More tightening and price corrections...

Article;
Towards a more predictable, transparent RBI-policy.

Comment;

According to the Urjit Committee report we have to check inflation at 6% because the range for monetary policy action is 4% with a band of 2% which means we should not expect tightening between 2-6% and between the range tightening will depend on other indicators such as unemployment. As far as unemployment is concerned we can expect tightening if the unemployment rate is below the natural rate or frictional unemployment. According to Keynes 5% of our workforce is always in the middle of loosing a job and joining a new one and considered it as the natural rate... It is true that inflation decides the course of interest rate but unemployment rate is important for the level of heating in the economy in form of prices. Unemployment-rate results in the divergence of nominal and real prices and will result in bubbles, such as in INDIA in the realty-sector and in the stock market too… stocks are overweight, over-expensive… Looking at the scene form a monetary-policy and interest rate perspective we can easily expect further tightening and a major correction in the prices. An inflation rate of 6% will probably see a correction of 6% in the prices, lower stock prices will lower income and demand and the effect will spill-over the economy, prices of other things will also go down. We have to weigh-down the trade-off between how much income has gone down and how much prices have gone down to get real-prices and income. Higher real income means higher welfare...

Health in Bihar...

When we say that economic-development contribute to good-health by improving wealth and nutrition; rich regions have greater capacity to invest in public health care and measures, then it is equally true that health improves economic development too. It is true from both ways… Better health increases productivity either by fewer days-off, due to bad health, or by increasing output. Healthy family makes other members devote less time taking care of ill ones thereby release more time for their jobs. Health also help cognitive-development and increase the learning capacity through enhanced nutrition and less disease in early childhood adding to human-capital, a vital element of economic-development. At a social-level investment in health leads to demographic changes which further contributes to economic-development. It may lead to a high ratio of workers to dependents which increases national-savings and investment which increases economic-growth. Health is defined not only in terms of physical and mental health but also by improvement in drinking water, shelter, sanitation and better livelihoods which can contribute to improve health-conditions of the mass to achieve Millennium-Development-Goals, ultimately… 

Bihar, an ancient centre of power, learning and culture, is among the one of the poorest states in INDIA. It is the third most populous state and has a population of 100 million people. Besides massive malnourished and underweight children at 55% in Bihar, against 40% for INDIA, Bihar has one of the highest infant and maternal mortality rates, 52 per 1,000 and 312 per 1,000, respectively against 50 and 254 for INDIA, due to improper health services in the rural areas. The number of anaemic children in the population is one third. More than 90% of the adolescent girls are deficient of iron. Bihar is among the few states where polio continues to be a threat for children’s life. Less than 5% of the women are able to breast feed their first milk (colostrums) which gives the baby immunity against many diseases and only a third are able to breast-feed their babies for the first six-months. Only one child out of four, suffering from diarrhea, receives lifesaving oral rehydration salts and zinc tablets. Bihar is one of the most vulnerable states for the spread of HIV in India due to a high level of income-seeking migration, poverty-induced trafficking of women and girls, and low awareness of HIV/AIDS. Among the major states the human-development-index in Bihar has been lowest for more than three decades.

The National Rural Health Mission is the largest public health programme of the Government if INDIA. The allocation of resources under the programme depends on health indicators and the states performing badly on those indicators are likely to get a larger share. Under the scheme 85% of the funds come from the Government of INDIA. The Government of INDIA has increased the allocation for N RHM to 73% from the year 2007-08 to the year 2013-14. But, many of the states are slow in releasing funds under NHRM and Bihar released only 48% of its total share. The NRHM is carried out through State Health Societies (SHS). To give strength to decentralize hospital management the NRHM has introduced District Health Societies (DHS) and Village Health and Sanitation. Janani Suraksha Yojna (JSY) is an important improvement in NRHM and is aimed at providing financial help, cash transfer to women. While responding to the question that whether doctors visit health centres 90% people in Bihar said “no”…

The above shortcomings in health care in Bihar can be said to be the result of deficiencies in the health care system aggravated by unavailability of the required manpower and infrastructure and inability to reach the needy. The health sector in Bihar is marred by shortfall in trained professionals in the rural areas.  Shortage of required drugs and medicines, and, poor condition of equipments and facilities are among the widespread problem that distort the service delivery mechanism and quality of health-care. About one-fourth of the Bihar villages still do not have any health-care-facility within their reach even after the advance in the areas of rural infrastructure and communication. High population growth further contributes to pressure on the favorable outcomes. Lack of proper health care facilities is an issue among the people of Bihar. Health has a positive and statistically significant effect on economic growth and development. A one year improvement in life expectation contribute to a 4% increase in output which is a relatively large effect to justify investment in public-health on the account that health may increase productivity of the labor-force which has a direct relation to economic growth, our ability to produce increases…

INDIA still supply-constrained...

Article;
Analysts see Rajan not losening rates despite better CPI data.

Comment;

I think the Urjit committee report on the time-table to bring inflation down to 8% by January 2015 and to 6% by January 2016 will only stretch the tightening-cycle and will prolong the industry's stress due to high interest-rates. As soon as we will be able to bring inflation down there will be more room to start loosening-cycle. I think the RBI should try to bring inflation down as soon as possible so that we can loose monetary-policy to promote economic-growth. The latest twist in the story has been the chance that government will decide inflation target for the RBI to achieve by using interest-rates. If the government has to decide inflation-target we can easily expect it to debase the currency because government by nature it is extravagant, they spend more than individuals (Wagner's Law). In INDIA (a developing/emerging) economy demand always likely to exceed supply because we are not producing much at competitive price to match supply with demand. We are supply constrained... The government should try to improve supply... Narendra Modi has a wonderful concept to overcome supply side constraints. He said he would set-up a fund under price-stability, a price stabilization fund to improve supply of goods, especially food, to the economy... No doubt it is like increasing subsidy and moreover in a different currency but the advantage with the Indian scene is that we need domestic-currency investment especially in agriculture products and their marketing... Industry can do it...

Stop inflation targeting (US)...

Article;
More on wages and monetary policy.

Comment;

The FED should definitely stop targeting inflation now and should let deflation materialize... lower prices will improve the competitiveness of US exports and lower prices domestically will also improve real wages... good for savings and consumption too... Delevereging would be less painful because of more resources due to increase in the value of wages and income. Downward rigidity is not supported by the UK example. Even the US graphs show that average wages and incomes have come down from the pre-crisis levels... . But are now rigid at  low-levels . The question is how much will you squeeze the economy... there are limits... The recent recovery of the UK economy has shown that lower wages help in reducing unemployment... because labor-intensive technologies are cheap to invest... Deflation would help from many sides... Higher inflation expectation would increase income-expectation and deflation would make people expect less income because inflation is very low... If we will target inflation people will expect higher incomes and lower prices will make people accept lower wages... Both nominal wages and prices should go down to clear both goods and labor market... the Fed should stop targeting inflation... we need to improve real wages by lowering prices (Pigou-effect)... It will also help the economy in liquidity-trap... 

Gujarat Vs Bihar...

Development does not only mean economic-growth. It is associated with improvement in human-welfare within an economy. The most common definition of economic development is to grow, improve and progress… Moreover it also means reduction in poverty, inequality and unemployment within an economy. Development more generally means improvement in incomes of people living in poverty. Amartya Sen says development means freedom for a common-man; it means improvement in “freedom and capabilities” of the poor. Therefore, development means upgradation in the quality of life, development of social, economic and political freedom. There are many indicators a person may take into accounts while comparing growth and development of any two regions. Here, Gujarat and Bihar… Education, skills and training levels, levels of manufacturing, sanitation, electricity, housing, hygiene, hunger, people living in poverty, unemployment-rate, human-development-index, and many more… There are many important objectives of development. Some of them are to increase the availability and improve distribution of most basic life-supporting goods such as food, health, shelter, and protection, to raise standard of living, provide more jobs, good education, attention to human-values to generate individual and national self-esteem, and to increase social and economic choices.

The human-development-index (HDI), created by Amartya Sen and a Pakistani economist, concentrates on three things, life-expectancy, education and income. According to the index Maharashtra was at the first place, Gujarat at third and Bihar was the last in the row. Even though Bihar spends more on education than Gujarat, but the HDI shows education levels are better in Gujarat. Bihar illiteracy-rate is around 15% higher than Gujarat at 10%. Recently the Gujarat government announced measures to promote skill-development through Public-Private-Partnership (PPP) model which will promote industrial and economic development in the region.  Education and skills development contribute best to reduce poverty and earn higher income. If you are more educated and more skilled and productive you will get higher remuneration. Income works best to increase welfare of a common-man, s/he can better take-care himself and others too. You become independent and demand more… good for economic growth rates and for economic development too. Skills-development is an important area these days which affect the level of income. Skills improve you productivity, and more productivity means more income. The condition of skill development in Bihar is inferior to Gujarat and this is reflected in the per-capita income. Per-capita income is also an important indicator development. Gujarat’s per-capita income at Rs 90, 000 is much above the per-capita income of Bihar at Rs 23,000. Much below, less than a half...Low skills base of Bihar is among the most important contributor to poverty. Gujarat is also better in terms of poverty ratio. Gujarat’s poverty ratio stands at 16.6% while Bihar was at 33.5%. It means that the number people living below poverty line are lower in Gujarat as compared to Bihar. Sanitation condition in Gujarat is also better than Bihar. Out of the total population only 16 percent has electricity connections.  Industrial development, which is must for employment and income, in Bihar lags behind Gujarat. The share of manufacturing in Gujarat over 34 % is much above Bihar at 5%.

Modi’s model can be applied to states like Bihar if we use policies to hit Bihar’s local condition and resources. Bihar is completely different as far as low-per capita income, higher poverty levels and low manufacturing base is concerned. Bihar’s power shortage is mainly responsible for less manufacturing compared to Gujarat which is responsible for low employment levels and backwardness. Manufacturing is important for employment generation. The priority for Bihar in the long run is to increase employment opportunities and a higher per capita income for the growing population. Poverty in Bihar is a major issue and more acute in terms of numbers. Therefore to remove poverty we need more jobs for those do not have a job. Manufacturing may be capital or labor intensive depending on the level of technology but for a labor rich region a labor intensive technology is more appropriate to reduce unemployment. Therefore as far as technology is concerned we need to use more labor intensive technology in manufacturing. An important element of the Gujarat model is the emphasis on development of basic infrastructure, like power, roads and ports. Gujarat’s 24 hrs power to its villages has worked in favor of the state economy and helped in boosting manufacturing. Gujarat is an example of how infrastructure contributes to economic growth and development. Agriculture in Gujarat has also supported rapid growth and is a key factor in the development. Agriculture affects the overall economic performance of an economy. If Bihar has to improve its industrial base it is important that it press for agricultural development. Agricultural development is an imperative for manufacturing and industrial development because its keeps a tab on inflation and wage increases which can increase the competitiveness of the goods and services produced in the economy.    

Nitish's second-term...

The progress of Bihar, a front-runner in many reforms in INDIA, started degrading just after few years after Independence. But, due to anti-congress rhetoric in 1989 and in the name of social-justice Lalu Prasad Yadav emerged as the inheritor of the throne of Bihar which marks the down-fall of development of the region. But then in 2005 Bihar saw a period of change. Lalu Prasad Yadav’s regime came to an end and a new age started… Again, another product of anti-congress sentiment and Lalu Yadav’s prior confidante Nitish Kumar came into power. Nitish Kumar no-doubt brought many fundamental changes in his first tenure. Bihar was brought on track of law and order, and, it made a leap in terms of development. But things changed in his second term and the environment deteriorated. People attribute this to the arrogance after a clear majority. Bihar has changed in terms of corruption during Nitish Kumar’s second tenure. Today ministers along with beaureaucracy are demanding money, actually bribe… Bihar even misuses funds given by the center under various welfare schemes to improve the quality of life of poor-people. Irregularities and corruption in schemes like MGREGS and Indira Awas Yojana (IAY) are the examples bad politics. Moreover, corruption in Police and Higher Education for posts and promotion are examples of corrupt practices prevalent in Bihar… 

  Many of the ministers in the Nitish government have massive properties. The liabilities of these ministers, politicians and beaureaucrats can give a tough competition to big corporates. They have invested in malls, real-estate, hospitals… actually, black money…Moreover there have been charges of politicians manipulating the media. Media is accused of hiding the facts from the public. Even on the internet you will not find many news on “corruption in Bihar”. Censorship of media in Bihar is not new. When Markandey Katju, president of Indian Press Council, mentioned this at the seminar at Patna-University the situation became chaotic. But, when the state-government said it is baseless the opposition raised its voice against the media-censorship by the Bihar-government. A three member committee was appointed by Justice Katju under Rajiv Nag to probe into the matter and the committee said that journalists work under pressure from the management to not to write against the government because it can stop the advertisements. Moreover, the committee also said that journalists writing against the government face even transfers and suspension in many cases.

Indira Awas Yojana (IAY) according to Comptroller and Auditor General was plagued by corruption. The scheme was intended to provide homes to the poorest of the poor. Accoding to CAG report rs 325.35 crores of IAY were deposited in general bank accounts and not in separate bank accounts of IAY. List of shelter-less family was not prepared as per required guidelines resulting in allotment of Rs 10.36 lakh to the owners of pucca-houses overlooking the waitlist. Adding that list of shelter-less was not prepared. .The assistance under the scheme was provided to more than one beneficiary against a single BPL (Below Poverty Line) number resulting in irregular benefit of Rs 17.80 lakh to 767 people. MGNREGS is also not without corruption. The registered labour figures are not as per the rules. Many times jobs card are given to more than one family-member. According to the country’s chief auditor that 40, 304 more families registered in 82 panchayats are counterfeit. As per CAG the state did not follow work-prioritization according to the norms. Only 50 percent of work stated under MGNREGS was completed. Bihar’s State education minister said that he is ashamed of the ongoing corrupt practices in higher education. He said it is really shame full that college and university teacher has to pay bribe for promotion and transfer along with other benefits. He said even students have to pay bribe for enrolment in Phd classes.

The politics in Bihar is said to have the same problems – corruption, horse-trading, poor-governance and crime- as in the national-politics. Few years ago, Bihar was in discussion for building road and bridges every-day but today that scene has changed. Now, people are talking about misuse of public funds in Indira Awas Yojana and other welfare schemes. They are talking about how millions of rupees are being fiddled. The death of nearly two dozen children after eating food under the mid-day meal scheme is a sign of corruption in the politics and political life… Bihar which was praised for high economic-growth, not too long back , but, is now facing problem of social-upliftment and development. Despite the higher growth rates achieved by Bihar in the past it remains one of the most backwards states. It has the highest number of poor. According to government figures, more than the one-third of Bihar’s population is below the poverty-line and almost 40 percent of the population remains illiterate…

Chinese depreciation...

Article;
Depreciating Yuan: Is China intentionally engineering a slide in its currency.

Comment;

The fear that Chinese currency will depreciate is too overblown because it is a strong economy with surplus in international-trade and it will not demand the US $ too much which also lessens pressure on the $ to appreciate, demand will increase price will increase. They have enough reserves... Currency is depreciating because of loose money policy. Inflation and depreciation exist with each other, both imply that money-supply was increased for foreign importers, too. Depreciation happens when money-supply is increased, higher supply means lower prices.  Foreign-importers income increases which results in more demand, more goods are supplied, profits increase. So depreciation in Renminbi is supported by fundamentals... Loose money-policy also stoke depreciation. Even when the QE programme was started the US $ depreciated and exports kicked. The Chinese currency will also not depreciate too much because the US will not let that happen. It will worsen the US’ trade-deficit, especially with China, imports to the US will increase. Moreover, it will give Chinese exports advantage over the US’ exports which will not be good for the economy as far as employment is concerned. The US will definitely not let that happen. But inflation and asset bubble points tightening in the Chineses economy. Shadow-banks have pumped so much liquidity in the economy and it is likely that there is a bubble in the real-estate. Tightening will make Renminbi strong and will help the economy deflate bubbles…