ECONOMICS STUDY MATERIAL
Friday 8 April 2016
Thursday 4 February 2016
DOSA ECONOMICS BY RAGHURAM RAJAN
DOSA ECONOMICS 30 jan 2016
Raghuram
Rajan has the simplest explanation of how inflation hurts the rich and the old
For
much of his tenure as the governor of the Reserve Bank of India, Raghuram Rajan
has focused on one thing: Taming India’s sticky inflation problem. At the same
time, he has come under pressure—from the government and industry—to slash key
interest rates and kickstart growth. On occasion, the governor has obliged with
rate cuts, but with an eye still firmly fixed on the inflation numbers.
Delivering
the C.D. Deshmukh lecture at New Delhi’s National Council of Applied Economic
Research on Jan 29, Rajan made a strong case against “weakening the fight
against inflation.”
“Let
me reiterate that macroeconomic stability relies immensely on policy
credibility, which is the public belief that policy will depart from the
charted course only under extreme necessity, and not because of convenience,”
Rajan said. “If every time there is any minor difficulty, we change the goal
posts, we signal to the markets that we have no staying power. Let me therefore
reiterate that we have absolutely no intent of departing from the inflation
framework that has been agreed with the government.”
Then,
the former chief economist of the IMF launched into a quick round of “Dosa
economics”—to better explain the impact of high inflation. Here’s an excerpt
from his lecture:
Industrialists
grumble about high rates while retirees complain about the low rates they get
today on deposits. Both overstate their case, though as I have said repeatedly,
the way to resolve their differences is to bring CPI inflation steadily down.
Let
me explain, starting with the retiree. The typical letter I get goes, “I used
to get 10% earlier on a 1 year fixed deposit, now I barely get 8%”, please tell
banks to pay me more else I won’t be able to make ends meet”. The truth is that
the retiree is getting more today but he does not realize it, because he is
focusing only on the nominal interest he gets and not on the underlying
inflation which has come down even more sharply, from about 10% to 5.5%.
To
see this, let us indulge in Dosa economics. Say the pensioner wants to buy
dosas and at the beginning of the period, they cost ₹50 per dosa. Let us say he
has savings of ₹1,00,000. He could buy 2,000 dosas with the money today, but he
wants more by investing.
At
10% interest, he gets ₹10,000 after one year plus his principal. With dosas
having gone up by 10% to ₹55, he can buy 182 dosas approximately with the
₹10,000 interest.
At
8% interest, he gets ₹8,000. With dosas having gone up by 5.5%, each dosa costs
₹52.75, so he can now buy only 152 dosas approximately. So the pensioner seems
vindicated: with lower interest payments, he can now buy less.
But
wait a minute. Remember, he gets his principal back also and that too has to be
adjusted for inflation. In the high inflation period, it was worth 1,818 dosas,
in the low inflation period, it is worth 1,896 dosas. So in the high inflation
period, principal plus interest are worth 2,000 dosas together, while in the
low inflation period it is worth 2,048 dosas. He is about 2.5% better off in
the low inflation period in terms of dosas.
This
is a long winded way of saying that inflation is the silent killer because it
eats into pensioners’ principal, even while they are deluded by high nominal
interest rates into thinking they are getting an adequate return. Indeed, with
10% return and 10% inflation, the deposit is not giving you any real return net
of inflation, which is why you can buy only 2,000 dosas after a year of
investing, the same as you could buy before you invested. In contrast, when
inflation is 5.5% but the interest rate you are getting is 8%, you are earning
a real rate of 2.5%, which means 2.5% more dosas. So while I sympathize with
pensioners, they certainly are better off today than in the past.
Let
us turn to the industrialist. At a recent conference, I met a businessman who
complained that his business was getting torn to shreds by imports. He was
lobbying for safeguard duties. When asked for evidence of unfair competition,
he said his revenues had not grown at all, with his volume growth barely
offsetting the price decline for his product. While commiserating with him, I
said lower input costs must be a boon, because commodity prices have fallen
even more sharply than output prices. He grudgingly agreed they had helped.
When asked about his profits, he eventually admitted they were at an all-time
high. But nevertheless, he said, we need safeguard duties because foreigners
are dumping below cost! Put differently, businesspeople complain about low
output price inflation, but the inflation that matters to them is the inflation
in their profits, which is higher. For instance, analyzing 2nd quarter results
for non-financial non-government corporations, we find that while revenues have
fallen by 8.8% year on year, input costs have fallen by an even higher 12.4%,
so that gross value added has gone up by 10.8%.
Clearly,
there are industries in trouble. We should, however, be particularly careful
about raising tariffs at a time when costs are falling everywhere – aside from
the inflationary impact, for every happy domestic businessman whose prices are
raised by the imposition of tariffs on imports, we have an unhappy domestic
businessman whose costs are raised by the very same tariffs, as well as unhappy
consumers.
You
can also check
Tuesday 15 December 2015
Wednesday 10 June 2015
Friday 10 April 2015
Sunday 5 April 2015
IMPLICATIONS OF TRIPS AGREEMENT ON INDIA
IMPLICATIONS OF TRIPS AGREEMENT ON INDIA
MAIN THEME OF RESEARCH ARTICLE
The Uruguay Round (1986 – 1994) was
the turning poi nt in the history of Intellectual Property Rights. This round
included the Agreement on Intellectual Property Rights under which minimum
uniform laws are to be carried out. The Agreement on TRIPs came into force on 1
January 1995 and is to be implemented over a six-year period ending 31 December
2000 for developed countries and over a ten-year period ending 31 December 2004
for developing countriesIndia has always remained committed to the WTO and in
every sphere; it has stood by those commitments. Going by such commitments to
the WTO, India has amended its Intellectual Property Laws. Apart from meeting
WTO obligations India has placed this new regime due to its economic rational.
It enables pioneering firms lead time to recoup sunk cost on research and
development1. India is ranked as the fastest emerging economy and a major
global player in the years to come. The country has the largest scientific and
technical human resources among top five countries in the world. India cannot
afford to remain in isolation, disregarding the norms of international
intellectual property rights convention. A careful consideration is equally
essential in the future interest of macro-level development.
TRIPs was one of the most contentious
issues in the Uruguay Round of multilateral trade negotiations, which was
concluded in 1994 at Marrakesh. As a member of the World Trade Organisation
(WTO), and having signed the General Agreement on Tariff and Trade (GATT),
India has agreed to comply with all the instruments and annexes of GATT, including
Trade Related Aspects of Intellectual Property Rights (TRIPs).Because of WTO,
India has to amend its intellectual property laws .India was forced to comply
with the TRIPs agreement. After the formation of WTO in 1995, the India being
its member has to implement the TRIPs agreement in toto. The commitment under
TRIPs agreement compelled India to amend its intellectual property laws. India
has implemented the TRIPs by amending its intellectual property laws mainly
patent thrice.
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