The Model...

Demand and inflation would increase when (real) wages/income/savings/investment will increase and that would happen when prices would fall because in the short run income is fixed or is lower due to unemployment.

The neutral or natural or zero real rate of interest would neither increase/ decrease demand/supply/price at full employment with neither inflation nor deflation Wicksell...

In this situation nominal interest should also converge to zero, zero real interest rate and zero nominal interest rate...

When it is the time to expect inflation through real wages build up (after full employment) amid low oil prices (lower transport cost) which was a key for inflation the Fed has increased interest rate and interest rate expectations which would lower demand/supply/investment/employment/inflation and demand/supply/investment/employment/inflation expectations leading to lower price level or inflation and inflation expectation.

At full employment and full investment supply would be highest which would tail or converge to (highest) demand with more investment/employment and trade and would increase the economic rate of growth.

Prices might rise or fall depending on demand and supply.... which increases first..., in trade cycle... but in the short run there is a limit in which price can move on demand or supply.

Due to lack of data on demand/supply for whole economy the Fed might miss the inflation target, but it is easier to gauge inflation in the short run through the consolidated data on demand and supply in the economy.

Exuberance is common… higher demand-higher supply and lower demand-lower supply and price changes or volatility or inflation deflation.

The stock market is an ideal market place or model of the economy...

NPA's Bidders and the two-Zeroes...

The NPA’s Bidders must have a credible plan otherwise they will fail too, only lower cost could not make them profitable because cost may increase with inflation, wages and interest rate could increase...

They should be judged on the basis that they have innovation and space to increase productivity and reduce price and increase demand to withstand change...

The stock market is a model market with demand and supply...

But the price level is volatile therefore there is little risk in the short run but if you can hold it would increase investment if you have invested at the right time or lowest price...

There is a limit in the short run in which price can move - between low price and high price - buy lowest and sell highest...

Price is lowest when there is no demand or zero demand and supply is highest and it is highest (stock price) when the demand is highest and there is no supply...

Price moves between these two zeroes, zero demand and zero supply...

Individual stock cycle is different from the market cycle...

Wait for the last...

The Insolvency and Bankruptcy Code (IBC)...

The process should be wary of diluting assets which are likely to revive with demand and growth...

If refinancing or restructuring could make them working it should be the priority...

We should not forget that the economy is yet to fully recover from the previous downturn and disruptions which might turn the investment with growth in the economy...

The attempt to resolve bad debt in a hurry for recovery in banks might negatively affect the medium term demand and growth...

Restructuring of loans for which could revive with growth and become viable should be given time...

Like fiscal austerity during slowdown would further deffect growth, harsh austerity of banks would destroke jobs and growth...

Bank cleaning might sell assets which might still have some scope...

Banks should clean the longer term bad loans first or older bad loans... They have also a responsibility to save jobs too...

Recapitalisation was urgent because it would increase banks'' capacity to deal with bad loans and lending capacity...

Even to refinance and finance at lower interest rate to already sick units that could recover...

Long run is uncertain but still could have some probability to make the bad, the profitable...

Let the growth bring back that would separate good from bad...

More resources during high growth would help consolidation too...

GST and Oil importing countries...

Ideally everybody should pay equal taxes... Increase in taxes to restrict either production or consumption in unlikely to give result unless prices increase above a certain threshold, as per the price elasticity of demand for which tax should be levied according to the same, which would help achieve the objective, discourage encourage demand supply, sometimes which could be inelastic...

However, a single tax rate would neither promote demote demand supply and would be neutral to value added to GDP, a single low rate would incentivize value addition and should move within a band to adjust to demand and supply shocks to the economy...

If somebody is earning higher he would pay higher tax in the nominal money terms eventhough he is paying the same rate... Many other countries levy low and single GST...

The rally in the oil market is the result of supply cuts and not explicitly due to demand... However, the advent of other energy resources like renewable energy has eroded the competitiveness of the oil leading to surplus capacity in oil...

Oil is losing its competitive advantage... However, higher oil prices have been traditionally associated with booms and inflation... But, this is not the case now...

Prices have increased due to supply cuts and little for demand... Oil countries are exporting inflation to the importer countries... Importing countries might object...

It reduces real wages and demand... also for the former countries... Actually higher oil price are cutting demand and supply and profits too...

They lose economies of scale... and market share among each other... Cheap oil would help avert competition increase demand and share...

Moody's upgrade, first in 14 years...

The Moody Credit Rating Investors Service Agency upgraded INDIA’s sovereign rating from Baa3 stable to Baa2 positive after a span of 14 years during the Atal Bihar Vajpaye – BJP term to again in the Narendra Modi term for the same party which might mean that the BJP style of functioning the economic machine has been viewed as superior to the rash style of the Congress.

However, this could be the first credit rating upgrade by any agency followed by others to confirm the pattern that INDIA has succeeded well in unclogging business and investment domestic and external by maintaining stability in the economic parameters since it acceded to power few years back amid gross mismanagement and dwindling growth which recovered during the current government even after the experimental demonetization and the GST with more room to changes according to the evolving situation and the required flexibility to arrive at the objective.   

All the economic indices improved during this government including the growth rate despite change in the methodology which the World Bank attributed as per the latest one to arrive at real-GDP and GVA with inflation, current account deficit and fiscal health under control coupled with burgeoning foreign investment and stock market.

Foreign investment has increased record during the BJP rule despite low domestic investment due to debt hangover and commercial banks’ bad assets.

The recapitalisation of the public sector ban was taken by Moody in the right spirit even though it could put some pressure on the government finances going ahead, but it saw it as helpful for domestic credit scene, both the banks capacity to resolve NPAs and push for loan growth.  

Nonetheless, the formalisation of the informal sector through cashless economy and digitisation would improve the transparency and public revenue.

Both, demonetisation and the GST moves have been viewed as important reforms which the rating agency praised.

Nevertheless, the upgrade in INDIA’s rating would further bolster credit and investment in the economy.  

DeMo Anniversary...

Taxes are a tool of redistribution of income to factors of production, mainly labour and capital, and reduce inequality which have a far and long reaching effects on demand and economy and is the scope of economics...

The governments have already tried to unearth black money by politely asking the rich to declare untaxed income, but it did not change their behaviour...

Even noted economists agree that DeMo is a short term pain for the long term gain... 

DeMo was to end shadow economy or black money economy which do not pay taxes by curbing the cash use and bring money to banks, interest rates have gone down after the note ban...

People understand that it is good for the government revenue and spending on schemes like MGNREGA and direct benefit transfers...

DeMo has been a success when viewed from the point of view of limiting corruption and it has almost full people support...

The purpose of demonetisation was to bring unaccounted income or black money to the banking and increase tax compliance... what is wrong with that?

People must pay income taxes, wouldn''t opposition agree with that...? By limiting transactions in Rs 500 and Rs 1000 notes the government tried to stop black money transactions and bring money to accounts...

Demonetisation to digitalsation were not a hit on all the black money, everybody knew people would not give up easily, black money in cash was just the tip of the ice-berg... But, would restrict the generation of black money...

It was a signal that the government won''t tolerate corruption and black money and the move was the end generation of the black money...

The government showed that it would not deter take strict action if it is in the favour of image of the government and of the common-man despite criticism... which showed results in the UP elections...

World Bank Rank...

Recently in a World Bank report on the ease of doing business INDIA moved unprecedentedly 30 places up from 130 last year to 100 this year which revived the optimism after several quarters of low growth and the government still aspires to be in the top 50 in the next two years on the back of reforms it has been pursuing in the last few years and on the promise to continue to do so in the future.

The government has introduced reforms which helped INDIA improve the perception on the ease of investing money in the country which has a direct link with employment in the economy and the economic growth rate. Businesses employ people which increases demand in the economy. Full-employment is the secondary objective of the economic policies after the primary objective of controlling inflation. The supply side reforms which the government achieved during its term resulted in low inflation and interest rate and expectations and helped improve stability in the economy that could be another factor that might help business and investment.

The bankruptcy and insolvency reforms brought last year are seen to give businesses more flexibility to move out of a business which is as important as the ease of starting a business. The World Bank see this reform as vital for doing business in INDIA and help resolve the problem of NPAs which has been holding businesses from investment and the timely solution would give businesses a boost. Moreover, NPAs are negative on the commercial banks balance sheets which could impair credit to other businesses.