Prime Minister's New Year Message: A SWOT ANALYSIS

Today, 31st December 2011, last day of the year, Prime Minister Manmohan Singh gave a rather lengthy speech, which is unusual of his nature!

While wishing citizens of the country, he summarized socialistic eras problems, nations achievement after 1990s reforms, upcoming challenges.

He identified 5 key challenges:

1. Livelihood Security (education, food, health and employment),

2. Economic Security,

3. Energy Security,

4. Ecological Security and

5. National Security

While addressing first challenge PM gave very firm and confident speech regarding the power of education (taking his own example), food security, employment creation and health standards.

In second challenge tackling, an economic turned politician, Prime Minister scored most out his total speech (as it is his STRENGTH). But the possible WEAKNESS is whether he and his government will be able to push through the much needed reforms! Whether they will be successful in convincing the allies, states, opposition parties in GST implementation, FDI in retail, subsidy reduction and etc which might become 2nd generation reforms and can become India's OPPORTUNITIES in coming days.

Again Energy Security has been the worst problem and will be the THREAT for future super power. At present we are pathetically mishandling the production, procurement, supply and distribution. The big question is whether the PM will be able to take his stance as firm as during Nuclear deal scene in empowering National Power Production companies.

Ecological security is a very complicated and conflict of interest situation as country is hungry for Industrialization, Service oriented development & Infrastructure improvement. Whether his Cabinet ministers will be able work cordially without fighting on National TV sets!

Final one is National security, which is a clear THREAT for the country from outside as well as internally.

Bottom line:

If Prime Minister and his Cabinet Minister perform to their full ABILITY and CAPACITY, the above mentioned 5 challenges can be easily achieved!

Click here for PM's full speech.

Food Security Bill

Today, Indian cabinet cleared the Food Security Bill.
Yesterday I read an article related to same, by Kirit Parikh in TOI.

Interesting readinds

As I was writing from couple of months about growth faltering due to various issues like inflation, interest rates, international demand dampening and etc., October IIP came dismally at -5.1% as compared with September's revised numbers of 2.0%. And major problem is all the important sectors like Capital goods, Manufacturing and Mining are in negative except Electricity growth. For more click here.

An interesting observation and opinion from Ruchir Sharma of Morgan Stanley about Economic Growth and Inflation (or Disinflation). Click here for more.

Interesting readings

Anti-National Politics by V Anantha Nageshwaran in mint. Click here to read.

Seven rules of the road for managers by Richard Branson in mint. Click here to read.

India's Q2 GDP at 6.9%

India's economy grew at its weakest pace in more than two years in the quarter that ended in September, at 6.9%.

For more click here.

rediff: Time to end P-Note menace!

Read an interesting article on rediff about Stock market volatility, FIIs selling, P-notes, Rupee depreciation and disadvantages of P-notes.

Click here to read the article.

Eurozone crisis

In February I wrote on Euro zone currency going in the path of Bretton Wood's gold standard and thought of completing that article in follow on post, but couldn't do it for some reason.

Click here for that article.

Now Ajay Shah has posted an elaborated insight about Euro Zone crisis by Percy Mistry in his blog. Click here to read that article.

Demand and Supply

In September I wrote piece on "Demand being more important than supply" and I hope people who are in my mailing list would have received my mail posting (as I am not publishing my articles on my blog now).

Now you might be wondering, why am I digging September’s article again, because recently I came across an interesting debate on similar topic between Mr. Paul Krugman (Nobel Laureate, Economics) and two other Professors (University of Pennsylvania and Duke University) through their respective articles. Please check out what they are saying...

Supply Side Argument	Demand Side Argument
The other two professors are arguing "Supply-side policies can be an important additional tool to pull economies away from the low output–high unemployment problems that the bound generates".	Whereas Mr. Krugman is saying "The important thing is not to lose sight of the fact that what we have now is a demand problem. Demand, demand, demand".
http://voxeu.org/index.php?q=node/7258	http://krugman.blogs.nytimes.com/2011/11/13/supply-side-solutions-beware-wonkish/

RBI's 2nd quarter monetary policy highlights

Repo rate increased by 25 basis points from 8.25 to 8.5 per cent.

The likelihood of a rate action in the December mid-quarter review is relatively low.

Based on the current and evolving macroeconomic situation, RBI revised projection of GDP growth for 2011-12 to 7.6 per cent from earlier 8%.

Deregulation of the savings bank deposit interest rate with immediate effect; banks are free to determine their savings bank deposit interest rate, subject to the following two conditions:

--> First, each bank will have to offer a uniform interest rate on savings bank deposits up to 1 lakh, irrespective of the amount in the account within this limit.

--> Second, for savings bank deposits over 1 lakh, a bank may provide differential rates of interest, if it so chooses. However, there should not be any discrimination from customer to customer on interest rates for similar amount of deposit.

For banking penetration RBI proposed to permit domestic scheduled commercial banks to open branches in Tier 2 centres (with population 50,000 to 99,999) without the need to take permission from the Reserve Bank in each case, subject to reporting.

In the area of financial markets, four important initiatives have been announced.

--> First, the Reserve Bank will issue the final guidelines on the cash settled 5-year and 2-year interest rate futures (IRFs), including the final settlement price by end-December 2011.

--> Second, guidelines on credit default swaps (CDS) will be made effective by end-November 2011.

--> Third, guidelines on short sale in government securities will be issued by end-December 2011.

--> Fourth, a Working Group will be constituted to examine and suggest ways for enhancing secondary market liquidity in the G-Sec and interest rate derivatives markets.

For more information, click here

Ajay Shah: Reining in the inflationary dragon

A critical feature of non-tradeables inflation is expectations. If people expect 10% inflation, they tend to wire high price rises into their negotiation of wage and other contracts. This generates inflationary momentum. Particularly in a place like India, where the institutional structure of monetary policy is primitive, economic agents have little confidence in the ability of policy makers to rein in inflation. As a consequence, inflation is highly persistent. Once high inflation sets in, economic agents expect high inflation to continue. There is a great deal of momentum in inflation.

Some argue that supply bottlenecks in India - such as hideous rules about mandis - are the cause of inflation.
The trouble with this explanation is that the supply bottlenecks have always existed. They have existed in high inflation times and in low inflation times. It is, thus, not possible to claim that supply bottlenecks have caused the inflation crisis which began in February 2006.

For more click here.

Middle class hypocrisy on the poverty line: Swaminathan S A Aiyar

I found this article interesting as lot of discussion is going on these days about Rs. 32/day/person being the poverty line. Click here for the article.

RBI increased repo by 25 basis points to 8.25

Click here for more...

ET: Shankar Sharma's analysis

Its a good read, have a look at it. Click here to read.

RBI's anti-inflationary stance: hikes interest rates by 50 basis points

Click here to for full report.

Highlights of the report are...

Increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points. The repo rate will accordingly move up from 7.5 per cent to 8.0 per cent

Consequently, the reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, automatically adjusts to 7.0 per cent. Similarly, the Marginal Standing Facility (MSF) rate, determined with a spread of 100 bps above the repo rate, stands recalibrated at 9.0 per cent.

Expected Outcomes

The expected outcomes of today’s policy actions are the following:

• First, the cumulative impact of past actions on demand will be reinforced;

• second, the credibility of the commitment of monetary policy to controlling inflation, and thereby to keeping medium-term expectations anchored, will be maintained;

• and, third, the policy actions will reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required.

It is important to recognise that in the absence of appropriate actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore. The economy's ability to grow rapidly for any length of time without provoking inflation is dependent on implementing policies, with corresponding resource allocations, which will allow the supply of various products and services to keep pace with demand.

Our baseline projection for WPI inflation for March 2012, as indicated in the May 3 policy statement, was 6.0 per cent with an upward bias. We have reviewed that projection. Keeping in view the domestic demand-supply balance, global trends in commodity prices and the likely demand scenario, we have revised the baseline projection for WPI inflation for March 2012 upward to 7.0 per cent. Let me reiterate what we said earlier, which is that inflation is expected to remain elevated for a few more months, before moderating towards the later part of the year.

The current trends in money supply (M₃) and credit growth remain above the indicative trajectory of the Reserve Bank. Keeping in view the evolving growth-inflation dynamics, the indicative projection of M₃ growth for 2011-12 has been revised downwards from 16.0 per cent, as set out in the May 3 Policy Statement, to 15.5 per cent. Non-food bank credit growth projection has also been revised downwards from 19.0 per cent to 18.0 per cent.

Interesting readings...

Swaminathan Aiyar's article in ET, "20 years to an economic miracle".

"QE2 proves no silver bullet" in WSJ.

Roopa Kudva's article in mint "The return of investment growth".

"Rakesh Jhunjhunwala to ET: Golden period of Indian equities is still ahead", click here to read.

The Economist Magazine's "An Indian Summary".

rediff:How China's bullet trains are powering its economy

Click here for full article.

Interesting readings...

RBI's repo rate hike (and default reverse repo also) by 25 basis points, click here for information.

Raghuram rajan's recent article ("Money Magic") on monetary stance and growth. Mike Konczal's reaction to the article and Paul Krugman's comment for Rajan's article in support of Mike's reaction. And today, Mr. Rajan reverted back to those comments and reactions on similar line with Keynes' Paradox of thrift.

Renu Kohli's article on capital formation in mint.

Haseeb Drabu's article, "ABC of new Indian economy" in mint.

An interesting column in mint about "India's poverty in virtual world".

A view on Dollar.

Niranjan Rajadhyakha's view on Indian Inflation.

mint:Double - dip redux

Click here for information

4th quarter GDP 7.8% vs 9.4% on YoY

click here for more information

Firstpost.com:Indian Economy's Classic Wage-Price Spiral

Click here for full article

STOI: Swaminathan Aiyar's Article

Click here for full article to read...

Narayana Murthy's farewell letter

Click here to read full article.

An open letter to my readers

Hi Guys,

From now onwards, I may not be able to express my views on financial markets, economy and others, where in mass-interest exist. So for time being, I will not post my views "publicly" due to some "professional issues", which I am trying to negotiate and find alternatives. Thats why I have not posted anything from last one week, as discussions/negotiations were on and I was very upset as the proceedings went on! Still I am waiting for final decision, and lets hope for the best! Till then I thought, I can arrange for "private-mailing", by group-mailing system. So interested readers can reply to this post with your email ids.

Keep reading...

Thanks & Regards
Naveen Mutnal

Good article from Jahangir Aziz about RBI's rate hike

We economists are an arrogant lot. If reality doesn’t match with our theory, we find faults with reality.

And so it has been in India for the last several months. Having decided that if it is food inflation then it must be supply shocks, we spent the last year in collective denial that it was loose fiscal and monetary policy pushing demand beyond the economy’s capacity that was the primary driver of inflation, exacerbated by the supply shocks and not the other way around.

And so both the government and the Reserve Bank of India (RBI) kept assuring us that we should not worry needlessly. If the record harvest didn’t tame inflation, base effects would. RBI did raise rates, in fact eight times, but with none of the urgency or aggression that was warranted. Secure in the same belief, the government went on pumping more fiscal stimulus into the economy.

With every passing month as the data unerringly surprised expectations on the upside and as the authorities kept raising inflation forecasts and exhausting one ad hoc explanation after another, these assurances sounded just a little less convincing and just a little more unreal. Instead, tolerating high inflation for this long only hardened expectations, pushing the economy into a generalized inflation spiral as it inevitably does.

More ominously, core inflation appears poised to accelerate further with inflationary expectations hardening by the month, crude prices remaining elevated and leading indicators such as the purchasing managers’ output price index underscoring that even the past rise in input prices have not been fully passed into manufacturing inflation.

Yet, some are still arguing that monetary tightening could cripple growth. Nothing could be more disingenuous. We know at least since 1972 (Bob Lucas’ paper) that the growth-inflation trade-off exists only when expectations are stable, not when they are rising as now, or falling as in Japan in the 1990s. Empirically, we know at least since the late 1980s (Stan Fisher’s paper) that such trade-offs exist only when inflation is low, not when the quarterly rate of core inflation is over 11%. Instead, at these levels, bringing down inflation is essential to safeguard future growth by sacrificing near-term growth.

It is against this context that the central bank came good in its credit policy today. It shrugged off its institutional inertia of moving in predictable 25 basis points (bps) steps, raising rates 50 bps. One basis point is one-hundredth of a percentage point.

The central bank acknowledged that inflation was now driven by demand factors and inflationary expectations were coming unhinged, and laid to rest the growth-inflation trade-off by making inflation control and safeguarding medium-term growth its primary objectives rather than worrying about near-term growth. These are the clearest signals yet that RBI is not afraid of turning on the heat to curb inflation and that we should expect similar aggressive tightening, which most likely will be needed, in the coming months.

Also important was the introduction of the marginal standing facility, which would allow banks to repurchase at any time 1% of deposits at 100 bps above the repo rate. With this change, the banking regulator has now a much better chance of keeping the overnight call rate within 100 bps of the policy rate—the repo rate, something the central bank has struggled to do in the absence of conducting daily open market operations.

That apart, raising the savings rate hopefully is a harbinger of deregulating interest rates on savings accounts. I am sure that there are many good reasons for continuing with our paternalistic attitude to protect the less sophisticated investors such as pensioners and the poor, but presuming them to be naïve is both untrue and disrespectful.

RBI increased interest rates by 50 basis points

Today, RBI increased interest rates by 50 basis points, a 9th consecutive move by Indian central banker to curb the inflation.

Before jumping to the internals of the interest rates, lets look at the important changes in the operating procedure...

* The weighted average overnight call money rate will be the operating target of monetary policy of the Reserve Bank.

* There will henceforth be only one independently varying policy rate, and that will be the repo rate.

* The reverse repo rate will continue to be operative, but it will be pegged at a fixed 100 basis points below the repo rate. Hence, the reverse repo rate will no longer be an independent variable.

* There will be a new Marginal Standing Facility (MSF). Banks can borrow overnight from the MSF up to one per cent of their respective net demand and time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100 basis points above the repo rate.

* The revised corridor will have a fixed width of 200 basis points. The repo rate will be in the middle. The reverse repo rate will be 100 basis points below it, and the MSF rate 100 basis points above it.

So according to above changes, RBI made increased the interest rates as follows...

* Repo rate increased by 50 basis points from 6.75% to 7.25%

* Due to pegging, reverse repo also increased to 6.25% from 5.75%

* MSF is fixed to 8.25% again due to pegging

* CRR is unchanged at 6%

* Savings bank deposit interest rate increased from 3.5% to 4.0%

Updates...

Markets...

Posting from home, Belgaum, market still looks to be in a symmetrical triangle as tops and bottoms are still tapering out. Nifty has handsome support at 5700, i.e. 50 EMA (Exponential Moving Average) and 5600 i.e. 200 EMA. Maintaining my previous view of break below these above mentioned levels should be short or book profit and break above 5900 i.e. present supply zone, should fresh buying.

RBI...

Today, a day before RBI's meeting on Monetary policy review for 2011, RBI has released Macroeconomic and Monetary Developments in 2010-11, and highlights are as follows...

Growth in 2011-12 is expected to stay close to the trend. Growth risks emanate from high oil prices and some moderation in investment. Business expectations surveys exhibit moderation. Survey of professional forecasters also predicts weaker growth and firmer inflation.

Inflation may remain elevated for some more time despite the current anti-inflationary bias in the monetary stance. Upside risks to inflation arise from high oil and other commodity prices, incomplete pass through and its likely impact on fiscal deficit, elevated inflation expectations and price stickiness.

Global recovery has advanced, but downside risk to global growth arises from oil prices and significant sovereign and banking sector default risks.

GDP growth during 2010-11 reverted to its recent trend, aided by a rebound in agricultural growth. Non-agricultural growth, however, was slightly below trend.

Industrial growth decelerated in the second half on account of high base effect and moderation in investment demand. Manufacturing activity was spread more evenly and the recent slowdown in IIP was exacerbated by volatility in output of a few industries.

Headline inflation exhibited strong persistence in 2010-11 due to supply-side shocks and gradual generalisation of price pressures.

Inflation drivers have changed over three distinct phases. Headline inflation during 2010-11 was impacted primarily by food inflation during April-July, by primary non-food articles during August-November and in a more generalised manner by non-food manufacturing articles since December 2010.

Can hawkish monetary policy alone, control the inflation?

Indian central bank, Reserve Bank of India is meeting on 3rd May for monetary policy meeting of 2011-12 and expected to increase interest rates by 25-50 basis points to rein the inflation. At that time RBI governor Mr. D Subbarao might wonder about the above question as he already increased the interest rates, 8 times in last one year or so. But still many analysts believe, RBI is behind the curve to curb the inflation pressure, as Inflation measured by CPI is in double digits (or near by) through out the year. A year back RBI’s comfort zone of inflation was 5.5% and now it has been revised multiple times and more recently to 8% from 7%. Because of this condition there is a talk going on about Indian economy overheating and India not able to handle the growth!

Economist, Sir John Maynard Keynes and Keynesians believed that “changes in the interest rates do not directly affect the prices and inflation is due to pressure in the economy”. They feel that supply of money is a major, but not the only, cause of inflation. They might be right or wrong in the case of other parts of the world but in Indian case it looks like they are correct. Indian inflation may be due third form of Inflation, i.e. Built inflation and neither Demand-pull inflation (increase in demand) nor Cost-push inflation (drop in supply)! In Built-in inflation, people expect higher prices for future from past experience and also supported by price/wage vicious circle.

The very basic point about inflation is, going by the definition, “its rise in the price levels of goods and services in an economy”. Considering the definition, let’s look at the causes of the inflation in Indian case.

First, inflation can be due to erosion in the buying power of the trading medium, i.e. country’s currency. The best example is recent hyperinflation of Zimbabwe where-in, 1 million Zimbabwean Dollar was equal to 1 American Dollar! But Indian rupee, in last two-three years traded against the major currency, i.e. Dollar in a band of Rs. 44 to Rs. 48 per Dollar. So there is not much scope for this argument.

Second, the Cost-push inflation due to sudden drop in the supply side of the economy. In a globalised world, supply side shocks may not lasts too long, particularly not two years and so (as Indian Inflation is in double digits for almost two years). Take recent example of Onion price, due to shortage, prices doubled and even tripled for a month or so, but once the supply resumed, prices cooled off. The same logic applies to Oil prices also whose price spiked due to Middle East crisis and hopes of recovery. If Oil price spike is only because Middle East crisis and not due to recovery, then it’s very difficult to sustain at this level!

Third, Demand-pull inflation due to rise in the demand because of higher expendable income helped by higher income and supported by higher spending by private and government. According to one school of thought, “Demand inflation is constructive to a faster rate of economic growth since along with favorable market conditions, it will stimulate investments and expansions”. They say, higher growth comes with higher inflation and we need to learn to live with that, if we want higher growth.

The Demand-pull inflation along with Built-in inflation is the most feasible reason for the Indian inflation from above mentioned three types of causes. Digging even further tells us that inflation is a part of the broad economical cycle and very structural in nature. So to curb this kind of inflation, there should be combined efforts from RBI (in monetary front), Governments (in reducing fiscal/current a/c deficit by reducing spending), lesser Borrowed inflation (from across the border in terms of imports), people’s mentality and so on. Finally we must remember nothing is decoupled in an open economy!

Good articles...

While browsing through Ajay Shah's blog, found couple of articles are good, so thought of sharing with you guys...

Mr. Deepak Lal's article in Business Standard regarding "Capital Controls" is very good reading material on interlinked macro economics. One piece of the article is as following...

"The current account deficit is by definition the difference between a country’s savings and investments, matched as a matter of accounting by equivalent net inflows or outflows on the capital account of the balance of payments. Current account deficit worries are, therefore, about the size of the capital inflows, which, Ceteris Paribus, will supplement domestic investment and raise it above what could be financed by domestic savings. This should raise growth rates, if the investment is productively employed. It clearly was not the case in the US, where the inflows primarily went to finance the politically-determined entitlements in the sub-prime housing market to Ninjas (borrowers with no income, no job and no assets). But, in India, which has vast infrastructure investment needs, capital inflows would be productive and the size of the corresponding current account deficit should not be a matter of concern to policy makers."

Ila Patnaik's article in Indian Express on GDP growth and Inflation. Will be a good reading on presently going on hot topic of Indian Economy Overheating. For more posts on Indian economy overheating, click here: 1, 2 and 3.

mint artilce: Why India overheats

Continuing my postings on "Indian economy overheating" articles, today I read an article in mint so thought of sharing with you guys.

Highlights of the article...

There is a structural element in the inflation trend, as higher incomes have raised demand for fruit, meat, vegetables and milk. Some inflation has also been imported, as global oil and commodity prices have shot up thanks to the strong economic recovery in emerging markets and loose monetary policies in most Western economies. But domestic cyclical factors are undoubtedly a big part of the story as well.

High inflation expectations could fuel demands for higher wages as well. Whether these two factors have an effect on final prices depends on the ability of Indian companies to pass on higher costs to consumers.

RBI will have to raise interest rates far more aggressively than it has till now. The government has already announced a fairly ambitious plan to cut the fiscal deficit. Higher interest rates will weigh down on private demand and less red ink in the national budget will keep government demand under control. Both strategies will mean that some economic growth will have to be sacrificed.

Demand management can work only in the short term. Further, it will involve sacrificing some growth. The more sustainable response will have to come from the supply side, through more investments and higher production capacity in farm and factory.

A final point: the Economic Survey released by the finance ministry in February used simple calculations to show that the Indian economy is quite capable of growing at 9% a year. India has an investment rate of around 36% of gross domestic product. India requires four units of capital to produce one extra unit output.

For full article click here.

Markets in a crucial Symmetrical Triangle

In my last post about Indian markets I mentioned about Nifty's trading range of 5400-5800. I am glad that I was right on lower end and slightly wrong on upper end of the range. Now it seems Nifty is hanging in between 5400-5900, a 500 points trading zone.

After rapid rise from 5400 to 5900 in a very short period, Nifty was expected to see some consolidation/profit booking. After unsuccessful try of breaking above 5900, Nifty witnessed some selling pressure and looks like it found support at 21 DMA/previous support of 5700.

In above chart, it looks like Nifty (or markets) is/are in a Symmetrical triangle, where in tops are topping out and bottoms are bottoming out indicating for a possible narrow range for immediate time frame and final breakout/breakdown after that.

Compared to other two triangle formations (Ascending and Descending), Symmetrical triangle(for more information on triangles, click here) is not a directional indicator, because it can be broken on either side. On higher side, if Nifty crosses 5900/5950 stays above for couple of days then the possible breakout is possible and on lower side as long as Nifty holds 5700 and 5600 levels, it is safe to maintain our longs.

Ajay Shah's interview to CNBC about Inflation

Yesterday, I saw Ajay Shah's, Senior Fellow, NIPFP(National Institute of Public Finance and Policy) interview in CNBC about Inflation. The way he (or NIPFP) is looking at inflation is clearly worrisome and indicates the RBI is lagging in tackling inflation. I have the transcript of that interview here.

Its a good to read material and also the way they analyze the macro fundamentals of an economy.

India needs purchasing power rather than subsidies

Recently Tamil Nadu faced state elections and both the main parties were talking about 1 kilo rice for Rs. 1 and other subsidized food products. I have taken Tamil Nadu's example because of recent elections, otherwise subsidies are abundant everywhere in India.

What I wonder is, governments fix the minimum support price for the food article to support the farmers, buys it from the farmers for the support price and same governments sell them to its citizens in a subsidized prices like of Rs. 1. Its same for the oil and its by-products also. So who is going to take care of the deficit of these transactions and how long is it going to work on just blame-game?

India faced a severe Balance of Payment (BOP) crisis in 1991 due to higher fiscal deficit and some external shocks like oil crisis and wars. At that time India had forex reserve of 1 billion dollars which was sufficient to import for just one week. Since oil and wars were/are not in our control totally, no point to elaborate on those issues. But what Indian central and state governments could have controlled is the deficit problem. Due to socialistic era and combined with populist budgets like above mentioned ones (particularly started in southern and eastern states) caused irreversible deficit to the exchequer. And surprising fact is still we are following the same old route towards a possible BOP crisis even after seeing other countries taking development mantras.

Now, in this LPG (Liberalized, Privatized and Globalized) era, India's much publicized recent problems are PDS (Public Distribution System) and Inflation. Due to subsidies, majority of the PDS quantity is sold in the black market without letting the targeted person to claim it.

To avoid the PDS problem central government has started an ambitious project called Unique Identification Number (also called as Adhar) under the leadership of Mr. Nandan Nilekani. But the fundamental problem of "deficit" remains the same even after UID or Adhar project.

India aspires to overtake the China, over a period of next 25-30 years, but with the kind of policies is it possible? India's debt to GDP is more than 70% where-as China's is about 20%. India's foreign reserve is about 300 billion dollars where-as China's is more than 3 trillion dollars. According to recent IMF data available, China's GDP at PPP (Purchasing Power Parity) per capita is more than 35,000 dollars per year where-as India's is around 3,300, thats almost one tenth of China!

Governments should really think of improving the PPP- instead of subsidies. And PPP can be improved only if everybody gets regular jobs to contribute towards the GDP. Again jobs require education, different skill sets and more, which in turn can generate jobs. Governments should think about taking up projects like converting Narrow Gauge to Meter to Broad and single line to double to four line railway tracks, not just increase the trains. Why I am mentioning railway project is because projects like National Highway (by Vajpayee government) and railway track doubling are through out India and can generate lot of employment and at the same time can improve the infrastructure of the country.

Indian Economy Overheating

Yesterday, 11th April, 2011 IMF came up with a report, stating emerging economies, particularly Brazil, India, China and sub-Saharan African countries are overheating.

On January 23rd, I posted in my blog about the Indian economy overheating due constant inflation from two years or so.

On 26th January mint published an article on similar topic of overheating of Indian economy due to Inflation pressure.

Today, 12th April 2011, mint has a front page article stating "IMF signals overheating of economy"

See the comparison...

Excerpts from yesterday's IMF report...

The global economic recovery is gaining strength, with world growth projected at about 4½ percent in both 2011 and 2012, but unemployment remains high, and risks of overheating are building in emerging market economies, the IMF said in its latest forecast.

“Fears have turned to commodity prices,” said Olivier Blanchard, Chief Economist at the IMF. “Commodity prices have increased more than expected, reflecting a combination of strong demand growth and a number of supply shocks. These increases conjure the specter of 1970s-style stagflation, but they appear unlikely to derail the recovery,” he told a press conference in Washington.

In many emerging market economies, demand is robust and overheating is a growing policy concern. Developing economies, particularly in sub-Saharan Africa, have also resumed fast and sustainable growth. But the IMF said new risks have emerged.

Rising food and commodity prices pose a threat to poor households, adding to social and economic tensions, notably in the Middle East and North Africa.

The challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating over the coming year. Inflation pressure is likely to build further as growing production comes up against capacity constraints, with large food and energy price increases raising pressure for higher wages.

For full statement click here.

Excerpts from Today's mint headlines...

The International Monetary Fund (IMF) cautioned on Monday that emerging markets such as India are exhibiting signs of overheating, which if not immediately addressed could result in a sharp reversal in the growth momentum.

Overheating of the economy happens when the productive capacity is not able to keep pace with aggregate demand. IMF is, therefore, regardless of the impact on economic growth, making a case for steeper rate hikes by central banks to contain demand and thereby curb inflationary pressures.

HDFC Bank chief economist Abheek Barua said there are “severe signs of overheating” in the economy. “We need to move to permanent slower growth for some time,” he said.

“Signs of overheating are starting to materialize in a number of economies. Continued high growth has meant that some economies in the region are now operating at or above potential. Credit growth is accelerating in some economies (Hong Kong, India, Indonesia), and it remains high in China,” IMF said.

For full mint article, click here.

Excerpts from my 23rd January post...

Many people might be wondering why I am talking about overheating of an economy in the midst of recovery from present financial crisis. Particularly many people may not agree with the Indian Economy overheating concept that too when November IIP numbers are below 3% (2.7% to be exact), Stock market corrected almost 10% in last two months compared to its peers which gained 5%-10% at the same time and etc..

But if you see the inflation number what India is facing from last two years is above RBI's comfort zone of 5% to 6%. For the year 2009 Indian Consumer Price Index was of 8.3% averaged and where as 2010 CPI was 10.9%. Where as from 2003 to 2008 Indian consumer price index moved between 3% to 6% on average basis. So in these last two years Indian inflation went up by 4% points in the consumer price index level. In this inflation CPI or WPI, food inflation has been major contributor towards the both indexes.

I feel India is facing wage inflation, it is condition where in higher wages or increased wages chase little goods available in the market and causing increase in the prices of the goods and in turn putting pressure on wages to hike. Its like a spiraling or vicious circle.

For full blog post, click here.

Excerpts from 26th January mint article...

With high-inflation expectations and an unceasing march of prices, India is close to a wage-price spiral.

Since the new year began, the Indian stock market has fallen 8% below its December peak of 20,509 points. Long bond yields have risen by more than 20 basis points, touching 8.2%. Foreign investors have reduced their weights on Indian investments and capital inflows have turned into a trickle.

There are other reasons, too, for further monetary action. While 36% (3.1 percentage points) of the 8.4% year-on-year rise in the Wholesale Price Index (WPI) in December resulted from food prices, manufacturing inflation accounted for 34% (2.9 percentage points). The persistence in food price inflation, however—a 13.5% increase over December 2009—is now prompting doubters to suspect that strong demand factors could be at play.

Unsurprisingly, inflation expectations look set to be entrenched at higher levels, only a step short of triggering a price-wage spiral.

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mint (WSJ)'s article on similar note of my recent post

Comparison between the two articles...

My post on Wednesday	Mint (WSJ)’s article in Thursday’s paper
The great recession 2007-08 is history now and world is in the brink of recovery (different opinions about shape of recovery) with different pace in different places. Now almost all central bankers (both developed and developing countries) are worried about the future course of monetary actions.Developed countries like US, UK, European Union and Japan have maintained their respective interest rate at very low levels almost equal to zero to avoid the depression. Since economy is now trying to recover from the crisis, these above mentioned country's central bankers are facing their own issues and are in dilemma whether to reverse the monetary stimulus or to go ahead with the present status for some more time? Coming to developing countries like BRIC (Brazil, Russia, India and China) are clearly under the tremendous inflation pressure. India and China's central bankers increased their respective interest rates almost on an average once in a two month (from more than a year) to control the inflation. Brazil is under the threat of "hot money" flow due to interest rate parity and threating its currency competency. Russians are facing bubble kind of formation in almost all asset class due to rapid increase in their valuation.	The European Central Bank and the U.S. Feder- al Reserve, facing similar challenges of fragile economic recoveries and surging com- modity prices, are charting dif- ferent courses.The world's major central banks “are in the post-traumat- ic stress clinic,“ says Willem Buiter, chief economist at Citi- group and a former member of the Bank of England's policy board. Interest rates are “ludi- crously low,“ he says. “This is clearly not the world central banks like to operate in.“ The central bank faces a deepening divide between its prosperous northern members of Germany, Austria and the Netherlands--where inflation is starting to take hold--and its weaker southern countries, plus Ireland, where unemploy- ment is high and economic growth sluggish. Managing the exit from easy- money policies could be more fraught than usual. Central banks have to decide both when to start the process, and how to do it. Minutes from the Fed's latest meeting in March, released Tuesday, gave hints of the brewing debate within the Fed about the economic out- look and its policy course.
US is getting mixed data from its economy as it Job data, and inflation data are on the positive side where as housing data is still under the pressure. UK is under the threat of Inflation and Japan is bombarded by Tsunami, nuclear crisis and 2 lost decades. European union is in dilemma as its different constituents are in very widely diverged due to countries like Germany and Ireland (or Greece) are like south and north poles in all aspects of economy.	The U.S. consumer price in- dex was up 2.1% in February from a year earlier, though an- other measure preferred by the Fed was slightly lower. Excluding the volatile food and energy sectors, the index was up 1.1%. Euro-zone inflation was 2.6% in the 12 months ended in March. It was up 1% for Febru- ary when food and energy pric- es were excluded. The Bank of Japan, shaken by natural disasters and a nu- clear crisis, is preparing for a meeting later Wednesday and Thursday at which it is consid- ering new easy-money meas- ures that would direct low-in- terest loans through banks to crisis-hit areas. The Fed, on the other hand, is betting it can afford to let a nascent U.S. recovery--still challenged by a slumping housing market, thrifty con- sumers and high unemploy- ment--run a while before try- ing to slow it down.
Yesterday, Tuesday, April 5th 2011 PBOC (People's Bank of China) has increased the lending and deposit rates by 25 basis points to from 6.06% to 6.31% and 3.0% to 3.25% respectively to curb the inflation. According to last available data China's CPI data for the month of February was 4.9% which is almost 1% higher than the PBOC's comfort (target) zone. But the problem PBOC might face in coming days is slower growth as it has forecast a lower GDP for coming years. Remember China spent massive amount (more than 4 trillion yuan) during the crisis times and its banks lent more than double the government spending/stimulus. So the base effect along with reverse the stimulus effect and lesser(than earlier) advantage of currency competence (due to international pressure to yuan pegging) may cause hindrance to Chinese.	The People's Bank of China on Tuesday raised its policy rate by a quarter percentage point, continuing a phase of interest- rate increases in the world's fast-growing emerging econo- mies that began earlier but that many economists say has been too timid.
Tomorrow, April 7th 2011 ECB (European Central Bank) is meeting and many analysts are expecting ECB to increase the interest rates to target the inflation. ECB might be worried about the December inflation of 2.2% which above its target of 2%, but what about Greece, Ireland and other debt ridden Euro zone countries growth! Will it start the process for other developed countries to follow?	The ECB, preparing for a pol- icy meeting Thursday, is poised to become the first central bank among the world's large, developed economies to raise interest rates since the world fell into deep recession in 2008. With the ECB moving toward tighter policy and the Fed stay- ing easy, the U.S. dollar could be heading for continued de- clines as investors seek higher- returning holdings elsewhere, said Bruce Kasman, chief glob- al economist for J.P. Morgan. The divergence among cen- tral banks is a test of their cred- ibility. The ECB is betting a rate increase now will prove its an- ti-inflation mettle and might help it avoid more draconian increases in borrowing costs later. ECB officials are expected to raise the bank's main lend- ing rate one-quarter percent- age point to 1.25% at the meet- ing Thursday. The euro hit five- month highs against the U.S. dollar this week.
MPC (Monetary Policy Committee) of Bank of England is in traction to take the first step to increase the interest rates from 0.5% to 0.75% to target the inflation, but question of the hour is when? According to latest available inflation data for February is increased to 4.4% (from 4%) above the Bank of England's comfort zone of 2%. So will it bite the bullet?	The Bank of England is ex- pected to hold short-term in- terest rates steady Thursday at 0.5%. The U.K.'s consumer price inflation, at 4.4%, is rela- tively high, but its economy contracted in the fourth quar- ter and shows scant signs of having recovered solidly in the first quarter. Reflecting the conflicting economic signals, the BOE policy board is divided three ways, with a majority be- hind steady rates, some mem- bers pressing for rate increases, and one backing more stimu- lus.
Now there is lot discussion is happening around the FED's possible about QE2 (Quantitative Easing 2), FED rate, Inflation (is 2.1% and FED's target is 2%). FED might be worried about its history of 1936-37 of recession after great depression in 1930. (In the course of 10 months between 1936-1937, FED doubled its interest rates by causing recession!). It also might be wondering about the consequences of premature stimulus exit.	The Fed decided to continue a $600 billion bond-buying program, known as quantita- tive easing, but “a few mem- bers“ thought the Fed might need to reduce the program. The minutes also showed Fed officials had an extended dis- cussion about the outlook for inflation, in which they tried to make sense of higher prices for oil, grains, metals and other commodities. Though Fed Chairman Ben Bernanke ex- pects the broader inflation im- pact of higher energy prices to be muted, some Fed officials are eager to start moving to contain it.
In almost all the cases of central bankers, everybody is targeting inflation and inflation, mainly increased due to spike in oil prices, high commodity price and higher primary food articles. And inflation in most of the cases is supply side issue also instead of just increase demand! Whether mere increase in interest rates (further more in the case of developing countries) will curb the inflation immediately, without derailing the growth prospects? Global economy may not be ready to face another credit crunch! At the same time, artificial asset boosting by keeping near zero interest rates is also not good for the longer term economy, as fast history is in front us!	The central banks' divergent policies will have enormous ef- fects on economic growth, in- flation and financial markets.The stakes are high for both banks. If the ECB is wrong in moving rates higher now, it could choke off economic growth in the euro zone. If the Fed is erring on the side of easy money, it could let U.S. infla- tion take off, damaging the do- mestic economy. This comes as other major central banks are pursuing their own varying approaches.
For my blog on this topic click here	For full mint article, click here