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Reform is a long process...

The Modi government at the Center has been accused for not reforming the economy in a consistent manner, which is misguided and not attached to reality; even the government has carried the baton forward by the previous government. The adherence to the fiscal deficit target and the GST reform, which were mere a dream during the previous government have been brought to reality only by the current government. However, the list of reforms does not fall short to add the badge of a “reformist” to the power at the Center. INDIA needed deep structural reforms on the supply side of the economy to arrest inflation when the NDA yielded influence; it reformed the food sector by allowing 100% FDI in food supply and processing, since it would increase farmers income by cutting the middle man chain in agriculture and further abolished the Agricultural-Produce-Marketing-Committee (APMC) which were important reforms on the supply side of the economy to unlock the food supply and lower inflation and interest rate. Moreover, the government has also resolved to set prices of selective items to contain food inflation. Recently, the practice to set fuel prices on a daily basis to align international prices with the domestic prices could be counted as a crucial reform because fuel is another important commodity after food which needs to be rationalized when over-supply has almost halved the prices internationally and that would benefits consumers and businesses in the form of lower transport costs. The setting up of a Monetary-Policy-Committee (MPC) was another feather in NDA’s cap which has replaced the Governor’s veto with a committee with some members appointed by the government, the rate cuts had been a constant point of spar with the Government. The adoption of inflation-targeting framework for the economy is also a landmark, never happened before. The demonetization movement and the willingness to curb the cash and the shadow or anonymous economy associated with it were most disruptive of all, which was felt by everybody, were strong signals that the government would not tolerate black money and illegal demand. The Insolvency and Bankruptcy Code were other mile-stones of the current government which would help solve the problem of bad assets of the commercial banks soared during the UPA and have been a major obstacle in the country’s growth, timely passage of the Code would help timely recovery. The universal social security measures like healthcare and pension under different yojnas are also noteworthy…

Yet, reform is a long process and the government must continue …   

The economy needs stimuli...

Lower growth and growth expectations and inflation and inflation expectations for the quarters ahead have raised concerns for the policymakers to push the economy through stimuli and incentives in order to keep investment and employment high while targeting inflation lower than 4%, however we, now, also have a Monetary-Policy-Committee (MPC) and three of its members are government appointees to represent government on the board which also underlines its commitment to keep prices in check and also assure cheap credit to businesses and low unemployment. During the past government higher public spending led to country wide overheating which reduced real wages and demand later in the economy, both consumption and investment spending suffered due to lower real wages and real interest rate and savings and investment due to higher inflation and nominal interest rate to restore prices by reducing some employment and demand, even when we had already cut on real wages by inflation, both lower employment and real wages set the contractionary forces that ended up with slow growth. Nevertheless, the higher growth rate we saw during the current government is lower than 10% growth we achieved during the UPA rule, but the inflation and unemployment are at comfortable levels which may help us continue investment on increasing infrastructure, innovation and skills to increase productivity and real wages, and, demand and growth in the economy. The lower prices would also increase exports demand, the economy would have better jobs in manufacturing and services when the agriculture sector has been over burdened for employment which has reduced the share of income per worker. Notwithstanding, lower prices might help increase spending, but if wages increase too that would help increase real wages and demand, Keynes also viewed higher wages to increase (effective)-demand... We have evidences of relationship between income and demand, for example in the international trade higher nominal exchange rate or income helps increase demand for exports, since prices go down relative to the nominal exchange rate or income... Lose money supply could also help increase real wages and domestic demand if we lower borrowing cost and the overall price level... INDIA is labour abundant, therefore it would be cheap to use labour intensive line of production to increase employment, using automation would need skill development to use technology or capital intensive techniques in production which has a low base in INDIA, but needs to be acquired to increase productivity... Improvement in technology or innovation would help increase productivity after full-employment, which would help save labour and increase production... According to the labour theory of value, amount of labour decides production and value of a product...

Monetary-Policy (INDIA) this week (June, 2017)...

The RBI is having its Monetary-Policy-Review on the 7^th of June, 2017 in the backdrop of demonetization, low inflation, higher unemployment and a lower economic-growth, and, those might form the basis of a dovish stance and soft commentary to continue with an accommodative monetary-policy instead of a neutral strategy and possible rate cuts in the future. The central bank is trying to take a perfect call on the policy rates and money-supply to moderate the market rates and increase loan growth and demand on the basis of data, which is difficult to happen, it thinks that it is difficult to adjust money-supply, interest rate and inflation too frequently, and it might be wrong, nevertheless it could communicate a rate hike when it is required, but low inflation in the data add consistency and credibility to the policy takes, the monetary-policy actions based on the incoming data would make it consistent and more credible, people should be able to understand the monetary-policy signals, it must not create confusion. The RBI is reading too much for too long and is procrastinating actions in the name of incoming data even when inflation and growth warrant a rate cut, it has made the monetary-policy difficult to be understood by the agents. Moreover, a higher real interest rate, because of higher nominal rate and low inflation, might lengthen recovery and deter achieving the potential growth rate, analysts and commenters still view 8 % real-GDP growth rate, a respectable for a country like INDIA with a higher population growth rate, to create jobs for all and reduce poverty. The RBI too might view it as normal without stoking overheating, inflation and loss in demand, it shall accept it as the new-normal in order to make the monetary-policy more effective in terms of its short and long-run objectives, controlling inflation in the short-term, however is important for the demand and growth in the long-run, but lower borrowing cost is also crucial for higher investment and supply to match demand. Notwithstanding, the commercial banks are still not in favour to cut back on the market rates, when NPAs and low income flows have restricted their balance sheets, commercial banks do not want to cut on the margins and profits, the banks probably are not in a position to lower rates due to low loan demand because of slow recovery and fear that they would also lose deposits. However, household savings in INDIA are at an all time high also because of higher inflation and inflation expectations, which might itself spell a correction in the market rates, if the commercials banks do not lead to increase demand for loans, higher real rates and savings might increase future rate cut expectations in the dynamic sense, which may take time, but if the banks try to increase demand it would bring equality in savings and investment and would keep interest rate stable, so far savings are high, but loan demand is weak which is responsible for weak recovery, low overall demand and low economic growth rate. Nonetheless, many claim that there is enough liquidity sloshing in the market, but question arises that then why banks are not passing the previous rate cuts completely even when there is an increased foreign competition and also competition from the bond market and the real rates are much higher which are holding on investment and demand. Probably, the issue of balance sheet slowdown, because of low loan demand due to high interest rates and NPAs deter the commercial banks from expanding because of inadequate liquidity, since they are reluctant to pass on the previous interest rate cut transmissions, if there was enough liquidity, banks had passed on the benefit to consumers and investors… 

INDIAn economy should cover soon...

The new estimate of the GDP with a revised base year from 2004-05 to 11-12 came out at 6.1% in the quarter ended March 2017, which was along the expected lines, the market was expecting a slowdown in the growth rate, including our former PM Singh who forecasted a 2% drop in the growth. Therefore, nobody is surprised, even the stock-market so far has showed not much correction following the weak GDP figures, probably it had already been accounted and since the remonetisation process has almost been completed, we might expect it to be only a temporary blip which may improve in the next quarters. The slow GDP growth was large anticipated, INDIA is likely to regain the tag of the fastest growing economy soon, again. However, this time the RBI might be forced to cut back on the key rates to increase money-supply and reduce the market rates, as the evidences it sought to act are much clear now and growth expectations must be increased in the unfoldings following the demonetization. The rate of inflation and the rate of growth both have gone down due to fall in demand and spending after the note-invalidation, which must be improved to maintain the GDP growth rate since the economy had been in the rate cut cycle and rate cut transmission by the commercial banks, which the RBI might continue to increase growth and employment hit by the curb on high value notes and money-supply and lack of bank accounts and digital infrastructure. The INDIAn economy yet to fully recover from the previous down-cycle and generate more jobs, the RBI must take the problem of jobs and falling economic-growth seriously, nevertheless people are criticizing the present government for less employment creation, which is actually the RBI’s domain, the bank is more responsible for full-employment, if the government creates employment by public spending it would crowd-out private spending, but spending on the infrastructure might crowd in private investment because of infrastructure deficit. Notwithstanding, the NDA government has increased workdays under MGNREGS and also allocated higher funds, the government is specific about the employment generation potential of the investment projects, 100% FDI in local food and food processing would also create employment through value addition in the agriculture sector, food processing has the potential to create large employment oppourtunities in food and agriculture industry. Food inflation has traditionally been an important source of seasonal inflation in INDIA which has a special place in the RBI inflation expectations scene, however the government’s commitment to mange food supply and also set prices under volatility would also borne fruits in lowering inflation and interest rate to increase investment, employment and growth…