How to Solve Inflation and Growth at the same time - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 11 January 2014
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How to Solve Inflation and Growth at the same time A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
The Indian economy faces twin challenges of high inflation and low growth. Most of the short term policy instruments at our disposal trade off one for the other. For example, the RBI has raised interest rates to combat inflation. This may lower inflation, but hurts growth because it increases the cost of funds for companies.

Nearly all short term fixes are going to face this problem that they can't solve both inflation and growth together. But in the long term, there is a way we can reduce inflation and increase growth simultaneously. The way to we do this is by investing heavily in infrastructure. This includes both creating new infrastructure and improving existing infrastructure.

The three areas where we need to tackle inflation are housing, transportation, and food. House prices are much too high relative to average incomes, and increased construction will make housing more affordable. When it comes to transport, poor roads and poor public transport make transportation expensive and slow. This affects both the movement of individuals, and of goods. Better transport infrastructure will reduce the cost of transportation, and thus lower inflation.

Food costs are perhaps the biggest inflation issue, because they hit the poor the hardest. Food inflation is caused largely by excessive dependence on weather for crops, and high transportation costs due to poor infrastructure. There is a lot we can do in modernizing agricultural processes to improve food production and reduce volatility. Improvements in financial and insurance markets also help reduce price volatility.

When it comes to investing in infrastructure, the benefits to inflation are clear. But the best part of infrastructure spending is that it also improves economic growth. It does this in two ways. The first is the infrastructure building itself that creates jobs. The second is the benefit to all of society from better infrastructure.

Better infrastructure reduces costs for companies. This makes it easier for them to expand and create new jobs. It also makes easier for new companies to enter the market, again improving output and increasing competition and quality in the marketplace.

The richest countries today went through periods of heavy infrastructure spending in the 20th century to get where they are today. We need to do the same to become successful. The long term benefits to increased infrastructure really cannot be overstated.

We invite to please post your views on the Equitytmaster Club on the importance of infrastructure spending as a tool to both increase growth and reduce inflation.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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11 Responses to "How to Solve Inflation and Growth at the same time"

Yatin

Jan 14, 2014

Well written article and thought provoking. Good responses from readers also. Lets get rid of the corrupt Congress and get BJP under Modi back with clear majority. AAP has still long way to go and no experience, but will keep a watch over BJP, who are pro-infrastructure. A Strong Govt is what we need right now to push Growth up & inflation down.

Like (1)

Kapil

Jan 14, 2014

One important reason for food inflation is gobbling up of agricultural land in the garb of housing and industrial projects. The whole Delhi/NCR is not producing any food, and similar situation is almost all major cities of country. Villages near any state / national highways are being acquired. All those farmers now have more money than urban salaried population and no incentive to do agriculture. Significant growth in number of eateries and restaurants waste huge amount of food. The significant drop in production causing the demand supply mismatch and hence high food inflation. Even if we say the supply can be increased in the not acquired villages, at least the transportation expenses go up in tandem with fuel prices.

Like (1)

JOISA

Jan 13, 2014

Sir,
Let RBI do anything, things r not going to change. Nobody enforces law when few traders in Maharastra with strong political backing take the price of onion to Rs.100. Even Congress forgets that it won Delhi elections in 1998 because of rising onion price, such is the complacency. They did not act even when 4 states were going to elections.
Growth. IIP etc, better we forget that.India imports sugar from Pak when our industry is in doldrums, Govt refuses to raise import duty from 10% may be because of lobbying by Cola/ buiscuit makers. Substandered turbines r imported from China, killing Thermax, BHEL. The trade agreements with other countries r so loaded against our industries, how they can survive.Even AAP CANT HELP as every effort will be made to defeat it
Let us trust in God, probably he may show a way out

Like (2)

Emilio

Jan 13, 2014

I agree with the article to a large extent. However, I do have one reservation.
The cost of housing today need not be a function of the construction activity at least in the short term. It is a known fact that a city like Mumbai has over 4 years of unsold inventory. This is being sustained only because of the political nexus which forces banks to be liberal in lending to real estate.
The moment banks are allowed to handle their business, real estate prices should correct significantly.

Like (1)

CMA SWAPAN KUMAR SAHA

Jan 13, 2014

Dear Sir,
I agree that biggest problems are to combat inflation and enhance growth for that investment in infrastructure is required.
But I feel right now a policy on population control and arresting corruption are the priorities. Otherwise ,the additional population will eat everything at GP ( geometric progression)rate whatever would be produced in AP (arithmetic progression) rate.
With best regards.
CMA SKSaha.

Like (1)

Abhay Dixit

Jan 12, 2014


Food inflation can be tackled by doing away with control government has over agricultural mandies and freer movement of food items. Transport and storage
(refrigeration etc) infrastructural alone will not be sufficient.

Like (1)

Colonel(R) VK Malhotra

Jan 12, 2014

I think Mr.Dossani should take up the job of being financial cum political advisor to the FM. No jokes. He has ideas and if he is able to make the FM and PM a little more wiser he would do a great service to this nation. His point on housing is valid and should be seen with the perspective of leading growth in all the connected fields; transport, service industry, labour, cement, iron and steel, brick kilns, construction materials of all kinds, employment to workers ( masons, carpenters, plumbers, painters, and what not ). I wish Mr. Sharad Pawar, should have the courage to look beyond the sugar industry and fight for a case to provide cheaper finance (as he has done for sugar industry recently ) to the housing projects(which may be asked to have a %age of houses earmarked for the weaker sections, to be given to them on cost to cost basis with no subsidy) it can lead to growth in the sectors as stated. But, Alas, who would like to take Mr. Dossani, as advisor, as he may not suggest ways and means to pocket. So we will remain wherever we are till there is a change: both in our thoughts and deeds.

Like (1)

chandrasekaran

Jan 12, 2014

All your solutions are right for the right people, but in our nation every developmental allocations have been dissolved in the thin air when it reaches the end point, let them plug every malpractice & corruption then if they start processing the developmental activity that would be the sustainable one & the actual growth may pop-in only after a long effort with the continued vigilance on the created develpment

Like (1)

Balakrishnan R

Jan 12, 2014

The aim to develop road is to reduce transport cost. It would be better done with two way rail links and additional metro rails in as many cities as possible.

In housing development, we should be careful. In most cases fertile lands are converted into housing plots. It should be avoided as much as possible. Waste non-fertile lands should be identified and offered for housing development.
Power is another most important infrastructure requirement. Non conventional energy sources such as wind and solar should be given a thrust.

Like (1)

Krishnan P.Nair

Jan 12, 2014

Cheaper housing,improved transportation and availability of food are defenitly important factors to reduce inflation and accelerate growth.Steps to achieve these and will to implement the actions are a) may be not crystallised in our country and
b) certainly citizens are not having focus and not willing to adopt.
Mr.Asad Dossani may suggest few concrete steps every individual citizen should follow to contribute in miniscules to the target achievement, since in the present status of the society, the three factors still will be effective only with government involvement, may be with even many parliamentary ordinances, which is always a mockery in democracy like India.As government struggles to do something the citizen should do his bit to contribute more.Citizens are not preoactive,he will not do on his own,he should be guided through .One example: Transportation improvement : The way each individual drives cars,motorcycles,buses,trucks etc can be improved by himself,with little added regulations controlled by police to follow the traffic rules strictly.No investment required.If we are able to achieve good discipline of driving on our roads,I am certain that transportation can be made more efficient,cost reduction and great benefit.How do we do it? A traffic maintenance ministry headed by a very sincere minister with a missionary group of talented individuals in what ever capacities drafted for few years can achieve wonders in the states.This programme should be monitored and driven by nothing other than the prime minister of the country with the zeal and importance he gives to space technology and atomic enery departments under him.This is a mission to work on and with missionary zeal.Results will be amazing and ever embedding into our behavioural pattern.To see it,this is very very small,but the benefits will be enormous.
May be more of these kind of maintenance ministries and missionary ministers are one small step to achieve growth and reduction in inflation with practically no cost.
Good luck,
K P Nair.

Like (1)
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