Whenever world is in economical crisis or in boom period, a school thought start talking about decoupling of certain regions or countries from rest of the world saying that particular region is well protected due to certain reasons.
Many times in my previous postings I talked about the cent percent decoupling in present globalized is not possible. But to a certain extent a region or a country can be decoupled from the rest of the world only on its own structural issues.
Starting from present financial crisis we can take lot of examples where certain parts of the world are in crisis and other parts are not or not affectedly as badly as those. Now so called developed countries like US, UK, Japan, and majority part of Euro Zone are in the threat of double dip recession of deflation, where as BRIC (Brazil, Russia, China & India) countries, Australia and certain African countries are facing threat of Inflation or we can say they are reaching their previous growth trajectory.
India is on the high growth trajectory due to structural issues like domestic savings' pattern (which is of 33% to 35% compared with 2% of US), consumption oriented economy (60% of total country's GDP consumed within India), demographics (55% to 60% of the population is under the age of 26 years), cost effective nature of the companies (which applies to China also), fiscal schemes like NREGS adopted by central government during the slowdown (rather than just monetary policies or so called quantitative easing which have limitation of after certain level like liquidity trap or leakage of money supply due to Interst Rate Parity). Now talking about Inflation which presently is the biggest threat to India's real GDP growth, again due to structural issues like: sudden increase in expendable income of rural household due to NREGS scheme, non-efficiency of public distribution system (PDS) along with supply side problem due to uneven rainfall in certain parts of the country and as usual growth comes with some inflation. According to yesterday's mint, IMF advised India to keep on hiking the interest to cool the inflation, an example of decoupling compared with problem facing countries'.
Now coming to China, the second fastest growing economy, as everybody knows its an export oriented country, but if it is only dependent on export oriented then it should have been in the same position that of US. But its not, in fact it is clicking double digit growth, due to:
1. Massive stimulus package of 4 trillion Yuan, they got from Chinese government of which they spent more than 80 percent, (i.e. more than 3 trillion Yuan on overall infrastructure, which is stepping stone for a country)
2. More than 9 trillion Yuan (more than double of government stimulus) loan disbursement of Chinese banks towards their countrymen lead to massive spending from Chinese towards their internal consumption.
3. Solid current account surplus of whopping $2.6 trillion due to continuous intervention in the forex market to keep Yuan undervalued to help the exporters.
And from inflation point of view, China is also facing similar kind of situation as that of India. Chinese real interest are deep in red due to as low as almost 2% deposit rate and about 5% inflation, which is again divergence from US, UK and Japan.
So similar respective things helped different countries domestically keep the growth momentum
--- Will be continued...
Showing posts with label Stimulus Package. Show all posts
Showing posts with label Stimulus Package. Show all posts
Friday, January 7, 2011
Tuesday, October 26, 2010
Ultra low interest rates in certain regions may cause global imbalance
To avoid present financial crisis developed countries like US, Japan, UK and European Countries are keeping ultra low interest rates [0.1% of Japan, 0.25% of US, 0.5% of UK and 0.25% of ECB (deposit) ] and more over governments & central banks of these countries flooding the their respective economies with lot of Quantitative Easing (QE) by printing more money as that is the last resort in monetary policy to boost the economy.
Countries opt for QE which are facing the problem of low inflation or threat of deflation and they might have already substantially lowered the interest rate nearer to Zero. So to boost the money supply in the economy central banks are compelled to print more money and purchase government bonds from different financial institutes like banks and NBFC (Non Banking Financial Services), in turn flooding these financial institutes with lot of cheap money.
Most of the economist and policy makers provide Keynes theory of "General Theory of Employment, Interest and Money" basis for their move towards monetary easing and QE.
But Sir John Maynard Keynes proposed this theory in 1930s then world was not so globalized as it is today and world was facing double dip recession or popularly known as The Great Depression mainly due to some bad moves like liquidity tightening by FED and protectionism by global leaders.
Where as now world is more globalized than ever and we are era of "BUTTERFLY EFFECT" of Chaos theory. No country is no longer 100 percent closed economy, so no country can say it is totally delinked from rest of the world. Ultra low interest rates in these countries and QE is flooding their banks with cheap money. And this cheap money is leaking to emerging markets. This "HOT MONEY" is creating its ripple effects in commodity market, emerging country's stock markets and their macro economy.
Commodities like Copper, Silver are trading at their peaks in last 2-3 decades and Gold is trading at all time high.
And hot money from these countries is flowing to emerging markets like there is no tomorrow. For example Indian markets witnessed highest ever inflow of FIIs in September month in last 17 years, from the day FIIs allowed. More than 5 billion dollar hot money flooded in Indian markets boosting Indian markets 13% rise in September. Srilankan stock exchange "Colombo Stock Exchange" has given more than 100% return in one year from sub 7000 levels to 16000 odd levels.
Brazilian currency "Real" is appreciated a whopping 30% from March 2009. Indian currency appreciated almost 7% in last 6 months and currency appreciation is common problem to all emerging markets. Already US-China currency war is on and Brazil is shouting at its full strength.
Due to this their respective central banks will (or would have already started) intervene in forex markets by selling their own currencies leaving their local banks with lot of liquidity. This liquidity is in turn creating a pressure on inflation which is already high in certain countries like China and India.
Ultimately its a "ZERO SUM GAME". In past also lower interest rates in initial parts of 2000 (to avoid ill effects of dot com bubble burst) lead to asset bubble in US which caused present crisis.
Countries opt for QE which are facing the problem of low inflation or threat of deflation and they might have already substantially lowered the interest rate nearer to Zero. So to boost the money supply in the economy central banks are compelled to print more money and purchase government bonds from different financial institutes like banks and NBFC (Non Banking Financial Services), in turn flooding these financial institutes with lot of cheap money.
Most of the economist and policy makers provide Keynes theory of "General Theory of Employment, Interest and Money" basis for their move towards monetary easing and QE.
But Sir John Maynard Keynes proposed this theory in 1930s then world was not so globalized as it is today and world was facing double dip recession or popularly known as The Great Depression mainly due to some bad moves like liquidity tightening by FED and protectionism by global leaders.
Where as now world is more globalized than ever and we are era of "BUTTERFLY EFFECT" of Chaos theory. No country is no longer 100 percent closed economy, so no country can say it is totally delinked from rest of the world. Ultra low interest rates in these countries and QE is flooding their banks with cheap money. And this cheap money is leaking to emerging markets. This "HOT MONEY" is creating its ripple effects in commodity market, emerging country's stock markets and their macro economy.
Commodities like Copper, Silver are trading at their peaks in last 2-3 decades and Gold is trading at all time high.
And hot money from these countries is flowing to emerging markets like there is no tomorrow. For example Indian markets witnessed highest ever inflow of FIIs in September month in last 17 years, from the day FIIs allowed. More than 5 billion dollar hot money flooded in Indian markets boosting Indian markets 13% rise in September. Srilankan stock exchange "Colombo Stock Exchange" has given more than 100% return in one year from sub 7000 levels to 16000 odd levels.
Brazilian currency "Real" is appreciated a whopping 30% from March 2009. Indian currency appreciated almost 7% in last 6 months and currency appreciation is common problem to all emerging markets. Already US-China currency war is on and Brazil is shouting at its full strength.
Due to this their respective central banks will (or would have already started) intervene in forex markets by selling their own currencies leaving their local banks with lot of liquidity. This liquidity is in turn creating a pressure on inflation which is already high in certain countries like China and India.
Ultimately its a "ZERO SUM GAME". In past also lower interest rates in initial parts of 2000 (to avoid ill effects of dot com bubble burst) lead to asset bubble in US which caused present crisis.
Thursday, April 30, 2009
Multiplier & Accelerator Effect
Today there is a very good article in The Hindu about how NREGA is helping in terms Multiplier & Accelerator effect in this crisis to Indian Economy.
Tuesday, April 7, 2009
Is this crisis worst than THE GREAT DEPRESSION!
There will be multiple opinions if you ask this question. Depending upon the which segment of the economy you are comparing there will be different answer for this question.
But for all the segments like crash of stock markets, industrial production indicator, interest rate response & etc are showing worst indication than the THE GREAT DEPRESSION itself! See this article from Barry Eichengreen & Kevin H. O’Rourke.
But for all the segments like crash of stock markets, industrial production indicator, interest rate response & etc are showing worst indication than the THE GREAT DEPRESSION itself! See this article from Barry Eichengreen & Kevin H. O’Rourke.
Thursday, March 5, 2009
Monetary Stimulus/Fiscal Stimulus-->Helicopter Money
All countries & companies are trying save themselves from the recession or depression by various tactics. In these tactics Fiscal & Monetary policies are major ones and remaining are the part these policies or slightly related to these policies.
Today when I was posting this article Dow Jones was down by 200 points mainly because of the negative news from General Motors & US Economy, which may be heading for another depression. After receiving 13 Billion US dollars package also, General Motors is on the verge of the bankruptcy. City bank, after getting stimulus packages also, its stock was trading below 1 US dollar because of lack of investor's faith in it.
To counter the cycle of the recession [which may lead to depression] UK has reduced the its interest rates to historical low of 0.5%. Today's UK move is towards the liquidity trap about which I have explained in the below paragraphs. Along with UK, European Region which is in recession technically, today its central bank, European Central Bank (ECB) has reduced the interest rates to 1.5% from 2%, lowest since it formation in 1999.
Some time back I wrote about the "helicopter money". Today I am posting about the "helicopter money" because, present situation is leading to that condition.
Before presenting the present condition, I would like remind my readers about the what is helicopter money? And when it arises?
Helicopter money is the ultimate solution to the liquidity trap. Now you may ask what is liquidity trap?
A liquidity trap is a situation in which a country's interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to savings rather than spending. This makes a recession even more severe, and can contribute to deflation. And interest rate cant be negative. This situation leads to helicopter money.
Helicopter money is situation in which Governments/Monetary Authorities gives the money directly to the consumer/resident of the country bypassing the financial intermediaries like banks. Keynes is considered is as the inventor of the Liquidity trap & Milton Friedman has coined the Helicopter Money.
Now coming back present conditions, Japan has cleared the cash in hand bill to the every resident of the country. This is nothing but helicopter money concept where in every Japanese resident is expected to get the 12000 yen costing total about 20 billion US dollars. Children under 18 and people aged over 65 would get 20,000 yen as part of the scheme. Japan took this controversial step because, it left with no other option. Every thing has been tried & tested including the fiscal stimulus & lowering interest to 0.1% level.
Today when I was posting this article Dow Jones was down by 200 points mainly because of the negative news from General Motors & US Economy, which may be heading for another depression. After receiving 13 Billion US dollars package also, General Motors is on the verge of the bankruptcy. City bank, after getting stimulus packages also, its stock was trading below 1 US dollar because of lack of investor's faith in it.
To counter the cycle of the recession [which may lead to depression] UK has reduced the its interest rates to historical low of 0.5%. Today's UK move is towards the liquidity trap about which I have explained in the below paragraphs. Along with UK, European Region which is in recession technically, today its central bank, European Central Bank (ECB) has reduced the interest rates to 1.5% from 2%, lowest since it formation in 1999.
Some time back I wrote about the "helicopter money". Today I am posting about the "helicopter money" because, present situation is leading to that condition.
Before presenting the present condition, I would like remind my readers about the what is helicopter money? And when it arises?
Helicopter money is the ultimate solution to the liquidity trap. Now you may ask what is liquidity trap?
A liquidity trap is a situation in which a country's interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to savings rather than spending. This makes a recession even more severe, and can contribute to deflation. And interest rate cant be negative. This situation leads to helicopter money.
Helicopter money is situation in which Governments/Monetary Authorities gives the money directly to the consumer/resident of the country bypassing the financial intermediaries like banks. Keynes is considered is as the inventor of the Liquidity trap & Milton Friedman has coined the Helicopter Money.
Now coming back present conditions, Japan has cleared the cash in hand bill to the every resident of the country. This is nothing but helicopter money concept where in every Japanese resident is expected to get the 12000 yen costing total about 20 billion US dollars. Children under 18 and people aged over 65 would get 20,000 yen as part of the scheme. Japan took this controversial step because, it left with no other option. Every thing has been tried & tested including the fiscal stimulus & lowering interest to 0.1% level.
Rate Cuts By RBI
As I was posting from many days, yesterday [04/03/09] finally RBI reduced the Repo & Reverse Repo by 50 Basis Points. Repo rate reduced to 5% from 5.5% & Reverse Repo to 3.5% from 4% with immediate effect.
And in previous posts I clearly mentioned that there is no need to reduce the CRR further as liquidity is not the problem for us now. It has been reduced to quite substantially from its peak levels of 9% in October to present 5%. Compared to October & November when Lehman Brothers collapsed, suddenly international lending/transaction stopped for some movement. This lead our call money rate go beyond the corridor of repo & reverse repo and reached round about 20%. And as of yesterday's closing call money rate is in the range of 2.25% to 4.30% which is well within the range of repo & reverse repo limits.
This move was expected by many experts & economists, because there are various indicators which were indicating towards RBI. For example Inflation coming below 4%, to be precise 3.36%, GDP growth of 3rd quarter contracting to 5.3% from expected 6.1%, fiscal stimulus should be followed/supported by monetary stimulus, no room,time & authority [with the central government] for further fiscal stimulus packages, fiscal deficit going beyond the expectation & etc.
As I said before also cut in reverse repo will force the banks to lend rather than going for safer route of depositing with the RBI for assured returns. Now because of low returns with the reverse repo rates, banks will be forced to think of other alternative, that is lending to clients & customer for higher lending rates varying from 10% to 18% [depending upon the purpose], as lending rates are yet to come down. Once the lending starts towards the various sectors & various sizes of the sectors [small, medium & large scale], the economy will start productive work. This lead to more jobs across the all working capable men/women. If you see the call money rates there is room to cut reverse repo further but that can be done in subsequent stages by looking at the conditions.
And talking about the Repo rate it has come down from 9% in October to 5% now. Because of this cost of capital will be a lesser burden to banks as compare to October condition. But only this move cant help the normal person. As in the time crisis everybody including banks wants to play safely as there is risk of default & rise in their NPA [Non Performing Assets]. So this move should be accompanied by cut in reverse repo as RBI has done/been doing.
But in addition to this there should be some clear cut criteria for lending norms. There should be clear regulation & ratings for corporates & individuals depending upon various parameter like risk aversion quality, past history, line of business, scope for the business, effect present conditions to business & etc.
Now government & governor of RBI should persuade the various bankers to lend & transform the benefit of RBI cuts to end user. Because banks, financial intermediaries can act as very important role in both development as crisis situation. In 1930s great depression time, situation aggravated because banks stopped lending & ultimately causing problems themselves also since almost 11000 out of 25000 banks collapsed in US at that time. So somebody has to take the initiation in reducing the rates. SBI, India's largest bank already reduced the deposit rates for various maturity periods. So I hope it will be followed by reduction in lending rates & other banks will also follow the path...
And in previous posts I clearly mentioned that there is no need to reduce the CRR further as liquidity is not the problem for us now. It has been reduced to quite substantially from its peak levels of 9% in October to present 5%. Compared to October & November when Lehman Brothers collapsed, suddenly international lending/transaction stopped for some movement. This lead our call money rate go beyond the corridor of repo & reverse repo and reached round about 20%. And as of yesterday's closing call money rate is in the range of 2.25% to 4.30% which is well within the range of repo & reverse repo limits.
This move was expected by many experts & economists, because there are various indicators which were indicating towards RBI. For example Inflation coming below 4%, to be precise 3.36%, GDP growth of 3rd quarter contracting to 5.3% from expected 6.1%, fiscal stimulus should be followed/supported by monetary stimulus, no room,time & authority [with the central government] for further fiscal stimulus packages, fiscal deficit going beyond the expectation & etc.
As I said before also cut in reverse repo will force the banks to lend rather than going for safer route of depositing with the RBI for assured returns. Now because of low returns with the reverse repo rates, banks will be forced to think of other alternative, that is lending to clients & customer for higher lending rates varying from 10% to 18% [depending upon the purpose], as lending rates are yet to come down. Once the lending starts towards the various sectors & various sizes of the sectors [small, medium & large scale], the economy will start productive work. This lead to more jobs across the all working capable men/women. If you see the call money rates there is room to cut reverse repo further but that can be done in subsequent stages by looking at the conditions.
And talking about the Repo rate it has come down from 9% in October to 5% now. Because of this cost of capital will be a lesser burden to banks as compare to October condition. But only this move cant help the normal person. As in the time crisis everybody including banks wants to play safely as there is risk of default & rise in their NPA [Non Performing Assets]. So this move should be accompanied by cut in reverse repo as RBI has done/been doing.
But in addition to this there should be some clear cut criteria for lending norms. There should be clear regulation & ratings for corporates & individuals depending upon various parameter like risk aversion quality, past history, line of business, scope for the business, effect present conditions to business & etc.
Now government & governor of RBI should persuade the various bankers to lend & transform the benefit of RBI cuts to end user. Because banks, financial intermediaries can act as very important role in both development as crisis situation. In 1930s great depression time, situation aggravated because banks stopped lending & ultimately causing problems themselves also since almost 11000 out of 25000 banks collapsed in US at that time. So somebody has to take the initiation in reducing the rates. SBI, India's largest bank already reduced the deposit rates for various maturity periods. So I hope it will be followed by reduction in lending rates & other banks will also follow the path...
Sunday, March 1, 2009
Newspaper Articles
Guys please read the article regarding "learn to live with slowdown" in swaminomics in TOI...
Read the article in Financial Express,"Buffett, the lender of last resort"
Read the article in Financial Express,"Buffett, the lender of last resort"
Thursday, February 26, 2009
Inflation 3.36% Vs 3.92
As expected Inflation came down substantially this week also. I mentioned "substantially" because from couple of months reduction in the inflation numbers is of the amount nearly equal to more than 50 basis points every week.
If you see this week also it came down by 56 basis points from 3.92% to 3.36%, due to fall in the prices of fruits, vegetables & some manufactured goods in the wholesale market. [May not applicable to retail market as retailer may be paying still higher prices only to above mentioned items]
And there is a news of possibility of reduction of diesel prices today. If that happens it may affect the WPI series further as Oil sector has nearly 17% to 18% weightage in WPI content.
Many times I mentioned about the how WPI series has disadvantage in measuring the exact inflation due to "BASE EFFECT". Here I got one more fact regarding this issue to show you guys. CNBC TV channel did a survey, according them expected the inflation & WPI is as follows...
Inflation expectations - WPI 2008 versus 2009
Here if you look at the WPI of 2009, from March, you can notice [marked with red color] the Inflation is coming down even though is there no change in WPI measurement. In the above table from March 7 WPI series is kept constant @ 227.6 but due to "BASE EFFECT OF 2008" Inflation is coming down. And as I mentioned in December, this table is also indicating that from the month of April we may face the "DEFLATION" for couple months. If prices really starts coming down in retail markets also then there is surely problem for central banker & governments.
In addition to this, third stimulus package in terms of tax reduction also will come into the picture for next couple of weeks. Since there is reduction of 2% in Excise, Service, Cement & for Naptha will add to further fall of inflation. Because Oil & Manufacturing sector have substantial weightage in WPI series.
So considering all these factors, there is sure chance of RBI action in terms of cutting down the rates. Because dealing with Inflation is quite easy as compared to that of Deflation. Lets wait & watch...
If you see this week also it came down by 56 basis points from 3.92% to 3.36%, due to fall in the prices of fruits, vegetables & some manufactured goods in the wholesale market. [May not applicable to retail market as retailer may be paying still higher prices only to above mentioned items]
And there is a news of possibility of reduction of diesel prices today. If that happens it may affect the WPI series further as Oil sector has nearly 17% to 18% weightage in WPI content.
Many times I mentioned about the how WPI series has disadvantage in measuring the exact inflation due to "BASE EFFECT". Here I got one more fact regarding this issue to show you guys. CNBC TV channel did a survey, according them expected the inflation & WPI is as follows...
Inflation expectations - WPI 2008 versus 2009
Here if you look at the WPI of 2009, from March, you can notice [marked with red color] the Inflation is coming down even though is there no change in WPI measurement. In the above table from March 7 WPI series is kept constant @ 227.6 but due to "BASE EFFECT OF 2008" Inflation is coming down. And as I mentioned in December, this table is also indicating that from the month of April we may face the "DEFLATION" for couple months. If prices really starts coming down in retail markets also then there is surely problem for central banker & governments.
In addition to this, third stimulus package in terms of tax reduction also will come into the picture for next couple of weeks. Since there is reduction of 2% in Excise, Service, Cement & for Naptha will add to further fall of inflation. Because Oil & Manufacturing sector have substantial weightage in WPI series.
So considering all these factors, there is sure chance of RBI action in terms of cutting down the rates. Because dealing with Inflation is quite easy as compared to that of Deflation. Lets wait & watch...
Wednesday, February 25, 2009
Business Standard: Pranab unveils fiscal stimulus III
Finance Minister Pranab Mukherjee today announced a stimulus package for the economy, the third this financial year, cutting excise duty and service tax two percentage points each, effective midnight, and extending previous excise cuts beyond March 31, 2009.
Service tax has been cut across the board from 12 per cent to 10 per cent and the excise has been reduced by the same margin only for items that currently attract the 10 per cent rate.
Consumers are expected to benefit significantly from this latest cut in indirect tax, since over 90 per cent of excise duty collections come from the 10 per cent slab rate, which is levied on white goods, metals, commercial vehicles, iron and steel and cement. Tyre makers have already responded by announcing a two percentage point cut in prices.
Overall, consumers can expect a more than 2 per cent reduction in retail prices if the excise and service tax cuts are passed on fully. This is because the Value-Added Tax (VAT), which is levied at the state level, is applied over and above the excise duty, said Vivek Mishra, partner, Ernst & Young, an auditing and consulting firm.
Most items attract 4 per cent or 12.5 per cent VAT rates. At 12.5 per cent, a two percentage cut in indirect tax will lead to a 2.3 per cent reduction in retail prices.
In terms of a deficit-financed stimulus, economists said cutting indirect taxes is more effective than government spending. “By cutting taxes, the government has put more money in people’s hands rather than spending on its own,” said D K Joshi, economist with Crisil Ltd, a ratings and advisory firm.
Agreeing that indirect tax cuts are more effective in stimulating demand than direct tax cuts, Abheek Barua, chief economist with HDFC Bank, said, “Cutting income tax rates, for instance, often leads to higher savings instead of increased spending, as precautionary savings increase when people are faced with uncertainty”.
Service tax has been cut across the board from 12 per cent to 10 per cent and the excise has been reduced by the same margin only for items that currently attract the 10 per cent rate.
Consumers are expected to benefit significantly from this latest cut in indirect tax, since over 90 per cent of excise duty collections come from the 10 per cent slab rate, which is levied on white goods, metals, commercial vehicles, iron and steel and cement. Tyre makers have already responded by announcing a two percentage point cut in prices.
Overall, consumers can expect a more than 2 per cent reduction in retail prices if the excise and service tax cuts are passed on fully. This is because the Value-Added Tax (VAT), which is levied at the state level, is applied over and above the excise duty, said Vivek Mishra, partner, Ernst & Young, an auditing and consulting firm.
Most items attract 4 per cent or 12.5 per cent VAT rates. At 12.5 per cent, a two percentage cut in indirect tax will lead to a 2.3 per cent reduction in retail prices.
In terms of a deficit-financed stimulus, economists said cutting indirect taxes is more effective than government spending. “By cutting taxes, the government has put more money in people’s hands rather than spending on its own,” said D K Joshi, economist with Crisil Ltd, a ratings and advisory firm.
Agreeing that indirect tax cuts are more effective in stimulating demand than direct tax cuts, Abheek Barua, chief economist with HDFC Bank, said, “Cutting income tax rates, for instance, often leads to higher savings instead of increased spending, as precautionary savings increase when people are faced with uncertainty”.
Tuesday, February 24, 2009
Duty cuts to boost the economy
Today Finance Minister Mr. Pranab Mukherjee announced the much needed duty cuts in the last day of the interim budget discussion of Parliament.
Excise duty has been reduced from 10 per cent to 8 per cent and the service tax cut from 12 per cent to 10 per cent. And 4% excise cut announced earlier in the stimulus package in December will continue beyond March 31. In addition to these majors, FM also announced Excise duty on bulk cement to be 8% or Rs 230 per metric tonne, whichever is higher and Naptha exempted from customs duty; extends customs duty in Naptha beyond March 31, 2009.
This is much needed action government should have taken before itself. Some people may argue that because of Duty cuts there is revenue loss of around Rs.28000 crore. Ya that's is true in normal conditions. But present conditions require some extraordinary majors to pull back the economy to grow at 7% to 7.5%. Since I think Tax cuts are most effective in boosting the domestic demand as compared to other majors like fiscal & monetary stimulus packages. And in case of monetary relief there will be time lag between the central banker's relaxation & individual banks relaxation which may not as act immediate boosting factor. And the problem with the fiscal stimulus packages, here in India particularly we have implementation problems. And in present scenario governments (Central & States) dont have full fiscal year also for big packages to announce.
These duty cuts are definitely going to help ailing manufacturing units [which are showing negative growth from last couple of months through IIP nos] & service industries. And duty cut on cement is a good relief to the real estate & construction industry which are presently facing the liquidity problems. And if industries transfer these relaxations to consumers then there will be impact on demand side. This domestic demand is India's life line in this crisis time. Since our Indian growth is more of domestic consumption oriented than the export oriented like China. 60% to 65% of our GDP is consumed by Indian population itself. And if governments succeed in boosting the domestic demand then half of the India's problems are solved. Instead of implementing the protectionism policies, government should think about the other alternatives like "Excise & Service Duty Cuts" so that, there will not be international trade retaliations.
And looking at the monetary conditions there is lot of room for reduction in rate cuts by central banker. Since individual banks are keeping there excess money into safe hands of RBI [instead of lending] through Reverse Repo route which is 4% presently. So there should be reduction Reverse repo from 50 to 100 basis points so that banks will look towards the alternatives like lending to Prime Customers.[Since there is risk of increment in the NPAs also] In addition to that there should be reduction Repo rate also so that there is proper balance in the corridor of Repo & Reverse Repo. Ultimately there should be money flow in the economy to boost the economic activities. But I dont think central banker should think of altering the CRR & particularly SLR. Because if we look at the Call Money Ratio it is between corridors of the Repo & Reverse Repo rate, so banks are not facing any problem with the liquidity adjustments between themselves. It is expected that RBI may act by this weekend in easing the monetary majors.
Bottom line:
Lets be hopeful that our Indian economy, counter cycle the present scenario by August/September 2009 with a new government & with its new policies...
Excise duty has been reduced from 10 per cent to 8 per cent and the service tax cut from 12 per cent to 10 per cent. And 4% excise cut announced earlier in the stimulus package in December will continue beyond March 31. In addition to these majors, FM also announced Excise duty on bulk cement to be 8% or Rs 230 per metric tonne, whichever is higher and Naptha exempted from customs duty; extends customs duty in Naptha beyond March 31, 2009.
This is much needed action government should have taken before itself. Some people may argue that because of Duty cuts there is revenue loss of around Rs.28000 crore. Ya that's is true in normal conditions. But present conditions require some extraordinary majors to pull back the economy to grow at 7% to 7.5%. Since I think Tax cuts are most effective in boosting the domestic demand as compared to other majors like fiscal & monetary stimulus packages. And in case of monetary relief there will be time lag between the central banker's relaxation & individual banks relaxation which may not as act immediate boosting factor. And the problem with the fiscal stimulus packages, here in India particularly we have implementation problems. And in present scenario governments (Central & States) dont have full fiscal year also for big packages to announce.
These duty cuts are definitely going to help ailing manufacturing units [which are showing negative growth from last couple of months through IIP nos] & service industries. And duty cut on cement is a good relief to the real estate & construction industry which are presently facing the liquidity problems. And if industries transfer these relaxations to consumers then there will be impact on demand side. This domestic demand is India's life line in this crisis time. Since our Indian growth is more of domestic consumption oriented than the export oriented like China. 60% to 65% of our GDP is consumed by Indian population itself. And if governments succeed in boosting the domestic demand then half of the India's problems are solved. Instead of implementing the protectionism policies, government should think about the other alternatives like "Excise & Service Duty Cuts" so that, there will not be international trade retaliations.
And looking at the monetary conditions there is lot of room for reduction in rate cuts by central banker. Since individual banks are keeping there excess money into safe hands of RBI [instead of lending] through Reverse Repo route which is 4% presently. So there should be reduction Reverse repo from 50 to 100 basis points so that banks will look towards the alternatives like lending to Prime Customers.[Since there is risk of increment in the NPAs also] In addition to that there should be reduction Repo rate also so that there is proper balance in the corridor of Repo & Reverse Repo. Ultimately there should be money flow in the economy to boost the economic activities. But I dont think central banker should think of altering the CRR & particularly SLR. Because if we look at the Call Money Ratio it is between corridors of the Repo & Reverse Repo rate, so banks are not facing any problem with the liquidity adjustments between themselves. It is expected that RBI may act by this weekend in easing the monetary majors.
Bottom line:
Lets be hopeful that our Indian economy, counter cycle the present scenario by August/September 2009 with a new government & with its new policies...
Saturday, February 21, 2009
Impact of the Global Financial Crisis on India
Couple of days back, RBI governor Mr. D Subbarao gave speech in IMF's function in Tokyo. Where in talked about the following issues...
--> Global outlook
--> Emerging Economies
--> Why has India been hit by the crisis?
--> How has India been hit by the crisis?
--> How have we responded to the challenge?
a]Monetary
b]Fiscal
--> What is the outlook for India?
--> When the turn around comes
Speech is very good guys, have a look at it, as has covered overall information from starting of the crisis to recovery...
--> Global outlook
--> Emerging Economies
--> Why has India been hit by the crisis?
--> How has India been hit by the crisis?
--> How have we responded to the challenge?
a]Monetary
b]Fiscal
--> What is the outlook for India?
--> When the turn around comes
Speech is very good guys, have a look at it, as has covered overall information from starting of the crisis to recovery...
Thursday, February 19, 2009
News Paper Articles
Today I read an article from Financial Express about Irving Fisher. It is really good article on Great Depression and Irvin Fisher. Interested guys go through it when you are free since article bit lengthy...
One more article is there in mint about Protectionism.
One more article is there in mint about Protectionism.
Wednesday, February 11, 2009
A Ray of Hope in midst of Crisis
I read an article from Mint which gives some ray of hope in this crisis time. In that author has compared present crisis to 1980 crisis. Author banked on government spending & consumers forgoing spending will boost the economy swiftly. Guys even though there is lot difference between normal reversal in the business cycle (1980's crisis) & bubble bursts (present condition) I suggest you to go through that article & be hopeful!!!
Monday, February 2, 2009
Threat of Deflation
Guys, I am back with my favorite topic deflation/inflation (microeconomics) after two days of net problem in the college. Many times I posted about the possibility of deflation due to reasons like current situations like financial turmoil, monetary policies, followed by bank's reluctance to lend, job losses which makes people save their consumptions for future purpose & etc. Today I read an article from business standard where Mr.Tushar Poddar(Chief India Economist, Goldman Sachs) expressed his thoughts. So I thought you guys also can have a look at it...
The Indian economy is currently being hit by the mother of all external shocks. With the US and the rest of the developed world in its worst recession in 75 years, and the impact being felt on India's growth, employment, exports, asset prices, and rapidly falling inflation, this is not the average downturn in the business cycle.
It is nearly certain, as confirmed by the Government's Chief Statistician, that India will face a period of deflation in the middle of 2009. Most economists tend to think that it will only be a matter of a few months before prices start rising again. Under reasonable assumptions, however, wholesale prices may show year-on-year declines from April through end-2009.
The real danger to the economy is that due to the large negative demand shock, deflationary forces get entrenched, leading to a vicious cycle of falling output and declining prices. To counter this clear and present danger, policy, especially fiscal, will have to use all its firepower to forestall it.
So, is deflation in India really possible, and why should we worry about it?
Everywhere one looks, prices are falling. From airline tickets to cars, from household goods to clothes, and from property prices to stock prices, all are seeing declines. The whole sale price index is already showing the largest absolute declines ever since the series started in 1988, falling by 2.5 per cent month on month in October, 4.7 per cent in November, and 3.9 per cent in December.
Hence, by this measure, we are already facing deflation. Going forward, falling commodity prices, the bursting of the equity and property bubble, and ongoing demand destruction, can continue the downward movement in prices which have nothing to do with a high statistical base from 2008. But why should this be a cause for worry?
Deflation hurts the economy much more than inflation, as borne out by the US experience during the Great Depression from 1929-33 when output shrank 40 per cent and nominal prices by 24 per cent, and by Japan's 'Lost Decade' in the 1990s.
Consumers postpone expenditure, because they think prices will be cheaper going forward. This affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy.
A temporary period of deflation can become sustained as asset prices fall, the credit channel stops working, and people start expecting falling prices. As property and equity prices fall, they reduce collateral which shrinks the balance sheet of firms and makes banks unwilling to lend, further hurting firms.
If consumer expectations of deflation become unhinged, which can happen very quickly, a temporary phenomenon becomes entrenched.
Although in India's case the supply constraints and traditionally high inflationary expectations militate against deflation, the size of the demand shock demand can outweigh them.
At any rate, policy needs to preempt even a small probability of such a grave threat to the India growth story. Policy has to re-inflate and re-ignite demand. It is better to err on the side of inflation rather than deflation.
Monetary policy, although it has been loosened considerably, still has considerable room left to ease. Short-term policy rates at 4-5.5 per cent are still too high, because with deflation on the horizon, real rates will be higher still.
With lending rates still in the 12-12.5 per cent range, real lending rates in India will be among the highest in the region. Given the long lags in transmitting policy rates to bank lending rates and then to overall activity, there is merit in getting policy rates down as quickly as possible.
Monetary policy alone, however, will not be enough. Its effectiveness is constrained due to rising credit risk, which is causing a divergence between policy and bank lending rates. Therefore, cutting policy rates is necessary but not sufficient to stimulate demand. An additional constraint is that at the extreme, nominal policy rates can't go below zero, so during a time of deflation, real rates can remain high.
The onus will then have to fall on fiscal policy. In particular, there needs to be additional stimulus in FY10, over and above the big stimuli provided in FY09. There is an argument that there is no more fiscal space for further counter-cyclical fiscal policy as it would lead to the crowding out of the private sector and could lead to our debt burden becoming unsustainable. Let us examine each in turn.
In the current abnormal environment, the private sector has been crowded out already as banks are not lending to them due to high credit risk. What is of concern is that corporate bond yields are very high relative to government bond yields rather than the level of government yields itself.
Indeed, if monetary policy is further loosened, in an environment of deflationary impulses, government yields can fall further. Additional fiscal stimulus is not part of the problem but part of the solution for corporates.
Although India's debt burden will rise, what matters more for the long-term sustainability of debt is the differential between GDP growth and interest rates. It would be much worse for our debt ratio if growth rates were to be significantly lowered due to the negative shock.
As long as the fiscal expansion is temporary and helps to boost growth, it will not endanger sustainability. India's favorable demographics will also help in bringing down the debt burden. However, the expansion should be carefully calibrated with a medium-term commitment to bring down the deficit when more benign conditions return.
So what form should a fiscal expansion take?
Increased spending by the government suffers from two problems - it takes time to filter through, and there are serious problems in implementation capacity. It is preferable to have a tax cut which is quick, equitable, and can unleash domestic demand from liquidity-constrained consumers. An income tax cut would fulfill all these requirements.
A good start would be to eliminate the education cess on income tax, and provide a one-year holiday on the corporate tax surcharge in the interim budget.
To get back to 8 per cent growth, the long-term policy response has to be more structural reform. But in the short term, where falling domestic demand can complicate the India growth story, the response has to be immediate counter-cyclical easing of both monetary and fiscal policy, while there is still time. There is no use saving ammunition if the battle is lost.
The Indian economy is currently being hit by the mother of all external shocks. With the US and the rest of the developed world in its worst recession in 75 years, and the impact being felt on India's growth, employment, exports, asset prices, and rapidly falling inflation, this is not the average downturn in the business cycle.
It is nearly certain, as confirmed by the Government's Chief Statistician, that India will face a period of deflation in the middle of 2009. Most economists tend to think that it will only be a matter of a few months before prices start rising again. Under reasonable assumptions, however, wholesale prices may show year-on-year declines from April through end-2009.
The real danger to the economy is that due to the large negative demand shock, deflationary forces get entrenched, leading to a vicious cycle of falling output and declining prices. To counter this clear and present danger, policy, especially fiscal, will have to use all its firepower to forestall it.
So, is deflation in India really possible, and why should we worry about it?
Everywhere one looks, prices are falling. From airline tickets to cars, from household goods to clothes, and from property prices to stock prices, all are seeing declines. The whole sale price index is already showing the largest absolute declines ever since the series started in 1988, falling by 2.5 per cent month on month in October, 4.7 per cent in November, and 3.9 per cent in December.
Hence, by this measure, we are already facing deflation. Going forward, falling commodity prices, the bursting of the equity and property bubble, and ongoing demand destruction, can continue the downward movement in prices which have nothing to do with a high statistical base from 2008. But why should this be a cause for worry?
Deflation hurts the economy much more than inflation, as borne out by the US experience during the Great Depression from 1929-33 when output shrank 40 per cent and nominal prices by 24 per cent, and by Japan's 'Lost Decade' in the 1990s.
Consumers postpone expenditure, because they think prices will be cheaper going forward. This affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy.
A temporary period of deflation can become sustained as asset prices fall, the credit channel stops working, and people start expecting falling prices. As property and equity prices fall, they reduce collateral which shrinks the balance sheet of firms and makes banks unwilling to lend, further hurting firms.
If consumer expectations of deflation become unhinged, which can happen very quickly, a temporary phenomenon becomes entrenched.
Although in India's case the supply constraints and traditionally high inflationary expectations militate against deflation, the size of the demand shock demand can outweigh them.
At any rate, policy needs to preempt even a small probability of such a grave threat to the India growth story. Policy has to re-inflate and re-ignite demand. It is better to err on the side of inflation rather than deflation.
Monetary policy, although it has been loosened considerably, still has considerable room left to ease. Short-term policy rates at 4-5.5 per cent are still too high, because with deflation on the horizon, real rates will be higher still.
With lending rates still in the 12-12.5 per cent range, real lending rates in India will be among the highest in the region. Given the long lags in transmitting policy rates to bank lending rates and then to overall activity, there is merit in getting policy rates down as quickly as possible.
Monetary policy alone, however, will not be enough. Its effectiveness is constrained due to rising credit risk, which is causing a divergence between policy and bank lending rates. Therefore, cutting policy rates is necessary but not sufficient to stimulate demand. An additional constraint is that at the extreme, nominal policy rates can't go below zero, so during a time of deflation, real rates can remain high.
The onus will then have to fall on fiscal policy. In particular, there needs to be additional stimulus in FY10, over and above the big stimuli provided in FY09. There is an argument that there is no more fiscal space for further counter-cyclical fiscal policy as it would lead to the crowding out of the private sector and could lead to our debt burden becoming unsustainable. Let us examine each in turn.
In the current abnormal environment, the private sector has been crowded out already as banks are not lending to them due to high credit risk. What is of concern is that corporate bond yields are very high relative to government bond yields rather than the level of government yields itself.
Indeed, if monetary policy is further loosened, in an environment of deflationary impulses, government yields can fall further. Additional fiscal stimulus is not part of the problem but part of the solution for corporates.
Although India's debt burden will rise, what matters more for the long-term sustainability of debt is the differential between GDP growth and interest rates. It would be much worse for our debt ratio if growth rates were to be significantly lowered due to the negative shock.
As long as the fiscal expansion is temporary and helps to boost growth, it will not endanger sustainability. India's favorable demographics will also help in bringing down the debt burden. However, the expansion should be carefully calibrated with a medium-term commitment to bring down the deficit when more benign conditions return.
So what form should a fiscal expansion take?
Increased spending by the government suffers from two problems - it takes time to filter through, and there are serious problems in implementation capacity. It is preferable to have a tax cut which is quick, equitable, and can unleash domestic demand from liquidity-constrained consumers. An income tax cut would fulfill all these requirements.
A good start would be to eliminate the education cess on income tax, and provide a one-year holiday on the corporate tax surcharge in the interim budget.
To get back to 8 per cent growth, the long-term policy response has to be more structural reform. But in the short term, where falling domestic demand can complicate the India growth story, the response has to be immediate counter-cyclical easing of both monetary and fiscal policy, while there is still time. There is no use saving ammunition if the battle is lost.
Thursday, January 29, 2009
US Clears the $819 Billion Stimulus Package
As desperately needed package of stimulus of worth $800 Billion passed in house where in all Democratic senators voting in favor of the bill & republicans against the bill. The bill is expected to be discussed in senate from Monday & finally signed in the Feb mid...
The stimulus package is expected to contain the major spending & tax cuts.
This was an expected move because of the pace at which job losses happenings in the US from couple of months is very high. And the gloomy forecast of the economy by IMF suggesting the -1.6% growth for US & rest of the world is as follows...
Reference
Yahoo
mint
The stimulus package is expected to contain the major spending & tax cuts.
This was an expected move because of the pace at which job losses happenings in the US from couple of months is very high. And the gloomy forecast of the economy by IMF suggesting the -1.6% growth for US & rest of the world is as follows...
Reference
Yahoo
mint
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