Real-Wages...

In the Western countries although productivity has increased, but real wages have been held constant, including China later... Policy makers have tried to cut real interest rate and real wages with inflation to help the Capitalist and supply, but, that has lowered demand of the Proletariat... China's depreciation and inflation, which it denies, to infuse exports has resulted in lower domestic demand and also lowered demand for imports that has also lowered demand in the trading partner’s economy... If China says that it's expansion has not stoked inflation in the economy, it is wrong because without more money-supply and inflation nominal exchange rate cannot depreciate... When you buy foreign exchange or dollar you release yuan-rmb which is likely to increase inflation and inflation expectations, therefore to increase nominal exchange rate inflation is important, when you increase demand for dollars it also increases it's price you release more money therefore more inflation and inflation expectation and also to cut real wages to increase competitiveness... Inflation though increases nominal variables but only after inflation which actually cuts real-GDP, real interest rate, real wages and real exchange rate... which actually reduces demand... domestic and exports... China is a blind follower of the West and market...

In our study we have formulated a regression equation with real-effective-exchange rate, exports-demand, money-supply, interest-rate-spread, private-debt, public-debt, external-debt and GPC-PCI, of the country as independent variables or regressors and economic-growth as dependent or regressand.

The equation obtained is as follow:

                                                 Eg = 22.605 – 0.122 REER

                                                 Sig =. (0.000) (0.000)                                               (1)

                                                                                             F= 33.396     R²= 0.788

Our study shows that the index of real-effective-exchange-rate in China has depreciated against the basket of the Special-Drawing-Rights currencies. From 2005 to 2015, the index has increased from 84.25 to 132, when 2010(=100). Moreover, the regression between the economic-growth as a dependent-variable and the real-effective-exchange-rate as independent-variable or predictor has given a significance or P-value or Predictor-value of (= 0.000), however, the relationship between Eg and REER is negative, and F (= 33.396), i.e. the significance of the equation {Eg = f (REER)}, which means that the depreciation in the real-effective-exchange-rate has contributed negatively to decrease in domestic-consumption and the economic-growth-rate. Probably, lower real wages have lowered the economic-growth by reducing domestic-consumption and lower imports might also reduce wages in the trading partners’ economy and thereby also exports of the Chinese economy to an extent. The R2 is equal to 0.788. Moreover, the analysis shows that REER has a tolerance or multi-collinearity with exports-demand, money-supply, interest-rate-spread, private-debt, public-debt, external-debt and GPC-PCI, of the country.

The Fed in the US might wait for rate hikes till real-wages show firm upside due to tight labour-market and stable inflation and inflation-expectations, when lower oil-prices due to upsurge in Shale oil exploration and employment, would definitely help, since there is already a gap in productivity and real-wages and demand... The share of the working-class in the income distribution must increase to attain equality and higher demand to offset lower labour-force-participation rate and growth...  Although, the skills and productivity have increased, there is a big gap in real wages since 1970s... Higher real wages are good for domestic demand and would also help exports; lower prices would increase demand... Shale is a major innovation in the US economy that would help lower oil prices which have coincided with prior recessions... It would increase the economy’s competitiveness and the economic-growth... Lower cost and prices increase demand...

The WPI and the CPI numbers are inconsistent...

In a low demand, spending and growth world which is evident in low domestic inflation and oil prices (only moving higher after supply cuts) we expect the monetary-policy to be accommodative and increase growth expectations... Governor could tighten anytime when inflation mounts, but low inflation must follow rate cuts to increase falling growth estimates, growth is an underlying objective of the monetary policy besides price-stability and full-employment... Changing inflation index too frequently might create uncertainty for investors... The government is committed to improve the supply-side and lower inflation through selective controlling the prices of important commodities... Lower borrowing cost is important for investment and supply...

Nonetheless the CPI in January at 3.2 % is lower than the WPI above 5% raises question about the supply management when WPI index is expected to be lower than CPI i.e. Wholesale-Prices and Consumer-Prices, respectively. The major element that increases the differences between WPI and CPI is cost incurred on wages on transmit and the transport costs. Paul Krugman shows that lower transport costs lead to lower-prices and increase demand and growth and the population or the labour-force increases around markets and industrial centers... Therefore, we might expect that that higher transport cost would increase CPI more than WPI and not the other way, WPI more than CPI. However, the different weightage of same things might in both of the indices show difference, but that could not reverse the argument the common understanding about the market that CPI would in most of the cases be higher than the WPI because of the cost of replacement from the wholesale market to the retail market. In short, we may say that the WPI and the CPI numbers are inconsistent.

As far as we know, WPI and CPI have same goods and services in the indices, but could have different weightage and Core-WPI has same things like WPI except that it excludes volatile food and fuel prices whereas Core-CPI is equivalent to CPI excluding food and fuel prices...

Prices, Wages and Exchange-Rates...

Increase in the exchange rate may also mean that you can now buy more goods and services because prices may go down relative to the exchange and that is called increase in the real exchange-rate... You could also buy more foreign exchange and foreign goods and services... Increase in the real-exchange-rate increases exports since domestic-prices go down and also increase imports because exchange-rate goes-up... However, increase in the nominal-exchange-rate would only increase exports and lower imports because exchange-rate has gone down, you can buy less foreign-exchange and goods... Strong-currency would increase both, exports and imports; however depreciation would lower domestic demand and demand for imports...

It is a common knowledge that a strong currency would attract inflows and a weak currency would increase outflows... Because, nominal exchange rate would increase, you would have to pay more exchange rates or you would get less domestic currency... That is why foreign investment's currency-risk is hedged by derivatives... Foreign investment entails exchange-rate risks... But, exports might increase due to lower exchange-rate...

It is natural for the dollar to be stronger than other countries because it is the world's one of the most favourite reserve currencies to settle exports especially oil... Moreover, heightened foreign exchange reserve requirement to pay future streams of exports and higher foreign investment in the US economy by other countries are also responsible for an overvalued dollar... By selling/buying foreign currency a country could try to manage the foreign-exchange rate with other countries, but higher domestic-currency in circulation may stoke inflation fears in the economy... However, if the country demands foreign exchange in the market it is also likely to lower exchange rate of the domestic currency thereby increasing exports... Differently, if a country allows more imports and increase in demand for foreign exchange rate it is possible that it would increase prices in the trading partners economy which could also increase domestic export competitiveness... The US too might try to settle exports with other countries in their own currencies to maintain competitiveness and a stable exchange rate...

It is probably a matter of real-wages in the trading partner’s economy... In order to achieve devaluation or depreciation we forget that we are lowering domestic real-wages by increasing inflation and also wages in the trading partner's economy by curbing imports only to reduce deficit or increase surplus though a lower unemployment is more important than deficits or surpluses and depreciation only reduces domestic-demand and also demand for exports only reducing the exchange-rate which is a matter of trade-off between domestic-demand and foreign demand... After full-employment more demand for exports might result in increasing wages and the economy might lose competitiveness... which might increase deficit... The central banks try to control demand after full-employment so how too much foreign demand might be good... And for this a higher exchange rate may be used to control demand for exchange and exports for price-stability in the economy... If demand for foreign exchange is decided by demand for goods and services by a country the problem of unstable exchange rate and depreciation might not be there because then the actual demand and supply would determine the exchange rate and there would be less currency manipulation to gain competitive depreciation and exports at the cost of domestic demand and imports...

Remarkable price-stability in Germany has made achieve competitive wages, too... Lower borrowing cost has increased production/supply... Lower borrowing cost has also increased competitiveness...

Germany and Netherlands have much in common, low inflation and competitive wages... France and Britain have high-inflation and increasing wages in common... At one end, we have Germany and Netherlands as examples of internal devaluation, countries which have gained competitiveness by cutting costs and increasing the real exchange rate and at the most extreme the UK or Britain and France which have tried to gain competitiveness by external devaluation or depreciation or by increasing inflation and the nominal exchange rate... The countries that have used internal devaluation seem more successful and have trade surplus... Whenever they try to devalue, internal by some countries and external by others, the gap between competitiveness increase double because at one hand we have lower prices and higher real exchange rate and at other we have inflation and higher nominal exchange rate... In internal devaluation prices are cut to decrease cost and prices and increase competitiveness and in external devaluation inflation cuts the real costs - real interest rate and real wages...

I'm talking about the difference in nominal and real wages i.e. inflation adjusted wages... Competitiveness means the scope to reduce costs, reduce prices and increase demand and secure economies of scale as in the Perfect-Competition in which price equals the marginal cost, lower prices also help achieve market share which increases domestic-demand first and also external, and help lower unemployment, and increase the economic-growth rate...

The Precautionary RBI...

Last day the RBI again maintained a status-quo that a sect of the market forecast, however the majority was for a 25 basis points booster as the bank has already anticipated a lower growth rate due to currency replacement and cash shortage or money-supply disruption caused by the note-exchange and a lower inflation and higher unemployment, all pointed that the rate cut was necessary to improve the market-expectations which did not happen that has actually caused interest rates on bonds to go up which could further lower investment by increasing the borrowing cost and it would further lower investment and growth. The RBI has increased interest cost for the government too. The RBI’s actions are important for expectations and outcomes, only expectations crafting by the central-bank might affect agents or economic subjects’ actions which affect demand and supply and inflation and unemployment and the economic-growth, by the way of manipulating spending and savings, higher interest rate expectations or sudden change in commentary or signals like both ways management of interest rate may create uncertainty for the economic agents’ actions too, uncertainty for growth and growth expectation could too put investments on hold. There was a mixed commentary and not a rate cut even after low growth-rate expectations, which have done little to improve market conditions. It is not difficult to find the reserve or central banks of Advanced-Economies to cut rates to boost the stock-market when they go low to improve market sentiments, However, the market in INDIA has recovered from the downs post-note-ban, but the real-economy, lower or postponed consumption and higher unemployment due to negative shock to the construction and real-estate by cash-crunch and curb on the black-money, needs the incentive to increase investment and employment which the rate-cut could probably have provided. However, if the RBI had a rate-cut and then a comment to hike as and when required would have given the market a direction that a lower interest rate is warranted only when there are lower prices and conditions on the Inflation-Targeting-Framework (ITF) are met, like targeting a 5% inflation in the short-run. Lower borrowing cost when there is high unemployment and low growth and expectations coupled with low inflation at 3.41% would have improved growth and expectations and increase investment and lower unemployment; however the RBI might have also said that it would still follow its ITF. However, in the last rate-cut cycle during the Great-Recession-2008 the policy rates were cut as low as 4% which is lower than what the market expects the bottom, policy rate is still above 6%. We have the next Monetary-Policy-Review after two months, in April, hope delay brings clarity and not the disappointment to act late, when the external-conditions are not conducive, too…   

Rate-cut might be possible...

We have just the second monetary-policy-review on February 8, 2017 after the demonetization struck the spending of the economy in terms of consumption and investment and higher unemployment and lower prices have turned the expectations in favor of a rate-cut when the RBI disappointed at the first-one, moreover lower growth expectations following the drive further attach the possibility of a rate-cut when real interest-rate is higher than the central-banks target range 1.25 - 1.50% and the lower inflation in December at 3.41% has increased them by 2.80% when the policy-rate is 6.25%. Higher real-interest rate might adversely affect investment and employment when the economy needs backup from disruptive reforms and is still trying to gain pace from the last rate hike cycle and the nominal interest rate cuts are in still in progress. The commercial banks, it is true that, have reduced rates close to 1% as the deposits increased after demonetization, however there is a gap in the policy-rates and the market-rates, but lower inflation has also increased real-rates when there is demand to lower interest rates and the economy is uncertain on the growth front that how much of it would be shaved-off as the money-supply was hit resulting in lower demand reflected in lower CPI numbers. Lower inflation has resulted in lower nominal rates by the banks, but has also pushed real rates higher which might result in lower demand for loans and investment and might be correlated to lower economic-growth. However, less people at banks and at ATMs show that the demand for cash has been met substantially, which might make us think that demand has been restored to an extent and the government measures through budget might also help lower unemployment that increased after the note-ban, affordable housing and push for better infrastructure might increase employment and lower interest rates would further accelerate the pace of job-growth and economic-growth. Therefore, we might expect that the Monetary-Policy-Committee would take cognizance of higher interest rates and the need to boost private investment spending to further strengthen the growth initiatives by the government to completely bring back the economic-growth that set-down post note-invalidation.    

Budget 2017...

This year’s budget announcement was started by our FM enumerating the government achievements while admitting that demonetization has transitory effects on the economy's growth rate which is expected to revive in the year 2017 and the budget had increased fiscal-deficit target to 3.2% of GDP. The budget has introduced the concept of TEC-INDIA in order to transform (T), energize (E) and clean (C) the Indian-Economy. He presented an outline of the budget expenditure of Rs 21.40 lakh-crore during next fiscal.  As expected our FM tried to give boost to the rural economy and irrigation with higher allocation of Rs 1, 87, 223 lakh-crore and increased the outlay on infrastructure to Rs 3, 96,135 crore after lower growth estimates following demonetization. The government has increased coverage under Fasal-Bima-Yojna to 40% and also increased allocation of money, FM also repeated his commitment to double famer’s income in five years. The budget also proposed to improve farm or agri credit by asiding Rs 10 lakh crore for the purpose. The budget has increased allocation to MGREGA from Rs 38,500 crore to 48,000 crore and has also increased money for Pradhan-Mantri-Gram-Sadak-Yojna (PMGSY). He proposed to give affordable housing the infrastructure-status in order to channelize more resources and credit and promised to construct 1 crore affordable houses for the poor and the middle-class. The budget has increased its expenditure on skill-development through Kaushal-Vikas-Kendras and has also allocated Rs 2.64 crore for the defence-sector. The government has set aside Rs 10, 000 crore for PSBs recapitalization though not sufficient. In continuation of less-cash objective the government has restricted cash-transactions above Rs 3 lakh and provided Rs 2,500 for improving digital-transactions. The FM has repeated to electrify all villages by March, 2019. This year the Rail-budget had not been presented separately and FM has increased expenditure to Rs 1.31 lakh-crores of which Rs 55,000 crore would be provided by the government. Moreover, the budget has sought to reduce income-tax in the bracket Rs 2.5 lakh to Rs 5 lakh from 10% to 5% and has also imposed a surcharge of 10% on income above Rs 50 lakh.

In short, if we say that the budget has tried to revitalize the economy through its expenditure would not be hyperbole and the FM has made clear that the budget is devoted to the poor and deprived, youth, women and children, rural-economy and schedule-casts and schedule-tribes. The government has attempted to satisfy all by increasing the budget expenditure which seems good when the economy’s spending has been hit by demonetization, the government has increased fiscal-deficit-target by 0.2% which is likely to have an expansionary effect on the economy in terms of growth. The stock-market too saluted the budget by increasing almost 500 points after the budget announcements. The market thinks that the budget is sound given the fiscal-restraints.