Indranil Sen Gupta, Economic Times 25/1/2012

source: http://articles.economictimes.indiatimes.com/2012-01-25/news/30662952_1_forex-reserves-monetary-policy-policy-rates

We welcome the Reserve Bank of India’s growing focus on protecting growth from fighting inflation. Monetary policy should change in three ways. First , policy rates need to cycle down to support growth. Second, RBI needs to reduce the money market liquidity deficit to ease pressure on lending rates instead of adding to it.

Finally, we expect RBI to rebuild forex reserves instead of strengthening the rupee to fight imported inflation. We are relieved to see governor Subbarao signal a possible rate cut in March. In fact, growth is flashing red lights: loan demand has fallen to 17% from 21.4% in March 2011 and December GDP growth will likely slip to 6-6 .5% levels.

After all, India is perhaps the only economy in the world in which lending rates have pierced their 2008-peak . What about inflation? We agree with RBI that the present relief could be temporary . In fact, we expect inflation to rebound in mid-2012 after the government hikes coal, oil and power prices.

Flagellating ourselves by killing India’s growth, however, will not pull down global oil prices. Not surprisingly, every other BRIC central bank has been easing already. We are quite confident that core inflation (ie, inflation adjusted for weather, oil and metal price shocks) will come off. With growth falling below the economy’s potential of 8%, corporates are losing pricing power.

Can we get past the mid-year rebound in inflation? One way could be to hike oil prices on Budget day itself. Sure, this will push up inflation by about 100 bps to 8% by March 2012 from our base case. Yet, markets will then see inflation falling straight to 5.5% in March 2013. This will also allow RBI to steadily cut rates without fearing a rebound in inflation.

We are happy that RBI cut CRR by 50 bps to bring down money market liquidity deficit to ease pressure on rates. In fact, we hope that it later buys more government paper via OMOs to bring the money market liquidity deficit to its targeted Rs 60,000 crore from Rs 1,50,000 crore now.

After all, monetary growth, at 16.5%, is running below the optimal 17.5% levels consistent with 8% growth. Finally, we expect RBI to revert to building up forex reserves as insurance cover . After all, the import cover (ie: months of imports that forex reserves can fund) has fallen to 7.7 months, the least since 1997.

We appreciate that RBI could not buy forex reserves because it was trying to fend off imported inflation with a strong rupee at a time of high current account deficit. But, the recent crisis has shown that high forex reserves help as markets respect the fact that the Reserve Bank carries a big stick. The RBI must, at the earliest opportunity, recoup the $45 billion it has sold since 2008.

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Source: Franklin Templeton Mutual Fund

At its third quarter review of the FY12 monetary policy today, RBI has announced the following changes –

• Monetary Measures:
  • Reduced Cash Reserve Ratio (CRR) by 50 bps to 5.50%
  • Repo rate has been maintained at 8.50%
  • Consequently the Reverse Repo rate and the Marginal Standing Facility rate stand unchanged at 7.50% and 9.50% respectively
• Policy move in line with expectations – central bank adopts cautious stance, given upside risks to inflation and high fiscal deficit.
• The CRR cut will inject about Rs.32,000 crore liquidity in the system and help reduce ongoing liquidity stress amidst high government borrowing and slowdown in capital flows.
• Has revised GDP growth projections downwards to 7.0% from 7.6% earlier, factoring in the sluggish investment activity and global uncertainties. Expects GDP growth to be relatively stronger in FY13.
• Has retained WPI projections for March 2012 at 7% – the recent moderation in inflation is primarily due to drop in prices of seasonal food items and high base effect. Upside risks to inflation persist from elevated global crude oil prices, weak rupee and fiscal situation.
• Non-food credit growth forecasts revised downwards to 16% from 18%, given lower demand for credit.
• Looking ahead, the bank has indicated liquidity management will be a priority for the bank in the current environment. A reversal in monetary policy cycle will depend on sustainable decline in inflation and policy actions to contain fiscal deficit.

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True cost of Dynasty: Sonia sends us a Rs 5,45,000 cr bill

R Jagannathan, FirstPost, 19/12/2011

source: http://www.firstpost.com/politics/true-cost-of-dynasty-sonia-sends-us-a-rs-545000-cr-bill-159602.html

Despite the objections of many in the UPA cabinet and the advice of economists, Sonia Gandhi is shoving the Food Security Bill down our throats.

It is tempting to conclude that all this is prompted by a desire to see the poor fed, but the truth is that the Food Security Bill (FSB) – like many of its predecessors – will end up achieving the exact opposite of what it wants to. It will achieve food insecurity and a devastated economy.

The FSB’s bills will fall due only later, but Sonia Gandhi’s old bills are already costing us plenty – not least inflation and a busted budget.

Let us add up the real cost to the country when Sonia Gandhi’s party feeds itself off someone else’s money: ours. This is the true cost of keeping the Dynasty in power.

The following are Sonia Gandhi’s political bills that have been paid by all of us – taxpayers and consumers.

# 1 Farm loan write-off of Rs 72,000 crore in 2008. All that the UPA needed to do to help farmers in debt was to waive interest, freeze the outstandings, and allow them to pay it all in easy instalments. But what could have been a bill of less than Rs 10,000 crore of interest waivers, which would have helped maintain a proper climate for loan recovery while providing real relief, ended up with a cost of Rs 72,000 crore for the exchequer. The political part of the bill is thus Rs 72,000 crore minus interest waiver costs – say around Rs 60,000 crore. The cost of damaging the repayment culture is incalculable – and will be paid by subsequent generations and banks.

# 2: Subsidies paid for keeping diesel, cooking gas and kerosene prices low:Rs 2,23,203 crore in 2005-11. Add this year’s under-recoveries of another Rs 1,32,000 crore, and the total bill is Rs 3,55,000-and-odd crore. Let’s further assume that all politicians would have subsidised petro-goods to some extent. But the NDA did not subsidise half as much. If we take 50 percent of the amount as subsidies that every politician would have paid to consumers, the subsidies paid only to humour Sonia Gandhi would be around Rs 1,75,000 crore.

# 3: The National Rural Employment Guarantee Act (NREGA) has cost all of Rs 1,00,000 crore so far, and by March, 2012, it will have cost around Rs 1,40,000 crore. Assuming, once again, a more sensible kind of populism would have ended up with only half the expenditure on such schemes, Sonia’s bill would work out to Rs 70,000 crore.

The Sonia-Rahul re-election bill so far thus amounts to Rs 3,05,000 crore.

Now, let’s bring in the Food Security Bill. The official estimate of costs is around Rs 1,00,000 crore, but since these are likely to be underestimates intended to force a foolish bill through a reluctant cabinet, we should look at more realistic estimates.

Ashok Gulati and Jyoti Gujral – the former is chairman of the Commission of Agricultural Costs and Prices, and thus should know what he is talking about – wrote in The Economic Times that the real cost of the FSB, taking both the direct cost of subsidies and the accompanying investment in infrastructure (godowns, higher food procurement prices, et al), should be reckoned at Rs 2,00,000 crore per annum in the next three-year period.

Now let’s assume that even this money is worth spending to feed the poor. But the existing public distribution system (PDS) leads to a leakage of nearly 60 percent.

Says a World Bank study prepared at the instance of the UPA government: “Leakages and diversion of grains are high. Only 41 per cent of the grains released by government reach households, according to the 2004-05 National Sample Survey (the latest data available), with some states doing much worse. In 2001, the Planning Commission has estimated this leakage of BPL (below poverty line) grains at 58 percent nationally.”

If 58-60 percent of Rs 2,00,000 crore spent on the Food Security Bill is going to be lost due to leakage and pilferage, this is a humongous Rs 1,20,000 crore loss every year. Since it is Sonia Gandhi who insists on the FSB in its current form after rejecting every other alternative (including cash transfers to the poor), it means this bill ought to be sent to her and the National Advisory Council (NAC) she heads. Since we have two years of food security to finance before the next election, the real bill will be Rs 2,40,000 crore for 2012-13 and 2013-14.

Add Rs 2,40,000 crore to the Rs 3,05,000 crore bill the dynasty has already racked up to keep itself in the good books of the electorate and to get Rahul Gandhi the gaddi in 2014, and the true cost of Dynasty is Rs 5,45,000 crore.

NAC’s annual budget in just around Rs 4 crore. But the bill it is sending taxpayers is as much as Rs 5,45,000 crore.

Can India really afford dynastic politics of this irresponsible sort?

Let’s return to the economics of the Food Security Bill (FSB) again. It’s worth beginning with the old saying, slightly modified for our purposes: Teach a man to fish, and he will feed himself for life. Give him a fish every day, and you will have him eating out of your hands. You would have created a permanent dependency and ultimately run out of fish.

This is what Sonia-nomics will achieve with the FSB: a population dependent on the dole, and an economy ultimately unable to feed itself.

To be sure, let’s give Sonia the benefit of the doubt and assume she has a heart of gold and weeps buckets at the thought of anyone going hungry. But nothing in the policies she has backed so far suggests she has her head screwed right.

If there is a crisis, of course, you should provide food to the hungry. But this can only be a short-term measure. Since Sonia has been in power for more than seven years, the crisis phase should have ended long ago and long-term solutions found to the problem of hunger and food supplies.

Sonia Gandhi wakes up to hunger only when elections are in sight. But we shall let that pass.

However, the damage caused by the FSB will be with us long after the UPA is gone. The Bill will result in the following dangers:

1)  It will damage the exchequer and stoke inflation – causing the subsidy bill to go higher and higher every year, leading to a pile-up of debts. India will be Greece by 2014.

2)  The huge procurement targets needed to feed 75 percent of rural households and 50 percent or urban ones will call for regular increases in food procurement prices. This will again feed inflation.

3)  If the monsoon fails in any particular year, we will have to import grain. International food prices are already well above Indian levels. If we enter the market – which we have seldom done – prices will go through the roof. High imports will send the rupee crashing – raising prices again. This is a recipe for disaster.

4)  High procurement means closing down three-fourths of the market system in grains since the government becomes a monopoly buyer everywhere.

5)  Both poor and rich farmers will try to game the system. If the market gets you a price of Rs 20 a kg for rice, and you can get 35 kg of rice per family per month at Rs 3, who will not buy from the PDS and sell to the market? This is cash transfer by another name: graft will be the only result.

6)  The massive bill of Rs 6,00,000 crore for the FSB over three years is essentially money down the drain. It works against the fundamental argument about teaching someone to fish as against feeding him indefinitely. It will create dependencies, when the amount could have been spent to create rural infrastructure to improve agricultural productivity, and incomes. What we have essentially done is consumed the seed corn of the future by spending money to feed instead of investing in rural infrastructure.

Raghuram Rajan, who teaches at Chicago’s Booth School of Business, said the other day at alecture organised by Business Standard that the root cause of poverty in India was poor rural productivity. But instead of raising productivity, Indian governments were busy offering palliatives through money transfer schemes like NREGA, higher support prices for food, and, now, the Food Security Bill. This can merely raise rural demand without improving agricultural productivity – causing inflation.

But with UPA-2 listen? Unlikely, for the government has just got its ears tweaked by Sonia Gandhi for delaying her Food Security Bill.

UPA-2 is hastening our tryst with economic disaster.

***

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28/7/2011

source: http://www.economysavvy.com/2011/07/us-treasury-holders.html

As the discussions on the debt ceiling  in US continue and the Credit Rating Agencies mull on the downgrade of the US debt let’s go through the major US Treasury holders.

The major US treasury holders end of  May 2011 are as below :

China Mainland – 1159.80 Billion USD – It is app. 26% of the total treasury holdings by foreigners.

Japan – The second largest holder of US treasury holds 912.4 Billion USD.  Yesterday the dollar has fallen against the Yen to 77.60 its lowest level since its all time low of 76.25 on 17 March. The stronger yen will affect the export driven economy to a great extent.

United Kingdom (incl. Channel Islands and Isle of Man) -  346.5 billion USD.

Oil Exporters (incl. Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait,Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria) – 229.8 Billion USD

Brazil – 211.40 Billion USD

Taiwan – 153.4 Billion USD

Carib Bnkng Ctrs (Caribbean Banking Centers include Bahamas, Bermuda,Cayman Islands, Netherlands Antilles and Panama. Beginning with new series for June 2006, also includes British Virgin Islands.) – 148.3 Billion USD

Hong Kong – 121.9 Billion USD

Russia – 115.2 Billion USD

Switzerland – 108.2 Billion USD

Canada – 90.7 Billion USD

Luxembourg – 68 Billion USD

Germany – 61.2 Billion USD

Thailand – 59.8 Billion USD

Singapore – 57.4 Billion USD

India – 41.0 Billion USD

Source : Department of the Treasury/Federal Reserve Board

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The Reserve Bank of India’s decision to raise its policy rate by half a percentage point surprised the market as the widespread expectation was a quarter percentage point hike

Tamal Bandyopadhyay, Mint, 26/7/2011

source: http://www.livemint.com/2011/07/26160200/Three-surprises-and-one-lesson.html?h=A1

The Reserve Bank of India’s (RBI) decision to raise its policy rate by half a percentage point surprised the market as the widespread expectation was a quarter percentage point hike. And, this is not the only surprise in the Indian central bank’s quarterly review of monetary policy. There are other surprises too. For instance, RBI has admitted that growth is slowing but not changed its growth projection for the year even though the year-end inflation projection has been raised from 6% with an upward bias to 7%. Unchanged at 8%, the growth projection for fiscal 2012 seems a bit optimistic at this point.

But the biggest surprise is perhaps the tone of the policy — the way it has blamed the government for doing nothing to fight the persistently high inflation. The rate hike, going by the RBI statement, is “to maintain the credibility of the commitment of monetary policy to controlling inflation”. But more important than that, its objective is to “reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required.”

This is the second instance of a half a percentage point rate increase since the beginning of the tightening cycle. In March too, RBI had raised the policy rate by an identical margin but that was on expected lines, at least for a section of the market. But this time around, Subbarao’s determination to fight inflation is refreshingly different. In the “outlook and projections” section of the policy statement, three paragraphs have dealt with “growth” while 11 paragraphs have been used to highlight the gravity of the high inflation scenario.

Subbarao has also refrained from giving any guidance, and merely said, “Going forward, the monetary policy stance will depend on the evolving inflation trajectory.” To that extent, it’s an open-ended policy and no one can guess whether RBI is coming close to the end of the rate-tightening cycle. The market is factoring in one more rate hike by October.

The next mid-quarter review of the monetary policy is on 16 September and the second-quarter review is on 25 October. Since Subbarao’s three-year term will end on 6 September, this would have been his last policy unless he gets an extension. This possibly explains why he has been so bold in taking action and candid in criticizing the government’s inaction in tackling high inflation.

At one place, the policy document says, “In the absence of appropriate actions for addressing supply bottlenecks, especially in food and infrastructure, questions about the ability of the economy to sustain the current growth rate without significant inflationary pressures come to the fore.” At another place, it lists the high fiscal deficit as a key source of demand pressure and one of the key risk factors.

One can always say that Subbarao could have shown this determination earlier and raised rates more aggressively instead of staying behind the curve most of the time but that does not in any way dent the governor’s argument that the government is doing nothing to address macroeconomic concerns. Apart from tackling supply side issues and infrastructure bottlenecks, the government can also raise indirect taxes such as excise on automobiles to dampen demand and fight inflation. If it does not do so, and monetary tightening alone has to fight the persistently high inflation, the damage to the growth story will last longer.

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