Inflation: Oh ’tis problematic. Or is it?

A student messaged last week, asking some questions about inflation and its measurement in India. In particular, they wanted to know about food and its impact on inflation right now.

Well, outsourcing is always and everywhere a good idea, and Vivek Kaul had already answered the question at great length:

What this means is that, despite the end consumers of food paying a higher price, the farmers are largely not benefitting from this rise in food prices, given that they sell their produce at the wholesale level.
This difference can be because of a few reasons.

a) A collapse in supply chains has led to what is being sold at the wholesale level not reaching the consumers at the retail level, thus, leading to higher prices for the consumer.

b) This could also mean those running the supply chains hoarding stuff, in order to increase their profit.

Having said that, the former reason makes more sense given that stuff like vegetables, egg, fish and meat, etc., cannot really be hoarded. Also, hoarding stuff like pulses, needs a specialized storage environment which India largely lacks.

https://vivekkaul.com/2020/10/13/10-things-you-need-to-know-about-indias-high-inflation/

The entire article is worth reading (and so is subscribing to Vivek’s blog, so please do so!). And if you think 2020 isn’t depressing enough already, do read this article, also written by him. A short excerpt follows:

To conclude, the Indian economy will contract during the second half of the financial year. There is a slim chance of growth being flat for the period January to March 2021. Inflation, even though it might come down a little, is likely to remain high due to the spread of the covid pandemic. Hence, India will see conflation through 2020-21.

https://vivekkaul.com/2020/09/15/conflation-contraction-inflation-is-here-and-it-will-stay-this-year/

From a reading-the-tea-leaves perspective, it would seem the RBI actually isn’t that worried about inflation right now (and rightly so!). Here’s an excerpt from an excellent newsletter, Anticipating the Unanticipated that makes this point:

But the RBI wants to signal it is willing to live with inflation running above ‘comfortable’ level in the coming days. The MPC report last week claimed almost 80 per cent of the increase in inflation beyond the 4 per cent target can be attributed to supply chain disruptions and increase in fuel prices. This it believes is a short-term phenomenon and inflation will be in the 5 per cent range next year. This is underlined to give comfort to bond investors to buy government securities without the fear of a near-term interest rate hike to contain inflation. Further, the other step announced by RBI in extending the HTM (hold-to-maturity) limits by another year to March 2022 is to protect any bondholder from the volatility of prices and booking losses on account of it. The overall RBI signal is it doesn’t want the worry of rising inflation and a consequent rate increase to come in the way of growth. It’s focus now is on improving the transmission of rate cuts to the borrowers to stimulate growth.

https://publicpolicy.substack.com/p/77-the-inflation-conundrum-

… and here is Anantha Nageswaran making the same point, but by utilizing a different analysis:

This exercise generates the hypothesis that there is little or no intersection of the household inflation expectations formation and the monetary policy regime. Two, high inflation expectations peaked in September 2014. Similarly, the current high inflation expectations should peak as supply disruptions ease. So, in my view, RBI is betting correctly that the rate of inflation would ease and project policy on hold for the next few quarters. Three, inflation generation process should matter only to the extent that it affects medium-term output and employment generation. For now, other indicators suggest that it is not as disruptive as it was in 2011-13. Therefore, there is no need to turn it into a fetish. The new MPC and the central bank have done well and done good. They should be pleased.

https://thegoldstandardsite.wordpress.com/2020/10/14/the-inexplicable-16-inflation-rate/

And for the data nerds among you, here is the Inflation Expectations Survey of Households by the RBI (do keep in mind the point Ananta Nageswaran makes about trimmed means in his article). Note that currently at least, not too many people seem to be too worried about persistently high food inflation.

Side note: Jason Furman’s podcast with Tyler Cowen contained this interesting snippet:

FURMAN: GDP could be more meaningful if we measured it better. The inflation rate gets harder and harder to measure over time. So I think the one that probably has deteriorated in meaningfulness is the measure of inflation. Number one, we don’t measure it well, and number two, it’s low enough that it’s hard to get that excited about it.

COWEN: Is that a quality-of-goods problem? Or how we do chaining over time? Where are we going wrong in measuring inflation?

FURMAN: Just more and more of the economy is in areas that are harder to measure the quality of, healthcare being the most notorious.

https://medium.com/conversations-with-tyler/jason-furman-tyler-cowen-economics-b3e6d73dfd0f

I’ve said it before, and I’ll say it again: macro is hard.

Finally, here are past EFE articles on inflation.

What Next in Afghanistan? A Podcast This Sunday

As you know, Sundays are usually for videos. But I was unable to find a video that was as informative and thought provoking as this podcast about the recent deal.

 

Click here to listen to Anand Arni, Pranay Kotasthane and Aditya discuss what’s next in Afghanistan.

Afghanistan Today

After Poland and Germany, let’s pick an Asian country to understand better for the month of March. And given the recent deal that has been signed, about which more below, let’s begin with Afghanistan.

As always, begin with the basics. The gift that is Wikipedia, on Afghanistan:

“Afghanistan is a unitary presidential Islamic republic. The country has high levels of terrorism, poverty, child malnutrition, and corruption. It is a member of the United Nations, the Organisation of Islamic Cooperation, the Group of 77, the Economic Cooperation Organization, and the Non-Aligned Movement. Afghanistan’s economy is the world’s 96th largest, with a gross domestic product (GDP) of $72.9 billion by purchasing power parity; the country fares much worse in terms of per-capita GDP (PPP), ranking 169th out of 186 countries as of 2018.”

And from the same article…

The country has three rail links: one, a 75-kilometer (47 mi) line from Mazar-i-Sharif to the Uzbekistan border; a 10-kilometer (6.2 mi) long line from Toraghundi to the Turkmenistan border (where it continues as part of Turkmen Railways); and a short link from Aqina across the Turkmen border to Kerki, which is planned to be extended further across Afghanistan. These lines are used for freight only and there is no passenger service.

Now, as opposed to how I structured the essays on Poland and Germany, I intent to begin with the now and work my way backwards. This is primarily because of what Afghanistan is in the news for:

The joint declaration is a symbolic commitment to the Afghanistan government that the US is not abandoning it. The Taliban have got what they wanted: troops withdrawal, removal of sanctions, release of prisoners. This has also strengthened Pakistan, Taliban’s benefactor, and the Pakistan Army and the ISI’s influence appears to be on the rise. It has made it unambiguous that it wants an Islamic regime.

The Afghan government has been completely sidelined during the talks between the US and Taliban. The future for the people of Afghanistan is uncertain, and will depend on how Taliban honours its commitments and whether it goes back to the mediaeval practices of its 1996-2001 regime.

Doesn’t bode well for India, obviously, but doesn’t bode well for the United States of America either, says Pranay Kotasthane.

And the New York Times says a complete withdrawal of troops, even over the period currently specified, may not be a great idea. Ongoing support is, according to that newspaper, necessary:

More important than troops, potentially, is the willingness of the international community to continue to finance the Afghan government after a peace deal.

“The real key to whether Afghanistan avoids falling into an even longer civil war is the degree to which the United States and NATO are willing to fund and train the Afghan security forces over the long term,” Mr. Stavridis said. “When Vietnam collapsed and the helicopters were lifting off the roof of the U.S. Embassy, it was the result of funding being stopped.”

But it’s not just military funding! Afghanistan needs a lot of the world’s support in the years to come. Water, for example, will be a contentious issue in the years to come, and that’s putting it mildly.

Afghanistan doesn’t face a water shortage – it’s unable to get water to where it’s needed. The nation loses about two thirds of its water to Iran, Pakistan, Turkmenistan, and other neighbors because doesn’t harness its rivers. The government estimates that more than $2 billion is needed to rehabilitate the country’s most important irrigation systems.

And water, of course, is just one of many issues. Health, education, reforming agriculture, roads – it’s an endless list, and it will need all kinds of ongoing and sustained help.

So, amid all of this, what should India be doing?

Meanwhile, India’s interests in Afghanistan haven’t changed. India hopes to build up Afghanistan’s state capacity so that Pakistan’s desires of extending control can be thwarted. Given this core interest in a changed political situation, what’s needed in the long-term in the security domain is to build the strength of the Afghan National Defense and Security Forces (ANDSF). Without a strong ANDSF — which comprises the army, police, air force, and special security forces — peace and stability in Afghanistan will remain elusive. India’s aim should be to help the Islamic Republic of Afghanistan and ANDSF claim monopoly over the legitimate use of physical force.

But, the article presciently warns us of the same what/how problem we first encountered in studying the Indian budget:

In short, the budget might itself not be the biggest issue. The US has pumped nearly $3.6bn on average every year for the last 19 years solely on reconstruction of the ANDSF, a support that is likely to continue even if the US withdraws its soldiers. The bigger problems are insufficient processes to plan and execute budgets resulting in unused funds and lack of infrastructure leading to pay shortfalls.

Now, to unpack all of this, we need to study the following: the Soviet invasion and its aftermath, American involvement in the region, the rise of the Taliban, leading up to Operation Enduring Freedom, 2002. That’s next Wednesday!

India: Links for 9th December, 2019

Five rather eclectic links from a variety of issues pertaining to India. Also, my apologies about the delay in posting today! I’m traveling a fair bit, and there may be some delay in posts this week.

  1. Surjit Bhalla and Karan Bhasin present the other side of the story when it comes to the release (or lack of it) of the NSO consumption survey.
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  2. The Scroll sheds light on a little known issue today: austerity in marriages in India in the years gone past – enforced by the government!
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  3. Anupam Mannur and Pranay Kotasthane make the important, but not well known point that Bangalore needs more firms (and more people!) not less.
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  4. Via Mostly Economics, a lovely write-up about the fish traders of Madras.
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  5. 18000 birds died in Rajasthan recently. Here’s why.

EC101: Links for 28th November, 2019

  1. “The zeroth step, of course, is being open to the process of unlearning. We come with our own biases, shaped by our varied experiences and perceptions. But our experience or knowledge is not always indicative of the macroreality. An unrelenting hold on what we have already learnt is the equivalent of the sunk cost fallacy in economics.”
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    Pranay Kotasthane has a new newsletter out, and it is worth subscribing to. Stay humble and curious is the gist of his zeroth lesson, and the other points are equally important. Go read, and in my opinion, subscribe.
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  2. “China is still a one-party state, but it owes much of its current prosperity to an increase in liberty. Since Mao died, his former subjects have won greater freedom to grow the crops they choose, to set up businesses and keep the profits, to own property, and to move around the country. The freedom to move, though far from absolute, has been transformational. Under Mao, peasants were banned from leaving their home area and, if they somehow made it to a city, they were barred from buying food, notes Bradley Gardner in “China’s Great Migration”. Now, there are more rural migrants in China than there are cross-border migrants in the world.”
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    The rest of this article from the Economist is about migration to the cities – and I find myself in complete agreement – many, many more people in India need to live in her cities. But also see this!
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  3. “Mazzucato traced the provenance of every technology that made the iPhone. The HTTP protocol, of course, had been developed by British scientist Tim Berners-Lee and implemented on the computers at CERN, in Geneva. The internet began as a network of computers called Arpanet, funded by the US Department of Defense (DoD) in the 60s to solve the problem of satellite communication. The DoD was also behind the development of GPS during the 70s, initially to determine the location of military equipment. The hard disk drive, microprocessors, memory chips and LCD display had also been funded by the DoD. Siri was the outcome of a Stanford Research Institute project to develop a virtual assistant for military staff, commissioned by the Defense Advanced Research Projects Agency (DARPA). The touchscreen was the result of graduate research at the University of Delaware, funded by the National Science Foundation and the CIA.”
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    Mariana Mazzucato, about whom more people should know, on the role of the government in today’s economy.
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  4. “Back in the early 1970s, Xerox had figured out a strategy to block competitors in the photocopying business. It took out lots of patents, more than 1,000 of them, on every aspect of the photocopy machine. As old patents expired, new ones kicked in at a rate of several hundred new patents each year. Some of the patents were actually used by Xerox in producing the photocopy machine; some were not. There was no serious complaint about the validity of any individual patent. But taken as a whole, Xerox seemed to be using the patent system to lock up its monopoly position in perpetuity. Under antitrust pressure from the Federal Trade Commission, Xerox in 1975 signed a consent decree which, along with a number of other steps, required licensing its 1,700 photocopier patents to other firms.”
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    Timothy Taylor adds grist to the anti-patent mill.
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    “Thinking about how to facilitate a faster and broader dispersion of knowledge and productivity gains seems like a potentially important part of explaining the current economic picture and suggesting a policy agenda.”
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    That’s the concluding part of the blog post. Just sayin’!
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  5. Every time I begin to think I kind of understand macroeconomics

India: Links for 13th August, 2019

Five links about India from the past couple of weeks:

  1. Nitin Pai explains why the banana thingie was a mere storm in a teacup.
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  2. A rather uninspiring review of the GST impementation, by reading the CAG review of the… well, GST implementation.
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  3. Vivek Kaul in the Livemint analyzes credit growth in the economy, and asks who exactly is borrowing. To me, this article raises more questions than answers.
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  4. “At the Centre, the privatisation of state enterprises during the Vajpayee era is an aberration which validates the norm. The government is the largest business house and owns 339 enterprises in 2019. Leave alone the disinvestment of Air India or 23 other enterprises. In 2018, the ownership of private carrier Jet Airways is parked on the balance sheet of public sector banks. The debate is not just about government ownership but about political management. ”
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    To me, a deeply depressing issue is the fact that no government in India, bar none, has taken divestment seriously, with the notable exception of the Vajpayee government. It’s been more of the same before, and more of the same after. Deep sigh.
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  5. Is democracy an end in and of itself, or is it the means to an end?