The Monetary Policy Review released a couple of days ago by the RBI makes interesting reading. I will make no comments. The figures speak for themselves. Just go through all the tables. The link is
Wednesday, July 29, 2009
Tuesday, July 7, 2009
Govt. spending - The multiplier effect
Just a passing thought on govt spending.
Modern Economic theories tells us that govt. spending has a multiplier effect. In other words, if govt. spends Rs 100/-, the GDP goes up by more than Rs. 100/-. Really?
If that were true, should not the socialist economies have been very rich?
Monday, July 6, 2009
Budget 2009-10
In my view the budget and the Economic survey can be summed up in two words.
POLES APART.
Thursday, July 2, 2009
Negative Deposit Rates
Ever heard of a situation where you have to pay interest to a bank for keeping your money in a savings account rather than the bank pay you interest? The first time i heard such a thing was at IIM, Kozhikode, where my finance prof. (a goan), told us that in pre 1961 Goa, one had to pay interest to bank for their deposits.
Well, we have a more recent example in the modern world. Seems that the Swedes have decided to follow the pre liberated Goan (portugese) system. Their central bank has cut repo rate by 25 basis points bringing the deposit rate to a whopping MINUS 0.25%.
It would be interesting to see the consequences.
Economic Survey 2008-09
The Economic Survey 2008-09 have just been released. The highlights of the survey and some quick observations are
The Economic Survey 2008-09 presented to Parliament today by the Finance Minister Shri Pranab Mukherjee says, the speed at which the Indian economy returns to the high growth path in the short term depends on the revival of the economy, particularly the US economy and the Government’s capacity to push some critical policy reforms in the coming months.
The govt. says recovery of the Indian Economy does depend upon the recovery in US economy. That is living in the hope that others will do well in due course of time. What is US economy does not recover for years?
The Survey goes on to note that there are early signs of recovery in the global economy manifested in rising stock prices and increasing price of commodities.
Green shoots do not take time to turn brown.
It is however, debatable whether rising prices are an indication of green shoots of recovery or a result of position taken by financial investors seeking to benefit from global recovery expectations.
Very true. Take an adverse possibility into account rather than just be an optimist based on hope.
It says despite the slowdown in growth, investment remained relatively buoyant growing at a rate higher than at the rate of the GDP. The ratio of the fixed investment to GDP consequently increased to 32.2 per cent in 2008-09 from 31.6 per cent in 2007-08. This reflects the resilience of Indian enterprise, in the face of massive increase in global uncertainty and risk aversion and freezing of highly developed financial markets.
This needs to be examined in detail. Is it because of bouyant investments or because prior committments/projects necessiated that they be completed.
The Survey expresses concern over the existence of hunger and widespread malnutrition despite the country achieving self-sufficiency in food production and with mounting public food stocks at its command. It says it is time that various interventions at the State and Central level addressing these issues are reviewed and redesigned.
Mounting food stocks? They will not last if we do not take adequate steps to improve productivity in agriculture as well as water management. Agri growth falls short of population growth. Of course lop sided growth is an issue and hence poverty still exists. While tackling equality, the govt must not loose site of problems in agri sector or else ten years later we will be in deep trouble. Agri sector would not grow just by providing incentives and credit. What it needs is technology, water management and consolidation of land holdings.
According to the study FDI investments into India
Higher FDI in 2008 is partly because of strong flows in first half of 2008, which came down to normal levels in second half. Remains to be seen whether, the trend would continue. Another issue is whether these figures come anywhere near say, China. A third issue is that a major portion of FDI is in service sector. While service sector is fine, a country of the size of ours should ideally be a manufacturing stronghold. These issues would need to be addressed.
While fiscal policy plays a dual role as a short-term counter-cyclical tool and an instrument to maintain microeconomic stability and promote growth in the medium term, the Economic Survey underlines the need to restore Centre’s fiscal deficit to the FRBM target of 3 per cent of GDP at the earliest. It says a number of factors will make it possible. They include reversal of much of the decline in business and corporate tax collections when growth accelerates from the second half of the year and the expected introduction of GST in 2010-11.
Good that there is a recognition that high fiscal deficit is unsustainable. But the control in deficit is linked to revival of economy. What about control on govt expenditure?
On the monetary policy front the Survey says that high deposit rates have now come in the way of cutting lending rates at a pace which is consistent with the current outlook on inflation and the need for stimulating investment demands.
Let the market set interest rates.
It says that as the low prices of oil has provided a temporary window for decontrol of petrol and diesel, this window must be utilised at the earliest.
Plan complete de-regulation. That will ensure that consumption of petroleum products moderates when prices increase, besides reducing the fiscal deficit. There is a catch though. High fuel prices would impact food prices and essentials, thus impacting the common man. Again a pointer towards why agri growth is a must and must have focus in the coming years.
The Economic Survey for 2008-09 says that the outlook for the trade sector in 2009 is not very encouraging with IMF projecting a negative growth in world output at -1.3 per cent and world trade volume projected to growth at -11 per cent.The subdued global outlook calls for efforts at both national and international levels to revive growth. While efforts to promote exports are needed, the Economic Survey emphasises the need to guard against protectionist measures originating from our trade partners. The Survey says, we also need to desist from any protectionist tendencies and proceed on the reform path.
True! Focus on productivity improvement and cost reduction and fight protection. no amount of stimulus will help in these conditions.
The Survey says, besides short-term relief measures and stimulus packages, some fundamental policy changes are needed. For the merchandise trade sector these include continuation of the reduction in customs and excise duty to make our exports and industry competitive, streamlining of existing export promotion schemes, giving special attention to export infrastructure alongwith rationalisation of port service charges, weeding out unnecessary customs duty exemptions and checking the proliferation of SEZs.
Agreed.
Overall, the economic survey seems to have pointed to the right issues. The only exception is the agricultural sector, which one would have thought was important enough to have seen a special mention.
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