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Dear its the linking of Gold ETF and Gold Deposit scheme which is likely to have more impact on CAD (reduce CAD).
The Gold ETF also has impact ( i.e reducing CAD) but the linking of above two schemes have greater impact.
Lets understand these schemes.
Gold ETF - ETF means Exchange Traded Fund . It means these are assets which are generally traded in stock market . For this the individual invest in company . Say I invest 30,000 rs . The company would buy gold as a security backup for this money (say 10 gm ). Now as the price of gold increases or decreases so does the asset price of my investment (i.e. 30,000 rs)
Usefulness - If i would have purchased gold directly say 10gm then it would have been idle with me but in this scheme I am investing money in economy and still enjoying the same security as of physical gold.
Negative aspect - Though I don't purchase fold yet the company in which i invest purchase gold so in net case India has to import gold ( India is poor in gold reserves) So net drain in forex.
Gold Deposit - It is scheme in which one deposits gold with bank or firm like Muthoot and gets the loan on behalf of its security.
Usefulness - The banks could use this gold to invest somewhere but till recent they were not allowed to invest in Gold ETF.
Negative - It does not help in curbing gold import.
Linking Gold ETF & Gold Deposit
Now since both schemes are linked so suppose a person A is going to deposit gold in bank and take loan and a person B is investing in gold ETF then the bank can provide the gold deposited by A to the firm providing gold security to B . In turn the domestic gold provided by A has helped to get Gold ETF to person B and there has been not need to import Gold. So it has two positive effects-
1) There has been reduction in gold imports. 2) There has been active utilization of gold in economy
Negative effect-
The risk sharing of person A is linked to person B
I guess it has become too lengthy but tried to elucidate in as detailed way as possible.
@Vazu Third you already have figured out why there was not rise in other items and only food sector because the percentage of saving has increased ( you have assumed 0) . So you know the fault .
You are absolutely right for the main cause
Bhai even if you take saving with that increased percentage the Per person contribution for buying protein food is decreasing with respect to the contribution made for other consumption,
and my view on why the cost of others are not increasing is "because as SC stated the middleman is the main reason of inflationary pressure, Food industry comprises of the longest chain of middleman, so i blv the reason is supply chain and further the middleman in it.
so thats not a fault
P.S.: Am not sure whether SC or some one else but i heard something on it.
Please explain if Gold ETF investment has same effect on CAD or not as that of physical gold investment?
PS - I am weak in English. I hope you understand the question.
Yes definitely, in ETF we don't buy(Import) the real gold METAL we only give units of gold on paper which at the time of buying are derived from the gold price on that date.
And when the investor want to move out of the ETF he just sell his units for cash and not gold, this instrument is for those who invest in gold and don't buy gold for other purposes.
Further, the purchase of gold comes only when the fund plans to dissolve, which also depends on the specific conditions of particular ETF.
Can high interest rates resolve the problem of Food inflation ?? ( Due to which RBI has not decreased interst rate this month )
Yes, Consumer is the king, if they say we don't have money for your product, the prices will fall.
Problem for food inflation connection with interest rate is that , how many people take loans from bank for food ?
To a little extent consumers can spend extra on food articles ( if they are already in loan) which can push inflation but will it effect that much that RBI have to adjust its policy rate due to this
In my opinion , Food Inflation as Vaju said is more due to supply side constraints ( lack of back godowns, back end infra etc)
The Table 4.9 is at 2004-05 constant prices i.e. inflation adjusted. Hence I don't know how can you even make out about inflation from here. The table talks about the structural shift in the consumption pattern in the sense that people (esp urban) have started eating more nutritious food with more money at their disposal (pay revision, high corporate salaries, MGNREGA etc)... You said:
further if you workout, you will find that share of protein oriented expenditure in overall expenditure of a household is decreased, Its share increased in food consumption but decreased in overall expenditure.So, if the smaller amount money is chasing same goods then how it cause inflation it must caused deflation, there must be some other reason.
I guess, you forgot to consider that there is a limit to what a person can eat. Consider this: An adult male requires ~2500 kcal/day today and same in 1950-60. With increase in PCI almost 5 times from 1950s to 2010(see Fig 4.9 pg 89 of ES) he can eat better/costlier nutritious food but he can't eat like 5000kcal/day just because he has more money now. Thus earlier if he was eating pulses (primarily) for protein intake , now he can eat costlier protein foods like paneer, milk, meat, eggs etc more often. Thus with more money protein expenditure increased from ~1000 INR to ~2200 INR, both at 'constant prices'. Notably pulses still are poor man's protein but with MGNREGA they can eat a bit more. Thus it is only logical that while share of protein food will rise in total food expenditure but share of total food (or protein food) in total expenditure will decrease sharply with such high increase in PCI. This is what Engel's shift also talks about. So the point you made that smaller money chasing same goods is not valid
Now major reasons for inflation in protein foods: Demand Pull: 1.) More money with people due to higher wages. 2.) Irrational subsidies (LPG to middle/upper middle class) giving more money to people. 3.) Slower response to increasing consumption of protein rich foods. i.e. Supply demand mismatch
Cost Push: 1.) rise in input prices. MSP increase leads to higher feed, fodder prices. Also to produce 1kg of meat 7kg of fodder is required 3.) Regional concentration of production centres & High transportation cost (also increasing Diesel prices) 4.) Large number of intermediaries i.e. supply chain mismanagement issue. 5.) Limited back end infra like cold chains leading to reduced quality & increased wastage. High perishability , a very strong reason for lesser supply/production. 6.) Global commodity prices affecting domestic prices. 7.) Rupee depreciation make things even worse & increase input prices as it has cascading effect.
So, as you rightly pointed out that higher incomes can't be the only reason for protein food inflation, there are various cost push factors involved as well.
Also supply chain mismanagement is the biggest reason for food inflation in our country but if asked in exam we must explore the protein inflation aspect also.
Well I checked out but nowhere ES says "Protein food is the ONLY reason" (as stated by you). Please refer Table 4.4, point 4.23 (pg 90) to point 4.30 (pg 92). ES has mentioned ample number of reasons for food inflation apart from protein inflation.
Guys, just out of curiosity- Is Gold ETF relevant to our course, in the sense that it is more of a corporate news. Thats my opinion & please point out if I am wrong as I'm not paying much attention to such topics.
Can high interest rates resolve the problem of Food inflation ?? ( Due to which RBI has not decreased interst rate this month )
Yes, Consumer is the king, if they say we don't have money for your product, the prices will fall.
Food is necessary item and not luxury item so even if money supply goes down people will not stop eating . So there is practically negligent effect as you can see still the food inflation is high though inflation is low.
I have never denied the supply side constraint as main cause for food inflation
Economic survey mentioned two points: 1.) The reason of Inflation is protein focussed diet of Indian middle class 2.) Percentage of total expense for food is decreased,
the percentage of both, the rise of protein oriented diet in normal food and the fall in the contribution of expenses towards food in somehow same,
so what is the reason of Inflation? :-/
Some other sources on internet says that its not the consumption but the supply thats causing the Inflation,
so what is the actual reason?
Provide your views
I had tried to answer the question in my blog. I have included the direct link to the excel sheet. Please download it instead of checking it on google drive as few charts won't appear properly on google drive.
@aurelio Quantitative Easing in US means pumping more money by printing new money. Since more dollars are pumped the loans become cheaper and saving and deposit interest rates go down in America so the investors bring and invest these dollars into other countries where the interest rates are higher than in America(so better prospects of return on investment) . Now that US Fed chief has stated to stop Quantitative easing as they feel american economy is increasing so there will not be extra dollars (i.e. dollars to become dearer in U.S.) and thus these FII's are pulling their money invested abroad as they feel that they can get high interest rates in their own country.
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Comments
Dear its the linking of Gold ETF and Gold Deposit scheme which is likely to have more impact on CAD (reduce CAD).
The Gold ETF also has impact ( i.e reducing CAD) but the linking of above two schemes have greater impact.
Lets understand these schemes.
Gold ETF - ETF means Exchange Traded Fund . It means these are assets which are generally traded in stock market . For this the individual invest in company . Say I invest 30,000 rs . The company would buy gold as a security backup for this money (say 10 gm ). Now as the price of gold increases or decreases so does the asset price of my investment (i.e. 30,000 rs)
Usefulness - If i would have purchased gold directly say 10gm then it would have been idle with me but in this scheme I am investing money in economy and still enjoying the same security as of physical gold.
Negative aspect - Though I don't purchase fold yet the company in which i invest purchase gold so in net case India has to import gold ( India is poor in gold reserves) So net drain in forex.
Gold Deposit - It is scheme in which one deposits gold with bank or firm like Muthoot and gets the loan on behalf of its security.
Usefulness - The banks could use this gold to invest somewhere but till recent they were not allowed to invest in Gold ETF.
Negative - It does not help in curbing gold import.
Linking Gold ETF & Gold Deposit
Now since both schemes are linked so suppose a person A is going to deposit gold in bank and take loan and a person B is investing in gold ETF then the bank can provide the gold deposited by A to the firm providing gold security to B .
In turn the domestic gold provided by A has helped to get Gold ETF to person B and there has been not need to import Gold.
So it has two positive effects-
1) There has been reduction in gold imports.
2) There has been active utilization of gold in economy
Negative effect-
The risk sharing of person A is linked to person B
I guess it has become too lengthy but tried to elucidate in as detailed way as possible.
and my view on why the cost of others are not increasing is "because as SC stated the middleman is the main reason of inflationary pressure, Food industry comprises of the longest chain of middleman, so i blv the reason is supply chain and further the middleman in it.
so thats not a fault
P.S.: Am not sure whether SC or some one else but i heard something on it. Yes definitely, in ETF we don't buy(Import) the real gold METAL we only give units of gold on paper which at the time of buying are derived from the gold price on that date.
And when the investor want to move out of the ETF he just sell his units for cash and not gold, this instrument is for those who invest in gold and don't buy gold for other purposes.
Further, the purchase of gold comes only when the fund plans to dissolve, which also depends on the specific conditions of particular ETF.
Yes, Consumer is the king, if they say we don't have money for your product, the prices will fall.
Problem for food inflation connection with interest rate is that , how many people take loans from bank for food ?
To a little extent consumers can spend extra on food articles ( if they are already in loan) which can push inflation but will it effect that much that RBI have to adjust its policy rate due to this
In my opinion , Food Inflation as Vaju said is more due to supply side constraints ( lack of back godowns, back end infra etc)
The Table 4.9 is at 2004-05 constant prices i.e. inflation adjusted. Hence I don't know how can you even make out about inflation from here. The table talks about the structural shift in the consumption pattern in the sense that people (esp urban) have started eating more nutritious food with more money at their disposal (pay revision, high corporate salaries, MGNREGA etc)... You said: I guess, you forgot to consider that there is a limit to what a person can eat. Consider this: An adult male requires ~2500 kcal/day today and same in 1950-60. With increase in PCI almost 5 times from 1950s to 2010(see Fig 4.9 pg 89 of ES) he can eat better/costlier nutritious food but he can't eat like 5000kcal/day just because he has more money now. Thus earlier if he was eating pulses (primarily) for protein intake , now he can eat costlier protein foods like paneer, milk, meat, eggs etc more often. Thus with more money protein expenditure increased from ~1000 INR to ~2200 INR, both at 'constant prices'. Notably pulses still are poor man's protein but with MGNREGA they can eat a bit more. Thus it is only logical that while share of protein food will rise in total food expenditure but share of total food (or protein food) in total expenditure will decrease sharply with such high increase in PCI. This is what Engel's shift also talks about. So the point you made that smaller money chasing same goods is not valid
Now major reasons for inflation in protein foods:
Demand Pull:
1.) More money with people due to higher wages.
2.) Irrational subsidies (LPG to middle/upper middle class) giving more money to people.
3.) Slower response to increasing consumption of protein rich foods. i.e. Supply demand mismatch
Cost Push:
1.) rise in input prices. MSP increase leads to higher feed, fodder prices. Also to produce 1kg of meat 7kg of fodder is required
3.) Regional concentration of production centres & High transportation cost (also increasing Diesel prices)
4.) Large number of intermediaries i.e. supply chain mismanagement issue.
5.) Limited back end infra like cold chains leading to reduced quality & increased wastage. High perishability , a very strong reason for lesser supply/production.
6.) Global commodity prices affecting domestic prices.
7.) Rupee depreciation make things even worse & increase input prices as it has cascading effect.
So, as you rightly pointed out that higher incomes can't be the only reason for protein food inflation, there are various cost push factors involved as well.
Also supply chain mismanagement is the biggest reason for food inflation in our country but if asked in exam we must explore the protein inflation aspect also.
Well I checked out but nowhere ES says "Protein food is the ONLY reason" (as stated by you). Please refer Table 4.4, point 4.23 (pg 90) to point 4.30 (pg 92). ES has mentioned ample number of reasons for food inflation apart from protein inflation.
Please let me know if i am wrong somewhere.
So there is practically negligent effect as you can see still the food inflation is high though inflation is low.
I have never denied the supply side constraint as main cause for food inflation
Gold ETF as such is not important but we must write it down as measures to check the surge of gold imports which is major cause for CAD
Link: https://docs.google.com/file/d/0ByZddIiTbiBCLTFzMU9aNExJNVE/edit?usp=sharing
. Now that US Fed chief has stated to stop Quantitative easing as they feel american economy is increasing so there will not be extra dollars (i.e. dollars to become dearer in U.S.) and thus these FII's are pulling their money invested abroad as they feel that they can get high interest rates in their own country.