Many column centimeters in leading newspapers, including your paper combined with interesting sound bites in all TV channels have put before us multiple reasons responsible for the spiraling price rise. Out of these a few stand out which has to be tackled by policy makers on a war footing.
The planned increase in agricultural production shall meet the increasing population, the additional demand created by new generations aspirations and affordability. This is best achieved by careful planning and timely implementation of irrigation projects, making available at the retail level advanced improved seeds, tested soil enriching techniques to improve the yield and above all easy rural credit with minimal collateral to the rural agriculturist. In the absence of such a coordinated approach there will be gaps which will leave us exasperating at the slow agricultural growth rate.
On the other hand diversion of land from wheat to Bio fuels in developed economies is one more self centered approach of the developed economy which we need to understand to live with. Financial centers have established and put in place procedures & mechanisms that make it easy for the non informed to bring in their savings in to commodities and make a fast buck on scarcities. We should have sufficient negotiating clout to bring them around to stop such a move which we sadly lack (as proved in various WTO forums).
Further, given the depth of scientific community available with in the country and the financial resources available with us (we have invested hundreds of billions of dollars in other country's instruments for a rainy day!) it is really surprising that a concerted approach is not being taken to solve this fundamental problem.
Politicians should take note that their continued neglect of this fundamental issue will shake them up and even dislodge them from their exalted positions.
Showing posts with label Excahnge Rate. Show all posts
Showing posts with label Excahnge Rate. Show all posts
Sub Prime Mortage Fall out
We are reading different reports of the impact of the US Sub Prime Mortgage fall out on developing markets and emerging economies. The reports unfortunately have to rely on information which are handed over to you by the administrations and regulators, who have the powers to remain opaque.
Given the levels of visibility reached through satellite imaging techniques such as Google Earth, it is surprising that in large financial transactions running to billions of dollars, opacity stares at you. The crisis which is purportedly created by a few banks, seem to have had regulatory sanction, as you find the Regulators coming out openly in support of them, with the public fund. The Regulator in UK has come out openly to save a bank and the US Fed is reportedly injecting billions to allow some of the entrenched entities to move out in a more orderly manner. In a mature functioning capital market, it is indeed strange that we are seeing certain Regulatory actions, which can be clearly interpreted to be in support of defined entities who have abused the rules.
In such circumstances, given the opacity of the transactions, it is but natural that one would come to the logical conclusion that the excesses committed by these entities, have been enjoying the Regulators tacit support all along. No wonder, RBI governor in his inimitable manner has warned of surprises and indicated recently his resolve to take "unconventional" actions as necessary.
All these point to more major events in the immediate future. The tremors of Sub Prime Mortgage, are still traveling through the depths of integrated global economy sea. One is not sure where it is heading and which is the shore it is going to hit. There are no sensors to track this "Tsunami"(financial) and predict land fall.
Planners may be warned to plan for the landing and put in place emergency mechanisms to evacuate and provide "First Aid"
Given the levels of visibility reached through satellite imaging techniques such as Google Earth, it is surprising that in large financial transactions running to billions of dollars, opacity stares at you. The crisis which is purportedly created by a few banks, seem to have had regulatory sanction, as you find the Regulators coming out openly in support of them, with the public fund. The Regulator in UK has come out openly to save a bank and the US Fed is reportedly injecting billions to allow some of the entrenched entities to move out in a more orderly manner. In a mature functioning capital market, it is indeed strange that we are seeing certain Regulatory actions, which can be clearly interpreted to be in support of defined entities who have abused the rules.
In such circumstances, given the opacity of the transactions, it is but natural that one would come to the logical conclusion that the excesses committed by these entities, have been enjoying the Regulators tacit support all along. No wonder, RBI governor in his inimitable manner has warned of surprises and indicated recently his resolve to take "unconventional" actions as necessary.
All these point to more major events in the immediate future. The tremors of Sub Prime Mortgage, are still traveling through the depths of integrated global economy sea. One is not sure where it is heading and which is the shore it is going to hit. There are no sensors to track this "Tsunami"(financial) and predict land fall.
Planners may be warned to plan for the landing and put in place emergency mechanisms to evacuate and provide "First Aid"
Indian Governments need to be more proactive
Choke Eases Even More
RBI has done its bit to unshackle the Indian Entrepreneur and industrialists from the chains of bondage to the Indian currency. The Investors are, by the day being encouraged to, explore new markets, compete globally to maximise returns on their capital.
It is now the turn of the Government to step in an unobtrusive way to support the initiative. In this era of globalisation, we need to ensure energy security, and committed linkages to commodities that help us meet our growing needs. This is best done through selective investments, which also translate to export of our capital globally. All these can be front ended by the nibble footed Indian investor, but he surely needs the unfailing commitment of the government.
We need politicians who will understand the dynamics of the Indian multinationals' support requirements and guide the policies. They should intervene to nudge friendly governments to grant a license or exclusivity. They should also provide the bureaucratic support to secure favourable terms for our capital such as Sovereign government guarantees, negotiate hard during bilateral exchanges with the Indian investors capital in mind.
Bulk of our increasing foreign exchange reserves are due to the earnings of Indian diaspora who are toiling away to bring in the riches to the country. It would befit all their efforts if the governments and Indian Entrepreneurs use this capital to further enhance the Indian growth story.
RBI has done its bit to unshackle the Indian Entrepreneur and industrialists from the chains of bondage to the Indian currency. The Investors are, by the day being encouraged to, explore new markets, compete globally to maximise returns on their capital.
It is now the turn of the Government to step in an unobtrusive way to support the initiative. In this era of globalisation, we need to ensure energy security, and committed linkages to commodities that help us meet our growing needs. This is best done through selective investments, which also translate to export of our capital globally. All these can be front ended by the nibble footed Indian investor, but he surely needs the unfailing commitment of the government.
We need politicians who will understand the dynamics of the Indian multinationals' support requirements and guide the policies. They should intervene to nudge friendly governments to grant a license or exclusivity. They should also provide the bureaucratic support to secure favourable terms for our capital such as Sovereign government guarantees, negotiate hard during bilateral exchanges with the Indian investors capital in mind.
Bulk of our increasing foreign exchange reserves are due to the earnings of Indian diaspora who are toiling away to bring in the riches to the country. It would befit all their efforts if the governments and Indian Entrepreneurs use this capital to further enhance the Indian growth story.
Monetary Policy
Central Bankers prime responsibility is to utilise the Monetary Policy to achieve Monetary stability over long periods under varying conditions. This as the author has indicated, predominantly relate to maintaining the Purchasing Power of a currency. But there are two other significant elements which need to be balanced;
- One the competitiveness of the export basket should not deteriorate and the other
- the main stay of the people be it industrial wages or the value of agriculture produce should be stable.
While some may tend to ignore the comparison of Gold to purchase power, as to be too elitist, the situation of the Indian farmer or the wages of our semi skilled worker will throw a definitive view. It will be too simplistic to assume that all these can be achieved only by the Monetary policy. But monetary policy can substantially support these, as in the case of USA where the Asian economies surpluses are funding the subsidy of the USA farmers(Budgetary deficit). Not many states will be able to practise this. The decision of the US central bankers to believe in their systems and make their currency fully convertible in an era of where everything was closed has brought them this reward. It is always the first mover who will have the advantage as it is evident here.
Given this background, it is necessary for the central banker to come up with innovative mechanisms and steps, structured to capitalise on the individual country's strength. We have today put in place sound controls which can be relied up on. So it is time to take bold steps which are unique to our country's strengths. Two starking uniqueness are evident
One - Our huge retail stock of gold(should say hoard) No other country has so many of their citizens hoarding gold. This immense asset is not put to use. This has to be done.
Second - Our Youth. We are one of the two countries who will have the largest number of youth in the next decade, whose services will be in dire need amongst the so called developed nations as well. We need to formulate policies, to retain this youth in our country to levergae thier earnings.
India is poised to move in to another era and path breaking efforts are needed to take to Her to the rightful place She deserves.
- One the competitiveness of the export basket should not deteriorate and the other
- the main stay of the people be it industrial wages or the value of agriculture produce should be stable.
While some may tend to ignore the comparison of Gold to purchase power, as to be too elitist, the situation of the Indian farmer or the wages of our semi skilled worker will throw a definitive view. It will be too simplistic to assume that all these can be achieved only by the Monetary policy. But monetary policy can substantially support these, as in the case of USA where the Asian economies surpluses are funding the subsidy of the USA farmers(Budgetary deficit). Not many states will be able to practise this. The decision of the US central bankers to believe in their systems and make their currency fully convertible in an era of where everything was closed has brought them this reward. It is always the first mover who will have the advantage as it is evident here.
Given this background, it is necessary for the central banker to come up with innovative mechanisms and steps, structured to capitalise on the individual country's strength. We have today put in place sound controls which can be relied up on. So it is time to take bold steps which are unique to our country's strengths. Two starking uniqueness are evident
One - Our huge retail stock of gold(should say hoard) No other country has so many of their citizens hoarding gold. This immense asset is not put to use. This has to be done.
Second - Our Youth. We are one of the two countries who will have the largest number of youth in the next decade, whose services will be in dire need amongst the so called developed nations as well. We need to formulate policies, to retain this youth in our country to levergae thier earnings.
India is poised to move in to another era and path breaking efforts are needed to take to Her to the rightful place She deserves.
Control Notes Supply
The constant increase in Printed Notes Supply and the excess requirement of working capital due to processes and legacy issues are two significant elements which need to be tackled head on to rein in inflation. The slack money which is in the system as working capital in form of credit at various stages is increasingly pushing up the cost to the consumer and sucking in more credit for achieving the same output. An alternative will be to incentivise use of money for shorter periods. This has to be through a policy initiative and will signal better management of working capital limits.
Given the fact that most of the receivables are linked to central & state governments the finance ministry will do well to seek a review of the Outstanding payments; the Government's "Sundry Creditors List" and devising methods to settle the same with in reasonable limits. Even for approved plan outlays, payments are with held or not released, as either the funds are diverted for meeting out salary payments (as in the case of state implemented projects with central funds) or stuck due to terms of contract an euphemism for dithering. This needs to be addressed immediately with the accelerated growth seen in the recent years.
Cash transactions have again not been controlled as the key contributor is Real Estate whose administration is the responsibility of the Center and state. A pragmatic to capture the true Real Estate values and make it attractive to comply with completing transactions closer to realistic values needs to be put in place.
Given the fact that most of the receivables are linked to central & state governments the finance ministry will do well to seek a review of the Outstanding payments; the Government's "Sundry Creditors List" and devising methods to settle the same with in reasonable limits. Even for approved plan outlays, payments are with held or not released, as either the funds are diverted for meeting out salary payments (as in the case of state implemented projects with central funds) or stuck due to terms of contract an euphemism for dithering. This needs to be addressed immediately with the accelerated growth seen in the recent years.
Cash transactions have again not been controlled as the key contributor is Real Estate whose administration is the responsibility of the Center and state. A pragmatic to capture the true Real Estate values and make it attractive to comply with completing transactions closer to realistic values needs to be put in place.
Currency rate Instability
One of the reasons the interest rates do not impact the Real estate asset class is because of the simple fact that it is running on money which is PARALLEL. No individual or HNI can borrow through the official channel to buy a land in any city. It may not even cover 5 % of the cost. That being the case to signal control of this asset class through monetary instruments, as you have very simply and eloquently argued is shooting your self in the legs and yes both of them.
Lack of agricultural growth and its impact on the growing economy has been ignored by the government even though the central banker has been highlighting its failure on this account. In the election year this becomes a much more bigger problem.
Importing essentials, while being a short term measure, to cover the ground to arrest inflation, long term bilateral international agreements (like the ones being done for energy Security) can be negotiated for essentials to cover a planned period before our internal agricultural production escalates.
We need to think out of box to come up with solutions which are specific to us and the way in which we allow our parallel economy to grow and accept inefficiency.
5 Points Overlooked by FM
The article Five points someone overlooked made for an interesting reading. I believe that the FM gave each of these five proposals a due thought and rejected it. And here is why?
- Excise Duty on cars: Passenger car segment has seen an overall growth of 23 % on the previous year and that too on a year when they have seen their input costs escalate. Across the sector they have reported healthy earnings and the sector is exiting enough to attract major players with the existing duty structure. So why reduce and loose revenue?
- Focus on Tourism Infrastructure: The hotel industry was not waiting for a 5 year tax holiday to launch new projects. They are waiting because of the more than 80 clearances which they have to take from governmental organisations starting from Central to state government departments, to corporations to local police. If it is a high rise building you need a clearance from the Aviation department and if you are on an important road the Highways! Clear these hurdles and increase taxes. You will still not be able to discourage investors rushing in. The average room tariff of our hotels is after all comparable with the some of the costliest in the world!
- Duty Structure on Petroleum Products: The case here is driven by the need to generate enough revenue for a rainy day. Imagine a situation when the Oil price stays stable at US $ 75 per barrel or above. The impact on our economy will be severe; may be the FM thought it prudent to pass on further cuts at that time! The real cut in this sector should come from states who never are convinced about it. May be we have to wait for the GST for an overall taxes reform in this sector.
- Promoting savings: I do not agree that this has been missed out in the budget though the author may have his reservations as to the extent. tax deductions on Premium paid on Medical Insurance has been increased and the interest costs paid on educational loan taken for one's spouse and Children are tax deductible. Satisfying enough for a middle class person.
- Abolishing DDT for Holding companies: This wish, I tend to compare with the wish for reduction in taxes on tobacco. Holding companies are vehicles which serve to enrich the investors and work around the regulatory, taxes network. To reduce taxes for such Holding companies will translate to encouraging their breed. Let us encourage more transparency and may be increase the taxes for these companies.
RBI's new approach
The title as befitting a Central banker is just a hint for the well heeled and one needs to drill down and mull over the contents to understand the implications.
The suggestions by the former governor is very timely and needs to be implemented. We need to "segregate a part of the reserves that can be traced to more sustained flows" and allow a government agency to manage these funds to achieve more than " 6 % plus returns" will really help the economy. I see the "Invisible receipts" which our economy boasts of as one amount which is sustainable and growing. These receipts majority of which emerge from middle east can be invested in infrastructure projects to accelerate the growth.
The "comrades" will also like the idea.
The suggestions by the former governor is very timely and needs to be implemented. We need to "segregate a part of the reserves that can be traced to more sustained flows" and allow a government agency to manage these funds to achieve more than " 6 % plus returns" will really help the economy. I see the "Invisible receipts" which our economy boasts of as one amount which is sustainable and growing. These receipts majority of which emerge from middle east can be invested in infrastructure projects to accelerate the growth.
The "comrades" will also like the idea.
No Point in Blaming RBI ?
The authors have correctly argued that RBI has limited scope for deploying other instruments.
But what the RBI can do and which has failed to do is to prevail up on the Finance Ministry to deepen the debt market. Corporate paper is nearly absent in the debt market and there is crying need for it to be quickly implemented so that the Non agricultural credit growth is met at rates which the industry can service and credit growth in this segment is not mixed up with the rest of the market.
Similarly expansion of currency notes in circulation, which is taking place year on year to support the Real Estate expansion and phenomenal rate increases is being ignored. It is surprising that RBI as an institution which does not come under any direct influence of the Government should turn a blind eye to this phenomenon.
It is necessary for RBI to take a bold step in this regard and announce through its reports the damage currency based transactions bring to its policies. As long as RBI continues to hide and thus encourage such transactions, they will be blamed and quite correctly too.
Rupee Appreciation
he article "Making Sense of Rupee Appreciation" made an interesting reading. As the authors have pointed out there are diametrically opposite views on allowing the Rupee to appreciate.
The depreciating rupee while allowing for the perceived existence of the "Export competitiveness", also adds to the coffers of the Largest Indian Corporate "RIL", whose refining margins are better than the benchmarked Singapore rates and ONGC coffers are swelling in spite of partly providng for the petroleum bonds. Do our agriculturists who do not have any recourse but to use Diesel for even their water requirements for the field and are adjusting to international parity pricing for the Diesel, in the words of author have to further bear the brunt of a depreciated rupee to ensure that our Software, textile and other cash crop exports are competitive?
Socially and Politically such an approach would truly bring in surprises.
Another important view of the leading thinkers including Sri. Shnamugasundaram (whose article appeared in your paper recently) have correctly highlighted the danger of advocating the view of the appreciation of rupee while evaluating with respect to US dollar only. These thinkers have correctly argued that there has been no significant appreciation of the rupee when compared with the basket of currencies. A look at the behaviour of other Asian currencies in a comparable 4 year time frame support this view.
Added to this fact today, our export industries enjoy the pricing power. They are in the market because of their other inherent strengths and a favourable exchange rate will make it better no doubt, but they can survive. IT companies are not too much bothered about the impact this appreciating rupee make on their balance sheet. Textile, Diamond Industry, Cashew nut processing industry, (just to list a few) are crying hoarse about the impact the appreciating rupee is creating on their balance sheet. But they are quickly launching their equipment up gradation projects taking advantage of the appreciating rupee. Others are shrewed to enough to ensure that their value addition is retained at the same levels by driving down purchase costs(imports of Cashew Kernels and raw diamonds) again taking advantage of the appreciating rupee.
In the petroleum front we are in threshold of a major break through in Gas Exploration. Our refining capacity has significantly increased and is further increasing. This will definitely reduce the current level of our import dependence on Oil. Similarly with the current boom in the gulf market due to the high prices of crude our expatriate labour are also getting significant increases and I am sure will renegotiate their salaries to match with the appreciating rupees.
We need a stable forex climate but the boundaries and timing are influenced by our own typical situation and the increased globalisation which we are facing today. It cannot be closely pinned to some other models. Some of the benefits of this appreciating rupee is already being felt. It has brought in a negative outlook on "Inflation Expectation"and is helping controlling inflation.
Literally if the policy makers do not worry about the price of cabbage a new set will come soon enough to look at it!
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