Outlook:Inflation: India

There is a cris-cross in the plot of WPI on Jun/06/2009. The index falling below the level COPPY. And the headline inflation dips into negative quadrant, as a rare case in past three decades. The weekly sequential growth for WPI is usually fluctiating. The range during 2007/jun/2009 is bound between +1.18 and -1.51. This leaves a scope of fulctiation of 330 bps over a fairly long time series of 156 data points. The tendency is of a simple 'mean revesion' and stationarity. The long-duree hump in 2008/9 series had computationally generated a rapid rise in inflation. Since Oct/2008 the WPI displayed a flattish growth. A 'naive' carry forward of Apr-May/2009 data is the base case scenario. This can be done on Excel by simply select and drag down.

As long as the projected blue line remains below the orange one, we may see a minus numbers computationally. This is the typical example of base effect. The computed point-to-point inflation will remain in negative quadrant during Jun/6-Oct/3/2009. This period of negativity may be shortened with a revision in the regulated domestic fuel prices. A upward revision of Re.1/litre of Diesel and Re.2/litre of Petrol will pull the Fuel index a little up and shorten the phase of negative inflation.

Leaving everything else as usual, and assuming a least gradient growth in WPI, would otherwise take the inflation up pretty fast. The FY2009/10 may end at 8 % plus inflation.

Government Finance: Equations and Ratio

Revenue receipts= Tax revenue + Non-tax Revenue
Capital Receipts=Recovery of Loans+Other receipts+Borrowings and Other Liabilities
Total Receipts = Revenue receipts + Capital receipts
Total Expenditure= Non-plan expenditure + Plan expenditure
Revenue non-plan expenditure, includes interest payments
Revenue plan expenditure
Capital non-plan expenditure
Capital plan expenditure
Revenue Deficit= Total expenditure- Revenue receipts
Fiscal deficit= Total expenditure - Revenue receipts- Recovery of loans-other receipts
Primary deficit= Fiscal deficit-interest payments
Key Fiscal indicators are expressed as a ratio to GDP at current market prices.

Consistency lacks in FRBM Rules 2004

The Fiscal Responsibility and Budget Management Act, 2003 mandated to eliminate revenue deficit and contain Fiscal deficit. A minimum reduction in deficits were prescribed in The Fiscal Responsibility and Budget Management Rules, 2004 rules. In order to improve fiscal transparency the FRBM Rules prescribed a statement containg three elements:
a. Macroeconomic Framework Statement: This report shows the underlying assessment of
growth prospects, and the underlying assumptions. It defines the macroeconomic backdrop
under which the fiscal policies and projections are being made.
b. Fiscal Policy Strategy Statement: This report specifies the policy measures pertaining to taxation, expenditure, subsidies, administered prices and borrowing.
c. Medium-term Fiscal Policy Statement: This report specifies three-year rolling targets for prescribed fiscal indicators, and the underlying assumptions.

The macroeconomic framework statement is the real anchor, as the key fiscal indicators are measure in respect to GDP at current market prices and the target ratios are sensitive to the denominator. For example, if the medium term fiscal policy statement wish to lay down targetted reduction in key fiscal indicators for Y+1 and Y+2, the GDP at current market prices for Y+1 and Y+2 assumes significance as denominators.

The prescribed template in macroeconomic Framework Statement however does not share this vision. It covers actual data for Apr/Reporting period for the previous and current year. Moreover, the template is seemingly outdated on certain descriptors and data categories:
a. The GDP at Factor cost at current price is not relevant as the Fiscal deficit indicator requires GDP at current market prices as a denominator.
b. The GDP series in base 1993/94 prices are not longer relevant.
c. Point-to-Point WPI cannot capture the inflation for a span reference period.
d. Foreign Exchange Assests is a non-existent data; either it is foreign exchange reserves or foreign currency assets, which is FX reserves excluding gold and SDRs, RTP at IMF )