My interview at Sakaal Times On Budget Expectations

Even as Union Budget is presented on February 29, Manasi Phadke, a consultant economist, tells Namrata Devikar about the current state of the Indian economy.

What should the government do to tackle problems like inflation and price rise?
Well, technically, inflation has been soft in the last one year as compared to before, a gain that has primarily come in from the oil price reductions. However, food prices continue to be high, which is a cause of concern for the policy makers because it is these prices that are the most closely linked to welfare of the disadvantaged sections. Government needs to do more in food management. Food subsidies can be delivered much more effectively through the DBT mode and more coverage under DBT will be crucial as we go ahead.

How would you view the Indian economy at present?
Indian economy could well be described to be in ‘snooze-mode’. While it has clearly snapped out of the political logjam and economic stagflation, it is somehow yet to rise to the occasion. The growth has shown a revival at 7.6 per cent for 2015-16. However, this creates a GDP level that is nonetheless much lower than the potential output we can produce. The economic survey of 2015-16 has hinted at a long-term potential growth rate of 8-10 per cent and so there are clearly issues. As I see it, there are certain issues that are created externally and certain others, which are rather structurally and culturally Indian. The former includes a slowly growing global GDP, which affects export outlook, climate changes and monsoon vagaries, volatility in perceptions connected to emerging markets, etc. These do create problems, but it is the latter structural and cultural factors that are really tricky.

Structural factors pertain to the woeful levels of infrastructure and farm investments that have been witnessed in India. It takes time to cure such neglect. Again, the slowdown in revenues that was witnessed in India from 2011 onwards has contributed to a corporate sector that is by now debt-burdened. Even if revenue growth happens now, companies divert their earnings towards debt servicing, as a result of which investments suffer. The toughest to change however, would be the cultural factors. Everyone talks about the steep pendency rates in judiciary. However, our bureaucratic pendency is equally steep and creates a slower movement down the line from policy to implementation. While the Government has been changing things through a policy platform, structural and cultural roadblocks take time to clear and that is perhaps the greatest challenge right now. Given the political mandate that the government enjoys, it does seem to be a now or never time for these issues to be resolved and I am hopeful that they will stand resolved soon.

What should be the thrust and focus of the budget and why?
Clearly, agriculture has to be the focus point for the budget. It not only is a huge source of employment, but also can swing the price stability balance fairly sharply. Monsoon vagaries this year too have contributed to low production and high food prices. Add to that a burgeoning middle class with higher demand for protein foods, and you have a recipe for food inflation. The budget will have to allocate funds towards micro-irrigation systems, cold storages, crop insurance and financial inclusion. More allocations towards smart cities, education programmes, women and child programmes, re-capitalisation of banks will all be equally important. These allocations can only be supported provided the tax collection increases. Tax reforms should also be a thrust area, else we risk moving away from the fiscal consolidation path, with consequences for interest rates, exchange rates and inflation. Econometric results suggest that fiscal deficits can promote growth in the short run, which is tempting, but tend to be inimical for growth in the longer term perspective. Hence, another thrust area for the budget is to make sure that fiscal discipline is maintained.


The reader may view the interview directly at



Thus Spake Yellen: The true reason for the Sensex crash!

Dear Reader,

Hi! Here’s a spoof piece that I wrote on the Sensex crashing because of Janet Yellen catching a cold 🙂 It was carried today under my column “Tweakonomics” in the Hindu Business Line. You can see it at, else read it here directly. Do send in your comments! Enjoy!


“Ma’am, the weather has created an issue. I’m not sure our international audience can hear us properly. Should we postpone this, Ma’am?” That was Fed’s tech support, looking anxious and worried. “Whad! No, no… lend us go aheand with the pnodcast… achooo!!” That was Yellen, determined to set a few things right on the global front.

“But the pnodcast, errr, the podcast, is having serious tech issues Ma’am…” Tech support faltered as the Fed eyes glinted dangerously at him. “Okay, Ma’am. Good luck!”

Back home in India, at a typical Bambaiyya broking firm on Dalal Street, Boss was talking to the novice employee, freshly graduated from Delhi School of Economics and enthusiastic about sharing his gyan with the mere mortals, the traders. “Boss, as per OECD as well as NBER forecasts, the best predicted value of global growth rates should be in the range of 1.3 per cent, with a standard deviation of 0.2 per cent. The contagion could spread to India. I can’t wait to hear Yellen speak!”

“Arre, talk English. This is a broking firm, not a some fancy think tank. Why can’t we receive the signal properly? What is she saying? Ssshhh! Listen”

JY: I stand here tonday, waning to snet things right, ndespite poor nealth and ndespite this nasty cnrough.

Novice: Sir! She is saying its rough! Yaay, I was right!

Boss: Arre Bhagwan! Punch the sell button, idiot. You got to punch it before others. Gawd, why don’t I get youngsters with nimble fingers?

JY: We need to ndo something ndifferent, to nflow on indeas…

Novice: Sir! Didn’t I tell you? She is saying go slow on India!

Boss: Punch sell! Don’t talk, just punch sell… gawd, they’re all selling! What are you waitin for? Sell!

JY: The cnurrent nituation on oil has ncaused a slowndown which is very nconplex, not seen in the pnast nfifty years…

Novice: She is now talking about the Sensex and the Nifty getting into a slowdown. (Now with awe in his voice) I never thought a Fed governor would give so much importance to the Sensex!

Boss: Oye, give me your philosophy later. God, why did I hire an economist? Arre, punch sell. Oh my God, what was that? Was she saying something about who is a role model for the Fed?

JY (suddenly racked by a coughing fit): Achroo, ichko, achkoraaaa!

Novice: She said Haruhiko Kuroda! America is going to go into negative interest rates, Sir! Global scene looks to be really bad!

Boss: Arre, main toh looti gayo! Market bhi gayo! What are you staring at me for, you nutcase? Punch sell!

JY: With Bank of NJapan going into negative nrates, narkets are talking of other bnanks mirroring that move. I am not ngonig to buy that indea…

Novice: What! She is not going to buy on India!

Boss (in total despair): Market is totally down and we’ve lost so much money. What are you punching now, you idiot?

Novice: My resignation, Sir. The Sensex and Nifty are now both at 52-week lows. Hurrah! Time to join NDTV as an analyst!

Will the US raise interest rates in September?

No. Based on the volatility we’ve been witnessing in the global markets, it seems unlikely that the Fed will hike interest rates in the September review.

One of the external factors that the RBI has been watching closely for taking a call on its own interest rate stance is the behaviour of the US interest rate. Since Jan 2015, increasing number of Fed members, policy analysts and traders have opined that an interest rate hike in the US is a question of when, rather than of.

The markets were largely expecting that the Fed would raise its interest rates in the September review. The RBI, which did not slash rates in last month’s policy review, also seemed to be waiting for some kind of a cue coming in from the Fed, before it could give a reduction on rates.

Pre-volatility, why were the markets expecting the Fed to hike rates?

The basic argument was that the jobs data from the Labor Bureau has been very good in the run-up to August. Unemployment rate in the US seems to be around 5.5% (see chart below). Now, the Federal Reserve believes that the “Natural Rate of Unemployment” for the US stands between 5% and 6%. This is the unemployment rate faced by the US when the labor resource is almost fully employed. Thus, any further reduction in the unemployment to say, 5%, would eventually spark off wage inflation and feed into an overall price hike.


Has the inflation in the US been very high?

Actually, no. But since monetary policy is as much about managing inflationary expectations as it is about curbing the actual inflation, the Fed was taking a view that the current jobs data seemed to show a trend of future potential inflation. It would be necessary to curb this potential overheating by hiking interest rates.


How has the dollar been moving vis-a-vis other currencies in the past one year?

Now this is one trend which is really interesting. If we observe the US Dollar Index (which is 6 currencies weighted against the dollar), we find that the dollar has pretty much strengthened against a basket of currencies since September 2014. The aggregate strengthening of the dollar over the past one year works out to a hefty 14%. So for a year now, the dollar has been getting stronger, which has been hurting the exports movement from the US.


So what has changed now?

Many things.

  • Since the Emerging Market economies have all witnessed considerable depreciations in this week, the dollar will emerge even stronger once the dust starts settling down. This by itself, should help the economic system to move from overheat to a more calm economy.
  • Add to this the fact that cheaper exports and cheaper oil should take the inflation southwards. Since the Chinese growth rate is expected to be soft in the coming fiscal, the biggest buyer of commodities will be showing low demands. This will cause commodities to remain low for a while, helping inflation to be controlled for all economies including the US.
  • Finally add to this the fact that the Chinese Central Bank PBOC has reduced its interest rates in an attempt to excite the real sector fundamentals into growth. Even with the US interest rates untouched, it really creates a differential between the US interest rates and the Chinese interest rates, which effectively helps in controlling overheat and dampening inflation in the US.
  • One last point before I wind up. Interest rates are changed in order to give critical direction to the economy. By that I mean, that interest rates are used as an instrument to change values in the real sector of the economy. However, that they have an impact on financial markets is also a given. When markets are already jittery and on tenterhooks, it would be pointless to rattle them some more by hiking the rates at this point.

There seems to be no case left for a September hike anymore.