Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.
As the new financial year begins, all eyes are on the government living up to its brave expenditure commitments. No spring of recovery is guaranteed to trail behind a winter of economic distress.
A vigorous recovery that brings comatose businesses back to life, restores jobs and generates new ones, while filling the government’s coffers with taxes, depends on effective delivery of the promised growth stimulus. The world’s largest economies — the EU, the US and China — are all focused on generating domestic growth with big State-led spending: on infrastructure, climate resilience, digitalisation of government services and, in China’s case, strengthening the internal circulation, that is, domestic demand, in contrast to the mainstay of past Chinese growth, the external circulation, meaning exports.
Much depends on central banks. The central banks of the US, the EU and Japan have created large pools of liquidity and sent out waves of money washing across the world’s capital markets. This has depressed interest rates, lowered the discount rate for assessing the net present value of future earnings on company stocks, sending price/earning ratios to heights where the oxygen is thin. The prospect of coordinated fiscal expansion focused on infrastructure promises a surge in demand for metals, fuel and other materials.
This could spell cost-push inflation, especially given the liquidity sloshing around the world. Anticipation of inflation has been sufficient to send the 10-year US Treasury yield up by more than a third to over 1.7% over a few weeks. Unless central banks carry conviction, inflation expectations will perform their self-fulfilling harm, and force central banks to raise rates and dampen growth. India’s central bank must look through temporary price surges and keep its attention on boosting growth. Some pricing power will help firms make up their minds to invest, to supplement State spending on infrastructure. At the same time, RBI has to focus on financial stability in a world of footloose capital.
Courtesy - The Economic Times.
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