Exchange-rate and employment...

It would not be an overstatement that in the recent times foreign-exchange-rate policy is centered around exports, employment and growth. The pattern is present everywhere... US, Europe, Japan, China... Even the Make-in-INDIA initiative of the present government is a step in giving Indian export sector a push. INDIA’s export sector, especially manufacturing, is largely underdeveloped and there is a scope for employment generation with relatively low wages. The country so far has concentrated on domestic-demand for growth but now with greater emphasis on manufacturing and exports INDIA is likely to out-pace cooling China which is going through a slow down much like the Japanese and the US style, a deflationary bias in the economy... However, INDIA with a sound policy, even in the exchange-rate...  a little depreciated Rupee to give export and employment a chance... can take advantage of both the positions... An investment inflow and hardening rupee and investment outflow and depreciation... Increasing foreign-exchange reserves during inflows and hardening will help us weather too much depreciation during outflow and costlier imports and also increase our competiveness... Moreover outflow and depreciation will, again, increase export competitiveness. We should use our foreign-exchange rate policy for more productive employment and growth, it would be helpful as far as demand and growth (external and domestic) is concerned... The investment-cycle in INDIA too is soon to kick-in with interest-rate reduction... Good for exports... Depreciation and low interest-cost...

Fed should wait...

A strong-dollar is bad for US’ exports and employment in the country. i think Krugman is pointing in the same direction, more exports, more employment and more growth. Even the QE in US was initially designed to depreciate the dollar by increasing money-supply and give exports a push. Even the whole Europe is on the same track... QE and depreciation... Just the Fed’s signal for a hike can pull out money from emerging market and reinvested in US. More money-supply back to the US is likely to put downward pressure on the rates because money-supply to the economy will increase. The Fed has poured billions of dollars by QE which will return to the economy and that is going to lower interest-rates on government bonds and short-run rates will adjust to the relative money-supply. Whenever money-supply increases it lowers interest rates. In the models they assume no central-bank... when money-supply curves shifts to the right it will reduce interest rates... What will be the effect of money-supply on the dollar is still not clear because the money is already in circulation and will have only a marginal-effect on the dollar... Perhaps the Fed would not like see to US’ exports bogged down by a strong-dollar... The US has lot of potential in the import –substitution area because its trade deficit with China is high. Exchange rate depreciation has always been a centre-piece for countries struggling with recession. Fed should wait because rate hike can make the economy uncompetitive...

Off-date rate cut, again...

Today, again, our RBI Governor reduced repo-rate by a quarter basis points, from 7.75% to 7.5%... But, commentators were trying to find out reasons that resulted in a rate cut without having reference to the latest data... The data for CPI is 5.11% is almost a month old... In January Rajan too delivered a rate cut on an off-date which experts attributed to falling oil-prices and confidence in the inflation glide-path... Nonetheless, the effect of falling oil and transport price/cost is yet to appear in data... May be this time too Rajan has assumed lower prices on the occasion of falling crude-prices and delivered a rate-cut earlier than expected... This time budget too might be responsible for a rate cut... Experts were expecting a rate cut after the budget, but not this soon... on an off-date... which is good from the point of view of ‘timing’... The commitment for fiscal-credibility in the budget has given space to monetary easing, nevertheless for more capital expenditure or infrastructure investment we will also need lower rates... Many times economists reiterate that to remove supply-side bottlenecks we need more investment... The current rate-cut is in line with the current line of thought... Rajan is a supply-side economist too...It is the time to relook at our multi-brand-retail-policy... We need more investment in food-supply-chain-management, in retailing... Good food yet remains out of reach of poor because of prices... Good supply will reduce prices...      

Progressive budget...

Any budget is judged in terms of its effect on demand and supply in order to achieve investment, employment and growth... There has been a push by our FM in the budget to increase investment in the economy especially by the crowd-in-effect of infrastructure, including railways... A lot is dependent on good infrastructure when the private-sector is overleveraged and facing problem of bad-debt... To improve the condition of infrastructure in the economy the government has proposed to bring tax free bonds along with a Rs 70, 000 crore investment which is good... However, how the government works-out the complete plan is yet to be seen... It has ideas, like PF funds and oversees bonds, but it needs to be implemented.... Rs 10,.000 crore has also been allocated to the railways... The government has decided to change excise duty on petrol as Road-cess and invest the money in the rail and road infrastructure... The money we will get selling gold coins could also be channelled to infrastructure... In the power sector we need more companies in production and distribution to increase supply and reduce prices... According to our Railway minister rail-fuel-cost remains high despite of lower diesel prices but high power bill... Power should be made affordable for consumption and production, too... FM has given money for many big power projects... The RBI has around $ 20 billion in gold reserves which it can put in circulation for investment... Infrastructure is a must for rapid development and will create alot of demand within the economy; demand for other things will go up...

The government’s focus on infrastructure is indeed a brightest-spot in the budget and after that corporate tax reduction from current 30% to 25% in the four-years which is also expansionary in terms of income and demand... It will get translated in lower prices of goods and services in the years to come... For this year, corporate-tax reduction should be around 1%... Moreover, reduction in duties of several products will increase their demand by becoming more affordable... However increase in surcharge by 2% on super-rich will improve the revenue... Hike in service tax to 14% will affect consumer, but will increase revenues... All the small increases in taxes here and there seem justified as long as fiscal-deficit target of the following years are concerned... The government will have less and less fiscal-space as we go ahead every year even when the economy is yet entangled in the supply-side constraints... roads, storage and marketing policies... The government is likely to find out more ways (more resources) to bridge the gap between the public needs and means...

In order to give rural population a demand boost the minister has allocated Rs 5, 000 core additional resources to MGREGA... But the budget was not very vocal about its direction, its orientation to make it more human-capital and infrastructure based... The government has given Rs 1500 crore for the skill-development of the rural youth to get them placed according to industry demand... The FM has underscored the need to match skills with job-opportunities...

The government has tried to cover all in universal healthcare and pension under the social security system...

Allocation to a number of schemes which will directly affect poor-people in terms of cash transfer... As far as demand and multiplier is concerned it is highest for poor because they spend all of the cash and save little... It will also give room to divergence of funds to other goods and services... it will increase demand...  

The government has used all levers to increase demand and investment in the economy with a push to increase infrastructure facilities...

Whenever you decrease tax it means you have given extra purchasing power to agents and they will spend-off the money on other heads... it is an incentive in terms of savings and demand... it goes viral...  

 

Greece can refinance the debt at lower rates...

One thing notable about Greece’s is that interest-rate on government-bonds is exceptionally high compared to its euro-zone peers, but, debt is not too much high in comparison. Others yields are closer to the ECB rates which leaves a lot of room to refinance the debt at much lower rates... Greece government can sell bonds at yields little higher than peers, but much below their current rates... it will find the buyers easily... Debt to repay debt, but at much lower rates ... Greece’s debt, probably, is not so much burdensome, if we adjust the interest-payments... They are sky-high... Not, sure who decides bond-yields in Greece, but it must be the treasury of the government, but, again, there is no central-bank to run QE to reduce overall rates... Government bond-yields decide direction of other assets in the economy... and hope other rates are also high... This could be a factor responsible for high unemployment and deflationary bias... Interest-rates are very high during recession... How does it will help the economy in recovery? Moreover deflation is high... High interest-rate and deflation points that real-interest rates are too high which is deteriorating the investment and employment... There are clear reasons why investment is not picking up within the country and unemployment is high... Internal-devaluation to increase competitiveness and employment at a time when the country can go for domestic demand will even hurt the domestic income and consumption...     

Oil prices will help...

Inflation is closer to the upside-target even when we have used a higher price base-year and also a change in methodology. A change to a higher-price base-year for inflation will reduce inflation relative to the low base-year. A low price base will show higher inflation... All these changes in the base-year and methodology have made our inflation target achievable... And, if we will retreat to original base year, definitely the inflation rate would be higher... more than 5.11% and hopefully less than 6%... A rate cut is warranted only when our inflation-rate is lower than 5%... and, probably the effect of lower oil prices is yet to show-up in the latest inflation data for the last quarter or later... We are definitely on a glide-path... an all around lower prices because of low transport cost/prices... But, no doubt economists and policy makers need data to decide and justify the course, for more informed decisions, too... It is not always necessary for the RBI to keep the inflation rate lowest, also because of price-rigidity, but it is important to keep it low and try to stabilize at that level... means more consistency in policy, not too much frequent changes... INDIA is a supply-constrained economy, not only in terms fuel and energy like the developed countries, but also due to bad marketing of other essentials of life, mainly food... A rate cut would help exports competitiveness. More money-supply, more depreciation... Good time to build-reserve, too, more depreciation...

Land-acquisition...

No doubt Land is scarcest factor among all factors of production and without which no single production process can take-off because you need land to set up machinery or a place to start any process... But, there is a difference between land used for setting up infrastructure (transport and education units) and setting up factories... There is a natural question that beyond land, capital and labor both are scarce too and we cannot borrow internally too much without reducing or crowding-out capital for the private sector, that which investment is our priority or which can be delayed and ofcourse the crowd-in effect? The use of land to improve transport and schools and colleges are our immediate priority because without an educated workforce (the income and demand factors) and a good transport-system it is very difficult for the goods and services, and people to reach eachother (supply creates demand)... and INDIA’s supply-side is very weak... The government should bring the land-acquisition-bill only for transport and education centers and should leave the land-acquiring for companies/factories, between the buyer and seller and moreover fertile lands should be protected by bridges, least possible usage... Government should only be concerned with land acquisition which is most important. And, if the government is expecting demand then it must be ceased as an opportunity to increase revenues. Just like oil and hike in its duty...