Chillin' out till it needs to be funded
We have been saying of double digit inflation since October 2009 when the Central Bank started speaking of tightening policy on par course with withdrawal of stimulus. Unfortunately, the politically charged atmosphere and the lack of victory lap economics’ vision of the dichotomy between the two purposes sent the Indian charter flying out of the window and where earlier reform is now being rolled back changing the base rate to 10% and a probable target of 25% for GST (only half joking ; if the planners take state demands into account, they will get this rate) while DTC is going ahead, seems a policy planning animal just kowtowing to killing opposition , political and fiscal rather than following through on their own plan from October 2008.
Criticism aside, the problem is two fold. The fiscal runaway growth is happening on a year ago low base and also underfed , unrequited farmers and rural dreams. If anything, the same must be dually fed with higher support prices and more tools for Quality of Life. The second is taking care of deficit by lowering tax rates and widening the tax net. What stopped the government and probably therefore the Central Bank is the weakness in the knees that comes from dropping tax revenues when you are growing by 8%. There is no basis why that should have happened unless we do not know how to measure growth. Money supply is lower than the purported 20% but even a nominal growth of 15% in GDP will not help us grow much as an economy without a drop in inflation.
The China situation
China in the meantime has surplus inventories in a multitude of industries like Steel and even retail items where consumer demand has dropped. It has to present a growing stimulus to middle class / consumer families that can take charge of growth with even spending.
However, they also have as a twin, the problem of runaway bubbles in pricing, not just in real estate but elsewhere as well. The Chinese seem to be takking a cue too many from their own growth and trying at the Corporation level, whatever has not been taken away with the Central Government. However, their model can sustain itself once they reach a trade deficit this month, which though not being looked forward to, might work in their favour in deciding buckets of items where production focus must shift and where the pricing pressures should move. They still remain the largetst market for Cars and are even trying reserving Car sales in the consumer markets for their own produce like BYD. Funny government!
The US and Europe Conundrum
US is going to take some time to recover and a $1.4 trillion debt where India’s GDP is the same amount, means that the two economies would never think in the same direction again. However, Europe always was and US always will be a centrally directed economy from here because of the empty pockets for the tates esp. with large programs like Healthcare going thru for the US and problems like Greece and Portugal falling in the plate for Europe.
These advocates of free market are in afct now waiting for the world markets to give them a direction and India should sieze the opportunity at hand, if it can harness its own much touted talent pool.
The way forward
India has to get into a higher gear of growth, but fiscal correction cannot wait for the same cycle. We have already proved that we are in the virtuous cycle of growth and should fearlessly plough forward with larger rate increases and leave the banks freer to lend at higher , even usuriu rates. That would be the quickest path to correction and stimulus working together. Our credit rating has also stabilized and in fact we could soon be headed northward there if we can maintain the growth momentum and market liquidity. A rate increase of even 200 bp across CRR and Repo rate is unlikely to upset that apple cart with Fuel and Food taking it toll omn manufacturing. The real test of growing IIP at 20% regularly for the next 12 months is in being able to get inflation manageable rates with quicker even faster decisins. OOnce the market reads the logivc, rater than the reactiveness of the Central Bank it would be more pliable. Fixed Income markets have been north of 8% now because they have known this to be the natural progression. We should take a cue from that marke and keep increasing rates till the yield curve breaks and turns direction.