Is Inflation problem India-Specific?????????

The year-end inflation figures as given from CIA Fact Book for India are 8.3% (2008) & 10.9% (2009), respectively. This year we have seen double digit inflation figures with WPI being at around 11 % in March 2010. Strong demand, supply constraints, rise in oil prices all are set to pressurize the Indian Government while making economic policies.

As recently we saw central bank’s initiative to tame inflation by shifting the BPLR system to the base rate system in which credit could not be lent to anyone at a rate below the base rate. Sure enough, this way of contracting the money supply help in taming inflation as the interest rate would be transmitted to the end-consumer in this way & hence would curb their spending thereby reducing their demand, & hence control the supply led inflation.

But the issue of concern is that is this inflation problem India-specific or is the same with other developing economies as well.

"This time around, inflation does appear to be an India-specific phenomenon, as there are no global factors at play as was the case during 2008," said Mr. Saumitra Chaudhuri, Member of the Planning Commission.

The question to ponder over is that is the RBI’s measure only sufficient to control inflation or we need to do something over our aggregate supply. Well, in the short-run, it would be impossible to increase our aggregate supply because it will take some time to start new plants and all. In the short-run, contracting money supply is the measure while in long run, focus should be towards improving the supply side.

When we see in developing economies like BRICs nations, we see that unlike India & China, Russia’s inflation has declined considerably. The reason may be attributed perhaps to the fact that India & China are already working at nearly full capacities & hence growing demand in these economies is further causing the inflationary pressures to rise.

What is your opinion from India’s perspective????? Is inflation problem India-specific????Are we running at nearly full capacities????Is RBI’s step sufficient to tame inflation?????

News 12th July 2010

Widening Trade surplus in China

For the past three weeks, China remained in phenomenal focus with regard to the undervaluation of Yuan. The pressure had just started building up on China, that it is again saddled with the global pressure. On 9th July 2010, China’s trade surplus increased to 20.2 billion, 140% from the previous year. The rise in exports was 44% and imports surged to 34%.
US Treasury Secretary Timothy Geithner said that US will be continuously monitoring Yuan’s appreciation. Also analyst predicted that Yuan would appreciate by 4% by the end of 2010 and 6% next year.This news ought to generate the weekend effect in the markets.DJIA, NASDAQ, NEKKEI, FTSE 100 would show volatility, which would be further witnessed by Indian markets as a Spillover effect. Also, the commodity prices tend to shoot up in the short run.
China is estimated to have invested about 70 percent of its foreign reserves in US denominated assets and is the biggest holder of US Treasuries of about $900 billion. Large trade surplus of China depicts, greater capital inflow, thereby increasing its forex reserve and thereby depicts a greater budget to purchase US treasury. Thus it is quite evident, that as the trade surplus of China surges, US would play the game of Tug of war and pressurize upon Yuan appreciation.
But the question still remains unanswered, that whether such increase in the Trade Surplus of China is signaling an economic growth or formation of an asset bubble in the near future.

United States standing on cross- roads of Inflation, Deflation, depression or recovery? Which of one them is closer?

World seem to be caught turbulences one after other but it seem to be tougher for United states than others 2008-2009 recession, massive unemployement, threat to global currency value and now a new question appearing for the world’s biggest economy.

Where it heading to?

United States is indebted to worlds largest economies the country is running on 11 % deficit and has gross debt of 83% its GDP. As of now the country is majorly running on subsidies and rebates, Sooner the government would like to repay these debts and also reduce the subsidies so what would happen then?

After the subsidies reduction the Fed would like the demand in economy to be maintained and to foster growth it would possibly pump more money in the system and maintain money supply by keeping lower interest rates.
However what can be the impact of lower interest rate be?

• Lower interest rates would lead to more money in system hence fear of inflation.
• It would lead to easy purchases and hence people would buy more than they can afford (Unemployment levels are still same and hence people do not have sources to repay the debt) hence eventually another bubble and another recession.

What if the FED is cautious and the lending and rules are made strict then they were before recession?

• The purchasing power of people will go down, the consumer price index will go down and the economy would move towards deflation.

Which one of them seems to be closer and what could be the right move towards recovery is something to ponder about.

News 4th July

Repo rates Up, BPLR system shifted to base rates

Inflation on its rise with WPI rise of 10.16% in May and the soaring prices of non-food manufactured products like metals, textiles, plywood etc along with petrol hikes have all placed the policy makers in a dilemma as on one hand, they need to tighten the monetary policy to curb inflation and on the other hand, they also don’t want to affect the economic growth since economy is in the recovery phase after the credit crisis. “We had to control credit demand, especially unproductive demand has to be curtailed”, said KC Chakrabarty, Deputy Governor of RBI. That means, demand which is leading to price hikes has to be checked.

As a result, the reverse repo is raised from 3.75% to 4% and the repo rate from 5.25% to 5.5% (source: RBI website).This Thursday i.e. July 1 2010 saw a new regime in banking system with BPLR shifted to base rate policy. The base rate fixed at 7% - 8.75% with a view to have a transparent banking system, as said by the Chairman, OP Bhatt, SBI “The base rate will be transparent”, while the CRR remains at 6%.

The existing Benchmark prime lending rate system led to unequal distribution of policy rates to the customers. In BPLR system, the banks could also lend to the customers at a rate below than BPLR, in some cases like lending to large corporations, housing loans etc. As a result some sections were being benefitted at the expense of others i.e. housing & corporates were being benefitted since they are the credit-worthy customers of banks so were getting loans at a lower rate than the small retail investors. Hence, the whole system was not transparent as well as the monetary policy didn’t seem to be that effective as it was proposed. Hence, fixing a base rate for banks in the range 7% - 8.75% aims to have an effective monetary system as the banks won’t be able to lend below 7% even to the large corporations.

This could be the right time for the policy actions as waiting more could lead to more spiraling inflationary pressures.

Wait & watch for the July 27 policy review!!!!!!!

News 25th June

Ambanis agree terms on gas supply

Mukesh Ambani (RIL) will supply 28 million metric standard cubic metres a day of gas for 17 years toAnil Ambani (RNRL) at the government-set price of $ 4.2 per million metric British thermal unit (mmBtu) as per the GSMA (Gas Supply Master Agreement) signed on 25th June 2010.

Supreme Court explicit statement ‘Natural resource is National resource’ led to the GSMA agreement between the brothers and also the termination of previous non-compete agreement between RIL and RNRL, thus allowing them to enter into the arena of each others business except Gas-based power generation by RIL for another 12 years.

This will not only foster operational and financial flexibility but will also create an envoirnment of cooperation and collaboration among groups.

The effect of agreement is evident on BSE, as prices of RNRL and RIL moved up by 7.5 % and 0.7% respectively.

Yuan appreciation leading to a series of doubts

Chinese currency has risen by 0.5% against US dollar in last week after the formal announcement of revision to its exchange rate policy.

The increase in Yuan’s strength to 6.7971 from 6.8272 against 1 dollar on Friday, a significant change in terms of exchange rate has led to a series of questions. It is widely speculated as a step taken to ward off the exchange rate issue off the G-20 summit to be held on 26th-27th June which will put undue pressure on China from US and other participating countries.

Yuan also refered as Renminbi , it’s undervaluation was a boon for the Chinese market as it was simultaneously helping to export their goods to foreign markets and imposing a tariff on import of goods. In this scenario, yuan’s appreciation simply looks like a diplomatic step taken by the Chinese Government.


Deregulation of Petrol and Diesel Prices

The minister for Petroleum and natural gas, Murli Deora, announced that the prices of petrol and diesel would be market- driven , thereby accepting the recommendations of the group headed by the Planning commission member Kirit Parekh.The government agreed to increase the price of petrol by Rs 3.50 and that of diesel by Rs 2

The decision of price hike in fuels, thereby resulting in lowering the fuel subsidies, aims at correcting the fiscal deficit to 5.5% of GDP, followed by an increase of 0.9% in the wholesale price inflation. The inflationary pressure created by such a move would be taken care by RBI, by increasing the interest rates in its monetary policy next month. On one hand, it is lessening the burden on government’s part but simultaneously shifting the load of the burden upon the consumers.

By market-driven prices we mean that the consumers ought to pay price for petrol and diesel as per the international crude oil prices. But what if the volatility of the crude oil prices increase to a major extend? Would the consumers be able to bear the burden of such volatility of prices in the market? As in for now, the government has announced that it would intervene, if such volatility occurs in the market with regard to crude oil prices. But shouldn’t the government be more clear and transparent upon to what extend the intervention would be palpable. Shouldn’t the government set definite limits, so that in future we don’t see a tug of war between economics and politics?

Agenda G-20 Summit in Toronto

The G-20 summit to be held at Toronto on 26-27 June 2010, is being organized when there are a series of tribulations in the world economy after the Euro-zone crisis and when the emerging economies are in full swing
Agenda of G-20 Summit:
• to examine the global economic scenario with stress on the recovery process
• fiscal consolidation process of the economies
• reform of international financial institutions such as IMF
• issues related to resolving the eurozone crisis.

News 30th June

30th june:
G-20 summit still in news and still attracting views:

What is till to date news?

• Targeted debt reduction fiscal deficit to be halved by 2013 and stabilized by 2016. (Estimates given by US is approximately reduce its debt from 10.1 % of GDP to 4.2% of GDP , Germany expects to reduce from 5.5% to 3%.)
• Tighter bank capital requirement by 2012, but bank takes possibility only in debt zone of Europe.
• Financial regulations to be tightened and more stringent however will be discussed in the Seoul Summit.
• Focus on raising private demand and get away from the stimulus backed economies
  

What’s in for India?

• The government would reduce subsidies in gasoline and Kerosene complying to long term goal of G20 to reduce subsidy on energy products.
  
• India Signs a nuclear deal with Canada too open nuclear commerce with Canada.

*****Anjana Khanduri

Third Party Involvement in Trade Between Thailand & Africa

Ok here is the state of affairs up till now!

There has been trade between Thailand and Africa for decades now. Thailand is the largest exporter of rice in the world and it exports more than 42% of the rice to Africa. That makes it a cool 2.3 billion dollars. But the concern here is that there are no direct links between Thai and African banks.

Let’s comprehend the situation better. Assume that Thailand exports rice to Africa, and the African banks issue a LOC to the exporters back in Thailand. The Thai bank will merely reject the LOC is as it does not accept any letter of credit from any African bank. So there is a third bank in the picture i.e. a foreign bank. The foreign bank will have to issue a LOC on behalf of the African importers. Sine there is no direct links between Thai and African banks all payment from Africa will have to be made through a third party broker, in this case the foreign bank. The commission that will be charged by the third party broker will be about 1% of the entire trade amount. For a $ 2.3 billion trade, the third party broker will earn $ 23 million.

Dr. W Wongsurawat, a Thai economist opines that many non-economists fall prey to the erroneous belief that creating direct links between the Thai and African banks will improve the efficiency. In most situations he says it is a simple lack information and trust between the two transacting parties. The transactions being highly risky the middle men actually act as the risk bearers in this unique situation.

On the other hand Dr. R. Amoussou-Guenou an African lawyer states the reasons for creating direct links between the two parties. Africa is an emerging market. Countries like India and china already have direct relationships with Africa.

In 2009 the world economic forum has rated many African countries above USA and Singapore for the soundness of their banking system. No global crisis has ever originated from Africa.

Post 1973 Thailand has struggled to mark its political contours for a long time now and it will take sometime for Prime Minister Abhisit Vejjaviya to stabilize the situation. Thailand has seen a difficult and sometimes bloody transition from military to civilian rule, with several reversals along the way. In 2006 there had been the dissolution of the parliament and a provisional body was formed. In 2007 Thailand saw a civilian government and in 2008 many after a small revolution many parties joined hands to form a new government.

Now that you have heard both sides of the argument; darty o you think that Thailand should establish direct relations with Africa and save on the third party payments?