Now, some inflation has become important to contain the inflation target...

RBI must include unemployment rate in its model... Lower growth could also mean higher unemployment... 11% growth in 2011 reduced unemployment to 6%... which is still above the natural rate of 5%... Potential rate is decided by the rate of population growth rate (17% per ten year) minus frictional unemployment (5%), which is present all the time. That means INDIA can grow to achieve 12% on average... INDIA achieved 11% growth rate which is less 1% than its potential 12%... and unemployment could go more 1% down to touch the 5% threshold... Therefore, if the current growth rate is 6.1% we could expect that unemployment might have gone up 11%... which might need substantial rate cuts ahead... NPAs too have reduced confidence...

We have lower price level and price level expectations upto full employment because supply would increase with lower unemployment or higher employment and lower borrowing cost and higher price and price expectations after full employment due to low scope of increasing supply due to scarce labour and higher borrowing cost, however the purpose is to stabilize or constant the price level and price level expectations at full employment and neutral or constant unemployment and constant supply and neutral borrowing cost….

Lower inflation and lower inflation expectation have also increased the rate cut and expectations. However, inflation in 2011 was close to 8% with all the supply side constraints and mismanagement, but CPI at 1.5% in June has revitalized rate cut expectations and higher unemployment and low growth also point rate cuts and expectations. However, if we use the reasoning or logic in the above paragraph that would also indicate rate cut and rate cut expectations… The inflation in INDIA is often ascribed to the supply side weakness and higher demand, too, but this time it is a different situation, INDIA has improved a lot on the supply side and inflation has gone down, also due to higher unemployment and higher borrowing cost which are further likely to reduce the price level through lower borrowing cost, higher investment and higher employment, higher demand and higher supply. In INDIA there is enough scope to increase supply, demand and growth by lowering the borrowing cost and the unemployment rate. Lower borrowing cost might help to sustain inflation around the target 4%. This time by not lowering the interest rate the RBI is expected to ditch its inflation targeting itself… Now, some inflation has become important to contain the inflation target. Lower borrowing cost would increase investment, employment and growth to hit the inflation target… Lower borrowing cost may also help the commercial banks and businesses to reduce NPAs by adjusting margins…

Risky to gauge prices...

Most of the times the economists are seen debating and prescribing demand, supply, price-level and unemployment adjustments or sides in order to achieve the potential growth rate decided by the rate of growth of population, but during the past few decades the population growth rate of the  world has gone down, despite increase in the average life expectancy, which has also reduced the growth rate many economies and has put the onus of creating employment and demand and growth on the export sector of the economy in a world where the policymakers have favoured the Capitalists by cutting the domestic real wages, interest rate and real exchange rate with inflation to achieve full employment and full growth, but they forget that inflation reduces demand and spending because purchasing power goes down, it also reduces savings  and investment, because people would save less and the economy would invest less, and lower exchange rate or depreciation would increase only export demand, but could reduce domestic demand and imports, which reduces both domestic demand due to lower real wages and foreign demand due to less employment and wages and incomes. The lower demand and employment in the trading partners economy would also reduce export demand to a degree therefore the only gain from inflation, external devaluation and depreciation is exports, but the economists misses that in the long-run inflation and a lower value of money would aggravate the problem of low population growth rate and demand and growth of all the countries. Ricardo’s theory of subsistence wages using Malthus assumes that higher wages could lead to higher population growth rate and higher labour supply and wages would again fall to minimum wages. But, as has been observed, population rate of growth has gone down and using the same line of thought we could derive that wages could bounce back from the minimum wages. In other words, wages should increase as a result of lower population growth, but it has not… which could be attributed to lower real wages around the world despite increase in nominal minimum wages only because of higher inflation. Nonetheless, as have already been noticed before inflation is the second best strategy to increase demand, supply and growth, which actually adversely affects demand and growth, because middle and lower classes have a higher propensity consume than the richer and higher classes who have a higher propensity to save, they (poor) spend more than the rich also because they constitute a larger number. However, lower inflation or little deflation is also important for lower borrowing cost and increase supply which might further lower price level and price level expectations which have just the opposite effect on the real wages, real interest rate and real exchange and demand and supply and price level and unemployment. A lower price level and price level expectations and higher real wage and real wage expectations are likely to increase both consumption and savings which might also lower interest rate and interest rate expectations and increase in the real exchange rate and exchange rate expectations could also increase both imports, since real wages would increase, and exports too because of lower price-level and borrowing cost and increase in the real exchange rate. So far, the economists have assumed inflation and inflation expectations as a result of expansion of money and growth which could be right after full employment, but before full employment we might assume the price level to go down and a result of more money or money-supply and lower borrowing cost because supply or production could increase which could only be constrained by full employment, but international trade may also help to keep prices lower and increase real wages, real interest rate and real exchange rate. The technological innovation may further help save labour and increase supply and lower the price level, and increase real wages, real…real…… which could help increase supply, demand and growth and achieve full employment… Notwithstanding, if the economists and policy makers try to stabilize the price level at or around full employment that would also help stabilize real wages, real interest rate and real exchange rate and expectations which might end the demand-supply debate, for the time, and might help maximize or achieve potential growth but might be with lag. Differently, if we could target a constant price level and price level expectations at full employment by a constant money supply we could still have both demand and supply adjustments and a higher growth rate but with time lag. However, improvement in technology and innovation could further increase productivity of labour and capital leading to lower prices to increase real wages and demand, real interest rate and savings and investment and supply and real exchange and exports/imports and growth in the long-run in the event of lower population growth…..  

      

The economists often claim that deflation expectation, and not deflation, is the main problem because people would delay purchases and spending in expectation of lower prices in the future, but price level remains same in the short run to medium term and only changes in the long-run, more than a year, however some prices might be more volatile than others because of faster changes in demand and supply, like food and fuel, which mostly hurt real wages and incomes and are consumed by all. Moreover, it is very difficult to exactly predict price changes, and even more for the general public. However, investors might try to make profit of price and price change expectations, but even they could not rightly predict prices 100% and there might remain glitches even for the central banks. Notwithstanding, it could also be attributed to information asymmetry and difference in methodology, mainly investors and the central banks, but the general public is often not interested in future level of prices a year ahead, public is often short sighted, and even unable, to predict or forecast the future economic variables like prices right in the long-run, they only take in to account the current inflation and think that prices would also rise in the future, but how much exactly they do not know and in some cases the may guess… The whole stock market is a game of predicting the right prices, low buy and high sell, which is risky, amid all the information… People could not delay purchases or spending more than one-or-two weeks, if they have employment and money, because it is difficult to forecast prices beyond and lower prices would also restrict some of the supply, which could change price expectations from deflation to inflation and that might increase supply and lower or stabilize the price and price expectations. We have lower price level and price level expectations upto full employment and higher price and price expectations after full employment, however the purpose is to stabilize or constant the price level and price level expectations at full employment….

Research and Policy... & Limitations of the Study...

Research and Policy Implications

The present study has mainly concentrated on the Chinese economic policies which have gathered China a growth momentum for thirty long years above the global average and its effect on distribution and inequality within the economy and out. The economic growth leaves traces on distribution of wealth and income inequalities to derive conclusions and develop framework for further policy research and implementation. The economists often criticize China for its policy of external devaluation or depreciation which increases exports at the cost of domestic real wages and demand and growth and imports too. Moreover, the debt fueled growth and a higher current account surplus that is increasing trade balance in the global economy and with trading partners also raise important questions the way global inequality has been affected through low employment and low demand and growth globally. Lose money supply and depreciation have also increased fears of the housing bubble in the economy. It raises object in the way Chinese economy is gaining competitiveness in global trade. The cheap Chinese goods, no doubt, increase real wages, but reduce employment in the domestic economy so the question of real wages does not arise, therefore cheap goods and dumping are not received in the right way for domestic growth, and it hurts domestic employment and growth. On the other hand, if China uses internal devaluation means higher real exchange (nominal exchange rate minus inflation) by making the internal price-level competitive through reforms and increasing productivity, through all the possible measures like more investment in education and innovation. It is well behind the developed countries like the US. We could easily find clues about how and what the economic policies should be used to increase both, domestic and global demand and growth

Limitations of the Study and Scope of Further Research

The limitations of the study include poor spending on education, innovation and growth in productivity which might deter the economy from increasing competitiveness, lower cost and prices to increase demand and growth, domestically and globally. Unless China increases domestic demand and also help increase demand abroad by increasing real wages, the growth of exports alone might not achieve the growth rate it saw during the last three decades. Nonetheless, there is a further scope of research in the factors that help achieve productivity and competitiveness in the long-run. So far China has relied on higher nominal exchange to increase exports demand which has been criticized by many to achieve competitiveness, but in the long-run a higher real exchange rate achieved through increasing domestic productivity might also help gain competitiveness. Lower domestic real wages and less employment and demand abroad may itself put brakes on Chinese expansion, which it should definitely try not to happen and should explore other options to increase demand and growth. Chinese authoritarian style of operation could derail its ambitions which might be replaced with a more democratic and market based economy. There is a scope for research to help rebalance the economy from an export and investment driven economy to a consumption driven model that has also scope for imports and higher demand and growth in the trading partners economy, too. 

A deja vu is awaiting...

In June the Fed in the US raised the repo-rate the third time on an out of policy date in the range 0.75- 1 % amid still low inflation and inflation expectations and repeated that the economic conditions, unemployment rate at 4.8 % and inflation near 1.6 % and wage pressure and consumer spending and a slow but steady improvement in the economic growth rate warrants only a gradual increase in the rate hike path in the event of falling natural or neutral real rate of interest, historically, and showed interest in unwinding the commercial banks balance sheet which might put an upward push on the interest rates globally due to the outflow of liquidity flowing from the emerging world and to higher differential interest rate in the developed economies and that might reignite the debate to “how to save the emerging world with the mass exodus of capital and deal with inflation, depreciation and higher interest in the emerging markets?” We might feel the déjà vu moment of the past taper tantrum. The safe haven status of the US dollar and government bonds might drive the capital back again in the US economy and increase savings which may not be good for spending, consumption and investment, which has also been held back due to inflation and inflation expectations by targeting the price-level at 2%. However, lower oil prices have helped lower inflation and inflation expectations, but higher real wages, through tight labour market, increase in the nominal wages and some due to lower price-level are more likely to increase spending and savings too. Nonetheless, the Fed has maintained an accommodative stance in the form of lower interest rate and only gradual rate hikes. It is important that the central bank try to increase spending by increasing real wages and lower inflation and inflation expectations might further boost spending or increase consumption and lower inflation and inflation expectation would also lower interest rate and interest rate expectations and increase investment spending.  At this moment not only the US economy needs lower interest rate, but the emerging markets, too, notwithstanding, external situation too should be a concern and only if the Fed tries to stabilize inflation and inflation expectations and interest rate and interest rate expectations that would help the both. A constant inflation and inflation expectations and interest rate and interest rate expectations might too help increase spending when real wages and incomes increase with increase in innovation and productivity. The US is trying to increase productivity and wage pressure on the price level when there is already a big gap in real wages and productivity since three decades which has depressed demand and prices. There is already a demand to increase minimum hourly wages to 16 dollars, it nevertheless could dent competitiveness, but lower borrowing cost could still make up the cost, countries that are capital rich could increase competitiveness by lowering the borrowing cost and provide free capital to increase value and rate of interest could be earned by the commercial banks on the value addition. Lower borrowing cost should be used to add or create value to capital and earn margins…    

Renewed rate cut hopes...

The Consumer Price Inflation (CPI) has fallen to decades low of 1.54 % in June on the back of prudent supply management of food items and demonetization that resulted in low demand and growth, which have caused higher capacity and inventories of the firms turning up in lower prices and inflation. The economy is facing a situation of excess capacity, partly due to slowdown in investment; investors are waiting for lower interest rates, and partly due to slow recovery in real wages, incomes and demand because of higher inflation in the past, which led to a tightening in the interest rate and wages. However, the Reserve Bank of INDIA had committed a neutral or data dependent stance in order to justify further actions and maintain credibility, it said that it would consider inflation data for few months to take a rate cut call, it wanted proof that lower inflation is stable so it does not contradict its actions later and affect credibility. However, to fine tune the economy and achieve a “neutral or natural” real rate, that neither inflates nor deflates the price-level,  has been viewed by the Monetary Economist, as “ideal”, in other words, to match demand and supply for stable prices. As has already been discussed before, INDIA is going through a period of excess capacity, which invites measures to increase demand which has suffered since higher interest rate has put a lid on investment spending and lower real wages and income have put a hold on consumption spending and both have resulted in excess capacity and savings also due to inflation and inflation expectations, which are now changed to deflation and deflation expectations and that need rate cuts to increase spending, both investment and consumption, the deflation or disinflation and same expectations might also incentivize people to consume or spend and save and invest, more. The RBI probably tried to increase investment by communicating an end to rate cuts and rate cuts expectations, but lower inflation or disinflation or deflation has renewed hope for further rate cuts across all the sections. The Chief-Economic-Advisor has had been most vocal about inflation forecasting errors and demanding a rate cut, he says that situation warrants a rate cut on a substantial basis. Nonetheless, the government too might help increase demand through speedy implementation of the 7^th Pay Commission and wage spending, which are likely to increase real incomes, when prices are below the RBI’s lower target band at 2%, prices have gone below the central bank’s target, so it must been seen that, now, how the RBI is going to handle the novel situation? The Economists view forecasting and proactive policies as vital for more credible monetary policy; they help avert a problem even before a problem arrives… Nonetheless, under the new conditions the situation might lead to change in the RBI’s stance to accommodative and rate cuts and rate cuts expectations…

Lower cost and prices are feasible for competitiveness, demand and growth...

The notion of flexibility of prices has been a point of divide between the Classical economists and the Keynesian economists, Sir (Paul Krugman) teaches Keynes so his inclination is acceptable and welcome. But, prices in the economy of which some are rigid and sticky and some not, however, wages are rigid, but interest rate are not... Near zero interest rate in much of the developed is a simple example of flexible price of capital... Moreover, the law of supply that price may fall as a result of increase in supply and vice versa, also operates in the economy; the supply glut of oil has lowered prices... In the developed world the price-level has gone down as a result of more money supply, lower interest rate and higher supply... However, there is nominal downward wage rigidity as put by Paul because labour won’t accept lower nominal income, but lower real wages or minimum real wages cut with higher inflation might reduce the actual or real price of labour which has increased supply, but lowered demand which have resulted in low demand and growth... Lower real wages have also reduced demand for imports... Lower real wages in order to gain competitiveness and exports has actually resulted in low domestic demand and imports culminating in low domestic demand, low global demand, low domestic growth rate and low global growth... Prices might be flexible, but nominal wages might be not...

Lower domestic price-level and wage demand have made Germany more competitive i.e., internal devaluation... Lower prices in the domestic economy and inflation and depreciation in the trading partners’ economy have lowered the prices of German exports more relative to the competitors... The only way to reduce trade imbalance is to also use internal devaluation by the trading partners to increase competitiveness of exports and reduce trade-deficits... Germany has increased real exchange rate (nominal exchange rate minus inflation) in order to achieve devaluation and exports and the other countries may also increase real exchange rate by lowering the price-level and contain wages and increase competitiveness... To reduce German surplus it is important to play the German way...

 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...

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...

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...

It is probably a matter of real-wages in the trading partners’ 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...

Trade becomes important in the short-run after full-employment if inflation (is there and) to be controlled. Economists favor lower prices and higher real wages and incomes to increase demand and growth…

Few lessons from past...

The past government kept the money-supply loose in the form of fiscal spending and also pushed the central bank for lower interest rate longer in the aftermath of the Recession 2008 which set fire in the market leading to double digit inflation and the problems of twin deficits – fiscal deficit and the current account deficit. Economists saw the period after 2011 under the UPA rule as a period of gross mismanagement under all the supply side and structural constraints and INDIA had a history of easily overheating under a directionless agriculture and food supply management increasing food inflation and lowering real wages and demand. The unprecedented increase in spending by the UPA led to inflation, higher interest rate and lower real wages and lowered demand and growth in the economy in the final years of its term. INDIA has a full-fledged irrigation deficit upto 50% land dependent on the rains for irrigation and a major factor driving the food inflation every year, but none of the government in the past has showed determination to deal with the problem of lower productivity and food security. The demand for agricultural loan waiver due to flood and droughts has had been a regular problem faced by the every government which needs attention of the government to reduce the risk associated with rains in the agriculture sector of the economy which has given employment to the half of the labour force due to less investment, less job opportunities and slow growth. However, demand might advent after the implementation of the 7th Pay Commission and Good Monsoon... Higher inflation and successive droughts in the last years of UPA considerably dented demand of the urban and the rural areas which is also responsible for rising NPAs due to less demand and slowdown... The Government must try to contain demand due to loss in real wages and incomes because of inflation; otherwise 8th pay commission is not far resulting in Public deficit/debt... The government must continue spending on increasing productivity instead of blindly investing on increasing employment and demand... The Reserve Army of Labour is also important to keep prices and wages low through increasing productivity... Wages should correspond productivity otherwise it would just create demand without supply... Higher spending on education, skills and innovation or technology is expected if we want to increase demand and supply, both, without heating or inflation. If investments either create only demand or only supply that would destabilize the prices and unemployment, but if we try to increase both that would result in better growth outcomes with stable prices and unemployment.

GST could be dis-inflationary...

The Goods & Services Tax (GST) has been rolled out from 1^st of July 2017 in order to make the previous cumbersome indirect tax regime less complex, while replacing the bunch of taxes with a single GST.

However, to cover a wide range of goods and services we have four rates of 5%, 12%, 18%, and 28%, instead of a single rate, and 0% tax on the food items which might lower food inflation and inflation expectations and that is likely to boost demand of food and food products in the economy which would be a plus for the food-industry and employment and growth.

 Lower inflation and inflation expectation and interest rate and interest rate expectations would help strengthen growth.

Improved flow of goods and services across all the states would also increase supply and lower the price-level.

Taxes are often passed to the consumers which is called profiteering for which the government has made provisions for anti-profiteering rules to reduce the incidence of taxes on the consumers to not to stroke consumer demand negatively.

Nonetheless, taxes should be neutral in the sense that they should not affect either demand or supply so that growth and growth expectations are not disrupted, but taxes are an effective tool to incentivize or disincentivize demand and supply.

Lower inflation and inflation expectations due to better supply or flow of goods and services could increases interest rate cut and rate cut expectation to improve growth and growth expectations…