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Finally some good news from the IMF

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The Dalai Lama at the IMF? Not at all, but we think he would like the IMF's new de-growth manifesto and would be delighted if all macro-economists turned vegetarian. Photo: Courtesy the official website of His Holiness The 14th Dalai Lama of Tibet

The Dalai Lama at the IMF? Not at all, but we think he would like the IMF’s new de-growth manifesto and would be delighted if all macro-economists turned vegetarian. Photo: Courtesy the official website of His Holiness The 14th Dalai Lama of Tibet <;

The first signs of the long-awaited change in thinking at the International Monetary Fund (IMF) can now be seen in the World Economic Outlook report. This routine blatherfest, which is issued by the IMF’s slick-but-barmy public relations department, is unremarkable on every occasion and the only reason you’d want to punish yourself by plodding through the 500-odd pages of this ode to deforestation is to admire the very latest chic for presenting boring graphs and charts. But this time, it’s as if a Buddhist rinpoche has edited the manuscript.

What’s changed and why? For the year 2013 the IMF has said that ‘global output’ (output of what, you may well ask, but do hold your horses) to expand 2.9% instead of the 3.1% it had, in an unsporting manner, forecast this July. Between that monsoon month and this one some heads must’ve rolled at the IMF (many more to follow suit I hope) because now the IMF has taken a firm long stride towards its manifest destiny: bringing about the no-growth economy.

However, some die-hard lumpens are still doing their best to rally growth insurrectionists to their tattered flag. They are still making announcements like “our analysis attributes the slowdown in part to cyclical forces, including softer external demand and in part to structural bottlenecks” and are wondering why “this has happened in spite of supportive domestic macroeconomic policies, (still) favorable terms of trade, and easy financing conditions, which only began to tighten recently” but confess to being bemused by “a non-trivial portion of the slowdown remains unexplained, suggesting that other factors common to emerging markets are at play”.

Not to worry, these radical elements will soon be overwhelmed, rounded up, their iPads and Nasdaq terminals will be confiscated and they will be issued the standard entry level rations of organically grown tulsi tea, second-hand kolhapuri sandals (‘chappals‘ to the initiated) and Indian khadi kurtas.

All you ever wanted to know about excel charts but were afraid to ask. I have suggested to our IMF comrades that they rename the 'current slowdown' bubble 'the fish'n'chips crisis'.

All you ever wanted to know about excel charts but were afraid to ask. I have suggested to our IMF comrades that they rename the ‘current slowdown’ bubble ‘the fish’n’chips crisis’.

Nonetheless, I will be the first to admit that their ideologues present quite a different challenge. You can see for yourself how difficult it is going to be to dislodge some of the rebel ideologues from an IMF that has already, in rank and file, enthusiastically redefined odious growth to in fact mean none at all. This soporific video will help you judge. I couldn’t get beyond 00:07 of the footage before falling over with acute narcosis, but perhaps you are made of sterner stuff.

Likewise, one of the leading rebel subcomandantes is broadcasting a steady tattoo of counter-revolutionary propaganda. She has been recorded as saying “changing global growth constellations have exacerbated risks in emerging market economies” and that “monetary policy accommodation combined with domestic vulnerabilities in emerging market economies may lead to further market adjustment globally” and even threatening “risks of asset price overshooting or even balance of payments disruptions”.

It is only a matter of time before this resistance is overcome. Meanwhile, I would be remiss in my duties as a degrowth advocate along the inspiring lines now redrawn by IMF if I did not remind these recalcitrants that Chairman Mao had said “A revolution is not a dinner partyy” or that Muammar Gaddafi had written (the Green Book, naturally) that “Mandatory education is a coercive education that suppresses freedom. To impose specific teaching materials is a dictatorial act” and that General Vo Nguyen Giap had when confronting the enemy firmly said “Their morale is lower than the grass”.

Finally, intelligence reports just in have confirmed that the conclusion of the IMF’s revolutionary new no-growth tract, which reads “a new round of structural reforms is a must for many emerging market economies, including investment in infrastructure, to reignite potential growth” is in fact a printer’s devil.

Making sense of India’s credit rating palpitations

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The financial media in India and the mainstream English newspapers are sparing no effort to announce their alarm over the feint by a credit rating agency, Standard and Poor’s, to lower India’s sovereign credit rating. Standard and Poor’s (no, I don’t like the ampersand) is one of the three large agencies which the movers of global capital rely on to tell them where to move illusory money, the other two being Moody’s and Fitch.

As you can see from the tone and tenor of India’s craven business press – all of which are beholden to the country’s big corporations (cross-holdings are common) and which cheer every new sally in the direction of share bazaar capitalism made by the Ministry of Finance and Department of Commerce – their writers and columnists, their reporters and correspondents seem immobilised by rating fear.

The Business Standard reported: Global rating agency Standard & Poor’s on Monday cautioned India might become the first BRIC (Brazil, Russia, India and China) country to lose its investment-grade rating, unless growth issues were addressed immediately. The credit rating agency cited slowing GDP growth and political roadblocks in economic policy making as some of the factors that could lead to such an action.

The Mint commented: Some economists questioned the content and timing of the S&P report, titled Will India Be The First BRIC Fallen Angel?, which came some two months after the credit assessor lowered the outlook on India’s BBB- rating to “negative” from “stable”. The release of the report on Monday triggered a fall in the rupee and caused the benchmark index of BSE to slump. India was upgraded to investment grade in 2007. “In our view, setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, thus, its credit quality,” S&P analysts Joydeep Mukherji and Takahira Ogawa wrote in the research report dated 8 June.

The Economic Times commented: In an unusually direct reference to what it perceives to be poor quality of the nation’s political leadership, S&P has expressed concerns that ballooning government expenses, widening trade deficit and political vacuum could lead to protectionist policies. Prime Minister Manmohan Singh, whom the agency described as “unelected”, a reference to Singh’s membership of the Rajya Sabha, is battling more with party colleagues over policy than with cantankerous allies often blamed for policy paralysis, the rating agency said. It fears that government policies, which in some instances are aimed to benefit what the report refers to as “politically well-connected firms”, could result in a populist backlash against liberal economic policies. Heightened populism to counter the political fallout of corruption scandals could slow economic growth further, and weaken the already-battered fiscal position.

What do the credit rating agencies do for India? What do these three (and their counterparts in India) have remotely to do with the lives and well-being of the 800 million rural Indians (there are 355 districts whose populations are over a million), or the urban poor in India’s 53 million-plus cities? They are among the tools with which ‘reform’ is grafted onto a country in order to further immiserate the poor and annex natural resources for a global upper middle class whose ranks are being swelled by India’s new rich. They are among the staunchest advocates of ‘austerity’ in the belief (backed by kilogrammes of elegantly designed working papers from the International Monetary Fund and the World Bank, and yes the Asian Development Bank too) that such measures revive investor confidence. Credit rating agencies are the canaries of this intangible called investor confidence, and it ought to be seen as an intolerable affront to India that our people and our myriad economies are to be encapsulated – absurdly and so irrelevant – by the meaningless equations of Standard and Poor’s and its cousins.

“It is a hallmark of the crisis, that every effort the government makes to end it, within “neo-liberal” framework, will only succeed in worsening it,” said Prabhat Patnaik in ‘The End of the “Shine”‘ (People’s Democracy, 10 June 2012). The role of these agencies is to legitimise the enticement of finance back into an economy to keep its bubble spherical. Hence the worried tones of India’s business press, because far more worrying to them (as it is to the 5% of urban Indians who are the audience for this media, who control the flows of money and commodities and who exercise political power) is the spectre of a collapsed bubble being beyond recovery. That is why, every effort on the part of the government to tighten monetary policy in the belief that this would curb inflation and revive ‘investor confidence’ (currently viewed by the ruling alliance with more reverence than it accords to India’s Constitution) will hasten the economy’s downturn.

These are not uncoordinated gambits. In the latest issue of the IMF’s journal, Finance and Development, an article has discussed how “the relatively low-hanging fruit has been picked, and the harder, more exacting, job of addressing tougher problems lies ahead”. (The language sounds neutral but is loaded with violence.) The article goes on to outline an incomplete reform list: “identifying and building tools — still in the early stages of development — to mitigate systemic risk; improving the ability of the authorities to deal with the aftermath if the tools designed to prevent systemic events fail; and providing a framework for financial intermediation (the transfer of savings to investments) to assist in strong and stable economic growth, without overly prescriptive regulation.”

The IMF likes credit rating agencies; they are invaluable for the Fund’s agenda. Their work allows borrowers “to access global and domestic markets and attract investment funds, thereby adding liquidity to markets that would otherwise be illiquid”. The IMF’s Global Financial Stability Report 2010 (Chapter 3), ‘Sovereigns, Funding and Systemic Liquidity’ (2010 October), had said that these ratings “influence market prices, and that downgrades through the investment-grade barrier trigger market reactions… shows that their market impact is associated not only with new information, but also with a ‘certification’ role, though this is most evident through their use of ‘outlooks’, ‘reviews’, and ‘watches’ (pre-rating change warnings) rather than actual rating changes”.

Not content with the sophistication of the regime denoted by the alphabetic identifiers such as AAA, AA or BBB  and the pluses and minuses appended thereunto or removed therefrom – or more likely anticipating that the means used to ‘tend’ bubbles by the agencies was as likely to be used as political ammunition as it was to be cunningly exploited by the commodity traders and their money market partners – India’s Ministry of Finance this year developed an index of relative ratings of sovereigns. This it has called the Comparative Rating Index of Sovereigns. What will such an index serve? “Given that existing ratings do not give an idea of the inter se rankings of various economies with respect to the performance of the others, this index addresses an important conceptual lacuna,” the paper has explained. “The results reveal major changes in relative ratings of various countries, driven largely by the rapid downgrades of some European economies following the global financial crisis.”

And so we have the ‘Comparative Rating Index for Sovereigns (CRIS): A Report Based on “The Relativity of Sovereigns: A New Index of Sovereign Credit Ratings and an Analysis of How Nations Fared over the Last Six Years’ (2012 March). This is the ‘let’s pat ourselves on the back regardless of what the rating agencies say’ argument, and it is a sorry effort to lend an ephemeral shine to the old India Shining metaphor (insubstantial as that was, overused as it came to be). That is why the outcome of this indigenised index is that “India’s Comparative Rating Index for Sovereigns has improved over the six years from 2007 to 2012 by about 2.98% while its rank moved up from 61st to 55th… The US has gone from the top of the chart to the 13th position though it still improved its CRIS score by 2.12%… Some of the largest falls were among European economies and Japan. Greece fell by 71 positions, Ireland 68, Iceland 61, Portugal, 53, Spain 36 and Japan 21. BRICS economies show continuous improvement and the global financial crisis does not seem to have impacted them adversely in terms of CRIS scores”.

A counter index to nullify the unattractiveness of the credit ratings own indices – ratings that are meaningless to Bharat and its people. If we needed more evidence that our major ministries are populated by lotus-eaters – as is the Planning Commission and its opulent toilets – this is it.

FAO food price index tops the 2008 peak

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The UN Food and Agriculture Organization’s food price index has risen to 214.7 for December 2010, which is above its peak of 213.5 in June 2008.

This new peak, at a time when the price of crude oil is above USD 90 a barrel, is the strongest signal yet that global foodgrain supply has entered a critical phase. The FAO index has been rising steadily through the second half of 2010 – we discussed it here.

The cereal price index stands at 237.6 which is almost 40 points below the peak of 274.3 (in April 2008). The oils price index stands at 263 which is just under 20 points less than the peak of 282.6 (in June 2008). The dairy price index stands at 208.4 which is 60 points under the peak of 268.6 (in November 2007).

But the sugar and meat price indices are at all-time highs. The meat price index is now at 142.2 (in September 2008 it was 137.4 and its previous all-time high was 139.3 in September 1990). The sugar price index is now at 398.4 which is an extraordinary 180 points above its all-time high of 218 (in March 1990 – it was 207 at the maximum during 2008). The sugar price index crossed 300 in August 2008 and remained above 300 until March 2010, and again crossed 300 in September 2010.

Comparing three-month averages for the FAO food index and its main index components helps us understand how the 2010-11 food price crisis compares with its predecessor in 2007-08:

Food     Meat       Dairy     Cereals    Oils       Sugar
3-month avg
at 2008 Jun    210.4    129.5    240.8    271.7    273.9    173.9
3-month avg
at 2010 Dec    206.4    141.2    206.3    227.0    242.1    373.7

A Bloomberg report quotes FAO senior economist Abdolreza Abbassian: “One might expect prices to come down in spring, and this may be in fact the worst. But given how unexpected the weather events have been, I for one would not want to bet on anything along those lines.” The report said that concern about drought doing harm to Argentine harvests helped corn jump 52% in Chicago last year and soybeans to rise 34%. Prices also gained as China, the world’s largest soybean buyer, became a net corn importer. Wheat added 47% in 2010 as Russia, hit by its worst drought in a half-century, banned all cereal exports.

“Eyes will be on the Argentina corn crop,” Abbassian said. “There is still, unfortunately, a potential for grain prices to strengthen on the back of a lot of uncertainty. If anything goes wrong with the South American crop, there is plenty of room for them to increase further.” Potential damage to South American soybean and corn crops is of greater concern for world grain prices than harm to wheat in Australia caused by floods, according to the economist. Argentina and Brazil are the world’s second- and third-biggest corn and soybean exporters after the US. “The watch is definitely on South America for the next two weeks,” Abbassian said. “Given the very tight corn market, and demand from China for soybeans and the tight soybean market, if those commodities start to rise more, that will also lift wheat.”

Agrimoney has a report polling commodities fund managers in several financial centres worldwide for their views. What they say about the impact major forecasts, such as the World Agricultural Supply and Demand Estimates, have is worth paying close attention to. The WASDE report provides the US Department of Agriculture’s comprehensive forecasts of supply and demand for major US and global crops.

Reuters has reported that India’s food inflation rose for the fifth straight week to the highest in more than a year, reinforcing fears it has spilt over to broader prices and cementing expectations of a January interest rate hike. “But the spurt in prices of many basic foodstuffs has also raised questions over the government’s ability to control price rises through monetary policy, with poor infrastructure, hoarding and supply bottlenecks contributing to stubbornly-high food inflation.”

Unseasonal rains are officially blamed for pushing up prices of vegetables such as onions and tomatoes, but some commentators point instead to poor agricultural productivity and transport after years of few reforms and weak government investment. Onion prices, a key food staple for Indian families, rose over 23% percent over the week to December 25. The food price index rose 18.3% in the year to December 25 and the fuel price index climbed 11.6%. This compared with 14.4% and 11.6% annual rises the previous week.

The Wall Street Journal has said that food prices in India are continuing their sharp rise, increasing concerns among economists about a prolonged spell of high prices and adding pressure to the central bank to raise interest rates later this month. “The Reserve Bank of India next meets on Jan. 25 to consider an interest rate rise after pushing up rates six times in 2010 – one of the most aggressive tightenings of any central bank. But calls for a further move keep coming, most recently with the International Monetary Fund saying in a report released Thursday that rates need to be higher to curb inflation.

“The central bank will need to walk a fine line, however, since liquidity within the bank system is tight and further rate hikes could exacerbate that problem, economists said. Data from the Ministry of Commerce and Industry Thursday showed that the wholesale price index for food articles rose 2.5% in the week ended December 25 from the previous week. The year-on-year inflation rate for food surged to 18.32% from 14.44% the week before. It was the fifth straight week of rising food prices, which have been hovering at elevated levels in recent months.”

Food inflation in Asia and India, and a word about price indexes

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Vendors in Mapusa, Goa

Vendors in Mapusa, Goa. The middle basket contains 'nachne', local millet


The question in Asia again is food inflation. Entering the last quarter of 2010, news reports from South and South-East Asia cite continuing high food inflation as a persistent worry for consumers. The food weighting in Asia’s consumer price indexes is mostly high. China, India, Indonesia and Thailand have CPI weightings of 33%-46% for food.

Hence, persistently higher food prices pose a bigger risk of a rise in inflation expectations and wages in these countries as compared with higher per capita income economies on a relative basis, says the late September Global Economic Forum briefing from Morgan Stanley. “While job growth was affected by the latest global financial crisis, with GDP growth back to trend line and employment levels having recovered sharply, the risk of a rise in inflation expectations is significant. While employment statistics in the region are not very transparent, given the GDP growth trend, it appears that employment growth should have been strong.”

China, India and Indonesia together account for 40% of the global population. Any small increase in demand from these countries in the form of imports tends to push up global prices. The recent crop failure in India and its attempt to import sugar are a case in point. Moreover, there are some crops that are peculiar to local markets with very little global supply. For instance, in the case of India last year, the country fell short of pulses (lentils), and it was not really possible to import the crop even if the government had wanted to. Indeed, the top four (in terms of population) countries in the region (China, India, Indonesia and Thailand) are all net exporters of food items. All four countries tend to maintain inventories for staple items like rice and wheat, and have public distribution systems to ensure availability of these essential items at a reasonable price. Most countries in the region subsidise food for the poor.

Against this background, two recent speeches from senior figures in India’s central bank, the Reserve Bank of India, are worth examining closely. First, in ‘Managing the Growth-Inflation Balance in India: Current Considerations and Long-term Perspectives’ the deputy governor of the RBI Dr Subir Gokarn talks directly about food inflation (he gave the speech on 05 October 2010 at The Private Equity International India Forum).

“The inflation rate, which was briefly negative in the middle of 2009, began to accelerate rapidly later in the year. This upward momentum continued into the first half of 2010, with double-digit inflation persisting for a few months. The rapidity of the transition was surprising, given the fact that the recovery in growth was just getting under way and, importantly, the global situation was still very uncertain. However, the reason for the sharp increase was that all the possible drivers of inflation were simultaneously contributing. Each one by itself may not have resulted in the outcome that we saw, but all three working together resulted in a rather sharp acceleration. Food prices rose sharply because the monsoon of 2009 was deficient in most parts of the country, impacting agricultural production. However, there are, I believe, longer term forces at work on food prices, which are a matter of concern.”


UN Millennium Development Goals Report 2010 / UNICEF Photo

UN Millennium Development Goals Report 2010 / UNICEF Photo


Next, in a speech titled ‘Perspectives on Inflation in India’, executive director of the RBI, Deepak Mohanty (on 28 September 2010 at the Bankers Club, Chennai) said that the Reserve Bank is concerned over “the unacceptably high inflation rate”. Mohanty dwelt awhile on the Indian government’s new wholesale price index series.

“In the meanwhile, the Government has also released the new series on the Wholesale Price Index (WPI) changing the base year from 1993-94 to 2004-05. In terms of change in the relative weight of major commodity groups, the share of primary articles has gone down by 1.9 percentage points, which has been compensated by increase in the share of fuel group by about 0.7 percentage point and manufactured products by 1.2 percentage points. There has been a reduction in weightage of primary food articles and manufactured food products by 2.6 percentage points in the new series to 24.3 per cent from about 26.9 per cent in the old series.”

“Second, notwithstanding a significant reduction in weightage, the food inflation in the new series is higher than in the old series. This is because of change in the consumption basket in favour of protein-rich items such as egg, meat and fish where price rise has been high apart from milk and pulses. Third, the non-food manufactured products inflation is lower in the new series than in the old series. This is because of a substantial overhauling of the basket with the introduction of a number of new items. For example, the new series has 417 new commodities of which 406 are new manufactured products. Fourth, the new series has wider coverage. For example, the number of price quotations has increased from 1,918 in the old series to 5,482 in the new series. The new series, therefore, is better representative of overall commodity price inflation.”

What is curious is that these trends have taken place during a phase of rapid growth in India’s formal economy. Gokarn explained that what was most significant from the monetary policy perspective was the growing visibility of demand-side pressures. He examined the price dynamics of the manufacturing sector – overall and without the food processing component. The latter, he said, has been used by many analysts as a reasonable proxy of demand-side inflation, which is the phenomenon that monetary policy can and should influence. Both sectors he said, and particularly non-food manufacturing inflation, “show a tremendous acceleration from a significantly negative rate of inflation during 2009 to reach rather worrisome levels by the middle of 2010”.

Mohanty finds that the new series of WPI inflation marks a major change in terms of scope and coverage of commodities and is more representative of the underlying economic structure. As per the new series, the manufactured products inflation is lower than what was seen on the basis of the old series, he said. The food price inflation, on the other hand, is higher than what was seen on the basis of the old series. “The high level of food prices is The 100th postindeed a matter of concern as the prices of protein-based items, which have a higher share in the consumption basket, are showing larger increases”. Moreover, Mohanty said, there is continuing shortage of food items such as pulses and edible oils. “If the supply response doesn’t improve, there is a risk that food price inflation could acquire a structural character”.