So finally some good news today! The World Bank's shareholders have agreed to raise the bank's lending capital by $5.1 billion. This will come in two separate increases of $3.5 billion and $1.6 billion (by developing countries). With this, the voting share of the developing economies have also gone up (47.19% from 44.06%). China has surpassed Germany, France and UK to become the third largest shareholder with 4.42% voting rights from an earlier 2.77% voting rights. This is really some good news since its been long overdue to increase the lending and voting share of some major developing countries like China. This makes an international body like World Bank look more representative of the international economies in the current global economic scenario.
Also, I am glad that the lending capital is increased. There will be a total capital increase of $86.2 billion for the International Bank for Reconstruction and Development (IBRD). The difference of the total capital increase of $86.2 billion and the operating capital of $5.1 billion is called "callable capital" that can be drawn upon when emergency arises, from the member countries. There are too many projects that depend on World Bank funding in developing and poor countries. And with the world bank committing itself to large amount of funds during the recession, this has strained its resources. And now I hope that the projects in poor countries will continue unabated.
All this said, I would still like to see more improvements in the governance architecture of the IMF and World Bank. Though this capital increase is a good news, we still need more capital down the road and I hope that gets done. Also, some poorer countries have lost some of their voting share due to this re-allocation. I hope this is also corrected down the road. Personally, I think that European countries have far more voting rights than what is needed. If we consider Europe as a whole from an economic standpoint, we have far more European countries with larger voting rights than what should be to represent Europe. I hope this correction is also done in the near future so that we can accommodate more poorer countries in the governing architecture with more voting rights for them.
Sources:
http://www.businessweek.com/news/2010-04-26/world-bank-says-nations-agreed-to-boost-lender-s-capital.html
http://blogs.worldbank.org/meetings/node/616
http://www.nytimes.com/2010/04/26/business/26bank.html
Monday, April 26, 2010
Monday, April 19, 2010
Pathetic Poverty
With tears I write, India's new official poverty estimates were just released by the government panel who worked on this. The poverty rate has gone up from 27.5% in 2004 to 37.2% and this puts almost 100 million more people below the UN estimated poverty line of $1.25 a day. So now, a total of 410 million Indians live in poverty. And the malnutrition rate in children in India still stands at a whopping 46% (in China it has come down to 7% after the start of economic reforms). Just to quote a line from the Reuters article - "A third of the world's poor are believed to be in India, living on less than $2 per day, worse than in many parts of sub-Saharan Africa, experts say." I have no strength to write anything beyond this at the moment other than to say a sarcastic "Thanks!" to the Indian elite political class.
Source: "Reuters" which published the numbers from the poverty estimate report.
http://news.yahoo.com/s/nm/20100420/india_nm/india478257
http://news.yahoo.com/s/nm/20100419/india_nm/india477918
Source: "Reuters" which published the numbers from the poverty estimate report.
http://news.yahoo.com/s/nm/20100420/india_nm/india478257
http://news.yahoo.com/s/nm/20100419/india_nm/india477918
Tuesday, March 9, 2010
Reform or Bubble? Choose one
Why is it very important to prevent the banks from speculative trading? Let's consider these facts that are relevant today:
1. America has injected enormous amount of liquidity into the financial system and the interest rates in US are near zero.
2. Asia, especially China and India, seem to be in a comfortable zone (relatively) out of the recession and have started monetary-tightening.
Is there a relationship between American financial system and Asia? Yes there is. With the US interest rates at an all time low near zero and expected to remain low throughout this year, there are huge amounts of capital outflows from US into emerging markets. This capital-outflow is supported by the speculation that emerging markets will do better than the US, atleast in the shorter term. There are good reasons to believe this - economies like China and India have had tremendous growth in recent years, have financially sound banks, have huge foreign reserves and high savings rate. And all these are currently being deployed and will be deployed in their respective economies to promote and support growth.
In both China and India, I expect strong government spending during the coming years. China, I would expect, to spend on factors that would drive consumer-spending. China is already embarking on a $150 billion nation-wide health-care package.
India has plans to spend heavily on its broken infrastructure like roads, ports, bridges, public-transportation etc. India is expected to need $500 billion in the next five years to meet the growing infrastructure demand (and the govt. acknowledges this).
Both China and India have huge savings rate and large amount of foreign reserves that should see the planned investments get implemented. United States is also expected to invest on a large scale in infrastructure related projects to push the economy higher. So all this should ensure a considerable amount of global capital-sector spending.
But the recovery from this recession is very different from the earlier ones. In this recession, the US consumers are hit hard and they are likely to spend less in the coming years. Can this decrease in US private consumption be compensated by an increase in private consumption from Asian economies like China and India? I very much doubt it. In 2007, US consumed $9.7 trillion worth of goods and services which is six times more than the combined consumption of China and India in the same year (source: "The Next Asia" book by Stephen Roach, Morgan Stanley Asia Chairman).
And this time, Asia leads the recovery and US will follow, which means exports are going to be a key for growth in the US in the coming years. Will this mean that America will need a weaker dollar? Well, I am not in favor of this idea. With enormous capital spending expected in the coming years in the world's two most populous nations and other developing countries, a weaker dollar will shoot up the commodity prices to unsustainable levels and that combined with the large liquidity in the US financial system and with low interest rates will make a good recipe for inflation in US.
Now there are two questions that we have to answer here:
1. How are we going to make American exports more competitive?
2. But even before answering the first question, how can we be sure that Asian economies don't get into any kind of economic trouble, which if they, will bring down the world again into recession?
One of the solutions to the second question, which will be a very good first step towards a stable global economy, will be to bring about financial and banking reforms in the US. If the commercial banks are allowed again to get involved in proprietary trading, which is done using the abstract concept called "speculation", then there is high-risk of asset-bubbles forming in Asian economies due to cross-border capital flows. Many Asian economies, especially China and India have some sort of capital-controls but this will not be sufficient to stop the speculative inflows. And this may cause unsustainable shoot-up in real estate and stock prices. At the same time, allowing banks to do proprietary trading will seriously reduce bank-lending in US. This is especially true after the credit-bubble burst. Bank-lending is very much needed now for small businesses and to an extent to consumers in the US. By preventing banks to speculate using depositors' money, we can bring a balance between exports and domestic consumption in US and this will also help reduce the currently unsustainable current account deficit.
Now coming back to question number 1 - how can we make American exports more competitive? The answer to this does not lie in a weaker dollar but instead in increasing productivity. For this to be achieved, US must direct the cheap money available into education, investments to achieve higher energy-efficiency, investments in people, scientific-research and other areas of technology. What the US does NOT want now is the government and Federal Reserve trying to increase the retail-spending of American consumers through cheap money to pre-crisis levels that were already unsustainable, to prop up the economy. Trying to do this may look right now but going back to the old-ways will likely make our economy present us something in the future, which has been presented to us again and again - a "bubble"
1. America has injected enormous amount of liquidity into the financial system and the interest rates in US are near zero.
2. Asia, especially China and India, seem to be in a comfortable zone (relatively) out of the recession and have started monetary-tightening.
Is there a relationship between American financial system and Asia? Yes there is. With the US interest rates at an all time low near zero and expected to remain low throughout this year, there are huge amounts of capital outflows from US into emerging markets. This capital-outflow is supported by the speculation that emerging markets will do better than the US, atleast in the shorter term. There are good reasons to believe this - economies like China and India have had tremendous growth in recent years, have financially sound banks, have huge foreign reserves and high savings rate. And all these are currently being deployed and will be deployed in their respective economies to promote and support growth.
In both China and India, I expect strong government spending during the coming years. China, I would expect, to spend on factors that would drive consumer-spending. China is already embarking on a $150 billion nation-wide health-care package.
India has plans to spend heavily on its broken infrastructure like roads, ports, bridges, public-transportation etc. India is expected to need $500 billion in the next five years to meet the growing infrastructure demand (and the govt. acknowledges this).
Both China and India have huge savings rate and large amount of foreign reserves that should see the planned investments get implemented. United States is also expected to invest on a large scale in infrastructure related projects to push the economy higher. So all this should ensure a considerable amount of global capital-sector spending.
But the recovery from this recession is very different from the earlier ones. In this recession, the US consumers are hit hard and they are likely to spend less in the coming years. Can this decrease in US private consumption be compensated by an increase in private consumption from Asian economies like China and India? I very much doubt it. In 2007, US consumed $9.7 trillion worth of goods and services which is six times more than the combined consumption of China and India in the same year (source: "The Next Asia" book by Stephen Roach, Morgan Stanley Asia Chairman).
And this time, Asia leads the recovery and US will follow, which means exports are going to be a key for growth in the US in the coming years. Will this mean that America will need a weaker dollar? Well, I am not in favor of this idea. With enormous capital spending expected in the coming years in the world's two most populous nations and other developing countries, a weaker dollar will shoot up the commodity prices to unsustainable levels and that combined with the large liquidity in the US financial system and with low interest rates will make a good recipe for inflation in US.
Now there are two questions that we have to answer here:
1. How are we going to make American exports more competitive?
2. But even before answering the first question, how can we be sure that Asian economies don't get into any kind of economic trouble, which if they, will bring down the world again into recession?
One of the solutions to the second question, which will be a very good first step towards a stable global economy, will be to bring about financial and banking reforms in the US. If the commercial banks are allowed again to get involved in proprietary trading, which is done using the abstract concept called "speculation", then there is high-risk of asset-bubbles forming in Asian economies due to cross-border capital flows. Many Asian economies, especially China and India have some sort of capital-controls but this will not be sufficient to stop the speculative inflows. And this may cause unsustainable shoot-up in real estate and stock prices. At the same time, allowing banks to do proprietary trading will seriously reduce bank-lending in US. This is especially true after the credit-bubble burst. Bank-lending is very much needed now for small businesses and to an extent to consumers in the US. By preventing banks to speculate using depositors' money, we can bring a balance between exports and domestic consumption in US and this will also help reduce the currently unsustainable current account deficit.
Now coming back to question number 1 - how can we make American exports more competitive? The answer to this does not lie in a weaker dollar but instead in increasing productivity. For this to be achieved, US must direct the cheap money available into education, investments to achieve higher energy-efficiency, investments in people, scientific-research and other areas of technology. What the US does NOT want now is the government and Federal Reserve trying to increase the retail-spending of American consumers through cheap money to pre-crisis levels that were already unsustainable, to prop up the economy. Trying to do this may look right now but going back to the old-ways will likely make our economy present us something in the future, which has been presented to us again and again - a "bubble"
Monday, February 22, 2010
"Festival"onomy in China and India
Recently, I have been trying to analyse the positive impact of festivals in Chinese and Indian economies. I have heard innumerable economists talk about the strong fundamentals of the Indian economy compared to that of China's. I agree that currently, the economic fundamentals remain strong in India than in China but that's not to say that the Chinese cannot get their fundamentals strong. In fact many are wondering how China would rebalance its current model of economy from being export-oriented to an economy driven by domestic factors. But from the response that they have shown to the global economic crisis, especially with the introduction of a $587 billion stimulus package (about 14% of their GDP) last year, it seems to me that the first step taken by China is on the right track to shift their focus considerably from exports to domestic private consumption even though the next big challenges for China would be to control inflation, gradual cooling of the economy that now looks like over-heated and sustaining the private consumption even after the stimulus is withdrawn.
China:
Okay, now coming back to the festival spending - China just celebrated its Lunar New Year and according to the data released by the Chinese commerce ministry that was quoted by Xinhua news agency (and I got this from "AFP Reuters" news), shops across China are estimated to have had a total sales of about 340 billion yuan ($49.8 billion) which is 17.2% up from 2009. During this spring festival, consumer spending on food, travel, tobacco, liquor, communication equipments, jewelry and home-appliances have all shown an increase from 2009. So, what we can infer from this is that there is a considerable amount of retail spending by the Chinese consumers during the months of January-February of every year. Apart from this, we can consider the Buddhist festivals in a year that would see some increase in consumer spending. And then there is Christmas which is celebrated since there are considerable amount of Christians in China. Apart from this, there are more lunar festivals in a year that might see an increase in spending by consumers that might be above average but not on a large scale.
India:
Now let's consider India. India is a very diverse nation in religion and culture. And almost every state speaks a different language and have their own culture, tradition and festivals. Now consider this example of a festival in a very generic scale - In January, south India celebrates one of the most important cultural festivals and some northern and north-western states celebrate festivals around the same time. During this time - there is an enormous increase in spending on - textile and food (particularly sugar). Most of the Hindu festival days during this January month are also considered auspicious for any kind of new purchases and new ventures. So January also clocks a good amount of consumer spending in capital goods in many parts of the country. Likewise, a wide array of Hindu festivals are spread throughout the year and throughout the states in differing formats. And around 70-80% of the population being Hindus, there is a drive in consumer spending especially on the retail side. Again, the point to note here is that most of these festivals dictate new clothing and other new "things" since they are considered sacred, auspicious and the "right thing" to do during festival time. Now India has more than 150 million Muslims. And India celebrates the Muslim festivals in a grand way leading to more retail spending, especially during that part of the year when the Hindu festivals aren't seen much. And then India has more than 50 million Christians who celebrate Christmas in December right after some of the most holiest festivals of Hindus and Muslims. Then there are Buddhist festivals, Jain festivals, Sikh festivals and other regional festivals spread almost evenly that makes sure that there is buoyant retail spending.
Apart from this, there are festivals that bring demand (and thereby supply) to certain commodities. One such festival is the "Gold Rush" festival (named differently in each Indian language, so I preferred to use English :) ) where people think that it is auspicious to buy gold on that day. Every year during this day, a good percentage of the nation's 1.1 billion people buy gold. And there are other examples like this.
One more thing that we have to note is that India has more rural population than urban population and rural Indians tend to spend more during festival seasons when measured as a percentage of their incomes. In any country, urban population spends on luxury goods as they get richer whereas majority of the rural population spend when mandated by their culture or religion. And since both China and India has a high percentage of rural population, my analysis shows that this rural spending makes a difference. Even during the worst economic times, consumer spending has been a major contributor to India's GDP.
Consumer spending contributes around 35% to China's GDP whereas it contributes more than 60% to India's GDP.
I might have missed to stress the importance of spending in some more Chinese festivals but I don't think Chinese festivals are evenly spread in a year and even if they are, I don't think it mandates spending like that on the Indian side. So now we see one of the reasons for buoyant consumer spending in India when compared with China especially in the retail sector. And this is another reason why there are hundreds of millions of Indians in retail businesses (many of them are family-run small shops). And this private consumption by all sections of Indians, especially the rural Indians forms one of the main reasons for growth in small businesses across the country and causes economists to say that India has stronger economic fundamentals than China. But this is not to say that the festivals are the only reason - United States has fewer festivals than India but has a society that tends to spend more. I did this comparison to see the reason of why the two nations, China and India, which have the same tendency to save more than spend, differ in consumer spending by such a large difference when measured as a percentage of their GDP. Rural spending in India definitely makes a difference but this is not to say that festivals are the only reason for this difference in consumer spending. There are other reasons but this is what festivals have to do to each nation's economies.
China:
Okay, now coming back to the festival spending - China just celebrated its Lunar New Year and according to the data released by the Chinese commerce ministry that was quoted by Xinhua news agency (and I got this from "AFP Reuters" news), shops across China are estimated to have had a total sales of about 340 billion yuan ($49.8 billion) which is 17.2% up from 2009. During this spring festival, consumer spending on food, travel, tobacco, liquor, communication equipments, jewelry and home-appliances have all shown an increase from 2009. So, what we can infer from this is that there is a considerable amount of retail spending by the Chinese consumers during the months of January-February of every year. Apart from this, we can consider the Buddhist festivals in a year that would see some increase in consumer spending. And then there is Christmas which is celebrated since there are considerable amount of Christians in China. Apart from this, there are more lunar festivals in a year that might see an increase in spending by consumers that might be above average but not on a large scale.
India:
Now let's consider India. India is a very diverse nation in religion and culture. And almost every state speaks a different language and have their own culture, tradition and festivals. Now consider this example of a festival in a very generic scale - In January, south India celebrates one of the most important cultural festivals and some northern and north-western states celebrate festivals around the same time. During this time - there is an enormous increase in spending on - textile and food (particularly sugar). Most of the Hindu festival days during this January month are also considered auspicious for any kind of new purchases and new ventures. So January also clocks a good amount of consumer spending in capital goods in many parts of the country. Likewise, a wide array of Hindu festivals are spread throughout the year and throughout the states in differing formats. And around 70-80% of the population being Hindus, there is a drive in consumer spending especially on the retail side. Again, the point to note here is that most of these festivals dictate new clothing and other new "things" since they are considered sacred, auspicious and the "right thing" to do during festival time. Now India has more than 150 million Muslims. And India celebrates the Muslim festivals in a grand way leading to more retail spending, especially during that part of the year when the Hindu festivals aren't seen much. And then India has more than 50 million Christians who celebrate Christmas in December right after some of the most holiest festivals of Hindus and Muslims. Then there are Buddhist festivals, Jain festivals, Sikh festivals and other regional festivals spread almost evenly that makes sure that there is buoyant retail spending.
Apart from this, there are festivals that bring demand (and thereby supply) to certain commodities. One such festival is the "Gold Rush" festival (named differently in each Indian language, so I preferred to use English :) ) where people think that it is auspicious to buy gold on that day. Every year during this day, a good percentage of the nation's 1.1 billion people buy gold. And there are other examples like this.
One more thing that we have to note is that India has more rural population than urban population and rural Indians tend to spend more during festival seasons when measured as a percentage of their incomes. In any country, urban population spends on luxury goods as they get richer whereas majority of the rural population spend when mandated by their culture or religion. And since both China and India has a high percentage of rural population, my analysis shows that this rural spending makes a difference. Even during the worst economic times, consumer spending has been a major contributor to India's GDP.
Consumer spending contributes around 35% to China's GDP whereas it contributes more than 60% to India's GDP.
I might have missed to stress the importance of spending in some more Chinese festivals but I don't think Chinese festivals are evenly spread in a year and even if they are, I don't think it mandates spending like that on the Indian side. So now we see one of the reasons for buoyant consumer spending in India when compared with China especially in the retail sector. And this is another reason why there are hundreds of millions of Indians in retail businesses (many of them are family-run small shops). And this private consumption by all sections of Indians, especially the rural Indians forms one of the main reasons for growth in small businesses across the country and causes economists to say that India has stronger economic fundamentals than China. But this is not to say that the festivals are the only reason - United States has fewer festivals than India but has a society that tends to spend more. I did this comparison to see the reason of why the two nations, China and India, which have the same tendency to save more than spend, differ in consumer spending by such a large difference when measured as a percentage of their GDP. Rural spending in India definitely makes a difference but this is not to say that festivals are the only reason for this difference in consumer spending. There are other reasons but this is what festivals have to do to each nation's economies.
Tuesday, February 9, 2010
Economic growth in India is 'exclusively' for?
Indian economy has been growing at an average of 8% in the past decade. The agricultural sector has clocked an average increase in output from around 2% to 3% in the past decade and agricultural sector contributes about 18% to India's GDP. It is constantly being said that the agricultural output has to grow at 4% per annum to meet the food demand of the country. During a recent panel discussion on the topic "India's Future Agenda" in Davos World Economic Forum, Montek Singh Ahluwalia, the Deputy Chairman of India's Planning Commission, gave a rough calculation as an answer to a question asked by a gentleman from the panel-floor. The question was something like - According to the World Bank, landlessness being the best predictor of poverty in India, what are the steps taken by the government to address poverty? The Deputy Chairman was right to say that giving land to the poor is not the solution and there is not much free land available. Remember, around 70% of India's population of 1.1 billion depend on agriculture for their incomes. Most of them are farmers and most of them live on less than $2 a day. Some farmers might not own land and might actually do farming in the land that is leased. But in any case, the leasing of land should not be the cost-issue that gives them low net-incomes. In fact, most of the land that is leased should be cheaper compared to the output produced by theoretical terms. Okay before I proceed, let me tell you the calculation that the Deputy Chairman gave : With the assumption that the agricultural output is increased to grow at 4% per annum and with the population projected to grow at 1.5% a year while the economy grows at an average of 8%, then the growth per capita will be 6.5%. So now it is essential that people move out of agricultural sector into other sectors (industries) at the rate of 2.5% annually so that the income levels for the people producing 4% agricultural output remains high enough for a good standard of living. Well, when looked from a very generic perspective, I agree with what he is trying to say even though I might have to disagree with the "4%" number because with the Indian middle class growing at a rapid rate and as more number of people move out of poverty due to increasing globalization, more number of people will be willing to consume healthier food in the coming years and in order to meet this demand, agricultural output might have to grow at more than 4% starting from within a decade.
But there are other various points that we have to confront here. First of all, why is the agricultural output so low even when we have so much population working in that sector? And more number of people in agriculture means that more land is cultivated. With so much cultivation, why is the gross national agricultural output growing at such a weak pace? In fact, due to poor monsoon rains, agricultural output is expected to decrease in fiscal 2009-2010. And increasing industrialization is taking away many fertile cultivable lands. The answer to the above questions is a complete lack of investment in the agricultural sector. One poor monsoon season in 2009 and 70% of India's population suffers directly and the rest suffer in the name of food-price inflation. And the policy makers keep thinking of whether this food-inflation would slip into the broader inflation! Huh! While private investments are necessary to achieve higher growth in the agricultural sector, it is the duty of the government to make some essential initial investments in agricultural-infrastructure that will pave way for private investments. It is a national shame that India being an agrarian economy for generations, still depends heavily on monsoon rains every year for desired and needed agricultural output. There is still NO organizational structure put in place to eliminate the middle-men and increase incomes for the farmers. And there is - very low, if not none, investments in agricultural universities and research; very poor transportation-infrastructure in rural India for the farmers to transport their goods; NO cold-storage facilities available to store excess farm-goods; no proper water management techniques to store rain water and inadequate supply of electricity to rural India to carry out irrigation activities. I feel that we could have more output even at present conditions by just facilitating some kind of cold-storage for farm-goods. Almost one-third, if not more, of the farm goods get spoiled before it reaches the market and poor transportation infrastructure is another reason to be blamed here. Speaking in the same forum, Venu Srinivasan, President of CII (Confederation of Indian Industry), spoke about how the poor quality government subsidies like providing urea is actually spoiling the land and affecting the farmers in the longer term even though it might look all good in the short term. (I am not very sure about how correct Mr. Srinivasan's point is). Also, the Public Distribution System (PDS) is enormously flawed. Well, with the expected introduction of national identity card that is due in a few years, I expect the efficiency of the PDS to improve to a certain extent.
It is expected, whether desired or not, that a good chunk of the population will continuously keep moving out of agriculture due to increasing industrialization and low-incomes in agriculture. But if high grade investments are not done in agricultural sector, then we will see a decrease in agricultural output every year while the population keeps growing and this will result in a direct threat to the country's food security. While India keeps moving up the economic ladder it is important that everyone is taken along. What India needs now is not just "growth" but "inclusive growth". Everyone knows that India is a very diverse nation but we do not need a new kind of wide ranging diversity now - in the living standards of the people.
But there are other various points that we have to confront here. First of all, why is the agricultural output so low even when we have so much population working in that sector? And more number of people in agriculture means that more land is cultivated. With so much cultivation, why is the gross national agricultural output growing at such a weak pace? In fact, due to poor monsoon rains, agricultural output is expected to decrease in fiscal 2009-2010. And increasing industrialization is taking away many fertile cultivable lands. The answer to the above questions is a complete lack of investment in the agricultural sector. One poor monsoon season in 2009 and 70% of India's population suffers directly and the rest suffer in the name of food-price inflation. And the policy makers keep thinking of whether this food-inflation would slip into the broader inflation! Huh! While private investments are necessary to achieve higher growth in the agricultural sector, it is the duty of the government to make some essential initial investments in agricultural-infrastructure that will pave way for private investments. It is a national shame that India being an agrarian economy for generations, still depends heavily on monsoon rains every year for desired and needed agricultural output. There is still NO organizational structure put in place to eliminate the middle-men and increase incomes for the farmers. And there is - very low, if not none, investments in agricultural universities and research; very poor transportation-infrastructure in rural India for the farmers to transport their goods; NO cold-storage facilities available to store excess farm-goods; no proper water management techniques to store rain water and inadequate supply of electricity to rural India to carry out irrigation activities. I feel that we could have more output even at present conditions by just facilitating some kind of cold-storage for farm-goods. Almost one-third, if not more, of the farm goods get spoiled before it reaches the market and poor transportation infrastructure is another reason to be blamed here. Speaking in the same forum, Venu Srinivasan, President of CII (Confederation of Indian Industry), spoke about how the poor quality government subsidies like providing urea is actually spoiling the land and affecting the farmers in the longer term even though it might look all good in the short term. (I am not very sure about how correct Mr. Srinivasan's point is). Also, the Public Distribution System (PDS) is enormously flawed. Well, with the expected introduction of national identity card that is due in a few years, I expect the efficiency of the PDS to improve to a certain extent.
It is expected, whether desired or not, that a good chunk of the population will continuously keep moving out of agriculture due to increasing industrialization and low-incomes in agriculture. But if high grade investments are not done in agricultural sector, then we will see a decrease in agricultural output every year while the population keeps growing and this will result in a direct threat to the country's food security. While India keeps moving up the economic ladder it is important that everyone is taken along. What India needs now is not just "growth" but "inclusive growth". Everyone knows that India is a very diverse nation but we do not need a new kind of wide ranging diversity now - in the living standards of the people.
Monday, January 11, 2010
Not a good "job"!
The unemployment report released by US Bureau of Labor Statistics(BLS) is so depressing and worrisome. The unemployment rate was unchanged at 10% in December from a month earlier. Non-farm employment dropped by 85,000 in December. I have been hearing many economists and government officials saying that the recession is over and the US economy would grow in the coming quarters. It is true that the recession in the US is technically over and the economy would grow in the coming quarters. But my question is how sustainable is that growth? When we look at the BLS report, we have some very clear indications. First of all, 10% unemployment rate is very very high (total number of persons unemployed currently = 15.3 million and this is without taking into account the persons who are unemployed but have given up searching for work). There was a decrease in unemployment rate from 10.2% to 10% in November from October and it remains unchanged in December. But when you look at the individual sectors, I find this marginal decline in unemployment rate with zero-significance. Infact the 10% unemployment rate worries me to the same extent as I was worried during the peak of the recession.
I looked at the past 5 months trend (from August to December) and I can see that the core sectors that include construction, manufacturing, wholesale trade, goods-producing sector (durable and non-durable), leisure and hospitality have all shown steady decline in terms of employment (there are some minor up ticks in these sectors here and there but on the basis of a straight August-December comparison we have had a steady decline in employment and an increase in unemployment). In December alone, construction has shed further 53,000 jobs; manufacturing-27,000 jobs and wholesale trade-18,000 jobs. The increase in employment was seen in temporary help services and health care. But here, as the name suggests it is only temporary and the increase in the number of physicians reported in health-care only adds to the scare. If it is true that more number of people are needed in health-care (read supply) then can we assume here that the demand is high (which means more sick people) and can we further assume that a measurable percentage of the increase in sickness in individuals is due to recession? If my assumption is true then this doesn't look good for the sick individuals and the for the country.
So to put it bluntly, all the stimulus programs introduced by the US government have simply not had the effects that were expected. Yes it decreased the unemployment rate but did NOT create efficient and sustainable jobs. The US government rightly spent $700 billion in rescuing the troubled banks but at the same time committed the biggest mistake of not nationalizing the banks. The government has poured billions of dollars of taxpayers' money and is now begging (should i say literally) the banks to lend to businesses in need. Not just businesses but the country as a whole needs that to. But in the meantime, the banks have gone to the old system of speculative-trading in the secondary markets. And with the global economic system currently being so volatile, so fragile and so awash in liquidity, it only makes it easier for these banks to speculate and earn profits. And this speculation only leads up to higher commodity prices thereby causing a further slack in consumer-demand. At the same time, these banks, saved by taxpayers money, are caught in a fever of suspicion to lend. If only the government had nationalized these bailed-out banks after their rescue, we would have had an efficient lending to businesses that would have then added jobs and created demand. The government stimulus then working in parallel would have helped to boost further demand. Some might argue and actually did argue that nationalization of banks would mean socialism, but pouring hundreds of billions of dollars of taxpayer money into private banks that played with the taxpayer money, on the principle of, as Dr.Paul Krugman would say, heads bankers win, tails taxpayers lose, without nationalizing the banks is the ugly side of capitalism. Some good capitalists would call this "bad capitalism". (Please note: I am NOT a socialist but I would like to be a good capitalist). And I am not talking about permanent nationalization of these banks but I would have preferred a short-term nationalization of these banks till we reached a point of sustainable recovery.
But let's look ahead and see what could/should be done. Currently we face a difficult situation of a shortage in supply of credit and an all-time low aggregate demand. And the current situation looks like demand must be created before supply for which jobs need to be created by the government. Programs like the "short-term work" program introduced by Germany need to be considered. Special loan programs to small and medium enterprises (SME), direct incentives to American export industries etc are some of the other things that need be considered. I might prefer the federal government to borrow from private banks and then set-up something like a federal-loan institution which would lend money directly at subsidized interest rates to businesses and consumers. This might increase the willingness of the banks to lend and at the same time we can have a check on the money supply in the system without printing anymore money or atleast printing less money. I have not looked/studied all the pros and cons of the above suggested programs but the stimulus program that will be inevitably extended should be something on this line and thinking. Some economists keep saying that if the "jobs" part is not taken care of then the economy might face another recession (double-dip). I don't know if I would agree that a double-dip recession is likely but if the jobs part is not taken care of then there might be an inevitable and prolonged slump in the economy.
So far, it's not been a good job by the US government but let's hope they the get the job done, WITH PERFECTION!
I looked at the past 5 months trend (from August to December) and I can see that the core sectors that include construction, manufacturing, wholesale trade, goods-producing sector (durable and non-durable), leisure and hospitality have all shown steady decline in terms of employment (there are some minor up ticks in these sectors here and there but on the basis of a straight August-December comparison we have had a steady decline in employment and an increase in unemployment). In December alone, construction has shed further 53,000 jobs; manufacturing-27,000 jobs and wholesale trade-18,000 jobs. The increase in employment was seen in temporary help services and health care. But here, as the name suggests it is only temporary and the increase in the number of physicians reported in health-care only adds to the scare. If it is true that more number of people are needed in health-care (read supply) then can we assume here that the demand is high (which means more sick people) and can we further assume that a measurable percentage of the increase in sickness in individuals is due to recession? If my assumption is true then this doesn't look good for the sick individuals and the for the country.
So to put it bluntly, all the stimulus programs introduced by the US government have simply not had the effects that were expected. Yes it decreased the unemployment rate but did NOT create efficient and sustainable jobs. The US government rightly spent $700 billion in rescuing the troubled banks but at the same time committed the biggest mistake of not nationalizing the banks. The government has poured billions of dollars of taxpayers' money and is now begging (should i say literally) the banks to lend to businesses in need. Not just businesses but the country as a whole needs that to. But in the meantime, the banks have gone to the old system of speculative-trading in the secondary markets. And with the global economic system currently being so volatile, so fragile and so awash in liquidity, it only makes it easier for these banks to speculate and earn profits. And this speculation only leads up to higher commodity prices thereby causing a further slack in consumer-demand. At the same time, these banks, saved by taxpayers money, are caught in a fever of suspicion to lend. If only the government had nationalized these bailed-out banks after their rescue, we would have had an efficient lending to businesses that would have then added jobs and created demand. The government stimulus then working in parallel would have helped to boost further demand. Some might argue and actually did argue that nationalization of banks would mean socialism, but pouring hundreds of billions of dollars of taxpayer money into private banks that played with the taxpayer money, on the principle of, as Dr.Paul Krugman would say, heads bankers win, tails taxpayers lose, without nationalizing the banks is the ugly side of capitalism. Some good capitalists would call this "bad capitalism". (Please note: I am NOT a socialist but I would like to be a good capitalist). And I am not talking about permanent nationalization of these banks but I would have preferred a short-term nationalization of these banks till we reached a point of sustainable recovery.
But let's look ahead and see what could/should be done. Currently we face a difficult situation of a shortage in supply of credit and an all-time low aggregate demand. And the current situation looks like demand must be created before supply for which jobs need to be created by the government. Programs like the "short-term work" program introduced by Germany need to be considered. Special loan programs to small and medium enterprises (SME), direct incentives to American export industries etc are some of the other things that need be considered. I might prefer the federal government to borrow from private banks and then set-up something like a federal-loan institution which would lend money directly at subsidized interest rates to businesses and consumers. This might increase the willingness of the banks to lend and at the same time we can have a check on the money supply in the system without printing anymore money or atleast printing less money. I have not looked/studied all the pros and cons of the above suggested programs but the stimulus program that will be inevitably extended should be something on this line and thinking. Some economists keep saying that if the "jobs" part is not taken care of then the economy might face another recession (double-dip). I don't know if I would agree that a double-dip recession is likely but if the jobs part is not taken care of then there might be an inevitable and prolonged slump in the economy.
So far, it's not been a good job by the US government but let's hope they the get the job done, WITH PERFECTION!
Monday, January 4, 2010
India's food crisis (Part-2)
This post is a continuation of my first article, "India's food crisis", since the situation in terms of food price inflation has evolved further and needs a newer look on the case. The food price inflation has reached 19.83% in the 12 months to the December 19, 2009. We have to remember that the oil prices were down below normal levels this time last year. So the food price inflation of 19.83% looks very high and considering that this is only a WPI measured inflation, the prices of the food products in the retail market will be much higher. In a country where almost half the population live on marginal incomes this situation is totally unacceptable. But nothing could/should be done on the monetary policy side to control this food price inflation. I agree that it is a genuine concern that this increase in food prices might slip into broader inflation. But we have to keep in mind that this food price inflation is due to a shortage in supply and is sector-specific. The only way to reduce price rise is by increasing supply and the way to increase supply is through imports and offloading some food stocks from the storage. I was assuming that a decent proportion of price rise of food products was contributed by speculation. So I was wondering if imports would increase the price of food products in the retail market above what could be achieved by controlling speculation. But the situation looks like the food price inflation is shooting above acceptable levels of real food price inflation minus speculation. I know that the Government of India was in direct talks with other governments to import essential food items but I am not aware of the results of the actions by the government. In any case, it is time to import food items and offload some amount of food stocks in storage. I have been hearing about the success of winter crops harvest. So a small amount of imports of essential food items along with offloading a measured amount of food stocks from the storage should reduce the food price inflation for few months before we come across the next monsoon season. And if the next monsoon season is a success then the government can offload a further measured amount of food stocks from the storage without importing any further to keep a tight lid on the food prices till we reach the next harvest season. Currently if the import costs are very high then the government might be forced to sell the food products at more-than-expected subsidized rates which may increase the government's deficit. But that's fine, the government must go ahead and import food for the sake of preventing this sector specific inflation from falling into the broader inflation. So yes I think it is time for the government to take some of the above mentioned measures (if they have not started already).
Again, no amount of monetary tightening should be done now to control food price inflation or in the fear to control broader inflation. Again, this is sector specific and is due to shortage in supply and is not because of excess demand or excess liquidity in the system. So all the great personalities talking about exiting monetary stimulus, I kindly urge them to think again.
By the way, considering the benefit of the people of India, I am confused as to why some top government officials OTHER than RBI Governor, Deputy Governors, Prime Minister, Finance Minister and Finance Secretary are even talking about monetary policies. Some are not just talking but are hinting and strongly predicting about monetary policies. Those officials will do a great favor by not talking about monetary policies. I hope they are aware that their on-the-run interviews in the media is unnecessarily hurting the financial markets and I also hope that the Indian media will in the future better know about whom to ask what questions.
Again, no amount of monetary tightening should be done now to control food price inflation or in the fear to control broader inflation. Again, this is sector specific and is due to shortage in supply and is not because of excess demand or excess liquidity in the system. So all the great personalities talking about exiting monetary stimulus, I kindly urge them to think again.
By the way, considering the benefit of the people of India, I am confused as to why some top government officials OTHER than RBI Governor, Deputy Governors, Prime Minister, Finance Minister and Finance Secretary are even talking about monetary policies. Some are not just talking but are hinting and strongly predicting about monetary policies. Those officials will do a great favor by not talking about monetary policies. I hope they are aware that their on-the-run interviews in the media is unnecessarily hurting the financial markets and I also hope that the Indian media will in the future better know about whom to ask what questions.
Update 1:
Update Date : January 13, 2010
Good News - as per the news on January 13, 2010 the Agriculture Minister of India after a cabinet-level meeting today announced the release of 3 million tons of wheat and rice from storage into open markets. But he said that the Govt. has decided not to import rice.
Well, I am atleast glad that the release of wheat and rice is done. This should ease the price to a considerable level. The enormously high cost of sugar in recent weeks was an area of concern during the meeting and some political problems in one of India's state (which has not processed raw sugar that's imported and is sitting idle in its ports due to local political problems)was quoted as a reason and some measures have been taken to address this issue. I am not going into this political issue now but one thing that I can say is the - it is festival time in many parts of South India. And one of the highlights of this festival is consuming more sugarcane and making sweets at home. So this would have shooted up the prices of sugar. Once the festival ends this week, the demand should go down and I am expecting the sugar prices to come down a little. And the other measures taken by the government should reduce the price of sugar further more. So it looks like we are in a good situation. The food price inflation in December was near 20% and I am expecting it to come down a little in the coming weeks. I will keep this case posted.
Update 2:
Update Date : February 11, 2010
Food-inflation was 17.94% during the week that ended January 30, up from 17.56% in the previous week.
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