Indian Economy: News and Discussion (Jan 1 2010)

[Nihat]

Malaysia, India sign pact to boost trade

[Suraj]

somnath: Interesting points. A few additional thoughts of my own -
* I credit the NDA for having actually passed a meaningful law on fiscal rectitude, despite its flaws - something no Cong administration did. No law is ironclad, and I give them particular credit for having done so in the midst of rather dire fiscal circumstances that they inherited, and also partially exacerbated in the aftermath of the '98 Pokharan tests.
* The UPA inherited an economy on a high growth trajectory in the middle of a global boom - the NDA inherited one sputtering at the fag end of the mid 90s cyclical peak as the effect of the first set of reforms ran its course along with the global bust, and just as the 5th pay commission burden came into the picture. Not even close to comparable circumstances for a comparison. However, that the economy did grow continuously between 2003 to present day is absolutely true - having that savings/GDP base helped make that the trend growth level, as opposed to just cyclical ups and downs.
* The rise and fall in savings/GDP before 2002-03 were quantitatively not particularly meaningful, in that they merely rose from mid teens to low 20s. In absolute terms, both are very low - it wasn't until after the 10th finance commission and the improvement in savings/GDP to over 25% since 2002-03, than consistently high GDP growth manifested itself. Cyclical 1-2 year highs are partially statistical creatures on account of the base effect.

[Rampy]

Well, the PM neatly found scapegoats for every issue affecting the country. reforms stalled because of parliament deadlock(never mind that in UPA-1, BJP offered support to the pension reform bill, but UPA held back), coalition partners for corruption and international economic conditions for inflation. I would take his claims with a big bag of salt

^^ add to it I am being an ASS due to Oxphord and British rule which taught me so much

[shyamd]

ADAG accuses trader in bear attack

The Anil Dhirubhai Ambani (ADA) group has alleged that a trading cartel led by Sharad Shah also known as ‘Sharad Bobada’ was involved in spreading rumours and manipulating the prices of infrastructure company stocks to unfairly accumulate wealth. In a letter written to the Intelligence Bureau

on February 10 after group companies saw their shares plunge between 9 and 19% on February 9, Reliance Infrastructure said the illegal bear cartel has destroyed market value of over Rs 3,00,000 crore for the infrastructure sector in less than 90 days.
The group also registered a complaint with SEBI on February 9, saying its rivals had been spreading rumours about its companies, leading to stock prices falling.

“The stock market sources indicate that such bear hammering of infrastructure stocks has been led by a powerful stock market operator Sharad Shah, also known as “Sharad Bobada,” said the Reliance Infra letter to the IB, a copy of which was obtained by Hindustan Times.

When contacted Sharad Shah told HT, “I have not done anything wrong.” Reliance Infra’s letter said Shah’s cartel has constantly indulged in manipulation of infrastructure stocks for his “personal enrichment.”

And ADAG probably benefited from the same cartel. This has been there for several years. Now, ADAG is going on an offensive. Lets see if Anil can catch some of these criminals - he probably can't because CEO's of several companies are involved in this.

[Vipul]

RIL has forever been against anyone bearish on their stocks for obvious reasons.ADAG is stretched at the moment and hence is vulnerable and is crying wolf.
In the early 80's ow Dhirubhai had taken on the entire BSE Broker community successfully and taken them trough the cleaners by making them default and since then RIL stocks were never taken on by any bear cartels.

[somnath]

Suraj,

Mostly agree with you, though fail to understand the linkage between the Finance commission award and savings rate, or fiscal deficit...The job of the FC is to basically lay down a format of revenue sharing between centre and states...The 5th FC laid down generous norms for states...Which is good from a federal polity perspective..But as a stand-alone measure, does nothing for either consolidated fiscal deficit (centre+state) or savings rate...

IMO, the enhanced slope in the growth of savings rate owes a lot to PC's "dream budget" in 1997 (which Sitaram Kesari managed to convert into a nigtmare - but thats a different story!)...Finally the Raja Chelliah recos on direct tax reforms were fully, and unambiguously implemented (at least mostly)..That is what led to two things - increased disposable income leading to greater share of income being saved..And lesser "wealth repatriation" by the wealthy as tax rates in India finally went over the Laffer curve hump...It took a couple of years as people had to build confidence in the stability of the tax regime, bt that is what created the stimulus...

Which is why the GST is so important - it is world class, and should have a similar fundamental impact on the economy...The three major parties should just get it done now, amit Shah or not, IT or not...

[Theo_Fidel]

Which is why the GST is so important - it is world class, and should have a similar fundamental impact on the economy...The three major parties should just get it done now, amit Shah or not, IT or not...

There is little revolutionary about the GST. Most efficiencies were squeezed out when the VAT was rolled out. The main reason for the GST is the central government shenanigans. When the VAT was rolled out the GOI refused to roll the CST into the VAT for fear of losing revenue. So now here we are arguing again...

[somnath]

Which is why the GST is so important - it is world class, and should have a similar fundamental impact on the economy...The three major parties should just get it done now, amit Shah or not, IT or not...

There is little revolutionary about the GST. Most efficiencies were squeezed out when the VAT was rolled out. The main reason for the GST is the central government shenanigans. When the VAT was rolled out the GOI refused to roll the CST into the VAT for fear of losing revenue. So now here we are arguing again...

Theo-fidelji, I am not an expert on tax...So I sent a query off to a friend who is (he is a tax consultant with one of the big 4 firms)..His response..

CENVAT and the State VAT have certain incompleteness. The CENVAT does not extend to include chain of value addition below the stage of production. It has also not included several Central taxes, such as additional excise duties, additional customs duty, surcharges, etc., in the overall framework of the CENVAT, and thus kept the benefits of comprehensive input tax and service tax set-off out of the reach of manufacturers/dealers.

VAT has also now subsumed up several taxes in the States, such as, luxury tax, entertainment tax, etc.

CENVAT and state VATs clubbed with CST, present a grim tax scenario having cascading tax effects.

The Centre is restrained by the constitution from collecting tax on goods beyond the point of manufacture. Similarly States are restrained by the constitution from levying tax on services and interstate transactions.

Nature of complexities varies from taxability to classification to valuation. Some of such burning issues are: Excise on MRP, Excise, VAT and Service Tax on Software, VAT & Service tax on Works Contracts, Right to Use and Composite Contracts such as AMC transactions.

Central Sales Tax (CST) on inter-state sales, collected by the origin state and for which no credit is allowed by any level of government.

Real estate transactions are outside the scope of both VAT and CENVAT.

The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs.

Having just done a real estate txn on PA, I know that the point on RE is valid - some builders are collecting presumptive amounts...

In any case, seems like a significant journey, from CENVAT to GST..

[Theo_Fidel]

Somnath,

Appreciate you taking the time to clarify. yes, there is some operational benefit.

But all the efficiency improvement in terms of compliance and transactional clarity has already been squeezed out. In any case a separate central tax + state tax rate will be maintained. So depending on the state all the rates will be different anyway. Also the total rate is 14%-16%. This very high by world standards as well. I fail to see any real benefit for the nation.

Lets do it for operational reasons without any great expectation of revenue efficiency or even business benefit..

[Nihat]

PM's advisors gung-ho on growth, curbing inflation

Some highlights of the report in the link

* Economy expected to grow at 8.6 per cent in 2010-11 and 9.0 % in 2011-12
* Agriculture expected to grow at 5.4% in 2010-11 and 3.0% in 2011-12.
* Industry expected to grow at 8.1% in 2010-11 and 9.2% in 2011-12.
* Services expected to grow at 9.6% in 2010-11 and 10.3% in 2011-12.
* Inflation rate projected at 7.0 % by March 2011.
* Slow recovery in global economic and financial situation.
* Rising domestic savings and investment chief engines of growth.
* Investment rate expected to be 37.0% in 2010-11 and 37.5% in 2011-12.
# Domestic savings rate expected to be over 34% in 2010-11 and 34.7% in 2011-12.
# Current Account deficit estimated at 3.0% of GDP in 2010-11 and 2.8% of GDP in 2011-12.
# Merchandise trade deficit projected to be $ 132.0 billion or 7.7% of the GDP in 2010-11 and $151.5 billion or 7.7% of GDP in 2011-12.
# Invisibles trade surplus projected to be $ 81.3 billion or 4.8% of the GDP in 2010-11 and $95.7 billion or 4.8% in 2011-12.
# Capital flows can be readily absorbed by financing needs of the high growth of the Indian economy.
# Against the level of $47.8 billion in 2009-10, the capital inflows projected to be $ 64.6 billion for 2010-11 and $76 billion for 2011-12.
# Against accretion to reserves of $13.4 billion in 2009-10, projected to be $12.1 billion in 2010-11 and $20.2 billion in 2011-12.
# The declining trend in food prices particularly that of the vegetables will result in lower food inflation
* Manufactured goods inflation has remained low. Considerable care from the policy side has however to be taken to ensure that the manufactured goods inflation remains below 5 per cent in 2011-12.
* Monetary Policy to complete the process of exit and operate with bias toward tightening.
* Liquidity conditions are taut enough for monetary policy signals to be appropriately transmitted to the financial sector.
* Monetary and fiscal policies have to be appropriately tight to protect the economy from inflation.
* Monetary policy has an important role to play even in situations where inflation is triggered by supply constraints.
* Current year fiscal adjustment may not be a problem, the challenge is of adhering to the Finance Commission's targets with credible expenditure management.

* To sustain a growth rate of 9.0 per cent, steps required are:
* Containing inflation by focusing both on monetary and fiscal policies and supply side management.
* The pace of infrastructure creation has to be stepped up with renewed focus on the power sector.
* Continue efforts to contain Current Account Deficit (CAD) at 2-2.5 per cent of GDP and in parallel encourage flow of external investments into the country.
* Greater attention to agriculture, including on seed development, management of water and soil fertility and improving delivery system.

[Sravan]

Hi Guys,

I am in the works on inventing a whole new technology. One of the first markets will be India!!



Please support by watching the video. Also I'm partaking in the Berkeley Business plan competition. If you like the concept, please vote for me in link provided in the video. The winner gets 30k cash reward. The product is due for release in India March 31st, 2011.

[VenkataS]

Merchandise trade deficit projected to be $ 132.0 billion or 7.7% of the GDP in 2010-11 and $151.5 billion or 7.7% of GDP in 2011-12.

From Nihat's post, the above line implies, 2011 GDP is $1714.28 billion and in 2012 GDP is going to be $1967.53 billion.
Nice!!!

[ramana]

So Prem,
2020 is arriving early!

[Prem]

So Prem,
2020 is arriving early!

Not yet sir , we must wait for 2012-2017-2022 to "arrive"in British terminology. Ask Suraj sir, he has been 99.9999% ( ~ .001~ )corrrrrrect in his estimation. 2012 should have been close to 2100. But still better than the dream of SB Chavan who in 1989 was seeking 1 Trillion $ Economy by 2010.
Post 2012, we run for 10 years while old China rest to catch breath.

[somnath]

Post 2012, we run for 10 years while old China rest to catch breath

Well, dont know for 10 years, but the street (including IMF/WB) are expectng India to outpace china in growth from 2012-13...Kaushik Basu concurs as well, an he is a more "reliable" source...

The numbers should look much better for 2012 if USDINR plays out to street estimates - people are expecting INR @ 41...Assuming a 15% nominal growth rate in GDP (~8% real+7% inflation), nominal GDP in INR terms should be about 83 lac crores, or >USD 2 trillion!

@ 34-35% domestic savings, and another 2-3% foreign savings, achieving 8-9% growth should be pretty par for the course...

Most importantly, the govt is serious about not derailing it, even at the political cost of inflation..That was pretty much the only insight that came out of the PM's press conference...This PM should know, he saw the growth rate induced by his first reforms-burst stymied by a monetarist RBI...Hopefully this time he can convince D Subbarao not to repeat the same mistake.

[Suraj]

On the other hand, the mid 90s growth peak was not about to last very long, considering savings/GDP was in the 21-23% range back then - it would have supported no more than about 6% growth at most, and the inefficiencies present then were ripe to trigger inflationary pressures early. Further, that was an era when the very need for economic reforms was not something that had widespread political backing as yet - unlike today. It's natural that there was a much higher political cost of inflation then. Today, while inflation is still a huge liability, people see the money around them and know that economic reforms themselves are not an option or something to be rolled back.

[Arjun]

Well, dont know for 10 years, but the street (including IMF/WB) are expectng India to outpace china in growth from 2012-13...Kaushik Basu concurs as well, an he is a more "reliable" source...

That's the 'street' expectation, but more hard evidence is required in order to conclude that the Chinese growth engine is definitely slowing. Based on the same ICOR based growth model for China, even if one assumes that China's 50%+ savings rate will drop significantly - they can maintain growth rate by transitioning to current account deficit, and to more of consumption rather than savings / exports-led growth.

The government needs to get moving on the 'promise' of infrastructure and other sectors, and needs to hasten reforms to take India's performance to the next level. The current attitude seems to be that India is on some kind of 'auto-pilot' to meet her 'tryst with destiny', which I find more than a little jarring.

[Theo_Fidel]

The government needs to get moving on the 'promise' of infrastructure and other sectors, and still needs reforms to move India's performance to the next level. The current attitude seems to be that India is on some kind of 'auto-pilot' to meet her 'tryst with destiny' which I find more than a little jarring.

I don't think it is auto pilot. Having talked to govt types it is fear.

They mostly don't understand why India is growing so fast. There is a tremendous fear of doing anything big that might upset the growth rate. So we have this tinkering around the margins, which is not a bad thing in it self. Even labor reforms are proving unnecessary as private industry has found ways around it.

The future reforms would actually involve government itself. And no one has the stomach for that battle.

[somnath]

That's the 'street' expectation, but more hard evidence is required in order to conclude that the Chinese growth engine is definitely slowing. Based on the same ICOR based growth model for China, even if one assumes that China's 50%+ savings rate will drop significantly - they can maintain growth rate by transitioning to current account deficit, and to more of consumption rather than savings / exports-led growth.

China isnt going anywhere, thats for sure...They are however an incredibly inefficient user of everything - from energy to capital..And inflation is catching up as well, which is triggering the monetarist policy responses....So we'll need to see - though if Kaushik Basu says something, it is usually very very solid...

On reforms, there isnt much "policy" on the table left..Its mostly day-to-day governance issues...And a lot of it is in the domain of state governments..

[Nihat]

Well, dont know for 10 years, but the street (including IMF/WB) are expectng India to outpace china in growth from 2012-13...Kaushik Basu concurs as well, an he is a more "reliable" source...

The current attitude seems to be that India is on some kind of 'auto-pilot' to meet her 'tryst with destiny', which I find more than a little jarring.

Actually, it is sort of an Auto-pilot in the sense that there is a significant growth momentum in the economy now which is feeding itself. This is apparent in Services and industry but unfortunatly not in Primary sector which needs urgent reforms.

[Arjun]

China isnt going anywhere, thats for sure...They are however an incredibly inefficient user of everything - from energy to capital..

If ICOR is an indication, China's efficiency on the capital front is the same as India.

On reforms, there isnt much "policy" on the table left..Its mostly day-to-day governance issues...And a lot of it is in the domain of state governments..

Disagree. As does MMS and the Indian stock market - if you have been following the former's statements and the latter's movements. Reforms are urgently required in -

1. Agriculture - both for combating long-term structural inflation and to make this sector far more dynamic. Even though agriculture's contribution to growth is low, more than 50% of the population depends on it, and money spent on NREGA would be better spent on making Indian agriculture sustain its rural population.

2. Pensions - channel Indian savings appropriately

3. Infrastructure - $1 Trillion of funding is required over the next 5 years. Where does this come from?

4. Education

5. Subsidies - with food security and other massive social schemes promised, fuel subsidies need to go.

6. Land / Land acquisition

7. Corruption in government interfacing industries

Sure, like Theo says Indian industry might find their way around a few of these - but there is only so much of nation-building the private sector can take on at the current juncture (though over the longer term privatization of all governmental activities might not be a bad idea!).

[Nihat]

Indian economy : A Report Card

PM Panel Wants Stimulus Withdrawn

The prime minister’s economic advisory council called for the withdrawal of fiscal stimulus citing the need to boost revenues. “We have to get back to the fiscal consolidation ...this means withdrawal of some of the stimulus,” council chairman C Rangarajan said on Monday while releasing a report, ‘Review of the Economy 2010-11’. The report said budgeted levels of fiscal deficit and revenue deficit are still beyond the comfort zone. It suggested that a significant portion of fiscal adjustment will have to come from additional tax revenues.

The council called for continued efforts to reform tax administration, review double taxation avoidance treaties and recommended measures to prevent flight of funds to tax havens.

The fiscal deficit is likely to decline to 5.2% of the gross domestic product (GDP) in the current year as against the budgeted 5.5%, going by an expected 8.6% growth in the GDP, Rangarajan said. He called for speedy implementation of the goods and service tax to boost revenues.

[Suraj]

The existing high level of savings/GDP and investment/GDP in itself is an indication of an 'autopilot' mode, though I wouldn't put it in such a hands off sense. Rather, it demonstrates that a huge number of parties have their own money invested in the continued fast growth of the economy - a situation that both feeds and perpetuates itself. The more political and business interests that have a stake in our continued growth, the better, because the fact that the ones who have the money and the power also have their entire hand in the pie is the best possible guarantee that they will continue to back growth, despite the messy, chaotic way we might go about it. It's a similar dynamic to the CPC/PLA's stake in Chinese growth, though in terms of execution, there's a world of difference; say what you will, but the Chinese are masters at getting things done, as costly, inefficient or brutal they may be going about it.

[vina]

I don't think it is auto pilot. Having talked to govt types it is fear.

They mostly don't understand why India is growing so fast. .

Govt not understanding something is good. The more clueless the St Stephens/DSE/ISI/JNU/Planning Commission monkeys are, the better for everyone. The more the Dilli "economists" dont get it,the better.

These same monkeys couldn't understand IT/Vity and thought it is a bunch of kids playing around with something called computers (something they didnt understand), thought they were glorified typists , who after all couldnt do much, so no harm in letting them play. Err. Now 20 years later, they have become so big and are now sneering down at the Dilli monkeys!

The "why India is growing so fast" is easy. The dead weight of the govt in most sectors is removed. The Indian economy is more globally integrated. This is the "New Hindoo Growth Rate TM vina ".Earlier, even if you had to build a toilet and/or make toilet paper, you had to go to a Baboo in Dilli who would dictate how much toilet paper you could make, when and in what quantity and what price and to whom to sell it for! That kind of intelligence is what unscruplous businessmen (D.Amb for eg) tapped into to find out where there are demand supply mismatches and a sure shot low risk area for investment (Polyester and other syn fibers for instance and later Petrol refining).

Now no one needs to give a f*ck about Babooze in Dilli. I need to set up a business, I do it right away. I dont need a license, no nothing. No need to tell Babooze what I am doing, how am I doing, and why am I doing and where! Multiply this a million times and Babooze are now "Konphused" , dont know where their a*ses are, cant find it, and are flummoxed why their "models" dont explain where the growth is coming from.

Case in point JNU types like CP Chandrashekar. They are stuck with wonderment ..nay bewildered that IT/Vity services exports in India alone is able to pay for oil imports (nearly).. This is something their monkey models could never predict earlier , "it has not been done before he says.." . It doesn't fit with their worldview of "Glorious Socialist worker" toiling in the factories and "making" (things they understand) and doing "self sufficiency " and ushering in "Socialism" (search http://www.macroscan.org , where such "alternate" JNU critters put out their verbal vomit). Dilli Babus are stuck in some make believe world. Let them stay where they are. That they are clueless is great. It is a function of their lack of control over the economy! Let them sleep . After all, ignorance is bliss!

Psst.. You wanna know why India is growing, here check out this link..A model of Growth of Contemporary Indian Economy .. The conclusions fly in the face of empirical evidence over centuries . For eg, if what this guy says is even remotely true, (err. he assumes that labor productivity rises faster than investment. a factory owner's total wet dream/ideal case for everyone. little need to invest, more profits for everyone!) then the massive productivity improvements in W.Europe /USA/Japan /Newly Industrialized Asia over the centuries must mean that the unemployment there must be much higher than what was there before industrial revolution ! Well like I said, these St Stephens/JNU/DSE/ISI types live in their own cloud cuckoo land. Let them live there. And psst. most of the Eye Yea Ass and other E-Con ministry types get into govt from there! All the better.

[somnath]

Vina-ji,

Your angst against the DU/ISI-types is well taken (even by a DU alum! )...

But you are being simplistic by saying that "global integration" is the reason why India is growing and govt intervention is gone...As a matter of fact, India ould one of the "least globalised" of all economies, if you go by all the indices that are done on the subject..One below..

http://globalization.kof.ethz.ch/static ... s_2010.pdf

And in any modern economy, govt intervention remains critical and valid - the issue with India today is that govt capacities have not risen in tune with the demands of the new economy (2G etc are symptomatic of that)..

What reforms have done has been to remove the restrictions and bring in foreign competition..But govt remains important, on policy and actions..On s/w for example, someone in govt had the foresight to set up STPIs and extend a tax holiday (which gets extended ad infinitum!) -that was the prime driver of the industry...If that wasnt in place, Infy may not have existed..

That article by Prabhat Patnaik isnt so "iconoclastic" - fact that labour productivity growth can be faster than investment growth is pretty standard across many scenarios...At a firm level, that is why firms have a growth in profits higher than gorwth in staff costs! At a macro level, that is why (or at least partly why) we have a growth in GDP growth rate higher than growth in savings (as one input), which is why ICOR moves from (say) 4 to 3.8 - I think thats the point he is making..

[vina]

But you are being simplistic by saying that "global integration" is the reason why India is growing and govt intervention is gone...As a matter of fact, India ould one of the "least globalised" of all economies, if you go by all the indices that are done on the subject..One below..

http://globalization.kof.ethz.ch/static ... s_2010.pdf

All I meant is that India is more integrated into the global economy than earlier and this has benefits and that has boosed the growth rates.

But the stats you posted are hokey to say the least. For eg, under "Economic Globalization" China is ranked BELOW Yemen, Colombia and Paraguay and just above Egypt and lets see , major exports of Yemen , Colombia and Paraguay .. Terrorism, Cocaine and Shakira and Electricity and these are more globalized than China and India economically ? And under "Social Globalization" , India is ranked after Bhutan, Ghana,Zambia, Sao Tome & Principe and ten places below Pakistan? Wonder if these stats are some parallel universe like the ones the dilli billis live in.

But govt remains important, on policy and actions..On s/w for example, someone in govt had the foresight to set up STPIs and extend a tax holiday (which gets extended ad infinitum!) -that was the prime driver of the industry...If that wasnt in place, Infy may not have existed..

Got to hand it to you . That is as original as an argument I have heard. Infy wouldnt have existed without the STPI!! Problem is that Infy (and also Wipro 77? and TCS 67) was established in 1981, a full 10 years before the STPI was set up in 1991! I doubt that Narayanamurthy and his team were so clairvoyant in 1981 that they could see 10 years ahead into a thing called STPI and Nirvana beyond.

Hmm STPI --1991 ?. See the link about the BOP crisis, need to boost exports and hence tax breaks for export related industries ?Even before 1991, per the wiki on STPI, India had IT/Vity exports of $131m, chump change today, but in 1991, nothing to be sneezed at!

Befoe STPI, Infy and others were importing computers at 150% duty. After that, it was duty free. That is all . Yeah. STPI allowed them to reinvest more of their earnings in their business and growth, rather than hand it into the hands of the grubby politicos!

That article by Prabhat Patnaik isnt so "iconoclastic" - fact that labour productivity growth can be faster than investment growth is pretty standard across many scenarios...At a firm level, that is why firms have a growth in profits higher than gorwth in staff costs!

Problem is that Prabhat Patnaik was a "grand" narrative on the causes of India's growth. Be that as it may, even on a firm level, Mr Patnaik obviously hasn't heard about accrual (a cruel?) accounting, and if he had done that and not done the cash based "Invest today" and "Huge profit due to labor productivity increase over the next 5 years" kind of kindergarten accounting, he would have seen much smoother and more realistic estimates of profits (err.. there is something called depreciation and amortization in balance sheets you know) and yeah, that is surely short run and can't continue indefinitely (even galley slaves die if overworked, machines wear out, maintenance increases and you need guess what..more capex /investment and galley slaves!)

At a macro level, that is why (or at least partly why) we have a growth in GDP growth rate higher than growth in savings (as one input), which is why ICOR moves from (say) 4 to 3.8 - I think thats the point he is making..

What any half decent growth model (not the make believe ones in DSE/ISI) would tell you is that in the long run what matters is Total factor productivity growth (Solow Model for instance). If you are growing faster than the long run capital growth, then you are doing better with other productivity factors .

The point he is making is misrepresenting short run growth factors (and that too at firm level) as long term trends/growth models for the economy as a whole. In the long run, productivity does not destroy employment, but rather creates massive wealth and INCREASES overall employment. If that had been the case, before Adam Smith's pin factory and technology improvements (such as steam engines), Victorian England should have seen a decrease in overall employment (along with the rest of W Europe that industrialized) , especially when there was massive population growth at that time as well, while empirical evidence is to the contrary! This is the paradox that they teach you about in Econ 101 in any half decent place. Now we are to disregard historical empirical evidence and well regarded theory in favor of wild make believe from JNU ding dongs!

[somnath]

Vinaji,

1. Globalisation - all that I said that by most measures of "globalisation", surveys or data sets (exports-to-GDP ratio, foreign investment-to-GDP ratio et al), India would be behind many countries...So it is not such a big deal, exposure to foreign competition and realtive open-ness of the markets is..Thats all..

2. On STPI - I am surprised you are so dismissive about them...Most industry veterans swear by the role of STPI and the tax exepmtion assocated in driving the industry..Before STPI, Infy, Wipro dabbled in a variety of things, incl hardware...STPI was the sort of facilitating incubator that propelled growth - Narayan Murthy himself says it! In any case, the larger point is whether govt intervention is required for a better funcitoning economy...The simple answer is yes, I dont think anyone argues that govt inervention is not required - the direction and quality of the intervention is the matter of debate..

3. On Prabhat Patnaik's postulates..I dont know how depreciation comes into the discussion, but he is not writing Econ 101 stuff on growth of total factor productivity and impact on growth over the long run...He is making a specific, in fact specialised point on a bunch of conditions that might lead to countries having high growth with lower growth in employment because of structural efficiency gains...It is frankly hardly new or special, but hardly "stupid" as well, the way ou seem to be projecting it...the DMP model for example (Diamond Mortensson Pissarides for the uninitiated) said something similar - high unemplyment can at times co-exist with high # of vacancies (representative of economic growth) - and it won a Nobel prize for it!

I am no great fan of Prabhat Patnaik, but nothing terribly wrong in the POV being expressed there....

One can argue that India is in a position today that is pretty close to what he is saying - organised sector employment has just not grown, despite tremendous growth and an obvious availability of jobs across sectors (as can be seen in wage infaltion)...There might be many reasons for it - but structural effieciency gains would be one, as would be skills deficiency...Someone like Surjit Bhalla will dispute massively and polemically, but thats him...PP says something that hardly something that betrays JNU/ISI (glad you kept my alma mater away!) qualification, or the lack of it!

[ShauryaT]

The dead weight of the govt in most sectors is removed.

Vina: I couldn't agree more and yet disagree, in the sense that we still have a long way to go. If we continue to just do this one thing for the next 20 years, i.e: disinvest government interests in business along with a reform agenda, we will more or less guarantee Indian growth. If we then work on "reducing" the size of government and more effective devolution of powers for the next 20 years, we will again guarantee Indian growth and then for the next 20 years, if we arrest the fiscal deficit and create a successful alternative to subsidies, we will again guarantee Indian growth.

So, in all three areas, Government disinvestment, devolution of powers and drastic reduction of subsidies, the above quote "dead weight of the government" has a long way to go. Now, if we manage to get a government, who can actually act (talk is cheap) on these three together is the one, I will vote for.

[vina]

1. Globalisation - all that I said that by most measures of "globalisation", surveys or data sets (exports-to-GDP ratio, foreign investment-to-GDP ratio et al), India would be behind many countries...So it is not such a big deal, exposure to foreign competition and realtive open-ness of the markets is..Thats all..

Somnathji. I dont contest the fact that by some definitions a country like Yemen will be more "Globalized" than China. But such rote and numb statistics, especially with small bases give severely distorted picture. China probably exports AND imports in a couple of hours what Yemen would do in a year!.

I do agree that what matters more is global competitiveness. When you are more closely integrated with global markets your firm's competitiveness has to be at the global level and this has spin off effects on the domestic economy

2. On STPI - I am surprised you are so dismissive about them...Most industry veterans swear by the role of STPI and the tax exepmtion assocated in driving the industry..Before STPI, Infy, Wipro dabbled in a variety of things, incl hardware...STPI was the sort of facilitating incubator that propelled growth - Narayan Murthy himself says it! In any case, the larger point is whether govt intervention is required for a better funcitoning economy...The simple answer is yes, I dont think anyone argues that govt inervention is not required - the direction and quality of the intervention is the matter of debate..

This STPI is/was important. It sort of made IT/Vity into a "Gated Community" that insulated it from the general mayhem and difficulties of operating in an Indian system.. Sort of like a mini "Shenzen SEZ" for IT! . But to trace that to the very existence (not the growth and where it has reached today, for that do credit the STPI , where the lack of it would have stunted the growth) is an urban legend on the lines of "Mr Premji took a vegetable oil company and built it into $ XX billion market cap company" (anyone in the know will politely disagree and say that until rather recently Premji was in Bombay, was totally hands off and actually ran the company only from say after Vivek Paul for 3 years or so when it underperformed it's peers rather badly).

On the broader point of Govt regulation (not intervention.. I think the best thing the govt can do is to get out) and smart regulation, I agree with you. Intervention is a dirty word in my book because the Govt picks winners and losers and skews the table . Staying out and ensuring a fair industry structure is the best way to go.

3. On Prabhat Patnaik's postulates..I dont know how depreciation comes into the discussion, but he is not writing Econ 101 stuff on growth of total factor productivity and impact on growth over the long run...He is making a specific, in fact specialised point on a bunch of conditions that might lead to countries having high growth with lower growth in employment because of structural efficiency gains...It is frankly hardly new or special, but hardly "stupid" as well, the way ou seem to be projecting it.

.

See, the problem with that is that it is sort of workable ONLY under the assumption that he made ie productivity growth rate is higher than investment growth rate.

Now it is so difficult to sustain a high productivity growth rate (even in the face of blistering technological leap frogs ) and that too one that is far higher than the investment growth rate, it is usually possible only in the short run and possibly more so in periods when investment growth falls for some reason. This is not a sustained long term thing on which to base any long term prescriptions on. To pass this off will fly in the face of empirical evidence and not pass the "smell" test.

For eg, the concluding lines in his work on china exhibiting lack of labor elasticity to output is simply not true circa 2011! After all, we are hearing stories of Chinese wage inflation , shrinking profitability of firms and larger claims of labor on the total pie as against profit! So the bottom is knocked off his postulate made in 2007 (not that long ago) on continuous increase in the share of profits in total output vs labor! The Chinese labor market is simply not behaving the way his model postulated over the long run!.

One can argue that India is in a position today that is pretty close to what he is saying - organised sector employment has just not grown, despite tremendous growth and an obvious availability of jobs across sectors (as can be seen in wage infaltion)...There might be many reasons for it - but structural effieciency gains would be one, as would be skills deficiency...

I do think the biggest elephant in the room for that is the perverse incentives that came with having the kind of sticky and "5 Star" labor market, especially in the organized sector. There is lot more incentive for the firm to substitute labor with capital , even when it might make sense in nominal terms to be more labor intensive, precisely because of those perverse incentives. But talk about labor market flexibility and it will bring all sorts of union folks crawling out of the woodwork.

PP says something that hardly something that betrays JNU/ISI (glad you kept my alma mater away!) qualification, or the lack of it!

Ok. Ok. Sorry I missed your alma mater. In the next rant, I will make sure to include it..

[shaardula]

perhaps a minor nitpick.

bangalore electronics city was done during Gundu Rao's regime. RK Baliga was the brain behind it. The electronics city was established in 1978.

http://en.wikipedia.org/wiki/Electronics_City

[ShauryaT]

And in any modern economy, govt intervention remains critical and valid - the issue with India today is that govt capacities have not risen in tune with the demands of the new economy (2G etc are symptomatic of that)..

Do not have a general disagreement that government intervention remains valid and critical, however in the case of India, the government is overly involved at the national and state levels, but severely under involved/disorganized/overwhelmed/unempowered at the district/city or taluka and city zone levels.

Also, not sure how is the 2G scandal symptomatic of that. The 2G case and the telecom area is one, where the government is actually playing the role of a regulator and the custodian of air waves, as it should. To a certain degree (especially wireless), the government has it right. Exceptions like the government run business like BSNL, MTNL still remain. VSNL was disinvested. The 2G case, was a simple matter of loot and chori. It was symptomatic of the lack of general accountability on government actions, rather than any larger desire for a change in policy.

[Theo_Fidel]

I don't buy the "Tea Party" kool aid about destroying government. Growth occurs in the system government creates.

Yes, government is venal and corrupt but it has also kept the peace and ensured a small measure of fairness so ALL entrepreneurs can try to progress. Most of India's growth is not from the truly big players. Even INFy types are only marginally responsible for growth. Most of India's growth has come from very small players, often 100 employees or less. And it is not that they grow as much as they multiply and proliferate. Every year there are more of them and this is what spreads growth out to the margins. We can see it in the fact that organized employment has not grown for some time now yet millions upon millions have been hired and put to work. It is by these small-mid size companies.

Here's the chart from the commerce ministry.



This just companies that have issued shares and so are more organized. The other companies should be ten times this amount. One can see the growth in new companies. So before we get all teary eyed at WIPRO, et al, lets remember where our growth really comes from.

[ramana]

Theo I was told by a true blue Dilli Billi that GOI elite (Sarkar and politicians) wanted to create new centers of wealth not linked to traditional powers and let the new economy in Electorincs and IT/VTycome up. The plans were underway since late 70s/eraly 80s. However once IT/VTy started getting ADRs they fell into the Globalization miasma. So there is thinking going on all the time. I agree that good government helps growth.

[Viv S]

Reforms are urgently required in -

1. Agriculture - both for combating long-term structural inflation and to make this sector far more dynamic. Even though agriculture's contribution to growth is low, more than 50% of the population depends on it, and money spent on NREGA would be better spent on making Indian agriculture sustain its rural population.

2. Pensions - channel Indian savings appropriately

3. Infrastructure - $1 Trillion of funding is required over the next 5 years. Where does this come from?

4. Education

5. Subsidies - with food security and other massive social schemes promised, fuel subsidies need to go.

6. Land / Land acquisition

7. Corruption in government interfacing industries

I think you could add Labour and Judicial Reform to that.

[Theo_Fidel]

Ramana,

It is truer than you think. All govt colleges in TN have a CM's quota which is invariably filled with Babu spawn. Even Anna universities CSE course has been filled with them for a looong time, many who shouldn't even be in a BSC course. The IT/VITY group are populated with legions of babu progeny. One thing they did not want for their children was to become babu's as well hence the IT and private hospital explosion.

We grow as fast as our governance permits. The best example we can see is how the better run states perform versus the laggards.

As far as reform, we should be focusing on making the existing system work better as well as new laws. Laws are never the shortage in India, it is the implementation that causes problems.

Just to give you one example. There is a long standing law limiting the number of Pineapple seedlings one farmer can receive. The station at Pechiparai has always overlooked this for me and provided as many as I need. This year they have a new director who is ruthlessly following the rules. So I ended up with just 20% of the seedlings I need. The remainder were just thrown away. So now every 2 weeks I have to send someone there to get my next 20%. This means that my crop is going to mature over 8 weeks next year! I doubt I can get even half the crop harvested properly at this rate. This sort of stuff happens constantly in India. People with very little knowledge or understanding of the industry making decisions that affect other peoples lives. This is one time I actually wished he were corrupt so I could bribe him and get my seedlings, but nooo....

[somnath]

If ICOR is an indication, China's efficiency on the capital front is the same as India

China saves 52-53% of GDP, producing ~9.5% growth, India saves 34-35%, producing ~8.5% - do the maths!

On the issue of government intervention, the presence of it is an absolute sine qua non, surely in matters of policy, but also in actual investment decisions..One of the big mistakes (if I may use that word) of MMS/PVNR paradigm in the early '90s was an asumption that private investment will fill up all gaps in public investment..So while the govt retreated from being a participant, it simultaeneously also retreated from being an investor..As a result we saw a good 10 years when public investment just dried up, and no material private investment took its place...IMO that is the single biggest reason for the infrastructure deficit in the country - the '90s was a "lost decade" in that respect...

It wa only in the latter half of NDA's regime that they realised that without govt partcipation, pvt sector isnt going to come in, and made baby starts with the NHDP programme...It still took a few more years for public investment to get back to a reasonable level...All this talk of 1 trillion in infrastructure etc - aint gonna happen without the big daddy's participation....

Now it is so difficult to sustain a high productivity growth rate (even in the face of blistering technological leap frogs ) and that too one that is far higher than the investment growth rate, it is usually possible only in the short run and possibly more so in periods when investment growth falls for some reason. This is not a sustained long term thing on which to base any long term prescriptions on. To pass this off will fly in the face of empirical evidence and not pass the "smell" test.

For eg, the concluding lines in his work on china exhibiting lack of labor elasticity to output is simply not true circa 2011! After all, we are hearing stories of Chinese wage inflation , shrinking profitability of firms and larger claims of labor on the total pie as against profit! So the bottom is knocked off his postulate made in 2007 (not that long ago) on continuous increase in the share of profits in total output vs labor! The Chinese labor market is simply not behaving the way his model postulated over the long run

Vinaji, I am confused...are you saying that growth in labour productivity can never outpace growth in wages (read, growth in investments)? Because in case productivity lags investment growth, it should also lag wage growth...Or are you saying that total factor productivity growth cannot outpace investment growth in the long run..Most frameworks, incl 101 Ricardian et al, and even on an intuitive "smell test" level, unless TFP growth keeps pace with investment growth, it is an unsustainable scenario...

the data bears itself out all the time...Some data from Singapore..
http://www.tripartism.sg/files/document ... 0-2011.pdf

since you mentioned China, here is some on China..
http://epress.anu.edu.au/china/pdf/ch02.pdf
(refer to Fig 2.11) - labour productivty growth outpaces wage growth...

As I said, PP isnt saying nything revolutionary - its prety standard stuff...

I would agree with your point on the labour market rigidities - there was a nice article on bloomberg a few weeks back on an Indian garment maker concentrating on lingerie for Victoria's Secret rather than Boxer shorts as the former required less labour (an took him below the labour law nets) and yielded better margins!

[Arjun]

If ICOR is an indication, China's efficiency on the capital front is the same as India

China saves 52-53% of GDP, producing ~9.5% growth, India saves 34-35%, producing ~8.5% - do the maths!

When you are talking of efficiency of capital, you would need to use Investment rate and not Savings rate as the measure...or was that not taught at DU?

Obviously a significant percentage of Chinese savings, due to current account surplus, is lent out to other countries primarily the US. Since you were the one to bring up ICOR in previous discussions, I presumed you knew what it stood for: the Incremental Capital to Output ratio. See this article - the ICOR for both India and China have been practically the same over the last decade....Key Determinants of GDP Growth in India and China. Efficiency of capital usage as measured by TFP (total factor productivity) also yields the same results as ICOR...

[somnath]

Arjunji,

Are you interested in discussions or trying stupid insults?

Efficiency of capital - ICOR is one measure..But if a country delibrately folows a strategy of large current acocunt surpluses which is then deploys in US treasuries, then it is a conscious choice of investments it is making...Hence, the return on its total portfolio of investments therefore be judged on the full portfolio, not just what is invested internally..In other words, China saves 54% of GDP, deploys 44-45% domesticaly , which generates a real growth of 10%..It deploys the balance 7-8% in US treasuries, where it generates 1%...So as an economy, it is a (relatively) inefficient user of its own savings...

Second, ICOR...India's ICORs have been historically lower than China's - its a well recognised fact, not just in academic circles but also in financial circles...Here are a couple of reference from both sides of the divide..

http://www.nber.org/~wbuiter/india.pdf

http://www.deloitte.com/assets/Dcom-Bos ... 082006.pdf

Yasheng Huang and Tarun Khanna have done seminal studies on precisely this point (comparing India and China on efficiency) - if you are REALLY interested in knowing, you would study them, rather than casting aspersions on my knowledge of ICOR or my qualifications (which you know nothing about)..

[Arjun]

Are you interested in discussions or trying stupid insults?

If you feel my question was insulting I take it back ... But I am certainly surprised by your persistence in continuing to defend the indefensible- on this occasion as on others, which I think detracts from the value that you undoubtedly otherwise bring to debates on this forum.

Efficiency of capital - ICOR is one measure..But if a country delibrately folows a strategy of large current acocunt surpluses which is then deploys in US treasuries, then it is a conscious choice of investments it is making...Hence, the return on its total portfolio of investments therefore be judged on the full portfolio, not just what is invested internally..In other words, China saves 54% of GDP, deploys 44-45% domesticaly , which generates a real growth of 10%..It deploys the balance 7-8% in US treasuries, where it generates 1%...So as an economy, it is a (relatively) inefficient user of its own savings...

That's a neat way of trying to rationalize.....can you point me to any single authoritative study that correlates GDP growth to savings rate rather than investment rate as a measure of capital efficiency of any country?

Second, ICOR...India's ICORs have been historically lower than China's - its a well recognised fact, not just in academic circles but also in financial circles...Here are a couple of reference from both sides of the divide..

Are your studies current? They are dated 2005 and 06...the one I referenced is more recent. If you can show me that current ICOR rates (say for last 5 years) for India are lower that would certainly prove India to be a more efficient user of capital.

[vina]

That's a neat way of trying to rationalize.....can you point me to any single authoritative study that correlates GDP growth to savings rate rather than investment rate as a measure of capital efficiency of any country?

That is quite easy. Econ 101 would tell you that Invesments = Savings (in a closed economy or with NX=0 and net govt spending exp-tax = 0 ) . So that really is not such a big leap to do so, esp if you consider that NX in China is massively positive (it is a net capital exporter.. you have to if you run such current account surpluses and keep currency const), and I do think it runs Govt surpluses (though small /nearly balanced), so the Investment massively is less than savings for China.

Yeah. Somnathji is right. China does resemble Microsoft a lot. A huge $40b of cash on the book earing piddly rates , while the main business enjoys a decent 60%+ Gross Margin historically and is a massivecash machine, and hence the overall nos gets beaten down a bit.

China's net investments gets piddly Treasury rates, but that that deal is part of the China story and you cant take it out of their ICOR numbers!

If you can show me that current ICOR rates (say for last 5 years) for India are lower that would certainly prove India to be a more efficient user of capital.

That part is correct. India runs has huge govt deficits, is a small net importer of capital and has a savings rate much lower than China and still has growth rates that are within striking distance of China. That can come about only if the ICOR is much better. Err.. let me modify that a bit, and say that India uses it's available capital much better than the Chinese do with their available capital.

That is a plausible explanation. If you have access to the research databases of many e-Con-o-Mik think tanks or that of the I-Banks (like I used to have), it is easy to pull out the ICOR rates and comparative performance etc. That is quite easy. Maybe Somnathji (who in Singapore sounds like someone who is an Eye-Panker /Private Yukwity kind of dude from Dilli Posh School and St Stephens, while us Dhoti clad types lounge around in Bangalore Kearala slurping filter Kapee ) can pull out current reports right away (but I doubt will be able to share it online !) and can quote from those.