In an article in Business Standard titled How to combat inflation , the author provides the simplest of solutions to tackle Indias problems for the short term.,

a. Allow a 10% appreciation in INR  (to USD/INR = 36) to quell inflation

b. Reduce Interest rates by 3% (to say 4% p.a)

 My Take : I wish the policy makers were this straight forward. They always want complicated untested methods employed like the below

a. Ban Rice exports

b. Subsidise maize imports

c. Cut Steel prices

All the above activities are naive and useless. I wish the policy makers knew,

“If the prices of volatile commodities are rising, and the prices of finished goods and services are rising at a slower rate than would be warranted by their commodity content (which is to say, the price of value added above those component commodities is not rising, at least not any faster than is considered normal), how does this resemble a balloon blowing up? Most of the balloon is not expanding.”

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A week ago, Joshua Hager was despondent. Laid off by a mortgage company, he has looked for jobs ranging from bank teller to risk analyst. He was sending out as many as 10 resumes a day but was getting barely a nibble from employers or recruiters.

Hager has joined nearly 125,000 others on Wall Street and at mortgage firms and other financial companies who received pink slips since the start of 2007. It seems that nearly every week another financial firm lets go of thousands of workers at all levels. With the market flooded, it’s hard for the unemployed to land a job, experts said.

Every time he turns on the television, Hager worries that he’ll hear of more layoffs. He shuddered when he learned that JPMorgan Chase would acquire Bear Stearns, which employs 14,000 staffers.

“How many people will be swamping the job market?” he said. “Everybody in finance will be looking for a job.”

My Take : Rightnow the problem is with the Finance jobs. If the economy continues to detoriate, we might soon see other sectors also getting affected. If that continues for a prolonged period, other countries also could affected.

For those of you who are wondering what is happening with Indian Economy, here is a quick update.

We know inflation is alive and kicking. Food prices are at a high.
Growth has slowed down from 9% (which we saw over this year).

A slowing growth and rising inflation is called STAGFLATION.  

S-T-A-G-F-L-A-T-I-O-N is the word that I am humming now. I was discussing this with an eminent economist here in the US and he quickly told me… “In order for stagflation to really take hold, you would need some concrete evidence that unemployement is increasing — otherwise, we’re just talking about inflation.”

A very good point indeed. The trouble I have is, Indian govt doesn’t produce the unemployment numbers like US. I won’t be able to make a reasonable judgement with unemployment.

OK, now govt has two things to do. (it always had a twin mandate)

a. Keep up growth (And hence employment to masses).
b. Contain Inflation.

For (a), the easiest thing that Govt can do is to lower interest rates but that will hamper (b).

Now its all about playing the cards right, which of the above is important now ? (b) seems to be the priority now ****, contain price rise, ward of Communists wrath, put up a good face in the elections next year.
Now that the direction is clear, here are my predictions

a. If US situation continues to detoriate, govt could let lose the USD/INR a bit more. USD/INR = 38 looks a possibility in the near term
b. Once (a) plays out and US situation continues to detoriate and goes past the recession zone, inflows into India go pale and USD/INR could appreciate past 40.

So USD/INR volatility is here to stay which is why FM is worried.  ****** ( How nicely a straddle can work )

In short, India is in the problem zone which I have been talking about for the last 2 years.
We are COMPLETELY at the mercy of US / Global growth.

How is this going to affect us ? Thats a topic for the next article.

Business is obviously booming in India and China.  This is the common perception, India ranks 2nd in IPO, 4th in M&As.   Villages don’t seem to be left behind. Last week, I heard from one of my friends that a barber (usually considered a lower class of economic strata) has put his son on the “management seat” in an engineering college. 

Ysterday, On my way to office, I went past the American School , a FORD Endevor (costs around 15L ?) pulled up near the school gate. There was a lonely looking girl who got out and went inside the school. The driver parked the vehicle there and had to wait.

 When I rode few yards further, there was an MTC bus which had around 70 passengers broke down. All of them were stranded and shouting. I could only think of the time the passengers were wasting and they trouble and tension they had to undergo when they reach their work locations (or anyother destinations they were set to). Productivity !!!

Two Inferences :

1.  Economic Divide is massive.  A ford Endevor for a school girl vs a dilaphitated MTC bus for masses.

2. India and Productivity growth are Antonyms

I wanted to break the long hiatus from blogging. What better day than to do it than the Independence Day of my mother land. 

When I was about to return from UK, I called a friend from there and informed him of my impending departure from the “Empire”.  I sounded very excited to meet up with friends and family. He quipped back … “You sound so excited about your return to your mother country “.   Frankly, this “mother country” theme NEVER turned me on.  Its just my family and friends. 

I am still wondering why we celebrate this Independence Day. It sounds so hollow here.   If you had lived in a western country you would know the difference.  Mediocrity and resistance to change has become the norm of this country. It’s so silly to hold the parade on republic and independence days and shows of the military toys. We have been doing the same thing over for 60 years. The toys are not great anyway. The speech is listened by none. Whatever speech the leaders give is not going to be followed by them. This is what I call resistance to change and mediocrity.

 I would touch upon economics, a subject dear to my heart. Economically, India is in a better shape than before. No doubt. In terms of preparedness for the future, we are a long way off. One small shock, we are at great risk. You might have noticed the big clamour that ensued the dollars descent from 43 to 40. This is a harbinger of the times ahead.

Enough said. This could be the icing on the cake of Independence Day celebrations. 

You can turn to me and ask “This is a nice rant but how are you helping the cause ?”. I say “Forget the cause; I am trying to make you understand so that you save your ass”.

I asked an economist and a realist….

 His reply – “there is no best measure of wealth. It is entirely subjective. you can define wealth however you see fit, but that doesn’t mean your definition is the same as mine. “