positively significant for demand and negatively significant to supply and further higher prices and the opposite is also true... Price expectations are self-reinforcing because they subconsciously work this way, everybody wants to profit from the situation both consumption and investment demand.
Road and construction have been topmost in creating employment... But, no data on how much has been paid as wages and created stable growth in people's incomes... Wages paid in bank accounts could set up data points on how much variable employment has been created... Skills improvement could increase productivity and help climb the career ladder... Road construction has been quite visible development.....
Honourable PM shall try to fill the void within BJP, too. He shall create a credible leadership and a PM candidate after he leaves. He should help find an alternative to him since he is against Parivaarvaad... Who would be his Political Nominee?
INDIA is a Superpower in terms of land size and human capital which present enormous investment opportunities. Ranking firms must claim their stake in this growth... This is the best time to invest in INDIA for 25 yrs horizon... Free trade in food could help lower food prices and increase real wages and demand. Farming costs would go down, too... Healthy food at low prices could help increase health outcomes and productivity. Government shall ensure the food at the lowest prices. Here protectionism could fail since farm wages increase too...
