Recession : Loss of Commonsense
You can fool some persons for some time or all the persons for some time but you can not fool all the persons at all the times. Lot has been said and lot has been heard about recession. Recession is the result of loss of commonsense not only of Americans but all the people of the world for some time. Fear and Greed had occupied our minds for some time. We forgot to apply our minds .Money had made the Americans to consume blindly and fear had made the Chines to invest in the treasury of Americans.
Major mistake made by the Financial Sector is that they had given loans against the security of houses.. Houses cannot generate money (unless you give them on rent) rather they consume money if borrower is living in pledged house. Financial sectors had given the money to the consumers to consume on the basis of security of houses in which they were living. Thus value of the security became important rather then purpose of loan which ultimately leads to recession in the economy.
Financial Sector should gives the money to the householders even against the security only when there is a regular source of the income of householder. But it is not the regular income that is important but the source of regular income that is important while lending the money to the household. Financial Sector lost the commonsense that source of the regular income should be permanent. Job in a private sector (even from last 10 years) cannot be said to be the permanent source of income as we are seeing now a days in the form of huge job cuts all over the world.
Financial Sector is there to lend the money to the productive sectors of the economy so that these sectors can add to the GDP of the country by investing that money into income and employments generating assets.
Financial sector should always think about the purpose for which the money is being given. Money is always given by financial sector for investment and not for consumption purpose. Value of the security for loan is not as important as purpose for which loan is being given. When loan is given for the long term it will be the purpose of loan that will return the money of financial sectors. Financial sector is not the taker of assets (Security) of the householders rather it is to get the money back with appreciation.
Financial Sector forgot the basic concept that purpose of giving the loan against security is just to set fear in the minds of the borrowers that in case they did not applied the money for the intended purpose then they will loose something valuable for them. It is this fear that forces a borrower to work hard to apply the loan for intended purpose i.e. to create an asset that will produce money for him and for lenders.
Financial Sector lost commonsense that money is only a piece of paper in the hands of lenders but when it comes in the hands of borrowers then it changes its meaning and form instantly. Same piece of paper can be used to create a bomb or building depending upon the purpose of borrower.
Financial Sector applied technology i.e computers and complex models to calculate earnings and payback periods. Discounted Cash Flow techniques were applied without thinking that commonsense is also required to make decision which cannot be depicted on any paper. Technology cannot do anything except analysis of the data but choice has to be made by humans by applying non-monetary factors, facts, figures, commonsense. There are the models to control the prices of commodities but hardly there are measures to control the price of assets. Financial sector lost the commonsense that it is the Decision Maker that is important rather then technology used by decision maker. Technology can assist but cannot replace humans at any cost.
There is also a failure on the part of international financial institutions to track flow of money between different nations, its utilization and purpose of utilization.
With the lesson learnt from recession, we can say that money is not everything but money can do anything. We have to rebuild our commonsense to avoid recession in future. We have to again learn basics what is money? What is Loan? What is consumption? What is investment? before entering into financial world. Money should be given only for the investment purpose and financial sector has to be very strict about its usage.
I CERTIFY THAT THIS ARTICLE IS MY OWN CREATION.
CA SATBIR SINGH
casatbirgill@gmail.com
Saturday, August 8, 2009
Recession
Friday, August 7, 2009
100 Days Programme
• Early passage of the Women’s Reservation Bill providing for one-third reservation to women in state legislatures and in Parliament.
• Constitutional amendment to provide 50 percent reservation for women in panchayats and urban local bodies.
• Concerted efforts to increase representation of women in central government jobs.
• A National Mission on Empowerment of Women for implementation of women-centric programme in a mission mode to achieve better coordination.
• A voluntary national youth corps which could take up creative social action for river cleaning and beautification programme beginning with the Ganga.
• Restructuring the Backward Regional Grant Fund which overlaps with other development investment, to focus on decentralised planning and capacity building of elected panchayat representatives. The next three years would be devoted to training panchayat raj functionaries in administrating flagship programmes.
• A public data policy to place all information covering nonstrategic areas in the public domain.
• Increasing transparency and public accountability of National Rural Employment Guarantee Act (NREGA) by enforcing social audit and ensuring grievances redressal by setting up district level ombudsmen.
• Strengthening Right to Information Act by suitably amending the law to provide for disclosure by government in all non-strategic areas.
• Strengthening public accountability of flagship programmes by the creation of an Independent
Evaluation Officer at an arm’s distance from the government catalysed by the Planning ommission.
• Establishing mechanisms for performance monitoring and performance evaluation in government on a regular basis.
• Five annual reports to be presented by government as Reports to the People on Education, Health, Employment, Environment and Infrastructure to generate a national debate.
• Facilitating a voluntary technical corps of professionals in all urban areas through Jawaharlal Nehru National Urban Renewal Mission to support city development activities.
• Enabling non government organisations in the area of development action seeking government support through a web-based transaction on a government portal in which the status of the application will be transparently monitorable.
• Provisions of scholarships and social security schemes through accounts in post offices and banks and phased transaction to smart cards.
• Revamping of banks and post offices to become outreach units for financial inclusion complemented by business correspondents aided by technology.
• Electronic governance through Bharat Nirman common service centres in all panchayats in the next three years.
• A model Public Services Law, that covers functionaries providing important social services like education, health, rural development etc and commit them to their duties, will be drawn up in consultations with states.
The President outlined a paradigm shift in governance, to be effected through:-
• One, ongoing, independent evaluation and public reporting of progress in implementing schemes;
• Two, big strides in e-governance;
• Three, decentralisation and empowerment of panchayats and non-government organisations to implement and monitor government schemes;
• Four, breaking barriers between departments and schemes to achieve synergy and integration;
• Five, innovative regulation of health, education and provision of public services;
• Six, liberal use of technology in welfare transfers and achieving public awareness; and
• Seven, institutionalisation of the government’s basic commitments by requiring all cabinet notes to specify how their proposals would enhance the goals of equity or inclusion, innovation and publicaccountability
Thursday, July 2, 2009
INDIAN BUDGET TERMINOLOGY
INDIAN BUDGET TERMINOLOGY
READING THE BALANCE SHEET
The lines and figures that reveal the receipts and expenditure of the year
ANNUAL FINANCIAL STATEMENT
This is the last word on the state’s receipts and expenditure for the financial year, presented to Parliament by the government. Divided into three parts — Consolidated Fund, Contingency Fund and Public Account — it has a statement of receipts and expenditure of each. Expenditure from the Consolidated Fund and Contingency Fund requires the mandatory nod of Parliament. CONSOLIDATED FUND
The government’s life line: it is a consortium of all revenues, money borrowed and receipts from loans it has given. All state expenditure is made from this fund.
CONTINGENCY FUND
As the name suggests, any urgent or unforeseen expenditure is met from this Rs 500-crore fund, which is at the disposal of the President. The amount withdrawn is returned from the Consolidated Fund.
PUBLIC ACCOUNT
When it comes to this account, the government’s nothing more than a banker, as this fund is a collection of money belonging to others, like public provident fund.
REVENUE VS CAPITAL
The budget has to distinguish revenue receipts/expenditur e on revenue account from other expenditure. So all receipts in, say, the consolidated fund, are split into Revenue Budget (revenue account) and Capital Budget (capital account), which includes non-revenue receipts and expenditure.
REVENUE RECEIPT/EXPENDITURE
All receipts like taxes and expenditure like salaries, subsidies and interest payments that in general do not entail sale or creation of assets fall under the revenue account.
CAPITAL RECEIPT/EXPENDITURE
Capital account shows all receipts from liquidating (eg. selling shares in a public sector company) assets and spending to create assets (lending to receive interest).
REVENUE/CAPITAL BUDGET
The government has to prepare a Revenue Budget (detailing revenue receipts and revenue expenditure) and a Capital Budget (capital receipts and capital expenditure) .
CREATING A HOLE IN THE POCKET
Taxes come in various shapes and sizes, but primarily fit into two little slots:
DIRECT TAX
This is the tax that you, I (and India Inc) directly pay the government for our income and wealth. So income tax, FBT, STT and BCTT are all direct taxes.
INDIRECT TAX
This one’s a double whammy: It’s essentially a tax on our expenditure, and includes customs, excise and service tax. It’s not just you who thinks this isn’t fair - governments too consider this tax ‘regressive’, as it doesn’t check whether you’re rich or poor. You spend, you pay. That’s precisely why most governments aim to raise more through direct taxes.
MAKING YOU PAY
The various taxes that the government levies
CORPORATION (CORPORATE) TAX
It’s the tax that India Inc pays on its profits.
TAXES ON INCOME OTHER THAN CORPORATION TAX
It’s income-tax paid by ‘non-corporate assessees’ — people like us.
FRINGE BENEFIT TAX (FBT)
No free lunches here. If you want the jam with the bread and butter, you’d better pay for it. In the 2005-06 Budget, the government decided to tax all perks — what is calls the ‘fringe benefit’ — given to employees. No longer could companies get away with saying ‘ordinary business expenses’ and escape tax when they actually gave out club memberships to their employees. Employers have to now pay a tax (FBT) on a percentage of the expense incurred on such perquisites.
SECURITIES TRANSACTION TAX (STT)
If you’re dealing in shares or mutual funds , you have to loosen those purse strings a wee bit too. STT is a small tax you need to pay on the total amount you pay or receive in a share deal. In the 2004-05 Budget, the government did away with the tax on profits earned on the sale of shares held for over a year (known as long-term capital gains tax) and replaced it with STT. CUSTOMS Anything you bring home from across the seas comes with a price. By levying a tax on imports, the government’s firing on two fronts: it’s filling its coffers and protecting Indian industry. UNION EXCISE DUTY
Made in India? Either way, there’s no escape. In other words, this is a duty imposed on goods manufactured in the country. SERVICE TAX If you text your friend a hundred times a day, or can’t do with-out the coiffeured look at the neighbourhood salon, your monthly bill will show up a little charge for the services you use. It is a tax on services rendered.
MINIMUM ALTERNATE TAX (MAT)
It’s known that a company pays tax on profits as per the Income-Tax Act. That just may not always be enough. If its tax liability is less than 10% of its profits, the company has to pay a minimum alternate tax of 10% of the book profits. SURCHARGE This is an extra bit of 10% on their tax liability individuals pay for earning more than Rs 10 lakh. Companies with a revenue of up to Rs 1 crore are spared this rod. VAT AND GST After a lot of discussion and brainstorming, the government levies what is called a ‘value-added tax’: a more transparent form of taxation. The tax is based on the difference between the value of the output and the value of the inputs used to produce it.. The aim here is to tax a firm only for the value it adds to the manufacturing inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes as a product passes through different stages of production/value addition. A GST, or goods and services tax, on the other hand, contains the entire element of tax borne by a good — including a Central and a state-level tax. MORE REVENUE Of course, tax isn’t the only way governments make money. There’s also ‘nontax revenue’ NON-TAX REVENUE Any loan given to state governments, public institutions, PSUs come with a price (interests) and forms the most important receipts under this head apart from dividends and profits received from PSUs. The government also earns from the various services including public services it provides. Of this only the Railways is a separate department, though all its receipts and expenditure are routed through the consolidated fund.
CAPITAL RECEIPTS RECEIPTS
in the capital account of the consolidated fund are grouped under three broad heads — public debt, recoveries of loans and advances, and miscellaneous receipts PUBLIC DEBT Don’t mistake the phrase. Public debt is not something incurred by the public. In Budget parlance the difference between borrowings (public debt receipts) and repayments (public debt disbursals) during the year is the net accretion to the public debt.. Public debt can be split into two heads, internal debt (money borrowed within the country) and external debt (funds borrowed from non-Indian sources). The internal debt comprises Treasury Bills, market stabilisation scheme, ways and means advance, and securities against small savings.
TREASURY BILL (T-BILLS)
These are bonds (debt securities) with maturity of less than a year. These are issued to meet short-term mismatches in receipts and expenditure. Bonds of longer maturity are called dated securities.
MARKET STABILISATION SCHEME (MSS)
The scheme was launched in April 2004 to strengthen Reserve Bank of India’s (RBI) ability to conduct exchange rate and monetary manage-ment. . These securities are issued not to meet the government’s expenditure but to provide the RBI with a stock of securities with which to intervene in the market to manage liquidity.
WAYS AND MEANS ADVANCE (WMA)
RBI is the big daddy of banks being the banker for both the Central and State governments. Therefore, the RBI provides a breather to manage mismatches in their receipts and payments in the form of ways and means advances.
SECURITIES AGAINST SMALL SAVINGS
The government meets a small part of its loan requirement by appropriating small savings collection by issuing securities to the fund.
MISCELLANEOUS CAPITAL RECEIPTS:
These are primarily receipts from disinvestment in public sector undertakings. The capital account receipts of the consolidated fund — public debt, recoveries of loans and advances, and miscellaneous receipts — and revenue receipts make up the total receipts of the consolidated fund.
EXPENDITURE
Before we begin to examine the nitty gritty of where and how the government spends its money, we need to understand what’s called the Central Plan. This is what every child in the country learns about in school; only, we all know it better as the Five-Year Plan. A Central Plan is the government’s annual expenditure sheet, with a five-year roadmap. Here’s where the government gets the money for the grand five-year exercise: The funding of the Central Plan is split almost evenly between government support (from the Budget) and internal and extra-budgetary resources of stateowned enterprises. The government’s support to the Central Plan is called the Budget support.
PLAN EXPENDITURE
This is essentially the Budget support to the Central Plan. It also comprises the amount the Centre sets aside for plans of states and Union Territories. Like all Budget heads, this is also split into revenue and capital components.
NON-PLAN EXPENDITURE
All those bills the government has to pay, under the ‘revenue expenditure’ head are bunched up here: interest payments, subsidies, salaries, defence and pension. The ‘capital’ component, in comparison, is small; the largest chunk of this goes to defence.
DEFICIT
When government’s expenditure exceeds its receipts it has to borrow to meet the shortfall. This deficit has material implication for the economy.
FISCAL DEFICIT
This is where the government feels the pinch. It often lives beyond its means, a lot like the situation mere mortals find themselves in. And then, the vicious circle is complete: it goes right back to the people for more money. Here’s how that works out: The government’s ‘non-borrowed receipts’ — revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds — fall short of its expenditure. The excess of total expenditure over total nonborrowed receipts is called ‘fiscal deficit’. The government then has to borrow money from the people to meet the shortfall.
REVENUE DEFICIT
It’s not just because it’s a deficit, but that it’s a revenue deficit makes it an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero, else the government will be in debt.
PRIMARY DEFICIT
This is one ‘primary’ indicator everyone likes to watch: when it shrinks, it indicates we’re not doing too badly on fiscal health. The primary deficit is the fiscal deficit less interest payments the government makes on its earlier borrowings. It’s the basic deficit figure, if you will.
DEFICIT AND THE GDP
It’s important to see where all this fits, in the larger economic picture. The Budget document mentions deficit as a percentage of GDP. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then it’s not such a bad thing after all. Prudent fiscal management requires that government does not borrow to consume, in the normal course. FRBM ACT Enacted in 2003, the Fiscal Responsibility and Budget Management Act required the elimination of revenue deficit by 2008-09. This means that from 2008-09, the government was to meet all its revenue expenditure from its revenue receipts. Any borrowing was to be done to meet capital expenditure — that is, repayment of loans, lending and fresh investment. The Act also mandates a 3% limit on the fiscal deficit after 2008-09 —one that allows the government to build capacities in the economy without compromising on fiscal stability. The financial crisis and the subsequent slowdown has forced the government to abandon the path of fiscal consolidation. ...AND THE REST Some of the other important terms that figure in the Budget
BHARAT NIRMAN:
Bharat Nirman is UPA’s unfulfilled dream of Build India, Build: irrigation, roads, water supply, housing, rural electrification and rural telecom connectivity. Though it couldn’t meet the target of 2009, the government is still at it.
FINANCE BILL:
This, all important sheaf of papers, is all about taxes and is presented in time before the levy breaks.
FINANCIAL INCLUSION:
This is to ensure that everyone has a bank account and financial institutions are accountable. It sees to it the common denizen is not denied of timely and cheap credit and, more importantly, not intimidated by the facade of a modern bank. However, it has not fully got past the counter. PASS-THROUGH STATUS:
Nothing can be more dreadful than having to pay twice for the same thing. This position is accorded to those investments which stands the danger of being taxed twice like mutual funds. SUBVENTION:
This is how a government bears the loss that financial institutions incur when asked to give farmers loans below the market rates.
RESOURCES TRANSFERRED TO THE STATES
As we saw earlier, the Centre gives states a helping hand in two ways — a part of its gross tax collections goes to state governments. The Centre also transfers funds to states to support their plans. These are largely in the nature of grants, and include those given to states for managing Centrally-sponsored schemes.
Sunday, July 20, 2008
INFLATION
continued from yestarday..............
Oil fuels inflation to 11.05 per cent
Companies and consumers can expect another round of monetary tightening and administrative measures as headline inflation based on the wholesale price index crossed double digits to touch 11.05 per cent for the week ended June 7, the highest since May 6, 1995.
The inflation numbers spooked the stock markets, with the benchmark Sensitive Index dropping to its lowest in almost 10 months. The Sensex fell 516.70 points, or 3.4 per cent, to 14,571.29, its lowest since August 24. All but one stock in the index fell.
The 13-year high beat all analysts' — and the government's — expectations by almost 100 basis points and reflected the impact of the June 4 increase in auto and cooking fuels.
Petrol prices were raised by Rs 5 per litre, diesel by Rs 3 per litre and LPG by Rs 50 per cylinder after the basket of crude oil that Indian refineries buy touched $125 per barrel.
The inflation rate stood at 8.75 per cent in the previous week and 4.28 per cent in the corresponding week the previous year.
"Ninety-four per cent of the weekly jump is on account of fuel," Finance Minister P Chidambaram said in a brief statement outside his North Block office this afternoon.
"Inflation for the current week also captured rupee depreciation making imports dearer," said Dharmakirti Joshi, principal economist, Crisil.
"This is indeed a very difficult time," Chidambaram said, adding: "We will have to look at stronger measures on the demand side and the monetary side."
The government has already taken several fiscal and administrative measures like banning the export of some food items and cement, cutting import duties, banning futures trading in some items, and reducing customs and excise on petroleum products to curb the price rise.
Analysts and companies expect the inflation rate to stay above 10 per cent in the weeks ahead as the fuel price rise works its way through the system.
"The inflation rate will be around 11.45 per cent next week," said Saugata Bhattacharya, vice-president, economic research, Axis Bank, attributing the rise to an increase in private transport prices that will push up fruit and vegetable rates.
"Even by December the inflation rate will remain close to 10 per cent. It will decline only by January or February, but not below 9 per cent," he added.
"The wholesale price index does not look like coming down unless there is a very sharp correction in crude oil and commodity prices," Joshi added.
Meanwhile, with the inflation rate consistently above the Reserve Bank of India's comfort level of 5 to 5.5 per cent since February (see chart), bankers and economists expect the central bank to raise the cash reserve ratio (CRR), the proportion of deposits the central banks require banks to keep with it, 25 to 50 basis points
THE END
BY BHUVAN
MEMEBER JAB WE MET CA
REDEFINING PROFESSIONALISM.....
Saturday, July 19, 2008
INFLATION
Continued from yestarday..............
Capital requirements.......
All banks are required to hold a certain percentage of their assets as capital, a rate which may be established by the central bank or the banking supervisor. For international banks, including the 55 member central banks of the Bank for International Settlements, the threshold is 8% (see the Basel Capital Accords) of risk-adjusted assets, whereby certain assets (such as government bonds) are considered to have lower risk and are either partially or fully excluded from total assets for the purposes of calculating capital adequacy. Partly due to concerns about asset inflation and repurchase agreements, capital requirements may be considered more effective than deposit/reserve requirements in preventing indefinite lending: when at the threshold, a bank cannot extend another loan without acquiring further capital on its balance sheet.
Reserve requirements
Another significant power that central banks hold is the ability to establish reserve requirements for other banks. By requiring that a percentage of liabilities be held as cash or deposited with the central bank (or other agency), limits are set on the money supply.
In practice, many banks are required to hold a percentage of their deposits as reserves. Such legal reserve requirements were introduced in the nineteenth century to reduce the risk of banks overextending themselves and suffering from bank runs, as this could lead to knock-on effects on other banks. See also money multiplier, Ponzi scheme. As the early 20th century gold standard and late 20th century dollar hegemony evolved, and as banks proliferated and engaged in more complex transactions and were able to profit from dealings globally on a moment's notice, these practices became mandatory, if only to ensure that there was some limit on the ballooning of money supply. Such limits have become harder to enforce. The People's Bank of China retains (and uses) more powers over reserves because the yuan that it manages is a non-convertible currency.
Even if reserves were not a legal requirement, prudence would ensure that banks would hold a certain percentage of their assets in the form of cash reserves. It is common to think of commercial banks as passive receivers of deposits from their customers and, for many purposes, this is still an accurate view.
This passive view of bank activity is misleading when it comes to considering what determines the nation's money supply and credit. Loan activity by banks plays a fundamental role in determining the money supply. The money deposited by commercial banks at the central bank is the real money in the banking system; other versions of what is commonly thought of as money are merely promises to pay real money. These promises to pay are circulatory multiples of real money. For general purposes, people perceive money as the amount shown in financial transactions or amount shown in their bank accounts. But bank accounts record both credit and debits that cancel each other. Only the remaining central-bank money after aggregate settlement - final money - can take only one of two forms:
physical cash, which is rarely used in wholesale financial markets,
central-bank money.
The currency component of the money supply is far smaller than the deposit component. Currency and bank reserves together make up the monetary base, called M1 and M2.
Exchange requirements
To influence the money supply, some central banks may require that some or all foreign exchange receipts (generally from exports) be exchanged for the local currency. The rate that is used to purchase local currency may be market-based or arbitrarily set by the bank. This tool is generally used in countries with non-convertible currencies or partially-convertible currencies. The recipient of the local currency may be allowed to freely dispose of the funds, required to hold the funds with the central bank for some period of time, or allowed to use the funds subject to certain restrictions. In other cases, the ability to hold or use the foreign exchange may be otherwise limited.
In this method, money supply is increased by the central bank when the central bank purchases the foreign currency by issuing (selling) the local currency. The central bank may subsequently reduce the money supply by various means, including selling bonds or foreign exchange interventions.
Margin requirements and other tools
In some countries, central banks may have other tools that work indirectly to limit lending practices and otherwise restrict or regulate capital markets. For example, a central bank may regulate margin lending, whereby individuals or companies may borrow against pledged securities. The margin requirement establishes a minimum ratio of the value of the securities to the amount borrowed.
Central banks often have requirements for the quality of assets that may be held by financial institutions; these requirements may act as a limit on the amount of risk and leverage created by the financial system. These requirements may be direct, such as requiring certain assets to bear certain minimum credit ratings, or indirect, by the central bank lending to counterparties only when security of a certain quality is pledged as collateral.
Examples of use
The People's Bank of China has been forced into particularly aggressive and differentiating tactics by the extreme complexity and rapid expansion of the economy it manages. It imposed some absolute restrictions on lending to specific industries in 2003, and continues to require 1% more (7%) reserves from urban banks (typically focusing on export) than rural ones. This is not by any means an unusual situation. The US historically had very wide ranges of reserve requirements between its dozen branches. Domestic development is thought to be optimized mostly by reserve requirements rather than by capital adequacy methods, since they can be more finely tuned and regionally varied
TO BE CONTINUED TOMORROW.................
Friday, July 18, 2008
INFLATION
.............CONTINUED FROM YESTARDAY
Controlling inflation
There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations (that is, using monetary policy). High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied.
Monetarists emphasize increasing interest rates (slowing the rise in the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.
Another method attempted in the past have been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. In general wage and price controls are regarded as a drastic measure, and only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. Many developed nations set prices extensively, including for basic commodities as gasoline] The usual economic analysis is that that which is under priced is overconsumed, and that the distortions that occur will force adjustments in supply. For example, if the official price of bread is too low, there will be too little bread at official prices.
Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed.
METHODS OF CONTROLLING INFLATION
Open market operations
Through open market operations, a central bank influences the money supply in an economy directly. Each time it buys securities, exchanging money for the security, it raises the money supply. Conversely, selling of securities lowers the money supply. Buying of securities thus amounts to printing new money while lowering supply of the specific security.
The main open market operations are:
Temporary lending of money for collateral securities ("Reverse Operations" or "repurchase operations", otherwise known as the "repo" market). These operations are carried out on a regular basis, where fixed maturity loans (of 1 week and 1 month for the ECB) are auctioned off.
Buying or selling securities ("direct operations") on ad-hoc basis.
Foreign exchange operations such as forex swaps.
All of these interventions can also influence the foreign exchange market and thus the exchange rate. For example the People's Bank of China and the Bank of Japan have on occasion bought several hundred billions of U.S. Treasuries, presumably in order to stop the decline of the U.S. dollar versus the Yen.
TO BE CONTINUED TOMORROW...................................
Thursday, July 17, 2008
INFLATION
Causes of inflation
In the long run inflation is generally believed to be a monetary phenomenon while in the short and medium term it is influenced by the relative elasticity of wages, prices and interest rates.[6] The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian schools. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trendline. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy.
A great deal of economic literature concerns the question of what causes inflation and what effect it has. There are different schools of thought as to what causes inflation. Most can be divided into two broad areas: quality theories of inflation, and quantity theories of inflation. Many theories of inflation combine the two. The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the equation of the money supply, its velocity, and exchanges. Adam Smith and David Hume proposed a quantity theory of inflation for money, and a quality theory of inflation for production.
Keynesian economic theory proposes that money is transparent to real forces in the economy, and that visible inflation is the result of pressures in the economy expressing themselves in prices.
There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle model":
Demand-pull inflation: inflation caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion. The failing value of money, however, may encourage spending rather than saving and so reduce the funds available for investment.
Cost-push inflation: presently termed "supply shock inflation," caused by drops in aggregate supply due to increased prices of inputs, for example. Take for instance a sudden decrease in the supply of oil, which would increase oil prices. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices.
Built-in inflation: induced by adaptive expectations, often linked to the "price/wage spiral" because it involves workers trying to keep their wages up (gross wages have to increase above the CPI rate to net to CPI after-tax) with prices and then employers passing higher costs on to consumers as higher prices as part of a "vicious circle." Built-in inflation reflects events in the past, and so might be seen as hangover inflation.
A major demand-pull theory centers on the supply of money: inflation may be caused by an increase in the quantity of money in circulation relative to the ability of the economy to supply (its potential output). This is most obvious when governments finance spending in a crisis, such as a civil war, by printing money excessively, often leading to hyperinflation, a condition where prices can double in a month or less. Another cause can be a rapid decline in the demand for money, as happened in Europe during the Black Plague.
The money supply is also thought to play a major role in determining moderate levels of inflation, although there are differences of opinion on how important it is. For example, Monetarist economists believe that the link is very strong; Keynesian economics, by contrast, typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. That is, for Keynesians the money supply is only one determinant of aggregate demand. Some economists consider this a 'hocus pocus' approach: They disagree with the notion that central banks control the money supply, arguing that central banks have little control because the money supply adapts to the demand for bank credit issued by commercial banks. This is the theory of endogenous money. Advocated strongly by post-Keynesians as far back as the 1960s, it has today become a central focus of Taylor rule advocates. But this position is not universally accepted. Banks create money by making loans. But the aggregate volume of these loans diminishes as real interest rates increase. Thus, it is quite likely that central banks influence the money supply by making money cheaper or more expensive, and thus increasing or decreasing its production
TO BE CONTINUED TOMORROW..........................
Wednesday, July 16, 2008
INFLATION
...........................CONTINURD FROM YESTARDAY
Issues in measuring inflation
Measuring inflation requires finding objective ways of separating out changes in nominal prices from other influences related to real activity. In the simplest possible case, if the price of a 10 oz. can of corn changes from $0.90 to $1.00 over the course of a year, with no change in quality, then this price change represents inflation. But we are usually more interested in knowing how the overall cost of living changes, and therefore instead of looking at the change in price of one good, we want to know how the price of a large 'basket' of goods and services changes. This is the purpose of looking at a price index, which is a weighted average of many prices. The weights in the Consumer Price Index, for example, represent the fraction of spending that typical consumers spend on each type of goods (using data collected by surveying households).
Inflation measures are often modified over time, either for the relative weight of goods in the basket, or in the way in which goods from the present are compared with goods from the past. This includes hedonic adjustments and “reweighing” as well as using chained measures of inflation. As with many economic numbers, inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost increases, versus changes in the economy. Inflation numbers are averaged or otherwise subjected to statistical techniques in order to remove statistical noise and volatility of individual prices. Finally, when looking at inflation, economic institutions sometimes only look at subsets or special indices. One common set is inflation excluding food and energy, which is often called “core inflation”.
Effects of inflation
A small amount of inflation can be viewed as having a beneficial effect on the economy.[3] One reason for this is that it can be difficult to renegotiate prices and wages. With generally increasing prices it is easier for relative prices to adjust.
Many prices are "sticky downward" and tend to creep upward, so that efforts to attain a zero inflation rate (a constant price level) punish other sectors with falling prices, profits, and employment. Efforts to attain complete price stability can also lead to deflation, which is generally viewed as a negative by Keynesians because of the downward adjustments in wages and output that are associated with it.
With inflation, the price of any given good is likely to increase over time, therefore both consumers and businesses may choose to make purchases sooner rather than later. This effect tends to keep an economy active in the short term by encouraging spending and borrowing, and in the long term by encouraging investments. But inflation can also reduce incentives to save, so the effect on gross capital formation in the long run is ambiguous.
Inflation is also viewed as a hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation. In investing, inflation risks often cause investors to take on more systematic risk, in order to gain returns that will stay ahead of expected inflation.[citation needed]
Inflation also gives central banks room to maneuver, since their primary tool for controlling the money supply and velocity of money is by setting the lowest interest rate in an economy - the discount rate at which banks can borrow from the central bank. Since borrowing at negative interest is generally ineffective, a positive inflation rate gives central bankers "ammunition", as it is sometimes called, to stimulate the economy. As central banks are controlled by governments, there is also often political pressure to increase the money supply to pay government services, this has the added effect of creating inflation and decreasing the net money owed by the government in previously negotiated contractual agreements and in debt.
For these reasons, many economists see moderate inflation as a benefit; some business executives see mild inflation as "greasing the wheels of commerce." But other economists have advocated reducing inflation to zero as a monetary policy goal - particularly in the late 1990s at the end of a long disinflationary period, when the policy seemed within reach; and some have even advocated deflation instead of inflation.
In general, high or unpredictable inflation rates are regarded as bad:
Uncertainty about future inflation may discourage investment and saving.
CONTIUNED TOMORROW..............................
Tuesday, July 15, 2008
INFLATION
DEFINITION OF INFLATION
Inflation is a rise in general level of prices of goods and services over time. Although "inflation" is sometimes used to refer to a rise in the prices of a specific set of goods or services, a rise in prices of one set (such as food) without a rise in others (such as wages) is not included in the original meaning of the word. Inflation can be thought of as a decrease in the value of the unit of currency. It is measured as the percentage rate of change of a price index[1] but it is not uniquely defined because there are various price indices that can be used.
Many economists believe that high rates of inflation are caused by high rates of growth of the money supply.[2] Views on the factors that determine moderate rates of inflation are more varied: changes in inflation are sometimes attributed to fluctuations in real demand for goods and services or in available supplies (i.e. changes in scarcity), and sometimes to changes in the supply or demand for money. In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation at moderate rates: the "monetarists" argued that money supply dominated all other factors in determining inflation, while "Keynesians" argued that real demand was often more important than changes in the money supply.
There are many measures of inflation. For example, different price indices can be used to measure changes in prices that affect different people. Two widely known indices for which inflation rates are reported in many countries are the Consumer Price Index (CPI), which measures consumer prices, and the GDP deflator, which measures price variations associated with domestic production of goods and services.
Measures of inflation
Inflation is measured by calculating the percentage rate of change of a price index, which is called the inflation rate. This rate can be calculated for many different price indices, including:
Consumer price indices (CPIs) which measure the price of a selection of goods purchased by a "typical consumer." In the UK, an alternative index called the Retail Price Index (RPI) uses a slightly different market basket.
Cost-of-living indices (COLI) are indices similar to the CPI which are often used to adjust fixed incomes and contractual incomes to maintain the real value of those incomes.
Producer price indices (PPIs) which measure the prices received by producers. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any resulting increase in the CPI. Producer price inflation measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" as consumer inflation, or it could be absorbed by profits, or offset by increasing productivity. In India and the United States, an earlier version of the PPI was called the Wholesale Price Index.
Commodity price indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee.
The GDP Deflator is a measure of the price of all the goods and services included in Gross Domestic Product (GDP). The US Commerce Department publishes a deflator series for US GDP, defined as its nominal GDP measure divided by its real GDP measure.
Capital goods price Index, although so far no attempt at building such an index has been made, several economists have recently pointed out the necessity of measuring capital goods inflation (inflation in the price of stocks, real estate, and other assets) separately.[citation needed] Indeed a given increase in the supply of money can lead to a rise in inflation (consumption goods inflation) and or to a rise in capital goods price inflation. The growth in money supply has remained fairly constant through since the 1970s however consumption goods price inflation has been reduced because most of the inflation has happened in the capital goods prices.
Other types of inflation measures include:
Regional Inflation The Bureau of Labor Statistics breaks down CPI-U calculations down to different regions of the US.
Historical Inflation Before collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology. This is equivalent to not adjusting the composition of baskets over time.
TO BE CONTINUED TOMORROW......................
Monday, July 14, 2008
INFLATION
INFLATION
The following is the text of the statement made by Finance Minister P. Chidambaram Saturday, a day after India's inflation reached 11.05 per cent. "Yesterday, the WPI (wholesale price index) for the week ending June 7, 2008 was released. Predictably, grave concern has been expressed at the rate of inflation crossing 11 per cent. "I have carefully read the news reports and the statements made by a number of people. I have also read the editorials in the newspapers. "It is necessary to place the matter in context. The context is a relentless rise in crude oil prices as will be seen from the following table:
Date WPI Inflation (percentage) Nymex Crude Oil Price ($/bbl)
24 Nov 2007 3.11 98.19
1 Mar 2008 6.21 101.85
31 Mar 2008 8.75 127.37
7 June 2008 11.05 137.54
"Since the Budget was presented on Feb 29, 2008, crude oil prices have increased by 37 per cent. "Besides, we administer the prices of only four petroleum products - petrol, diesel, LPG (liquified petroleum gas) and kerosene (PDS - public distribution system). All other petroleum products and derivatives are sold at market prices. When crude oil prices rise, those prices also rise. For the week ending June 7, 2008, the week-on-week increase in inflation was 1.77 per cent. Of this, the petroleum products under administered prices contributed 0.79 per cent and other petroleum products contributed 0.88 per cent, making a total of 1.67 per cent. Thus, fully 94 per cent of the week-on-week increase in inflation is attributable to petroleum products. "In the primary articles group, the index for food articles declined by 1.11 per cent. For the group as a whole, the index declined by 0.37 per cent. Even the manufactured products group registered only a small increase of 0.30 per cent. It is the 'fuel, power and light' group that has sharply pushed up the inflation rate. The most important driver of the current inflation is crude oil prices. "Last evening (Friday), I called on the prime minister and had a long discussion with him. This morning, I invited the Governor, RBI (Reserve Bank of India) to meet me and we have reviewed the situation. "I am happy to take note of the sober and reasonable advice given by Shri Yashwant Sinha, a prominent leader of the principal opposition party. He has suggested that Government could have gone for 'deeper cuts in taxes'. I have no quarrel with the proposition. After the Budget Estimates were presented to parliament, we have cut taxes and sacrificed considerable revenue. Only recently, we gave up revenues of Rs.22,000 crore (Rs.220 billion). I may point out that giving up revenues and borrowing an equivalent amount in the market in order to finance expenditure would also be inflationary. Nevertheless, I take Shri Sinha's suggestion on board and will explore the options. "We take comfort in the fact that there has been record production of wheat and paddy and we have adequate stocks of wheat and rice. We have procured 220 lakh (22 million) tonnes of wheat and, so far, 260 lakh (26 million) tonnes of rice. We will provide adequate wheat and rice to the PDS and we will also use our stocks to moderate prices in the open market. Hence, there is no cause for worry regarding wheat and rice. "Given the difficult circumstances, government will take appropriate measures in order to contain and moderate inflation. A number of well-meaning experts as well as the editorials have advised that the authorities should take monetary measures; that we should not give room for panic; that we should take steps to quell inflationary expectations. That is precisely the course that the government has adopted in the past and will adopt in the future too."
to be continued tomorrow........
Sunday, July 13, 2008
Is India a superpower of poverty?
Wednesday, July 9, 2008
INDIAN ECONOMY
Indian economy is growing day by day.It is clearly reflected by data of GDP which is consistently revolving between 8- 9% which is healthy sign for Indian economy.India is just close to China whose GDP is around 11 to 12 %.But GDP alone is not an indicator of Development as there r many countries in world that have GDP around 20% even they lacks behind other countries, because they don’t have enough who can work or lack demand because for any economy to grow industrial growth in that country must be rapid and for industrial growth to take place there must be element of demand in that country. So India also has this advantage as huge amount of population leads to increased demand which also favours India. Development of Indian economy is also reflected by the fact that from last year increasing foreign currency flows are coming to India because of development potential of Indian industries.
But the main problems confronting Indian economy today are Inflation and rising crude oil prices. Inflation for week ended June 14 has touched 11.45% and crude on Friday has touched $143 per barrel from $136 a barrel in last week showing a uptrend of 4-5 % in last week which is a worrisome indicators for global as well as Indian economies.
Inflation & rising crude oil prices
When economy will grow that’s sure inflation will also increase but inflation above 6 % is cause of concern for our economy. But the main increase in inflation if we can analyze is mainly due to crude oil prices which have increased from $97 per barrel in October,2007 to $143 a barrel in June 2008 due to which 44% increase in crude oil has affected inflation to extent of 95% approx. as it has increased from 4% to 8.10%. 11.45% is weekly data annual inflation is around 8.10%. S o what I want to say that it is a short term phenomenon as in maid term crude will go to around $110 a barrel n also RBI has taken various steps such as it has increased CRR ratio as well as Repo rates by 0.5%. So the effect of all will tame down inflation and by September it will be around 6 %.
Saudi Arabia stated that it is ready to increase production by 200,000 barrels per day to give support to the international prices. This is provided there is an appropriate increase in investment both upstream and downstream necessary to ensure adequate and timely supplies. Also, the transparency and regulation of financial markets should be improved, it said. So in long run crude oil prices will also come down
Hoarding is also a factor which has resulted in increase of crude prices. Government has also taken measures to control it as follows
In response to record oil and gasoline prices, however, the US House of Representatives has approved legislation directing the Commodity Futures Trading Commission to use its authority, including emergency powers, to “curb immediately” excessive speculation in energy futures markets, which have been affected by massive inflows of money and zooming prices and also to control speculation and hoarding.
I am a BULL who has very optimistic view towards Indian economy and according to me in coming 2 to 3 years Indian markets will see an equity boom tht has never occurred place n in my point of view our stocks from where they are today will triple from current price sin coming two years. Its my own view
By Bhuvan