Indian Economy: News and Discussion (Jan 1 2010)

[Ambar]

http://www.seasonalmagazine.com/2011/02 ... ecret.html
Indian Economy’s Dirty Little Secret - Inflation is Here by Design

From the article:


This is a misguided article ... inflation happens when production fails to keep up with the money-printing.

Also, the statistics seem to be incorrect ... In India, about 80% of the population lives on about Rs 50 per day or thereabouts, and have no livable housing, water supply or toilets.

The article also fails to mention the primary cause for this bone-crushing poverty - namely the money being looted hand over fist, in lakhs of crores, by the 2G family and other political elites.

If inflation happens when production fails to keep up with money supply, then how do you explain China's high inflation despite negligible output gap? I would rather define inflation as a expansion of credit and money supply.

80% of Indian population lives on a dollar a day? GoI puts the figure at 27% and WB at around 41%,so i'm not really sure how one can have 80% of population living on 1$/day and yet have 750 million cell phone subscribers ? Mind you, this figure does not include millions of people who are either too young to own a cellphone and people like my mother who don't see the need for one.

Nobody is denying we've had an uneven growth with around 8 states standing head over heels above the rest, and with less than 1500$/per capita GDP, we have a long way to before we catch up with the richest nations on earth.

The current inflation has engulfed not just India but every nation on earth. Emerging economies suffer more due to low income.Brazil has taken harsh steps through capital controls, maybe its about time we look at that direction too.

[somnath]

If inflation happens when production fails to keep up with money supply, then how do you explain China's high inflation despite negligible output gap? I would rather define inflation as a expansion of credit and money supply.

"Infltion is always a monetary phenomenon!" Milton Friedman, old man!

For India, there are supply side issues as well, and IMO more important than monetary issues..

[Theo_Fidel]

Pranav & others,

For inflation what matters more than production is productivity. If you make more at less cost prices will be dampened.

For instance, our production of Onions has risen 300% in the last 10 years but our productivity has only risen 50%. Hence the onion price inflation of 250% over the last 10 years. Esp. as productivity has not kept up with income growth of well over 500%. WRT onions our average productivity would have to rise 300% to match world class performance.

[Ambar]

Theo, my question remains unanswered. If making more at less cost can curb inflation, then nothing can beat the tallel friends sweatshops, yet they have 10+% of 'real' inflation. Why?

ICOR should be a good indicator of productivity,no? Is there a graph that can compare ICOR of BRIC nations?

[somnath]

Theo, my question remains unanswered. If making more at less cost can curb inflation, then nothing can beat the tallel friends sweatshops, yet they have 10+% of 'real' inflation. Why?

The key point is that for the monetarist theorists, inflation is a function of not just money supply (or its growth), but money supply AND the velocity of money..Mathematically,

MV=PY, or

m+v=p+y

where
M= money supply, V=velocity of money, P=Price levels, Y=GDP: the next eqn is just a first order derivative to use delta, or "growth"..

(basic qty theiry of money)

Typically, in fast growing economies, it is the velocity of money that contributes more to inflation than money supply...This is because as high as productivity growth can be, investments have a certain gestation period and hence cannot move in tandem with rising income...Especially true for "mature" sectors like agri, natural resources etc...

The monetarist view is however skewed in countries likke India (and possibly China) because of very high systemic suply-side issues....In India's case , infrastructure is the perennial one...A messed up distribution system across commodities is the other...

BTW, a fine paper (fairly simple) on the monetarist view of inflation

http://www.econ.kuleuven.be/ew/academic ... E_2005.pdf

[Pranav]

Pranav & others,

For inflation what matters more than production is productivity. If you make more at less cost prices will be dampened.

For instance, our production of Onions has risen 300% in the last 10 years but our productivity has only risen 50%. Hence the onion price inflation of 250% over the last 10 years. Esp. as productivity has not kept up with income growth of well over 500%. WRT onions our average productivity would have to rise 300% to match world class performance.

Price of a commodity will depend upon supply, demand, and the amount of money that is chasing the commodity.

There is some circularity in the sentence that I have made bold ... "cost" is the same as "price".

[Pranav]

Theo, my question remains unanswered. If making more at less cost can curb inflation, then nothing can beat the tallel friends sweatshops, yet they have 10+% of 'real' inflation. Why?

ICOR should be a good indicator of productivity,no? Is there a graph that can compare ICOR of BRIC nations?

In the case of PRC, their exporters earn dollars and want to bring them back into PRC. But their central bank does not want the Yuan to appreciate. Thus it overpays for those dollars, which injects a large volume of newly printed Yuan into circulation, which drives up inflation in PRC.

They do try to control the volume of money by removing the injected Yuans from circulation by "sterilizing" them, i.e. requiring exporters to put their Yuans into bonds.

[somnath]

Price of a commodity will depend upon supply, demand, and the amount of money that is chasing the commodity.

AND the veolicty of the money supply!

[somnath]

They do try to control the volume of money by removing the injected Yuans from circulation by "sterilizing" them, i.e. requiring exporters to put their Yuans into bonds.

They dont force exporters to buy RMB bonds...Sterilisation in China follows the typical Asian example..Increase reserve ratios for banks against deposits, and issue stabilisation-bonds to banks and financial institutions...And also liberalising capital a/c transactions for companies and indviduals to take dollars away (QDII for instance)...

The problem with sterlissation of course is that the problem is simply delayed for another day...For China, the toss up is between higher inflation and a stronger RMB..

[vina]

Thats the usual "crowding out" theory..Doesnt pan out in India...If you plot the fiscal deficit numbers along with investment/GDP and GDP growth rate, there is no statistically significant issue of crowding out in India...When I studied economics first (15 years back ), they said India's deficits are unsustainable...they said the same thing 25 years further back, and they still teahc the same thing ...But a combination of various factors (primarily a govt deficit financed totally by domestic savings anda rising savings rate) have meant that we have lived (and will continue to lie) with high fiscal deficits...JMT.

Oh no. It does pan out in India alright. What the SLR and the CRR business does is that it DOES crowd out investments and raise the cost of capital (and general interest rate) for every one in the broader Indian economy (except the govt of course, which gets it's paws on the people's savings at SLR rates). Net result, India is structurally prone to higher inflation and input shocks than most other civilized countries and the depressed investment levels feedsback into lower growth and higher supply bottlenecks feeding into higher inflation.

Yes, the high fiscal deficit, when you studied economics 25 years back of 2.5 years back entails real costs in the India economy and that is higher overall interest rates , obscenely high deposit-lending spread in the banking system (much higher than most civilized nations), and high structural inflation and stunted growth.

Now lost growth etc are not immediately tangible and is somewhat "notional" and barely noticeable in the typical election cycle of 5 years. So it is easy to short circuit those things and run high fiscal deficits anyways! And of course, the "Dilli E-Con-O-Mists" (St Stephens, DSE, JNU & ISI) will write reams of (toilet) paper with stat-is-sticks (lies, damn lies and statistics .. the old saying), which will "prove" that India is /was fine despite high fiscal deficits!

CPI-M of course will vociferously lobby for abolitition of the fiscal responsibility act and will want to run much higher fiscal deficits.. All good for India onree, I suppose.

The article seems strange, no doubt..But about the stats, this whole business of 77% of the population living below poverty line (Arjun Sengupta estimates) is a bit of an ideological stretch...Surjit Bhalla has written extensively on how the statistics actually point out to much better numbers..And quite frankly, going by asset ownership patterns (mobiles phones, two wheelers, TVs etc), the numbers DO seem to be much better than that...

Anything the JNU/DSE ding dongs say, i sort of immediately put it in the mental dustbin. Surjit Bhalla, I would reduce it by half and take that with a dollop of salt.

[Theo_Fidel]

Yes, the high fiscal deficit, when you studied economics 25 years back of 2.5 years back entails real costs in the India economy and that is higher overall interest rates , obscenely high deposit-lending spread in the banking system (much higher than most civilized nations), and high structural inflation and stunted growth.

The only reason we are able to handle the structural deficits is the 9% growth rate. If our economy should slow to 3% even for 2 years we would go into a deep coma of stagflation.

As such we are staying one step ahead of the fire. Let us remember that.

[shyam]

For instance, our production of Onions has risen 300% in the last 10 years but our productivity has only risen 50%. Hence the onion price inflation of 250% over the last 10 years. Esp. as productivity has not kept up with income growth of well over 500%. WRT onions our average productivity would have to rise 300% to match world class performance.

What about price of onion WRT price of gold?
Didn't that go down? Does that mean that there was increase in productivity?

[shyam]

AND the veolicty of the money supply!

And, what decides the velocity of money?

[Arya Sumantra]

IMHO, the basic problem with this debate is, terms like Supply, Demand, Productivity, Money Supply, Velocity of money supply are being used without first deciding what is your ISOLATED or CLOSED SYSTEM.

What is your isolated system? The World or the country? Only a country that is cut off from global trade can be treated as being in isolation and its supply demand productivity money supply discussed in isolation. Otherwise even if its supply demand are stagnant, inflation can happen in a commodity due to demand from overseas.

One can treat a country as Semi-closed system if it exports finished goods but bans raw materials exports.

When the whole world is one system, even if money supply is in excess in some other market countries, the exporting nations bear the repercussions of the same unless they diversify to other nation-markets and consciously avoid the country printing money unceasingly.

If inflation happens when production fails to keep up with money supply, then how do you explain China's high inflation despite negligible output gap? I would rather define inflation as a expansion of credit and money supply.

Because their output would cater to demand elsewhere in the world too not just internal demand. If their production finds better prices due to inflation elsewhere they will supply to that part of world to get better prices and in return import that country's inflation by that amount.

When you export, you import market country's inflation as well.

----------------

Also the overseas demand may not necessarily be for consumption, it could be a buffer demand created in anticipation by commodity traders that only sells it back to you at inflated prices once the inflation from supply shortage has kicked in in the original source country. And this buffer non-consuming demand is being funded by those money printing folks who want your costs to go up. Closing down agri-exports after these folks have done their damage(supply shortage) becomes ineffective. The damage has been done.

Also some inflation is caused by demand from non-essential agriproducts. Common man competes for his daily food items supply with very large consumers like processed foods makers who strike deals with farmers directly offering a bigger volume purchase than a consumer. Example for Potatoes you would compete with potato chips manufacturers, Mc D(french fries) etc, for wheat to make Chapatti at your home, you compete with Nestle which would want you to eat Noodles instead or with others who want you to eat their biscuits instead, For Sugar your home requirements compete with Coke Pepsi etc. As long as prices are stable, it is fine that these junk food companies source their commodities from a common man's supply. But if prices shoot up, it is they who should be funding the higher priced imports in proportion to the amounts they consumed out of local supply Common man's kitchen has first right to farm supplies before the junk food manufacturers.

[somnath]

Oh no. It does pan out in India alright. What the SLR and the CRR business does is that it DOES crowd out investments and raise the cost of capital (and general interest rate) for every one in the broader Indian economy (except the govt of course, which gets it's paws on the people's savings at SLR rates). Net result, India is structurally prone to higher inflation and input shocks than most other civilized countries and the depressed investment levels feedsback into lower growth and higher supply bottlenecks feeding into higher inflation.

Yes, the high fiscal deficit, when you studied economics 25 years back of 2.5 years back entails real costs in the India economy and that is higher overall interest rates , obscenely high deposit-lending spread in the banking system (much higher than most civilized nations), and high structural inflation and stunted growth.

Empirical evidence for all the assumptions above are quite thin on the ground...

One, there is no such thing as govt "getting people's savings at SLR rates"...Certain bonds (mstly govies) are classified as eligible securities for SLR invetsments, but interest rates on those bonds are not mandated, they are market driven..SLR is part of reserve requirements of banks, esentially a regulatory risk management tool...All major countries have some variant of SLR (and CRR), and India's levels are not materially different from those in most Asian countries..The qestion of "crowding out" would be borne out in case banks were "at the limit" of their SLR requirements...The fact is that most of the time (barring times of tactical liquidity stress, like mar-end, sometimes) banks maintain SLR ratios in excess of the regulatory norm..the latest numbers here..

http://www.rbi.org.in/scripts/WSSView.aspx?Id=15677

"High" interest rates - well, nominal interest rates are not as relevant as real inetrest rates...Rates in India are high (today) because our inflation rates are high (though IMO it has been a wrong policy prescription - monetarist reaction to inflaion, but thats a differetn story)...Ditto with the contention on "deposit lending spreads" (NIM in technical parlance)...India's NIMs have been relatively higher not due to "fiscal deficits", but because of mandated rates on demand deposits (your vanilla CASA a/c - this is the only "regulated" price left!)...And over the last 8-10 years, Indian bank NIMs are braodly in line with rest of Asia...

The proof of the pudding is in statistical significance of fiscal deficit to GDP gorwth..

http://www.rbi.org.in/scripts/Publicati ... x?id=12928

As you can see, the high growth periods (1993-96, 2003-now) have fairly stable high average deficit levels..Of course a few years of continuous good growth pulls the number down on base effect (20007-08 for example)...But for an economy that has a growing savings rate and funds all its public debt through domestic savings (with some to spare - note the actual SLRs of banks) AND where large parts of corporate balance sheets are dollarised (ie, corporates have access to overseas funding), the "crowding out" theory is conceptually on weak grounds...

The only reason we are able to handle the structural deficits is the 9% growth rate. If our economy should slow to 3% even for 2 years we would go into a deep coma of stagflation.

Why 2 years? Between 1998 and 2002, growth avearged about 4-5%, with the same "high" fiscal deficits...Inflation ran at record lows, drivign down interest rates massively in the 2000-03 phase...

The linkage in India between inflation and growth is pretty linear...We ssaw it in 1993-97, and we are seeign it again now...The reason is infrastructure and supply side bottlenecks, or growth soon outpaces the ability of the "system" to crank itself in tune...The real issue is suply side delivery, not monetary....

BTW, the same institutions you referred to dutifully parrot the "high deficit bad" message - so I dont know who you are blaming

[Theo_Fidel]

Why 2 years? Between 1998 and 2002, growth avearged about 4-5%, with the same "high" fiscal deficits...Inflation ran at record lows, drivign down interest rates massively in the 2000-03 phase...

The linkage in India between inflation and growth is pretty linear...We ssaw it in 1993-97, and we are seeign it again now...The reason is infrastructure and supply side bottlenecks, or growth soon outpaces the ability of the "system" to crank itself in tune...The real issue is suply side delivery, not monetary....

BTW, the same institutions you referred to dutifully parrot the "high deficit bad" message - so I dont know who you are blaming

Somnath,

It is hard to follow your stream of thought. Are you saying deficit is good or bad or inconsequential. Of the many 'push' factors in inflation, fiscal deficit is a major item. The others would be supply side shortages/inefficiencies, slow response of the system, monetizing M3, etc as you pointed out. The factors that restrain inflation are productivity, production, savings, etc.

Not sure what you mean by velocity of money. Sounds like one of those made up terms. My dad has been in finance for 50+ years and has always told me to be suspicious any monetary term that must be described. Sounds like it might describe consumer confidence. Is that it?

If we don't save enough, the money will be spent, investment can not be made and inflation would go up. WRT to the 2000-2003 period the deficit as a proportion of GDP actually declined. From about 9.4 to 8.4. The reason we survived that was that savings went up allowing the government not to monetize its deficit. This was the post Nuclear test period as well when the NRI's pitched in as well. Also AFAIK our real growth rate has not dipped below 5% averaged over 2 years for about 20 years now.

I have seen 3% growth and know what happens to India in such situations. 1991 anyone. Nothing has structurally changed since then except our savings rate rise.

[joshvajohn]

Black money: Out of 1,400, Pranab Mukherjee chases 17, won’t name anyone
http://www.dnaindia.com/india/report_bl ... ne_1503825

Supreme Court should intervene and expose people who are criminals according to the Law of the nation.

I do not see any rationality in hiding the names of these people. It is safeguarding interests of a few individuals. When the government itself is not intertested to maintain the law and breaks it by supporting criminals it has all the rights to be called under question and even the govenment can be suspended by the president on the recommendation of the supreme court.

There is no legal foundation for keeping the names in secret. Also the central governement way of dealing this issue is completely illegal by helping and supporting indirectly those who keep blackmoney and avoided paying tax to the government.

[Hari Seldon]

'velocity of money' is actually old coinage, IIRC. Refers to the speed at which money changes hands, of sorts. Critical ingredient in all 'em models touting the 'money multiplier' effect or some such. Has particular relevance to today's America where despite sri Ben printing by the ton, the printed sits as excess reserves on bank balance sheets (hence, pathetic velocity of money) and does not spillover into the main street economy. TIFWIW, of course.

[PrasadZ]

If we don't save enough, the money will be spent, investment can not be made and inflation would go up.

Paul Krugman put up a short post about worldwide inflation in grain prices (Soaring food prices) due to wheat harvest shortfalls in FSU countries. I think somnath's point was that, in a globally integrated economy, inflation could follow from worldwide demand. To take your anology further, "If we dont save enough", the money might be spent on imports causing negative trade balance and a depreciating currency, not necessarily local price inflation. Likewise, an external shortage of wheat produce can cause grain price rises in India through the threat of attractive export markets - export controls in India are leaky.
There is some evidence that infrastructure to store and move agri produce has a disinflationary effect on food prices at the margins but I cant get hold of a good paper right now.

[vina]

Empirical evidence for all the assumptions above are quite thin on the ground...

All on very solid ground. That is the experience the world over. The "Indian" model is the exception and should have the burden of proof of proving otherwise!

One, there is no such thing as govt "getting people's savings at SLR rates"...Certain bonds (mstly govies) are classified as eligible securities for SLR invetsments, but interest rates on those bonds are not mandated, they are market driven..SLR is part of reserve requirements of banks, esentially a regulatory risk management tool...All major countries have some variant of SLR (and CRR)

Pardon the French. It is not any FRIGGIN risk management tool. SLR is basically the means for the Govt to get it's paws on the people's savings on a priority and guaranteed basis at much lower interest rates than the general population!

Cash reserve ratios ,along with capital requirements and sufficiency and access to liquidity windows at emergency times are risk management tools. Show me what is the SLR (is that term present at all ?) in Basel III norms ? This SLR is a uniquely Indian invention like the "No Objection Certificate".

True, SLR says either gold, cash or "approved" govt securities!. Now any half wit bank will know that it is better to deploy the mandated 24% or so of term and demand liabilities (not just deposits mind you) in govt securities, which atleast pay some interest. Now if you somehow say that the GSecs /US Treasury secs have "market determined" rates of interest and not the ones decided by Shri Subbaroa and Shri Bernanke, we are living in planet Mars!

, and India's levels are not materially different from those in most Asian countries..The qestion of "crowding out" would be borne out in case banks were "at the limit" of their SLR requirements...

That is a circular argument. How many countries (US , Europe ) have this SLR business ? I know US. You tell me the rest!.

"High" interest rates - well, nominal interest rates are not as relevant as real inetrest rates...

Not true! Real and nominal interest rates are mathematically related (via inflation) and for a real interest rate of say 1%, it DOES psychologically and actually matter if the nominal rates are say 4% or 15% . Not everyone can uniformly pass on or sustain nominal cost of capital at 15% with the same fortitude as say 4%. The effects of inflation are never uniform and are really jagged , and your risks start increasing much faster with higher expected nominal returns to service high nominal costs of capital

Rates in India are high (today) because our inflation rates are high

. Perfect example of a tautological argument.

Fact deficits caused high structural inflation which is sought to be fought with high nominal interest rates!

Ditto with the contention on "deposit lending spreads" (NIM in technical parlance)...India's NIMs have been relatively higher not due to "fiscal deficits", but because of mandated rates on demand deposits (your vanilla CASA a/c - this is the only "regulated" price left!)...And over the last 8-10 years, Indian bank NIMs are braodly in line with rest of Asia...

Yeah, yeah, I know that the deposit spread is called the Net Interest Margin in India (i do read the Economic Toilet and watch CNBC and the others ). The reason for the high spread is again, well, you guessed it!. There is much less money to lend than other comparable economies, because the govt took away some 24% right away of the lendable amount for the rest of the economy sees reduced supply and hence higher rates!

But for an economy that has a growing savings rate and funds all its public debt through domestic savings (with some to spare - note the actual SLRs of banks) AND where large parts of corporate balance sheets are dollarised (ie, corporates have access to overseas funding), the "crowding out" theory is conceptually on weak grounds...

Ah, this is where you get clean bowled and your logic is actually topsy turvy.

Because the outsized public debt is financed from preferential access domestic savings at low rates and high fiscal deficit pushes up rates for everyone else, India's private industry finds it totally unattractive to raise debt in India and goes to global markets and despite taking on forex risks, an "India discount" and even probably lower credit rating (unless some SPV structure with insulated and over collatarlized cash flows and assets) than it could possibly have enjoyed in a domestic market!

See, this is the effect of govt crowding out the private guys. Any established two bit guy, who can raise debt outside does so, the guys who cant are shafted and have to raise it from domestic banks at pretty high rates!

If the total absence of a domestic corporate bond market of any kind and the "dollarization" of the balance sheets of corporates is not a clear empirical evidence and damning indictment of the govt's high fiscal deficits, I dont know what is!

The linkage in India between inflation and growth is pretty linear...We ssaw it in 1993-97, and we are seeign it again now...The reason is infrastructure and supply side bottlenecks, or growth soon outpaces the ability of the "system" to crank itself in tune...The real issue is suply side delivery, not monetary....

BTW, the same institutions you referred to dutifully parrot the "high deficit bad" message - so I dont know who you are blaming

Linear ? My word, Stat-is-sticks can prove anything. Extend it from 1993-97 back to 1989 to 97, you will be hard pressed to account for that around 21% interest rates, 19% or so inflation and zero growth from 89 to 91 with that nice lovey dovey world of 1993-97 .

Arguments aside, part of the problem is this. All budgets (including Chidambram's dream budget) gambled that growth would give a much bigger balance sheet that would take care of the deficit over time. Thankfully, that gamble has proven right until now and it is a good call. Unfortunately, the devil is in the details. The recent budgets especially in UPA 1 and UPA II has been on "consuming" , rather than "investing" today and that actually results in under investment, and all the structural factors that anchor future high inflation and high interest rates!

The UPA-1 and II have actually been "consuming" tomorrow's earnings today and well, the "future" is no longer that far and has actually become today and has started biting them in the aR*e. In many ways, I am happy that it is biting UPA-II right now and not after this administration's days are over and a new fall guy takes over just when the yellow matter is hitting the roof!

[Theo_Fidel]

See, this is the effect of govt crowding out the private guys. Any established two bit guy, who can raise debt outside does so, the guys who cant are shafted and have to raise it from domestic banks at pretty high rates!

The best example of this is that all those shiny fancy metros are being built with loans from JBIC in Japan. Even for the Dilli Billi's. Even Reliance recently had to get financing from Panda Banks for Power equipment.

In India Credit is not allocated based on the risk/rating. It is decided by the government. Number one sector that needs reform.

[somnath]

Somnath,

It is hard to follow your stream of thought. Are you saying deficit is good or bad or inconsequential.

Not sure what you mean by velocity of money. Sounds like one of those made up terms. My dad has been in finance for 50+ years and has always told me to be suspicious any monetary term that must be described. Sounds like it might describe consumer confidence. Is that it?

If we don't save enough, the money will be spent, investment can not be made and inflation would go up. WRT to the 2000-2003 period the deficit as a proportion of GDP actually declined. From about 9.4 to 8.4. The reason we survived that was that savings went up allowing the government not to monetize its deficit. This was the post Nuclear test period as well when the NRI's pitched in as well. Also AFAIK our real growth rate has not dipped below 5% averaged over 2 years for about 20 years now.

I have seen 3% growth and know what happens to India in such situations. 1991 anyone. Nothing has structurally changed since then except our savings rate rise.

Theoji, what I am saying is that the "Washington dictum" - dutifully parroted by most of the illustrious institutions referred to be Vinaji (soem of which I have been, and am a proud alumnus of! ) - that "fiscal deficit of India is bad and unsustainable" is a truism that hasnt been proved for India...Like any other econmic decision, there are always policy choices to be made..A toss-up between a high fiscal deficit and growth has been one such - and Indian policy-makers have tended to go for the latter...If India has sustained a 7-9% fiscal deficit (and remember, the real numbers would be far worse as there are items that are off budget, like oil subsidies) for this long, AND managed to remain both solvent as well as on a growth trajectory, then there is merit in questioning the Washington consensus...I have referenced some of the data - the numbers telll their story...

About velocity of money, it is at the CORE of the monetarist explanation of inflation!! It isnt anything "fishy", stnds at the foundation of monetary policy making in general!!!! YOu might want to look at the basic QTM (quantitative theory of money) equation I wrote about earlier...That gives you the idea..Most standard econ textbooks will give you the details in case you are interested....

The "Indian" model is the exception and should have the burden of proof of proving otherwise!

Precisely, the "Indian model" is unique, and therefore cannot be subjected to WAshington consensus policy prescriptions!

SLR is basically the means for the Govt to get it's paws on the people's savings on a priority and guaranteed basis at much lower interest rates than the general population!

Cash reserve ratios ,along with capital requirements and sufficiency and access to liquidity windows at emergency times are risk management tools. Show me what is the SLR (is that term present at all ?) in Basel III norms ? This SLR is a uniquely Indian invention like the "No Objection Certificate".

Vinaji, reserve requirements are de rigeur across the banking system..the US has one, China has one, Singapore has one (I am referencing a few articles below) - every banking sector has its own version, but it IS ubiquitous..

http://www.federalreserve.gov/monetaryp ... rvereq.htm
http://money.cnn.com/2011/01/14/news/in ... /index.htm

I am not an expert on Basel, but as far as I know, it deals with capital requiremetns more than it deals with statutory reserve equirements on deposits...

Net net, reserve requirements on deposits are as ubiquitous as opinions among economists (incl whether inflation is a wholly monetary phenomenon!)...Most banking markets have it...

Yeah, yeah, I know that the deposit spread is called the Net Interest Margin in India (i do read the Economic Toilet and watch CNBC and the others ). The reason for the high spread is again, well, you guessed it!. There is much less money to lend than other comparable economies, because the govt took away some 24% right away of the lendable amount for the rest of the economy sees reduced supply and hence higher rates

Its called NIM everywhere, not just in India, nothing unique in this case.. But yo didnt read me properly - I said that NIMs today are not much different from the rest of Asia, and part of the reason for historic high NIMs is the regulated pricing on CASA...NOt a case of "crowding out"....If that were to be be true, as I said before, if the banks would have been fully loaded up on SLR..But the data shows (as the current WSS does) that banks have excess SLR in their inventory....therefore, there obviously no case of "less money to lend"..

India's private industry finds it totally unattractive to raise debt in India and goes to global markets and despite taking on forex risks, an "India discount" and even probably lower credit rating (unless some SPV structure with insulated and over collatarlized cash flows and assets) than it could possibly have enjoyed in a domestic market!

Someone told you? What proportion of Indian corporate credit is offshore? And how much of the offshore borrowing is for overseas acquisitions (that cannot be funded onshore)? Offshore credit outstanding is a small % of total bank redit outstanding to Indian corporates...

Here are the details of total external debt of india..
http://www.finmin.nic.in/the_ministry/d ... QDEC10.pdf
Commercial borrowings are about 80 odd billion...Total bank credit outstanding (incl advances to other banks) stand at nearly 38 lac crores (refer to WSS) - about 900 billion dollars...

Further, borrowing offshore to fund onshore works out to be incrementally chepaer than borrowing onshore only in tactical circumstances, its not a generic reality...Take for instance, State Bank of India...It can raise 5 years funding @ about 200 bps over teh swap, or about 4.5% on dollar...Swapping that into rupees, that would translate to around 10% in INR terms, which is broadly in line with SBI's 5 year rupee bond...Again, its tautological - remember the interest parity principle?? Cheaper cost of funds is not necessarily always the reaso for corporates to venture offshore...

The best example of this is that all those shiny fancy metros are being built with loans from JBIC in Japan. Even for the Dilli Billi's. Even Reliance recently had to get financing from Panda Banks for Power equipment.

Two different cases...The metro needed JBIC loans because concenssional funding is essential for any metro project (which is unviable without govt subidies/concenssional funding)...JBIC was willing to do so as it is a mode of "economic diplomacy" for Japan - JBIC deploys almost as much in China as well eery year...

The Reliance loan was supplier-funding arranged by the equipment maker, its standard feature of many such large machinery/infrastructure projects...A financial arrangement accompanies the equipment maker...Which is why GE Capital is such a large part of GE!

[vina]

Precisely, the "Indian model" is unique, and therefore cannot be subjected to WAshington consensus policy prescriptions!

Right. The "Indian model" was a dead end for 40 years until 1991 until someone had the guts to change fundamental direction!

Vinaji, reserve requirements are de rigeur across the banking system..the US has one, China has one, Singapore has one (I am referencing a few articles below) - every banking sector has its own version, but it IS ubiquitous..

Somnathji, I am well aware about the ubiquitousness of the reserve requirements. What you are referring to is CRR , which is the risk management tool to preserve the bank's stability.

What I am questioning is the thing called SLR . Please show me any other civilized country which says that all the banks in the country has to have 25% of their liabilities in Government Securities (essentially) ! Show me even some that says 5% or 10% Hint, I can't think of even ONE other than India I know of! Yes, govts do have a borrowing program and the Primary Dealers are "expected" to participate in Treasury Auctions! But there is no first right to claim the savings of a country anywhere else that I know of!

So, it looks like a duck, squawks like a duck, walks like a duck, flies like a duck.. well, it is a duck! It is a cheap fund raising drive for the govt to finance it's spending program!

I am not an expert on Basel, but as far as I know, it deals with capital requiremetns more than it deals with statutory reserve equirements on deposits...

Basel sets out capital adequacy and stability requirements. Now what is this animal called "SLR" that the Dilli Babus have invented!

[somnath]

Right. The "Indian model" was a dead end for 40 years until 1991 until someone had the guts to change fundamental direction

Precisely it changed in many ways, OTHER than fiscal discipline (or the so-called lack of it)! That should say something about the policy choices, no?

Somnathji, I am well aware about the ubiquitousness of the reserve requirements. What you are referring to is CRR , which is the risk management tool to preserve the bank's stability.

What I am questioning is the thing called SLR . Please show me any other civilized country which says that all the banks in the country has to have 25% of their liabilities in Government Securities (essentially)

Vinaji, CRR and SLR together do the same job (both are "first rights of the govt")...CRR is a very small number (3-4%), SLR makes up bulk of the reserve requirement in India..It works for the banks as yileds on G-secs yiled FAR more than a depo with RBI (CRR - it pays 3.5%)...In all other countries, the reserve requirement is basically a depo with the central bank, which pays a very small, "much below market" rate...Remember the Central Bank is basically the sovereign, and derives its ratings from the same...So basically, the bank takes the same risk as that of a G-sec, and gets paid less than half the yield for the same...A reserve requirement that pays a diktat yield therefore is substantially worse than a reserve constituion that substantially consists of market-traded G-secs...Any "crowding out" impact therefore is similar whether the monies are deployed in CRR and SLR, both are monies with the sovereign..India's reserve norms (CRR+SLR) are not much different from the rest of Asia (China is 20%, SG is 22% AFAIK and so on)...But Indian banks get rewarded fairer for the same risk!Yet again, the Indian policy maker is more sagacious!

It is a cheap fund raising drive for the govt to finance it's spending program!

If it is, it is the same for hina, Us and everyone else!

Basel sets out capital adequacy and stability requirements

Capital requirements for solvency and reserve requirement for liquidity are two different concepts..I can check with our Basel guys on whether Basel III ha anythin on the latter, but maybe you can educate?

[Arjun]

Somnath, seems somewhat improbable that fiscal deficit in India would not lead to any of inflation or higher interest rates or crowding out of private sector investment. Is India exempted from the rule that there are no free lunches (!), or do you see other downsides besides the one enumerated?

[vina]

Vinaji, CRR and SLR together do the same job (both are "first rights of the govt")...

Not exactly. CRR directly restricts the amount of money creation by the banks, while SLR as far as I know mandates that of all the lendable monies, around 25% gets to buy Govt securities! Yes, the effect is the same in so far as reducing the amount available for general lending, but for different reasons!

CRR is a very small number (3-4%), SLR makes up bulk of the reserve requirement in India..It works for the banks as yileds on G-secs yiled FAR more than a depo with RBI (CRR - it pays 3.5%)...In all other countries, the reserve requirement is basically a depo with the central bank, which pays a very small, "much below market" rate...

The CRR in India I think is about 6.5% or so (dont know exact nos, which Shri Subbaroa has tinkered around with). While CRR is a no interest deposit (usually), SLR is not a Reserve requirement in the conventional sense, but a "guaranteed quota" for the govt out of the total money created by the banking system!

A reserve requirement that pays a diktat yield therefore is substantially worse than a reserve constituion that substantially consists of market-traded G-secs...Any "crowding out" impact therefore is similar whether the monies are deployed in CRR and SLR, both are monies with the sovereign..

The point is nearly all countries have just a CRR and nothing called the SLR (which of course doesn't mean that banks don't get forced to commit to buying govt bonds via indirect means).

India's reserve norms (CRR+SLR) are not much different from the rest of Asia (China is 20%, SG is 22% AFAIK and so on)...But Indian banks get rewarded fairer for the same risk!Yet again, the Indian policy maker is more sagacious!

Nope. India's of a much larger magnitude than other systems. For eg from Wikpedia Reserve Requirement, China and Brazil have around 20% (and China's was 15% odd at beginning of 2010!), while India's is around 24% SLR in addition to the 6% CRR (so effectively equivalent to way above China and Brazil as comparators) . That shows up in the lack of a corporate bond market in India .

Believe me, if between a hypothical AAA bond from Infosys and a GOI bond, I will take Infosy's higher yield anyday and kick the supposed soveriegn premium of GOI in the shins!

If it is, it is the same for hina, Us and everyone else!

Nope . It isn't . Alteast there is clarity on why the money is raised. Unlike India, they dont claim the Gov'ts borrowing is a "Liquidity" , "Stability" and "Risk Management" thing.

Capital requirements for solvency and reserve requirement for liquidity are two different concepts..

Err. Solvency and "liquidity" are not two different concepts! Fundamental to any bankruptcy is this. If you don't have cash, you are bankrupt! The size of the balance sheet and assets over liabilities dont matter. Dont believe me, ask Lehman!

[shyam]

We have many well to do people in this forum who miss Walmart in India. Guess what is happening in its country of origin?

Wal-Mart draws ire even in poor parts of Brooklyn

NEW YORK (Reuters) – Wal-Mart's lengthy struggle to open in New York City has hit fresh problems -- a controversial report that said America's biggest discounter does not just sell cheap, it makes neighborhoods poorer.

The report concludes that Wal-Mart, the biggest U.S. private employer, kills jobs rather than creates them, drives down wages and is a tax burden because it does not give health and other benefits to many part-time employees, leaving a burden on Medicaid and other public programs.

The New York City Council will hold a public hearing on Thursday on the impact a Wal-Mart would have but the retailer has declined to attend.

Wal-Mart dismisses the critical report -- released in January by City University of New York's Hunter College Center for Community Planning -- as "randomly selected statements from ... flawed studies."

The report is based on 50 studies of Wal-Mart openings and comes as the company tries to gain a foothold in some of New York's poorest neighborhoods.

"The overwhelming weight of the independent research on the impact of Wal-Mart stores ... shows that Wal-Mart depresses area wages and labor benefits ... pushes out more retail jobs than it creates, and results in more retail vacancies," the report concluded.

Wal-Mart spokesman Steven Restivo said a store would bring good jobs and good shopping for fresh food to locals. To push its case, Wal-Mart launched a public relations blitz in mid-January with radio and newspaper ads and a website, http://www.WalMartNYC.com, which features positive coverage of the company.

New York City Public Advocate Bill de Blasio calls a possible Wal-Mart store in New York "a Trojan horse."

"It looks appealing to a lot of families who are hurting but it turns into a big problem in the long term because of the net elimination of jobs," de Blasio said.

Wal-Mart has been trying to open in New York since 2005 but various plans floundered on objections from the community and union activists. Now the company is reported to be looking at locations including East New York and Brownsville -- Brooklyn neighborhoods known for high unemployment, crime and drugs.

Dilapidated buildings and empty lots are common and many residents live in public housing in these neighborhoods. The U.S. Census data for 2007-2009 show the median family income in the East New York neighborhood is $33,485; in Brownsville it is $26,802. The median family income in all of New York City is $55,562.

Planned Wal-Mart stores have long met vocal opposition in places such as Chicago, where last year Wal-Mart built two new stores after agreeing to use union labor.

Despite the poverty in East New York and Brownsville, many residents are against the stores setting up here.

"It would be a disaster," said Mark Tanis, owner of an East New York shopping market about three miles from a proposed sites. "It would have a detrimental impact on our area."

Tanis said he fears a product he sells for $20 could sell for as little as $12 at Wal-Mart and drive him out of business.

East New York resident Darryl Williams, 43, echoed the view of many, saying, "Cheap things would be nice but if it's true that we'll end up with even fewer jobs, that's not good."

Courtney Laidlaw, 22, who lives near the two possible locations said, "We have become a society of bargain shoppers and having a Wal-Mart locally will definitely be beneficial.

"The small businesses that can adapt to the socioeconomic times that we live in will find a way to survive. Wal-Mart is just an alternative destination, not the only destination." {this is the standard argument favoring Walmart}

In Brooklyn, one of the loudest anti-Wal-Mart voices has been City Councilman Charles Barron from East New York, who has been leading demonstrations.

"We don't need Wal-Mart (which) has a history of destroying the local economy and hurting it, not helping it," he said.

(Reporting by Bernd Debusmann Jr.; Editing by Mark Egan and Bill Trott)

A quote from Max Keiser:

We’ve been pointing out for years the evil economics of WMT. For every dollar you ‘save’ on prices, you lose at least $1.20 in wages. It’s a negative sum game that has results in misery and homelessness.

[somnath]

Vinaji,

the good thing about a discussion is that it enables one acquire motre knowledge (which I did this morning) :

The point is nearly all countries have just a CRR and nothing called the SLR (which of course doesn't mean that banks don't get forced to commit to buying govt bonds via indirect means).

1. SLR is NOT unique to India...Use of govies as part of resreves requirement is there in other countries as well. Singapore has MLA (akin to SLR) and MCB (akin to CRR) - our Singapore treasurer tells me tht the requirements are 13% and 3% respectively. I am sure other countries in Asia have similar requirements as well..

The CRR in India I think is about 6.5% or so (dont know exact nos, which Shri Subbaroa has tinkered around with). While CRR is a no interest deposit (usually), SLR is not a Reserve requirement in the conventional sense, but a "guaranteed quota" for the govt out of the total money created by the banking system!

2. CRR is pegged @ 6% today (it is up by nearly 200 bps in about a year's time) - and it pays a 3.5% interest, not zero. SLR is a reserve requirement too, and has a different impact on M3 management than CRR.

Nope. India's of a much larger magnitude than other systems. For eg from Wikpedia Reserve Requirement, China and Brazil have around 20% (and China's was 15% odd at beginning of 2010!), while India's is around 24% SLR in addition to the 6% CRR (so effectively equivalent to way above China and Brazil as comparators) . That shows up in the lack of a corporate bond market in India .

3. You are right, India's reserve requirements are higher...But that is a question of prudential norms preferred by RBI, and might not always be a bad thing..Additionally, in China the 20% of reserves pay close to nothing, while in India out of 30% reserves (CRR+SLR), 24% pays higher market-level interest rates...So banks in India are financially better off at the margin..

Believe me, if between a hypothical AAA bond from Infosys and a GOI bond, I will take Infosy's higher yield anyday and kick the supposed soveriegn premium of GOI in the shins

4. Not true as a generic example...All banking norms around the world have single borrower limits, prudential limits etc..There are no limits for investments in govies..So if you run out of Infy limits, you can still invest in govies..the data hows exactly that - banks have more investments in govies than is regulatorily mandated..Plus, investment in govies require far less capital than loans to corporates...Plus the fact that trading in govies is a large profit pool for all banks, from a RoRWA perspective, typicaly much more profitable than a loan to Infy...

Err. Solvency and "liquidity" are not two different concepts! Fundamental to any bankruptcy is this. If you don't have cash, you are bankrupt! The size of the balance sheet and assets over liabilities dont matter. Dont believe me, ask Lehman!

Take a simplistic hypothetical bank balance sheet. Say it has NO reserve requirement..

Liabilities:
Capital: 10
Deposits: 90 (say from 9 depositors, each contributing 10 each)

Assets:
Loan to Infosys: 100

Now refer back to the day Lehman collapsed...2 of the depositors came to the ATM/bank teller and asked for their money...the bank is not "bankrupt", but how does it meet its obligations to the depositors? Reserve reqrueiments are to deal with such exigencies.CRR is cash (cash lying in the branch is also counted in CRR), while SLR govies are the second level of liquidity cushion, as govies are the most liquid part of the credit markets...

about Lehman, that is a different (longer) story!

Somnath, seems somewhat improbable that fiscal deficit in India would not lead to any of inflation or higher interest rates or crowding out of private sector investment. Is India exempted from the rule that there are no free lunches (!), or do you see other downsides besides the one enumerated?

Arjunji, India is not "exempt" from free lunches...But in policy making there are always choices that are being sought to be made (and politics play a decisive influence as well...Indian policy makers are typically always making the choice of sacrificing fiscal iron discipline in favour of growth...It is a reasonable choice for India as a) we fund deficits wholly domestically and b) the domestic savings pool is increasing rapidly and c) our growth strategy is paying off..

The discussion is very similar to the ones on Current Account deficits (CADs)...For many years, India was lectured on the inadvisability of running large CADs (which we did barring a brief while in NDAs time)...While CADs do need to be kept within moderate limits, the strategy is now being idely hailed around the world as a model (as compared to large surpluses built up by China)!

[Arjun]

3. You are right, India's reserve requirements are higher...But that is a question of prudential norms preferred by RBI, and might not always be a bad thing..Additionally, in China the 20% of reserves pay close to nothing, while in India out of 30% reserves (CRR+SLR), 24% pays higher market-level interest rates...So banks in India are financially better off at the margin..

The financial sector may be assuming less risk than China's as a result of this policy, but this also simultaneously points to crowding out of private sector credit. If India's reserve requirements had been at the same level as China's - an additional 10% of banking system deposits would have been directed towards industry, rather than to government.

Fiscal deficit leading to growth is valid only when used as a temporary stimulus...typically during a recession. In a growth market, it would likely have the opposite effect - since industry / private sector would have used the same borrowed funds for more productive investment resulting in higher long-term growth.

[Ambar]

Here's an example that not only the pvt sector, but bankers themselves are worried about a looming credit crunch in India :

Fighting a tight liquidity situation amid a more-than-expected rise in credit demand and slowing deposit growth, bankers on Tuesday requested the Reserve Bank to cut mandatory reserve balances like cash reserve ratio and statutory liquidity ratio, even though they expect a 25 basis points spike in policy rates on January 25.

"The Reserve Bank will have to balance between growth and inflation," Indian Banks Association chief executive K Ramakrishnan told reporters after the customary pre-policy meet with the central bank in Mumbai.

He further said, bankers told RBI about their concern about the sluggish deposit growth. "We expect only around 17% deposit growth this fiscal against a 22-24% spike in credit demand," Ramakrishnan said. Despite many an increase in deposit rates, banks have been unable to attract money from the public for quite some time now.

Bankers who met, attended the customary pre-policy meet with the central bank included the heads of the State Bank, ICICI Bank, HDFC Bank, Bank of Baroda, Union Bank of India, and Allahabad Bank among others. However none of the leading bankers spoke to the media.

Amid a massive spike in food inflation in the recent weeks and slowing industrial growth, RBI is slated to unveil its third quarter credit policy on January 25. It is widely expected that against its last policy announcement of a pause in rate hikes, the central bank will yet again increase policy rates to batten down the wayward inflation.

In October and November, the six core sectors recorded poor growth rate. While in October they grew by a paltry 3.5%, in November it further dipped to 2.3%. Economists expect a deceleration in industrial production in the third quarter. In Q1 and Q2, GDP grew by a robust 8.9%.

- Source : HT

PS : Suraj might find the last paragraph interesting

[somnath]

Here's an example that not only the pvt sector, but bankers themselves are worried about a looming credit crunch in India :

And thy are (IMO) right...Hiking reserve ratios (and policy rates) are Central Bank tools to raise overall interest rates in the economy...And typically, the "monetarist" response to inflation! IMO, the wrong prescription - inflation in India has a lot to do with supply side constraints, a monetarist response to it only kills growth without necessarily easing inflation..

We had a similar situation in 1996-97..three years of (hitherto unknon levels of) growth created huge inflationary pressures..The RBI under C Rangarajan used the heavy monetarist arty and jacked up rates...Without making any immediate dent on infation, growth got killed, and remained (relatively) low for nearly 4-5 years...So much so that when RBI started reversing, from 2000 onwards by easing off rates - grwth remained stubbornly moderate for 3-4 years before picking up in 2003-04...

[somnath]

Fiscal deficit leading to growth is valid only when used as a temporary stimulus...typically during a recession. In a growth market, it would likely have the opposite effect - since industry / private sector would have used the same borrowed funds for more productive investment resulting in higher long-term growth

That is the theoretical idea..In practice, much more difficult to "switch on , switch off" the tap..For example, in days of high inflation, can you let go of free fuel prices? Theoretically yes, but much more difficult to do in the political economy..Similarly, indirect tax breaks during a recession are notoriously diffiult to pull out, as capacities are built up on commercial assumptions of those breaks, and it becomes difficult to restore the levels..

the general direction that policy makers have been betting on over the last 10 odd years is that high levels of growth will take care of the problem - as long as the denominator (GDP) grows faster than the numerator (deficit), the problem is seen to be growing smaller...That is what was happening for much of UPAI, before Lehman..Hopefully in the next 2-3 years, we will get back to more reasonable levels..

[Nihat]

Fighting a tight liquidity situation amid a more-than-expected rise in credit demand and slowing deposit growth, bankers on Tuesday requested the Reserve Bank to cut mandatory reserve balances like cash reserve ratio and statutory liquidity ratio, even though they expect a 25 basis points spike in policy rates on January 25.

"The Reserve Bank will have to balance between growth and inflation," Indian Banks Association chief executive K Ramakrishnan told reporters after the customary pre-policy meet with the central bank in Mumbai.

He further said, bankers told RBI about their concern about the sluggish deposit growth. "We expect only around 17% deposit growth this fiscal against a 22-24% spike in credit demand," Ramakrishnan said. Despite many an increase in deposit rates, banks have been unable to attract money from the public for quite some time now.

Bankers who met, attended the customary pre-policy meet with the central bank included the heads of the State Bank, ICICI Bank, HDFC Bank, Bank of Baroda, Union Bank of India, and Allahabad Bank among others. However none of the leading bankers spoke to the media.

Amid a massive spike in food inflation in the recent weeks and slowing industrial growth, RBI is slated to unveil its third quarter credit policy on January 25. It is widely expected that against its last policy announcement of a pause in rate hikes, the central bank will yet again increase policy rates to batten down the wayward inflation.

In October and November, the six core sectors recorded poor growth rate. While in October they grew by a paltry 3.5%, in November it further dipped to 2.3%. Economists expect a deceleration in industrial production in the third quarter. In Q1 and Q2, GDP grew by a robust 8.9%.

- Source : HT

I don't understand one basic thing, it's been obvious for a while now that high fuel costs and balooning food inflation are the main cause of consistent 7% + core inflation in the Indian economy. How is hiking rates by the RBI going to help in this scenario because it seems to me that by hiking rates RBI is only artificially supressing demand for Industrial and consumer goods which may have an impact on slowing of Industrial production.

We don't have a real estate bubble in India and a healthy savings rate implies are consumers are not indulging in deficit spending en masse a la U.S.A. , then why does the central bank have to hike rates.

Today if fuel costs where to be highly subsadized (yes, it would cause high Fiscal deficiet) and food inflation were to come down to say 3% on account of over production and better distribution then won't the core inflation come down drastically without the RBI playing with CRR and SLR and artificially supressing growth.



P.S. - I would be happy to be corrected.

[somnath]

Today if fuel costs where to be highly subsadized (yes, it would cause high Fiscal deficiet) and food inflation were to come down to say 3% on account of over production and better distribution then won't the core inflation come down drastically without the RBI playing with CRR and SLR and artificially supressing growth.

If the govt subsidizes fuel prices (more than it does currently), it will have to borrow the money from the market. If the govt plans to borrow (say) 3 lac crores (and not ~2 lac crores it plans to), it needs an incremental 1 lac crore to borrow...If they do that, it will increase general levels of interest rates as investors will need to be rewarded more for incremenal exposure...This will result in increased borrowing costs for the rest of the economy..The increased borrowing costs will then get passed on to the consumers, resulting in more inflation..

BTW, core inflation does not include fuel typically..

[jagga]

India's per capita income to grow 17.3% at Rs 54,527 in FY'11

India's per capita income is projected to grow by 17.3 per cent to Rs 54,527 in 2010-11 from Rs 46,492 in the year-ago period, according to the official data released today.

[Suraj]

Ambar: core sector output in Oct/Nov suffered due to multiple causes:
* Heavy rains dampening construction activity and cement consumption
* Petroleum refining production down due to Reliance Jamnagar being shut Sept/Oct
* Coal transport hampered by rain, affecting thermal fired electricity output.

In December, core sector output is up 6.7%, as previously reported on this thread. 3Q GDP growth is likely to be high just from the significant growth in farm output compared to last year.

[krisna]

Agriculture rebound driving India's GDP growth

Agriculture, which had dragged down growth during UPA's first term, is now helping the GDP numbers shine. Good monsoon has helped drive the growth expectations comfortably over 5 per cent, adding some new shine to the economy.

In October, the government raised the minimum support prices for rabi crops. The price of pulses was raised by up to Rs. 380 a quintal, while that of gram or chana was raised by Rs. 340 a quintal to Rs. 2100 per quintal. MSP for wheat was raised by Rs. 20 a quintal to Rs. 1120.
The sharp increase in MSP for pulses indicates that the government wants to cut down on the dependence on exports. That has helped drive up the acreage which is showing up in the higher output.

With over dependence on monsoon, the country's agricultural growth continues to fluctuate year- on-year depending on the weather gods.

when will the dependence on weather gods get reduced??

[Theo_Fidel]

when will the dependence on weather gods get reduced??

Probably never. We get 80% of our rains during the monsoon. There is no easy replacement for it.

At best we can hold the excess for the lean years, which we are doing already. Our reservoirs can hold about 200 BCUM out of a usable runoff of 400BCUM. Yet every new reservoir is now opposed tooth and nail.

The other way to look at it is to thank the rain goods. We are in the same latitude as Somalia and Thailand. Without the monsoon we will look like Somalia with about 30 cm of rain annually. The seasonal dry weather also means that our land is more arable, rather than a tropical jungle like Thailand. This allows more people of live on this land.

[Suraj]

The coefficient of variance in agricultural output to GDP growth has fallen dramatically since the 80s; there was a quantitative analysis in Financial Express or Business Standard, posted on this thread back in ~2007, that indicated a cofficient of variance of 0.1 now, as opposed to ~0.6 or more back in the 70s, i.e. for a 1% change in agricultural output, there's a 0.1% change in GDP growth, as compared to 0.6% before.

[Prem]

http://www.sify.com/news/india-must-loo ... edjhg.html
India must look outward to reap demographic dividend

The government is confident that an increasing use of contraceptives will enable India reach this target (a brilliant deduction, but one thought we had already missed the target!) and is beefing up the supply chain mechanism to reach the grassroots. But the government does not want to impose legislation to drive stricter compliance -- possibly mindful of the reaction of the 'aam aadmi' (votebank!) to such imposition in the mid-1970s.
The situation is grim, is there a solution? Well, send the migrant from Jhumri Talaiya straight to Tokyo!
Japan's population peaked at 128 million five years ago and has started declining. By 2050, Japan will have less than 100 million people and 50 million by the turn of the next century. The country's fertility rate has remained under 2.1, the level needed to sustain a low mortality population group, and remains steadfast at around 1.5 despite the government's best attempts to vitalize it.
As a result, the country will see growing labour shortages and decline in consumer demand, asset values and overall economic productivity. Meanwhile, it is estimated that Japan's GDP will crawl up from $5 trillion at present to $6 trillion by 2050. Achieving this will require unprecedented increase in productivity of the average worker, backed by huge investment in technology, both of which are unlikely to happen in the prevailing recessionary conditions. So, the economy may instead be headed south over time.
Japan desperately needs people, rural India desperately needs employment. And the opportunity is not limited to Japan alone. Countries across Europe will see their populations shrink, requiring external infusion of human resources to maintain economic productivity.