India concerned about Inflation

RBI moves to contain inflation without hurting growth
Aiming to tackle inflationary pressures, the Reserve Bank on Tuesday increased a key statutory deposit ratio for banks by one percentage point to 25 per cent but the move is not expected to push interest rates up.

Barring the hike in Statutory Liquidity Ratio, the deposits that commercial banks are to park in government securities, the central bank left other key policy rates and ratios unchanged. ( Watch )

Although the one percentage point hike in SLR could suck up over Rs 30,000 crore from the system, the average SLR of banks is already at 27.6 per cent.
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Doing Business - Country Rankings

Here are the actual rankings

Click on the picture to see a Indo-China comparison

India to pull back stimulus package

Times of India had the following story-

Stimulus may be rolled back as recovery sets in
With the economic slowdown bottoming out, the stage could be set for a "gradual and caliberated" rollback of revenue giveaways contained in the stimulus packages, starting with a review of the 2% excise and service tax cuts announced in the interim Budget.
The confidence that the economy might have turned the corner is growing in government and its attention is turning to the fiscal deficit that has grown larger in view of Rs 70,000 crore of revenue concessions coupled with big spending plans and reduced tax collections. The fiscal deficit has been put at over 10% of GDP.
It is the excise and service tax cuts amounting to Rs 30,000 crore that may be reviewed first....continued

My 2 cents on this story-
1. Overall, it is a very bad idea to even consider thinking about
2. Its seems like the govt has become not only optimistic but also certain about the future. I think there is still time for the recovery. India's growth is not going out of control. So why dampen it??
3. Govt cannot be uncertain about the steps it is going to take. This level of uncertainty will trickle down to the other economic agents and lead to delay in decision making
4. No need to worry about the debt. We are in control. Pulling back stimulus is a very naive way of controlling debt
5. Inflation is also under control
6. I am not sure about whether the govt considers the earlier rolled out packages as a success and a key reason behind the slight growth recovery. If it does, then I would would say that govt by pulling back stimulus would be just killing the geese which had been laying golden eggs

Are we out of this crisis?

I don't know the answer to this question. The recent data shows that GDP of a few countries is growing, but the unemployment rate is not falling. Infact it is rising.This is true for both U.S. and Japan.Intutively, people would expect companies to start hiring in an expanding economy.

Economic purgatory- thats what Krugman calls this phase. He does NOT admit that there is a lag between increase in GDP and decrease in unemployment and also does not provide any reason behind this trend.

Here is an attempt to discuss the key reasons-
Please add any others reasons that you believe are leading to this jobless growth phase-
1. I feel globalization is a key dampner here. Almost every second
company's fortune are tied to fortune's of clients from other economies. It will
require a lot more countries to come out of the recession in order for the companies to start hiring. It is too soon for the companies to become confident about future demand
2. People are still uncertain about future. Every recession bring with it a feeling
of unsecurity and uncertainty about future. This feeling goes away with time
3. As a result of the crisis, the companies have become focused on increasing productivity of existing labor force. Hiring is the next logical step after this.
4. Any others?

Domestic consumption- key to sustainable growth

See below a table from an article on 'The Hindu Business Line'-



I find this table to be interesting. As expected, U.S. is at the top of the list and the South-East Asian countries are at the bottom.

I would have loved to see the effect of leverage on consumption. Consumption based on income is good, however consumption based on heavy leverage is always undesirable and risky. This is the reason why U.S. is contracting and India is still expanding.

The marginal propensity to consume has been low in India and even lower in China. However, this will definitely increase in the future.
... and yes, domestic consumption holds the key to any country's turn around; this will lead to self-sustaining growth

Most horrible correlation argument

The above is a graph that posted was by NY times for an article- SAT Scores and Family Income.
Key conclusion of the article-
"Generally speaking, the wealthier a student’s family is, the higher the SAT score."
This has sparked a debate between two of my favorite economists- Greg Mankiw and Paul Krugman.

This is straight from Mankiw's blog-
"In essence, what I said was
1. People vary in their innate talents, as measured by, say, IQ tests.

2. More talented people tend to earn higher incomes.

3. More talented people tend to have more talented biological children--that is, talent is partially heritable.

4. As a logical implication of the above three points, the raw correlation of kids' SAT scores and family income conflates the true effects of family income with the biological transmission of talent."
--
Well, I cannot disagree more with Mr Mankiw because-
1. There is ample evidence in real life that suggests the opposite. Rich people have children who do not do well in examinations.
2. The argument is flawed in assuming that IQ is representative of the talent in a person. There are people who have become rich not because of the gift of intellectual endowment. There are several examples of people who did well just because of good management skills. I don't think IQ can be indicative of such things
3. The argument seems to suggest that children of rich people will do well in exams because their parent's are talented; it does not take into account the school conditions, factors such as intention of children to become intellectuals, etc. As an analogy- How,/When/Where the seeds of a rose plant are sowed determined the quality of the rose flower. If you plant the seeds in a desert and do not give any water, then the result is obvious.
4. I assume that the author of the original article will agree with the below statement:
"Transfer of money to dumb people will make the dumb people rich and hence intelligent"

WB loan for recapitalization of Public Banks

The World Bank and India have concluded negotiations for loans worth $3.2 billion for recapitalising state-run banks and funding for the India Infrastructure Finance Company Ltd.

The World Bank board would meet in September in Washington to approve a $2 billion loan for the recapitalisation of the state-owned banks and another $1.2 billion loan for the IIFCL. - Source: Economictimes
---

Although, the intention to recapitalize the banks and spend on infrastructure is 100% right, I don't see any need for a loan from "The Bank" at this stage because-
1. In the middle of the crisis last year, the average CAR ratio of public banks was around 13%. I don't think that this ratio would have fallen drastically since then
2. Infrastructure spending is required right now. But, frankly we can't be throwing money at the problem. Effective investment strategies are required; we have spent enough. Govt should focus on following the money that it has already allocated for infrastructure and ensure that the money enters the system soon