The Other side of IT, Onsite & NRI's
There seems to be fuss around, as how the inflation (the rate at which my money loses value) has reached the 6.73% and even slated to kiss the unprecedented 7.0 % levels . The government has come up with knee jerk reactions like cutting down the fuel prices; it has taken steps to ban exports of wheat and milk powder, announced import duty cuts on cement, steel and edible oils. The happy news is that it would take time to show results and we can now live in an inflated environment.
The latest spike has occurred due to increased prices of manufactured products and primary articles like vegetables, eggs, meat and fish, oil seeds, condiments and spices.You know who this hurts the most ?
RBI recently increased the Cash Reserve Ratio CRR (the portion of total deposits in a bank that need to be deposited with the RBI) by 50 basis points to 6% in two stages. The first hike of 25 basis points will be effective from February 17 and the second from March 3 of the current year. The CRR increase will drain Rs 14,000 crore of liquidity from the banking system, on top of Rs 13,500 crore drained in the last week of December and the first week of January.
As the CRR is increased, the excess money would be drained out of the system; banks would have lower money to lend. This would essentially translate to lower credit growth and the consumer would not have excess money which would reduce the demand for goods and hence prevent the price from seeking north.
You might ask me as so what the point. The banks have had a credit growth of around 30 % over the past few years (Can you recollect so many tale calls pleading you to get credit cards and personal loans) and there is culprit in the form of real estate funding. Somebody needs to stop the real-estate from hopping up every another day.
Blame the IT & the new economy jobs, people have too much of money earned out of the dollar arbitrage and they are like irrationally bidding higher prices for the real estates. We can expect the FM to tinker the tax sops on the interest and principal now availed on home loans. No other prudent way to keep the prices down.
The salaries have compounded by 25% for the past three years and they are in reality unsustainable even in the mid term. All would vanish once the RBI decides to abstain itself from dirty float on the dollar rate. This is exactly what creates the supply side shock. People have too much money and they feel like buying too many things and that’s keeping the prices high (of course which company would not price the goods high if people are willing to pay any price just because they have too much money)
You might be wondering as to why I pulled the NRI's and the people who are retreating their hard earned money back to India. They are the people who are putting abundant money into the system. The RBI is unable to control the money supply as the money from NRI's are routed into the Indian system. Just compare this, a software engineer earns around $15,000 per in India gets to earn around $50,000 in the US. They are so kind enough to send the money back to our sweet homeland India. Now he is all eager to invest in Indian real estates. They can afford a flat for 50 lacs because they earns $50,000 and now how about the people who earn only $15,000.Infact the Per capital Income of an Indian is around $650.
The government needs to take some serious steps to lower the cap interest rate offered on NRI money. The RBI is like buying $2Bn every week just to keep the dollar hovering around 44 and keep exports attractive to rest of the world. This dirty game would end soon or latter, the market forces would eventually take guard. have seen what would happen if we try to control the exchange rates. The Central bank can certainly see the images of East Asian Crisis, the Russian imbroglio and the Tequila effect of South America looming over.
When the rupee is allowed to float, export would become expensive and margin would take a hit and think about the repercussions of this in the IT/KPO sector where the personal expenses currently contribute to around 45% of the total expenses.
The latest spike has occurred due to increased prices of manufactured products and primary articles like vegetables, eggs, meat and fish, oil seeds, condiments and spices.You know who this hurts the most ?
RBI recently increased the Cash Reserve Ratio CRR (the portion of total deposits in a bank that need to be deposited with the RBI) by 50 basis points to 6% in two stages. The first hike of 25 basis points will be effective from February 17 and the second from March 3 of the current year. The CRR increase will drain Rs 14,000 crore of liquidity from the banking system, on top of Rs 13,500 crore drained in the last week of December and the first week of January.
As the CRR is increased, the excess money would be drained out of the system; banks would have lower money to lend. This would essentially translate to lower credit growth and the consumer would not have excess money which would reduce the demand for goods and hence prevent the price from seeking north.
You might ask me as so what the point. The banks have had a credit growth of around 30 % over the past few years (Can you recollect so many tale calls pleading you to get credit cards and personal loans) and there is culprit in the form of real estate funding. Somebody needs to stop the real-estate from hopping up every another day.
Blame the IT & the new economy jobs, people have too much of money earned out of the dollar arbitrage and they are like irrationally bidding higher prices for the real estates. We can expect the FM to tinker the tax sops on the interest and principal now availed on home loans. No other prudent way to keep the prices down.
The salaries have compounded by 25% for the past three years and they are in reality unsustainable even in the mid term. All would vanish once the RBI decides to abstain itself from dirty float on the dollar rate. This is exactly what creates the supply side shock. People have too much money and they feel like buying too many things and that’s keeping the prices high (of course which company would not price the goods high if people are willing to pay any price just because they have too much money)
You might be wondering as to why I pulled the NRI's and the people who are retreating their hard earned money back to India. They are the people who are putting abundant money into the system. The RBI is unable to control the money supply as the money from NRI's are routed into the Indian system. Just compare this, a software engineer earns around $15,000 per in India gets to earn around $50,000 in the US. They are so kind enough to send the money back to our sweet homeland India. Now he is all eager to invest in Indian real estates. They can afford a flat for 50 lacs because they earns $50,000 and now how about the people who earn only $15,000.Infact the Per capital Income of an Indian is around $650.
The government needs to take some serious steps to lower the cap interest rate offered on NRI money. The RBI is like buying $2Bn every week just to keep the dollar hovering around 44 and keep exports attractive to rest of the world. This dirty game would end soon or latter, the market forces would eventually take guard. have seen what would happen if we try to control the exchange rates. The Central bank can certainly see the images of East Asian Crisis, the Russian imbroglio and the Tequila effect of South America looming over.
When the rupee is allowed to float, export would become expensive and margin would take a hit and think about the repercussions of this in the IT/KPO sector where the personal expenses currently contribute to around 45% of the total expenses.
Somebody needs to be rational else the electronic herd can take us for a ride!!! .There would be no hip, hop and hurray.All this happy feeling would vanish in a hurry
Labels: economics
I believe its a good think if the dollar takes a hit, and margins start shrinking. It will make growth much tougher, my companies rethink salaries and eventually help curb inflation.
Eventually, we know who loses are! Its the 700 million Indians who dont care a damn about IT industry or real-estate, instead have suddenly realized that the price of the rice they buy has doubled in three years
Posted by
Santhosh |
2:00 pm
Dude...
Although I cud understand some new terminologies thru this post, I m left kinda confused about the message you are driving in here.
Are you tryin to push a panic button about the way growth is happening now in India ? Without money to spend, how do u think to grow the economy ?
.... kindly answer this layman, who knows nothin about economy and keeps believing that IT is driving the Indian economy.
Posted by
Balamurugan B |
5:09 am
Back to economics eh.. It seems the RBI guys dont seem to take too kindly to the word dirty float.. u might wanna be careful abt it :)...interesting theory though...
Posted by
Sudarshan |
9:46 pm
though i largely agree with wht u say... a more important and oft-harped upon factor s th state of our infrastructure... not only too much money but also supply side constraints were also a major factor in the current inflationary hike...
1.we need more investment in agriculture
2.we need to build satellite cities n reduce concentration in cities. with connectivity boom, i dont think it shud a pbm...
i think this comment s gettin too long... so enuf fr now
Posted by
Unknown |
11:03 pm
@Santhosh
I would be more than happy If we can slow down and concentrate on a overall growth..Is the the FM hearing that???
@Bala
I am tryin to caution that things are not as sweet as we think.There is a sour taste to people who cannot rally with the people in madrush
@Sudharsan
I know, the RBI dont like it but Its high time they see what "liberal freakanomics" can do !!
@sk
I agree that there is a supply side shock, it could have been averted if we had concentrated on improving agricultural productivty and encouraging credit growth i the rural economy
Posted by
Sara |
11:25 pm
Inflation is definitely a factor to worry about. But I guess, there is more to inflation than discussed in your topic. Remember, the inflation levels were much worser almost a decade ago where it was hovering around the 7 to 8% mark for a long time and you would definitely know that it wasn't because of any IT boom or anything.
Dude, the Internation trade is a real dirty game. As I understand, except for the US and Canada no other country in the world follows a free float system. So, by appreciating the value of rupee you would be unnecessarily conceeding an undue advantage to other countries. In essence, both agriculture (the occupation of majority of the Indian population) and the new economy companies (which is fuelling the growth of the country) would go for a toss due to lack of export competitiveness.
So, in my opinion the right option to control inflation perhaps is not in appreciating your currency but in ensuring that the growth doesn't remain lop sided. The growth in Per capita income should've led to higher unit consumption especially of agricultural produce. But that doesn't seem to be happening. Perhaps the government should take efforts to ensure that income distribution is more equilateral (perhaps by getting more direct tax/luxury and entertainment taxes) and properly spending it in such way to reduce the below the poverty line population.
Perhaps that won't bring the inflation down. But who cares about inflation if you get equally higher cash inflow and are secured.
Posted by
Viswanathan M B |
8:51 am
@ Viswa
Inflation is certainly the most important measure to worry about.The inflations was higher during those periods and the interst rates were even higher @ 14-16% levels.
Basics first
Nominal interest rate ( the rate at which my money grows)= Inflation( the rate at which my purchasing power decreases)+ Real rate ( the real growth in my purchasing power)
Our GDP growth rate was 9% and inflation was around 7% which leads to gross assumption that the real rate of change in income levels for the country was around 2%.
The salaries of the industry has grown on an average by 30% in IT/KPO this year whereas its around 15% in other sectors and thing about the income levels for the lower mass.
The people in the higher income increase the demand and the inflation.The increase in price is what they can afford and not the rest of the country where most people live in poverty.
The capital should be employed in agriculture which can help the majority of the people who damn a care about Inox or MayaJaal
Regarding the the agriculture consuption part.It is not the marginal increase in the demand which has created the problem but the drastic decrease in the crop/pulse production( as upply side shock) due to inappropriate capital allocation
Reagrding managing the currency rate.If we dont leave it to the market now we would have to do it some othere which may even more devastating effects like like latin america or east asia
Posted by
Sara |
4:33 am
Machi, why are you explaing to me the basics of interest rate da? In what way does is it explain or contradict my statement?
and you got it right by saying that the growth in income is lop sided and that is exactly what I also said. Perhaps my suggestion to do that was to use fiscal policies than correcting the exchange rate (a 9% growth with 7% inflation is much better than 3% growth with 1% inflation)
Finally, I too admitted that inflation is a factor to worry about but what I said was if income is uniformly distributed and the increase in the net cash inflow of every individual exceeds the rate of inflation then it wouldn't be a case to worry for.
Finally, coming back to the exchange rate funda - yes in the long run we might get forced to allow the exchange rate to free float. But you also know that in the long run we are all dead. If you are going to allow it to free float with countries like japan and China keeping it tight then you would be no more alive when the world is forced to shift to floating rate system.
Posted by
Viswanathan M B |
4:51 am
Sara,
Compliment you for writing a very very insightful post . One of the few ( actually lesser ) posts of yours that people like me with lower processing have understood ;) . Real good stuff man.
Not contradicting anyone here. Just a few pointers to the discussion:
1) The whole measurement of Inflation needs to be considered. Its basically T year/ T-1 Year computation and as such is not a fool proof measure. Genuine supply side issues ( which should not judge any economic policy )are part and parcel of this. Inflation might be over stated/ under stated to this extent.
Not sure if Real estate prices/ electronics and host of other goods are included either. And this has definetly understated the inflation figures.
2) Absolutely no doubt the growth /income distribution has been lopsided. The positive thing is that the benefits of this have however started to trickle down albeit slowly.
3) We are saying two things here - One, income levels in higher bracket are increasingly becoming unsustainable - and - two, income levels below the poverty line have now moved as steeply.
The other way of looking at this is with increasingly unsustainable income levels, things will mature and ease out and secondly with income levels not rising below the poverty line, the only way to go is up - plentiful of opportunity.
4) And not to forget its the so called higher income people who are earning higher income for the nation as a whole and contributing their best possible. And Inflation is a very relative thing. What will you do with a 1 % inflation if you dont have any growth .
Putting this across as a general query - if the growth in income levels is across all spectrum of society , is even a 7% inflation bad. Are we not getting our priorities correct.
Posted by
Bhatter |
4:27 am
I endorse the view of Deepak to a large extent.
Infact, the one factor that we need to understand further is that the 8-9% growth that Indian has been computed at constant prices. So, I guess the growth rate is already adjusted for inflation. Its much better have scenario of such high growth and high inflation than having low inflation and low growth at all
Posted by
Anonymous |
12:01 pm