Reforms and the promise of Achche-din...

There is a discussion around the narrative that the Modi government has mismanaged the reforms that have struck the economic growth rate negatively when it was already in a recovery mode since there has been a heightened expectations that interest rate would go down more to aid the speed of growth from the past slowdown and rate hike cycle, however transition from a non-reform period to a reform period requires certain amount of adaptation, the economy adapts from one policy or set of rules to others which might also create uncertainty for a period because people take time to practice the new set of rules based on the information, both demonetization and GST were such kind of reforms, demonetization was also a reform, a reform to curb tax evasion and black money…

Therefore, these reforms were long pending only Modi government has brought them to the fore, they we needed… How would you tell people that black money is illegal and it is also a hit on the revenue, it is true that revenue deficit has lowered expectations from the government, tight fiscal deficit numbers might divulge in the case of lower private investment, nonetheless increasing productivity would help increase competitiveness and demand and growth… Spending on the skill development according to the industry demand is likely to create more employment since it would also increase demand for teachers and trainers…  The supply of labour must accommodate the demand of labour otherwise there would unemployment… More spending on education, skills and innovation would be anti-inflationary because production could increase despite of full-employment…

Onething the Modi government did from the onset was to infuse a sense of “Achche-din” in the minds of the people which has given rise to expectations of better days ahead which might give rise to spending in the expectations of better incomes in the future, even the economists try to paint a good picture of the future, ie good expectations about future to increase consumption and investment spending…

Govt could still contribute through lower prices...

Increasing fiscal deficit-debt limit is the second best strategy to boost spending and growth is widely accepted... the first being the lower interest rate and lose monetary policy... During the 2008 crisis the RBI reduced interest rates to 4% and now we have a higher interest rate at 6% which means we have still a lot of room to reduce interest rates... In a globalised world higher real interest rates when the developed countries real rates are negative is a perfect recipe for making the domestic economy and investment uncompetitive... However, inflation and the inflation targeting are concerns, but that is much a supply side problem... If the government could commit better supply side management, even through price stabilisation policies and funds for food supply and food security instead of increasing spending directly, it might convince the RBI to lower rates and increase domestic investment...

Inflation is a problem for the poor who have less bargaining power in the market and less income and savings, but good for businesses because it lowers real interest rates... The government should support the poor so that inflation does not affect their income function (Consumption plus Savings)... Poor people's propensity to consume is more than rich people, therefore demand would come from the poor and lower interest rate would increase investment and supply which are good for the economic growth rate...

Government should keep doors (imports) open for food and fuel supply in the short run... Inflation in INDIA is basically a supply-side problem... The Government and the RBI might incentivize imports which might improve supply and lower inflation and interest rates... Lower inflation might further increase chances of rates cuts in future... Import substitution is a better strategy to create more employment... INDIA shouldn't allow imports that it can produce at lower prices... Tariffs might incentivize local production too... It is upto to INDIA what it chooses to do... It is just how you will achieve full-employment and full growth...

Public Debt, Spending and Productivity and Banks' Recapitalisation (Revised)...

Instead of capitalising public sector banks itself the government should sell stake or shares in the equity market that would not need government capital or borrow through bank-bonds form the money-market using private capital... Moreover, there is enough space to increase public debt when the developed countries have exhausted aggressively, including China... INDIA is very conscious of the credit-rating-agencies for a better rating for itself, but INDIA should not be bind by this assumption that credit rating are very credible and foreign investors would pour more money, but the problem in INDIA is private investment and not foreign investment which is aided by cheap capital despite huge public debt in the developed countries... The government should spend without overheating on increasing productivity, education, skill, innovation and infrastructure which also decrease cost of investment and lower inflation... Public spending on increasing productivity would also lower inflation and inflation expectations because production would increase…

Domestic debt is not much a problem because it could be bailed-out with new money... However, debt in foreign currency, especially dollars, could still have far reaching effects across the globe when interest rate are being increased by the US which could increase the risk of default on foreign debt...

Sooner recapitalisation of PSBs would speed recovery in investment, employment and growth... The government must push those plans which have a higher employment multiplier... Skill development according to the market demand would also increase demand for teachers and trainers... If, INDIA could be able to regain 8% growth rate and low inflation (within target) that would increase domestic investment and foreign investment too... Higher growth and growth expectations are better indicators of how the economy is doing for more investment and employment instead of ratings...

International oil prices are now near $ 50 per barrel, half from their peak, but local oil prices are not half from their peak due to different type of cesses... Passing lower oil prices to consumers would increase their spending consumption and savings... Moreover, lower oil prices would also reflect in lower inflation numbers... Both would have a soothing effect on the interest rates and demand, and investment, employment and growth...

Non-performing... and Interest-rates...

Price stability and financial stability are not two objectives... When demand and inflation is low financial stability requires more demand in order to stabilize the situation... When FDIs, FIIs, are coming in domestic higher interest rates does not make sense... Why only foreign countries make investments (?) when the domestic investments are being held back by higher rates which are also responsible for default on loans, lower rates could lower borrowing cost of the non-performing-businesses and could make them viable... If foreign investment could grow why not domestic private investment... Currently INDIAn economy needs more demand in the sight to lower growth and growth expectation for which revival in private investment is vital... Higher real effective interest rate and real interest rate for domestic investment would make domestic industry uncompetitive... INDIA is far far away from bubbles overheating and financial instability because inflation and demand are low...

Nonetheless, higher NPAs pose currently the biggest drag on the private investment and credit creation which has made the economy add less jobs and create less demand and growth, the non-performing businesses and the non-performing-assets on the commercial banks’ balance sheet has reduced investment, employment, demand and growth because of less transmission of rate cuts by the RBI which has also made the new investments costly, the domestic private investment has been delayed due to slow recovery in demand, again due to bad-debt and higher real interest rates. However, the tradition to hedge businesses or investment in INDIA has been behind the developed countries which might help cover risk by insurance, it is like crop insurance which is probably more risky than business that is done by finding the feasibility of investment based on demand and supply side estimations… Hedge investment could help manage risk better in the future…  The government and the RBI are mulling the ways to unload the commercial banks’ off the less reserves problem to kick-in credit take-off which might pay dividend interms of lower interest rate and spending and growth …  

Interest-rate and Competitiveness...

If inflation has picked up in August which means supply might has gone down and/or demand has gone up, but lower growth indicate lower demand and supply and inflation, too... However, it increases rate cut expectations... Lower economic-activity point to rate cut expectations because growth is the underlying objective of the monetary policy... When the policy rate is 6% and inflation is 3.3, and the real effective rate of interest is above 3% that still increases space for rate cuts when the developed countries rates are lower than 1%... Otherwise it would decrease competitiveness and demand and growth... The real interest story is already well known which might negatively affect domestic competitiveness and demand and growth might go down... Lower interest rate increases competitiveness and demand and growth during a recovery...

                                              

Higher wages or income expectations because of progressive policies could increase demand, but if investment and supply do not increase we would be unlikely to break the vicious inflation cycle... Interest rate cut and expectations same as expectation of lower prices could delay investment spending if there are lower inflation and expectations or at least contained, below the inflation target, but it is a little uncertain to expect what would happen... Therefore, businesses must start accumulating inventories or use their capacity to produce more to lower average cost and prices and increase competitiveness and demand... The government and the RBI might try to incentivize investment and employment by the private sector through every possible means when they are hit by loss due to low demand and growth... 

Spending must come...

Expectations play a crucial role in propelling spending in the economy which is all the important to distinguish between the periods of boom and busts, during booms spending increase and in busts spending goes down leading to recession, spending is one special factor that decides how fast an economy is growing and creating job oppourtunities, a low spending scenario demand policies that increase private spending, consumption and investment, through monetary, fiscal and international policies, though economists favour fiscal spending better to counter cyclical deficit-surplus spending in the economy to strike a balance between prices and unemployment while achieving the potential growth rate. The growth of economy and the expectations about it has a significant effect on the spending of the economy, the expected growth rate often based on the current data and policies and would be policies has considerable influence on the spending decisions, basically investment. However, the spending constitutes spending from all sides, the consumption spending, the private sector or investment spending and the public spending, the monetary policy tries to incentive them through money supply and interest rate and expectations and full employment and wage or income and expectations while maintaining price stability. The inflation reduces demand and spending and disinflation or deflation increase spending through interest rate and real wage or income and expectations, a lower price level would increase interest rate cut and rate cut expectations and increase investment and higher real wages or incomes and expectations would increase consumption spending, guided by higher growth and growth expectations. Lower price and price expectation are important to form expectations about interest rate and wages which, as have been said before, increases investment and consumption spending and growth with less pressure on the public spending and interest rate, however in developing economies like INDIA there is a need to increase infrastructure and basic facilities like power to crowd in private investment and increase employment when the private sector is waiting for the demand to revive with consumption spending due to higher wage or incomes and expectations, the government in INDIA has pledged to double farmers income, increase minimum wages and has implemented the 7^th Pay Commission, nonetheless the real GDP has seen a reduction from the mid 2016 which has been further lowered by Demo and uncertainty created by GST. However, spending must come either in the form of consumption and investment, or both, to arrest falling growth and growth expectations. China has grown for thirty long years by projecting a higher warranted growth rate and expectations on the back of its huge population, but now receding, INDIA too has the same advantage and could grow at higher rates if everybody is gainfully employed with the right spending.     .

Strong Currency or Depreciation...

Strong rupee would lower domestic inflation since imports would be cheap... Domestic inflation would go down... INDIA is a net importer therefore strong inflows and strong rupee are likely to help reduce demand for foreign reserves and inflation and depreciation... However, cheap imports, lower domestic inflation could also increase demand for exports... It increases demand through internal devaluation because domestic price level might go down too due to cheap imports... Cheap imports could also make the domestic economy competitive in terms of low inflation and wage demand...

Depreciation is only a temporary approach to the problem of low exports and too much of it may engage trading partners'' in currency adjustments to reduce trade deficit... Exporters might try to increase competitiveness by innovation and other means to cut costs and prices... Lower wages too give INDIA a competitive advantage and labour intensive line of production except dear capital techniques might also be used to increase competitiveness... Interest subvention and tax holidays could help too...

Depreciation is often objectionable by the trading partners due to higher trade deficit... But, interest rate cut due to low inflation and then depreciation, indirectly, would not be directly objected... Depreciation occurs due to domestic rate cuts and more money supply and inflation... Lower borrowing cost would also increase export competitiveness, cost and prices of exports would go down... Adding to foreign exchange reserves unnecessarily, like China, and depreciation would still be opposed by the trading partners... Moreover, unless there are inflation and inflation expectations depreciation is not likely to work because nominal exchange rate would not increase and this time INDIA has low inflation and expectations because of higher unemployment and low growth... Inflation and inflation expectations increase only after full-employment... The US has increased money-supply indefinitely, but inflation and depreciation did not materialize because of high unemployment...

Lower GDP increase rate cut expectations...

Yesterday the GDP number was out which showed lower figures for the June quarter of the year at 5.7% due to lag in private investment, attributed to hangover of NPAs and slow revival in demand, both consumption and investment, due to higher inflation and interest rate during the previous regime’s profligacy without food-security coupled with supply-side problems that sent prices over-shoot people’s budget which ultimately reduced demand in the economy and higher interest rate further choked business activity resulting in low growth. The growth recovered only during the current government when inflation and interest rate started coming down with progressive reforms and fiscal rectitude and more space for the private sector, however saddled with low demand and growth, but higher wages and income expectations by interest rate cuts, lower unemployment and higher demand also due to supportive government policies, minimum wages and 7^th Pay Commission have just started showing results which are likely to increase spending given time in implementing GST which could be a reason for slower growth in and after July. Analysts had accepted short-run disruption due to GST, already anticipated. Lower money supply and growth due to DeMo has been further weakened by GST which has also lowered inflation expectations since of low growth, probably it is time for the RBI to cut substantially to improve growth and growth expectations. Lower growth and lower inflation expectations once again might make way for rate-cuts. Nonetheless, lower borrowing cost could also make the economy competitive and increase demand; lower borrowing cost would also result in lower prices in the domestic economy and more demand and growth. Prices and price expectations play an important role in the economic growth by the way of price of labour and capital, investment goods, and commodity, the consumer goods. There is a long standing argument between the Classicals and the Keynesians that “Are prices rigid or flexible?” Keynes considered prices as rigid or sticky, but Classical viewed prices as flexible. However, not all prices are completely rigid or flexible, and as we know, price of capital or the borrowing cost is an example of flexible price, but wage-price is not, evidence suggest that there is a downward nominal wage rigidity (Paul Krugman), similarly commodity prices too are not rigid since the central bank adjust interest rate and expectations to adjust the domestic price level, therefore if we say that the borrowing cost mainly decide the commodity prices would not be unture, however wage cost is the fixed part of the commodity, Ricardo’s labour theory of value is worth pointing that labor decides the price of a thing. Therefore, lower borrowing cost could play an important part in lowering the cost and price and increase demand which could increase inflation expectation, but as we know higher prices also attract supply which could also lower or contain price-level or inflation expectations, but it could be difficult to form a clear expectation, inflation or disinflation or deflation on the basis of the existing models, however, lower prices could increase real wage or incomes and real wage or incomes expectations and rate cut expectations and demand and spending and growth. Nevertheless, lower growth and growth expectation in the near-term increase disinflation and disinflation expectations which increase interest rate cut expectations in order to push growth and growth expectations through higher investment, employment and demand.