Some food for thought
"You have to sound sad first of all, then maybe later you
can sound good."
—Steve Lacy (American Musician 1934-2004)
Word for the day
Abusage (n)
Improper use of words; unidiomatic or ungrammatical language.
First thought this morning
The incumbent BJP led NDA government seems to have perfected the
art of managing denominators. Wherever they find difficult to improve the
numerator, they have been changing the denominator itself, such that the
resultant figure looks more acceptable and optically pleasing.
Starting with GDP, a number of time series have been modified to
make the current set of data look progressive. The latest to join the list is
the amount of rain that qualifies a monsoon season to be "Normal".
Reducing the amount of rain needed for a monsoon season to classify it as
Normal means changing the definition of drought itself. In economics terms it
means lesser pressure on the governments to provide drought relief assistance.
In social terms it means less panic amongst people dependent on monsoon.
Some psychological relief apart, how would it actually help
someone is not clear yet.
Chart of the day
Lesson from Greece
The RBI governor made a totally irrelevant and meaningless
comment recently. What he said implies that the liquidity measures taken by RBI
in recent past is equivalent to 25bps rate cut. This prompted market
participants to believe that MPC may actually not cut rate any further in their
next meeting on 5-7 August. Consequently, the already depressed market
sentiments sank a little deeper.
I believe that RBI governor is just one vote in 6 Member MPC and
need not be considered the sole decision maker insofar as the monetary policy
of the country is concerned. From the minutes of last MPC meeting, it is clear
that the policy stance may remain accommodative in future. MPC had outlined
that supporting economic growth is primary priority as the objective of price
stability has been reasonably achieved.
I therefore do not see much reason to worry on policy direction
front. However, there could be some concern over the trajectory of policy
easing and monetary accommodation. I would prefer a forceful action that can
provide adequate escape velocity to the economy struggling to break 7.5 - 8%
growth barrier. If it means 150-200bps rate cut, let it be.
Since yesterday, my inbox is full with a forward showing how the
Greek Govt 10yr bond yields have fallen below the US Govt 10yr bond yield. This
is significant, because Greece was one of the key triggers for the global
financial crisis. Greek economy slumped into deep in 2009-12. 10yr Greek bond
yields rose to a high of 38% in 2013. Fiscal deficit was higher than 13-14%,
and consumer confidence totally in distress. Greek government had to be bailed
out by IMF at least twice.
Though, Indian and Greek economies are not comparable. But still
it might be noteworthy for the policy makers to study the resuscitation of
Greek economy in past five years.
1. Bond yields have
fallen to ~2%, lower then lows seen in pre crisis period.
2. Greek economy is
hardly growing, but it has escaped the recessionary trap.
3. Current Account
deficit that ballooned to over 15% of GDP in 2008 is now reasonable 2.5%.
4. Fiscal profligacy
that resulted in budget deficit slipping to as high as 15% of GDP in 2008,
looks a lesson in ancient Greek history. In 2019 Greek government presented a
surplus budget.
5. Corporate tax
rates that have risen to a high of 29% from 25% pre crisis level have begun to
fall.
6. Personal income
tax rate at 45% and Sales tax rate at 24% remain elevated, highlighting the
sacrifices made by Greek populace in economic recovery.
7. Consumer
confidence in inching back to the pre crisis level as lending rates have fallen
to 15yr low of 4.5%, from a high of 7.25% in 2012. Policy rates in the meantime
remain zero.
I am no economists or expert of economic policies, but the data
prima facie highlights to me that high level of fiscal prudence and materially
lower rates could help overcome the crisis of confidence and stimulate growth.
While the government has been rightly focusing on raising tax
revenue, and curtailing government revenue expenditure, more efforts may be
needed in raising non tax revenue to pay for public investment. Aggressive
disinvestment is an obvious solution.
Cutting rates aggressively and providing a business environment
that is conducive for accelerated growth, can stimulate consumer demand and
consequently private investment, in my, may be, naive view.
Y
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