Friday, January 9, 2015

Avoid overheating...


Public-spending... when inflation has an upside-risk under all the supply-side constraints, including infrastructure-deficit... it is also a supply-side-problem... no doubt... and will lower inflation after the gestation-lag... But, why the government wants to stoke growth by putting pressure on the level of natural-unemployment which increases pressure on wage-growth-demand, wage-cost-push-inflation... Nonetheless, recent data on unemployment-rate in INDIA shows it is close to that level... The government’s argument is that it wants to increase revenue by expending more... So there is a lot of trade-off that will take place... At one place it (the government) is increasing expenditure, means money is going-out and when it will crowd-in investment and growth, money will come in... So, it depends how much money is going-out and how much money is coming-in and what is the productivity because economist oppose deficit which is not good for any type of productivity (increase in the ability to produce more as per demand)... No doubt, more government expenditure will help increase wages/income, demand, growth and revenue and more profits due to supply- clot which is due to industry’s clamour for less competition... Less competition because they do want to be bogged-down by price-competition (read imports), especially retailers in the food-segment, higher exports in few categories is also responsible for higher domestic prices... The high population growth rate of the region has been traditionally criticised, because with so much of skills and productivity gap, a large part of population is still dependent on the State for jobs and livelihood which is mainly responsible for higher deficit and debt...  When unemployment-rate is close to NAIRU and supply-side is still choked by inconsistent policy, public expenditure will increase inflation... The time is not ripe for public-spending... Economists favour public-spending when there are supply-side problems and the economy is below full-employment... Supply-side problems are not difficult to identify and the government should commit to the target set by the RBI... If the government does do it, it will repeat the mistake of the last government of overheating the economy...  Nonetheless, if the government delays its employment-guarantee scheme or make it more infrastructure and human-capital oriented that would help... Atleast, there would be less pressure on resources especially labour... Market will compete less for labour means less wage-push inflation... And, lower-inflation will lower interest-rate, on government-debt, too....

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