Wednesday, 14 June 2017

Low inflation is an anemic economic condition

  • Low inflation at 2.28%, IIP at 3.12% is due to low food prices and only indicates anemic state of economy which is unable to produce more and spend more. There is  no need to greet 'low inflation' with a hurrah, which is a symptom of ailing economy.
  • Modi administration has laundered away savings due to low oil prices on his mindless adventures in the name of reforms.
  • Make in India campaign without any ground work has deindustrialized India and our economy dependent on Chinese imports so much like never before.
  • Low food prices and low consumption has not increased the consumption pattern. Low consumption is injurious to market economy and indicates declining economy.
  • Farmers are on street agitation due to prices not even covering production expenses.
  • Low crude oil prices for last three years even though good for consuming countries like India is destroying economies of oil producing countries.
  • RBI's higher interest rates and not cutting them are not indicative of inhibiting expenditure and holding back consumption. It is weak demand that is culprit.
  • Higher inflation within a band is preferable, because it means economy is moving and sputtering.
  • It is Modi & BJP's failure to spur growth even after three years. Blaming predecessor doesn't work beyond two years.
  • The over publicized 'demonetization' has failed to achieve any of its stated objectives but has jolted informal sector which operates on cash that brought its economy to its ominous halt. What ever good it may do in long term, demonetization has proved to be painful and disastrous in short term.
  • The other big decision of Modi administration is uniform GST rate across nation, w.e.f. July 1, 2017, is supposed to improve tax compliance and governments will be able to spend more money on infrastructure and enable people to produce more, sell more and buy more and will result in economic growth. Paradoxically, benefits might come only in long term but its devastating short term effects are to be coped with by our already ailing economy. The transition to GST and its impact on lower tax compliance might persist over an year. 
  • There is hardly any activity on ground. Economy needs a push. GST is going to be a speed breaker rather than a stimulus at least during first year. It is not going to energize our economy, which at the moment is going nowhere.
  • Low inflation, low growth, demonetization and GST are aggravating the already bleak situation and when economy will become better is a million dollar question? In the meantime, how many will vanish or perish?

Inflation is taxation without legislation ... Milton Friedman
Inflation effectively transfers wealth from savers to borrowers.

The government will always tell you that it wants low inflation. 
The real issue is the horizon over which to bring inflation down ... Raghuram Rajan

My View:
Low inflation and low growth are features of rich & developed nations. Their economy is largely dependent on consumption. Yet they grow rather slowly. For a developing nation like India with considerable infrastructure activity, higher inflation rates within a band is necessary for good growth associated with job creation. Here, RBI's primary role is to contain inflation within the band by managing interest rates and bank's CRR & SRR ratios. India with 40% people below poverty line and half of the population without personal latrines, low inflation and low growth regimes are undesirable. Modi government resorting to high speed & high risk financial reforms only to please rating agencies and foreign financial institutions, indicates his lack of understanding of the ground realities and exposes his incompetency as a sound economic manager. Today, instead of creating a million jobs every month, reckless Modinomics resulted in deindustrialization, exorbitant Chinese imports, loss of millions of livelihoods in informal sector is what he has done so far. Modi must realize that perpetual promises and blaming predecessors work well during initial years only but not during fourth year. Prolonged low inflation resulted in agriculture becoming a loss making activity and with no support from government, farmers have taken to streets. GDP growth with  job losses is an astonishing feature of Modi's achievement. Pep talk & unsubstantiated publicity won't do any trick.

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