tag:blogger.com,1999:blog-5043138489010794057.post8872455741096644462..comments2024-03-27T15:57:09.192+05:30Comments on Urbanomics: The impact of rising government borrowingsUrbanomicshttp://www.blogger.com/profile/16956198290294771298noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-5043138489010794057.post-38578181705272996192009-07-22T08:52:16.146+05:302009-07-22T08:52:16.146+05:30thanks for those comments. sorry for the long resp...thanks for those comments. sorry for the long response<br /><br />1. as you said, "reduced availability" of funds, sooner or (than!) latter, pushes up interest rates. as competition for the same pool of funds increases, the banks slowly start increasing their rates. the biggest and immediate impact will be felt by those other than the Tier I companies, whose cost of capital will shoot up. <br /><br />though interest rates are regulated, there is considerable room for banks, including PSU banks, to vary their rates. and gone are the days when government diktats could keep a lid on rates by decree.<br /><br />2. There are four inflation indices - WPI, and three CPI indices for urban non-manual employees, industrial workers, and agricultural labor.<br /><br />The WPI, with its distribution of weights, is a more accurate reflection of the national economy, while the CPI is a more accurate representation of the impact of price changes on the common man. Unlike other major economies, where inflation figures are published on a monthly or quarterly periodicity and the focus is on WPI, India has weekly figures with focus on CPI. <br /><br />inflation figures mean different things to different audience. the frenzied weekly debate on inflation in India is meaningless for many reasons - its accuracy is doubtful, we can draw limited conclusions from such variations over a short period etc. academically and for policy makers, the most meaningful set of inflation indices are those (core inflation) stripped off items which can vary sharply over time - foodgrains, energy prices etc. ironically, those are the same things of relevance to common man. <br /><br />i have discussed this earlier in detail, including aam admi indices and the proposal for changing it. <br /><br />http://gulzar05.blogspot.com/2008/09/new-inflation-index-in-india.html<br /><br />http://gulzar05.blogspot.com/2009/03/deflation-in-india-extension-of-index.html<br /><br />http://gulzar05.blogspot.com/2008/06/impact-of-inflation-on-common-man.html <br /><br />http://gulzar05.blogspot.com/2008/06/it-is-not-embedded-inflation.html<br /><br />3. this is not an easy question to answer. inflation is of two types - cost push (one arising from supply side constraints that causes scarcity of the product in demand) and demand pull (arising from excessive money supply in the system). the inflation we experienced last year was contributed more by cost push factors, whereas any inflation now is more likely to be the result of increase in money supply. <br /><br />the actions of the RBI, by way of monetary (lower rates and eased credit policy by lowering CRR and SLR) and credit policy (multiple liquidity auctions), and by government through fiscal policy (loan waivers, Pay Commission grants, infrastructure spending, tax-direct and indirect-cuts etc)actions to combat the recession have had the effect of pumping large quantities of money/liquidity/credit into the banking system and the economy. The RBIs actions injected money primarily into the banks, whereas the government's actions have been aimed more at directly pumping money into the hands of consumers and firms. <br /><br />Once the banks' reserves expand, <br />they generally increase their lending. but unfortunately, despite the higher reserves and lower interest rates, and being flush with liquidity, thanks to the weak economy and the increased risk perception, both banks have been reluctant to lend to borrowers and demand for credit off-take among businesses too have been weak. the result has been - banks flush with liquidity, but both unable and unwilling to lend. <br /><br />your last two questions do not have easy answers (nor any satisfactory answers at all!). it is almost impossible to accurately predict when inflation is setting in or when those pressures are getting out of control. and even when we belatedly know, though there are a number of options open, it is not possible to say with any degeree of certainty which specific policy or what set of specific policies can be applied to the specific context.Urbanomicshttps://www.blogger.com/profile/16956198290294771298noreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-67049916497604516382009-07-22T07:08:38.392+05:302009-07-22T07:08:38.392+05:30How are you going to link the stimulus package/ hi...How are you going to link the stimulus package/ high government spending to inflation. Can u expand a step by step sequence of actions and consequences leading to such an increase.<br /><br />What set of government money causes inflation? Is there a point of inflexion somewhere? where does inflation set in and upto what point does it not?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-20958090014770721292009-07-22T07:04:50.809+05:302009-07-22T07:04:50.809+05:30Is there an Index of inflation other than WPI. Why...Is there an Index of inflation other than WPI. Why is the CPI not used? What are relative weights assigned to different components of the CPI. What set of weights are closet to the AAm admi. Is there such a set developed by any of the left thinking economistsAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5043138489010794057.post-1705658474293423162009-07-22T06:58:04.325+05:302009-07-22T06:58:04.325+05:30You Said:
"If the economy recovers before the...You Said:<br />"If the economy recovers before the government borrowings end, the government will end up competing with private borrowers in thee credit markets, thereby putting upward pressure on interest rates."<br /><br />Since the interest rates are regulated, most banks being PSUs and lack of an effective functioning market, it might mean reduced availablity and not higher interest rates for the private borrowers.Anonymousnoreply@blogger.com