Tag: gst

Bob and Ronald Come to India, Part II

The Story So Far

Today’s post is a continuation of yesterday’s. We learnt in yesterday’s post about the problems with the upcoming delimitation exercise, and how the Southern States feel that they contribute “too much” to Union government taxes, and get “too little” in return. The reason the phrases in the previous sentence are in quotation marks is because there are major differences of opinion about whether this is the case or not.

Asking a politician about this question is a useless endeavor, at least in public, because they’re optimizing for answering the question in a way that maximizes their current electoral benefits. If it is more important (for the moment) to win state elections, they will say that it is true that states doth give too much. If it is more important (for the moment) to win national elections, they will say it is true that the Union government doth take too little. This is not a criticism of politicians, please note. It is an application of one of the simplest principles in economics: incentives matter.

And by the way, for those of you thinking I’m throwing shade at a particular political party, perish the thought. All politicians in all countries have done this in the past, regardless of their ideology, they’re doing it now, and they’ll do it in the future. You and I would do it too, in their place, for those have become the rules of that game. So it goes.

Well, can us economists do a better job? How do economists think of the answer to the question of how much is the “correct” amount to be transferred from a given state to the Union government? How do economists think of the answer to the next obvious question – how to think through vertical and horizontal devolution?

In today’s blogpost, I am going to try and answer this question, but in terms of frameworks, not in terms of data. My job today is to help you develop a framework about thinking through this issue. Once you have a framework, the data tends to make much more sense – or so some economists hope. I’m one of them.

Let’s begin!

Trade is a non-zero sum game

You’ve heard me say this before, and you’ll hear me say it again. Today is a good day to reiterate this point – it is as important as the point “incentives matter”:

Trade is a non-zero sum game

People just don’t get this point. When two parties engage in trade voluntarily, both parties are better off. When I pay the chai-tapri owner ten rupees for a cutting chai, he’s grateful for the ten rupees I give him, and the lord knows I’m grateful for the chai I get in return. This is equally true for an overpriced cup of Americano at Starbucks. Sure it’s over-priced, over-roasted and over the top, but you know what you don’t see outside Starbucks? You don’t see Starbucks baristas kidnapping people and then forcing them to buy coffee (venti, naturally). It is voluntary trade, and the reason folks step in to a Starbucks is because they want to buy that coffee. The trade is worth it to them.

And that simple idea underpins modern economics. Why, you might say it defines who we are as a species!

So I would urge you to think of the “problem” of the Southern states as a trade between the states and the Union government. We’ve heard from the Southern states side of this debate – they think they give too much to the Union. Well, if this is a trade, it is worth asking the obvious question.

What do the Southern states get in return?

There are two questions at play here, not just one. And it is important to think through both of these questions:

  1. What do the Southern states get in return from the Union government?
  2. What do the Southern states get in return by being a part of a Union?

Think back to the young man who plaintively called up his uncle from yesterday’s post. Everybody in that young man’s house contributes half their salary to run the house, and our young friend feels hard done by, because he earns the most (and therefore contributes the most). Worse, once the money is pooled in, he doesn’t get a bigger say in how it is to be spent – that decision is purely democratic. So he feels he pays in too much, doesn’t get enough in return, and doesn’t have enough of a say in how the money is spent.

But as an economist, I would urge him to be more holistic in his thinking. Young man, I might harrumph in his direction, should you not be accounting for the pleasure of having your friends stay with you? The emotional benefits? The security you get by staying together? The ability to call on the help of near and dear ones when the time arises? You may still feel hard done by, and maybe you should, that’s not for me to say – but I would urge you to do a complete cost benefit analysis.

The Cost Benefit Analysis Framework

Weird tangent alert – you’re going to feel I’ve flown off the handle here for a bit, but I’ll circle the discussion back to the topic at hand, I promise. But for now, let’s talk migration. Say you are an unemployed youth in a rural part of our country, with not much education. Should you migrate to the city in search of a job?

Here’s a framework to help you think through the answer to this question:

Source: https://ucsbecon114help.wordpress.com/2013/06/10/todaro-migration-model/


It looks like a pretty complicated picture the first time you take a glance at it, but all that it is really saying is this:

  1. How much will you earn by living in the city?
  2. How much do you earn now?
  3. How much will it cost to be in the city?
  4. How much does it cost to stay where you are?
  5. Not just economic costs and benefits, mind you! Note the boxes that talk about psychic costs and psychic returns!

Net all of this out, and if you’re in the black, move to the city. If you’re in the red, stay where you are. Easy-peasy.

It never is that easy, of course, and cost-benefit lists aren’t always the answer. But us economists will always give poor ol’ Ross a sympathetic pat on the shoulder. He was wrong, of course, but still. Brownie points for using a framework (and god help you).

What framework can we use?

So, OK, here is where we are now:

  1. Think of the delimitation and devolution exercise as a trade between the states and the Union government.
  2. The Southern states are quite clear about the fact that they think they’re contributing too much.
  3. But they should also think about what they’re getting in return from the Union government, and by being a part of the Union.
  4. A cost-benefit analysis will help, as will a cost-benefit framework.

So let’s go find a framework!

And what framework am I going to use? I’m going to call upon the ideas of the great Canadian economist, Robert Mundell (and those of Peter Kenen). A very accessible discussion of these ideas is to be found in a lovely little essay by Paul Krugman, called Revenge of the Optimum Currency Area. The title is a play on important work done by Robert Mundell in the late 1950’s on the topic of Optimum Currency Areas (OCA’s).

What are OCA’s? Have you ever wondered why, say, all SAARC nations don’t have the same currency? If you are going to break out in spots and rashes at the thought of having anything at all to do with Pakistan, calm down, and think of why all the ASEAN nations don’t have a single currency. And then think of how and why all of the states in the United States of America chose to have a common currency.

What are the conditions, Robert Mundell was asking, under which having a common currency across different political jurisdictions is optimal. And (very) long story short, Paul Krugman’s take on the issue, courtesy Mundell and Kenen’s ideas, is this:

It makes sense to have the same currency (a monetary union) across political jurisdictions if:

  1. These jurisdictions have labor mobility
  2. These jurisdictions have capital mobility
  3. These jurisdictions have a fiscal union

What if we “flip” this around? For those of you familiar with linear programming, think of the “dual”. It is not an exact analogy, I’ll be the first to admit, but try this on for size:

It makes sense to bear the costs of being in a fiscal union across political jurisdictions if:

  1. These jurisdictions have labor mobility that proves to be beneficial
  2. These jurisdictions have capital mobility that proves to be beneficial
  3. These jurisdictions have a monetary union that proves to be beneficial

That is, so long as the net benefits that accrue from having labor mobility, capital mobility and being in a monetary union are more than the net costs of being in a fiscal union, it is more than worth it.

(This is worth emphasizing again: net benefits and costs. Sure there are costs to being in a fiscal union, but there are benefits too!)

Labor mobility means being able to count upon (freely!) accessing surplus labor from other parts of the country. Capital mobility means ditto, but for capital, not labor. And a monetary union is, of course, having the same currency across all states. What is the net benefit from all of these? So long as this is more than whatever the (actual and perceived) costs of being in a fiscal union are, well, all izz well.

But kahaani abhi baaki hai mere dost!

Heresy for an economist, but counting is problematic

My head hurts just thinking of the number of academic papers that can be churned out in terms of trying to quantify the previous section. We can keep the paper mills churning for years on end, and LinkedIn will drown in a deluge of “Delighted to share that our paper on…” messages.

But I would say that such exercises will ultimately be futile. Why, you ask? Here’s Paul Krugman’s take on this:

Now, what we need to say right away is that this “weighing” takes place only in a qualitative sense: at this point nobody says that the benefits of joining the euro are x percent of GDP, the costs y, and x > y, so the euro it is. Instead, it is more along the lines of arguing that Florida is a better candidate for membership in the dollar zone than Spain is a candidate for membership in the euro zone. This does not necessarily say that Spain made a mistake by joining the euro—nor does it necessarily refute the argument that Florida would be better off with its own currency! But the theory does at least give us some insight into the trade-offs.

https://www.journals.uchicago.edu/doi/full/10.1086/669188#

And my own take is this: remember psychic costs and benefits from our migration example? Drill this into your head – just because these cannot meaningfully be measured doesn’t mean they don’t exist!

What are the psychic benefits of being in a monetary and a fiscal union? In English, if you prefer (and you should, because economics is a most unpoetic* language):

What are the psychic benefits of being part of a nation?

Equally, because being analytical requires being evenhanded, what are the psychic costs of being part of a nation? Factoring in the answers to these questions is impossible very, very difficult. So very impossible difficult, in fact, that I would be of the opinion that it cannot and should not be done.

So how to think of a solution?

Ronald, the OG, will tell us all about it on the morrow.

*It’s a word, and I will not be taking any questions.

Bob and Ronald Come to India, Part I

The Penny Drops

Imagine this:

Let’s say a young man calls you up. Could be your cousin, or your nephew.

I’ve got a problem, he says.

Temme, you say.

Well, it’s like this, he says. I work in an MNC in Bangalore, and make a lot of money.

Great, you say. What’s the problem?

Well, I stay with roommates, and it’s complicated. We were all together in college, and we’d sworn while in college that we’d be roommates. Problem is, all my friends earn nowhere near as much as I do. We’d sworn to live as one big happy family, so we’re all staying together, and that’s awesome. But…

Yeah, you say. But what?

Well, our motto was and is “All for one and one for all”. The problem is that what that ends up meaning is I contribute a lot to run our home, because I earn a lot more than the others. My contribution goes into a common “kitty”, proportionate to how much I earn. We all contribute half of our salary to run our home, but because I earn much more than the others, I contribute much more.

So what’s the problem, you yawn. If you contribute more, you should also get a bigger say in how that money is to be spent, no?

But that’s the problem!, comes the response from the other side. How the money is to be spent is not up to me. There, the principle is one person, one vote.

Wait a minute, you say. When it comes to pooling in the money, it is a function of what you earn. But when it comes to distributing the money, it is a function instead of how many of you are there?

Exactly, says the young, troubled whippersnapper. Now what?

If you contribute more, should you (or should you not) get a greater say in how your contribution is to be spent? And if not, should you be contributing more in the first place?

What is fair, what is just, what is desirable, and what is best? And for whom?

I don’t know if you’ve noticed, but there has been a bit of a kerfuffle recently about southern states saying it’s all very unfair. What exactly is unfair, you ask? Buckle up, because this is going to be a long ride.

The Background

Like I said, this is going to be a long story, but because this is one of the most important things we have to tackle as a country, let’s set about learning more about it. Let’s begin with the 42nd Amendment to the Indian Constitution:

Up until 1976, after every Indian Census the seats of Lok Sabha, Rajya Sabha and State legislative assemblies of India were re-distributed respectively throughout the country so as to have equal population representation from every seat. The apportionment was done thrice as per 1951, 1961 and 1971 population census. However, during The Emergency, through Forty-second Amendment the government froze the total Parliamentary and Assembly seats in each state till 2001 Census. This was done, mainly, due to wide discrepancies in family planning among the states. Thus, it gives time to states with higher fertility rates to implement family planning to bring the fertility rates down.

Even though the boundaries of constituencies were altered in 2001 to equate population among the parliamentary and assembly seats; the number of Lok Sabha seats that each state has and those of legislative assemblies has remained unaltered since 1971 census and may only be changed after 2026 as the constitution was again amended (84th amendment to Indian Constitution) in 2002 to continue the freeze on the total number of seats in each state till 2026. This was mainly done as states which had implemented family planning widely like Kerala, Tamil Nadu and Punjab would stand to lose many parliamentary seats representation and states with poor family planning programs and higher fertility rates like Uttar Pradesh, Bihar and Rajasthan would gain many of the seats transferred from better-performing states.

https://en.wikipedia.org/wiki/Delimitation_Commission_of_India

What does this mean, and why does it matter?

Let’s talk about a Lok Sabha constituency from Tamil Nadu, and a Lok Sabha constituency from Uttar Pradesh. If the Lok Sabha Member of Parliament (MP) from Tamil Nadu represents a 100 people (let’s assume this), how many people should the Member of Parliament from UP represent?

Should it be around the same number, 100? Is a little bit more OK? Is a lot more OK? At what stage do you say “whoa, this is too much!”? Let’s rephrase the question: should each state in our country send the same number of Members of Parliament to the Lok Sabha, or should larger states send a higher number of MPs? Larger defined in terms of total population, please note.

And one of the tenets of democracy is that each Member of Parliament should represent roughly the same number of people. We can’t have – or shouldn’t have, at any rate – a very large number of MPs representing very few people. Nor should we have a very small number of MPs representing very many people.

Malapportionment from 1971-2021 (based on census data till 2011 and author’s calculation thereafter) Source: Shruti Rajagopalan’s essay

This chart has been taken from Shruti Rajagopalan’s excellent essay, called Demography, Delimitation and Democracy. And what is shows us is one way to answer the question I have raised above. By her calculations, when the delimitation freeze ends*, Uttar Pradesh will have 12 to 13 seats short of what their population should merit. Or put another way, Tamil Nadu will likely have 11 seats more than what their population should merit.

Here’s another way of thinking about this: if a state has (say) x% of a country’s population, it should have (say) y seats in the Lok Sabha. If that be so, another state that has 2x% of a country’s population should have 2y seats in the Lok Sabha.

Why? Because otherwise, the second state will have a smaller number of MPs arguing for it in the Lok Sabha – smaller relative to the number of people in that state. And the first state, of course, will have a larger number of MPs representing that state in the Lok Sabha – a larger number relative to the number of people in that state.

As Shruti puts it in her essay:

One aspect of the “one person, one vote” concept, as envisioned by Ambedkar, was about granting every single Indian over 18 the right to vote in elections. India has adopted universal adult franchise since the birth of the republic in 1950. But to give the principle of “one person, one vote” any meaning, constituency sizes must be roughly equal. The random circumstance of being born in Bihar means that the constituency size is about 3.1 million, but if the same person is born in or moves to Kerala, the value of their vote increases because the constituency size is 1.75 million.

https://srajagopalan.substack.com/p/demography-delimitation-and-democracy

So in essence, each state should send a proportionate number of MPs to the Lok Sabha. And the number of these MPs should be proportionate to what? To the percentage share of the total population in each state. That way, we can make sure that each state gets proportionate representation in the Lok Sabha. Right now, there is an imbalance – the people of Tamil Nadu are over-represented, and the people of Uttar Pradesh are under-represented.

Of course, Tamil Nadu and Uttar Pradesh are used to represent, generally speaking, states in the less populous south and the more populous north respectively.

What is the scale of the problem?

Right, now that we have established this, let’s ask the next obvious question: how many people are there in each state in our country? Here’s one way to answer that question:

https://www.visualcapitalist.com/population-of-india-compared-with-countries/

Here’s another way of putting it – the Indian Prime Minister is in effect the Prime Minister of the populations of all of these countries put together.

You know how we keep saying that hey, we have one-sixth of the population of the world in our country, and it is therefore unfair that we don’t have a permanent seat on the UN Security Council?

Uttar Pradesh can say the same thing (kinda – you know what I mean), but at the national level.

So What Are We Waiting For?

Well, ok then, a layperson might say. All this is good to know, and er, carry on and all that – but why don’t we just go ahead and, you know, change the distribution of the seats in the current Lok Sabha? If UP gets to send 84 MPs to the Lok Sabha, up that number. And If Tamil Nadu gets to send 39 MPs, well, adjust that number downwards. What’s the problem?

Well, the endowment effect, for starters. But more importantly, it’s all well and good to talk about demography and all that, but this is, after all econforeverybody. Sooner or later, rokda must enter the building.

How does this country of ours function when it comes to finances? Well, back when we got independence, we decided that we would organize finance in the following way – states would get to levy some taxes, and they could spend that tax revenue on stuff they were responsible for, such as health, among other things. We call this Own Tax Revenue. The Union government would get to levy some taxes, and part of this revenue would be kept for the Union Government’s expenses (army related expenditure, for example, among other things). And there’s other complications, but we’ll skip that part for now.

But ah, there is a small part of one of the sentences in that last paragraph that hides a world of pain. Note that I said “part of this revenue would be kept for the Union government”. Now, the part that is not kept for the Union Government – how is it distributed to the states?

For example, let’s say the Union government collects 100 rupees in taxes.** How much should it keep with itself? Should it keep 40 with itself and give the rest to the states? Or should it keep 80 with itself and give 20 to the states? Or some other number? How do we decide? How should we decide?

Dr. Arvind Panagariya and his band of merry men and women shall answer this question for us in the months to come, as mandated by the law. They shall answer two questions (and do a whole lot of other things too, of course!)

  1. How much should the Union government keep with itself?
  2. Of what can be distributed to the states, which state should get how much, and why?

It is that second question that is tricky. Oh so very tricky. And figuring out how best to answer it is, as it turns out, what we’re all waiting for.

So How Do We Decide Which State Should Get How Much?

Of all of the taxes collected by the Union government, we first have to decide the split between what the Union Government keeps for itself and what is given to the states. This is called Vertical Devolution.

Then, of what is given to the states, we have to decide how much each state gets. This is called Horizontal Devolution.

The predecessors to Dr. Panagariya’s merry band came up with this formula:

https://fincomindia.nic.in/asset/pdf/commission-reports/XVFC_202021%20Report_English_Web.pdf, p. 29

The higher the population in a state, the more it should get when it comes to horizontal devolution. How important is this idea? It gets 15% weightage.

The larger the physical area of a state, the more it should get (15% weightage)

The greater the forest cover in a state, the more it should get (15%)

The poorer a state compared to average incomes in our country, the more it should get (45%)

The better a state at lowering it’s Total Fertility Ratio (demographic performance) the more it should get (12.5%).

The better it is at mopping up taxes, the more it should get (2.5%).

So while other factors apply, as they should, the primary consideration is this: the poorer a state, the more help it should get.

“Well, of course” you might say, channeling your inner Mahi.

And your inner Mahi would be right, of course. This is how it should be. Except, as our little story at the start of this blogpost helps us understand, it is a bit more complicated than that.

This is a multi-part series, to be continued! In later posts, we shall learn about how to think about this problem from an economic perspective, and how to think therefore about resolving the problem. But this point is worth emphasizing: if you are an Indian citizen, you should be thinking long and hard about this issue.

*Quite when the delimitation freeze will end is a matter of some conjecture. As Shruti says in her blogpost: “The Eighty-Fourth Amendment extended the 1971 census freeze on the total number of seats per state in the Lok Sabha/state legislatures until the publication of the census figures after 2026 (which is expected in 2031, unless the 2021 census is delayed so much that it is only published in 2026).”. I’ll go a step further and say that there is no guarantee, of course, that the 2031 census will be conducted as per schedule.

** How it collects these taxes is a story involving VAT, MODVAT, CENVAT, GST and other horrific acronyms. As with other inconvenient acronyms (such as, say, CRS) so with these acronyms in this blogpost. We shall simply assume that they don’t exist for now.

Is The Indian Economy Slowing Down?

That is a bit of a misleading title, because the focus of this blogpost isn’t about answering the question. It is, rather, about how to go about answering this question.

If you are a student new to economics, and someone were to ask you the question that is the title of this blogpost, how would you go about answering this question?

  1. Note that GDP data comes with a lag of about two months. You really should be looking at more recent data. But that being said, a good place to begin will be by tracking India’s quarterly GDP growth for the past (say) twelve quarters or so. This is actually bad advice for this specific time period, because of the pandemic, but under usual circumstances, not a bad place to start.
  2. Take a look at electricity generation numbers for the country. Check if there has been an increase, and if so, by how much.
  3. Check the trends in GST collections.
  4. Check trends in freight movement.
  5. Take a look at the Index of Industrial Production data.
  6. Take a look at India’s foreign trade data. Note that I have not used the word trend for these two points. That’s not because trends aren’t important (they are!) but because I want to lament the fact that India – the country that makes software for literally the entire world – isn’t able to come up with better ways to represent its own government’s data. Why does this not improve?!
  7. Take a look at the “Quarterly Financials of Listed Companies” on the CMIE website. Take a look at the trends for Net Profits and the PAT margins. This is usually on the right hand side of the website, you’ll have to scroll down a bit.
  8. Use the same website to take a look at the employment data.
  9. Take a look at the inflation data.
  10. Take a look at the bank credit data.
  11. Finally, note that this list is by no means complete. Other economists might well have more indicators they would like to recommend, and please don’t hesitate to show this list to them, and ask what they might like to include.
  12. Then, and only then, should you start to read opinion pieces about how well/badly the Indian economy is doing. See if your assessment matches with what is written or being said by others. If it doesn’t, ask yourself why. Check if you should look at other data sources, or other opinion pieces.
  13. But as an economist, remember: data comes first.

The Business of Beer

… happens to be the title of a lovely little essay on just this very topic.

A short read, it is worth your time if you happen to be a student of economics because of the following reasons:

  1. Learn how who gets to tax what and why is (and has always been) a political question rather than an economic one.
  2. Learn how what should be taxed is determined, and ask how this might have evolved over the ages.
  3. Imagine learning about macroeconomics while learning about beer. What better way to start, eh?
  4. Got nothing to do with economics, but I learnt about the etymology of the word spinster.
  5. The Insider Outsider model – heard of it? Read the Wiki article, and ask yourself whether this fits (and if not, why not?)
  6. Should alcohol be subsumed under the GST?
  7. Centralisation of anything isn’t something that proceeds in linear fashion over time. What lessons should we be learning from this today?
  8. The petty tyranny of local inspectors ain’t new. That’s not a new finding, to be clear, but it usually comes as a surprise to newbies in the field of econ history.
  9. Change is important when it comes to society, but the rapidity of this change is rarely welcomed. This is true for individuals, organizations, institutions and society. Trust me on this.
  10. The footnotes have some excellent books to add to your infinitely long reading list.

A Summer Spent Doing Macroeconomics

Say you’re a student, and you’ve just finished learning a fair bit about macroeconomics. You’ve read and not understood Keynes, you’ve read and think you’ve understood Friedman, and you don’t have the faintest idea what folks in macro have been up to since Robert Lucas.

OK, all that is fine, but how should a budding macroeconomist spend her summer this year?

You could do a lot worse than reading this article, and asking yourself some simple questions.

Such as, do I hear you say? Read on!

Google mobility, for instance, is down more than 40 per cent since the start of April and currently at levels seen a year ago, when the national lockdown was in effect. This dynamic is also visible in the cross-section: states that forced down mobility more strongly have, in general, also seen a larger drop in positivity rates.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is Google Mobility? What does the data for India look like? How does this data correlate with statewise Covid-19 numbers? Can I create simple tables and charts in, say, Google Sheets that show a link between the two? And write up a blog about how I did it? Or maybe create YouTube tutorials that show how I did it?

That said, there’s growing evidence the impact will not be trivial even if not of the same scale as the first wave. By the middle of May, power demand was down 13 per cent and vehicle registrations were down 70 per cent compared to the start of the quarter, while e-way bills in the first half of the month were at 40 per cent of where they should be. A broader composite index would suggest activity is tracking a 6-7 per cent sequential decline this quarter and, while this is much shallower than the 25 per cent sequential contraction witnessed last year this time, the fact that it comes on the heels of the first shock, and can potentially trigger more hysteresis, remains a source of concern.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Where does the data for power demand come from? Where does the data for vehicle registration come from? Where does GST data come from? What does the phrase “tracking a 6-7 percent sequential decline” mean? What is hysteresis?

Household income uncertainty and precautionary savings can be expected to rise. Even before the second wave, households had signalled caution about future spending (manifested in the RBI Consumer Confidence Survey) likely reflecting both an income hit and a precautionary savings motive. This behaviour is consistent with labour market dynamics wherein the unemployment rate, once adjusted for reduced labour force participation, had increased meaningfully even before the second wave.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is the RBI Consumer Confidence Survey? How is it calculated (see Annexure A in this document)? Where do we get unemployment data from?

Private investment could also take time to pick up. Even before the second wave, utilisation rates were in the mid-60 per cent range, much lower than needed to jumpstart investment.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is OBICUS? It stands for Order Book, Inventory and Capacity Utilization Survey. How else do we track capacity utilization?

We have previously found a strong elasticity of India’s exports to global growth and, if that holds, this should drive a strong export rebound in India. Some of this is already visible in the data with manufacturing exports surging in recent months, and currently 18 per cent (in nominal dollar terms) above pre-pandemic levels.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Where might that paper/research be, the one that talks about the strong elasticity of India’s exports to global growth? What does it tell us? What is different between the time that paper was written and today? Is that to India’s advantage or not? How do we tell?

If crude prices average close to $70 this fiscal year, as is expected, that would constitute a 50 per cent increase over last year and serve as a negative terms of trade shock that impinges on household purchasing power and firm margins — a process already underway.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

EIA? Or something else? Should we take lagged data? If yes, with what lag? If no, why not? Where do we get information on firm margins? Bloomberg/Reuters? If yes, do we have access to a terminal? If no, whom do we ask for a favor?

When all is said and done, the completeness of an economy’s recovery from Covid-19 — and therefore the level of scarring — is assessed by comparing its post-Covid-19 path of the level of GDP with the path forecasted pre-Covid-19. If the aforementioned forecasts fructify, the level of quarterly GDP at the end of this year would be about almost 8 per cent below the level forecasted pre-pandemic. To be sure, India will not be the only emerging market to be below its pre-pandemic path. In fact, among the large economies, only the US and China will surpass it. But that said, an 8 per cent shortfall is meaningful.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is the level of GDP, and how is it different from the growth rate of GDP? Which should one use, and how does the answer change depending on the context? Where do we get data on GDP of all countries at one time? Which one of these measures should we use for comparison, and why?

Macro is hard, and in many different ways. Understanding the theory is hard, but piecing together parts of the puzzle from disparate (and at lest in India, gloriously unfriendly) data sources is perhaps harder still. But if you want to “do” macro for a living, being familiar with the answers to these questions is table stakes.

That is, getting familiar with the answers to the questions I have asked here gets you the right to sit at the table. Playing the game better than the others once you’re in is a whole different story. And playing the game means using this data with your knowledge of theory to try and take a stab at the really important questions:

The question, therefore, is how should economic policy respond to this second shock? With fiscal and monetary policy already quite expansive, is there space to respond further? We assess policy options and tradeoffs in a companion piece tomorrow.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Trust me, macro is hard.

Notes on “India’s Footwear Industry: A Reality Check”

Gulzar Natarajan has an excellent, excellent blogpost up on this blog, Urbanomics, titled “India’s Footwear Industry: A Reality Check“. In what follows, I make notes for myself about the post in terms of what it reminds me of, what I did not understand, and additional links or resources I learnt about while reading the post.

  • “The footwear industry makes 2 billion pairs, of which 286 million pairs were exported last year. It employs 2-4 million people, the vast majority as informal and contract labour and/or hired through manpower agencies and at very low salaries in the range of Rs 6000-10000.”
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    Reading more about this helped me land up on a website called worldfootwear.com, and I learnt of the existence of the 2019 World Footwear Yearbook. In 2018, the world manufactured 24.2 billion pairs of footwear, and the industry grows at about 3% a year in normal circumstances – give or take a few points.
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    90% of all shoes manufactured in the world come from Asia. That makes sense, as Asia is responsible for 54% of the world’s demand for footwear on an annual basis.
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    China alone was responsible in the year 2018 for about 70% of the world’s exports.
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    All of these snippets come from this page.
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  • “As a summary, the current state of the Indian footwear industry is characterised by small scale, very low productivity, low automation, stagnant growth, and pervasive informality.”
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    One of the reasons I liked reading this blogpost so much is because while I get to learn a lot about the footwear industry in India, I also get to reflect on how so much of what is true for the footwear industry is also true of other industries in India. The inability to break out of the small scale (about which much more below), the low levels of automation and the pervasive informality are to be seen in almost all industries in India. There is, perhaps, a sociological point to be made about whether the causality runs from the inability to scale to informality or the other way around (or indeed, both!), but we’ll save that for another day.
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  • “The highest value market segment is the mainstream global branded manufacturing in non-leather footwear. But this is a segment that has proved elusive even to the Chinese manufacturers, especially in the global market. It may well be outside the reach of Indian manufacturers, unless some particular brand breaks out due to a combination of exceptional entrepreneurship and even more exceptional good fortune.”
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    As you will learn later on in this blogpost, Gulzar Natarajn seems to be as big a fan of “How Asia Works” as I am, and perhaps a bigger one. One of my favorite questions to ask in class as a consequence of reading that book is this one “Name one globally recognized brand from ASEAN nations”. This applies to India, and to a lesser extent to China as well – that’s basically the point that is being made here. Being a manufacturing and export powerhouse is not the same as building globally recognized brands.
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    This brings to mind both the “manufacturing smile” as well as Peter Thiel’s distinction between technology and globalization. It also raises important questions about what paths India should choose between for the next two decades when it comes to manufacturing policy, but again, more on that later.
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  • “The next best alternatives may be to increase their share of the Indian branded manufacturing segment and become large scale contract manufacturers for global brands. This is the playbook of the Chinese footwear industry.”
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    Have you read Shoe Dog, by Phil Knight? Don’t know who Phil Knight is? Well, have you heard of Nike? Read especially the bits about his travels in Japan, in search of contract manufacturers.
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  • Gulzar Natarajan’s first recommendation when it comes to the footwear industry in India is to be a contract manufacturing hub. Easier said than done! (To be clear, that is not a criticism of the point he makes – it is a reinforcing of his message, and also a reminder to readers that India is not quite ready to this just yet, for a variety of reasons).
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    One of these reasons is actually mentioned in a more recent post by the same author, regarding Vietnam’s recent agreement with Europe about tariffs on Vietnam’s exports.
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    What about India and the EU, you ask?
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    “Negotiations for a comprehensive Free Trade Agreement (FTA) between the EU and India were launched in 2007 and suspended in 2013 due to a gap in the level of ambition between the EU and India.”
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  • The last bullet point was about India making for the world. Gulzar Natarajan goes on to point that we must also think about India making footwear for India.
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    “Any strategy to increase local branded manufacturing to capture this market has to focus on Make for India (and not Make in India for the world). This does not mean skimping on quality, but competing with the imported manufacturers by gradually improving productivity. This can be done only by efficiency gains to cut costs – improving labour productivity, local component manufacturing, greater automation (not full automation, but enough to enhance labour productivity), and economies of scale.”
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    He speaks about each of these four points: improving labor productivity, local component manufacturing, greater automation and economies of scale in his blogpost, click here to read those specific parts of the post.
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  • Gulzar Natarajan speaks about manufacturers having no incentive to train workers:
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    “In order to train the workers, the manufacturers have to incur the cost of trainings as well as bear their salaries. They have no incentive to bear this cost, even if a couple of months trainings can suffice.”
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    Well, maybe so. But this does remind me of an excellent excerpt from one of my favorite books to recommend to students about macroeconomics – Tim Harford’s “The Undercover Economist Strikes Back“
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    The section on Ford and superior wages is especially worth reading. Perhaps I am missing an obvious point (which is all too possible), but I can’t help but wonder why Ford’s strategy cannot work in India – whether on footwear or elsewhere.
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  • “While capital investment subsidies are in general not a very desirable thing, some form of fiscal incentives may be necessary to encourage the smaller and medium sized manufacturers to increase their level of automation. Though targeting and tailoring these subsidies will be challenging, the government could consider a subsidy that is linked to some performance, either exports or on higher productivity growth.”
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    For those of you who have read the book, the reference is unmistakable. And for those of you who haven’t, I’ll say it again: How Asia Works is mandatory reading.
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  • “The Government of India already has specialised institutions on footwear design and leather research. There is a need to have them play a much more proactive role in supporting with supply of trained and quality designers. There may also be a need for an arrangement to access good quality designers at a reasonable cost. An incentive compatible subsidy mechanism may be required here too. This should be complemented with colour and fashion forecasting support.”
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    I actually find myself in disagreement here with Gulzar Natarajan. Reading this post made me aware of the Best Footwear Design and Development Institute (yes, it really exists), but isn’t this an example of government overreach? Facilitating a college like this is one thing, actually having government run it is quite another, no?
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    But the solution is in the quote above: incentive compatible subsidy mechanism. Another recommendation in this regard: please read In The Service of the Republic, by Vijay Kelkar and Ajay Shah. My notes on this book can be found here. Providing subsidies that are designed to keep incentives (preferably for both parties) in mind is a surprisingly powerful idea!
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  • “For sure, the industry will not collapse, but will meander along business as usual. There may even be the occasional mutant success. But there cannot be a sectoral exit out of the current low productivity and stagnation trap.”
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    It is oddly depressing to have Gulzar Natarajan be pessimistic about the growth prospects for this sector, particularly because it is so hard to disagree with him on this account.
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  • He is against tax breaks, particularly because of the inevitable equilibrium in terms of the lobbying that will take place.
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  • “The conventional wisdom in this regard blames poor quality of infrastructure, restrictive labour laws, difficulty in assembling large land parcels, high cost of capital, and pervasive red-tape. These are all, in general, factors of concern.”
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    My favorite book to recommend to students in this regard is Bhagwati and Panagariya’s book “Tryst with Destiny“. And of course, in terms of policy prescriptions, Gulzar Natarjan’s own book “Can India Grow?“
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  • Gulzar Natarajan has an extended section on the “innate charactersitics of entrepreneurs“. It is too long to excerpt, but it did remind me of an excellent paper on why productivity in India is so very low. Worth reading, especially if you are a student of micro, IO or India.
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  • “The impact of reforms like GST, while certainly beneficial in the long-run, may have ended up squeezing the vast majority of the small manufacturers. For a start, for these small manufacturers, the compliance costs in terms of hiring accountants and IT requirements are a non-trivial share of their profits. Then there is the structure of the GST tariffs – 18% for the components and 5% for the final product. This means that the manufacturers capital gets locked up as receivables for a long time. For small manufacturers, these costs are prohibitive.”
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    This point is a little weird. Let me explain what I mean when I say “weird”. I think almost every economist is aware of this issue, and has spoken about it repeatedly. But the level of awareness otherwise is very, very low. Again, the GST is a great idea with poor implementation. The unique nature of India’s economy (a blend of formal and informal along the supply chain for many, many things) makes the implementation worse.
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  • And perhaps the coda to this excellent blog post, and for me the most important part:
    “It is important for the Government to play an important role if the footwear industry can move significantly forward. The market by itself is unlikely to have the incentives or the capacity to manage that.”
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    This is a classically Studwellian recommendation. The problem is that the “no but markets will work if you let them” brigade will never accept this line of reasoning. Additionally, there are far too many people in India (especially within government) who will interpret this to mean that government needs to actively participate in the actual ecosystem by getting into manufacturing and allied activities.
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    And hardly anybody will get what I think is the actual Studwellian message. Government needs to carefully design incentive compatible subsidy mechanisms and make it clear to producers that it (the government) carries a very, very big stick – and that it is not afraid to use it. And well, if push comes to shove, actually use it. Please, read How Asia Works!

India: Links for 23rd December, 2019

  1. “When it comes to data centre storage though, India lags behind not just the developed world but even Asia-Pacific. With roughly 40 million less Internet users, Europe has more than 12 times its capacity to store data — 8,600 MW, compared to India’s 700 MW. And while India comprises 25% of Asia-Pacific’s Internet users, in 2017, it accounted for only 8.6% of its data centre growth, as per a 2018 research of the Data Center Advisory Group.”
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    A nice article from the Livemint about how this is set to change.
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  2. A short write-up from the Business Standard on reforms to the GST. The specifics do not matter (to me, that is) as the fact that this article needed to be written at all.
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  3. “The remedial measures have to be a combination of factors: capital infusion, capacity building on the supply side to resolve the unproductive assets, incentives for new entrants and tweaks in the regulatory framework. We need to wipe the slate clean and look ahead. The need of the hour is also to take some hard decisions impacting the current stakeholders. Remember, this situation is akin to the housing-led credit crisis in the US, where a turnaround was led by foreclosed properties and those under development.”
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    On revitalizing the real estate sector in our country. It is going to be a long, hard drive, but one that needs to be undertaken as soon as possible. This is necessary reading for anybody who would like to understand India’s economy today!
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  4. Niranjan Rajadhakshya, about nine months ago, on the need (“maybe?” he said then) for Operation Twist.
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    “One option right now is to borrow a trick from the US Federal Reserve—Operation Twist, named after the dancing style that was all the rage in the years after World War II. There have been two famous instances when the US central bank “twisted” a steep yield curve through clever money market operations, first in 1961 and then in 2011. In each case, the Fed changed the relative amounts of short-term and long-term securities in the market. How? It sold the short-term treasuries it had and used the proceeds to buy long-term securities. The result was that short-term interest rates went up while long-term interest rates came down. The yield curve flattened.”
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  5. And we went ahead and did it. However…
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    “Yet it is far from clear that the RBI’s goal will be achieved. Certainly, there might be some flattening of the yield curve. But it is not clear that the amounts being discussed are sufficient. The response of the market for short-term bonds is also being questioned. The sale of the shorter-tenor bonds might well blow up yields in that segment, according to some market participants; on the other hand, liquidity at that end is so ample that there might be an effective cap on yields. The essential problem in the Indian bond market is that the country has, in spite of an apparently manageable debt-to-GDP ratio, entered a state of effective fiscal dominance. “

India: Links for 9th September, 2019

  1. Mild disagreement with the conclusions of this piece, but that notwithstanding, a useful piece to read. This is on the slowdown in the Indian economy
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  2. “Those who access public services can be roughly divided into three segments—those who can pay to get, those who vote to get, and then there is the middle class.”
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    Shankkar Aiyar is a fine, fine writer. Here’s further proof.
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  3. “There is no real right time for disinvestment—only the right reason. Yes, mergers are good, but what about erosion of value—the market value of HDFC Bank is more than all PSBs put together.”
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    And even further proof…
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  4. Niranjan Rajadhakshya on the linkages between GST reform, DTC reform, and how they feed into and out of each other.
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  5. On Bouncing Boards.

India: Links for 13th August, 2019

Five links about India from the past couple of weeks:

  1. Nitin Pai explains why the banana thingie was a mere storm in a teacup.
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  2. A rather uninspiring review of the GST impementation, by reading the CAG review of the… well, GST implementation.
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  3. Vivek Kaul in the Livemint analyzes credit growth in the economy, and asks who exactly is borrowing. To me, this article raises more questions than answers.
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  4. “At the Centre, the privatisation of state enterprises during the Vajpayee era is an aberration which validates the norm. The government is the largest business house and owns 339 enterprises in 2019. Leave alone the disinvestment of Air India or 23 other enterprises. In 2018, the ownership of private carrier Jet Airways is parked on the balance sheet of public sector banks. The debate is not just about government ownership but about political management. ”
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    To me, a deeply depressing issue is the fact that no government in India, bar none, has taken divestment seriously, with the notable exception of the Vajpayee government. It’s been more of the same before, and more of the same after. Deep sigh.
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  5. Is democracy an end in and of itself, or is it the means to an end?