Internal devaluation in the Indian-Economy...

Article;
Politicians make symbolic statements on rupee in the run up to the polls which will subside after May 16.

Comment;

Basically the economy is concerned with employment and job creation that is why policymakers choose depreciation over appreciation. We should follow real-effective-exchange-rate which also has a large element of inflation which when inflation will go down REER will automatically go down... Inflation is responsible for a depreciating a currency... Lowering inflation is another way of making your exports competitive... it is called internal devaluation... Therefore we do not need to depreciate currency necessarily... lower price level will make the economy competitive... Basically there is not much flaw in the argument and depends on trade-offs...

I made a mistake. I confused REER with nominal exchange rate…

Sorry! REER is already inflation adjusted but people are more concerned with nominal exchange rate which (this one!) has a large element of inflation, REER is equal to nominal exchange rate minus inflation which will go down with inflation, but, exports will become competitive because general price level has gone down and the Indian currency has become strong in REER terms. The prices of goods and services decreases relative to the quantity of money... It is a gain in terms of income; real income has gone up... There is a trade-off between how much nominal exchange rate has appreciated and how much price-level has gone down... If the currency has not appreciated in the nominal terms and price-level has gone down that is good for exports, they will become competitive, lower prices will increase demand for our exports... Precisely this is called "internal-devaluation". Employment grows with internal-devaluation, too... It will also create jobs in the export sector... Therefore the RBI should try to achieve/target/maintain REER while at the same time it should try to reduce inflation at home… This is another way of making exports competitive…

Modi, positive for stocks...

Shares’ Sensex reflects the investors’ perception of an event which has a positive or negative effect on their earnings… if the investors see that a particular decision, by political-parties, government and its agencies like RBI, and/or, demand and supply in the goods and services market, can affect their earnings negatively they will sell, or, otherwise, if they perceive that the same things will increase their earnings they will hold and invest more… The Sensex even responds to the changes in the government which has been a trend since last few elections… Every time when Manmohan Singh, under UPA, was nominated PM the Sensex reacted positively since he is an economist and a reformer, he introduced many reforms in his stint as finance-minister and, now, people try to figure-out who can be the best for the stock market… This time the stock market investors, both foreign and domestic, are trying to anticipate the next government and PM, and, Narendra Modi is seen as the prophet of change against the boring and burdensome second term of UPA. Everybody started complaining against inflation and even the stock market is treading slow due to high-interest rates by the RBI. According to the experts the stock market is very much inflated and there is an asset price-bubble, the inflation adjusted Sensex is around 16, 000. And, we can not reject the idea that the Sensex is very much inflated in the hope of a good government, and, probably, Modi.  Therefore, there is a big gap between a share’s real-prices and nominal prices (what we generally see), and, this gap is not supported by fundamentals of demand and supply and their effect on prices, and, is expected to go down with inflation, because nominal-prices equal real prices plus inflation and when inflation goes down real prices go up. The Sensex these days is moving around it historical heights, never reached before, which is a testimony that the market sees Narendra Modi as the one who can tread the economy through choppy waters. He can help the economy grow out of sticky inflation and high interest rates which will help in reviving investment, in the stock-market too, and achieve higher growth rate.

The defeat of the Congress in the recent state polls and BJP’s success with Modi appearance on the national level as the prime-ministerial candidate has an unprecedented effect on the stock markets. The Sensex has increased almost 20% since September 13, 2013, when Narendra Modi was first declared as PM candidate, even in the face of a slowing economy. The price of stocks which were not doing very fine early, like power, infrastructure and capital goods sector, bounced back. These sectors are perceived by investors to be the major beneficiaries if Modi becomes PM after 2014 general elections. Modi has done tremendous infrastructure development in Gujarat which is the reason why investors see Modi as good for power and infrastructure development stocks. Gujarat based Adani Enterprises was the biggest beneficiary of the recent rally in the stock prices which gained almost over 100% since September. Moreover, the capital goods companies like BHEL, Seimens and L&T, and, power financing companies (PFC) saw sharp increase in the price of stocks of capital and power industries which are likely to do well after the elections. Even though these companies have seen a rise of 30-40% in their stocks but their prices are still below their all time highs which are expected to go up as the investment cycle flourishes. The market has a lot of expectations from Modi, especially agriculture and industry, as far as inflation and high interest rates are concerned. Gujarat’s agriculture with a high growth rate of around 10% is a model for the rest of INDIA when food inflation, especially cereals, is in double digits and the overall agricultural growth rate for the country is 2-3%. However, BJP has opposed FDI in multi-brand retail. But, FDI in multi-brand retail would improve the condition of our farmers. Agriculture is just like another industry. It would help farmers to sell their product directly to companies; a whole chain of middle-men will go down. Higher income would further boost investment in agriculture, higher prices will act as an incentive, and farmers will produce more...

Modi’s effect on the Sensex can be gauged from the fact that it continued to increase since Modi was announced BJP’s PM candidate on September 13, 2013 and reached new heights in the expectation that he will become PM. On the day Narendra Modi was declared PM candidate the Sensex was around 18, 887 and just after a month, on 13 October, the Sensex gained 1000 points or 5.3% and was around 19, 902. In the next month, on 13 November 2013, the Sensex appreciated to 21, 196 by gaining 1300 points or 6.2 %. However, in the month of December the Sensex fell to 20, 898, but higher than the base in September 2013 and regained 21, 140 in Januray 2014. In February 2014 the Sensex fell again but regained in March and April and is moving around 22, 876.Therefore, if we find the total percentage points the Sensex gained since Modi was declared PM candidate, we find that it has appreciated round 4000 points or 21%.. However, experts are expecting the stock-market to correct at least 3, 000 points in case Modi does not become PM, but, see Sensex hit 24, 000 if Modi becomes PM. If Narendra Modi becomes PM with his pro-business, pro-growth and development image, the market may witness increase in the Sensex because his party has shown credibility as far as inflation is concerned and the BJP has also credible plans to reduce inflation. Therefore, Modi’s government will be good for real-prices of shares because inflation will go down, interest-rate will go down and investment in the stock market will pick-up…

Inflation reduces debt-burden...

Article;
The economy is not like a household.

Comment;

Nominal interest-rates are zero and the Fed is trying to push inflation because it wants to ward-off deflation, without policy the pressure on the prices is to go down, but real-interest rates are negative. Krugman is suggesting that fall in the prices will not reduce the burden of debt, because interest rates are already zero, but not on home-loans. Interest rates on home-loans are around 3-4% and since there is pressure on prices to go down (without policy), means low-inflation; the Fed should try to compensate for the rise in the value of debt by reducing interest-rates. But, the Fed does not regulate home-loans directly; it manages base-rates, repo-rates. Nevertheless the Fed manipulates the value, of any debt, by manipulating the rate of inflation and real interest rates. Home loans have constrained the economy’s demand and a lower real interest rate will reduce the burden of debt and will generate demand for other products. Therefore, if inflation in the economy is around 2% (which is not), it is only our target, and home loans are 3-4% we need to increase inflation by 1-2% to reduce the value of debt to zero, means real-interest rates at zero, but we need negative real interest-rates to push the demand more. The more the Fed would push inflation the more the value of debt will go down. Inflation reduces the value of debt. Repo-rates are already zero, but home-loans are not. But what if the Fed does not use inflation targeting and let the prices fall… falling prices with constant wages and income, because of nominal-wage-rigidity, and income is certainly likely to increase demand and more resources for debt repayment but we are limited by the nominal interest rate, they can not go below zero but we can reduce the burden of debt by inflating the economy and reducing real interest rates… I think this is precisely what Krugman wants…

Model Code of Conduct Violations…

To control the conduct of political parties and their candidates the Election-Commission issues a set of rules called the Model-Code-of-Conduct. The model-code-of-conduct becomes effective once the election dates are announced. The MCC include guidelines regarding general conduct, meetings, processions, polling day conduct, polling booth, observers, and, political-parties in power. In the general conduct, political-parties are barred from provocative speech on communal matters and wrong allegations against other candidates and political parties. Moreover, parties and their representatives can not offer anything to the public which can affect the poll-outcomes and that would be akin to bribe. Parties must conduct meetings with decency. As far as meetings are concerned, permission for using loudspeaker and conducting meetings is to get in advance by the political-parties and their candidates, and police restrictions are to be followed. The political parties and their candidates should inform the police about their procession and its due course in advance which will help the police in controlling traffic, and, the organizers must follow the rules and should not carry any destructive thing. On the polling day candidates should fully co-operate with polling-officials, and, should carry and show identity-cards whenever it is required. Distribution of liquor is one malpractice which is frequently prevalent in election seasons and should be stopped before 1 day. To much crowd on the polling-day is not permissible. Polling booths are barred from entry of people except voters and persons with ECI passes, therefore candidates should not attempt to enter polling booths without permission. ECI appoint many observers to conduct elections successfully and the candidates are free to complain any misconduct. Political parties in power should also follow the election commission’s guidelines and should not use the government machinery for influencing the voters; they can not take advantage of being in the government. This year many new rules have been added to the Model-Code-Of-Conduct. According to the latest Supreme-Court directive, now, the political parties should present the financing details of the promises they make in their manifestos. The limit for expenditure has been increased to Rs 70 lakh from the previous limit of Rs 25 lakh. Nonetheless, model-code-of-conduct is violated very often, and, liquor and cash is distributed to influence the voters. Effigies of opponents are burnt very commonly. As far as election spending is concerned over-expenditure is also very common…

The Election Commission of India has decided to stop illegal distribution of gifts, liquor, and money which are common election malpractices and are used to influence the voters. The commission seeks the reports on sales and distribution of liquor in every state and to other states also. It has setup posts on state borders to check illegal transport of liquor and money. Moreover, there will be three static surveillance teams in every state to check movement of liquor and money during Lok-Sabha elections. In Jharkhand the State-Excise-Department has installed CCTV cameras on all 22 liquor manufacturing units as per the Election-Commission’s directive. It is taking-note of every transaction and if there is anything unusual the Election commission will take the due action. Every sale is being monitored by the CCTV cameras and the footage will be provided to the commission. The Election-Commission wants to ensure that no free liquor is distributed by political-parties in the face of Lok-Sabha elections. The current police intelligence and Excise-Vigilance in all states will carry out inspection in suspected regions. On the account of two registered cases one truck is held at Karwar of Karnataka and Goa state border carrying Rs 34 lakh worth of liquor and another truck was detained in Bijapur district.  According to an election commission official, “anyone who is buying suspicious amount of liquor will be interrogated.” Compared with previous years’ liquor sales have been down significantly this election season. In Jharkhand this year (2014) 18.20 lakh liters of liquor is sold which is lower than sales, 32.59 lakh liters, in 2013. The sale of India-made-foreign liquor has seen a rise. In March 2013, 13.19 lakh liters of IMFL was sold whereas in 2014 the sales have increased to 14.79 lakh liters.

To check the use of money power to influence voters the Election Commission has established mechanisms including deployment of expenditure observers in every state throughout the country during the nine-phases of Lok-Sabha polls. The commission has identified states where cash distribution is more common and has taken a number of steps to check expenditure of the candidates. According to the Election Commission Chief, violation of the expenditure limit, currently Rs 70 lakh, is the most challenging of all. States like Uttar-Pradesh, Maharashtra, Karnatak, Andhra-Pradesh, Tamil-Nadu, Punjab and Delhi has seen the use of money-power, expenditure and distribution, in the past elections. According to an Election Commission official flying-squads will be used to control illegal distribution of money to manipulate voters and to control over-expenditure. In order to check huge illegal money cash flows the Election Commission has directed the CBDT (Central-Board-of-Direct-Taxes) and FIU (Financial Intelligence Unit) both under the Finance Ministry to keep their eyes on election finance… So far, the Election Commission has confiscated Rs 195 crore from all over the country, of which only Rs 118 crore was seized only in Andhra-Pradesh. 11, 469 FIRs were registered all over INDIA against complaints of illeagal distribution of cash and other-things. The Election Commission has appointed 659 officers from central revenue services in all the constituencies during the elections and they have reported confiscation of cash from all INDIA. According to the official data, election expenditure observers has also confiscated Rs 10.49 crore in Uttar-Pradesh, Rs 14.40 crore in Maharashtra, Rs 18.31 crore in Tamil-Nadu, and Rs 4 crore in Punjab...

Election manifestos 2014...

In Political-Economy a “manifesto” is a declaration of major issues the political-party will undertake after winning the elections. A good manifesto increases the chances of the political-parties to win in elections, which is the goal of political-economy. From the point of view of growth and development, an election manifesto outlines the course by which these two objectives can be attained; every issue leads to these… But, on a subtle level every government tries to maximize employment or minimize unemployment and ensure price-stability by curbing wasteful expenditure because fiscal profligacy can lead to inflation. Every issue in the manifesto has a cost and a benefit in terms of inflation, because government expenditure increases demand, and employment, again, because of increase in demand. These two issues, price-stability and full-employment, form the core of all other issues. Government expenditure leads to increase in demand and employment as long as there is unemployment in the economy, otherwise inflation will increase because production can not be increased, again, because of full employment. The present government at the center overlooked the importance of price-stability and continued fiscal expenditure following recession in 2008 even after the economy reached full-employment in 2012, the economy’s unemployment rate was recorded 3%. The desire to stoke growth-rate after full-employment resulted in high inflation. And, all these happened when we have had an economist and an academician as a Prime-Mnister. Every monetary economist knows that the objective of the economy is price-stability with full-employment, but he favored full-employment and over-employment over price-stability in the face of supply-side problems… Increasing employment when we have supply-side constraints is bound to increase inflation. Presenting a populist manifesto when inflation is stubborn at high levels can backfire when people know that inflation is high and finances are stringent therefore it is hard for the government to deliver its promises. As far a fiscal position is concerned no further big expenditure is desired and possible. Therefore to think that the upcoming government would fulfill it promise is like rain without cloud, not probable. Nonetheless, if we have democracy, then we will have elections and manifestos. Everybody knows that how much it is difficult to pass even a good legislation in the Parliament. Any political party voted to power will face big challenges as far as country finances and politicians are concerned…   

Inflation made the Congress lose election in many states recently. It is an issue which is directly related to common people and their income. High inflation means low real-income, low savings and investment, and lower welfare. It directly affects the growth rate of the economy because high inflation means higher interest rate and lower investment and low growth rate. Congress in its manifesto has rarely spoken of inflation and wherever it is mentioned it said to be a problem tackled by the RBI and at the other place inflation is attributed to global factors which reflect the serious flaw in the government understanding and argument… The Congress has no concrete plans to control inflation and I think people will not provide more time for correction in inflation when it lost all the crucial time when it was in power (now). I think people will not believe the Congress as far as inflation is concerned by looking at its inflation fighting credentials. As far as the BJP is concerned its track-record on inflation is good. Inflation during the NDA rule was averaged around 4-5 % which is also a testimony for non-inflationary policies. Moreover, the BJP in its 2014 manifesto has vowed to bring inflation and interest rate down. It has proposed to set up a price-stabilization-fund to combat inflation which is a norm in the developed countries they use the price-stability-fund to restrict too much volatility in the prices. BJP has said to reform the APMC act to control food-inflation and to bring special courts to curb hoarding and black-marketing. Therefore, as far as prices are concerned we can draw the conclusion that BJP looks more credible by looking at history and by the ideas like APMC reform and price-stabilization fund. Atleast it has a  road map for reduction in inflation and price-rise. People this time will vote for an anti-inflation, anti-price-rise government, because inflation is among the most important issues for the upcoming elections…

Another peculiar feature of the 2014 election has been all party emphasis on employment and jobs. Some are talking about reservation in jobs in the private sector to lure voters like SP and JD (U) while other are trying to push job-creation by economic-growth, a natural way, while others are trying to push employment through welfare-schemes, like Congress. The youth of the country has the highest number in the population of INDIA which forms a big constituency. Every party has schemes for youth to attract them as voters and the most important policy for the youth which we help them gain productive employment is skill-development. Both, the Congress and BJP has given considerable importance to skill development in their manifestos and the BJP even has provided an innovation over skill-development, “multi-skill-development”. Skill-development has been an older and successful programme in Gujarat as compared to the whole INDIA. Gujarat has been successfully implementing skill-development for years. Congress wants to promote manufacturing for jobs while BJP has placed emphasis on labor intensive manufacturing which will create more jobs in the sector. BJP’s focus on the type technology is right because in a labor rich country like INDIA it is more important to apply labor-intensive technology to give people employment. Manufacturing and skill-development are complementary ideas; one is incomplete without the other. The skills manufacturing use to produce goods and services are provided by skill- development. The skill-development programmes should impart only those skills that are instantly required and consumed by the market... 

 This year decentralization found place in the BJP’s manifesto against the Congress, which probably does not suit its ideology. In the terms of an economy, decentralization means redistribution of the power of decision making from Center to the lower levels of government in the hierarchy. Poor economic condition, rise in government expenditure and free-market ideology contributed to reinforce the idea of decentralization of government functions. It aims to foster competitions between different services, seek help of the private sector and privatize some services and functions. Government decentralization has two parts, the political part and the administrative part. Political decentralization means more power to citizens or their elected representatives. There are many types administrative decentralization, delegation, de-concentration, devolution and disinvestment, but, here, we are concerned with devolution. In devolution the power of decision-making, finance and many functions are handed over to local and state government. Fiscal decentralization means shift of the power to raise revenue and expenditure from center to the lower level of the government. Poor health is one of the impeding factors which affect education and the quality of human-capital in many developing countries; thereby any investment made to improve health of the vulnerable segment of the country is likely to have a positive impact on human capital, national income and per-capita income. Several studies have showed the importance of decentralization of governance and is a subject of debate among social scientists, historians, policy-makers and politicians...           

Decentralization improves governance outcomes...

In the terms of an economy, decentralization means redistribution of the power of decision making from Center to the lower levels of government in the hierarchy. For example, the redistribution of power from center or central-government to the panchayats in the states. Decentralization has always attracted historians as theme of their writings.  Poor economic condition, rise in government expenditure and free-market ideology contributed to reinforce the idea of decentralization of government functions. It aims to foster competitions between different services, seek help of the private sector and privatize some services and functions. Government decentralization has two parts, the political part and the administrative part. Political decentralization means more power to citizens or their elected representatives. There are many types administrative decentralization, delegation, de-concentration, devolution and disinvestment, but, here, we are concerned with devolution. In devolution the power of decision-making, finance and many functions are handed over to local and state government. Fiscal decentralization means shift of the power to raise revenue and expenditure from center to the lower level of the government. Better health for socially and economically challenged sections of the society is one of the objectives of Millennium-Development-Goals underscored by United-Nations in the year 2000. Poor health is one of the impeding factors which affect education and the quality of human-capital in many developing countries; thereby any investment made to improve health of the vulnerable segment of the country is likely to have a positive impact on human capital, national income and per-capita income. Decentralization of power from the central-government to the local government can improve the health outcomes in a region. Several studies have showed the importance of decentralization of governance and is a subject of debate among social scientists, historians, policy-makers and politicians...  

Lower real-interest-rate, good for investment...

Article;
RBI governor Raghuram Rajan says current policy-rate appropriately set.

Comment;

I do not know why the Industry is pressing for lower interest rates when real interest rates are already so much down. What is real interest rate? Nominal interest rate minus inflation is the real interest rate... Normally investors track real interest rate to decide for investment and opt for it when real-interest-rate is at its minimum. Actually this is precisely the thing the Fed is trying to achieve by its monetary policy in the US. The Fed has kept nominal interest rate at zero and is trying to push inflation up to reduce real interest rates so that investors find it profitable to invest, lower real interest rate will lower the cost of investment in real terms, adjusted for inflation. But why investors in INDIA are not recognizing the investment opportunity? Are they not cut-out for wise investment decisions? We can not rule out the possibility that many do not know when it is best to invest? If you do a survey many would not know what the real interest rate is? Our investors only know interest rates compared with the past… But there can be a difference as far as real interest rates are concerned. In the past, it is possible, that given an interest rate a lower rate of inflation will increase the cost of investment because real interest rate (nominal interest rate minus inflation) will be high but now when inflation is high and real interest rate is near zero then it is more profitable to invest in economic activity. We know inflation reduces the cost of debt…Inflation lowers the cost of debt, because it lowers real interest rates… I think the Industry should recognize this opportunity and does not press the RBI for rate cut. Moreover, a lower real-rate-of interest will attract fewer bank deposits. And, the industry while pressing for rate cuts is also reducing interest rate on its savings and less capital will be invested, wages are consumed and profits are invested. If industry will wait for rate cuts and lower inflation it means they are waiting for real interest-rates to go-up because inflation will go down. Rate of inflation is also a sign of demand in the economy, environment for investment is good, what the industry will produce will be consumed by the economy, but we should not indulge in overproduction because that would push the economy in deflation and would necessitate changes in policy…