Interest Rates, and Growth…
How stubborn can Central Bankers be? It is surprising – and I am not saying it is easy to be a central banker..just commenting.
Inflation in the US and UK are about 5% – if you ask the people living there (increasing ‘consumer confidence’ is inflation assisted). However the Central Banks are refusing to believe this. With interest rates pegged at 1-2% in both the places, the Central Bank is making a mockery of the ‘smart’ people who ‘saved’ money. Money is losing value real fast – and asset bubbles are getting created ONCE AGAIN…in both these countries.
China holds its currency low, so the Chinese guys who export are INVESTING the money outside (Money is brilliant, it finds the best risk-return avenues). If a Chinese company has exported to Singapore, it buys more properties in Sing rather than bring it to China. Now the average Chinese who cannot do this kind of stuff happily buys gold. Gold here is not an investment – it is a way of saying ‘I do not know what will happen to the yuan’.
Our own RBI CANNOT control inflation, prices of real estate, prices of other non essential commodities. The Government of India is in sleep mode and doing nothing to reduce inflation.
We have a huge supply constraint – 30 years CTC for a house (clearly a bubble? I do not know) or complete failure of infrastructure (5 hour power cuts in parts of the suburbs of MUMBAI) cannot bring the prices below Rs. 90 lakhs for a 2BHK – 40 kms from South Mumbai!!
So at best we can only say what a tough job it is to be the Governor of the Central Bank, do sensible things with your policies, hope that the government will do sensible things, – and talk to the media on a quarterly basis (sounding smart too!),….God…are you listening!!
Srinivas Muthadi
Can Govt.’s really control prices and inflation? Best way is leave it to businesses and people, and ‘demand and supply’ to determine the prices. Govt. interference only makes things worse, as people at the helm have vested interests. Their policies are based on false statistics.
Govt. sees to it that business people are blamed for inflation. I look at it as decrease in the worth of currency, which is controlled by Govt., rather than increase in price.
pravin
rare is the analyst who has pointed out that the datum on which the REER was determined in 1992 was based on the reality then of india suffering from a BOP crisis.so 40 rs to the dollar was realistic then.today there is no such capital crisis in india,but the exchange rate still has an element which is based on that scarcity phenomenon-which is joke when we have close to 300 billion in reserves(it is overabundance and not scarcity).inflation in india could be much less if the rate were closer to 30 instead of 50 -adjusting for the reality of the last 10-12 years.in that case,the RBI wouldnt have to tinker with the interest rate and destroy demand universally. a stronger rupee would make imports very efficient and generate jobs internally and would shake off the deadwood in the exports which have no competitive advantage except that artificially provided by the rupee.
it is a shame we have an ‘exports’ minister while imports are looked down upon.if anyone reads arthashastra,chanakya detailed imports as the way to get rich. this keynesian stupidity about exporting ones way to wealth is wrongheaded and our big economists like chacha manmohan and montek aloobhai,kamal nutt, are all potatoheads who believe in this idiocy
subra
Pravin when Chetan Bhagat calls Infosys ‘body shopping’ did you feel bad? I did not. Our software is aided by the $ at 50 instead of being at 30 🙂
Sreekant
We should firstly learn to have realistic expectations from any government, especially Indian as politics is after all a business. Indian government’s performance and more especially the PM’s is pathetic, to put it mildly. The election commission should perhaps make it mandatory for the government to disclaim “Past performance may or may not be repeated in the future” at the time of elections to puncture voter expectations.:-)
And India should have realistic growth expectations in line with our capabilities and limitations. Rhetoric on double digit growth is plain jingoism. When you bite more than what you can chew, you do get hiccups in the form of high inflation. RBI seems to be fully justified in trying to bring down the growth rate to sustainable levels of 6-7%. When we cannot manage power supply, congestion free roads etc what’s the point in aiming for 10% and burning ourselves?
krish
Where is the tax payers money going in India. It covers mostly salaries, army, institutions (eg.air India), travel and protocols of babus and netas. Obviously each year we see the deficiet means we are overspending than what we are receiving. However 4-5% deficiet is acceptable even while it is piled up each year. The rules for the government and individual are different. The same government says that individuals must save for the bright future.
If the government has surplus budget it can drive economy through creating better infrastructure. The opportunity to generate additional budget was through PSU sale and once in a while through licenses. Almost this decade, we saw divestment in all PSU starting from Maruthi and the latest was Coal India. When the government needed a budget surplus, 3G license was critical to mop up revenues and it presented a huge opportunity to bridge the gap. The telecom ministry was given to first timer in crucial time and we all know the history. As a result, the economy is suffering and so as the citizens. This is a failure of profession like robbery in Police station, house collapse of PWD engineer or economy collapse under the leadership of global economist.
pravin
not true@body shopping.some of the companies in the IT business are obviously surviving solely on account of cheap rupee,but the point is at rs 30 to the dollar,wages wouldnt have to increase so rapidly.there is definitely a good competitive advantage in india in IT.the cost arbitrage thing would exist even outside of the exchange rate.it would be in addition to the skills.i was speaking about the so industries like textiles which are hampered by lack of technology and electricity,making even bangladeshi stuff more competitive.
Ankur Lakhia
@ Pravin,
Solution is not exchange rate. For example, if you think Rs. 30/- a USD is better then why not make Rs. 1/- to a USD? This is not right way. Even at today’s exchange rate, current account is in deficit and this deficit is being bridged by FII money. Solution is to become competitive, not only in software services but also in manufacturing. That requires improvement in productivity of labor & capital both by debottlenecking of infrastructure as well as education sector. Only then our country will be able to stand even with appreciating currency and then only wealth, in its true sense, can be achieved for masses…..we are far from it.
pravin
ankur,true -competitive advantage can only be sustained by increased productivity.
but why do you say able to ‘withstand’ appreciating currency?.a strong rupee is a good thing.it makes us richer.you dont have to withstand prosperity.you enjoy it.
as economists who understand WHY we export at all explain,the sole reason we export is so that we can IMPORT!.And here we are praising exports and denouncing imports.
the rs 1 is not a solution because it is as harebrained as rs 50 -doesnt reflect the fundamentals.
my point was that the REER mechanism on which the exchange rate is determined is flawed today and hasnt adjusted for the fact that we are not in capital crisis today unlike 1991.so the rupee has to reflect that fundamental change.otherwise we are unnecessarily strangling our own necks.
i may not be explaining this well.check out this better explanation.
http://www.business-standard.com/india/news/isreer-modelany-use/393265/ by rajiv shastri who makes a lot of sense.
Sanjay
@pravin : When you are importing a lot of oil, you need a minister who will look at exports as well.
Much of the reserve can be hot money which will flight whenever FII sees any trouble.
pravin
@sanjay. yes,true -when they see trouble.is it the FII’s fault that the troubles are caused by the indian govt? the hot money fearmongering doesnt apply to india since 1991 before which we were an autarky.and i dont see india becoming a closed country again.
btw,most of these reserves are not FII money -they are actuallY ECCB/ECB dollar borrowings by indian comapnies and businessmen who prefer dollar loans .eg the loan for purchasing Corus taken by Tata.
so unless you are afraid of Tata,we have nothing to fear.
we absolutely dont need to pick winners between exports and imports.so we dont need to promote exports as if it is a good thing.
most people think exports-good,imports -bad.
well,the way to explain that absurdity is to reduce it down to an individual level: we all export our services(work) and in return get money(say rupee).the reason we get those rupees is so that we can go ahead an import -food,clothing,housing,oil,entertainment -all those things we dont produce and export.
the same logic applies at a national (or any arbitrary geographic boundary) level.the purchase power of that rupee(or whatever currency) is what determines how much stuff we can buy cheaply.our economic aim in life is not to provide others a good bargain,but to find a good bargain for ourselves.the only reason we export is because those damn foreigners have the gall to ask for payments when we purchase somethign from them.ideally,wouldnt we all want to get stuff for the cheapes(best would be free!)
there is an argument that exports create jobs.but that is sloppy thinking.cheap imports create OTHER jobs in india because of the savings made possible by cheap imports.those are the unseen effects which people cant analyse.good economics means taking into consideration both unseen and seen effects
Sanjay
@pravin : when a country export more and has a surplus, government has a lot more say in political world because you have a lot of money. Look at china. Chinese people are not well off there as compared to India but chinese government has a lot more say in political world. So metaphorically, chinese people are slave of chinese government. There were few suicides over wages in chinese manufacturing sector.
Compared to China, it feels like Indian government is not so bad even though we have regulated exchange rates.
pravin
agree coompletely @sanjay. indian govt’s control is not as bad as china. but just because our neighbors ill treat their children is no reason for us to beat our own kids.thats all i am saying.we should expect better from out govt(over whom we can atleast pretend to have some influence).we have no control over how the chinese govt manipulate their citizens
subra
“Chinese people are not well off as compared to India” – will you please explain? Let us not ignore 40 million Indian child labour (ministry figures, real figures must be higher..4 CRORES! IS huge). Indians have democracy, but if you are not from the class that knows its rights, chances are you will not have any rights.
India and China both have regulated exchange rates, both have a surplus – but they have a bigger surplus.
Indian govt is doing a terrible job, RBI is doing a good job. Monetary policy vs. Fiscal policy fight – that is all.
Praveen
Dollar at Rs.30 🙂 Then all the IT, textile companies go bankrupt & there won’t be jobs. If no jobs then default of EMI’s, house loans., then banks go burst., automobile sales slump., then…. (or whatever it is)
pravin
@praveen. incorrect.indian IT worked fairly well in the 80s when dollar was 13 rs to the dollar and FERA was in place.
the boom of the post y2k came because of the bandwidth revolution and dotcom boom which lead to cheap availability of telecom resouces making outsourcing cheaper. the lower wages and the dollar excng rate helped,but the massive boom has been caused by the increasing productivity .indian IT workers have consistently earned more revenue and profits per employee over the last 15 -20 years.it is a fallacy to explain it all due to a single factor of currency advantage which has been around 42-49 thru out.
textile companies -yes,they are decently competitive in niche areas (embroideries,design) .china clearly holds the advantage in mass production.textile companies in india should re-evaluate if they are actually more productive than 20 years back.that should be the guiding principle.
only 20% of indian economy is dependent on exports.what about the rest of it -which imports? importers dont even have lobbies i guess.but nasscom and every other exporter makes sure they have their voices heard.
ofcourse a sudden jump to rs 30 will cause mayhem.that is nobody’s case.any such artificial shock will cause dislocation.but policy makers/RBI should try to listen to the silent majority of india which will benefit from cheaper exports(and create so many jobs -from the now surplus money).the vocal exporters influence govt which is already sold on the exportled path to prosperity story
Dr Khan
@ Pravin @ Subra
The BEST solution is to CLOSE DOWN the central banks and bring back the Gold Standard and link it to all currencies.. All the funny money printed by the central banks will go away. Interest rates will reflect the market. There will be no currency exchange conundrums. Any trade deficit that develope will be swiftly corrected. There will be more efficient allocation of resourses.
But, for this to happen, the governments of the world will have to live within their means. The big banks cannot make huge (unearned) profits and their executives cannot have outrageous bonuses. So, there will be a huge resistance to a Gold Standard. The lackeys of the big bankers- The so called “Economists” of the Keynesian mould will never let it happen.
pravin
@dr khan. the gold standard is pooh-poohed by many. i’d therefore put gold to the market test again. let there be competing currencies.gold,silver,faith-in-the-govt all can compete with any new age technology that may have come up.let people pay their taxes in any of these currencies (ie abolish legal tender laws).let the market decide what will win.
experience and history says gold.but ,hey,who knows if human nature has changed in the last,er,40 years
Sanjay
@pravin : if suddenly 30 indian rupee is equal to 1 dollar then salary will decrease/stagnate but EMI will remain the same 🙂 People who have taken huge home loans would appear fool. And people who have kept money in FD will be a lot richer. I guess I am not able to grasp the scenario correctly.
Dr Khan
@Pravin
Maybe we have to consider Voltaire’s observation
“All paper money eventually reaches its intrinsic value, which is Zero”
Personally, I think that in a free market, with competing currencies Gold will eventually be accepted as a money. The Chinese have already started to realize what a big fraud paper dollar really is, I think. They have Gold ATMs now!