Another Bubble likely

A year ago investors were panicking and there was talk of another great Depression. Now the share prices in all most all the economies are 70-100 % higher than their respective lows of 2009. This was mostly due to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets.

Central banks see these market rallies as a welcome side- effect of their policies. The market rebound was necessary to stabilise economies last year, but now there is a danger that bubbles are being created. Apart from high asset valuations, the other symptoms of a bubble are rapid growth in private-sector credit and an outbreak of public enthusiasm for some particular assets. The longer the world keeps its interest rates close to zero, the greater the danger that bubbles will appear and its most likely in emerging markets specially China.

The remedies could be forcing banks to adopt higher capital ratios which will curb speculative excesses apart from the interest rate which clould me a major tool to curb speculation. But central banks are wary of using these measures to pop bubbles because it risks of crushing growth as well. Current scenario of high asset prices, low interest rates and massive fiscal deficits seems unsustainable.

Interest rates will stay low only if growth remains slow. But if economies grow slowly, then profits will not rise fast enough to justify current share prices and incomes will not rise far enough to justify the prevailing level of house prices. On the other hand, if the markets are right about the prospects for economic growth, and the current recovery is sustained, then governments will have to react by cutting off the supply of cheap money.

Water crisis- Immediate action required.

Nearly all large cities in India are in the grip of a serious water shortage, and it isl ikely to get worse in days ahead. As global warming makes the weather more unpredictable, the water economy of urban India will have to be planned without depending on reservoirs getting routinely filled up by rain every year. The solution to the cities’ water problem has to be sought mostly within the cities themselves by trapping rainwater, saving water and recycling as much of waste water as possible.

May be a part of the solution lies in simply running the water utilities better. Another solution lies in regulating and pricing the exploitation and use of groundwater. If this is not done, then groundwater levels will keep travelling lower and start scripting a disaster in the not too distant future. Water use has to be charged through pricing reflecting long-term sustainable cost. There need be no controversy over whether poor slum-dwellers should be made to pay because they already are, often with money and invariably with their time.

Few good examples cld be, Chennai has now a well-established system of mandatory water harvesting and the Hubli-Dharwad's infrastructure, efficient delivery and recovery of user charges have enabled 24x7 supply of affordable water.

Its time now for other cities to follow and replicate if they cant better it.

Economy- Moving from the crossroads

The Union finance ministry’s mid-year fiscal Review, tabled in Parliament last week, notes very correctly that the “current period represents a crossroads for the Indian economy”. Having weathered the global economic downturn, the Indian economy has performed better than expected. The review offers an honest account of the challenges ahead, hence the view that India is at a crossroads.
Much of the near 7.0 per cent growth this year has come from the government’s fiscal stimulus packages. As the government gradually winds down the stimulus, which it must in the interests of fiscal prudence, private consumption and investment will have to step in to sustain the growth process. For this, the economy needs policy reform and sustained investment, especially in infrastructure, that can drive the growth process forward.
The Review also offers an honest assessment of the inflation challenge, noting that in the current phase, food price inflation is being driven both by supply constraints and the rising demand for food among the poorer classes — a consequence of the government’s pro-poor policies. By rejecting the view that inflation is being caused by rising aggregate demand, the Review seems to want to discourage a monetarist response to price rise.

A second concern that preoccupies the Review is the likely embarrassment of riches from a potential surge in capital inflows. The Review admits that such a surge could stoke inflationary pressures, firm up the rupee and reduce the competitiveness of Indian exports, entailing fiscal costs. Noting correctly that this could be a long-term challenge, but ruling out any early possibility of imposing a tax on capital inflows, the Review expresses the hope that such inflows could be channelised into productive investment in infrastructure. The government has also hinted that it can afford a deterioration in the current account deficit up to 2.5 per cent of GDP. Appreciating the policy dilemmas facing the Reserve Bank of India, the Review correctly takes the view that “the challenge is to support the recovery process without compromising on price stability and through a careful management of trade-offs”.
The most important trade-off is between growth and inflation, and between fiscal stimulus and fiscal rectitude. While underscoring the government’s commitment to fiscal rectitude, the Review is candid enough to state that the “timing of the exit and the pace at which it should be carried out will depend on the strength of the recovery and its sustainability without fiscal stimulus”. The Review is right to underscore the importance of reducing wasteful expenditure, especially on non-merit subsidies. This is an issue on which the government has remained at a crossroads for far too long, not taking the right path to fiscal rectitude. In the name of stimulus and growth, a range of subsidies are still dished out to a variety of vested interests. Till that bill is curtailed, not much can be done to move away from the crossroads on to the right path to sustainable growth.

BS