Tweakonomics: Trouble in two mins

MANASI PHADKE | Updated on January 24, 2018


The real reason behind the rate cut!

June 2; 10 pm. Eve of the Monetary Policy Review. He was seriously worried. To cut or not to cut was cutting into his mind. On the one hand, moderate growth revision from 7.8 per cent to 7.6 per cent had the doves squawking to him incessantly about how a rate cut is necessary.

And pressure from the government. Lower rates needed to support Make in India. And then, those self-proclaimed, pompous market gurus who had “factored in” a repo cut. How the hell can they factor anything in at all, he wondered irritably.

On the other hand, the inflation-averse advisors. Sigh! Typical RBI. He could almost hear the voices of his team droning on about higher inflation. Monsoon uncertainties and even more uncertain, the government response to poor rains. Oil moving into correction. Add better jobs data in the US and Yellen will move into an interest rate hike. Some fun it’ll be if I slash and she raises in the same month.

No, no, no, that won’t do at all. And that inflation warrior tag, that’s kinda nice. Hmmm. I think I won’t cut. This is final. No slash in the repo tomorrow.

God, I am so stressed, I really need a quick snack. And so he headed into the kitchen, looking for his favourite snack, when it hit him. Gosh, there’s no Maggi noodles to de-stress me this time around.

Why God, why? They couldn’t reduce the MSG and I can’t reduce the CRR. They market the lead and I lead the market. Here I am, trying to run an entire banking system, and nothing quick to eat. It took him the next 12 minutes to fix a sandwich.

Hmm, he thought. Maggi Noodles. ₹1500 crore sales. Assuming a ₹10 price point, that’s 150 crores of Maggi Noodles packets being sold in the fiscal.

Now, every packet takes 2 minutes to cook. Sans Maggi, the next best alternative takes about 12 minutes. OMG, that is 10 minutes extra.

That means that Indian people will now spend 150 crores x 10 = 1500 crore minutes extra time in just cooking. That’s 1.04 crore days. Now, personal experience tells me that when an Indian woman works an extra one hour in the kitchen, the probability of her getting into a foul mood increases by 10 per cent. Gosh, 1.04 crore days additionally spent in cooking will create social disturbance of a type unseen before.

There’s also the economic cost. Average cost per manday is around ₹500. So we are now looking at a loss of ₹520 crore (1.04 crore days x ₹500 per manday) in GDP just because people can’t have Maggi noodles. And this is just the direct effect.

A Keynesian multiplier value of 5 implies that the actual loss in GDP will be ₹520 x 5 = ₹2,600 crore. On a base of ₹120 lakh crore (GDP estimate), this is another 0.0002 per cent reduction in the GDP which my team never thought of!

That means growth will become even softer than 7.6 per cent and will hit an unbearable 7.5998 per cent this fiscal. Multiply it by 10,000 and you get 75,998; that’s the additional calls I’ll get from the FM. Multiply it by 1,000 and you get the Nifty levels; 7,599 will be a bloodbath. Multiply it by 100 and you get the Sensex down by 759 points.

Multiply it by 10 and that’s the additional 75.9 decibels with which Times Now will attack me. Unbearable! Multiply it by 1 and you get the current repo rate, the cause of all the trouble. Drat it! It’s final. I cut the rate tomorrow.

The writer is a Pune-based economist

Published on June 09, 2015

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