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.