Why We Shouldn’t Be All That Worried About Rexit

It’s number three on the list now of exits that world can’t stop talking about, behind the two exits that Britain managed from one kind of Euro or the other, but it still is big news here in India: Is Raghuram Rajan leaving the RBI in September the end of civilization as we know it?

 

Short answer: no.

 

Having never met Mr. Rajan, we can’t be sure about this, but we’d bet on he being horrified at the very idea of any single person (including himself) being the sole reason behind an institution’s efficient functioning. The Reserve Bank of India is the apex body when it comes to monetary policy in India, and has been ably served by many individuals in the past and the present, and that is only likely to continue in the future. So no, he leaving the RBI is not the end of civilization as we know it. It’ll be kind of like MS Dhoni leaving the Indian cricket team. Not great news, but not a disaster either.

 

On the other hand (I love counting the number of times we economists use that phrase. You should try it sometime – fun game), that does not mean that Raghuram Rajan leaving the RBI is good news. Especially if there is some truth to the rumour that he had to go because he was not afraid to speak his mind. He, and anybody else, ought to be judged for what they do in their job, and anybody who argues that Mr. Rajan was not good at his job is also likely to think that Grand Masti is good wholesome cinema.

 

On the parameter of doing his job well, Mr. Rajan excelled himself.

Rajan

He was appointed to tame the beast called inflation, and he has managed that in style. This is not the place to go into the details, but whatever steps he took clearly worked. And as he himself mentioned in his statement regarding his decision to not continue as RBI governor, he would have liked to finish working on the agendas he had initiated. From that perspective, he not being around to see the job through is bad news for both the RBI and for India.

 

But it’s not as if we don’t have other people eminently capable of doing the job of being the Governor of the RBI.

 

To go back to the MS Dhoni analogy, sure he can’t be replaced, and it’ll be a sad day when he hangs up his boots. The new keeper (and the new captain) will take a while to kick rear ends as expertly as Dhoni used to, but they have the ability.

 

And that’s our point: it’s bad news, but it ain’t the end of the world.

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Five things Udta Punjab teaches you about economics

First things first: if you haven’t seen the movie yet, you should really go this weekend. Really good performances all round, and Alia Bhatt in particular is in a not-to-be-missed role.

Now, you might think that Udta Punjab is about one thing, and one thing only.

Charlie Sheen Drugs
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But for folks like us, we couldn’t help but take a look at an alternate angle: economics!

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Here are five ways in which you could try and claim that watching the movie was like learning economics in college.

  1.  If you want to build a business empire, choosing a product that has massively inelastic demand really, really helps
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  2. A high volume, high margin business necessarily involves a monopoly. Competition will likely be, well, eliminated.
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  3. Politicians know. And they’ll want their cut. Money talks.*

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  4. Truly effective reform of anything, anywhere can’t happen unless it begins from within. That applies to this movie, to people’s movements, or to countrywide reforms. Top down approaches tend to not work.

    inner peace
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  5. And finally, you’d think people would have figured this out by now, but if it needs to be said, we’ll say it: suppressing censorship never works.

    obviously
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*Yeah, ok, you didn’t need to watch this movie to know that.

 

Why is your Android phone never up to date? 

If you own an Android phone, it ain’t running the latest and greatest version of Android. What I just said is almost certainly true, because as of June 2016, just about 10% of all Android users were on Android M. It’s been a year since M was launched, they’re already out with a preview version of N, and yet only 1 in 10 users are anywhere close to up to date.

Why should this be so? Why haven’t all phones updated to the latest version? It’s presumably better, more stable, packed with the newest features and what not, and well, I want! So gimme already!

The reason your phone hasn’t updated to the latest version, and probably won’t update at all after a couple of years is because your phone manufacturer finds updating your software a very expensive, time consuming affair. And the reason it is expensive is because the software on your phone has been customized by your manufacturer. It isn’t what Google calls “stock Android”.

Stock Android is easier to update because there hasn’t been that much tinkering around done with it. But with every layer of customization (TouchWiz by Samsung, Sense UI by HTC and so on), you add a level of complexity that makes software updates more difficult to manage.

So why customize in the first place, dammit? Two words: product diversification.

Essentially, your phone manufacturer wants you to think that the phone you just purchased is like no other in the market. And all phone nowadays come with more or less the same features at a price point: you know that at the 15,000 rupee mark you’re going to get so much memory, such and such camera, this chipset, that screen definition etc. So what’s different: unique version of Android!

It’s like a car that’s priced around 5 lakh rupees. Since you, I and everybody else knows more or less what to expect, the salesman is going to try and convince us that the extra cup holder at the back is the one unique feature that should totally make us buy his car. TV’s that have OLED panels, washing powders that have active atoms, water that has more oxygen (that one’s my favorite, by the way. Screw chemistry!) – these are all examples of companies trying to convince you that this is the product you’ve been waiting for all your life.

So why the need for product diversification? Because “itna paisa mein itna ich milenga”. You’re not willing to pay more, as a consumer, for a product that other companies offer you at a lesser rate. So build the same thing as your competition, but try and convince the consumer that it’s different.

That’s product diversification, and it explains why your phone will almost never be up to date. So why build the same thing as your competition? Two words: perfect competition. And that’s what we’ll talk about in our next post!

Housing prices decoded

In the previous post, we learnt about how governments sometimes have a say in what the price of a particular good is eventually going to be. However, in the case of other goods simple market forces determine the price.

Market forces refer to the forces of supply and demand, which we spoke about in the previous post. In this post, we’re going to speak about how those forces actually work in practice.

Most of us have in reading for a while about how real estate prices in some (but not all!) parts of the country have either been flat or falling. Now, in a nation of 1.3 billion people, less than half of whom stay in cities, that doesn’t really make sense. India’s growing steadily richer, more people are moving to the cities, and so more people should demand housing. More demand = higher price, right?

Well, most of the times, yes. But it turns out that in certain parts of India (parts of Pune, Gurgaon, Noida and Bangalore are good examples right now) many more apartments are for sale than there are buyers right now. And in particular, it turns out, there are many more “luxury” apartments for sale than there are buyers. So yes, there is strong demand, but there is stronger supply.

So apartments remain unsold, and that results in the kind of gimmicks and price discounts that you see builders resorting to these days. How do such situations tend to resolve themselves? Well, in any one of three ways: either builders reduce the price to entice more buyers to come into the market, or over time, more buyers enter the market in any case, or both.

This process isn’t always smooth of course – but that’s part and parcel of living in the real world. The real lesson of this blog post is actually quite simple: a change in the price of a particular commodity could be because of changes in supply, or changes in demand, or both.

And since real markets are always reacting to new information and since buyers and sellers are always adjusting to new information on a real time basis, it becomes quite difficult to figure out whether the price change is only due to supply or demand. When you add the government to the mix, as in the previous post, the situation becomes very messy indeed.

But that’s what makes economics so fascinating! Teasing out these effects (increased supply, reduced demand, government interventions) and therefore reasoning out your best response as a producer or consumer is an endlessly fascinating game that, if played well, can end up enriching you quite considerably. Try thinking about other markets this way: cellphones, college fees, the price of tur daal – and see where you go with your analysis.

Supply, demand… or both?

Who decides the price of petrol?

It doesn’t matter when you’re reading this article. You’re likely pretty pissed because the government has gone and raised the price of petrol again. Or you’re pissed because crude oil prices are low (so you hear), but the government hasn’t reduced the price of petrol just yet. One way or the other, you’re pissed.

In this blog post, we’re going to unravel the mysteries of the pricing of petrol. What “should” the price of petrol be? How is this price “arrived at”? And finally, is everything priced the same way as petrol?

The price of anything is really dependent on two things. How much of that thing is the market willing to supply (and sellers will want to sell more if the price is high and rising), and how much is the market willing to demand (and buyers will want to sell more if the price if low and falling).

The price of a particular thing is simply the point at which these two factors (supply and demand) happily coexist. So if the price of petrol is too low, sellers don’t see the benefit of going through the whole routine of drilling for oil, extracting oil, refining oil and transporting oil. If the price is too high, you’re not going to want to tank up just so you can go on a weekend trip out of town. And so the price settles at a level that allows for happy coexistence of supply side factors and demand side factors.

Or at least, that’s how it is supposed to happen in theory. What happens in practice, here in India, is that the government decides what the price of petrol should be, on the basis of primarily one factor: on the price at which we import crude oil from abroad. The higher the import price, the higher the likely price of petrol.

What complicates the issue is the fact that the pricing of petrol is seen as such a politically sensitive issue. Keep it too high, and governments might lose the next election – and which is why governments in India like to meddle in the pricing of petrol, and have sometimes kept it artificially low in the past.

However, artificially managed prices have a nasty way of blowing up in your face. The folks you import from aren’t going to offer you a discount just because you are selling petrol cheaply. In other words, if the government is buying at a high price and selling at a low price, it must make up the difference by paying for this subsidy.

How high is this subsidy in India’s case? Well just this year, we’re slated to spend about twenty-six thousand crores on our petroleum subsidy. Fun challenge: try writing that number down, commas and all.

And that’s just this year! The government’s been subsidizing petrol for years! So, in a nutshell: the government decides the price of petrol in India, and does so for political reasons. But the price of those decisions, at the end of the day, must still be accounted for.

In the next post, we’ll look at how the price of other things materializes. Real estate, for example – that’s a good place to start.

In the meantime, let us know what you think by dropping a comment below.

Wrapping Your Head Around Brexit

Everybody and their naani knows that Britain’s voted to leave the European Union. Everybody also knows that most people think this was a bad thing. This blog post attempts to explain why most people think this was a bad thing.

Three questions we need to answer in order to make sense of this particular brouhaha. One, what exactly is the European Union? Second, why exactly does Britain want to leave it? Third, from an Indian perspective: what my father goes?

First question ka jawaab: The European Union is an association of countries that try to pretend as if they’re really one big country. They all have a common currency, exactly the same way the states of Maharashtra and Orissa have a common currency, along with all the other states in India.

They also allow capital to move freely across their countries. Remember how Mr. Tata was able to move his Nano factory from West Bengal to Gujarat? In theory, the European Union makes it easy to move capital from Austria to France. They also allow labor to move freely across their countries. Notwithstanding Mr. Raj Thackeray and his attempts, most Indians are free to move  and work wherever they want across the country, and in principle, Europe was supposed to be the same thing.

However, and this is the fatal flaw in the way the European Union is structured, it’s not a fiscal union. Do you know, for example, what percentage of your income taxes went towards the construction of a road between Kanpur and Lucknow? No, you don’t, and nor should you know. We’re one country, and one of the reasons we elect our government is precisely because we expect those guys to handle issues like that. But German citizens care deeply about whether their income taxes are being used to fund unemployment benefits for Greek citizens. Remember how we said the EU is an association of countries that try to pretend as if they’re one country? Well, unfortunately it has turned out to be a bit of a halfway job. They’re more than separate countries, but less than a unified nation.

And that’s caused problems.

Second, why does Britain want to say sayonara. Well, the people who were in support of Brexit in Britain give out a lot of reasons, but it ultimately boils down to three. One, the Mr. Raj Thackeray effect. They really don’t want “other” people to come in to their nation. And that makes no sense for the same reason in EU as it does in India. Second, they think that Britain and its money should be separate, and it shouldn’t have to give any money to the Europeans. And third, they think Britain’s kinda culturally separate and removed from the mess that is the European Union today and don’t want anything to do with it.

If you ask us though, we get the impression it’s mostly reason no. 1.

Third, why should we care? Today, in the sixteenth year of the twenty-first century, the global economy is like a single organism. If Brexit is going to cause a slowdown in business between themselves and Europe (and you can bet that is going to happen), then you can expect our business with both Britain and Europe to suffer. Here’s a useful way to think about it: if the world was like the human body, it’s liver is now doing really badly. Saying that shouldn’t affect our overall health just doesn’t make sense, now does it?

How much will it affect us, and for how long, and when will the liver get better are all questions the patient really wants to get answers for – and we’re about to find out over time.

I don’t know about you, but hospital waiting rooms always kinda depress me.

Deciphering India’s GDP

What is India’s GDP and why should I care?

As we discussed in our previous post, the reason you should care about India’s GDP is because it is a good way to get a quick, one-number estimate about how “well” India is doing. This post is about answering the first part of the question posed above: what is India’s GDP?

First things first: that’s an incorrect question. What people really mean when they ask that question is: what is India’s GDP growth rate. That last phrase is often missing, which is what can (and often does) cause confusion.

GDP is what you, I and literally millions of Indians produced in one time period. GDP growth rate is how much more did we produce this year, relative to last year. When we say that the Indian economy grew at 7.5% last year, we mean we produced 7.5% more of goods and services this year when compared to last year.

Why is that a good thing? Well, producing more stuff usually means selling more stuff. Selling more stuff means more of us earned more this year compared to last year – and since when was that a bad thing, huh?

Also, producing more stuff implies requiring more people to produce said stuff, which means (probably) more people were employed this year compared to last year. And that’s also a good thing, right?

So: a higher number for our GDP growth rate means richer Indians, and more jobs all round. That’s why economists, policy makers and the media watch the GDP number so closely – its because this number tells us whether India is getting richer over time, and gives us a rough idea about whether more Indians are with jobs this year compared to the previous year.

Where should you go to check out India’s GDP growth rate? Well, there are many sources out there, but the safest is go to the source: the Ministry of Statistics and Programme Implementation. (Fun challenge: spend the next five minutes coming up with a name that bores you more than this one did)

On the home page, under a column titled “Latest News”, look for a banner heading that runs along the lines of “Provisional Estimates of Annual/Quarterly Estimates of GDP”. Clicking on that link opens up a PDF, in which the growth rates of GDP will be given. 2016-06-20 (1).png

Be careful! You should look for the GDP growth rates in constant prices, not current ones. In a later post, we’ll explain what the difference between the two is, but for now, do note that its constant prices that matter, not current.

As you can see in the table to the right, we grew at about 7.6% for the period 1st April to 31st March 2016.

And that’s a (very!) quick introduction to GDP. We’ve hopefully managed to convince you of the need to know a country’s GDP growth rate, and where to find it in India’s case. In posts to come, we’ll talk much more about GDP. For now, we’ll do a follow-up post on our Facebook page about links relevant to this topic that you might want to check out. Let us know what you think by dropping us a note in the comments below!