RBI’s tight monetary policy may not have to be extended: FM

"I feel that the existing monetary policy of reigning in inflation may not have to be extended... If the monetary policy is extended, there will be an overall impact on the growth scenario," finance minister Pranab Mukherjee said

Kolkata: Finance minister Pranab Mukherjee on Sunday expressed hope that the Reserve Bank of India (RBI) may not continue with its tight monetary policy as it may have implications on economic growth, reports PTI.

"I feel that the existing monetary policy of reigning in inflation may not have to be extended... If the monetary policy is extended, there will be an overall impact on the growth scenario. I am optimistic that the present monetary stance will not have to be extended," Mr Mukherjee said at a CII event here.

In its bid to tame inflation, RBI has hiked policy rates 11 times since March 2010. The overall inflation, which crossed 9% mark in December stood at 9.22% in July.

However, with higher cost of borrowing and slowing project investments, gross domestic product (GDP) growth for the April-June quarter (Q1) slipped to an 18-month low of 7.8%. In the corresponding period last year, it was 8.8%.

Referring to slowing of GDP growth in the April-June quarter, the finance minister said, "It is disappointing but not totally unexpected... If the monsoon is good, then GDP will be better."

Mr Mukherjee further said that good monsoon would help bring down food inflation to 6%-7% by March end. After a gap of over five months food inflation jumped to double digits. It was at 10.05% for the week ended 20th August as onion, fruits, vegetables and protein-based items turned more expensive.

"I hope good monsoon and elimination of seasonal factors will bring down food inflation to single digit. By the end of the year, it should be around 6% to 7%," Mr Mukherjee added.

Further, Mr Mukherjee said that the Indian economy should come back to the path of fiscal consolidation, after expansionary policy stance of the fiscals 2008-09 and 2009-10.

He also sought cooperation of opposition for passage of the several financial sector reform bills pending in Parliament. Several important bills like increasing foreign direct investment (FDI) cap in insurance sector and Goods and Service Tax (GST), are pending in Parliament.

"Other political parties will have to cooperate so that the legislations are passed. Legislation concerning economic reforms could not be passed in Parliament as it did not function," the finance minister said.

Trying to allay fears about high fiscal deficit (FD) in the first quarter, he said it was nothing unnatural.

"While FD in the first quarter was 55%, it was around 58% on average for the last five years in the similar period. It always happens. For the current year, FD would be 4.6% of GDP," he said.

The finance minister said that there had been considerable buoyancy in direct tax and indirect tax collections during the first four months. "It is quite satisfactory".

"I have fixed a target of 10% more resource mobilisation for the current year," he said.

The finance minister said that the department had taken a decision to refund I-T refunds upfront. "This has lead to some cash management problems, but we'll be able to tackle it and in the later part we will have nothing to pay," Mr Mukherjee said.

On the expenditure side, the finance minister said that expenditure pattern of key ministries would be monitored on a quarterly basis. "I am telling the ministries to go on making expenditure but not to park resources somewhere and claim that expenditure has been made."


Urea output to rise to 223 lakh tonnes in FY11-12: Govt

In order to boost urea output, the government has decided to revive the closed units of Fertiliser Corporation of India and Hindustan Fertiliser Corporation, minister of state for chemicals and fertilisers Srikant Jena informed the Rajya Sabha last week

New Delhi: Production of urea, a key fertiliser, is expected to increase by 4.2 lakh tonnes to 223 lakh tonnes this fiscal, reports PTI.

India produced 218.80 lakh tonnes of urea in 2010-11, minister of state for chemicals and fertilisers Srikant Jena informed the Rajya Sabha last week.

Consequently, imports of the essential crop nutrient are estimated to decline by 4.1 lakh tonnes to 62 lakh tonnes in the 2011-12 financial year compared to 66.10 lakh tonnes in the last fiscal.

"In the financial year 2011-12, the projected demand and indigenous production of urea is 285 lakh tonnes and 223 lakh tonnes, respectively. The gap is met through imports," Mr Jena said.

In order to boost urea output, the government has decided to revive the closed units of Fertiliser Corporation of India (FCIL) and Hindustan Fertiliser Corporation (HCIL).

The government has decided to revive the Sindri, Gorakhpur, Talcher and Ramagundam units of FCIL as well as the Barauni and Durgapur units of HCIL. All the units were shut down in 2002 by the government.

The Cabinet Committee on Economic Affairs (CCEA), in its meeting held on 4 August 2011, decided to revive the four units of FCIL and two of HCIL, Mr Jena informed the House.

The minister added that the list also included two non-commissioned fertiliser units at Korba and Haldia, which were set up by FCIL and HFCL, respectively.

Urea is the only fertiliser subject to partial movement, distribution and statutory price controls. It is imported for direct use on the government account to bridge the demand-supply gap.

A proposal for a Nutrient-Based Subsidy (NBS) for urea is under the government's consideration.


This recession is different: Booms in the emerging economies have accumulated too much debt

Conventional wisdom is that the recent global crisis was caused by developed countries and that many emerging markets were barely touched by the recession. On the contrary many of these economies have not only been expanding, but also overheating, and the amounts and the extent of debts they have piled up in the process are only just beginning to be realised

The US Department of Labor announced its monthly job report last week. Economists had hoped that the report would announce 68,000 new jobs had been created in the United States in August.  Instead they got zero. Not really a good sign concerning the health of the US economy. It is even worse if you look at the global economy. In a recent report on purchasing managers' indices (PMI) for 17 countries, only Japan, Poland and the Czech Republic saw rising new orders. Many of the indices were at 2009 levels.

What has happened to the economies in the developed world? Carmen M Reinhart, a senior fellow at the Peterson Institute for International Economics, and Kenneth S Rogoff, a professor of economics at Harvard University, have an answer. According to Ms Reinhart and Prof Rogoff this recession is different.

Most recessions are part of a normal business cycle. Business cycle recessions are usually short-lived. There is a quick contraction followed by rapid growth. This recession is the result of a financial crisis. Financial crises are caused by too much debt. When economies accumulate too much debt during a boom, they have to get rid of the debt during the bust. When you have too much debt, it is impossible for the economy to grow.

Getting rid of the debt is difficult. There are two ways. First, the debt gets restructured, but this is a long and difficult process. In game theory a debtor's best move is not to pay a creditor back. During a boom it is easier to finance a house at an inflated price, than to foreclose on the property after the bust. It is easier for a consumer to run up a credit card debt, than for the bank to force them to pay the debt back. It is easier for a country to sell sovereign bonds than to force the country to raise taxes on its citizens to pay the money back.

The second way to get rid of a debt is to make money and pay it back. But if there is too much debt hindering growth of an economy, or the debtor is unemployed, it is difficult to find the cash to pay off the creditors. The problem becomes acute when the debtor's failure to pay inevitably leads to revelations about the magnitude of the problem. The result is that recovery from a financial crisis can be long and painful.

The conventional wisdom is that the recent global crisis was caused by developed countries. Many emerging markets were barely touched by the recession. On the contrary, as I pointed out in my column at the beginning of the month, many of these economies were not only expanding, but also overheating. According to the The Economist's emerging markets overheating index, the economies of Argentina, Brazil, India, Indonesia, Turkey and Vietnam have real issues. In order to control the inflation created by the rapid growth, almost every economy with the notable exception of the US and Japan, have recently raised interest rates to slow growth.

As I pointed out in my previous column, the booms in the emerging markets have also resulted in very large debts. The amounts and extents of these debts are just beginning to be realised, but they are substantial throughout the emerging markets and especially in the BRIC economies. So the stage is set for a major contraction, and it has happened before.

In the mid-1970s, both the US and Europe went into recession. The US problems ended in stagflation and the economy did not achieve sustained growth until 1983. The emerging markets (then known as Less Developed Countries or LDCs) did not immediately feel the stress of the recessions due to a flood of recycled petrodollars from the oil shock. When the investment boom ended like all major investment booms, LDCs suffered the "Lost Decade" of the 1980s.

According to Prof Michael Pettis, "Every single case in history that I have been able to find of countries undergoing a decade or more of 'miracle' levels of growth driven by investment (and there are many) has ended with long periods of extremely low or even negative growth-often referred to as "lost decades".

Why the aftermath of a financial crisis in an emerging market is worse than that in a developed market, has to do with debt. In a developed country liquidating the debt is difficult and time-consuming. In emerging markets, it is impossible. For the average OECD country, a bankruptcy takes 1.7 years and returns 70% of the original amount loaned. In emerging markets the process can take over four years and return less than 20%. So when the stench of debt rises, it stays around for a long, long time, because the legal plumbing necessary to wash it away doesn't exist.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected]  or [email protected].)



Nalliah Thayabharan

6 years ago

US$, Wars & Earthquakes

By Nalliah Thayabharan

At the end of WWII, an agreement was reached at the Bretton Woods Conference which pegged the value of gold at US$35 per ounce and that became the international standard against which currency was measured. But in 1971, US President Richard Nixon took the US$ off the gold standard and ever since the US$ has been the most important global monetary instrument, and only the US can print them. However, there were problems with this arrangement not least of all that the US$ was effectively worthless than before it reneged on the gold-standard. But more importantly because it was the world’s reserve currency, everybody was saving their surpluses in US$. To maintain the US$’s pre-eminence, the Richard Nixon administration impressed upon Saudi Arabia and therefore Organisation of Petroleum Exporting Countries(OPEC) to sell their oil only in US$. This did two things; it meant that oil sales supported the US$ and also allowed the USA access to exchange risk free oil. The USA propagates war to protect its oil supplies, but even more importantly, to safeguard the strength of the US$. The fear of the consequences of a weaker US$, particularly higher oil prices is seen as underlying and explaining many aspects of the US foreign policy, including the Iraq and Libyan War.

The reality is that the value of the US$ is determined by the fact that oil is sold in US$. If the denomination changes to another currency, such as the euro, many countries would sell US$and cause the banks to shift their reserves, as they would no longer need US$ to buy oil. This would thus weaken the US$ relative to the euro. A leading motive of the US in the Iraq war -- perhaps the fundamental underlying motive, even more than the control of the oil itself -- is an attempt to preserve the US$ as the leading oil trading currency. Since it is the USA that prints the US$, they control the flow of oil. Period. When oil is denominated in US$ through US state action and the US$ is the only fiat currency for trading in oil, an argument can be made that the USA essentially owns the world's oil for free. Now over $1.3 trillion of newly printed US$ by US Federal Reserve is flooding into international commodity markets each year.

So long as almost three quarter of world trade is done in US$, the US$ is the currency which central banks accumulate as reserves. But central banks, whether China or Japan or Brazil or Russia, do not simply stack US$ in their vaults. Currencies have one advantage over gold. A central bank can use it to buy the state bonds of the issuer, the USA. Most countries around the world are forced to control trade deficits or face currency collapse. Not the USA. This is because of the US$ reserve currency role. And the underpinning of the reserve role is the petrodollar. Every nation needs to get US$ to import oil, some more than others. This means their trade targets US$ countries.

Because oil is an essential commodity for every nation, the Petrodollar system, which exists to the present, demands the buildup of huge trade surpluses in order to accumulate US$ surpluses. This is the case for every country but one — the USA which controls the US$ and prints it at will or fiat. Because today the majority of all international trade is done in US$, countries must go abroad to get the means of payment they cannot themselves issue. The entire global trade structure today works around this dynamic, from Russia to China, from Brazil to South Korea and Japan. Everyone aims to maximize US$ surpluses from their export trade.

Until November 2000, no OPEC country dared violate the US$ price rule. So long as the US$ was the strongest currency, there was little reason to as well. But November was when French and other Euroland members finally convinced Saddam Hussein to defy the USA by selling Iraq’s oil-for-food not in US$, ‘the enemy currency’ as Iraq named it, but only in euros. The euros were on deposit in a special UN account of the leading French bank, BNP Paribas. Radio Liberty of the US State Department ran a short wire on the news and the story was quickly hushed.

This little-noted Iraq move to defy the US$ in favor of the euro, in itself, was insignificant. Yet, if it were to spread, especially at a point the US$ was already weakening, it could create a panic selloff of US$ by foreign central banks and OPEC oil producers. In the months before the latest Iraq war, hints in this direction were heard from Russia, Iran, Indonesia and even Venezuela. An Iranian OPEC official, Javad Yarjani, delivered a detailed analysis of how OPEC at some future point might sell its oil to the EU for euros not US$. He spoke in April, 2002 in Oviedo Spain at the invitation of the EU. All indications are that the Iraq war was seized on as the easiest way to deliver a deadly pre-emptive warning to OPEC and others, not to flirt with abandoning the Petro-dollar system in favor of one based on the euro. The Iraq move was a declaration of war against the US$. As soon as it was clear that the UK and the US had taken Iraq, a great sigh of relief was heard in the UK Banks.

First Iraq and then Libya decided to challenge the petrodollar system and stop selling all their oil for US$, shortly before each country was attacked. The cost of war is not nearly as big as it is made out to be. The cost of not going to war would be horrendous for the US unless there were another way of protecting the US$'s world trade dominance. The US pays for the wars by printing US$ it is going to war to protect.

After considerable delay, Iran opened an oil bourse which does not accept US$. Many people fear that the move will give added reason for the USA to overthrow the Iranian regime as a means to close the bourse and revert Iran's oil transaction currency to US$. In 2006 Venezuela indicated support of Iran's decision to offer global oil trade in euro. In 2011 Russia begins selling its oil to China in rubles

6 months before the US moved into Iraq to take down Saddam Hussein, Iraq had made the move to accept Euros instead of US$ for oil, and this became a threat to the global dominance of the US$ as the reserve currency, and its dominion as the petrodollar.

Muammar Qaddafi made a similarly bold move: he initiated a movement to refuse the US$ and the euro, and called on Arab and African nations to use a new currency instead, the gold dinar. Muammar Qaddafi suggested establishing a united African continent, with its 200 million people using this single currency. The initiative was viewed negatively by the USA and the European Union (EU), with French president Nicolas Sarkozy calling Libya a threat to the financial security of mankind; but Muammar Qaddafi continued his push for the creation of a united Africa.

Muammar Gaddafi’s recent proposal to introduce a gold dinar for Africa revives the notion of an Islamic gold dinar floated in 2003 by Malaysian Prime Minister Mahathir Mohamad, as well as by some Islamist movements. The notion, which contravenes IMF rules and is designed to bypass them, has had trouble getting started. But today Iran, China, Russia, and India are stocking more and more gold rather than US$.

If Muammar Qaddafi were to succeed in creating an African Union backed by Libya’s currency and gold reserves, France, still the predominant economic power in most of its former Central African colonies, would be the chief loser. The plans to spark the Benghazi rebellion were initiated by French intelligence services in November 2010.

In February 2011, Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), has called for a new world currency that would challenge the dominance of the US$ and protect against future financial instability. In May 2011 a 32 year old maid, Nafissatou Diallo, working at the Sofitel New York Hotel, alleges that Strauss-Kahn had sexually assaulted her after she entered his suite.

Accepting Chinese yuans for oil, Iran and Venzuelathey have constantly been threatened by the US. If euros, yens, yuans or rubles were generally accepted for oil, the US$ would quickly become irrelevant and worthless paper.This petro dollar arrangement is enforced by the U.S. military.

On Aug 18 2011, Venezuelan President Hugo Chavez announces a plan to pull Gold reserves from US and European Banks .Venezuela reportedly has the largest oil reserves in the world. Venezuelan President Hugo Chavez has been a strong proponent for tighter Latin America integration - which is a move away from the power of the US banking cartels.

Venezuelan President Hugo Chavez formed oil export agreements with Cuba, directly bypassing the Petrodollar System. Cuba was among those countries that were later added to the “Axis of Evil” by the USA. Venezuelan President Hugo Chavez has accused the US of using HAARP type weapons to create earthquakes.

On Aug 24, 2001 a 7 magnitude earthquake rocks Northern Peru bordering Venezuela which doesn’t use the Petrodollar system and Brazil which has been engaged in discussions to end US$ denominated oil transactions. Is it a coincidence that these uncommonly powerful earthquakes are occurring in historically uncommonly large numbers during such a short period of time?. And that they are occurring in or close to countries that have been seriously discussing plans to leave the Petrodollar system, or are already outside it?

HAARP stands for High Frequency Active Auroral Research Program. It is an ionospheric research program that is jointly funded by the US Air Force, the US Navy, the University of Alaska and the Defense Advanced Research Projects Agency. The HAARP program operates a major Arctic facility, known as the HAARP Research Station. It is located on an US Air Force owned site near Gakona, Alaska. HAARP has the ability to manipulate weather and produce earthquakes. It is capable of directing almost 4 Mega Watts of energy in the 3 to 10 MHz region of the HF band up into the ionosphere. This energy can be bounced off of the ionosphere and directed back down at the earth to create earthquakes. Patents have been applied for discussing such applications. HAARP could potentially be used by adversaries to produce such events.

HAARP based technology is being actively used to emit powerful radio waves that permeate the earth and subsequently cause strong enough oscillations along fault lines of targeted areas to produce earthquakes.

Thigh power radio waves of HAARP can be used to produce such intense vibrations as to cause an earthquake. HAARP based technology can be used to encourage/produce various weather phenomena such as hurricanes, flooding, or drought through manipulation of the ionosphere. Already Russia, China and Venezuela have suggested that a HAARP type technology weapon is capable of such and attack and been used against several countries causing severe destructions in Haiti, Japan, Russia, China, Iran, Chile, New Zealand, Afghanistan, India etc.

What would the probable response be to such an attack be? An armed conflict with the US? Or perhaps something more within reach and even more damaging at this point, the elimination of the Petrodollar system and a subsequent dumping of surplus US$ into the international and US financial markets resulting in the quick collapse of the US$. Attacking these countries with HAARP would destabilize their economies and currencies and to prevent a move away from the US$ and the Petrodollar system.

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