Tag: niranjan rajadhakshya

What Lies Ahead for India?

AshishLeave a comment

Towards the end of his column, Niranjan highlights three key areas for India to work on in the years to come:

  1. Jobs, and those preferably in manufacturing.
    There is no sugarcoating this: we need to do much better in this regard, and if anything, we have been doing marginally worse in the last decade or so.
  2. Irregular and inefficient access to energy.
    We’ve tried to solve this problem the way teenagers clean their rooms. And the results have been exactly as bad as in the case of those teenagers. Niranjan offers hope by speaking about the transition to green energy, and I wish I could share his optimism.
  3. Political economy: will India resemble East Asia or Latin America?
    I put on my Straussian hat to think about the points Niranjan is making here, and I would encourage you to do the same.

Each of these points is spot on, to which I would add the following:

  1. More expenditure on the capital side.
    We need to build. More roads, more airports, more dams, more electricity projects, more ports, more housing units, more everything. One of my favorite factoids in the recent past has been about China pouring more concrete between 2012-2016 than the USA did in the entire 20th century. India needs to join this conversation, and real quick. But that is a hard political economy problem.
  2. Preserve and improve the quality of our institutions.
    Easier said than done, but the quality of our executive, our legislature, our judiciary, our monetary policy authority, our media, our regulators and our public policy institutions needs to not regress and become better over time. There is an unfortunate tendency to have a discussion about this very quickly turn into finger-pointing and yelling, but the sad truth is that these institutions are nowhere near as good as they need to be, and are arguably getting worse. Institutions matter!
  3. Better education, better health:
    Not more schools and colleges, not more degrees. But better know-how, a better trained work-force and a focus on improving the quality of education at all levels rather than the quantity of institutes and organizations.
    India’s healthcare system is a mess, and we don’t yet realize how bad it is. But twenty years down the line, there is waiting for us a ticking time bomb: a rapidly ageing population of India’s size, going up against our healthcare system as it currently exists is something that should fill all of us with dread.

Each of these are truly hard problems, with no easy solutions. But hey, nobody ever claimed that this was going to be a walk in the park. If you are a student of economics in India today, you have your work cut out for you, and time is of the essence.

My thanks to Niranjan Rajadhakshya for writing this excellent column, and I hope his column and these blogposts spark many conversations, debates and projects in the days to come.

Onwards!

Land, Labor and Capital

AshishLeave a comment

A very long extract to begin with today, because it just is that important:

The first tentative economic reforms began after Indira Gandhi came back to power in 1980. Political scientist Atul Kohli has written of how she made her peace with Indian business houses. The licence raj was eased. Taxes were reduced. VP Singh presented a reformist budget in 1985, when Rajiv Gandhi was prime minister. Manmohan Singh helmed the seventh five-year plan. It focussed on technology, productivity and efficiency. The Reserve Bank of India allowed the rupee to gradually depreciate in a bid to promote exports.
The growth spurt in the 1980s was supported by a large increase in fiscal deficits as well as international borrowing. It was unsustainable. The road to the 1991 crisis lay ahead. The macroeconomic crisis—in the midst of political and social instability —was a turning point. The duo of PV Narasimha Rao and Manmohan Singh abolished industrial licensing, slashed import tariffs, opened up the financial sector, attracted foreign capital, fixed public finances and made the rupee convertible on the current account. In his landmark budget speech in July 1991, Manmohan Singh cogently argued that the balance of payments crisis was a symptom of a deeper malaise: macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, indiscriminate protection that had weakened the incentive to export, lack of domestic competition, a weak financial system that was not allocating capital efficiently, lack of access to the latest technology, and much more. The great achievement of 1991 was not each reform in isolation, but the rollout of a comprehensive reform programme where different parts complemented each other.
The development state was replaced by the regulatory state. The government was no longer the main vehicle of investments. That job was handed over to the private sector, while new regulators were set up or empowered to ensure markets functioned well in a wide range of areas.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

The entire column is excellent – that’s why we’ve spent four days (and counting) on it. But it is awe-inspiring to see how concisely and yet how thoroughly Niranjan has spoken about the 1991 reforms in three short paragraphs. Shruti Rajagopalan and her excellent colleagues at the Mercatus Center have an entire website dedicated to the events of 1991 and what came after, and I would strongly encourage you to spend a lot of time on it.

If you are younger than thirty years today and are reading this, you need to understand why you are able to read this today. You need to understand how the Indian economy changed enough for me to be able to write this blog in addition to all of what I do to earn my daily bread, and you also need to understand how your own income (or that of your family’s) went up enough to be able to afford the device that you are using right now to read this. To say nothing of the job/business that paid for this device- both the device and the job likely wouldn’t have been available prior to 1991.

I hope to write more about how the 1991 reforms changed lives on the ground for those of us who were around in the 1990’s and the early 2000’s. In all my classes, I tell my students that they have a secret superpower that they should make full use of. This secret superpower is called TMKK. It stands for Toh Main Kya Karoon? In English, that means ‘so what should I do?’, although a more accurate translation would be ‘so why should I care?’.

Consider this sentence once again: “The duo of PV Narasimha Rao and Manmohan Singh abolished industrial licensing, slashed import tariffs, opened up the financial sector, attracted foreign capital, fixed public finances and made the rupee convertible on the current account.”

Especially as a young student, you should absolutely be asking TMKK. How did the life of the average Indian change because industrial licensing was abolished? So what if import tariffs were abolished? What could I buy and consume that I could not earlier? How did opening up the financial sector help ordinary folks who were around in the 1990’s? What changes in the lives of ordinary citizens when India finds herself able to attract foreign capital?

You get the drift. I suspect most folks nod along when they hear us economists rhapsodize about 1991, without really getting what was in it for them. But they need to know. One, to better understand why exactly 1991 was so important, and second, to realize how fragile our economic freedom is, and to do our utmost to preserve it in the years/decades to come.

In their book, Tryst with Destiny, Bhagwati and Panagariya speak about how far India has come since 1991. And it really has come a long way! But they also speak about the need to have sustained and accelerated growth from here on in (the book was published about a decade ago). And they say that this needs two kinds of further reform.

Track I reforms are all about accelerating and sustaining growth, while making it even more inclusive, while Track II reforms are about making redistribution even more broad-based and effective. And they make the point that while 1991 was a great start to Track I reforms, there is a long, long way to go:

If truth be told, India is far from done on Track I reforms for two broad reasons. First, the potential for growth remains grossly underexploited. The economy remains subject to vast inefficiencies. Removing these inefficiencies not only offers the opportunity to arrest the recent decline in growth but to push the economy to a double-digit growth trajectory. Second, the poverty reduction that directly results from growth, in terms of enhanced wages and employment opportunities per percentage point of growth, can be increased: we can get a larger bang for the buck.

Panagariya, Arvind; Bhagwati, Jagdish. India’s Tryst With Destiny . HarperCollins Publishers India. Kindle Edition.

Every single economics student is taught, sooner or later, about the three factors of production: land, labor and capital. The link I have added here mentions a fourth, but let’s keep things simple for now. And I find it instructive to think about what Bhagwati and Panagariya choose to talk about in Part II of their book. This section of their book is about accelerating, widening and deepening what they refer to as Track I reforms, and the these are the first three sub-sections:

  1. Labor laws
  2. Land Acquisition
  3. Infrastructure

That is to say, even now, a full 75 years after India’s Independence, it isn’t as easy as it should be to utilize land, labor and capital to the fullest extent possible. You may agree or disagree with their solutions to these problems, but I would argue that the diagnosis is spot on.

The Indian economy is freer today than it was in 1990, and that is really and truly awesome. But it isn’t free enough, and much more work remains to be done.

Quite what this work is, and how to best go about it, is the journey that we need to undertake on the long road to breaking free.

And if this challenge excites you, well, like it or not, you are a student of the Indian economy – welcome to our tribe!

One Step Forward, Five Steps Back

AshishLeave a comment

Alternate history is a genre is underrated. I should say at the outset that I haven’t read as much as I would have liked to in this genre, but have thoroughly enjoyed what little I have read (or seen, in terms of movies).

Why begin with this? Because Niranjan raises, as he puts it, a tantalizing question:

The short period when Lal Bahadur Shastri was prime minister offered hope of change. Shastri wanted more investment in agriculture to control rising food inflation. He saw that physical controls were creating artificial shortages and black markets; he preferred financial controls. And the failures of the public sector convinced him that the private sector should have a bigger role in the economy. One of the tantalizing questions in Indian economic history is whether India would have embraced liberal economic reforms 25 years before 1991, if Shastri’s tenure had not been cut short by his premature death.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

But if there is somebody reading this whose interests lie at the intersection of writing fiction and studying economics, boy do I have a project for your consideration. What if agriculture had become more productive and efficient back in 1965? What if we had moved away from the License Raj, rather than embracing it wholeheartedly? What if – the most ‘if only’ question of them all – 1991 had instead been 1965?

Please, somebody, write this book.

But alas, we went in a whole other direction. It all began promisingly enough, but things soon went awry:

Indira Gandhi began with a relatively liberal economic agenda, including devaluing the rupee as well as easing trade restrictions in response to balance of payments pressures. However, in response to the international geopolitical situation as well as domestic political calculations, she swung to the Left after 1969. The economy was choked with stringent licensing, credit rationing, import controls, as well as draconian laws such as the Monopolies and Restrictive Trade Practices Act and the Foreign Exchange Regulation Act. A series of exogenous shocks between 1965 and 1980 — wars, droughts and oil prices — further battered the economy.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

I would strongly encourage young readers and folks new to economic theory to go over the presentation linked to in this blogpost. Why do I recommend this presentation? Because it is one thing for Niranjan to say that Indira Gandhi ‘swung to the Left after 1969’ because of domestic political calculations, and it is quite another to model why this was inevitable. Economics, remember, is the study of how to get the most out of life, and Indira Gandhi chose to get the most votes. This presentation explains why.

Economics is also the study of opportunity costs, and this presentation explains to us the cost of her choices. India fell behind when compared to some of her Asian peers in this period, and any student of Indian economics must almost heave a wistful sigh when studying this era of India’s economic history.

But the other reason I ask you to go over that presentation is because it helps you understand decisions made by all political leaders in all electoral democracies everywhere in the world. And as students of economics, it helps to understand how politicians respond to their incentives. This helps you become a better analyst of both economics and politics, and therefore of public policy.

The 1970s were a lost decade, with low growth and high inflation. However, there were two significant structural breakthroughs. First, the Green Revolution that began in the late 1960s helped India make a big dent in the food constraint. Second, the domestic savings constraint eased, perhaps helped by the spread of bank branches after nationalization. There were also the first signs of introspection on the nature of Indian economic policy in several official committee reports, though actual policy reforms were not yet on the horizon. The underrated budget speech by H M Patel in 1978, as finance minister of the short-lived Janata party government led by Morarji Desai, deserves more attention.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

To me, what is most interesting in this paragraph is what Niranjan doesn’t say in it. In my personal opinion, this decade is worth studying not for its datasets or its metrics, but for the weakening of India’s institutions. The Solow Model is a great way to think about the growth trajectories of nations, and what students often miss out in the Solow Model are the underlying assumptions. Well defined property rights, a strong and independent judiciary, free and well-functioning markets, and a legislature that doesn’t indulge in over-reach are crucial for reasonably rapid long-term growth, and I would argue that all of these were missing either in parts or wholly for much of the 1970’s.

Niranjan hints at part of this in the paragraph that precedes the one I have extracted above, but there is much more going on in that unfortunate decade. If you wish to learn more about this decade and the impact that it has had on our growth trajectory, come to the economic data and its analysis last. Begin with biographies of the more important public personalities of those times, read about landmark judgments passed in and around that decade, and speak to journalists and political scientists who were around back then, or have studied that era well. Once you get a sense of the politics and the culture (political, social) of that decade, then start upon the economic analysis. That would be good advice in general, I suppose, but it is particularly applicable to the 1970’s. Oh, and watch the movies that were being made back then!

There is far too much going on in this decade for us to speak meaningfully about it in a single blogpost, and I hope to come back and write/speak about this topic later. But for the moment, I wish to leave you with my own sense of utter regret and wistfulness regarding the 1970’s. There was some progress, of course, but there was, in my opinion, much that was wrong, and too little that was right.

Growth always matters, but it really and truly mattered back then, and we failed to optimize for it.

One Step Forward, Two Steps Back

AshishLeave a comment

Niranjan speaks about three things in his essay as regards the first two decades or so of India’s independent history:

  1. What did we seek to achieve? A more accurate framing of the question, arguably: what should we have sought to achieve, and how should we have gone about it?
  2. How did we do in terms of conventional macroeconomic metrics?
  3. What did the dissenters of the time have to say?

Let’s deal with each of these questions in turn.

  1. What did we seek to achieve?

The Indian economy had to create opportunities for people to move from farms to factories/offices, from villages to cities, from household enterprises to formal enterprises. Each shift would enable labour to move from low productivity to high productivity activities, thus boosting incomes.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

The reason I said that a more accurate question would have been “what should we have sought to achieve” is because it is not clear to me if economists, politicians and policymakers of that time would have agreed with Niranjan’s goals in the excerpt above.

As Niranjan himself mentions in his essay, MK Gandhi wouldn’t have agreed with this vision, preferring a version of India in which each village was a republic unto itself, and as self-sufficient as possible. But Gandhi’s wasn’t the only dissenting voice – we simply didn’t know then what was the most appropriate path to development, and lots of different folks had lots of different ideas. By the way, a good way to begin your exploration of what ideas were being discussed around and before Independence is by reading Towards Development Economics, a collection of essays edited by J. Krishnamurthy. Another excellent, and more recent source is Planning Democracy, by Nikhil Menon. There is a ton of material on this issue, of course, so please treat these recommendations as random starting points, and read as much about this period of India’s history as possible.

We sought to raise incomes as rapidly as possible, it is true, but there were many different opinions about how this should be done. Some of the ideas that we adopted then have been discarded over time, and not just by India. Others were eventually jettisoned, but this didn’t happen rapidly enough, in my opinion.

What were these ideas?

The elements of the classic Nehruvian growth strategy are well known: A focus on public sector investment rather than private sector investment, on capital and intermediate goods rather than consumer goods, and on the domestic market rather than foreign trade. There was more than just economics in play. The focus on building capacity in steel, machine tools and mining was an attempt to maintain strategic autonomy in the Cold War era—similar to why countries, including India, are today trying to build domestic capacity in semiconductors, electric batteries and telecom equipment, for example.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

Remember, economics at its heart isn’t as complicated as us economists make it out to be. “What are you optimizing for?”, for example, is a surprisingly powerful question, and reading the paragraph above reinforces my own answer to the question “what was India optimizing for back then?”.

India was optimizing for self-reliance in a socialist setting, and given these constraints, tried to raise incomes as rapidly as possible. India was not optimizing for growth, no matter the underlying ideology, and no matter the opportunity costs. India was prioritizing self-reliance and a socialist mindset, and so long as we didn’t deviate from this path, we tried to achieve as rapid a growth path as was possible.

We now know, given what took place in certain parts of Asia, that this was the wrong thing to optimize for. But that was the zeitgeist of those times, and this, unfortunately, was the path we adopted.

I have said it before, and I will say it again: “What are you optimizing for?” is an underrated question.

2. How did we do in terms of conventional macroeconomic metrics?

Economists have used statistical techniques to pinpoint 1950 as the first big structural break in India’s economic trajectory, with 1980 being the other. The economy accelerated after many decades of stagnant output. Economic growth averaged 4.2% a year between 1950 and 1965. Industrial output grew annually at 7.1%. The fact that industry grew faster than the rest of the economy meant that India began to reverse the deindustrialization that had begun in the last years of Mughal rule. Equally importantly, economist S Sivasubramonian showed in his monumental work on Indian economic growth in the 20th century that total factor productivity grew at 1.8% a year in the 15 years to 1965.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

Economic growth of 4.2% a year would imply a doubling every eighteen years or so. And while that is certainly nothing to sneeze at, another of my favorite questions to ask in economics seems appropriate right now: “relative to what?”

That is, what is the benchmark for deciding whether 4.3% is good enough or otherwise? Niranjan give us a potential candidate when he speaks about India’s first structural break in the year 1950. 4.3%, we understand, was certainly higher than the period preceding 1950, otherwise there wouldn’t be a statistical break to speak of. But two other benchmarks are possible.

  1. How did we grow relative to some of the other Asian economies of that time?
  2. What would have been the maximal rate of sustainable growth that other macroeconomic models would have afforded us?

The answer to the first question isn’t encouraging. And what we, as students of economics should take away from this is the fact that while India did well in the first two decades after her independence, she could (and should) have done better.

The answer to the second question is pure macroeconomic modeling, and can occupy the minds of the best and brightest economists for their entire careers. But long story short, the answer to this question is very much a function of ideology, assumptions and type of model developed. And for this reason, I would prefer to benchmark India’s performance against what came before 1950, or against her peers (howsoever defined), rather than the output of a model.

Bottomline: we did well, but could have done much better.

3. What did the dissenters of the time have to say?

One of the joys of being a social scientist is that there isn’t one definitive answer that everybody can agree upon. The is a deep richness in terms of complexity to human society. There is an inherent subjectivity that we bring to how we see the world in terms of what it looks like and why. And this guarantees that there will be different opinions about how to go about achieving whatever the aim.

There were two other powerful critiques of the Nehruvian development strategy. The Mumbai economists CN Vakil and PR Brahmananda argued that India should invest more in agriculture and the production of consumer goods — or what they called wage goods.
The famous dissent of economist BR Shenoy provided four red flags. First, the heavy dependence on deficit financing to build industrial capacity would lead to balance of payments pressures. Second, the focus on capital goods rather than wage goods for mass consumption would be inflationary, as people employed in new industries would get money incomes but nothing to spend them on. Third, high taxation to finance the plans would weigh on citizens. Fourth, increasing government control of the economy would eventually harm Indian democracy.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

Both arguments have turned out to be prescient. In fact, you could argue that the first of these arguments is really a subset of the second. But any student of the Indian economy should be familiar with the works of BR Shenoy, in my opinion one of India’ most underrated economists. If you can spare the time and have the inclination, read his dissenting note in full.

My point here is not just to explain how, in my opinion, we took some wrong decisions. We certainly did, but we would do well to remember that there were a lot of different opinions back then about how to help developing economies grow rapidly. It is easy, with the benefit of hindsight to look back and say this should have been done instead of that. But it is always easy to bet on the winning horse after the race is done!

My point instead is to make you, the reader, aware of some of the nuances of the excerpts that I have quoted here, and to leave you with a thought. How do we know what is best for India’s growth trajectory today? Whatever your own particular answer, how sure are you that it is indisputably the correct one? Might folks who disagree with you have an inconvenient iota of truth hiding in their arguments?

Argue more with folks who disagree with you, for these is no better way to learn!

The Long Reads on The Long Road To Breaking Free

AshishLeave a comment

Last week marked the 75th anniversary of our Independence. A lot of reflective essays were written to mark this special occasion, and some of them made for excellent reading.

But as a student of economics, I haven’t found anything better than a fantastic essay written by Niranjan Rajadhakshya in the Livemint. It makes for excellent reading, and there is enough material in there to keep students busy for years, let alone a semester. And I simply cannot do justice to the entire article in one blogpost.

So what we’re going to do is that we’re going to spend this entire week going through this article at our own leisure. I’ll give a broad overview today, and we’ll explore some of the finer nuances in the other four blogposts to come this week.

Let’s begin with the title itself. I don’t know if the choice of headline was intentional, and it is usually the case that the headline is not chosen by the author of the piece. But that being said, surely this is a nod to an excellent book written by Vijay Joshi? I, at any rate, interpret it as such, and strongly encourage you to read the book if you haven’t done so already.

Most essays would have begun with a nod, at the very least, to Pandit Nehru’s speech on Independence Day. It remains an excellent speech, and worth a re-read (or re-listen, if you so prefer). But Niranjan begins his essay with a quote from Sardar Patel instead, underlining the need for an economic regeneration in India’s case.

What might this entail? Niranjan highlights four major problems:

  1. Stagnation of economic output
  2. A chronically underfunded state
  3. A dire food situation
  4. A narrow industrial base centered around a few large cities

For each of these things to improve, Niranjan says, we needed a structural change in the way the Indian economy functions.

  1. People needed to move from farms to factories
  2. Almost consequentially (my interpretation, not Niranjan’s statement), we needed more urbanization
  3. And finally, we needed to move from household enterprises to formal enterprises

Why are these changes necessary in order to bring about a structural change in the Indian economy, and why is a structural change deemed necessary? These are excellent questions to ask if you are a student of economics. And the answer to these questions is a great way to begin your journey into the world of development economics.

But very simply put, here are the answers:

  1. Farms alone would not be able to generate the kind of surpluses necessary to raise the incomes of Indians, and certainly not as fast as was required.
  2. Try plotting per capita incomes for nations versus their rates of urbanization.
  3. Reflect on each of the figures in this paper (read the whole thing if you can, but please do look at all the figures)

Reflect on two paragraphs, which I will excerpt here without additional comment:

The famous dissent of economist BR Shenoy provided four red flags. First, the heavy dependence on deficit financing to build industrial capacity would lead to balance of payments pressures. Second, the focus on capital goods rather than wage goods for mass consumption would be inflationary, as people employed in new industries would get money incomes but nothing to spend them on. Third, high taxation to finance the plans would weigh on citizens. Fourth, increasing government control of the economy would eventually harm Indian democracy.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

In his landmark budget speech in July 1991, Manmohan Singh cogently argued that the balance of payments crisis was a symptom of a deeper malaise: macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, indiscriminate protection that had weakened the incentive to export, lack of domestic competition, a weak financial system that was not allocating capital efficiently, lack of access to the latest technology, and much more. The great achievement of 1991 was not each reform in isolation, but the rollout of a comprehensive reform programme where different parts complemented each other.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

Was it any surprise that the 1970’s were a lost decade? Was it any surprise that Amitabh Bachchan was an angry young man in the 1970’s? What if the budget of 1991 instead happened to be the budget of 1978 instead (or even earlier, now that we’re dreaming)?

To say nothing of the future! Niranjan ends his essay with four challenges that await us in the future:

  1. India needs to develop more, and develop more equitably at the same time? Is that possible, especially while remaining a political democracy?
  2. Jobs! Niranjan speaks of our inability to create quality jobs for the millions who are now leaving agriculture, but the problem is even more urgent, because not enough people are able to leave agriculture in the first place!
  3. What of energy? How are we looking to anticipate the problems that will inevitably crop up, and start thinking about how to deal with them?
  4. And Niranjan ends on what I interpret to be a quasi-pessimistic note by asking where we will find ourselves in 1947. The reason I find it to be a quasi-pessimistic ending is because if the answer to this question isn’t clear by now, that ought to worry all of us. It certainly worries me.

We’ll take a look at the first two decades, roughly speaking, of India post independence tomorrow, using this excellent column as a reference. See you tomorrow!

The meta-epistemology of the rate hike

AshishLeave a comment

Soon after I started blogging, Tyler Cowen joked, “You’re not really a blogger.” His point: Unlike most of the competition, I wasn’t reacting to the latest news or whatever’s hot. My goal as a blogger has always been to write think-pieces that stand the test of time.

https://www.econlib.org/a-fond-farewell-to-econlog/

I don’t know about standing the test of time where posts on EFE are concerned, but my approach to blogging is very similar: I prefer to not write about events immediately after they’ve occurred. This for a variety of reasons, not least of which is the fact that I’m lazy, and reading a lot of stuff at very short notice is something I would rather not do.

Another reason is that the very best pieces on any event usually take time to bubble up in my feed, and waiting therefore makes sense.

By the way, if you aren’t yet subscribed to Bryan Caplan’s new blog, please do!

But that being said, let’s talk about yesterday’s rate hike.

One of the pieces that I enjoyed writing last year was on the concept of meta-epistemology, after reading a post about it by Zeynep Tufekci.

I’m going to post a screenshot rather than an extract, because the formatting of the post helps:

https://econforeverybody.com/2021/02/05/zeynep-tufekci-on-metaepistomology/

Honest question: does this apply to the Reserve Bank of India as well?

Is it the case that the cost of downplaying inflation as a major problem now exceed the benefits of doing so? Have the incentives flipped for the RBI? If so, on what basis? Is there a sense, based on preliminary data, that inflation is a problem that can no longer be ignored?

And if so, how should we be interpreting not just the fact that rates have been raised, but the manner and the timing of the raise? In other words, are there two messages being sent out by the RBI: the message itself, and the implicit message encoded in the timing of the message?

And have (or will) the markets internalize this message, and if yes, what is to follow?

Learning about inflation, monetary policy, and the efficient market hypothesis via textbooks is less than half of the story. Take your view/model of how the world works to the world itself, and update your model as the years roll by.

Fun, exhilarating and occasionally nerve-wracking.

But it is the best way to learn.

The Vajpayee Moment in Telecom, IO and Porter’s Five Forces

AshishLeave a comment

Vijay Kelkar and Niranjan Rajadhakshya had on op-ed out in Livemint recently on the mess in the telecom sector, and their suggestions for (at least partially) resolving it:

It has been about a year since the Supreme Court instructed telecom companies to share not just their core telecom revenues with the government, but also to take into account promotional offers to consumers, income from the sale of assets, bad debts that were written off, and dealer commissions. The apex court has allowed the affected telecom companies to make a small upfront payment and then pay their excess AGR dues to the government in ten annual instalments, from fiscal year 2021-22 to 2030-31, in an attempt to ease their immediate burden, which has raised concerns about the financial stability of Bharti Airtel and Vodafone Idea. Analysts estimate that the extra annual payments by all telecom firms could be around ₹22,000 crore a year.

https://www.livemint.com/opinion/online-views/a-new-vajpayee-moment-for-the-troubled-indian-telecom-sector-11631123688457.html

Their suggestions for the resolution of this problem involve the issuance of zero-coupon bonds by the telecom companies, along with an option for the government to acquire a 10% equity stake. As always, please read the whole thing.

Now, this may work, this may not work. The more I try to read about this issue, the more pessimistic I get about a workable solution. But we’re not going to get into the issue of finding a “workable” solution today. We’re going to learn about how to think about this issue.

That is, what model/framework should we be using to assess a situation such as this? Kelkar and Rajadhakshya obviously have a model in mind, and they hint at it in this excerpt:

There are three broad policy concerns that need to be addressed in the context of the telecom sector: consumer welfare, competition and financial stability. Possible tariff hikes to generate extra revenues to meet AGR commitments will hurt consumer access. The inability to charge consumers more could mean that the three-player telecom market becomes a duopoly, through either a firm’s failure or acquisition. The banks that have lent to domestic telecom companies are also worried about their exposure in case AGR dues overwhelm the operating cash flows of these companies.

https://www.livemint.com/opinion/online-views/a-new-vajpayee-moment-for-the-troubled-indian-telecom-sector-11631123688457.html

So a solution is necessary, they say, because we need to have a stable telecom market that doesn’t hurt

a) the consumers,

b) the current players in this sector and

c) the financial sector that has exposure in terms of loans to the telecom sector

To this list I would add the following:

d) make sure the government doesn’t get a raw deal (and raw is a tricky, contentious and vague word to use here, but we’ll go with it for now)

e) make sure new entrants aren’t deterred from entering this space (if and when that will happen)

f) suppliers to the telecom sector shouldn’t be negatively impacted

In other words, any solution to the problem must be as fair as possible to all involved parties, shouldn’t change the status quo far too much in any direction, shouldn’t hinder the entry of new competition, and should give as fair a deal as possible to consumers.

Take a look at this diagram:

https://en.wikipedia.org/wiki/Porter%27s_five_forces_analysis#/media/File:Elements_of_Industry_Structure.svg (Credit: Denis Fadeev)

Students who are familiar with marketing theory are going to roll their eyes at this, but for the blissfully uninitiated, this is the famous Five Forces Analysis.

Porter’s Five Forces Framework is a method for analysing competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack thereof) of an industry in terms of its profitability.

https://en.wikipedia.org/wiki/Porter%27s_five_forces_analysis

Michael Porter’s Five Forces Framework can be traced back to the structure-conduct-performance paradigm, so in a sense, it really is an industrial organization framework:

In economics, industrial organization is a field that builds on the theory of the firm by examining the structure of (and, therefore, the boundaries between) firms and markets. Industrial organization adds real-world complications to the perfectly competitive model, complications such as transaction costs, limited information, and barriers to entry of new firms that may be associated with imperfect competition. It analyzes determinants of firm and market organization and behavior on a continuum between competition and monopoly, including from government actions.

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

The point is that if you are a student trying to think through this (or any other problem of a similar nature), you should have a model/framework in mind. “If I am going to recommend policy X”, you should be thinking to yourself, “how will that impact Jio? Airtel? Vi? How will that impact government revenues? What signals will I be sending to potential market entrants? Will consumers be better off, and if so, are we saying that they will be better off in the short run, or on a more sustainable basis?”

Now sure, the diagram doesn’t include government, but the Wikipedia article on the Five Forces does speak about it later, as does the excerpt above from the Wikipedia article on Industrial Organization. More importantly, this framework gives one the impression that we’re dealing with a static problem, with no considerations given for time.

I would urge you to think about time, always, as a student of economics. Whether it be the circular flow of income diagram, or the five forces diagram, remember that your actions will have repercussions on the industry in question not just today, but for some time to come.

So whether you’re the one coming up with a solution, or you’re the one evaluating somebody else’s solution, you should always be evaluating these solutions with some framework in your mind. And tweaking the Five Forces model to suit your requirements is a good place to start!

On The History of Public Health in India

AshishLeave a comment

The responses will keep you busy for days, if not weeks. This tweet, and the responses to it, are an excellent argument for why Twitter is such a valuable resource for all of us.

Vaccinations: Quantity and Pricing

Ashish1 Comment

I and Murali Neelakantan have a piece out today in Scroll about the economics of the vaccination programme that is due to start in May ’21. Feedback most welcome – in particular, points we may have missed. Please, I’d love to hear your thoughts.

But it isn’t enough to talk about how current policy isn’t the best way of going about it. You also need to be thinking about what is the best (or at the very least, the least bad) way of going about it.

So, well, ok, let’s assume for the moment that the states will cough up the amount, one way or the other. But which way (or the other)?

Here are some ideas:

His back of the envelope calculations peg the tab for West Bengal at Rs. 8000 crores (do read the thread for his assumptions). As he says, that’s 2.6% of the state’s budgeted expenditure, and given the large positive externalities spillovers, subsidization wouldn’t be a bad idea.1

You could do similar exercises for each state – but for the moment, let’s just assume that it’s around 2.5% of each state’s budgeted expenditure.2.

What might that do to state finances?

The covid-19 pandemic disrupted the finances of India’s states in the ongoing fiscal year. Expense needs grew and public debt swelled, while revenues shrank. While most states could return to pre-pandemic output levels next year, their fiscal indicators are likely to remain strained for much longer, projections by the 15th Finance Commission (15-FC) show.
States’ combined fiscal deficit is likely to have risen to 4.5% of their total gross state domestic product (GSDP) in 2020-21, from 2.5% in 2018-19, the panel said. The commission’s fiscal roadmap puts the figure at 3% by 2025-26. Debts by that year could still be 32.5% of the total GSDP, against 27.3% in FY20, the estimates show.

https://www.livemint.com/news/world/states-may-not-return-to-pre-covid-debt-levels-by-fy26-finance-comm-roadmap-11612765562078.html

The kicker? That article is from the 8th of February, 2021. Things have, um, changed since then. The “while most states could return to pre-pandemic output levels next year” bit, in particular, now looks a bit iffy.

Next, Arvind Chari ran the numbers, and he comes up with a number of INR 50,000 crores for free universal vaccination:

He also advocates direct monetizing of state government vaccination programs via the RBI:

Niranjan Rajadhakshya refers us to an article in which Maitreesh Ghatak and Tarun Jain recommend the issuance of public health bonds (not that this is from 2020):

Issuing bonds for 30 years’ duration matches the decades-long returns from investments in healthcare, and is about the time taken for a young child who benefits from health investments to become an active taxpaying adult. Very short-duration bonds mean that the repayment schedule will not match the boosts in tax revenue.

https://m.economictimes.com/news/economy/policy/view-state-governments-can-be-better-armed-financially-to-fight-covid-19-by-issuing-public-health-bonds/amp_articleshow/76202188.cms?__twitter_impression=true

And they thankfully answer the obvious question in the very next paragraph:

Arguably, GoI could raise the same money at lower cost and then transfer to states. But, recently, GoI held up disbursing states’ share of GST collections at precisely the point that states needed those funds the most. Market borrowing limits by states have been raised subject to administrative conditions, and GoI could possibly impose conditions for health funds as well. Finally, borrowing directly allows each state government to prioritise its unique healthcare expenditure needs.

https://m.economictimes.com/news/economy/policy/view-state-governments-can-be-better-armed-financially-to-fight-covid-19-by-issuing-public-health-bonds/amp_articleshow/76202188.cms?__twitter_impression=true

Note that the last sentence in the second excerpt doesn’t apply in today’s context.

What else could be done? I’ll try and update this post with articles as I read them – feel free to keep sharing them we go along.

  1. Truer, if anything, at the central level, but let’s not go there right now[↩]
  2. By the way, any GIPE student reading this: I have a fun project just waiting to be launched[↩]

Economic Policy Responses: What are India’s options?

AshishLeave a comment

V. Anantha Nageswaran and Gulzar Natarajan write in the Swarajyamag about what India’s policy responses can be. They advise erring on the side of too much, rather than too little:

…the nature of the crisis threatens to create economic, social and health distress among the low-income and poor households. This can have potentially adverse consequences for social and economic stability for many years to come.

Therefore, Indian policymakers have not much to lose by tearing up the conventional playbook. The risk-reward ratio is in favour of being bold rather than timid.

Even if they are not as effective or, worse, even if they backfire, history will not judge them harshly for trying harder and unconventionally to support the economy now.

Please go through the entire article carefully, it is worth your time.

Niranjan Rajadhakshya informs us about the history of quantity planning in India.

Just consider some of the key questions that are being asked right now. How many ventilators are available? Are there ample food stocks? Can more hospital beds be made available? How many masks be produced in the next few weeks? Can the production of testing kits be ramped up? It’s all about quantities, quantities, quantities.

P Sainath has some suggestions (they come towards the end of this article)

The very first thing that needs doing: preparing for emergency distribution of our close to 60 million tons of ‘surplus’ foodgrain stocks. And reaching out at once to the millions of migrant workers and other poor devastated by this crisis. Declare all presently shut community spaces (schools, colleges, community halls and buildings) to be shelters for stranded migrants and the homeless.

Shankkar Aiyar in The New Indian Express on the triage of relief, rescue and recovery.

And finally, Gautam Chikermane with 10 different suggestions, of which I find the last one to be currently dramatically under-rated:

Embed entrepreneurs and managers in crisis management. The corporate sector is not just about money or physical infrastructure. It is equally about infusing efficiency in projects, operations, crises management, innovation and entrepreneurship – that’s how they are trained, that’s what they do, that’s who they are. While hard money will flow easily, this expertise must not be held back by turf or administrative frictions. Patriotism doesn’t have a net worth and is not restricted to one sector (the government) alone. A start can be made by setting up a task force of technology entrepreneurs and big businesses that can support government initiatives with knowledge and insights.