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India’s Economic Growth Slows: Whys, Where-to and How-to questions

August 20, 2012 7 comments

The policy paralysis is symptomatic of a deeper mental paralysis in Indian polity. How can the system start thinking small again.

It is no longer clear who is more out of touch with the Indian Voter. |  Ajit Ninan on Aug 06, 2012, in The Times Of India Ahmedabad

It is no longer clear who is more out of touch with the Indian Voter. | Ajit Ninan on Aug 06, 2012, in The Times Of India Ahmedabad

Facts? Hard To Come By

If readers want biased reporting, are media-owners fools, to give them the ‘truth’?

Leftist readers want a leftist slant.

Now that the Left has been proved to be wrong the Right is always Right. So rightly, Right-Wing readers want ‘balanced’ coverage. Like many readers, media owners, producers and creators also have their own ‘agendas’.

Indian commentariat, within and outside India, like in global media, are afflicted by partisan logic and laziness.

Forget solutions.

Sensible analysis either by the Left or Right of the slowdown in the Indian economy has been hard to come by. Two timely analyses extracted here.

Growth in the developing world is currently running at just above 4%, about half the pace of the boom years from 2003 to 2007. But in all the ups and downs of the global economic cycle, India’s ranking among the world’s fastest growing economies has been remarkably stable since 1980. Of the 180 economies tracked by the IMF, India ranked 29th in terms of its average growth rate in the 1980s, 27th in the 1990s and 26th during the last decade.

Even during the strongest boom years from 2003 to 2007, India’s ranking was barely budged (at 24) because all emerging markets were surging, lifted by a tide of easy money. Now, as global growth slows, so does India’s, which is likely to grow at 6% this year. That would leave it right where it was in the global rankings, somewhere between 25 and 30. Just as the boom of the last decade did not deserve a Made in India label, at least so far neither does the present downturn.

India’s growth has followed a steady pattern for three decades. The economy tends to grow 1.5 to 2 percentage points faster than the global emerging market average, come what may.

via India’s breakout path: It needs to break global growth script, not slavishly follow it – Times Of India.

Here comes the nub.

With the Great Recession in full swing, across, US, EU, Japan, can the Indian economy be unaffected? Many have also rightly pointed out to a policy paralysis.

Will the Opposition collude, collaborate or confront?  |  Ajit Ninan cartoon on Aug 08 2012 from The Times Of India, Ahmedabad

Will the Opposition collude, collaborate or confront? | Ajit Ninan cartoon on Aug 08 2012 from The Times Of India, Ahmedabad

So, where is the problem?

If not a solution, the Left seems to have, for a change, at least got the diagnosis right.

But more than two years after 2ndlook pointed out the danger – and the solution.

Dark clouds are enveloping our economy threatening the livelihood of millions. The growth rate has dipped to the lowest in a decade. Inflation and price rise continues relentlessly. The index of industrial production, manufacturing in particular, has dipped to its lowest level in recent times and the Sensex has now registered a 24% fall from its highest level.

This has inevitably impacted on the growth of unemployment in the country. It’s now reported that at least 123 cotton and fibre textile mills in the organised sector have closed down resulting in the layoff of 44,681 workers. The Apparel Export Promotion Council estimates that over 45 lakh people have lost their jobs in the textile sector, the largest employer after agriculture in our country. About 65% of our textile exports are to the US and the European Union (EU). With both of them on the brink of a severe recession, the situation in India can only worsen.

Reflecting a typical ostrich mentality, the commerce ministry has announced several sops, estimated at over Rs. 1,200 crore, to promote India’s tumbling exports. While India’s exports grew by 21% in 2011-12, to touch $303.7 billion, they crashed to a mere 3.2% this year, despite the severe depreciation of the rupee. Depreciation would make our goods cheaper in foreign lands, which should normally increase their sales. This, however, is not happening because of the deepening global economic crisis and recession. Yet, UPA 2 has adopted a seven-point strategy to increase India’s exports, despite the recent sharp decline to $360 billion.

The world has seen a sharp deceleration in global trade from a 13.8% growth in 2010 to 5% in 2011 and the World Trade Organisation (WTO) forecasts a mere 3.7% in 2012. This can well lead to a slew of restrictive trade practices in many countries, in pursuit of protecting their economies, which will have an adverse impact on our exports. In this context, the Rs. 1,200 crore package to promote exports will end up helping exporters and won’t increase the volume of exports. The latter requires a growing demand for our products in foreign lands. This cannot be created by granting fiscal concessions at home. Further, export growth requires Indian manufacturing to face severe competition from countries like China and even Bangladesh (in apparel exports, which is our largest net export earner). These concessions, therefore, will only protect the profit margins of Indian exporters at the expense of a mounting fiscal deficit.

Rather than working towards reversing our economic slowdown, UPA 2 seems to be concentrating on the revival of larger profits to India Inc and international finance capital. This has found expression with the calls for GenNext reforms from the recent Congress Working Committee (CWC) meeting. The privatisation, with sizeable foreign financial participation, of pension funds is in the offing. Likewise, reforms seeking to increase foreign financial participation in the insurance sector and granting foreign banks the right to take over private Indian banks appear to be in the pipeline.

These reforms were on the agenda of the neo-liberal trajectory since 2004. However, they were prevented by the Left parties during UPA 1. This  resulted in the relative insulation of the Indian economy from the devastating impact of the global financial meltdown of 2008.  This shield, so to speak, is now sought to be ripped apart.

via It doesn’t add up – Hindustan Times.

So, is there a solution?

The  ‘Capitalist’ and the Leftist solutions outlined by the authors of the above two extracts (read complete post at source) miss out vital elements of Indian economic story.

For instance the corporate sector. Between Bombay High in 1975, when India’s liberalization made a cautious start, to now, in the middle of the Y2K generation.

Well represented by the Sensex. The 30-most actively traded stocks, with big market-capitalization, in leadership positions. Of these 30 companies, 13 companies were too small to count in 1975, or some did not even exist. Or from the Nifty-50, 25 companies did not exist or were too small to count. Some of the big groups then, like Alembic-Sarabhai, DCM, Khataus, Mafatlals, Modis, Ruias, Singhanias, Walchand are tottering with token presence – or do not even exist.

Do these behemoth give any returns?

While alive and growing, these behemoths take the most credit and capital. When down and dead they take down large amounts of capital again – from banks, share investors, tax-payer, etc.

If you look at Indian exports – SME sector is 35%-50% of exports, agriculture is 12%-20%, gem and jewellery sector is 12%-20% of exports, software is 15%-20% of exports; mining and minerals is bout 5%-10% of exports. There are cyclical variations in each segment, so these percentages cannot be simply added up. But the broad trend is that these segments, which are new or small in size, account for close to 90% of India’s exports. In turn they get less than 40% of credit from the banking industry.

In terms of employment, these sectors (including agriculture) employs (including self-employment) close to 98% of India’s working people.

So, in exports, employment, these sectors contribute the most – more than 90%. But in terms of capital allocation, these segments get less than 40%.

This is where the story gets more complex.

Powder keg India

India is sitting on boiler – waiting to blow up.

Naxalites are running amok with Big Industry wanting more and more land. Factory workers are getting mutinous – wanting the much promised employment. Agriculturalists are making lesser money – and all the post-Independence vitality of Indian agriculture is slipping. Rivers, lakes are drying up – or getting polluted, thanks to Big Industry.

(From left) RIL chairman Mukesh Ambani, former CEO of HUL M.S. Banga, Godrej & Boyce chairman Jamshyd Godrej, food processing secretary Ashok Sinha and agriculture secretary P. K. Basu in New Delhi on Friday.  |  Image courtesy - .telegraphindia.com; source - PTI

(From left) RIL chairman Mukesh Ambani, former CEO of HUL M.S. Banga, Godrej & Boyce chairman Jamshyd Godrej, food processing secretary Ashok Sinha and agriculture secretary P. K. Basu in New Delhi on Friday. | Image courtesy – .telegraphindia.com; source – PTI

And the Government keeps going back to ‘captains’ of industry. In 2010, soon after 2ndlook warned of this impending crisis, there was this very representative photograph. Mukesh Ambani, MS Banga, Jamshyd Godrej in a meeting with Central Government on how to improve agricultural productivity.

What would Ambani, Banga and Godrej tell the Government? Something that will benefit a small farmer with marginal holding of 5 acres?

Assuming no mal-intentions, there is the simple point of ignorance. Can Big Industry speak for small farmer? Why assume the opposite is true?

If the Government wants to help Big Business, will they call the small farmer?

Big is always Bad

Now our West-loving media, its West-loving readers, can only think of Big Projects, Big Ideas, Big Infrastructure.

Can they think of making 1 million night shelters in the next 24 months?

Can they think of setting up 1000 pedestrian mandis for hawkers? Can the National Highway System be put on hold – and instead can we redesign our roads to create 1 crore hawker spaces on roads?

Will the State set up 1 million waste collection units – separate for glass, metals, paper, plastics, and bio-waste.

In all these cases the State is needed because the State has become the owner of the land – and controller of land use.

Now these are very boring and unglamorous ideas. All these are also unlike to boost growth in the next 1-3 years. In fact they may damp consumption, reducing demand, and hence ‘growth’. For instance, if India were to recycle 500 gm of plastic per family each month, plastic consumption will reduce by 80% – my estimate.

But these measures will create a base for labour mobility on a scale not witnessed in India for the last 800 years at least. It will mean creation of more entrepreneurs than the rest of the world put together will create. From these crucibles of enterprise, we will see a new generation of entrepreneurs, who will rival the entrepreneurs of the Bombay High generation.

Govt. cant go for any big ticket liberalization that favours Big Industry. It has no stomach for non-conventional 'infrastructure' that will supercharge labour opportunity and productivity.  |  Ninan's World 19 Aug 2012, 1100 hrs IST; source & courtest - timesofindia.com

Govt. cant go for any big ticket liberalization that favours Big Industry. It has no stomach for non-conventional ‘infrastructure’ that will supercharge labour opportunity and productivity. | Ninan’s World 19 Aug 2012, 1100 hrs IST; source & courtest – timesofindia.com

Paralysed Polity

The polity is understandably nervous – and cannot take many more Big Industry reforms. At the same time, these small ideas have no technology zing, no spectacle. Maybe even dull. So, no one wants to even talk of these ideas. So, instead they are toying with confetti schemes. Throw 20-30 million mobile phones in public hands. Distribute cycles to the poor.

Even the dear reader and media consumers are understandably more fired up by Big Ideas – like satellites, rockets, Mars Mission, rather than night shelters.

Not irrelevant, but Indian Ayurveda expected a man to heal himself. All knowledge of herbs and medicines was pushed down to the lowest rung in the society. No nephrologists or medulla oblongata specialists. Or Messiahs and saviours and doctors.

Similarly if Indian society wants to change, we probably should be the change that we want to see!


Are we not lucky?

May 23, 2012 1 comment

Why does the global debate revolve around One idea. Spend more on mega public sector projects, that will create more jobs and create ‘demand’.

Same ideas; different 'authors'  |  Eureka cartoon from newyorker.com; artist & publication date absent at source  |  Click for image.

Same ideas; different ‘authors’ | Eureka cartoon from newyorker.com; artist & publication date absent at source | Click for image.

Bad times bring out bad ideas

With the global economy in a slowdown now for the fourth year, there is ‘consensus’ that the ‘government must do something’.

Apart from the problem of economic distortion that State intervention brings, there is an additional problem of consensus on what the governments must do.

Spend more.

The world, eurozone and UK economies are in a far worse state than expected. Yet Mr Cameron insists that “we are moving in the right direction”. Who is this “we”? UK gross domestic product is stuck at 4 per cent below its pre-crisis peak in what is the longest such slump since the 19th century, with no end in sight. Even if one believes that part of the pre-crisis output was an illusion, why should one accept that the UK economy has lost the capacity to grow altogether? How can Mr Cameron believe the economy is moving in the right direction when it is not moving?

As Jonathan Portes, director of the National Institute of Economic and Social Research, argues in a recent blog post: “With long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity, and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This is not just basic macro-economics, it is common sense.”

With real interest rates close to zero – yes, zero – it is impossible to believe that the government cannot find investments to make itself, or investments it can make with the private sector, or private investments whose tail risks it can insure that do not earn more than the real cost of funds. If that were not true, the UK would be finished. Not only the economy, but the government itself is virtually certain to be better off if it undertook such investments and if it were to do its accounting in a rational way.

Yet, instead of taking advantage of the opportunity of a lifetime to repair and upgrade the capital stock, as Mr Portes notes: “Public sector net investment – spending on building roads, schools and hospitals – has been cut by about half over the past three years, and will be cut even further over the next two.”

He recommends a £30bn investment programme (about 2 per cent of GDP). I would go for far more. Note that the impact on the government’s debt stock would be trivial even if it brought no longer-term gains. Indeed, it would be modest at many times this level.

The result is likely to be a permanent reduction in the output of the UK, not to mention permanent damage to a whole generation of the unemployed. I have words for such behaviour. Not on this list is the word “sensible”. (via Cameron is consigning the UK to stagnation – FT.com).

Create life and death situations - and then present, only one option  |  Old tricks served me well cartoon from newyorker.com; artist & pub. date absent at source.  |  Click for source.

Create life and death situations – and then present, only one option | Old tricks served me well cartoon from newyorker.com; artist & pub. date absent at source. | Click for source.

What’s wrong

And the spending must be on ‘productive’ asset building.

Build more schools, roads, bridges, airports, docks, et al. Anything wrong with this, could seem like a valid question.

Plenty. Plenty wrong.

Big Bucks for Big Guys

We already have a situation where a paltry twelve corporate entities control our food supplies, another selected ten control news and thought flows; fewer than ten companies control the global car industry.

How about an interest subsidy of GBP30 billion to small businesses? That will mean GBP600 billion of lending to small business – based on lending equal to 20 times of interest. If it takes GBP100,000 to create a job, we are talking of 6 million jobs – @10,000 jobs for each GBP1 billion.

But this is, I am sure, not ‘possible’. So, lets go back to …

Big Spending …

Who will get the contracts for all these roads, buildings, airports, schools, docks. The same 10-20 major construction corporations that dominate the global economy.

And we will get jobs.

Aren’t we lucky that so many people in the academia and media think about our jobs – and our welfare.


Indian economy – Complacency?

April 23, 2010 4 comments

Why waste time with ‘small’ projects for ‘small’ people that hardly add upto any top-line or bottom-line figures?

The fallacy of 'growth'  |  Cartoonist Nick Anderson; source & courtesy - cartoonistgroup.com  |  Click for image.

The fallacy of ‘growth’ | Cartoonist Nick Anderson; source & courtesy – cartoonistgroup.com | Click for image.

one can understand why everyone in India may be getting a little complacent and even smug. It is almost as if investors and policy-makers are convinced that this rosy outlook is baked in the cake, so to speak. If it is going to happen and India is going to march ahead anyway, why take hard decisions? Does one really need to battle vested interests when 8 per cent or even 9 per cent long-term growth is assured? (via Akash Prakash: Complacency Setting In).

Out of place

Importantly, the Indian economy (say observers) is getting strangled by

the increasing politician-industrialist nexus … beginning to resemble Russia, with the same characteristics of crony capitalism and huge wealth transfer from state assets to private ownership. India may not like hearing it, but in certain sectors, its institutions are too weak to face off against corporate interests.

India is US$1 trillion economy. Simplistically, each US$10 billion project will add one more percent to the Indian GDP. There is a clear policy-bias in ‘growth’ oriented economic system. Bias towards the rich and the powerful – who can swing bigger and more ‘important’ projects.

Why waste time with ‘small’ projects for ‘small’ people  – which will anyway hardly add upto any top-line or bottom-line figures?

The eco-system of small business  |  Cartoonist - Lisa Benson; source & courtesy - cartoonistgroup.com  |  Click for image.

The eco-system of small business | Cartoonist – Lisa Benson; source & courtesy – cartoonistgroup.com | Click for image.

Out of touch

Perceived complacency in the Indian policy establishment may be misplaced. It would do well to remember that

only 12 or 13 countries … have been able to grow at 8 per cent or faster for at least 25 years” of which only four countries (of a reasonable size) have been able to do what India aspires to. What investors are assuming is a done deal is actually extraordinarily rare.

The biggest block is when the establishment loses touch with the people. For Indian instances, look at modern Indian city planning. In each new Indian township, there is always space for an English medium school, always space for a play ground where Western sports can be played, always space for Western style auditoriums, stadiums, theaters, etc. The Indian State is spending huge amounts of money on the Commonwealth Games.

But there is a funds constraint for Indian sports like polo, kabaddi, wrestling, unarmed combat, etc. Why is it that (almost) all the mandis in every city (at least I have lived in) has come up in pre-Independence India. No modern township sets up a mandi. China is the epitome of this economic approach. And India is moving down that road – quite fast.

Why bother about the poor – especially if it is about infrastructure for the poor.

The nature of 'employment' (Cartoon by polyp; courtesy - polyp.org.uk). Click for larger image.

The nature of ’employment’ (Cartoon by polyp; courtesy – polyp.org.uk). Click for larger image.

The usual suspects

The usual prescription for removing inequities centres around jobs – for the poor. Foreign investors, (the writers goes on) are

surprised at the very low levels of political noise around job creation compared to China, where the government has an almost single-point agenda around creating 20 million jobs per annum.

That is because Indian’s are not hot about life-long servitude – but more about enterprise.

The writer cannot see that high quality of Indian enterprise and low noise-levels on job creation are complementary. Indian enterprise, which the toast of the investment world, is precisely because Indian are not enamored with job creation.

After making these two excellent points, the post descends into the usual “Indian democracy slows down India” routine. He then goes onto making the mistake of “small sections of society can seemingly hold back progress and the country to ransom.” What would you do – have an even smaller section of society dictate ‘progress’ to the country? A classic Platonic-Confucian model where a ‘wise’ ruling oligarchy will lead us to prosperity and peace.

Give me some other story!


Four Ways to Fight The Great Recession

February 7, 2009 1 comment

How Big Government and Big Corporations take care of each other – citing ‘public interest.’

Big Corporations fraud ... by Big Government (Cartoon by Mark Lester; source and courtesy - divisionoflabour.com). Click for larger image.

Big Corporations fraud ... by Big Government (Cartoon by Mark Lester; source and courtesy - divisionoflabour.com). Click for larger image.

the government borrow and spend, thereby pulling people out of unemployment and pushing up capacity utilisation to normal levels. There are drawbacks: the subsequent deadweight loss of financing all the extra government debt that has been incurred, and the fear that too rapid a run-up in debt may discourage private investors from building physical assets, which form the tax base for future governments that will have to amortise the extra debt.

But when you have only two tools left, neither of which is perfect for the job, the rational thing is to try both — credit policy and fiscal policy — at the same time. That is what the Obama administration is attempting to do right now. (via Four ways to fight depression- Comments & Analysis-Opinion-The Economic Times).

How about a fifth way, Mr.Delong!

How about reducing the compliance overload on small businesses. Small businesses typically spend between 30%-300% of the profits on compliance. In a country like India, this finally results in either non-compliance or worse, in corruption.

And how about a sixth way!

What about expanding liability, instead of limited liability. While LLCs can have limited repayment liability, they can create unlimited debt – in the way of loans, letters of credit, guarantees, factoring, bonds, bill-discounting, supplier credit, debentures, notes, commercial paper, et al.

I can similarly point out many other ways – which are inconvenient – but then that is what needs to be done. There is economics and there is fraud. With people like Delong & Co. around …

One doesn’t know where economics stops and fraud begins.


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