U.S. bond yields may explode in 100 days
At which point USD would cross Rs 100
This years budget is the acid test for FM
I have been a keen student of macro economics – a little bit of which was learnt in college from Samuelson but most of which was learned from the Indian government.
The first thing I learnt in the field is that Samuelson economics doesn’t really work in a tech world. And most certainly doesn’t work in an ai world.
What works in an ai world is counter parties – not fundamentals.
Shares are valued not by profits but by what someone is willing to pay to buy them. So a Zomato, Paytm or Nykaa may be loss making yet there are buyers willing to buy those shares in the hope of capital appreciation.
Counter parties are more important than fundamentals. You can have all the fundamentals but no takers and you have no realisable value.
The Indian rupee is fast entering that zone.
There are two reasons for this. First is that U.S. is letting bond prices slide to make it difficult for foreign governments to sell their bonds. If they sell, they have to book a massive capital loss. In the event of a major war involving the U.S., the U.S. govt will just let bond prices fall till the yield goes up from the existing 4.3% today (10 year bond) to around 5.5%. At that yield level, there will be a flight of global capital into the dollar.
Second is that if we increase the repo rate to say 7%, as an economy we will hit historic inflation levels resulting in economic stagnation. Economists call it stagflation. As a country we have borrowed way beyond means to invest in Infrastructure. The hope was that this will be an impetus for growth. And the growth generated additional taxation will help recover the infrastructure cost. And in fact unleash a virtuous spiral. If this doesn’t happen, our government will be stressed to make both ends meet.
We thus require a different approach to fiscal policy. And a lot rests on the shoulder of our Finance minister. This budget is going to be a test of her ability to navigate this possible tsunami of capital flight. Something which has to be prevented pro actively.
Capital flight means falling rupee, falling share price and possibly a real estate collapse. Global money will move into opaque dark pools like hedge funds and private equity – both of which will hunt for vulture capital deals.
The problem for the Finance minister is that she has virtually nothing in her control. Yet is accountable for everything.
If she has guts and wisdom – she will abolish individual income tax upto rs one crore pa. Finally individual tax is borne by employers. If individual tax is removed, companies can pay less and be more competitive.
Second will she tax agriculture. If individual income tax is abolished, this won’t hurt small or medium farmers.
Third she should bring in an inheritance tax. This will force capitalist to move their inheritance to foundations and trusts. A welcome move.
