Steady As She Goes

Gulzar Natarajan has a typically excellent post (part of a two-part series) on India’s economic growth trajectory. And they key point in the post is a counter-intuitive one.

India cannot, and should not, grow too rapidly.

In Can India Grow, we had argued that India does not possess the capital foundations to sustain high rates of growth for long periods. It does not have the physical infrastructure, human resources, financial capital, and institutional capabilities to grow in the 7-9% ranges without engendering serious distortions and overheating. The last such episode of high growth in the 2003-11 period required nearly a decade for companies to deleverage and for banks to overcome their bad assets. While some commentators have since come forth with similar views citing aggregate demand etc, I think we were the earliest to put forth a clear case for lowering expectations and targeting a 5-6% economic growth rate.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

Our household owns two cars, a Tata Zest and Tata Nano, and the best analogy I can come up with for 2003-2011 is that it was like racing the Nano along the expressway to Bombay at a 110 kilometers per hour. It might (perhaps) have made it to Bombay at those speeds, but the little blue car would then have needed a long time at the mechanic before being road-worthy again. India, similarly, did grow rapidly in that period, but as Gulzar Natarajan puts it, it did not have the “physical infrastructure, human resources, financial capital, and institutional capabilities to grow in the 7-9% ranges without engendering serious distortions and overheating.”

Or put another way, if we want India to grow rapidy in the next two decades or so (and who wouldn’t?), it is very much a question of whether we’re driving a Nano or a Zest over the course of the next two decades. Or, god willing, an even better car. But a Nano will simply not cut it, and in terms of our infrastructure, human resources, financial capital and institutional capablities, we’re more like Tata’s cheapest car than we are like the Tata’s most expensive car.

But our country needs those upgradations if we want to achieve (and sustain) those aspirational growth rates. And here’s another counter-intuitive bit: even a 6% growth rate would be a challenge when we are talking about sustaining it over the course of twenty long years. That’s not the pessimist in me talking, that’s empirics:

A 6% baseline growth for the next three decades would be extraordinary. Underlining this point, as Ruchir Sharma has written, there are only six countries which have grown at 5% for four decades – Taiwan, Japan, South Korea, Singapore, Malaysia, and China. As the data shows, India has become the seventh. But just two have done it for five decades in a row – South Korea and Taiwan. Given that China looks certain to fall short, India could become just the third. It could go one better and strive to become the only country to grow at 5% for seven decades in a row. This would be exceptional at a time when developed countries will struggle to grow at even 2%.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

But for that to happen – for us to embark on this journey, we would do well to first take the Nano to the garage, and bring out the Zest instead. We could do with a bigger engine, better suspension, better safety features – why, better everything:

We should simultaneously use the growth to build the capital foundations – increase domestic savings, deepen financial inclusion, develop robust financial intermediation systems, expand physical infrastructure, prioritise human capacity development, and develop and strengthen state capabilities.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

All of which is easier said than done, as many a “growth star” state of the 20th century will tell you. This stuff is hard, unglamorous, politically risky, and with payoffs that manifest themselves only in the long run. But also, this stuff is unavoidable. Here’s one way to think about it as a student of economics: studying macroeconomics without a deep study of development economics is dangerous.

For as a nation to our north and east is hell bent on showing us in recent times, attemptig rapid growth without getting the basics right isn’t a good idea:

A too rapid growth will invariably drive up signatures of overheating – high inflation, property bubbles and land valuations, spike in wages, environmental damage, clogged infrastructure like traffic congestions and water scarcity etc.

https://gulzar05.blogspot.com/2022/11/indian-economy-thoughts-on-growth.html

Institutions matter. Education matters. Physical infrastructure matters. State capacity matters.

And attempting to engineer rapid growth without getting all (not some, all) of these right is a bad idea.

P.S. If you are a student of the Indian economy, the first chart in this blogpost is worth deep contemplation and reflection. What is your best guess for what comes next, and why is your guess whatever it is? That’s be an excellent essay to assign at the end of a macro semester that focuses on the Indian economy.

Macro is *Hard*, Edition #293483343643

I began teaching a course on introductory macro this past Saturday at a college here in Pune. I often tell my students that my job in a macro course is to leave them more confused at the end than they were at the start. That always evokes laugther by way of response, but as anyone who has learnt (and especially taught!) macro will tell you, I’m quite serious.

Macroeconomics is hard, it is confusing and as the person responsible for teaching it, you’re always on your toes, because you’re never sure if you’ve understood it yourself!

And I really do mean that, it is not a rhetorical statement. My own PhD is in macroeconomics (business cycles, more specifically), but I’ll happily admit to still not being sure about what exactly causes business cycles, what (if anything) to do about them and when to stop doing whatever it is that we’ve chosen to do about them. And I suspect that most macroeconomists will tell you the same thing.

This humility stems from a very good reason: macro is hard.

It is hard for lots of reasons, and not to get too meta, but quite a few debates within the field are also about which of these reasons are most relevant, and whether the relevance changes over time – and if so, due to which reasons!

But if I were to try and write a simple post for people who have no formal trianing in macro about why macro is so hard, here would be my reasons:

  1. Macro is really about trying to figure out everything that goes on in an economy, and if you try to think about all the things that go on in an economy, you very quickly realize that figuring them out is even more challenging.
  2. Time and uncertainty!
    • Macroeconomic decisions take time. It takes time to decide to start a new factory. It takes time to figure out the financing. Land acquisitions, regulatory approvals, construction delays will all add weeks to the planned schedule, if not months, and sometimes years.
    • These expensive decisions are made at the start, but there is no guarantee that macroeconomic conditions will be the same at the finish of the project as they were at the start. You want a relatable example? How sure are you that macroeconomic conditions will be the same when you graduate from college – as they were when you enrolled in it?
  3. The way macroeconomic variables interact with each other isn’t known for sure. We think we know how inflation and unemployment are related to each other, but we can’t really say for sure. We think we know how exchange rates impact the domestic economy, but we can’t really say for sure.We’re still figuring out how monetary policy and fiscal policy should interact in theoretical models, let alone in reality. The impact of monetary policy in America today on India’s economy tomorrow? Don’t get me started. I can go on, and folks with greater expertise than me will prbably not stop for years.
  4. Life has a way of throwing up surprises that macroeconomic models never thought about. You could (and probably should) blame macroeconomists for not getting enough finance into their models prior to 2008, but who, pray, could have foreseen 2020 and 2021? How do you come up with models and policies on the fly in such a scenario? And then, just for fun, throw in a jammed Suez canal. Life, I tell you.
    We call these things exogenous shocks in macroeconomics, but the name hardly matters. Reality will always be more complex and more unexpected than any model you can come up with, and that’s just a fact.
  5. Counterfactuals are impossible to test. How do we know that Ben Bernanke did the “right” thing in 2008? We don’t! What if he had done x instead of y? There’s no way to test this, since we can’t turn the clock back to 2008, and ask Mr. Bernanke to, well, do x instead of y. This is both a problem and when it comes to critiquing models, a great convenience.
  6. Attitudes towards risk, and the propensity to copy what others are doing change according to your outlook towards the macroeconomic environment. You can call this animal spirits, but what you’re really saying is that you don’t quite know how to think about it, even less model it cohesively.
  7. Building a model – any model – requires simplification. When you build a model, it will by definition be an approximation. Unfortunately (and I wish this weren’t so), this very real limitation isn’t always front and centre within the field while developing models.
  8. What are you optimizing for when you build a model? Is it fidelity to reality or is it a beautiful model that may or may not have anything to do with reality? Again, I wish this weren’t so, but the answer isn’t always clear cut.
  9. Any field that uses the pool player analogy is a field that is, by definition, unsure about how the world works.
  10. No matter how much data we have access to, there will always be data points that we cannot capture, and we don’t quite know how these data points, and their unavailability, will impact our understanding of the economy.
  11. Social structures, psychological make-up, cultural parameters will all have an impact upon the decision making capabilities of individuals, but quite how this works (and that too across space and time) isn’t well known. For example, how would your grandfather have reacted to the prospect of not being employed upon graduation? What about your dad? What about you? What does this say about the nature of India’s changing economy, and what does it say about cultural norms and expectations? Is your answer likely to be different depending upon how much your family earns, where in the country you are located and your family size? Can we model this? (Hint: no.)

So sure, I’ll teach them about the variables, the models and the case studies.

But I’ll let you in on a dirty little secret, so long as you promise not to tell anybody: I’m just not sure if I really and truly understand what I’m teaching in macro.

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.

Risks, Investment and the Government

I linked to a Scott Galloway post about this topic recently, and have other posts about this topic (see this review of The Entrepreneurial State, and a post on R&D spends in an Indian context).

And the reason for another post about this topic is a recent Ezra Klein column about a new initiative out of the United States called ARPA-H:

Shortly after winning the presidency, Biden persuaded Congress to fund an analogue focused on medical technology: ARPA-H. Why do we need an ARPA-H when the National Institutes of Health already exists? Because the N.I.H., for all its rigor and marvels, is widely considered too cautious. ARPA-H will — in a move some lament — be housed at the Institutes, but its explicit mandate is to take the kind of gambles that Darpa takes, and the N.I.H. sometimes lets go. Wegrzyn, Biden promised, is “going to bring the legendary Darpa attitude and culture and boldness and risk-taking to ARPA-H to fill a critical need.”

https://www.nytimes.com/2022/09/18/opinion/biden-invention-arpa-h.html

Please read the whole article, as always, but I wanted to use this post to talk about the three things that make up the title of today’s post: risks, investments and the government.

If you are a student of economics, how should you think about these three things, and why do they matter?

  1. Investment is necessary for an economy to grow. And investment depends on a whole host of factors, and for a variety of reasons, this investment isn’t always forthcoming at speeds which one would like. This is one way to think about macroeconomics as a field of study.
  2. Part of the reason the requisite level of investment isn’t forthcoming is because of risks. Not all investments bear fruit, and it is quite likely that some investments will fall by the wayside. If firms are risk-averse, they may choose to not invest.
  3. Risk aversion (whether on parts of firms or individuals) isn’t a constant. It keeps on changing, once again for a variety of reasons, and what makes this even more difficult is that the assessment of risk is a very subjective phenomenon. You can dress it up in the garb of statistics and models as much as you like, but you’d be wrong to assume that subjectivity can be eliminated entirely. Leave alone the difference between risk and uncertainty, and the discussions that follow from here on in. That’s a whole other topic!
  4. If private firms aren’t willing to make investments, or take risks, especially in the case of moonshot investments that other nations are making, governments might decide to step in and invest instead. Remember that there is no reason to assume that governments will get the judgment call of when to do so right. They are as prone to mistakes as they rest of us, and if you take into account incentive alignment, you might well be right in assuming that they are likely to do marginally worse.
  5. But remember always that all-important question: relative to what? That is, if the need to invest is pressing and urgent (strategic considerations, geopolitical considerations, the need to develop more rapidly than we are thus far), and if investment is not forthcoming from the private sector, it makes sense for government to step in and get things moving.
  6. When should government step in? How much should it fund? How should it recoup its investments, if at all? How long should it stick around? What are the metrics of success? What are the opportunity costs? How is continuity of such programs guaranteed across different political administrations?
    There are no easy answers to these questions, and controversies galore are guaranteed.
  7. But the bottomline (to me) is that investments are necessary, they are risky, and they aren’t always forthcoming from the private sector. And there is therefore a role for government.
  8. But an economist should also worry about whether government will get it right or not, and if not, for what reasons. And to focus on making suggestions to make the processes associated with this better. This is hard, it is politically fraught, and it will go wrong more often than not.
  9. But it is necessary, and often unavoidable.
  10. If you are new to economics, and are wondering how principles of economics are applicable in “real-life” problems, I guarantee you this – you can spend entire careers thinking about these issues. And no matter when you start, your timing couldn’t be better.

Imports and GDP: This Stuff Matters!

I’ve done an earlier version of this post, but have tried to simplify it even further in what follows.

Let’s go back and take a look at a concept that most of us are familiar with, but perhaps don’t know well enough (myself included!): GDP.

What is GDP?

That’s an easy question to answer, and one that every student of Econ101 more or less memorizes:

The final value of all goods and services produced in an economy in one accounting period.

Check out this definition from Wikipedia, this one from the OECD, this one from the IMF,  or run a search yourself – they’ll all be more or less the same.

Now, you can measure GDP in more than a couple of ways, but the version that most students of economics are definitely familiar with is the expenditure approach. It says that GDP is measured by tallying up the total expenditure used to buy final goods and services.

You might be familiar with this equation, for example:

GDP = Consumption + Investment + Government Spending + Exports – Imports

Or, to give this equation its abbreviated version:

GDP = C + I + G + X – M

Now, this is where things begin to get a little tricky.

This equation, and the way it is written out, leaves a lot of people under the impression that a country’s income will go up, if only we imported less as a country. 

And it is an understandable position to take! If we imagine that M has a value of, say, 100, then GDP goes down by 100. If M were to be zero instead, GDP would be higher by hundred in this alternate scenario.

But this is wrong! I’m going to use two different ways to show you why this is wrong.

Here’s the first one: go back to the definition of GDP, at the top of this piece. Now that you’ve read it, answer this question: where are imports produced? Are they produced in our country, or are they produced in another country?

And if they’re produced in another country, should they be included in our GDP?

The reason the equation says minus M is because we shouldn’t be counting it in GDP in the first place. Once we remove imports, we’re left with the very definition of GDP: goods and services produced in an economy in a given time period. 

Subtracting imports doesn’t make GDP higher. Adding it is completely wrong accounting.

All right, fine, you might grudgingly say. But then why is it in the equation at all in the first place?

Fair question! 

If you are an American, living in America, and you buy a smartphone manufactured in China, that would count as an import (M). 

But here’s the thing: it would also count as consumption ( C ). 

Think about it: if you are using the expenditure approach to measure GDP, your purchase of a Chinese manufactured smartphone is consumption, and it is also an import.

If the American government were to import binoculars manufactured in Israel, it would be government expenditure (G). But it would also be imports (M). You could make similar arguments for investment (I) as well, but you get the idea now.

So, a longer, but more accurate and understandable way of writing out the expenditure method of GDP is as follows (hat-tip to Noah Smith for this version):

GDP = Domestically produced consumption + Imported consumption + Domestically produced investment + Imported investment + Government spending on domestically produced stuff + Government spending on imported stuff + Exports – Imports

Now, some simple crossing out of terms…

Gross Domestic Product = Domestically produced consumption + Imported consumption + Domestically produced investment + Imported investment + Government spending on domestically produced stuff + Government spending on imported stuff + Exports – Imports

…leaves you with this:

Gross Domestic Product = Domestically produced  consumption + domestically produced investment + Government spending on domestically produced stuff + Exports

That first version, with all the crossed out terms, is how we should really be writing it out all the time, because that is what economists really mean. But we don’t do that, unfortunately, leaving folks with the entirely understandable impression that reducing imports makes us richer.

But hey, now you know! GDP, by definition, has nothing to do with imports, and the reason we subtract imports out is because we’re adding them in while counting consumption, investment and government expenditure.

TN Ninan on The Misery Index

More often than not, inflation and unemployment move in opposite directions. Why this should be so, and whether this actually is so, are questions that can get a lot of economists very hot under the collar very quickly! 

But every now and then, this relationship breaks down very quickly, and we’re then staring at a problem that economists refer to as stagflation. That, in effect, is when inflation is stubbornly high, but unemployment is also stubbornly high. TN Ninan, a columnist for the Business Standard, riffs on this and related concepts in an excellent recent column

In particular, he drags up an idea that most of us haven’t heard about lately, the misery index. Given what’s around us these days, though, you might want to construct such an index for the months to come! What is the misery index, you ask? Well, simply add up the rate of unemployment and the rate of inflation for any given economy! It’s a simple enough index to create, and you can learn a fair bit by taking a look at which countries are doing well (low on the misery index), and which countries are the unfortunate table-toppers. 

As the column points out, Turkey, Argentina and South Africa top these charts, and Brazil and Russia round off the current top five. But most major economies are inching up this particular chart, and this is something you want to keep an eye on in the days to come. Here is more information, if you’re interested in learning more about the misery index.

Now, as with ice-cream flavors, so also with indices such as these. You can add in different flavors and come up with many different variations. So it was only a matter of time before somebody thought of adding in interest rates to create a new version of the misery index. Imagine living in an economy with high inflation, high unemployment and high interest rates! And if you want a little-bit-of-everything-when-it-comes-to-macro index, well, throw in per capita growth rates too. Note that this last addition actually makes it rather less of a misery index, since high per capita growth is a good thing.

And finally, TN Ninan’s column also mentions another interesting, relatively recent idea that you might want to explore yourself: The Great Gatsby curve. Take a look at what it means, and reflect on how appropriate the name is.

Literature and economic theory – who’d have thunk it, eh?

What is a Doom Loop?

Is a global recession imminent?

Probably. Macroeconomic forecasting is the stupidest of sports, but it is looking quite likely, yes.

How will recession start, how will it play out, and how long will it last? I don’t have the faintest idea, and trust me, nobody knows for sure.

But certain channels of both cause and effect (and sometimes both at the same time, because macro is hard) can be readily identified. And one such channel in today’s day and age is that of a ‘doom loop’.

A country is at risk of a doom loop when a shock to one part of its economic system is amplified by its effect on another. In rich countries, central banks should have the power to halt such a vicious cycle by standing behind government debt, stabilising financial markets or cutting interest rates to support the economy. But in the euro zone, the ECB can only do this to a degree for individual countries.

https://www.economist.com/the-economist-explains/2022/06/22/what-is-the-doom-loop-in-the-euro-zone

I haven’t taught international macro for a while now, but when I used to, I would explain this to my students by calling it the Mamata Banerjee/Narendra Modi/Raj Thackeray problem. I hope your curiosity is piqued!

For an economic union of political entities to work, there are (very broadly speaking) four things that must be present:

  1. A monetary union (which the EU has)
  2. A fiscal union (this is the Mamata Banerjee angle, explained below)
  3. Capital mobility (Narendra Modi)
  4. Labor mobility (Raj Thackeray)

Now, bear in mind that my examples are from a while back. I am referring to Mamata Banerjee’s first stint as Chief Minister, and the version of Narendra Modi I have in mind is the Chief Minister of Gujarat.

But back when Mamata Banerjee became Chief Minister of Bengal for the first time, one of the first things she did was to ask the Centre for help given West Bengal’s precarious finances. The point is not about whether it was given or not (as far as this blogpost is concerned), the point is that states routinely ask for, and sometimes get, aid from the centre. This may be because of natural disasters, or man made ones, financial ones or otherwise. The point is that the central government has the ability to ‘help’ out states if necessary. It is, of course, more complicated than that, and a fiscal union also implies the ability to raise and share taxes, but the central point is the fact there is help available, if needed.

But the ability of the European Union to do so is severely constrained, because you will need a lot of good luck to convince, for example, German voters that their taxes might be used to help the Spanish economy in its time of need. And for somewhat similar reasons, you can make more or less the same argument for the inability of the European Central Bank to chip in when necessary.

Or consider Narendra Modi’s invitation to Ratan Tata, to have his Tata Nano factory be relocated from West Bengal to Sanand in Gujarat. That’s an example of capital mobility, and again, this is much easier to achieve within a country.

And finally, Raj Thackeray, and his opposition to workers from outside Maharashtra ‘taking’ jobs within the state – that is a great way to understand what (lack of) labor mobility means.


The point is that an economic union must necessarily have these four things in place for it to be a meaningful, stable and well-functioning European Union. The idea isn’t new, of course – Robert Mundell‘s idea has been around since the late 1950’s, and there have been others who have worked on related ideas. Also read Paul Krugman on the topic.

But the point is that if a crisis strikes the EU, they have a limited range of weaponry that they can deploy.

Please read the rest of the article to get a sense of how linkages between European governments and its banks, the banks and the broader economy, and the broader economy and the European governments can both cause and exacerbate a crisis.

And as usual, the concluding paragraph for your perusal:

The euro zone is at less risk from doom loops than it was ten years ago, thanks to reforms to the banking system, the ECB’s commitment to preserve the euro and some embryonic fiscal integration. But the danger has not disappeared. And reforms to the euro zone’s architecture that would further reduce the risk have stalled⁠—in part because in 2012 the ECB boldly stepped in, easing the pressure on governments to make difficult decisions. As the ECB once again intervenes, the prospects for deep euro-zone reform look increasingly remote.

https://www.economist.com/the-economist-explains/2022/06/22/what-is-the-doom-loop-in-the-euro-zone

Neelkanth Mishra on the Inflation Spectrometer

There’s learning macroeconomic theory, and there’s applying what you know to the world around you. In an excellent column, which we shall parse together, Neelkanth Mishra teaches us how to use basic micro and macroeconomics to make sense of the world around us.

He begins with an analogy of the spectrometer, a device used to ‘disentangle’ waves. Having explained what a spectrometer is, and what it might be used for, he then goes on to say that you might be able to do something similar with economic phenomena, and asks if you could use an idea analogous to the spectrometer to disentangle the phenomena that are causing inflation.

Let’s dig in.


In theory, inflation is a macroeconomic phenomenon, and analysing it by category is unwise, as prices shift both supply and demand between categories — sometimes global and local factors mix as well. For example, higher oilseed prices could shift acreage from pulses in the upcoming Indian kharif crop, pushing up prices of pulses even though the initial supply disruption was in Ukrainian sunflower oil.

https://tessellatum.in/?p=433

It’s one thing to learn about supply and demand. It is quite another to learn about partial equilibrium. But it is a whole other thing (and the point of the entire exercise) to be able to apply these ideas to what we see around us. Can higher oilseed prices cause an increase in the price of pulses? And even if you were to tentatively say ‘yes’, the real challenge would be the follow-up question: through what channels, and why?

He identifies two clear strands of driving factors that are responsible for inflation today, beginning with a larger than necessary stimulus applied in America during Covid-19. As an interesting aside, he says that this ended up pushing retails sales ten standard deviations above normal.

If you are a student reading this, take the time to pause over here and reflect on this statistic. Ten standard deviations above normal? That sounds like a lot! But you should also ask yourself the following:

  1. What does above normal mean? How is it defined? Average annual sales over the last decade? Or is it monthly sales over the last five years? Or some other construct?
  2. The standard deviation only makes sense given our understanding of the first bullet point. What period has been used? How often have ten standard deviation events taken place in the last, say, one hundred years (assuming we have data going back that far, of course)?
  3. None of this, to be clear, is me doubting what Neelkanth Mishra has said. The point I am making is that you, as a student of economics, should try and run some Google searches to find out where that number comes from, or best of all, try and run the analysis yourself. Search for retail sales on Fred St Louis, and knock yourself out with a spreadsheet. As they say, get your hands dirty!
  4. Read the rest of the paragraph to get a sense of how to think through macroeconomic issues and understand them better.

The downward lash of this bullwhip is now starting, which can push apparent demand well below real demand. US federal fiscal deficit as a share of gross domestic product or GDP in the last three months is the lowest since June 2019. As services restart, a goods-to-services switch in consumption is underway; shipping bottlenecks have eased (though not fully); global industrial production got back above trend in February (though recent lockdowns in China hurt); and there is evidence of excessive inventory in many supply chains. Prices of TV panels and memory chips are falling, and the year-on-year price increases in metals are now much below those seen in April. Prices may not go back to the pre-Covid levels (meaning deflation from here), but the inflationary impulse does seem to be behind us.

https://tessellatum.in/?p=433
  1. Learn about the bullwhip effect.
  2. Play around with this chart to verify for yourself the fiscal deficit point. (If anybody reading this works, or can work with the RBI, please push for the DBIE website to be more like, and indeed better than, the Fred St Louis website. Thank you.)
  3. Run some searches for memory chip prices (add words like “trend”, 2022, H2 2022 and use Google’s search filters to narrow down the search results).
  4. Reflect on whether you agree about the inflationary impulse from the USA’s fiscal stimulus now being behind us. Say you had to disagree with his point: what would you choose to drag up as points that negate his hypothesis?

The second global impulse, the start of the Russia-Ukraine conflict, may be harder to adjust to, with demand and supply adjustments likely to take many quarters. The conflict and the associated sanctions have reduced the global supply of food and energy. Given that global GDP growth and the use of dense energy are intimately linked, fiscal and monetary measures can only redistribute what remains between countries; they cannot offset the shortages. Nearly every major economy has announced energy subsidies — while this is understandable, given the domestic political compulsions as well as the need to sustain growth, they will only prolong the period of higher energy prices. This can be seen as countries competing for the remaining supplies of energy, pushing up prices until the weak hands (countries) give up. Higher prices have also not triggered investments in new supplies yet, as suppliers lack certainty on how long the shortages may persist. These trends could keep prices higher for longer than currently anticipated.

https://tessellatum.in/?p=433
  1. Understand the point about fiscal and monetary stimuli being of limited use in a global context.
  2. Understand the unseen effect of domestic subsidies on global oil prices
  3. Trust me on this – there’s many, many, many pages of reports, news articles and blog posts that have been read for that one seemingly simple fragment of a sentence: “as suppliers lack certainty on how long the shortages may persist”. Learn, for your own sake, the art of reading a lot in order to be able to give a concise summary.

Moving to local drivers of inflation: Inflation occurs when a stimulus pushes aggregate demand above the economy’s capacity to meet it. Even though state governments’ deficits are much lower than budgeted, the total government deficit in India is higher than in pre-Covid times. The recent fiscal steps to prevent a rise in fertiliser and fuel prices, while prudent and to some extent necessary, may serve only to spread inflation over a longer period. The rise in India’s current account deficit (CAD), with May balance-of-payments (BoP) deficit run-rate at nearly 2 per cent of GDP, also suggests domestic demand, at least in its current mix, is unsustainable.

https://tessellatum.in/?p=433

If I was conducting an interview for a student who was aspiring to join the corporate world as an economist, I would have liked to have shown the candidate this paragraph, given them a laptop with an internet connection, and told them that they have thirty minutes to find the answers to the following questions:

  1. Find out for me the original source from where we can find out that state government’s deficits are much lower than budgeted
  2. Find out for me the original source for India’s CAD and B-O-P deficits.
  3. Answer for me, with data to back up your answer the following question: is India’s current mix of domestic demand unsustainable?

If you are not able to answer these questions, and you are currently a student of macroeconomics, you might wish to add stuff outside of your textbooks into your diet.


But now, best of all, for the three paragraphs that follow the one that I quoted in the previous section, I won’t come up with a list of comments and questions. I’ll in fact ask you to come up with questions yourself, along the lines that I just did, and then see if you can answer them.

Go ahead, give it a try!


This article is a great example of what hands on macroeconomics looks like. If you are in college and are wondering what your syllabus has to do with the world outside, ask yourself a simple question: do you see yourself as being capable of writing a similar article yourself?

That, if you ask me, is a true examination. Write it, please, and share it with all of us by putting it up for us to read in the public domain. What a great addition to your CV that would be.

No?

On Starting Salaries

I joined Genpact as a data analyst in the year 2006, fresh out of college. Genpact was one of the few firms that had visited our campus for recruitment that year, and I was lucky enough to be “placed” along with three other batchmates.

My starting salary? 3.75 lakh rupees, or INR 375,000/-.

I remember thinking how princely an amount this was back then, and I couldn’t for the life of me figure out how I could possibly spend whatever amount I got on a monthly basis. Of course, life very quickly taught me the same lesson that it has taught everybody else – so it goes.

But the reason I bring this up is because of a Finshots write-up that’s been shared with me a fair few times this past week:

₹3.6 lakhs
That was the typical salary paid out to a fresher in 2010 when they entered one of India’s top IT companies. Think — TCS, Infosys, HCL, and Wipro.
A decade later, they were still being paid roughly the same sum.
So technically, if you were to take into account inflation, freshers in 2020 were far worse than their counterparts back in 2010. And the salary hikes weren’t particularly enticing too.

https://finshots.in/archive/it-firms-great-resignation/

I’m not sure where they got the data from, but anecdotally, this sounds about right. I’ve been in charge of placements at the Gokhale Institute, where I work, for about four years now, and while we’ve managed to get firms on campus that pay substantially more, starting salaries for most firms at the entry level are at about this number, more or less.

Which, as the Finshots newsletter goes on to point out, is ridiculously low for 2022. And why might this be so?

Well, two ways to think about it. First, as the newsletter itself points out, it’s simple economics. There’s excess supply.

You see, India produces roughly 1.5 million engineering graduates every year. And IT firms hire around 200,000 people every year. This means the effective pool of applicants remains sizeable and IT companies continue to be spoilt for choice. Even others attributed it to cartelization, alleging that IT companies banded together to deliberately suppress salaries. But despite what you want to believe, the bottom line remains the same — Entry-level salaries simply did not budge a lot in the past decade and IT graduates were getting a bit angsty.

https://finshots.in/archive/it-firms-great-resignation/

It’s worth learning more about economics to help yourself understand what terms such as excess supply, homogenous goods, elasticity, cartelization, inefficient labor markets mean, because they help you understand why starting salaries are so low. Search for these terms online, on this blog, or begin with MRU videos, but help yourself by learning about these concepts if you are unfamiliar with them.

Or watch AIB videos!

If you ask me, do both. It’s a great way to learn econ theory and have a bit of fun.


But as the newsletter goes on to point out, things are changing, and they say this is because of three reasons: increased attrition, greater recruitment by start-ups and burnout from the pandemic. Each of three, I should add are inter-related, but I broadly agree with their explanation.

Average salaries are up, firms are paying more, and it’s a great time to be out there looking for a job. But, as the conclusion of the newsletter points out, it would seem that there is a recession looming on the horizon, and that may drag starting salaries back to square one.

How does one find out about the probability of a recession? Well, there’s lots of ways, but without being too meta, keep an eye out for the kind of questions that are being asked about the macroeconomic situation:

One data point doesn’t add up to much, I’ll admit, but there’s other ways to keep yourself abreast of the situation:

https://trends.google.com/trends/explore?q=recession&geo=IN

Or, once again, run searches online (this time for macroeconomics), or on this blog, or begin with MRU videos. Or all of the above, if you ask me.

But trust me on this: a good intuitive grasp of basic economics concepts goes a very long way indeed. And when it comes to wages, we all have skin in the game. (Read the book, if you haven’t already).

No?

Imports, Exports and GDP

“The key is to understand that imports are also included in consumption, investment, and government spending. The real GDP breakdown looks like this:

  • GDP = Domestically produced consumption + Imported consumption + Domestically produced investment + Imported investment + Government spending on domestically produced stuff + Government spending on imported stuff + Exports – Imports

So you can see that while imports are subtracted from GDP at the end of this equation, they’re also added to the earlier parts of the equation. In other words, imports are first added to GDP and then subtracted out again. So the total contribution of imports on GDP is zero.”

That is an excerpt from a lovely little write-up by Noah Smith on his Substack, and one that I’ll be using whenever I teach macro. It’s lovely for many reasons, but most of all for the reason that the bullet point goes a very long way towards making the point that a lot of folks miss: you don’t get rich by importing less.

When I say “you”, I mean the country in question – and this equation, written out this way, helps us understand why. If you’re a student of macro, and are under the impression that India will get richer if only we imported lesser, think about the definition of GDP:

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

https://www.investopedia.com/terms/g/gdp.asp

If you think about it, how can imports possibly qualify as being produced within a country’s borders? As Noah says, the equation can also be written like this:

GDP = Domestically produced consumption + Domestically produced investment + Government spending on domestically produced stuff + Exports

https://noahpinion.substack.com/p/imports-do-not-subtract-from-gdp?s=r

Read the rest of Noah’s post, especially if you are a student of macroeconomics. It should help clear up a lot of basic, but important and often misunderstood ideas about GDP calculations.


https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus

Russia has stopped publishing detailed monthly trade statistics. But figures from its trading partners can be used to work out what is going on. They suggest that, as imports slide and exports hold up, Russia is running a record trade surplus.
On May 9th China reported that its goods exports to Russia fell by over a quarter in April, compared with a year earlier, while its imports from Russia rose by more than 56%. Germany reported a 62% monthly drop in exports to Russia in March, and its imports fell by 3%. Adding up such flows across eight of Russia’s biggest trading partners, we estimate that Russian imports have fallen by about 44% since the invasion of Ukraine, while its exports have risen by roughly 8%.

https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus

Think about the previous section, and try and answer this question: is Russia poorer or richer or unchanged because Russia isn’t importing as much, as measured by GDP and changes in GDP?

Well, Russia may be worse off, and Russians may be worse off. It’s leader?

As a result, analysts expect Russia’s trade surplus to hit record highs in the coming months. The iif reckons that in 2022 the current-account surplus, which includes trade and some financial flows, could come in at $250bn (15% of last year’s gdp), more than double the $120bn recorded in 2021. That sanctions have boosted Russia’s trade surplus, and thus helped finance the war, is disappointing, says Mr Vistesen. Ms Ribakova reckons that the efficacy of financial sanctions may have reached its limits. A decision to tighten trade sanctions must come next.
But such measures could take time to take effect. Even if the eu enacts its proposal to ban Russian oil, the embargo would be phased in so slowly that the bloc’s oil imports from Russia would fall by just 19% this year, says Liam Peach of Capital Economics, a consultancy. The full impact of these sanctions would be felt only at the start of 2023—by which point Mr Putin will have amassed billions to fund his war.

https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus (Emphasis added)

Macro is hard! But it also matters, especially at times such as these.