Budget 2013 is Almost Indifferent...

The budget our Finance Minister has presented is not an exciting budget, it is an indifferent budget because the decisions taken neither indicate a price rise so that markets can cheer nor indicate a rise in income, after manipulating taxes, so that it brings relief to our middle class. Both are exciting, but not this time.

The government wanted to raise revenue a little so it levied a 10% surcharge on income above 1 crore and a Rs 2, 000 per Rs 10, 000 tax will be credited to Rs 2-5 lakh income bracket. Therefore as far as taxes are concerned the change is only marginal and will not affect aggregate demand in any effective way, and, if it does, it does it marginally, again. People will neither buy more nor less. We will more or less remain indifferent. We are not going higher. Moreover low taxes will mean that government will spend less and less jobs will be created, publically and privately, through multiplier. I mean multiplier will be low and less income will be generated. Therefore, in terms of income we are more or less same as previous year. No more consumption.

The government wanted people to build more houses so it offered them interest deduction of Rs 1 lakh for loans upto Rs 25 lakhs. This will boost demand for houses and with it demand for labor, land, and capital. For an estimate, suppose that 10 lakh people go for a house, then, the excess liquidity that will come out of the banks to the market will be around 25, 000 core. This is much money to produce inflation. When the RBI reduces cash reserve ratio (CRR) by 50 basis points it injects liquidity in the system of the same magnitude, 25, 000 crore. And, moreover, housing is the most labour-intensive sector of the economy and builders will spend more. Employment, wages, income, and prices will go up. I think 10 lakh is an underestimation and more people will think of buying a house. This was not a welcome decision keeping inflation in mind.

The government allotted Rs 1, 000 crore for 10 lakhs youth for skill development. I surprise whether we actually have this number of people who need skills up-gradation. India where half of the population is illiterate and poor who can not take care of themselves we, atleast, need to upgrade skills of minimum a crore people for which we will need atleast, again, Rs 1, 00, 000 crore. Skill gap in India has been widely discussed and is recommended by reports and surveys. We needed a big investment so that we can increase the productivity of our labour-force and they can earn higher per capita income. This was a good decision but insufficient to achieve the objective in mind.

Government has also proposed to bring inflation-indexed-bonds or certificates in consultation with the RBI to wean away investors from gold so that the funds are diverted to more productive use and investors get more value for their money. Moreover, too much demand/investment in imported gold has created a divergence between nominal and real prices which has to be reduced so that prices remain more sustainable to avert a bubble and a burst, later, that makes the economy vulnerable to shocks and will threaten stability. This was a good decision.

The fiscal deficit of 5.2%, lower by 10 basis points than the initial target of 5.3%, was achieved but it comes as no surprise because the Finance Minister has emphasized its importance keeping the rating agencies in mind in order to motivate foreign investors to enter Indian scene. But, since the RBI is constantly giving us its message that inflation is high and that is why we do not need more investment this time. We should know that inflation may come from foreign investment, too, they can push prices up at a time when we actually want to see them coming down. But for the external sector the decision was good. It will drive demand for Indian currency and it may go strong. Therefore, this decision produces a mix feeling; at one hand it may increase inflation and on other hand it may decrease prices of imported goods by making Indian currency strong. These effects will cancel out each other. Almost no gain.

Therefore, the budget 2013-14 is not a happening budget it is more a sort of indifferent budget. The Finance Minster did not have many options and curtailing fiscal deficit was an imperative just like controlling inflation. Nonetheless, whenever government spends money it increases inflation. We almost remain at the same indifference curve…

Indian Economy is at Full-Employment (Edit.)...

India's real GDP at 5% is good, not very low, when rich countries are doing at 2%. China is growing a little better at 7%, exports are an advantage. Believe me their nominal GDP must be much higher...

To be more exact, INDIA’s nominal GDP growth rate is equal to real GDP plus inflation means, 5% + 10% (inflation, CPI) = 15% which is not sustainable because inflation is too high, Income, consumption, and saving/investment is lagging behind. It is so high that no bank is giving 15% interest on savings a year. Bank is increasing income 8% a year. However, public and private spending is rising under compulsion price-rise…
 
In the long run when inflation is assumed zero, real GDP growth rate will equal nominal GDP growth rate in equilibrium. The long run potential GDP growth rate of the Indian-Economy is 12% because its population growth rate is 17% (every ten year), and, deducting frictional unemployment of 5% it comes to 12%, the rate of growth of labor force and employment to maintain full employment. Therefore India's full-employment long-run potential growth rate is 12%. And, under equilibrium full-employment long run potential GDP growth rate (12%) = nominal GDP growth rate (12%) = real GDP growth rate (12%). But, the situation is 12% = 15% = 5%.

The last one, the real GDP growth rate is a long run goal. In the short run we have achieved the target with nominal GDP growth rate at 15%. Indian economy is at full employment with all the supply side constraints. In 2012 the unemployment rate for Indian-Economy fell to 3.8% which is why inflation is so high and persistent. We can not achieve 12% real GDP because we can not tolerate inflation above 10%. The benchmark we have set for our selves. We need patience. No doubt inflation is the major problem…

Feasibility of Fiscal Policy...

Article;

Barack Obama Warns of Risks over Budget Cut Uncertainty


Comment;

Fiscal policy to cut through recession and liquidity trap in the US has very limited room left to stimulate the economy because it is already serving too much. During the worst recession since 1930s the government could not afford to pump money in real activities that could create employment and demand. America is at crossroads. At one hand it needs to spend on employment creation and at the other it has to cut back on its expenses. At third, it can levy more taxes to pay deficit/debt, actually when it has to cut down to boost aggregate demand, fourth. Income tax rates in the US are high compared to INDIA. Keynes, as far as I read books, advocated fiscal policy during a crisis. I do not think he would be a man who would advise for fiscal policy during a non crisis period. Some other may, because of Social Security if prices are high. Even Milton Friedman said that every single penny the government spends will produce little inflation. Both are conveying that we, actually, do not need fiscal policy during normal times. We have exploited that situation too much; we have used fiscal policy too much. And when we actually need to use it we are lacking options. And, cutting back on expenditure will mean this time that when the economy needs support we are actually withdrawing it. It will only hurt aggregate demand and consumer spending. We need more income, not less. Everybody needs it…

Liquidity...

Article;

We Must Ensure the Real Economy Grows before the Liquidity Bubble Bursts


Comment;

The situation is different in the US and Europe. The US is in liquidity trap; people are sitting on a lot of cash. They have no incentive to save in banks and probably they are expecting prices to go down. Consumer spending, wages and income are depressed, too. To push them up we need to infuse some purchasing power either by increasing nominal wages or by increasing real wages. The first one is under consideration but the second one needs laxity on the part of the central bank to not to support prices and let them go down. People sitting on cash or with fixed wages and income will find the value of their hoards going up and that will boost consumer spending. During the recession unemployment insurance/benefits restricted the economy from going demand bust. The increase in liquidity in the US will add to stock of money people sitting on and we need to break this thing. And that can be done by fiscal policy, too. But the government is budget constrained. Europe is also constrained by demand but is not in liquidity trap. They have raised interest rate a few times. They bailed out economies with stringent government finances but unemployment is still high because the governments have stalled their spending and multiplier is not working. Probably they are stuck with excess supply. The ECB too can decide to not to intervene in the market and let prices go down and that will increase the competitiveness of euro products in foreign market, and, will increase the value of euro and the demand with in the economy. Liquidity if finds its way in the market is good…