The Business Cycle Is Not Dead

Businesses, economies, nature and life move in cycles. Cycles are driven by reversion to the mean. If that was not the case, we would have a planet inhabited by 100 feet tall and 1 foot tall humans.

Just like in times of euphoria, we forget that profits can fall, that growth can fizzle and that the party can end; in times of pessimism we forget that the reverse can happen. More...

Insufficient Investment Fuels Inflation in India

The whole world is suffering from collapsing aggregate demand. Monetary authorities everywhere are struggling with liquidity traps as they experiment with alternative ways of injecting money into the system after taking short term interest rates to zero.

China stimulates its economy fiscally by planned and targeted capital investment (fraught with gross capital misallocation albeit).
India is suffering from a completely different problem. India has structural and too much aggregate demand. Its demographics are driving demand that is relatively price inelastic. In India, inflation is not being driven by the classic monetary reason of too much money chasing too few goods but is being driven by too many people chasing too few goods. More...

Indian Interest Rates Have Overshot

Reserve Bank of India (RBI) governor Subbarao’s decision to hike short term interest rates by 50 basis points on July 26th was a mistake. Monetary policy operates with a lag. Many of the earlier interest rate hikes are yet to filter through to economy.
The RBI is trying to fight inflation by raising rates and squeezing out demand. In the absence of fiscal policy action, the burden of inflation management falls on the RBI. The RBI is, however, fighting a lost battle. Interest rate increases are unlikely to be effective in controlling inflation and may in fact exacerbate the situation by choking investment and supply. More...