Archive for August 22nd, 2017

Learning Game theory the Sholay way…(are happy endings just Nash Equilibrium audience likes to see?)

August 22, 2017

What started as a series of Tweets has become a very interesting Mint column today.

Avinash Tripathi explains game theory basics using one of the iconic scenes of iconic movie Sholay:

(more…)

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The policymakers also join the deflation chorus in India..

August 22, 2017

The deflation chorus keeps coming in India. A drop in inflation is termed as deflationary by media every now and then. Former ECB member Lorenzo Bini Smaghi had earlier warned that one should use the two D words – deflation and depression with caution. The reason is that both suggest really difficult times for both economy and policy. However, we seem to be using the word deflation with little caution.

For instance, this time around even Economic Survey says India suffers from deflationary impulses atleast in short term:

Optimism about the medium term and gathering anxiety about near-term deflationary impulses simultaneously reign over the Indian economy. Optimism stems from the launch of the historic Goods and Services Tax (GST), the decision in principle to privatize Air India; actions to address the Twin Balance Sheet (TBS) challenge; and growing confidence that macro-economic stability has become entrenched. Optimism, even exuberance,
is manifested in financial markets’ high and rising valuations of bonds, and especially stocks. At the same time, anxiety reigns because a series of deflationary impulses are weighing on an economy yet to gather its full momentum and still away from its potential. These include: stressed farm revenues, as non-cereal food prices have declined; farm loan waivers and the fiscal tightening they will entail; and declining profitability in the power
and telecommunication sectors, further exacerbating the TBS problem. For the year ahead, the structural reform agenda will be one of implementing actual and promised actions— GST, Air-India, and critically the TBS. The macro-economic challenge will be to counter the deflationary impulses through key monetary, fiscal, and agricultural policies. The opportunities created by the “sweet spot” that recent Economic Surveys have highlighted
must be seized and not allowed to recede.

Even in RBI MPC Minutes, both Governor and Deputy Governor mention deflation in food prices:

Statement by Dr. Viral V. Acharya

Inflation prints since the last policy have turned out even lower, though there are emerging signs that certain deflating food items are on a price rebound. 

Statement by Dr. Urjit R. Patel

…….An assessment of whether the recent deflation in food items is sustainable, despite a normal monsoon, would require more hard data going forward.

There is always this confusion when the term deflation is mentioned. What people perhaps mean is disinflation but they end up calling it deflation.

Robert Ophele, then Deputy GOvernor of Banque de France clarified:

Inflation refers to a sustained increase in the general price level in an economy. It is not an instantaneous shock limited to the prices of certain goods. It is a persistent and general process. Inflation is fuelled by expectations – when workers and companies expect prices to rise, they adjust upwards their prices and wages accordingly.

Conversely, deflation is a sustained decrease in the general price level in an economy. If only certain prices fall, it is not deflation. For example, the price of laptop computers or hi-fi equipment may decrease due to technological progress, but this is not deflation.

Disinflation is a reduction in the rate of inflation or a temporary decrease in the general price level in an economy. For example, if inflation falls from 3% to 1% per year, this is disinflation. If, however, the rate of inflation falls into negative territory, to 1% per year for example, and this decrease is expected to last, this is deflation.

In a recent piece Tandit Kandu of Mint clarifies the so called deflation only on account of fruits and veggies:

The second volume of the Economic Survey released a little over a week ago by the Union finance ministry warned that the Indian economy faces deflation risks owing to the problem of over-leveraged private sector balance sheetsand other headwinds such as GST and rural distress. Concerns over deflation risks are understandable, given the recent downward trend in retail price inflation.

However, a Mint analysis suggests that the sharp drop in inflation below the Reserve Bank of India’s (RBI’s) 4% target has been driven by only two items—pulses and vegetables. The analysis shows that consumer price index (CPI), excluding pulses and vegetables, rose at the rate of 3.8% in July, much higher than the official headline figure of 2.4% inflation for the month. The re-calculated CPI is based on adjusted weights after excluding pulses and vegetables from the basket of goods and services.

…..

Thus, there does not seem to be any imminent threat of deflation in India. A more apt characterization of the recent trends in prices may be ‘disinflation’ (a fall in the inflation rate) rather than deflation (falling prices) given that overall inflation, excluding pulses and vegetables, is close to the RBI target of 4%.

This is pretty much the story each time deflation is mentioned in India. One or two items/categories lead to decline in inflation levels and we call it deflation in India and clamoring for monetary and fiscal stimulus.  Whereas deflation is persistent decline in most prices (if not all) and there is nothing of this sort happening here.


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