Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts

Monday, August 03, 2009

Sustainability of GDP

Oftentimes it is considered that a growing GDP is a panacea. We (at least yours truly) have believed that an increased Government spending and investment in infrastructure will ‘always’ lead to growth in GDP and hence it contributes towards the panacea for all economic frailties. But as this article from ‘The Economist’ conveys, the constituents of GDP will be an important factor in deciding whether or not the increased investments will have sustainable impact on GDP.

Let me try to give a brief summary of the above article:
GDP = Consumer Spending + Government Spending + Investments + (Exports – Imports)
Further breaking down, GDP = (Household Spending + Corporate Spending) + Government Spending + Investments + (Exports – Imports)

If growth in GDP is not accompanied by growth in Household Spending, that growth in GDP would be short term and would not be sustainable in the long run. Hence for a sustainable and long term growth in GDP, the Governments should target increasing contribution of Household Spending to GDP.

Wednesday, June 17, 2009

Economic Ramblings

Cross posted from my other blog: Lifestyle Investments

Monetary Policy, Fiscal Policy, Inflation, Interest Rates – some of the popular terms any student of Economics will go through, somewhat boringly, in their introductory courses. These concepts when linked to the real world can throw some interesting viewpoints about the various burning issues. In the last 12 months, the central banks/Governments of most countries have, more or less, uniformly and uncharacteristically followed expansive monetary policies to the extent of bringing interest rates close to 0%. This is inline with the Governments’ fiscal policies which are more or less expansive – at least at planning level. An expansive monetary policy and expansive fiscal policy will ring a nice note in one’s ears that things are going fine with the economies. In most cases, this could be true; it may not be so this time around.

If the Governments go for an expansive fiscal policy, the Government will spur spending. For spending, the Government needs money – there are multiple options for the Government to get the money. One, it can print money; two, it can issue bonds and raise debts. The former has its own implications on interest rates and the dreaded fear of deflation resulting in increase of the real cost of borrowing. The latter, however, depends on some other factor so far not mentioned: Debt-to-GDP ratio among other things. The Government’s ability to borrow is inversely proportional to the Debt-to-GDP ratio – less the debt to GDP, the better the borrowing ability of the Government – sounds very intuitive.

There is always a partisan view of the credit rating agencies’ role in the financial world. Irrespective of the side you are in, there is a considerable weight attached to the ratings given out by these agencies. It is only common-sense to believe these agencies downgrade those countries with less borrowing power and less repaying capacity. A very simple indicator of these is the debt-to-GDP ratio. Let us take the case of India. If Debt-to-GDP ratio increases (as this would be most likely the case in the late recession / early recovery stage of the business cycle that we are in; as the GDP would not rise as fast as the rise in debt), the agencies downgrade the ratings of the Government. If this happens, there is a double whammy effect as the existing Government bonds would lose value, investors may begin to dump and the Government would be at a disadvantage at raising money from the markets. Essentially, the market forces would be against an expansive fiscal policy. This is very pertinent in India’s case with a Debt-to-GDP ratio of 58% (compare this to Chinese Debt to GDP ratio of 18%) – so Government may not be able to follow expansive fiscal policy along with an expansive monetary policy.

If it persists with expansive monetary policy in this scenario, there would be too much money chasing too little economic activity, leading to the most commonly known economic term – Inflation. With so much political sense also attached to Inflation, no Government will be willing to let this happen. So, are we heading towards restrictive monetary and restrictive fiscal policies: not likely as this again also has a political and economic cost attached with the R-word and no one wants it. All this means is that the Government has to raise money from somewhere without losing its credit worthiness. The likely sources, I believe, would be PSU divestments, tightening of personal tax regime among other things. All this means is the Government would not be able to undertake a 'market-friendly' budget this time - expect no major tax cuts, duty cuts etc.

The scenario mentioned about India does hold true for developed economies like US (whose monetary policies are more expansive and debt-to-GDP ratio is higher). If China believes the US dollar denominated treasuries are downgradeable, it would be Armageddon – again in 2009. Brace yourself.

Saturday, December 08, 2007

Radiohead to Onbadhu Roobai Nottu

What's common to Radiohead and the soon to be released tamil movie Onbadhu roobai nottu: they come at a price of zero.

Radiohead got into the headlines due to their weird (innovative?) pricing strategy of pay what you want. In a rational world, no one who buys the album should pay for it. But not all are rational. Radiohead did make some money, whether it is big or small is a totally disparate issue.

Now a tamil movie Onbathu roobai nottu (Nine rupee currency) is coming up with a similar concept. In all of the Pyramid company owned theatres in Tamilnadu, the movie is to be screened free without any ticket. Post the show, the audience is expected to pay or rather give how much ever they feel the movie is worth by depositing cash in a hundi. At first thought, the revenue model looks like a road side koothu happening in the rural streets. This strategy carries with it one basic risk: people not paying up after the movie. All these revenue models based on the concept of tipping the waiter at a restaurant will not hold when there is minimal or no eye contact with the waiter (or producer) and hence no one to self-coerce oneself not to be stingy.