Indian Economy: News and Discussion (Apr 1 2011)

[SwamyG]

Our demographic dividend is going to be now not 20 years from now. It is critical that we focus on education as a top priority now.

In looooong term, one additional way to use the demographic dividend is actually send able Indians across the planet. As per a recent UN report, India now does not come under high fertility category. Our friendly neighbor Pakistan does. There are countless countries that are in the low fertility category. It also seems the World has also crossed "peak number of children". As years grow by the number of young children as a percentage to the population is climbing down. While the population will continue to climb; what this means is every country would need more young population who are ready to work. So a high density of working age population in the Indian Sub-continent is not a solution for India and the World. The population has to be redistributed. Concentration of power, wealth or population is not good in the long term; and nature will see to it that they reach equilibrium.

[Theo_Fidel]

Part of becoming low fertility is that you invest a heck of a lot more on every individual.

In massaland for instance the average investment in a child by the time he/she finishes college is $400,000 or so right now. Just taking a bunch of poorly educated types and transplanting them has proven to be a disaster.

Historically 50% of world population has always been in India & China due the favorable climate and arable lands. In any case we are far less dense than many of the European countries.

[somnath]

1990 VP Singh , farm loan waiver, fiscal deficit rose very high, Saddam invaded Kuwait, oil shock, , interest rates nearly 19% , perfect storm, reserves disappear, inflation shoots up (nearly 22% iirc), growth craters (even below from the already low Hindoo growth rate), rest is history

Well, most people make this mistake...The crisis in 1990 was an external payments crisis, or a "forex liquidity" crisis, not a result of fiscal deficit..The central fiscal deficit in 1990 was no different from the average registered by the previous Rajiv govt, without any of the farm loan writeoffs..
http://rbi.org.in/scripts/PublicationsV ... x?id=12926

More inetrestingly, if one looks at consolidated fiscal deficit (centre+states), which is what really matters, things in 1990 wasnt any different from what exists today! Or what has typically existed for the last 3 decades..
http://rbi.org.in/scripts/PublicationsV ... x?id=12928

In fact, there werent any of the fudging of oil subsidies in oil compay books in those days, so if anything, the fiscal situation was better in 1990 than it is today!

Actually by definition, all (rather most) crises are "foreign payment" led...India in 1990 too had an external payments crisis, primarily due to the shock on oil prices...What it meant was that capital account flows were not enough to fund fx liqudiity required to fund current account deficits..The reason for that was the Gulf War on one hand sent oil prices shooting up and on the other remittances (which funded a lot of the trade deficit then) fell as workers came back in droves from the Gulf...Plus, defence imports (from Russia) suddenly had to be paid in fx...These were a few too many shocks for the external sector all at one time...As commercial credit had also dried up as a reslt of the war, we had to aprpoach IMF or liquidity facility...

the high interets rates etc wasnt anything special - liquidity tightening is a common feature on account of temporary market shocks - we had call money rates touching 30-40% even in 1997..Even this year, call money rates were at 15-16% at year end...Nothing special...

And yes, GDP growth...Growth in in 1990-91 was a very very respectable 5.3%, follwing up on a 6.1% (!) the year before...it was actually in 1992, when MMS pulled out all stops to address the crisis that growth plumetted for a year...
http://rbi.org.in/scripts/PublicationsV ... x?id=12916

Net net, it was an Fx liquidity issue, not a credit (or fiscal deficit) issue..

At state level, look at he recent record of all govts in Kerala when they were commie run , esp the earlier one to the current one , following the great commie advice of "Fiscal Deficits dont matter", spend like there is no tomorrow and effects of it

Well, some more rhetoric..A lot is rotten in the state of Kerala, but fiscal performance is not really not one...As of the latest, Kerala's fiscal deficit was at the same level as that "exemplar", Gujarat!
http://rbi.org.in/scripts/PublicationsV ... x?id=13167

State fiscs have been much better in the last 8-10 years, thanks to Fin Commission grants...

Anyway, the last is a side point..In the main, India's never really had a structural issue on account of fiscal deficits - lots of reasons, primarily the fact that GOI does not borrow externally to fund deficits...But thats a different story...

[SwamyG]

Theo: However, historically the population of I and C, and World has not been this high. You must have seen the World population growth graph, so I am not posting it here. It is only after the 18th century we see the surge in population growth. Just because the Thanjavur delta was able to produce enough grains 1000 years ago, to sustain life, does not mean it will be able to keep up. What eventually matters is the people. Clean water is the top most priority any government should think - well that is in my opinion. The rains and rivers were aplenty to sustain the population. If you had looked at the old Madras map posted at SSC, you would notice how large number of lakes have been eaten up by the growing city. This does impact the water table and quality of life. Favorable climates and arable lands are good, but if we have the World, why restrict only into just a landmass?

Transplanting poorly educated people a failure? Well the British were successful no? In short term there will be problems, in the long run things will ease

[sugriva]

The 50 bps was quite expected (atleast I expected it).

This one takes the cake. It is obvious that the Ayatollah in question cannot quite connect the increase in rates with the sacrificing of future growth that higher interest rates entail. So now we know that the Ayatollah is good only for chanting "100% growth" 5 times a day but not quite in putting together 2 and 2 to get 4. RBI in its "wisdom" has decided to tackle inflation caused by supply side constraints by hiking rates to try and limit demand. This is a double edged sword and future growth which is a function of investments which in turn are a function of interest rates are being sacrificed. But then when the "debate" is all about throwing mud at "ISI/DSE/babu monkeys" why bother about the facts. At a later date the slowing of growth can always be blamed on "commie/naxal inclusive development fellow travellers". Now I don't know of any "Bhadra Bongs" in the top echelons of the RBI but the resident Mylapore Mullahs on the forum seem to think that what RBI is doing is "expected".

Industry screams that we need manpower today because of HIGH GROWTH TODAY

and

Lack of people is a function of our rapid growth, not lack of HDI.

Thank you for making my point. There is a need for manpower today because of high growth. Unfortunately our supplies of manpower cannot keep pace with the demand. The reasons are not difficult to understand. Low literacy rates and poor health automatically decrease the pool of available educated manpower that can be trained for work. However the Mullahs of Mylapore who demand 100% growth do not want to invest in this HDI improvement as it is a waste of taxpayer's money and also because of their polemical position that inclusive growth is what has kept India down for so long. More likely they want some fools to pick up the tab and do "HDI improvement and training" so that they can use the skilled labour for productive purposes. A lot like what the US gets from the India funded and trained engineers and scientists who work in the US. This is akin to subsidy for the US. The Ayatollahs of shallow thought will again not put 2 and 2 together and deduce that demand for labour without a commensurate supply will drive labour wages up. As productivity hasn't improved ever since the bearded ones at MSE decreed "100% growth, no waste, no HDI" (Rajnikanth economics) inflation also increases in the economy. Little do the ayatollahs realize that by investing in HDI we could improve productivity and have high growth rates and lower inflation.

There was another "fillum actor" chief minister in TN (at whom the "intellectuals" used to turn up their noses as so declasse).. Well, he introduced a mid-day meal scheme for school children

So if Rajnikanth tommorrow decrees, Rs 100 day DCT to every citizen in India it would be the next greatest thing since sliced bread, since it was Rajnikanth who decreed so. So if a welfare scheme is introduced by the chief minister of TN then it is an "enlighted decision" but if "babu monkeys and ISI ding dongs" introduce NREGS it is a "waste of tax payers money". One wonders if sometimes the angst of the Mylaporeans against NREGS was because they didn't get to introduce the idea first.

[vera_k]

People need to abandon farming and move to the cities where they can be trained and productively employed. NREGA is encouraging staying put in low wage occupations like farming. So how exactly is NREGA going to solve the manpower problem if its not training people or showing them a way to move into modern economic activities?

[Jaspreet]

People need to abandon farming and move to the cities where they can be trained and productively employed.

Are you being sarcastic? Or is this an internal joke of this thread that I don't get?

I am not an economist and don't understand a lot of things, but this appears to be a not-so-good recipe because of what I think are the following reasons:
1. If people abandon farming, who is going to grow food? Will all food be imported? Doesn't this have implications on security? Is it financially viable?

2. Why should training be limited to cities only? Training institutes, of whatever specialization, should be opened in smaller towns too and not just cities only. This will allow the towns and their hinterland to grow too and reduce pressure on already overcrowded cities.

A few more questions:
What sort of training are we talking about? Training to work as a salesperson in a shop or training to work a complex piece of machinery? Who would train them? Why would a business owner want to train them and potentially lose him to someone else in this dynamic economy? If govt, then does the govt. have enough funding to train all such people?

[Arjun]

The 'fiscal deficits don't matter' school of thought is also known as the Chartalism / Modern Monetary Theory (MMT). It is very much a fringe group in macro-economics (like the Austrian school) and is certainly not considered mainstream thinking....even Keynesians argue for fiscal deficit only in times of recession when the private sector does not have the ability to invest and believe in fiscal surplus in good times.

The overactive presence on this board of certain members might tend to provide a misleading impression about what leading mainstream economists think of the 'fiscal deficits don't matter' crowd.

[somnath]

People need to abandon farming and move to the cities where they can be trained and productively employed. NREGA is encouraging staying put in low wage occupations like farming. So how exactly is NREGA going to solve the manpower problem if its not training people or showing them a way to move into modern economic activities?

NREGS is not a silver bullet solution to all of India's development problems...It tries to solve a single issue, ie affordibility (or poverty) by putting money directly in the hands of BPL folks...It takes care of only one dimension of HDI - poverty levels, not everything else...The larger HDI project need multiple interventions in various forms..

As for productivity, it will go up only when people have baseline needs met - health, nutrition and basic education....Which is why these need focussed interventions..

1. If people abandon farming, who is going to grow food? Will all food be imported? Doesn't this have implications on security? Is it financially viable?

Jaspreet-ji, agriculture does not need as many people as are engaged today in India..There is massive (in econ terms) disguised employment...

The issue is this - without building basic competencies, health and education, there is no way a scalable model of upgrading skills of the rural folk can be implemented..."Growth solves everything" is an idiocy that data doesnt support...The key therefore is focused intervention for upgrading HDIs and upgrading skills..

[somnath]

The 'fiscal deficits don't matter' school of thought is also known as the Chartalism / Modern Monetary Theory (MMT). It is very much a fringe group in macro-economics (like the Austrian school) and is certainly not considered mainstream thinking....even Keynesians argue for fiscal deficit only in times of recession when the private sector does not have the ability to invest and believe in fiscal surplus in good times.

The overactive presence on this board of certain members might tend to provide a misleading impression about what leading mainstream economists think of the 'fiscal deficits don't matter' crowd.

Given that we are talking about India, you might want to explain with empirical evidence on how fiscal deficit has been a source of structural problems/crises in India...It doesnt matter if a view is mainstream or not, question is what impact has it had on India...

And yes, maybe you want to study MMT too in better detail rather than random blogs...Like Keyniesians, MMT-theorists too look to "unwind" expansionary govt spending in times of robust econmic performance...It is the funding mode of deficits rather than the principle of deficits itself that sets them apart from Keynesians..

[Arjun]

However the Mullahs of Mylapore who demand 100% growth do not want to invest in this HDI improvement as it is a waste of taxpayer's money

Can I request you to can the irrelevent references to Mylapore ? The growth vs social equity debate is certainly not unique to BRF by any means....Have you heard of the Jagdish Bhagwati vs Amartya Sen arguments ? Do you count Jagdish Bhagwati as a member of the 'Mylapore' school?

[Arjun]

Given that we are talking about India, you might want to explain with empirical evidence on how fiscal deficit has been a source of structural problems/crises in India...It doesnt matter if a view is mainstream or not, question is what impact has it had on India...

Fiscal deficits fundamentally turn out to be a source of crises due to their effect on financial markets. Countries which have issued global bonds or have completely convertible currencies obviously have a vulnerability through the credit / forex markets.....This is the problem in the Eurozone today. Fiscal deficits have translated to punishment from bond / currency investors in the economy.

India may not be as exposed to foreign credit investors but it is dependent on foreign equity investors to sustain its current account. Irrespective of what your views might be on whether the 'structural' issues of the economy are impacted by the fiscal deficit - the fact of the matter is that equity investors - BOTH foreign and domestic do believe the deficit to be critically important. Carnage on Dalal Street was avoided this February - solely due to the FM projecting a decline of fiscal deficit to 4.5% of GDP next year. So in India's case the punishment will not come from bond investors but from equity investors - and since FIIs finance the country's huge CAD that is an extremely significant issue for the country.

[somnath]

Have you heard of the Jagdish Bhagwati vs Amartya Sen arguments ? Do you count Jagdish Bhagwati as a member of the 'Mylapore' school?

The debate is fascinating precisely because it is based on data rather than polemics...That is also why there is far less sunlight between the two than the media would have people believe..

Here is the Hiren Mukherjee lecture given by Jagdish Bhagwati recently..

http://www.outlookindia.com/article.aspx?268616

He isnt talkig of scrapping programmes like NREGS, only making them more efficient by use of "science" - he specifically mntions the UID project as an enabler..

Shorn of polemic, there is a broad congruence of views in fact, rather than there being large cleavages...

[somnath]

Irrespective of what your views might be on whether the 'structural' issues of the economy are impacted by the fiscal deficit - the fact of the matter is that equity investors - BOTH foreign and domestic do believe the deficit to be critically important.

Well first, foreign investors "say" that fiscal deficit is mighty important, primarily because thats what the "books" say..the fact that consolidated FD is exactly the same today as it was 20 years back, while foreign investment (FII and FDI) continue apace, means that they dont vote with their money where their views are! They realise as much as others that FD, while being a source of tactical issue for a country like India from time to time, has no big structural relevance...

Second, there are tons of other variables that go into defining external flows, and hence financing of CAD - FD is but one of many variables...Certainly not the most important one...

Third, while FII investments are important for funding CAD, they are only one part of the equation - there are other capital flows (FDI, banking capital) that are larger...

Carnage on Dalal Street was avoided this February - solely due to the FM projecting a decline of fiscal deficit to 4.5% of GDP next year

I am pretty sure no investor worth his salt was fooled by Pranab Mukherjee's set of overamibitious (expdt restraint) numbers to arrive at that FD prjection for the year! I didnt see any opinion on the street that laid too much credibility on that number, though the attempt to be conservatve in terms of direction was lauded...

Net net, I am yet to see a single instance/case/empirical evidence of FD being a structural issue for India...Outside the circle of "gora" econmists and fund managers! And the latter obvioulsy dont believe in their own opinions in any case

[vina]

The 50 bps was quite expected (atleast I expected it).

This one takes the cake.

It was a nice cake indeed thank you. I never argue with money. In fact I always remind myself of what my orthodox jewish classmate and friend told me at the Madrassa.

"XXXXXXX (my name) , my friend. If there is money on the table, just take it! Don't f*ck around" . If someone like him gives you advice on money , you ignore it only at your peril. Sound advice I should say. There was money on the table that day (May 3rd) and I took it!

It is obvious that the Ayatollah in question cannot quite connect the increase in rates with the sacrificing of future growth that higher interest rates entail. So now we know that the Ayatollah is good only for chanting "100% growth" 5 times a day but not quite in putting together 2 and 2 to get 4. RBI in its "wisdom" has decided to tackle inflation caused by supply side constraints by hiking rates to try and limit demand.

True , true. But what does that have to do with the cake on May3rd , especially in light of all that I wrote beyond that in the post earlier and also in the subsequent posts!

This is a double edged sword and future growth which is a function of investments which in turn are a function of interest rates are being sacrificed. But then when the "debate" is all about throwing mud at "ISI/DSE/babu monkeys" why bother about the facts. At a later date the slowing of growth can always be blamed on "commie/naxal inclusive development fellow travellers". Now I don't know of any "Bhadra Bongs" in the top echelons of the RBI but the resident Mylapore Mullahs on the forum seem to think that what RBI is doing is "expected".

It is "expected" since the "welfarists" decided to have out huge boondoggles called NREGA and subsidies in power, fuel, fertilizers etc, in an era of global commodity price hikes and bust the fiscal dams (nearly) and there was nothing else left to do when it became unsustainable but to start monetary tightening when the govt borrow and spend seems to have no solution except pray for higher tax receipts via economic buoyancy!

I had written about this, BEFORE the fiscal stimulus here after the financial meltdown about how India has been running unwarranted deficits and sure enough when the storm came, the Chinese could pump some $600b into infra while we lacked the headroom to crank up a stimulus and continued spending on NREGA .

So there you are. The Chinese built hard assets out of the stimulus, while in India,it went towards digging a hole and filling a hole and was basically a "swaahaa" ie consumed/leaked/gone/finis/disappeared without a trace and a liability to have such cashflows continued into the future. Jai ho .. indeed.

So if Rajnikanth tommorrow decrees, Rs 100 day DCT to every citizen in India it would be the next greatest thing since sliced bread, since it was Rajnikanth who decreed so. So if a welfare scheme is introduced by the chief minister of TN then it is an "enlighted decision" but if "babu monkeys and ISI ding dongs" introduce NREGS it is a "waste of tax payers money". One wonders if sometimes the angst of the Mylaporeans against NREGS was because they didn't get to introduce the idea first.

Right . Now NREGA is actually a HDI raising longterm initiative like the noon meal scheme (focused, meets clearly defined objectives, has great outcomes), rather than an NREGA that is an anti poverty scheme, that is largely wasteful in both concept and execution. Why giving a straight dole as a means of supplementing the NREGA receipeints income would probably be better off, the can find gainful work outside.

But no,the welfarists with their faith in the statist models to be implemented by the Babu monkeys must of course becuase of their oh-so-soup-e-rear knowledge decide which hole to dig and fill.

Consider absolute hair brained luddism like only a small fraction can be skilled work in NREGA, lack of mechanization.. yada. yada, and now apologists like you come here to talk of NREGA leading of all things to increased PRODUCTIVITY , with unskilled peasants doing unskilled work with methods that are little changed since the time of pyramids!

If you are using NREGA to build social assets, fair enough. But I dont see that happening. If you want long term productivity, this kind of chain gangs with Pyramid building technology aint gonna cut it. You need to move them off the land into factories..(adam smith and pin factory and all that jazz eh ?) . I dont see the NREGA doing that!

[Arjun]

Third, while FII investments are important for funding CAD, they are only one part of the equation - there are other capital flows (FDI, banking capital) that are larger...

FII flows are much larger than either of FDI or ECBs. The last time FDI was larger than FII flows was in '08.

You talk of ECBs - but a rising fiscal deficit would lead to downgrades by S&P / Moody's of India's country risk, resulting in ECB rates going up and therefore ECB volume would also tumble along with FII volumes. Secondly, any significant decrease in FII inflows will cause the Rupee to also tank.

I am pretty sure no investor worth his salt was fooled by Pranab Mukherjee's set of overamibitious (expdt restraint) numbers to arrive at that FD prjection for the year! I didnt see any opinion on the street that laid too much credibility on that number, though the attempt to be conservatve in terms of direction was lauded...

Lets stop fooling ourselves. The moment the market senses that fiscal deficit is heading upwards rather than downwards the market would tank bigtime (it is already down by 10% from the peak of late last year and fiscal deficit concerns is one of the major reasons for this ). You are welcome to have a view to the contrary if you prefer to bury your head in the sands.

[Arjun]

That is also why there is far less sunlight between the two than the media would have people believe..

Not sure how you come to that conclusion...as far as I can see the two views are as completely at cross-angles as one would expect given their backgrounds. Here are the points that Jagdish makes-

1. Indian reforms were launched in '91 because the 'pro-growth' faction led by Jagdish himself won the day (as opposed presumably to Amartya's stated view that the Indian reforms process was lopsided because it should have first addressed health / education parameters in early nineties before embarking on economic liberalization).

2. He restates his strong opposition to the massive expansion of the public sector into several areas outside of utilities, in previous decades

3. He dismisses the Human Development Index (developed by Amartya Sen along with others) as rubbish..here's the language he uses:

This is a nonsensical index which reduces, without scientifically plausible weights, several non-commensurate elements like literacy and health measures to a single number.

It is a fine example of how bad science gains traction because of endless repetition by the media: it must be dismissed as rubbish

4. He reiterates that what India requires right now are Stage 1 reforms. These are further economic liberalization measures that have not yet been addressed (such as labour reform, retail sector etc). After this is done, he suggests down the road India look at Stage 2 reforms which he specifies as health and education related targeted measures (aimed at HDI parameters). This sequencing is the opposite of what Amartya Sen is calling for.

The argument is fairly clear. India must focus on 9 - 10% growth rates for the next several years. Assuming that India targets a reasonable fiscal deficit of say 4.5% over the same time period - that automatically setsup the limits for government spending each year. Whatever targeted HDI parameters can be addressed within this budgetary limit should certainly be addressed. But the primacy of GDP growth as the overarching economic objective for the next several years needs to stay.

[somnath]

Lets stop fooling ourselves. The moment the market senses that fiscal deficit is heading upwards rather than downwards the market would tank bigtime (it is already down by 10% from the peak of late last year and fiscal deficit concerns is one of the major reasons for this ). You are welcome to have a view to the contrary if you prefer to bury your head in the sands.

Well, I will consider that you have your head somewhere else higher up when you provide emprical evidence on the contrary! Till now, I have only seen rhetoric, light on evidence...

If fiscal deficit is the reason for the market correcting, a) very few peolple in the street seem to have heard it/speaking about it and importantly b) the market simply doesnt know - there is no data available yet for this year! Tp be sure, for those who knew how to read, the ambitious nature of the exdt target was visible ont he budget day itself (indluing myslef - read my post post-Budget!)...Nothing new has been revealed since then..

And as for a structural relationship between FD and equity markets, plot the FD ratios against the market for the last 20 years - if you see any evidence, let me know! Unlikely though, as the FD numbers have remained broadly in the same ballpark for that period (barrign a few years in UPA-I)...

Net net, thre is no evidence of a structural impact of FD on Indian economy...Tactical impact now and then yes, nothing structural...Unfortuntely gora press have started studying India only in the last 8-10 years, hence the 1990 crisis is defined as an issue with the fisc

As a side note,

FII flows are much larger than either of FDI or ECBs. The last time FDI was larger than FII flows was in '08

First up, thats not true...Gross FDI inflows has outstripped gross FII inflows for some time now..
http://rbi.org.in/scripts/PublicationsV ... x?id=12831
(look at the FDI - in India section, and FII - in India section for comparisons)...

Also plot FII flows into India (add FDI for good measure - the distinction is largely artificial, they should get rid of it) against consol FD - let me know if there is a deficit-sensitivity of foreign investment into India...there wont be..

[somnath]

Not sure how you come to that conclusion...as far as I can see the two views are as completely at cross-angles as one would expect given their backgrounds. Here are the points that Jagdish makes

Not really....

1. On HDI, JB is opposing the "HDI index" as an incongruous index of disparate variables..Fair enough, thats a POV..He isnt saying that the constitutent variables are not important, or that India has achieved enough relative to others..

2. Importantly, he mentions UID as the most "important" reform project precisely because of its utility in the NREGS and PDS programmes..He wouldt have done so if he was describing the latter as waste of time..

3. On stage 1 and stage 2 reforms, he isnt advocating one should "precede" the other...What he says is

There is little doubt however that, once we have put our minds to work and our shoulders to the wheel, we will move ahead on both Stage 1 and Stage 2 reforms

His hypothesis is simply that stage 2 reforms are socio-politically more difficult than stage 1..That is again a question of political choice being exercised..Obvioulsy, if both can be pulled off simultaeneously, JB is a supporter of that! BTW, Amartya Sen says pretty much the same thing! Which is why there is less daylight between the two views than superficial media analysis would like us believe..

[Arjun]

very few peolple in the street seem to have heard it/speaking about it

If you have even a passing interest in tracking the Indian financial press / business news channels / equity market blogs / broking reports - you can't possibly miss the references to fiscal deficit as a huge concern day in and day out !! I could list out 50 links out here, but seriously I am sure you can dig these out yourself. Btw, what I mentioned was not that fiscal deficit was the reason for market correcting, but it is one of the primary factors that the Street has been consistently talking about.

Here's what Nirmal Bang has to say in one of its reports last month-

The Indian stock market has become very volatile in the last two months. While the budget has sent a positive signal, the macroeconomic concerns still continue to worry investors, especially the overseas ones.

Also, high crude prices, unrest in west Asia, higher domestic inflation and burgeoning fiscal deficit are some of the factors that have created negative sentiments among foreign institutional investors (FIIs).

Here's the view of Asianomics, a research house used by equity and debt institutional investors to make their allocation decisions:

The government doesn’t seem able to control itself when it comes to entitlement programs. That’s bad news because the next thing that will be on the cards is downgrades from rating agencies.

India's fiscal house is not in order. Rating agencies have got their eyes open for that all across the world at the moment. If there is a slowdown in the economy and we go from 4.8% deficit last year to the forecast that we have which is over 6% for this year, then I am afraid downgrades are inevitable.

A quote from this link http://www.moneycontrol.com/news/mf-interview/govt-needs-to-control-fiscal-deficit-franklin-templeton_525439.html

Experts are awaiting the union budget for the government’s measures to combat inflation. In an interview to CNBC-TV18, R Sukumar, Director of Franklin Templeton Investments warned that the government should control fiscal deficit, global investors will lose interest in the India story.

Another link: Indian stocks gain on lower fiscal deficit

http://rbi.org.in/scripts/PublicationsV ... x?id=12831
(look at the FDI - in India section, and FII - in India section for comparisons)...

The data shows that the trend changed in FY '10. FDI in India for 2010 is lower than Portfolio Investment in India that year. The trend has only worsened for FY '11 as has been reported extensively in the financial media.

[vina]

Unfortuntely gora press have started studying India only in the last 8-10 years, hence the 1990 crisis is defined as an issue with the fis

1990 was NOT a Forex /BoP crisis ALONE. Though it manifested itself as one due to the oil price shock, the deteriorating fiscal situation over the last years of Rajiv Gandhi admin topped by VP Singhs loan write off (that was the straw that broke the fiscal camel's back), just removed all the buffers for the economy to absorb shocks and well, Saddam invaded , giving it just that. The rest is history.

So, if you insist that the 1990 is a BoP crisis alone, you are welcome to it. But that would be looking it at very narrow lenses I am afraid.

Also, go back and look at the "election business cycle" kind of thing with deficits in Kerala. The previous commie regime (not the current one), goaded by the JNU ding-dongs and their fiscal deficits dont matter , borrow and spend till kingdom come left a battered and tattered state in a basket case state to the incoming congress govt when they were thrown out.

[Arjun]

The portly Lord can actually write sense....I have to start changing my views on him !! More realization that the prognosis for the economy looks somewhat shaky now: Column : NREGA’s the cure as well as the problem

Posting in full the article by Lord Meghnad Desai:

The move by the Reserve Bank of India (RBI) yet again to raise interest rates comes as no surprise. Inflation pressures have remained strong in India for the two years the UPA-2 has been in power. In the first year, there was the excuse of the drought, though even here the countervailing action—timely release of foodgrain stocks—was neglected. The sum total of policy seemed to be the periodic forecasts by policymakers that within the coming six months inflation would subside.

The Budget of February 2011 failed to take the inflation threat seriously. Indeed, there was some complacency that the GDP growth rate had been notched at 8.6% in 2010-11 and was forecast at 9% for 2011-12 in the Budget. But it was obvious that the 8.6% was flattered by the recovery of agriculture from a low base of the previous drought prone year. Foodgrain output in 2010-11 did not exceed the level of two years previously. Yet the high figure was claimed and the higher figure of 9% was enshrined in the Budget.

The Budget did not mention that the nominal growth of GDP in 2010-11 had been as high as 25%, if not higher. The reduction of the debt-GDP ratio was claimed as a positive result but not linked to inflation. But an economy with 15-16% inflation has to be treated as in need of serious cure. It was clear that if inflation pressures were not to be tackled, there would be a setback for growth. I was bearish on the Budget day and thought 8% would be hard to achieve.

Things have got worse. The domestic inflationary pressures may have switched from supply shortage to excess demand, though supply-side bottlenecks remain. The extra factor is the international price rise of oil and commodities, partly thanks to Chinese growth but also due to quantitative easing that is flooding the markets with excess liquidity. The world economy has become tolerant of a slightly higher inflation rate than before the Great Recession because western monetary authorities do not want to kill the fragile recovery.

India has a very loose fiscal policy not only due to the pump priming during the growth recession of 2008-09 and 2009-10, but even now there is no sign of fiscal tightening. The Budget devotes a third of the total revenue collection to interest payments on debt, ten times what it devotes to health or education. There is no urgency about reducing the debt-GDP ratio either by more rapid divesting of public assets or by reining in expenditure.

Indeed, the spending policy of the UPA is being run by the NAC, which does not like liberal reform or even a high growth rate. Yet it loves to spend the revenues collected thanks to the buoyant growth on its pet projects. These are no doubt worthy—NREGA, health audit, food security, etc—but none of them contribute to raising output. NREGA is a stop-gap scheme and does not raise the skill level or productivity of the workers. It may make them grateful when it comes to voting at election times but their poverty will not be tackled by staying at home and working at most 100 days.

It just may be that the UPA is having an aversion to high growth rates lest it may be seen to be worshipping at the Temple of Mammon. The cry of the hour seems to be that the foundation of a welfare state has to be laid in rural areas, at least for BPL families. This again cannot be a bad idea. But the issue is: will there be sufficient growth to finance it?

One strong argument will be made that improving health and providing food security will by themselves raise not only the levels of well-being but also the levels of productivity of the rural poor. This extra productivity would then finance the extra spending. Yet there needs to be some strong quantitative evidence that such is the case. My scepticism is because of the fact that the rural sector, both in agriculture and other activities, is a low productivity sector. Growth has been mainly due to urban manufacturing and services and not rural activities. Indeed, a strategy for poverty reduction would be to move workers from low productivity agriculture and ancillary rural activities to low-tech manufacturing, which can employ unskilled and semi-skilled manual labour. NREGA does exactly the opposite by confining the workers to the rural areas.

My hunch is that in 2011-12, GDP growth will hit below 8%, perhaps as low as 7%. Inflation will be in double digits. With reforms no longer on the forefront and elections looming in UP, the risk-averse Congress leadership will let growth go. Then we shall regret the end of the Indian miracle.

The author is a prominent economist and Labour peer

[Theo_Fidel]

I have said this before but we shouldn't take our growth for granted. I terrifies me how casual some on this board are about this miracle.

All the indicators are that we have managed to to stay one step ahead of the fire. The fiscal deficit has not blown up in our face and destroyed our economy because tax receipts continue to grow at 20%+ annually. some years it has even exceeded 30%. Other countries would kill for such revenue growth. It is hard to fathom that even this is not enough in India. Our finances still not very stable and always on the verge of further deterioration. I say for certain that not Rs 1 of our revenue growth has come from NREGA. 2 years of 3% growth would destroy us.

This particular worm has turned on us many times before. I remember in the mid 80's under the older princeling we went from 8% growth to 3% growth on one year flat. Inflation spiked to 15% or so. Fiscal deficits were out of control. Yet nothing was done to deal with investment collapse. Yet more, "Hamein Banana hein..", banana speeches were made. More billions were dedicated to loan melas and garibi hatao programs with end result of catastrophe in 1991.

The snakes such as Amartya Sen act like we are a rich state with a lot of positives going for us. They sell the tale that we have the free resources of a rich state to eliminate poverty and we can afford to fool around and waste money. This is not true. We have poor in India because we are a poor state. Astonishing how many people seem to ignore this. We don't have the resources to change this yet. The only way to end poverty is to make us a rich nation. Again sounds simple but it is remarkable how many ignore this. We invest more than enough on Education and health. As Suraj says we need to focus more on out comes.

Meanwhile without our realizing/paying attention to it our Forex reserves have as a percentage of imports declined from 15 months worth of imports to 9 months. This is another crucial pillar our growth rate. Yet non of the 'concerned' economists even mention that fact. The market of course knows what is happening and has prudently down graded.

Let me point out one other simple fact guys. On the way to becoming a very modestly rich nation our capital stock has to increase to the point where it generate an income of $10,000 for every single Indian. This is my bench mark for when abject poverty will really end, though poverty can never be completely eliminated. So lets do the math. $10,000 for every India at a population of 1.5 Billion works out to 15 Trillion dollars GDP. Say our capital stock can generate a 10% return every year (this is very very optimistic, as it is 3% in developed countries) we need a capital stock worth 150 Trillion dollars. I'll tell you what our capital stock is worth right now, wait for it.......$10 Trillion. If we wish to end poverty we find a way to accumulate the remaining $140 Trillion ASAP. The longer we take by saving less, the longer we take to end poverty.

For those so carried away by the 'paltry' $10 Billion squandered on the NREGA let me point out the long term opportunity cost. Assuming it is taken straight out of the capital expenditure and assuming it inflates at a 6% average rate also factoring in our ICOR of 4.0 or a return of 25% on investment year after year. In 20 years our loss in income is 25% of $420 billion or about $105 Billion annually. Total loss over the next ten years is $1.4 Trillion total in income lost. Just 20 years. When you consider capital stock has a life of 100 years+ the losses are just staggering. Compounding loss is a bitch.

You can see why we became so poor. Always saying a thousand crore wasted here is no problem, 4000 crore for Air Parasite is no issue, etc.

[somnath]

1990 was NOT a Forex /BoP crisis ALONE. Though it manifested itself as one due to the oil price shock, the deteriorating fiscal situation over the last years of Rajiv Gandhi admin topped by VP Singhs loan write off (that was the straw that broke the fiscal camel's back), just removed all the buffers for the economy to absorb shocks and well, Saddam invaded , giving it just that. The rest is history

Bunch of gora fund manager poppycock, I am sorry to say...

First, go through the data - FD in 1990 was no different from the average of the previous 5-6 years..So there was no "sudden" deterioration in public finances..Pertinently, the same level of FD today triggers no crisis!
Second, this "loan writeoff" business did NOT hit the fisc at all, PSU banks took the hit - so there was no "immediate" straw on the fiscal camel to precipitate a crisis...
Three, most importantly it was no one's case in 1990 that GOI was not able to service its INR debt - far from it...So there was no issue about the ability to weather an economic slowdown...the issue was about our ability to source dollars in face of a sudden external shock - a liquidity crisis...Not very dissimilar to the situation in Thailand and Malaysia in 1997-98...
Four, there was no great impact on growth per se..Again as the numbers show, growth remained healthy (by then prevailing standards) even in the crisis year, and fell only when MMS brouht in the austerity measures in 1991...

Last, and perhaps most important..If FD was such a structural issue (and 1990 left deep scars in the minds of policymakers - just read Bimal Jalan's fantastic account of it), India would have gone gangbusters to lick the issue...But look at what was pursued by policymakers with religious zeal - external account stability (fx reserves, CAD etc)...But not FD, despite lip service, which remains at the same level today as it was in 1990!

Also, go back and look at the "election business cycle" kind of thing with deficits in Kerala. The previous commie regime (not the current one), goaded by the JNU ding-dongs and their fiscal deficits dont matter , borrow and spend till kingdom come left a battered and tattered state in a basket case state to the incoming congress govt when they were thrown out

Well, dont know which govt you are talkng about - EK Nayanar? YOu should look at the data carefully (I dont have it) - check how they compared to the rest of the country, and specifically, how far away from a pay commission report...Till about 10 years back, pretty much all state govts were broke, till successive Finance Commissions put more money into state govt coffers..

About the fundamental issue of FDs, doesnt matter whether its JNU or anywhere else - all "real policy makers" in the country have the same view

If you have even a passing interest in tracking the Indian financial press / business news channels / equity market blogs / broking reports - you can't possibly miss the references to fiscal deficit as a huge concern day in and day out !! I could list out 50 links out here, but seriously I am sure you can dig these out yourself

I have a little more than just a "passing interest" in the Indian markets...That is precisely why I tend to usually ignore pink media/news channels/blogs for anything more than entertainment value (with some notable exceptions)...

Parroting "fiscal deficit is a concern" is a Pavlovian statement in most commentaries talking of "negative sentiment", or "issues" with India...But I will believe it is a problem when someone shows data (or empirical analysis) that it has structural impact on India w.r.t a crises...What most fund managers comment on are stuff at the margin..So if FD expecttations are high, bond prices expect to react downwards...If interest rates go up too much, equity prices can react downwards, so there is an impact on foreign flows etc at the margin..the keywords are the last three..Tactical stuff...

Structurally, India went from a 9% consol FD in 1990 to 9% today, wihtout precipitating any crisis...And the last 8-9 years have been under a so-called FRBM regime!

Will we do better with a lower FD? Of course, thats tautological...Has it been a structural issue precipoitating a crisis? Or is there a magic number that is "reaosnable" (4.5%, or 3%, or indeed -3%!)? Data doesnt show that, not in any meaningful manner (outside blogs)

[somnath]

Theo has made a habit of posting stuff based on nothing more than rhetoric (with about zero cases of any data/empirical support)..But voodoo economics can get really bizarre..

On the way to becoming a very modestly rich nation our capital stock has to increase to the point where it generate an income of $10,000 for every single Indian. This is my bench mark for when abject poverty will really end, though poverty can never be completely eliminated. So lets do the math. $10,000 for every India at a population of 1.5 Billion works out to 15 Trillion dollars GDP

What @#$$! Its as if the aim of societies is to create a bank balance and then live off it happily ever after...

such voodoo theory couped with wrong data (mostly picked up from blogs) and some invectives about people without an iota of rationale for the same - that makes for "analysis"!

[somnath]

An interesting recent paper by Himanshu and Abhijit Sen on the Food Security Legislation that is (again) hanging fire..Recently n EGOM deferred taking a decision on tabling the bill, which was a surprise...Primarily on grounds of unfeasibility of universalisation..

This paper suggests a via media..More than the consusions, some of the insights are interesting.."Targeting" has actually reduced coverage and increased leakage, while universalisation does the opposite! High marks for TN and C'garh for adopting universal PDS policies (of course, "wasteful" expenditure accoridng to some worthies!)..

Anyway, for those interested in the economics of development in this area, a good read..
http://www.indiaenvironmentportal.org.i ... rity_1.pdf

[Hari Seldon]

OT to the above heated argument perhaps, but germane to the dhaga (I hope)

From twitter @gopimaliwal

>>AV Rajwade: Following wrong lead http://bit.ly/iL8QpR Do we adopt policies that implode - Russian socialism in '60s n fincapitalism now?

[somnath]

>AV Rajwade: Following wrong lead http://bit.ly/iL8QpR Do we adopt policies that implode - Russian socialism in '60s n fincapitalism now

Problem is, we do neither..We werent "socialist" enough by Russian standards in the '60s, and we have never been "capitalist" enough by washington consensus standards..Dare say, both have served us well!

AVR is reading too much into a statement...

[vera_k]

Are you being sarcastic? Or is this an internal joke of this thread that I don't get?

I am not an economist and don't understand a lot of things, but this appears to be a not-so-good recipe because of what I think are the following reasons:
1. If people abandon farming, who is going to grow food? Will all food be imported? Doesn't this have implications on security? Is it financially viable?

Humans started out hunting, moving to farming, then moving on to other modern economic activities. Most people engaged in the "modern" economy were or would have ancestors who were farmers at one point. This happened, because greater productivity in farming means that 2-5% of the population can grow enough food to feed the rest, who then are free to pursue other activities.

*I suppose an explanation of the industrialisation process should be added to history textbooks for children and mass media for adults, since there's a lack of awareness.

[wrdos]

SwamyG,

That is an awesome website.

In 1990 China had India's present Literacy rate of 74%. In 1980 China had a literacy rate of 60%.

We tend to think that Panda land came out of the revolutionary period with bright and Shiny HDI. This is completely false apparently. Very recent phenomena.

Also way back in 1980 those well know world beaters Vietnam & Phillipines had 90%+ literacy. That alone should tell you high HDI /= Growth.

India's 15-25 literacy rate is approaching 90%+. Up from 50% in 1985.

Sir, we Chinese use Chinese Characters, one has to know at least 2000 of them to read some document.When you talking about any literacy problem, never forget this please. We need much more efforts to reach a same literacy rate.

[Jaspreet]

Vera, you said:

because greater productivity in farming means that 2-5% of the population can grow enough food to feed the rest

But in your original post you said

People need to abandon farming and move to the cities

How can one infer from your original post that by "people" you meant 98-95% people, not 100%?
So now are you saying that 2-5% people are enough to grow all food needed for 1.2 billion people of India or do you want to further revise this figure?

-----
BTW, cut the condescending crap like

I suppose an explanation of the industrialisation process should be added to history textbooks for children and mass media for adults, since there's a lack of awareness.

[somnath]

Well, that 2-3% was surely rhetorical.

But jaspreetji, the numbers employed in agri can be rationalized heavily, it's already hapening through a Darwinian process, if you look at urbanization rates

[Jaspreet]

Well, that 2-3% was surely rhetorical. But jaspreetji, the numbers employed in agri can be rationalized heavily

I can totally believe that. And agriculture isn't the only thing which has an excess of people. I also agree with your point about Darwinian process.

My post wasn't about this point as much as poor wording in the original post. It said so simplistically "People, leave agriculture. Go to cities. Your uncles are waiting there to train you."

It didn't seem to have been thought through. An idea, no matter however good, will be useless if no thought is given to making it practical. By asking the questions that I did I was looking for a development of the idea.

[Theo_Fidel]

Wrdos,

Just to point out literacy in India is NOT English literacy. Our native languages are every bit as complicated as Mandarin Chinese, though I've heard Cantonese is easier.

My native tongue Tamizh has 12 Vowels and 18 Consonants with another rarely used special character. They combine to produce 216 characters which one must know to write. Functional literacy in India means being able to read and write a short paragraph using these characters.

Not only that most people in India know 3-4 languages, all with incompatible scripts and different grammatical structure.

This has made literacy a significantly more difficult project for India.

On the internet Tamizh is increasingly communicated using the Latin alphabet. 26 simple characters. Yet officially this is opposed tooth and nail.

[Aditya_V]

Wrdos,

Just to point out literacy in India is NOT English literacy. Our native languages are every bit as complicated as Mandarin Chinese, though I've heard Cantonese is easier.

My native tongue Tamizh has 12 Vowels and 18 Consonants with another rarely used special character. They combine to produce 216 characters which one must know to write. Functional literacy in India means being able to read and write a short paragraph using these characters.

Not only that most people in India know 3-4 languages, all with incompatible scripts and different grammatical structure.

This has make literacy a significantly more difficult project for India.

On the internet Tamil is increasingly communicated using the Latin alphabet. 26 simple characters. Yet officially this is opposed tooth and nail.

Which Tamizh do you mean, Certain "Dravidians" will consider some parts of like 'Je' as evil Aryan letters not to be used.

[Theo_Fidel]

OT but...

It is not the 'Aryan' influence that is/was opposed but rather Sanskrit influence. There are several Sanskrit words in tamizh though with the disappearance of Sanskrit and continuing modification it is increasingly hard to keep any language pure and know which came before which.

[Akshut]

Indian economy likely to slow down: OECD
http://profit.ndtv.com/news/show/indian ... e-Business

No, this news is not 24 or 18 or 12 or 6 months old. This is current one. Will post their same "projection" after 6 and 12 months also

[vera_k]

Well, that 2-3% was surely rhetorical.

Wasn't rhetorical. It was based on the amount of people engaged in agriculture in the USA. That process took more than a 100 years to play out, and that was fine because the population never stopped growing as the country grew rich.

More recently, South Korea managed something similar a lot faster with about 8% of the population engaged in agriculture. The key in their transformation is that the younger generation moved off the farms.

The population engaged in agriculture is about 3,530 thousands (7.6%) and 1,264 thousands families among the total population (2003). Moreover, the number of people over 50 occupied in agriculture is 55.4%.

Agriculture and food industry in Korea

Looking at the Korean experience, it's reasonable to have a strategy where NREGA is used to provide support to the adult population with the expectation that their children are educated enough to work off the farms.

[Aditya_V]

OT but...

It is not the 'Aryan' influence that is/was opposed but rather Sanskrit influence. There are several Sanskrit words in tamizh though with the disappearance of Sanskrit and continuing modification it is increasingly hard to keep any language pure and know which came before which.

Saar, Excatly . But for True "DRavidians', 'JNU" and Western 'HINDU Scholars' Sankrit= Aryan. OT.

Thats the best part these groups ignore, these 2 languages have a lot of similair words which often gets missed out.

[jagga]

X-posting from 2G scam dhaga
Investigative Piece of Journalism on “Fake Currency In India”.
Bluntly - fake currency


Rakshak’s its shocking ! For all those who can’t go through the full video or those who don’t understand Hindi, I am providing the summary below.

Loads of fake currency (Rs500 & Rs1000 notes) is in circulation along the entire Indo - Nepal border. Therefore, CBI starts the investigation to find out the source of fake currency. CBI finds out that the bank branches along the border are distributing the fake currency. CBI threatens the bank staff with dire consequences. Under pressure, Bank staff tells the CBI that all this currency is supplied by the RBI. CBI raids the RBI offices in Delhi and to their utter shock same fake currency is stocked at the RBI’s currency note units.

Quality of fake currency is so good that it is kind of impossible to find out the difference between fake and the real currency although CBI knew it’s fake. CBI sends both fake and the real currency to Japanese lab to find out the difference. Japanese fail to find out the difference. CBI then sends the currencies to US based lab. This lab is able to find out the difference between the printed fake and real currency. The difference they found out was nothing more than the position of one dot.

By now it was clear that the London based company “De LA Rue” {I was offered the interview by this company couple of months back but I declined} is supplying the both Fake and real currency. A team from India visited the company and stopped the further orders. Once this fraud came out in open, apparently there was lot of “hangama” in western press but Indian media was completely quite. Shares of this company went down as the fraud came out in open and also the reason that revenue from India makes about 25% of total turnover of “De La Rue” didn’t help.

Banks, ATM’s etc all are distributing the fake currencies under the impression that it is real. Reason: De La Rue is also supplying the machines to detect the fake currency. The company which is providing the fake currency is also providing fake currency detection machines ! No effort ever made to investigate the software of the machines by India.

It’s a big problem and Indian economy is already under threat. Inflation proves it. The CEO of De La Rue has resigned and also his links with Italian Mafia are now out in open.Indian government has taken no action so far and the news is being suppressed from coming out in open to the knowledge of people of India and parliament.