Speaker- Vivek Kaul, Author, Easy Money
Contributed By: Vikram Jhawar, CFA
The Pune Chapter of CFA Society India organised a speaker event titled,”Economics beyond headlines” by Mr. Vivek Kaul, author of the book-Easy Money on 31st May 2019.
The speaker started his talk with the indirect effects of economic policy changes with a famous quote –
“The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.”
-Bastiat in Essays on Political Economy
The indirect effects of macro-economic policy changes are not always obvious. At times, a well-intentioned policy can be toxic in the long run. The final costs of such policies are often passed on to the consumers.
As an example, the speaker cited a case from February 2016, when the Directorate General of Foreign Trade imposed a minimum import price on 173 steel products to encourage steel consumers to buy Indian steel. The direct effect of this policy was to the benefit of local steel producers and the banks financing these producers. However, as steel is an input to a wide range of industries, the indirect effect of this policy was increased prices of the products of those industries being passed on to the consumers.
The speaker next spoke about GDP being a measure of economic size of a country and the multiplier effect of money contributing to economic activity. The question that followed was-
How do we measure economic activity?
- Housing Sales: Buying a house is arguably one of the biggest expenditure in an individual’s life. Housing sector has around 250 backward and forward linkages – Cement and other raw materials, labor, steel, sanitary and electrical hardware to name a few.
- Domestic Car/2-Wheeler Sales: This comes next to housing in terms of expenditure and has a range of input factors.
- Domestic Tractor Sales: This is particularly important in rural areas. It signifies the growth in agricultural sector.
- Non-Discretionary Spending: Food, Clothing, FMCG products, Electricity etc. are basic needs and contribute a significant amount to total spending.
Next, the speaker talked about common ways adopted by governments and central banks to overcome a slowdown in GDP growth or even a recession.
How to overcome a slowdown?
- Fiscal Expansion: Government increases its spending, lowers direct and indirect taxes to aid the growth in economy. However, as governments around the world have unlimited power to print their currencies, it could lead to overspending and prove detrimental in the long run as government debts pile up.
- Monetary expansion: Central banks can reduce interest rates thereby making loans cheaper and encouraging business & personal spending.
The speaker pointed out a problem with Expansionary Fiscal Policy. As government spends more, it needs to borrow more. As it borrows more, less money is available to loan to businesses and individuals thereby shooting up the interest rates. This means that it might be difficult to carry out an expansionary fiscal policy and a loose monetary policy at the same time.
The speaker concluded with an interesting observation on why inflation in India in recent quarters, although reported low as per CPI (Consumer Price Index), doesn’t feel like one. The reason for this is the fall in food inflation. Food & Beverages weigh over 40% in CPI basket, which might not be indicative of actual expense on food for most population, especially in urban areas. Given that food inflation has averaged less than 5% in recent times, the overall inflation is skewed downwards.