Daily News Mail - News of 17/02/2015

WPI slipped to -0.39% in January

• Wholesale price index dipped to – 0.39% in January. It is for the eighth consecutive month that a fall in inflation has been recorded. Inflation was at 0.1 per cent in December.
• The last time the WPI inflation hit such a low was in June 2009 at (-) 0.4%
• The WPI has declined from 3.85% in August 2014 to (-) 0.39%. Prices of food articles - which have a 14% weight in the WPI — have, however, risen in recent months. Manufacturing-based inflation was static.
• Negative WPI inflation reflects falling cost of production in the economy.
• WPI captures inflation closest to producers and has a broader coverage of manufactured products(weightage-64.97%). It does not capture price inflation in services. With a sharp pick-up in pulses, grains and vegetables, food inflation surged to 8 per cent in January as against 5.2 per cent in December
• Retail inflation(CPI) for January came in at 5.11% under a new series with revised base year of 2012.
• This is against consumer price index (CPI) based inflation of 4.16% in December, 2014.

India inks nuclear pact with Sri Lanka

• In a sign of a closer strategic partnership between Sri Lanka’s new government and India, President Maithripala Sirisena and Prime Minister Narendra Modi concluded a civil nuclear cooperation agreement, which is Sri Lanka’s first nuclear partnership with any country.
• India and Sri Lanka had also agreed to expand defence and strategic cooperation, including a “trilateral format” with the Maldives.
• The agreement on nuclear cooperation was an initial one and would not lead to the construction of nuclear energy reactors immediately. The agreement would facilitate cooperation in the transfer and exchange of knowledge and expertise, sharing of resources, capacity building and training of personnel in peaceful uses of nuclear energy, including use of radioisotopes, nuclear safety, radiation safety, nuclear security, radioactive waste management and nuclear and radiological disaster mitigation and environmental protection.

Maithripal Sirisena and Modi in Delhi

A social role for NITI Aayog

This article has presented the global and Indian economy in comprehensive way and thus i cannot refrain from issuing it. (Source - The Hindu)

• NITI Aayog has had its first meeting with the economic experts. This was crucial since the government is trying to revive economic growth. The economy has experienced slow growth in spite of the revised national income data that has indicated faster growth. Industry, exports and so on, have shown tepid(meaning of tepid - (especially of a liquid) only slightly warm; lukewarm) growth in recent years. The National Democratic Alliance’s electoral promise of an economic turnaround seems elusive(meaning of elusive - difficult to find, catch, or achieve) in spite of its accelerating “reforms” by liberalising foreign direct investment (FDI) flows and land acquisition policies to signal its pro-corporate sector and big business inclinations.
• The budget is first a macroeconomic exercise and then a micro one catering to sectors of the economy. Two contradictory macroeconomic views are emerging from the government and its policy advisers. This is similar to the policy dilemma that the United Progressive Alliance faced earlier. The first view is to have a larger fiscal deficit so as to boost demand. The other view is to cut the fiscal deficit to keep the credit rating agencies (proxy for financial interests) happy so as to prevent a downgrade of the economy.The Finance Minister favours the latter view and argues that a fiscal deficit imposes a burden on future generations who will have to repay the debt.
• Increased government expenditures then boost the economy and lead to more investments via the accelerator. If increased spending is financed by increased direct taxation, that is even better. This is feasible in India since direct taxes are around 7 per cent of GDP which is low when compared to most other countries. But a government trying to signal its pro-business inclination would not wish to raise direct taxes like income, corporation and wealth taxes. Actually, tax rates need not be raised but only the concessions given in taxes (these are called tax expenditures and amount to 4.5% of GDP) need to be curtailed to get more resources. But this may also be seen as anti-business. The other possibility is to tap the black economy (more than 50% of GDP). This requires political will which is not yet visible. The business community, the largest generator of black incomes, would see this also as anti business — it has been opposing introduction of general anti avoidance rules (GAAR). Even if the economy grows faster due to the reduction of the size of the black economy and businessmen gain, they fear it since a bird in the hand is worth two in the bush.

Dilemma with Global echoes

• India’s current economic dilemma has global roots. The eurozone, Japan and Russia are in trouble, the Chinese economy has slowed down and the U.S. economy is the only big one that has improved. In such a scenario, increasing exports in a big way would be difficult. Declining commodity prices (like that of petroleum goods) signal a weakening global economy. Uncertainty is deepened by the arc of instability due to failing states, from Afghanistan, Syria, Iraq, Libya, Nigeria to East Africa. The war in Ukraine and the rise of IS are compounding the problem.
• Greece threatens the economic stability of the eurozone. The new government there is defying the dictates from the world of finance and has promised to end the austerity regime hoisted on the people of Greece. The Greek Prime Minister is telling the European powers that the economic rules of integration of the weaker economies of Europe into the eurozone need change. He is arguing that a substantial portion of the debt resulting from the earlier wrong policies needs to be written off. The other troubled economies of Europe — Portugal, Spain and Italy — are under increasing political pressure to follow Greece’s example.
• U.S. President Barack Obama has proposed increasing taxation of the rich while giving more to the middle classes to reverse the growing inequity there. This move not only has a political strategy underlying it but also economic reasons that favour it. Given the Republican domination in the legislature and their conservative inclinations, it is unlikely that this proposal would be accepted any time soon. But, other countries would be forced to think about the idea, especially in the context of the developments in Greece.
• In 2011, Mr. Warren Buffett gave a call to tax the rich more not only for the sake of equity but also to tackle the global economic crisis. This call was picked up in Europe with 16 of the wealthiest French urging their government to tax them more. Fifty wealthy Germans backed this petition. In Italy, the chief of Ferrari also lent support.

For people policies

• Events in Greece and Mr. Obama’s suggestion suggest that the time has come to end the domination of finance capital over the rest of society. Policy space has to be recaptured from the world of finance by the democratic forces so that policies favouring the people can be initiated.
• The dilemma currently facing Indian policymakers reflects these global trends. India’s rightward drift started with the Emergency in 1975 when Sanjay Gandhi marginalised the left of Centre thinking in the Indira Gandhi government. The trend continued during the Janata regime and thereafter under the Indira Gandhi government which had to approach the IMF for adjustment in 1980. Rajiv Gandhi, under considerable influence of the liberalisers, pushed this tendency faster. With the New Economic Policies in 1991 and the emergence of the World Trade Organization (WTO) in 1995, there was a paradigm change, with the policies of finance capital becoming entrenched.
• For India, which remains very poor and very unequal, policies based on the interest of finance capital and a narrow section of society can only spell disaster. These policies push markets and technology-based solutions which marginalise the individual. The underlying idea is that if making democracy work is difficult, substitute it with technology.
• The flyovers of Delhi were built to ensure smooth traffic flow but now have speed bumps to slow down vehicles and which leads to jams. The technological solution failed because the institutional design of management of urban traffic is flawed and that is because policymakers did not go deeper into the problem in their urge to provide quick fix technological solutions. The NITI Aayog could throw light on such long-term issues (with solutions that are not just economic or technological but also social and political) of strengthening democracy, building institutions, regaining policy space and so on.