Indian Economy

04/10/2011

Indian economy is quite sound as can be judege from the following:

i. there is no unemployment or the unemployment is very low now, compared to what it was in the past. In fact there is shortage of labour in every sector of the economy- in agriculture, industry, plantations, transport etc. Shortage of labour is seen both in the urban and in rural areas.
ii. production is increasing as can be seen from the increasing number of trucks moving goods across the country
iii. industry has no problem in getting finance, either by way of equity or loan from banks or other financial organizations-postponement of initial offerings by companies does not mean that the public are not interested in buying equity shares. It only shows that the prices of the offerings have been placed high.
iv. there is no dearth of loan facilities for agriculture
v. finance for acquiring vehicles is available from a large number of organizations
vi. there is no problem in selling products/commodities, (though sales promotions are required. ) This is because of higher purchasing power of people in general.
vii. the expenditure on food as a percentage of total expenditure f the households is continuously decreasing showing an increasing number of products being used by the people. This shows higher standard of the living of the people.
viii. prices are going up, but wages have already gone up and still are going up. Thus,price increases is not a major problem. For example, between 2006 and 2010 wages have gone up by about three times in most l cases. On the other hand, prices have gone up by 50%- 100% (which has resulted in higher standard of living of the people).
ix. people no longer walk even short distances. They use mopeds,motorbikes and cars. Very few people use bicycles. People are in a position to afford these luxuries now. They even travel by motorbikes for even the currently “low” paid jobs.
x. there is no communication problem now. Most of the people have cell phones.
xi. the markets are full of things –food items as well as industrial products.
xii. stock markets are volatile. Price of gold and silver is increasing,but this cannot be called economic crisis,but can only be called speculative activity. If FIIs are banned ,institutional investors are restricted in the secondary market, the markets will be steady.
xiii. however, there is a lot of scope to increase productivity, increase consumption and thus, expand production and GDP.
xiv. interest rates have gone up leading to higher cost of production, but the prices of all products have also gone up .Thus,the purchasing power of the interest amount from the deposits in banks,etc. Would have become lower, if interest rates are not raised. In other words, depositors would have suffered badly.
xv. there is shortage of labour. This can be solved by increasing mechanisation. In agriculture for example, mainly ploughing has been mechanised. There is scope of mechanisation in planting, weeding, harvesting,thrashing,etc. In industry also, there is a lot of scope for further mechanisation. This is how industrial revolution took place in Europe a few centuries ago.
Xvi. The problem of pollution should be tackled with proactive participation of the government.
xvi. Global warming is talked about but we are witnessing coldest winters and hottest summers which can rightly be called weather extremes rather than global warming.
xvii. higher public/government debt in itself cannot be an economic crisis if the debt has been incurred for productive purposes and the labour productivity remains high. after all, money can always be created by the government monetising debt.
As the fundamentals are strong in Indian economy, external happenings should not affect it. However, it does affect because of speculative activities. It would good to control speculations.


Debt to GDP ratio and Economic Growth

02/10/2010

There have been some studies and conclusions therefrom about Debt to GDP ratio of a country and the econonomic growth rate. Some of the conclusions are:

1.once the debt to gdp ratio exceeds 77%, the growth rate will fall

2.for every 10 percentage points fall in debt to gdp ratio, growth rate will go up by 1.4%

These conclusions do not hold good in all situations and for all countries. Further fall or growth in growth rate depends also on the type or purpose for which the debt is incurred.
Generally,

i.if the debt is maily for purposes of undertaking short gestation project like dams, irrigation canals, linking rivers with one another and with lakes etc. the growth rate will go up even if the debt to gdp ratio exceeds 100% or even 150%.

ii.if the debt is incurred for productive purposes like generation and distribution of electricity, import of technology, capital goods, raw materials etc. there will be no fall in growth rate even if the debt to gdp ratio is very high

iii. if the debt is incurred for unproductive purposes like increase in wages without increase in productivity, welfare measures, sports, entertainment etc. growth rate may fall with increase in debt, though in some cases, increase in spending power of the people may lead to increase in demand and consequently production.

iv. irrespecive of the debt-gdp ratio, economy would witness growth, if all able-bodied persons work and they put in their maximum possible ability, time, energy, attention etc to the work

v. the amount required for servicing the debt depends not only on the quantum of debt but also on interest rate. If the interest rate is low or nil, and the repayment period is long, serving debt may not be a big problem.


Bharat Bandh uncalled for

05/07/2010

Increase in diesel, petrol, cooking gas prices should lead only to a marginal or negligible increase in overall prices as:

a) The price of diesel was increased by Rs.2 per litre i.e. by around 6%. The cost of diesel in the truck freight charges is only about 40-50%, the balance being the cost of driver, cleaner, depreciation and profit margin. Thus the freight charges should increase only by about 2.4% – 3%.

 b)transport charges in the retail cost of any product is only 5- 10%, the major components being cost of raw materials, interest rates, depreciation, profit margin, wages & salaries, tax, advertisement charges etc. Thus the fuel price increase should lead to general price rise of just 0.12 to 0.30% i.e. if the retail price of a product was Rs.100, it should cost now only Rs.100.12- Rs.100.30 i.e just 12 -30 paise more, which is definitely negligible.

c)In the case of  auto rickshaws, one litre of petrol gives about 25 kilometers for which the charges are around Rs.150. After price increase it could go up to only Rs.152 or just 1.67%.

 d)in the case of private use of motorcycles, assuming an average consumption of 10 litres (traveling about 800 to 1000 km) per month by a person with an income of Rs.20000 per month, his expenses on petrol will go up by just Rs.35 only i.e less than 0.2% of his income which again is negligible.

 e) cooking gas price has gone up by 10% but average consumption in a  family per month is just 1 cylinder or increase in expenses is only Rs.35 or less than 0.2% of the monthly income.

 f) overall additional expenses for a middle class family shall not be even 1% and this every one can easily absorb

 g) the interest rates had drastically come down recently(by about 4 percentage points) as a measure of reversing the economic slow down. Truck owners, auto rickshaw owners, and manufacturers who usually get finance from banks save a substantial amount on this account. They can easily afford to absorb the additional expenses due to fuel price increase, in stead of passing on the same to the customer. Even if they pass on the additional cost to consumer, consumer’s burden is negligible.

 h) the common man, who works under employment guarantee scheme got an increase of 25% in wages, from Rs.80 to Rs.100 three months ago. So he should not have any problem in meeting less than 1% increase in cost of living.

 i)the increase in salaries of central and several state government and public sector undertaking employees on account of 6th  Pay Commission as also income tax liberalization will enable employees to bear the additional expenses without any difficulty.

 In view of the above, it appears that Bharat Bandh is uncalled for. At the same time the government should restrain truck owners from increasing their charges/prices on the pretext of fuel price increase, beyond 3%, auto rickshaw owners and taxi owners beyond 2%, and manufacturers beyond 1%.


Stimulating the economy

04/02/2009

There is economic slow down in most of the countries currently i.e. early 2009. These countries try to stimulate the economy by

  • Lowering interest rates
  • Giving tax benefits
  • Offering incentives to industries

By lowering interest rates for housing loans, vehicle loans etc. the governments try to encourage people to avail of the loans which in turn leads to construction of  houses, production of vehicles etc, thus reducing unemployment. But at the same time, people who deposit their money in the banks receive lower interest and thus the disposable income with them comes down leading lower consumption expenditure- lower retail sales, low demand and low production.

Giving tax benefits would make the companies and individuals to have additional money, but the governments would lose tax revenue and thus will not be able to undertake large infrastructural work.  Instead of reducing taxes, the governments can undertake infrastructural work and generate employment and additional spending.

Offering incentives would again reduce the government funds. It is likely that many of the industries would reduce the ex-factory prices of their products.  They would however result in lower cash balance with the governments and  lower government spending which is not good for the economy.

Cost of the production should be reduced by increasing the productivity of the employees. This could be done by requiring employees including the top managements in all the establishments in the country as well as self employed persons to work for additional one hour a day without any increase in salary.