Inflation Management, Even During Low Demand and Gradual Unlock...

The RBI needs to bring the market rates down, the psbs and the private commercial banks, they are not lowering the borrowing cost, but inflation has cut the real interest rate close to zero to negative which is the right time to increase spending, any attempt to lower inflation by rate hikes would reinforce inflation (and expectations) by restricting supply, since INDIA is supply constrained and demand is already low and could increase unemployment...

 

If it cuts rate of interest it would increase supply and demand by reinforcing disinflation or deflation by increasing supply and demand as long as there is unemployment in the economy, lower prices increase demand... Therefore, the RBI must commit the inflation target by lowering the borrowing cost and increasing the supply till the output gap closes with full employment...

 

The RBI may further cut as long as there is unemployment and possibility to increase supply and demand... with the natural real interest rate... Higher supply would help lower inflation and nominal or market interest rate and also increase demand....

 

Food inflation is a seasonal phenomenon, it could only be controlled through removing supplyside bottlenecks by the Government, it cannot be controlled by the higher borrowing cost by the RBI... The Govt could also lower oil prices when uncertainty and oversupply has lowered the international oil prices, somewhat...

 

Notwithstanding, if the lower prices are passed on to the consumers it would increase real wages, when food inflation and higher remuneration to the farmers, are used to control overall inflation and demand... If agricultural prices are not allowed to go up then core inflation must be brought down to increase real wages and incomes of the agricultural labourforce which accounts for a large part of the unoragnised sector and is around 60% of the total...

 

If manufactured products, oil and stocks prices are determined by demand and supply then why not the agricultural prices which could increase real wages and incomes of a large part of the population... US has subsidised the agriculture, INDIA too could help increase productivity by lowering the cost of the farmers and increase competitiveness...

 

The govt could also allow higher investment in water and irrigation (dams and reserviours) infra 'coz flood and drought add to the volatility of food prices and uncertainty for growth...

 

The underlying recognition of all the unholy alliances and allies is that no single party is able to provide a better and right substitute of the BJP and PM Modi... When all would become one it would lead to a sharp polarisation of voters, all vs BJP the probability of the BJP winning becomes 50%, other wise 1/all parties...

 

Post election alliance is a sign of thirst for winning anyhow... Congress joining the Seperatists in J&K would mean loss of its image only for the sake of win... Abolition of Article 370 is good for Kashmiris since it would increase growth and development and jobs and incomes and higher property prices and more wealth and prosperity...

 

Jean Dreze has included the training programme in MGNREGA... The govt cannot provide all the jobs on its own, it must use a mix of expenditure on the employment gaurantee scheme and training, skills and specialisation...

 

The govt may subsidise crops that are sensitive to inflation, provide da to wagers and import more, partly... and also let some price hike to help demand in the economy...

 

Additional incentive and spending about Rs 9 trillion would create employment and demand in the economy...

 

Spending on infra could help the blue collar workers who have a high propensity to consume, corporate tax cut would be saved, who have a high propensity to save, unless competitive gains and higher productivity are passed to the consumers, which could further increase real wages and incomes and demand.... Poor people are more likely to spend than their rich counterparts... spending is important during the lowdown... They also need more help...

 

If we pass on lower prices, lower corporate tax, to the consumers, banks too, lower interest rate that would increase real wages and incomes and lower cost and higher profits when money supply is increased... Majority would increase spending which could increase demand and price expectations, cheaper dollars and lower domestic exchange rate would also increase exports...

Reforms could Kickin the Economic Activity...

So far in a sense the govt has exploited the farmers by not letting agriculture prices market determined and by buying at low MSPs, it was the sole player in the market... It has bought produce on a price it wanted... Market would help determine prices by demand supply or quantity and if all farmers quote one price they would gain, poor farmers, too... Tax on the agricultural income is negligible which could prove out to be a profitable venture...

The NPAs have been a problem since the start of the NDA govt back in 2013, though the govt has recapitalised the PSBs few times in the past and also tried to lower NPAs through the Insolvency and Bankruptcy Code, but low demand and growth during slow recovery has further added to the new NPAs eversince the demonetization hit the money supply and supply chains... 

The NPAs handheld the RBI to lower the interest rate eventhough the banks were flooded with liquidity... Nevertheless, INDIA has a war chest of the dollar reserves which could be used to capitalise banks, lower dollars would help lower imported inflation and more competitive economy or the RBI could start quantitative easing to capitalise banks... The govt could also allow higher FDI limit in banks...

Spending that increases productivity and employment is quite welcome, though the govt has promised productivity linked incentive or pli to some sectors that is employment intensive and has capacity to shore up productivity and lower inflation to increase the economy's competitiveness and exports too... 

The virtuous cycle could soon kickin as investors wait the lower demand and price expectations to bottom out and increase demand and price expectations by spending more on investment and consumption, higher demand and price expectation could further increase spending and thus reinforce demand and price expectations as the lockdown fades... 

INDIA's growth rate contracted 24% in the first quarter and it is expected that in the second quarter growth rate would be 10% lower, but could soon recover at a healthy growth rate of 20% or more due to low base effect...

Infra directly add to development and growth... It offers job oppourtunity in the process of development of an area and prices like land, labour and capital by the way of construction and real estate development which is employment intensive... During 2008 Dr Rajan advised more investment in construction which led to the idea of priority sector lending which is followed by too much investment in construction and oversupply and loss which also created too much employment, demand and inflation, but of wagers which consume more food without food security and which resulted in food inflation and lower real wages and income and higher borrowing cost and the NPAs... 

MGNREA created more employment in rural areas and demand and too high food inflation without food security... Productivity increasing spending is quite welcome, it is a sign of innovation and increased competitiveness in the market... Lower prices increase competitiveness... 

But, the real estate never reduced prices to increase competitiveness which increases real balances with the public and demand... Same with banks they don't pass productivity gains and lower prices to the consumers when they are incentivised by the market, govt and RBI... Lower prices increase demand and price expectations...

Inflation is increasing more than wages which has depressed demand and growth... Inflation is a problem for everyone, those who have it and also for those who do not have it... It is also because it is in the demand model used by the economists, they expect inflation (and expectations) based on the Quantity Theory of Money as a result of the Money Supply and expansion when the truth is that as long as there is unemployment lower interest rate would reinforce lower price 'coz of increase in productivity of capital and labour and higher supply... 

The neo classical synthesis accepts that higher money supply lowers interest rate and increase supply and lowers the inflation and inflation expectations... The latter is observed in much of the developed world, overtime higher money supply and lowered the borrowing cost... The former the QTM is observed in the developing economy because of higher borrowing cost and supply side bottlenecks... Both, lower prices and higher prices and expectations play an important role in investment decisions and economic cycle... 

Lower prices increase demand and price expectation, but lower price expectations delay demand and increase supply which further reinforce lower prices, and, higher prices increase supply and delay demand, but higher price expectations increase demand and delay supply which further reinforces higher prices... Both lower prices and higher prices are followed by eachother is the economic cycle... It is profitable to invest when prices are low and sell when prices are high that would help stabilise the cycle... 

Both, little inflation and little deflation are good for consumption and investment and spending decisions... Lower prices increase real balances with the public and higher inflation increase nominal income... Lower prices increase demand and higher prices increase supply we need to balance, but at the highest which would also maximise growth and expectations...

Real bond returns depend upon bond yield and bond prices and inflation, too... Higher yield means lower bond prices which is the right time to buy bonds... Lower or cheap bond prices increase demand and bond price expectations and when people increase demand it further lowers bond yields and reinforce higher bond prices, when people buy a specific bond more money supply lower the demand for funds and reinforce lower bond yields... when the bond yields topout it increases demand... and vice versa...