Competitiveness, Foreign-Debt, Liquidity, GDP and the Fed...

Businesses are always run on the borrowed money that is why lower borrowing cost is very important for competitiveness and demand, it directly adds to the cost and prices, like transport prices which are the key costs for investment, it can reduce the cost of business investment...

It is unimaginable that imports are increasing due to lower domestic production and more competitive imports, due to lower borrowing cost from countries where capital cost is low... How domestic player could compete with foreign players?

Domestic lower prices through increased capital productivity could lower prices and increase demand... INDIAn businesses have been unable to compete with foreign companies... INDIA's low foreign debt and more expected inflows are likely to push domestic interest rates down…

And, the private companies could also borrow abroad like the Govt which could do the same; lower capital cost... and increase competitiveness and demand and growth expectations... Though hedging through derivatives would be important... Savings import could further facilitate interest rate transmission...

The government has tried to involve savings of Europe, Japan and US where interest rate are close to zero... which could lower borrowing cost in INDIA and increase supply or productivity and lower prices and increase real wages and incomes and demand and growth and expectations...

If the Govt borrows abroad in the domestic currency and/or hedge the currency risk and the interest rate risk it could help lower prices, especially the interest rate and increase productivity, capital, too and demand and growth expectations... means higher demand/supply {and growth (EXPECTATIONS)}...

And, by opening FDI in banking the Govt could further openup channels for foreign money flowing in, more inflows would make the rupee strong further reinforcing foreign capital inflows...

Nonetheless, the commitment for fiscal prudence has further lowered borrowing cost expectations for the private sector investment... The stock markets have been slow to recognise it... Moreover, Rs 100 Lakh-Crore infrastructure investment and boost to affordable housing through bank recap and liquidity assurance to NBFCs and HFCs are great cursor for investment demand spending... The Govt has tried to double the size of the economy to $5 Trillion form currently $2.7 Trillion which also means that wages and incomes would also increase to double which would increase demand and growth...

India Inc. thinks that liquidity is a major problem for the economy, but, RBI Gov thinks that there is adequate liquidity... To revive spending reviving earning expectations are important by cutting cost and prices to increase productivity, demand and price expectations... Lower prices increase demand and price expectations, overdemand and higher prices are common after lower prices and higher demand...

'The government had changed base year from 2004-05 to 2011-12 for prices or inflation which is responsible for a lower GDP deflator and higher real-GDP in the subsequent numbers... Nonetheless the Govt supplyside reforms have also kept inflation undercheck increasing real GDP by lowering interest rate… 

Though, there are claims that the economy has not completely bottomed out form the last interest rate hikecycle and still reflecting some slack amidst the renewed rate cut cycle... Changing base year has definitely increased real-GDP to some extent...'

INDIA's population growth rate, as in every other case, decides its potential growth rate which is 120 Crore/tenyear or 12% pertenyear, therefore to get everyone employed the economy must grow 8%, after accounting for the natural rate of unemployment at 4%, on an average basis... INDIA's potential growth rate is 8% and the economy should add 80 million jobs a year to achieve the potential growth rate... The growth in labourforce decides the potential growth rate...

A 2% inflation target (by the Fed) has lowered the economywide prices expectations below to an average of 2%... The policymakers have set a price increase of 2% on each product in CPI, including food and fuel, and whenever average inflation (CPI) reaches over 2% investors would start selling stocks/inventories, because of tightmoney by the Fed and lower demand and price expectations... which could further reinforce lower price and interest rate expectations and delay in demand and growth (expectations)...

Probably the Fed would like a fast recovery in the prices and growth by avoiding lower interest rate or interest price/cost expectations that could delay demand and growth, people would hold spending in expectation of lower cost/price... Either the Fed could reject market rate cut expectations to revive growth or it should deliver a rate cut soon to increase demand and price and growth and expectations...

Moreover, recovery could take 2 to 3 quarters... It(the Fed) and, everybodyelse would like a quick recovery to potential or full employment growth... The Fed could probably try to neutralize real interest rate at 0% that would bring balance in savings and investment and price and growth expectations... means 1.6% inflation and 1.6% interest rate... 1.6% interest rate is to compensate 1.6% loss due to inflation...

Incentivising or inducing the subjects/agents have been popular in Economics for a longtime, now... Actually, any economicpolicy either induces or deduces or disincentivises or incentivises the agents in the economy for a particular outcome...

We should probably cut glaciers to get fresh water and export; water could be costlier than oil in the future... Rain harvest is difficult, but snow harvest is easy, for water...

Bank Recap, Export Model, Price Expectations, Taxes, Foreign Debt and Stocks...

We have close to $ 500 billion in Foreign Exchange Reserves, if the RBI infuses $ 100 billion to capitalize PSBs which would be close to Rs 7, 00, 000 Crore it could help transmission of interest rate cuts and credit take-off...

NBFCs would also be benefitted due to credit flows... Liquidity is also important for the stockprices... People have also delayed spending in hindsight of Budget announcements...

Internal devaluation pursued by Germany is another model, except China''s external devaluation model which looks inferior when considered from the point of view of domestic real wages which increases in the internal devaluation as inflation goes down... and also reduces the domestic exchange rate and increase exports...

Since, the RBI has set an inflation target of 6% (max side) it has restricted the average movement of prices or inflation in the economy which also means atleast 7% wages and incomes growth would be necessary to sustain real wages/incomes and demand and growth...

Nonetheless, price expectations are the major determinant for investment decisions in the economy... The 6% inflation target binds price expectations at 6% on an average basis... and returns/profits... The inflation in core-manufactured items or CPI has also been restricted at 5-6%... except stockprices...

Both, low CPI and core-CPI tells that price and expectations are low (due to inflation targeting) and people have delayed spending due to lower price and interest rate expectations... Higher inventories and low demand have also resulted in lower price expectation...

To increase demand and spending the govt should try to reinforce higher price expectations, but not so much to reduce demand and growth...

Rate cuts by the RBI could be the appropriate response for lower price expectations..

As some claim... revenue is also dependent on the demand and growth and may increase as the economy bounces back... Lower tax and a big base or scale might be possible going ahead... Taxes also add to competitiveness domestic demand, exports and growth...

The government has reduced the corporate tax rate just like the US, but imposed tax on the buyback of shares... Paul Krugman says companies would increase buyback of shares instead of passing tax benefits to the consumers...

But, INDIA has tried to disincentivise shares buyback... Lower prices to consumers might increase real balances with the public and demand and growth...

INDIA should borrow foreign only in its own currency... dollar denominated foreign debt would increase the demand for dollars, resulting in strong dollar and higher imported inflation... and depreciation in the exchange rate and outflow of dollars...

To attract foreign capital a strong rupee is must... rupee denominated foreign loans would increase demand for rupee...

If people set same buy price, a lowest (low price) to buy and a sell price, a highest (high price) to sell, it is possible to make markets more predictable... All should buy at lowest price and sell at highest price... PEOPLE SHOULD QUOTE SAME PRICES, BUY OR SELL...

Niveshkon ko ek daam par kharidna aur bechna chahiye... nuntam par buy aur adhiktam par sell... demat mein pehle se set kar dein...

Also, the people (investors) who have money need not to worry much because they can always buy more to reduce the average money cost and add to sell capacity in terms of time horizon...

But, equities or shares are also a popular form of getting investable funds by companies... Lower investment in the stock market would mobilise less funds for investment... Budget has discouraged equity investment...

What is the rationale after increasing tax during a slowdown? Slowdown is not the right time to increase tax, it is the fastup or the upcycle, then it would also lengthen the expansion by stabilising expectations... by avoiding exuberance... or too much volatility in prices on the either side...

Higher taxes could lower demand and prices during higher prices... and help stabilise prices... and vice versa...

One cannot directly compare a millionaire in the Rupee in INDIA and that of a millionaire in the Dollar terms in the US... INDIA has less rich than the developed countries... Like poverty defining wealthiness is also difficult... 

Budget Highlights 19-20...

The Budget our FM outlined in her speech was one of the commitment for fiscal prudence, besides ensuring liquidity to continue investment and demand especially for the real estate and affordable housing, it has reduced corporate tax on 99% of the business form a turnover of Rs 250 Crore to Rs 400 Crore to 25%, the aim was gaon, garib, kisan…

NBFCs would be regulated by the RBI to reduce the risk of excesses and given lending assurance to genuine NBFCs… But, it lacked on popular expectations like less LTCG burden and increase investment and tax exemptions… The budget has targeted the fiscal deficit of 3.3 % of GDP…

The government has reiterated its plan to upskill youth in language, automation, artificial intelligence, internet of things…

The budget has sought to increase demand for affordable housing by providing interest rate benefits upto Rs 7 Lakh on a loan of Rs 45 lakh for 15 years…

The govt has pledged Rs 100 Lakh Crore for the infrastructure in the next five years which is likely to give investment and employment a big push, though construction has been saddled with NPAs…

Both, investment in real estate and infrastructure could crowd in private investment and employment…

The govt has promised to connect every household with piped water, water has been among the most pressing problem facing the INDIA economy and also for irrigation purposes…

The budget has failed to attest its interest to follow public’s expectations without pushing harder for growth, inflation and interest rate expectations, through limited borrowing plans and more space for the RBI to reduce cost of capital and increase productivity of capital and competitiveness, demand and growth…

Factors Affecting Growth, Budget and Beyond... (rev.)...

Managing or stabilising prices and expectations would be crucial for spending and growth... People''s consumption and especially investment decisions rely on growth and price expectations...

Lower prices increase investment and demand/supply and price and growth expectations and higher prices reduce demand/supply and price and growth expectations...

Budget may help reduce volatility and exuberance in the economy by stabilising price or inflation and growth and expectations close to its potential...

There is a slowdown in housing that employs mostly unskilled labour in large quantities which could go down leading to lower demand and prices, housing, too, but that would increase demand and price expectations...

Any price forecasting should entail that though price is volatile, but the situation can change in the medium to the long run...

Prices follow a cycle where prices move between high and low and lower prices mean higher demand/supply and price expectations and higher prices mean lower demand/supply and price expectations...

When prices fall people delay spending which further reinforce lower price and expectations and vice versa... Lower prices of housing could increase demand and price expectations...

Foreign debt has risk of exchange rate or depreciation in the currency... Borrowing in domestic currency may hedge against the risk of default...

The US borrows in its own currency that is why loans are free of the risk since it can mint money and pay loans...

Trump has imposed tariff on himself (US)... The goal is to increase productivity and lower prices and increase demand, at lower prices suppliers increase supply to increase profits...

Expecting or forecasting prices is risky... Even Fed's forecast of inflation has failed... Even after the best of equations there is always a stochastic or error variable or term....

LTCGT (INDIA) could be negative for big longterm investors... For small traders it is not a big stroke... but, it has definitely affected invest and sell off... Budget could think of increasing investment...

LTCG (Tax) is discouraging longrun and big investments which directly affect the stockprices... The corrections and recoveries we have seen during the past one and a half year could be attributed to LTCGT, people are booking profits and are trying to save 10% in tax...

LTCGT prompt investors to increase profits by selling stocks...

There is a vast service sector of hourly or daily or monthly or workly wages earners who do not pay direct taxes, but indirect taxes or gst, gst revenue may help gauge demand and growth... GST is paid by all...

Lower inflation has increased real interest rate on savings which has lowered investment and real interest rate expectations to revive growth...

If savings do not increase investment, return on savings would be low because people would borrow less and would pay less premium plus inflation plus expectations and risks in the long run, short run is safer and more certain than the long run, more uncertain, which runs counter to the argument that save/invest for the longrun...

This is also the reason that the longrun real interest rates are higher than the shortrun real interest rates...

When the central bank increases moneysupply it first reduces longrun rates and bond yields then the shortrun rates... If shortrun rates are higher than the longrun interest rates it means people expect low inflation expectations in the longrun...

Little deficit in rains could help increase food prices and farmers'' income and demand and growth... If they (farmers) expect lower prices they may increase supply, but on the contrary they decrease supply which increases prices and reduce demand...

On the otherhand, if they expect higher prices they may reduce supply to increase returns, but they increase supply which lowers prices and income and demand increases...

Any attempt, to increase/decrease prices through expectations either reduce demand and increase supply or increase demand and reduce supply and could reinforce lower/higher price expectation ... We need to balance demand and supply on the production frontier to keep prices stable...

Since the govt has given 10% reservation to upper cast earning less than 8 Lakh yearly it should tax less that group... probably in the lowest tax bracket...

MGNRES has just provided unskilled-unproductive-low paid jobs, but how long we could keep it going, the govt has artificially created jobs in the rural areas, urban locations still lack even that kind of job guarantee programme...

Skilling could create jobs according to demand and could help reduce fiscal spending... and would make people independent and not dependent on the State... NREGA should be a skill oriented on job training and job oppourtunity, thereafter...

The govt must encourage rural population to invest in food processing and exports...

Is it feasible that the govt run job guarantee programme with unskilled and low paid jobs which hurt income and demand... creating jobs would crowd out investment and employment by the private sector... ?

Low paid jobs are a form of exploitation for political mileage... MGNREGS is not sustainable because it is a load on the govt finance which is increasing and increasing... It is increasing demand after reducing demand at other places...

Automation skills could further increase productivity of labour and lower public borrowing could also increase productivity of capital by lowering interest rates...

Interest Rate, Wages, Exchange Rate, GST, Oil and Fed...

During Manmohan Singh back in 2008 interest rates were cut from over 7% to just above 4% because of recession... Real wages and incomes must be saved form price rise of daily use things to increase demand which are best represented by CPI than core-CPI or manufactured items…

Most important, real wages must be protected to increase savings and consumption, without saving investment and growth is not possible... Oil prices too could not increase too much if we use right foreign exchange right foreign exchange rate policy just to offset effects of oil price changes...

Foreign debt has risk of exchange rate or depreciation in the currency... Borrowing in domestic currency may hedge against the risk of default... The US borrows in its own currency that is why loans are free of the risk since it can mint money and pay loans...

Containing inflation and increasing real wages and maintain competitiveness of business is important for demand and growth... Fostering the spirit if competitive Federalism could further help contain cost and increase productivity...

The government should try to bring the liquor, oil, electricity and real estate to the GST to increase its tax base which could not been done before due to the fiscal revenue deficit... they have a huge demand...

(What) the GST collection does to revenue would depend a lot on the above four... Lower inflation and higher real wages could increase demand... Some countries include major expense like tobacco and booze in their inflation index...

Economy would recover... People have only delayed spending, especially the investors and consumers that have lowered inflation and interest rate expectation... A good budget and monsoon could further boost investment... INDIA''s long-run fundamentals remain intact...

It is worth introspecting that the US-Iran tension is coinciding with the lower oil prices which has made it to bounce back; despite of production cuts prices have been low... Higher oil prices have had been the cause of higher inflation and interest rate and lower demand in the global economy...

Lower oil prices are good for demand and global economic growth, for oil exporting countries too...

Containing inflation and increasing real wages and maintain competitiveness of business is important for demand and growth... Fostering the spirit if competitive Federalism could further help contain cost and increase productivity...

Devolution of more funds to the States and their ability to decide their tax rates allow for higher states' spending...

If unemployment has not reduced prices, in the US, then a rate cut expectation might delay spending, but high real wages and income and expectations could increase spending if the Fed avoids the rate cut expectations, though not a rate cut...

US' ails are low demand and higher supply, the share of labour has been low than capital, that is responsible for lower prices than target, capitalist is supplying more at zero or neutral real interest rate, but lower interest rate expectations have delayed spending, though real wages have increased.....

Real Rates, Recap, MMT, GDP, Jobs and the Fed...

The RBI has lowered GDP expectations despite an accommodative policy which should be revised upwards to improve expectations... GDP expectations are used for investment decisions..


Raghuram Rajan promised a real interest rate of 1.25 - 0.50 in a world of negative real interest rates.......


In the latest Modern Monetary Theory money is not a problem ''coz the Central Bank can print currency if the money supply is increased through the right channels like monetary policy that increase productivity, even through fiscal policy, and reduce inflation...


The RBI might think of recapitalisation of PSBs through the new money or buy recap bonds from the stressed public banks... Banks failure should be tackled by the RBI ''coz it is responsible for bank regulation and risks... It would help increase investment, employment, supply, demand and growth and expectations and help contain prices or price-level... 


Periods of slowdown or low growth are accompanied by lower prices and periods of high growth by high prices... INDIA\'s low inflation shows that INDIA might be going through a slowdown, but there is no such thing as deflation and a broader slowdown...


Both, food and fuel inflation have higher weight -age in CPI which are low leading to lower inflation and interest rate expectations which may boost growth expectations... Lower growth support lower inflation and high growth high inflation... If the claim is that growth is slow, then we cannot conclude that inflation would be high or vice versa...


Economy would recover... People have only delayed spending, especially the investors and consumers that have lowered inflation and interest rate expectation... A good budget and monsoon could further boost investment... INDIA''s long-run fundamentals remain intact...


The government may use school and college scores for giving jobs and not screening tests so that students work hard all along not just dependent on passing one exam... We now have semester system which is justified on the same line on thought that student should study all the year and also to lower syllabus load...


INDIA is largely unorganised or informal due to lack of information or data to extrapolate estimates... There has been full transparency as far as changes in the methodology and base years are concerned... The World Bank has appreciated the methodology as latest...


Investors have delayed spending after the yield curve inversion and looming recessions and tariff and trade wars discussions in the expectations of lower real interest rates ahead, in the US... now, it could further delay spending with delay in rate cuts...


The Fed has already increased interest rate in the name of normalisation evenwhen inflation and expectations have been low and quite stable which has increased real interest rate... The Fed is aware that it needs higher prices and interest rate and expectations to justify normalisation... Lower inflation and interest rate expectations may have delayed spending...


Neutral means zero real interest rate and lower inflation and higher real interest rate mean low demand and growth which requires cut in the nominal interest rate to achieve neutral... 2.25 nominal rate and 1.6 inflation which means a real interest rate of 0.65, higher than zero or neutral which could mean higher saving and low or delayed spending...


A rate cut or a patient approach could end lower interest rate expectations and increase spending also through higher real wages... The Fed could also wait for real wages or Real Balance or Pigou-Effects to increase demand, but lower price expectations could delay spending...


Rate cuts could increase demand and spending and prices and expectations, but rate cut expectations would delay recovery from lower prices and expectations and could also possibly reinforce lower prices and expectations... The Fed should take stock of the situation and deliver a rate cut soon....

Agriculture and Skills, and, Stocks and Monetary Policy...

Skill development to diversify agriculture into other industries and services could help increase productivity or production and lower prices and increase real wages and incomes... 


Higher productivity and lower and stable prices would increase demand and supply, exports too, due to lower inflation cost and prices, on a much larger scale means higher economies of scale and profits, including real wages and incomes...

Lower cost of agriculture is also important to double farm incomes… Less people in agriculture would increase share per person which could mean higher product... Govt may help bring private skill training institutions at low cost... Paid by the trainee... but, sure jobs according to industry demand...

There are not enough jobs for graduates except in few big centers ... there is oversupply of engineers and doctors ... the others have less scope for direct jobs, simple graduates... unless they opt for a low skilled and wage job which is a loss of product... and demand and growth...

People should buy low and sell high, the market points that large cap may see correction because they have done good during the past one year and people should book profits, but down beaten small and midcap might see revival in earnings...

A big correction due to domestic factors is improbable and FII could flow in due to uncertainty of trade war outcomes and oil prices are unlikely to go 90 anytime soon which should help contain CAD and inflation....


Fixed deposits pay nothing compared to other asset class... money should be invested not saved in passive funds which are generally robbed by inflation...

There should be some rule of thumbs to invest in the stock market like never sell in a falling market, but buying more and never buy an overpriced stock, but use for booking profits, invest slowly for atleast a quarter... Buy stocks that are consistent in performance... During good times even average stocks do well....

The rally could continue because we do not have a broad based recovery... We have money waiting on the sidelines to increase investment spending after lower real interest rate expectations bottom out which could increase demand/supply/prices and growth and expectations....

The trend in the market is that the market increases 1000-1500 points and then a correction of 500- 1000 points, but could correct 1500-2000 points in case of bad news, then again could increase 3000 points, the market goes through short cycles of buy and selling...

The Sensex has increased 15 000 points since 2016... a staggering increase of 40% in 3 years even when we are recovering from a slowdown... In this scenario the Sensex is yet to see its best days in terms of expectations...

The interest rate cycle is still to bottom out to increase demand and price expectations... Lower interest rate could increase supply and reduce unemployment and increase production that could lower price expectations below full employment and also because of lower borrowing cost...

The NPAs hangover and, then, the NBFCs or shadow banks crisis demand recapitalization and liquidity assurance by the Govt and RBI... Moreover, interest rate cut transmission is also dependent on the same...

Otherwise demand and growth could take long to materialise or might delay... Fiscal assistance to banks for recapitalization may increase productivity of capital by lowering the borrowing cost and expansion in banks capacity to lend more...

The RBI may allow banks to float the Rupee denominated foreign bonds which could also help maintain stability in the exchange rate offering higher interest rate than Japan, US, Europe.. Interest rates in the developed countries are lower than INDIA...

Nonetheless, higher fiscal spending could become more probable when even lower real interest doesn’t increase the private investment to increase growth expectations, but that is a far outcome because INDIA is not demand deficient, but lower investment and supply are reasons for higher inflation and interest rate expectations which are also the reasons for lower supply...

The evidence we have from the developed countries that price level in these countries has gone down with lower interest rate and higher supply, we have examples of Japan, US, Europe and, now, China... 


These countries have used more money supply and inflation and depreciation in the past to increase exports that have reduced real wages and demand in the domestic economy and further increased supply lowering inflation and interest rate and expectations...

Germany which has used internal depreciation to increase competitiveness which has also helped increase real wages... 

Lower competition among banks for the market share could be responsible for the problem of interest rate cut transmission further crippled by NPAs of banks... INDIA, in this situation, needs FDI in banking to cover loss in bank credit due to above reasons...

With real rates at 3%, inflation at 2.9% and unemployment above the natural rate, the RBI may reduce interest rate more than standard cuts, change to accommodative stance and increase liquidity through CRR, SLR and reverse repo cuts and OMOs...

Since growth has suffered due to higher inflation expectations which has changed to a much benign level as far as demand and food and fuel prices are concerned... The days of oil at $ 100 are behind us...

Contrary to the popular belief that debt funds work during slowdown is only half the truth... We know a bond has both, a bond yield and a bond price... During higher prices or inflation and growth, yield increases, but bond prices go down and bond prices increase during slowdown and yield go down, during low prices and growth... Bonds are less volatile than equities... Many people do not understand bonds...