Pranay Kotasthane on the defence budget

… which, of course, makes it self-recommending:

In Praise of Missing in Action, by Pranay Kotasthane and Raghu S. Jaitley

Some books are entertaining, and some books are erudite. Rarely do we get to read a book that is both.

Why do I write this blog? There are many reasons, but one of the most important one is that this is my attempt at making learning fun for everybody. And the most important factor behind me liking this book is just this – they make learning about public policy fun.

The subtitle of the book is “Why You Should Care About Public Policy”, but something that us academicians often forget is that supply does not, in the case of learning, create its own demand. You can write the most impressive (not to mention comprehensive) tome on public policy, but that’s no guarantee that people will read it. But with this book, the two authors have pulled off an amazing feat: not only will you most likely finish this book if you pick it up, but you will learn a lot from it. And more, you will be entertained for having done so.

Pranay and Raghu’s book is a delightful romp, but not through the subject of public policy, and the distinction matters. It is, instead, a romp through different aspects of life, to which the tools of public policy are applied. My biggest complaint with textbooks is that they teach you the subject, and include “boxes” in which you are allowed to think of the world outside the textbook. This book belongs to that all too rare (and therefore even more delightful) category of books that does the opposite. You are asked to only think of the world, and they attempt to make the world a more understandable place by supplying ways of thinking about it.

In order to do this, they divide the world into three different aspects: the state, the market and society. Or, to use their terminlogy: sarkaar, bazaar and samaaj. Think of the individual, and the individual’s life, as being impacted by her interactions with these three ‘pillars’ of society. How do these pillars impact her? How do these pillars interact with each other? What happens when the interactions between the individual and these pillars do not go along expected or ‘ideal’ lines? What are the potential remedies for these problems, and what are the costs of implementing these solutions? That is the focus of this book, and the answer to the subtitle of the book is, well, the book itself.

These three aspects – the state, the market and society – make up the three sections of this book. Each section is divided into bite-sized chapters, each dealing with a separate, specific issue. Three things bring each of these chapters to chirpy life – the breezy tone that they adopt, their obvious mastery over the concepts that they are explaining, and their obvious love of Bollywood. One chapter may be titled on the basis of a famous line from a Bollywood movie (Aap party hai ya broker, for example), while another may explain how to think about atmanirbharta by talking about Manoj Kumar and his movies.

But my favorite usage of this lovely party trick is when you encounter a line like this one: “The foundational premise of modern India is that the state is ontologically prior to society.” This is just the kind of line that is likely to make your eyes glaze over, no? Those of us who have struggled with weighty tomes on dreary afternoons in musty college libraries have learnt to resign ourselves to hours of tedium while tackling with what follows prose such as this. But this is what I meant when I wrote that first sentence of this post – they choose to explain what this sentence really means by asking you to think about Shakti, a movie starring Dlip Kumar and Amitabh Bachchan.

Even better, they first speak about Shakti, and then foist that sentence upon you. A little bit like putting healthy veggies in a chicken pizza one might make for the young ‘un at home, if you see what I mean.

The authors mention in the book that it isn’t ‘an economic reasoning textbook’, but I’d beg to disagree. It absolutely is an economic reasoning textbook, and of the very best kind. It tells you how to get the most out of life, and better, tells you how and why one is unlikely to succeed in getting the most out of life if one gets basic tenets of public policy wrong.

Think of this book as the public policy companion to a book like The Economic Naturalist, by Robert Frank. Look at the world, and ask how the world becomes a more understandable place for having learnt public policy.

As an economist, I particularly enjoyed the sections on sarkaar and samaaj. Not, I hasten to add, because the section on the bazaar is in any way inferior, of course. It is simply because I am somewhat more familiar with the material in that section. But that’s all the more reason to buy the book, especially as a student of economics – becaue this book makes you more familiar with how the state and society also influence economic outcomes. Within the economic sections, the sandalwood story and the airline pricing story are my personal favorites. But practically every chapter brings along a delightful little nugget of information that is surprising, or a delicious twist of phrase that will likely make you chuckle, or sly titles to some of the chapters that will elicit both raised eyebrows and raised tempers.

The one complaint I have with the book is that I find myself wishing for an index and a bibliography at the end of the book, both of which are missing. It is understandable, for more than one reason, but as a fundamentally lazy person who also hopes to use this book as a teaching aid, both of these things would have gone a very long way. An online resource, perhaps, if one is permitted to be a little greedy?

But that minor quibble apart, there is nothing that prevents me from heartily recommending this book to you. Younger people might miss some of the references (“Vinod Kambli? Who he?” I can hear ’em go already), and they may also not have seen more than half the movies that have been referenced in the book – but that actually brings me to my final point.

A great way to read this book together would be to start a film club, and watch the movie in question in each chapter, before reading that chapter. Before the next movie screening, have a discussion about both the movie and the chapter, and all of the many “that reminds me” that might emerge from said discussions. Rinse and repeat for twenty-eight glorious chapters, give or take. I hope students in colleges and universities take up this suggestion, and spend some time in learning about movies, life in India, the role of the state, the market and society in the our own day-to-day lives, and a whole host of books, reports and papers as well. A positive externality that will result as a consequence of this will be the fact that you will have acquired a degree of expertise in public policy.

But as the authors themselves (and that wise old sage Crime Master Gogo) tell you, aa hi gaye ho, to kuchh lekar jao.

In all seriousness though, please do make sure that you read this book, if you are in any way interested in India. Recommended wholeheartedly.

Econ Really and Truly For Everybody

I came across an excellent podcast on economics in Marathi recently. A friend had sent me the link about a month ago (and apologies, friend, because I promptly forgot all about it!), but in a happy coincidence, that same podcast linked to one of my posts, and it served as a useful reminder to check it out.

And it is excellent! Here is the post through which I was served the reminder, and here is a brief introduction to the blog itself:

And that also made me think about making it simpler for people at large. Economics and finance are English language topics, by default, due to their design and complexities around the world. But I wanted to bring some change to that by communicating in a regional Indian language, Marathi. That is the reason I have also created ‘econGully Marathi Podcast’. Here, I release three episodes a week and talk about different things happening around the world. Topics covered so far are broad in scope. From Srilanka’s economic crisis to LGBTQ economy and from the commodities market to climate change, the podcast tries to convey new developments and historical references affecting our lives directly or indirectly.

I want my career to be about helping more people learn about, and fall in love with, economics. But I’m chopping off my own legs, as it were, by writing only in English. All the more reason for me to admire the work that Swapnil is doing, and if you are familiar with the Marathi language, I strongly encourage you to subscribe to his podcast.

On a related note, do also subscribe to Puliyabaazi, a (mostly) Hindi podcast on matters related to public policy. And if you are familiar with Tamil, consider reading Alex Thomas’ excellent textbook on macroeconomics in the Tamil language.

It’s bad enough that people are turned off from learning economics because of badly written textbooks, bored professors and outdated syllabi. But the very thought that lack of accessible material in your mother tongue might be a stumbling block is an especially painful one. All the more reason to celebrate the work that people like Swapnil Karkare, Alex M. Thomas, Pranay Kotasthane and Saurabh Chandra are doing. And there must be many, many more, of course!

Speaking of the many more, a request: if you happen to know of work being done to help spread knowledge of economics (and related fields) in India’s many local languages, please do let me know.

On Muddling Through

Anticipating the Unintended is an excellent newsletter, and you should subscribe to it. This past Sunday, the authors came up with a lovely read on the Agnipath scheme. You may or may not agree with their analysis, but I would heavily recommend that you read it. There’s a lot that is important in it, but for today’s blogpost, I want to focus on this excerpt:

Considering the constraints, it is difficult to see what else the government could have done here. The need to reduce wage and pension costs to fund modernisation is real. And given the fiscally conservative instinct of this government, it won’t deficit fund the modernisation programme. As is its wont, it has chosen to put a bold announcement with emphasis on other benefits while trying to solve its key problems under cover. There’s this myth that a big bang approach to reform is the only model that works in India. That’s wrong. A lot of what has looked like big reforms in India have actually had a long runway that’s often invisible to people. A more comprehensive reading of the history of ‘91 reforms makes this clear.
So, the usual template has been followed so far: minimal consultation, no plans to test it out at a smaller scale and instant big bang implementation. The results are unsurprising.

Let’s figure out they key questions at play:

  1. What is the problem?: Wage and pension costs for the military spiraling out of control. You could argue that this is an old, inevitable problem made worse by the implementation of the OROP scheme, but for the moment, look past the cause and consider the effect. And the effect is that the Indian government spends over half of it’s budget on pension benefits (24%) and on wages (28%).
  2. What is the proposed solution?: That’s the Agnipath scheme in its entirety. I invite you, once again, to read the whole thing, but the first two to three paragraphs in the newsletter summarize the scheme very well, if you are not familiar with it yet.
  3. Why is this solution important?: Their takeaway is that the main focus of the Agnipath program is to reduce wage and pension costs, and that this is necessary. I agree on both counts – no matter what else is being said, and no matter what else Agnipath might achieve (a younger military, among other things) it’s main aim is to reduce wage and pension costs. And even a cursory glance at our government’s finances should make clear that this is necessary.
  4. The How: That’s what the rest of today’s blogpost is about! Here’s the thing: there is a problem, and it needs a solution. That (to me, at any rate) is clear. But is this (Agnipath) the best possible solution? And even if it is, is the current method of implementation the best way of going about it?

I don’t mean to get into a discussion of whether Agnipath is the best possible solution for this specific problem, nor do I mean to definitively answer the question of whether the method of implementation is optimal.

Instead, I hope to help you build a framework to start to think about the answer to these two questions (is this the best solution | is this the best way to implement said solution) in general. And then, if you like, you might want to use said framework to judge for yourself the Agnipath solution. I do exactly that in what follows: outline the principle, and apply it to the Agnipath case.

Minimal Consultation | No Plans to Test It Out | Instant Big Bang Implementation

Of the three things that RSJ and Pranay have highlighted in their excerpt , I plan to focus on the latter two in terms of the how question. The answer to the question about whether consultations were done or not, and whether they were minimal or not is essentially a grotesque Rorschach test, and I’ll skip it entirely. But the latter two – no plans to test it out, and instant big bang implementation – don’t just ring true, but are also truly important, especially if you are a student of public policy.

Let’s focus on the word “It” in the second phrase, “No Plans To Test It Out”. What does “it” mean, in this context? That’s simple, you might say – test the solution out.

And what’s the solution? Agnipath, you might answer a tad impatiently. Ah, but how do we know that this is the best possible solution? And here’s the simple answer to this question: you don’t know that this is the best possible solution, because as with everything else in life, the proof of the pudding is in the eating of it. Your models might tell you that this solution is the best one, but all models work well, if at all, only in theory. To mix an apt metaphor, no battle plan survives contact with the enemy.

In other words, Agnipath is one of many different solutions to this problem. Moving to something like the NPS might be one, a modified version of Agnipath might be another, curtailing expenditures in other areas might be a third (to those who know their public finances in an Indian context, no I don’t think so either, but play along for the moment). May be the final solution that will be implemented at scale will be a mix of all these and more, who knows – but the point is, there are many possible solutions, of which at least some are worth trying out in an experimental sense.

The process should be seen as experimental, and probably involve acting on multiple potential solution ideas at a time (instead of just one). It can also be accelerated to ensure the change process gains and keeps momentum (to more or less degree, depending on where one is in the change process and what
problems, causes or sub-causes are being addressed). Trying a number of small interventions in rapid “experiments” like this helps to assuage common risks in reform and policy processes, of either appearing too slow in responding to a problem or of leading a large and expensive capacity building failure. This is
because each step offers quick action that is relatively cheap and open to adjustment; and with multiple actions at any one time there is an enhanced prospect of early successes (commonly called “quick wins”).

Andrews, M., Pritchett, L., & Woolcock, M. (2017). Building state capability: Evidence, analysis, action (p. 288). Oxford University Press., pp 170

So begin small, and begin with many different potential solutions. See which of these work and which don’t – which need tiny modifications to be better, and which need major surgery. Which might be usefully combined with some other solution(s)? Iterate towards a solution set that works “best” – and then implement this solution set at scale. But never presume, and especially without on the ground small scale implementation, that a proposed solution is necessarily the best one.

Pritchett and Woodcock have an excellent diagram for helping us think through this:

Andrews, M., Pritchett, L., & Woolcock, M. (2017). Building state capability: Evidence, analysis, action (p. 288). Oxford University Press., pp 172

“A.” in this case is the status quo, and given that there are no overt protests about it, we can say that the status quo is administratively and politically possible. But it is, as we have discussed, not fiscally sustainable, and hence undesirable.

“D.” in this case is the Agnipath solution. Let’s assume that it is a technically correct solution, and let’s assume that it (or something very similar to it) has either solved a similar problem in other countries (empirically validated) or has solved this exact problem, but in a simulation (theoretically validated). But it is not, as we are observing, politically possible. Now, sure, you can talk about the political motivations of the organizers of the protests, you can (and you should!) condemn the use of arson and wanton violence, and you can bemoan the role of the media. But if you accept that there is at least an inconvenient iota of truth in the idea that some sections of society feel hard done by this decision (warranted or otherwise), then you do in effect accept that it is not altogether politically possible. Your assessment may well differ from mine (and that is fine) but hopefully only in magnitude and not in direction.

The point is that we are trying to move from “A” to “D” in one fell swoop. Not only is that not a good idea in public policy, but we don’t even know if Agnipath is “D”! The very definition of D (or Agnipath) has changed in the recent past, is changing as we speak, and is likely to further iterate in the days/weeks/months/years to come. Which is as it should be, of course – my point simply is that these iterations and experimentations should happen in the design stage, not the roll-out stage.

So the general principle is that iterating through potential solutions at restricted scales is better. Even better when you learn from these iterations, modify your solutions, and come up with a hybrid that stands a better chance of working at scale. This helps in building out buy-in for your proposed solution as well. Won’t work perfectly, because nothing ever does, but remember that in public policy utopia ain’t our aim, being better than the status quo is.

Also, if you’re wondering about the title of the blog post, it is a tribute of sorts to a paper that ‘started’ studies in this particular area. Look up that phrase and the the name “Charles Lindblom” to go down a very nice little rabbit hole.

Bottomline: Crossing the river by feeling the stones remains excellent advice.

Understanding Taiwan

A student recently got in touch asking about what he should read when it comes to understanding the current dynamics of Sino-Taiwanese relations.

This blog post is, in a sense, an answer to his question, but also a bookmark-worthy resource for me. And hopefully for you as well!

  • I’d recommend one beings by trying to understand Taiwan: it’s history, it’s society, it’s culture. And a good primer to begin with would be this blogpost by Tanner Greer.
    “The fact is that younger generations of Taiwanese, including the grandchildren of the waishengren have no memory of pre-communist China, have only distant relatives there, and have spent their entire lives living in freedom. This is an environment where the use of Taiwanese Hokkien is encouraged and Taiwanese nationalism has flourished. Thus very few people under 45 consider themselves Chinese.”
  • For additional reading, I heavily recommend this post by Noah Smith:
    “Taiwan has one of the most progressive societies, if not the most progressive, in Asia. It was the first Asian country to legalize gay marriage, and sports a vibrant gay culture. Taiwan ranks as one of the most gender-equal societies in the world, equivalent to Norway and higher than France on the commonly used GII scale. The President, Tsai Ing-Wen, is a woman, and women make up 42% of the legislature. The country has actively pushed for gender equality in business, and the gender pay gap, at 14% in 2018, is smaller than in the U.S.”
  • Taiwan is big on democracy (and if you read Greer’s post linked to above, you will begin to understand why), and Taiwan is a good way to start to learn more about digital democracy. A useful way to begin would be to learn more about Audrey Tang. Listen to these two podcasts as well in this regard: the first one is with Azeem Azhar, and the second with Tyler Cowen.
  • Now, a post written in 2022 has to be about Sino-Taiwanese relations, right? The Wikipedia article about Cross-Strait relations is a good place to begin, and you may want to read this Wikipedia article too. (And while you’re at it, this one too!)
  • And it also has to be about semi-conductors, and that one company in particular. Read this briefing from The Economist as well, along with this essay by Pranay Kotasthane. One thing I have realized is that I haven’t read books about the emergence of the semi-conductor industry in general, and about TSMC in particular. If you have any recommendations, please send them my way. Thank you.
  • And after all that, perhaps one can then delve deeper into the issue that my student really wanted to get at: present-day geopolitics and strategy. Edward Luttwak on Twitter is an excellent source of information, and this essay by him is good reading. Tyler Cowen’s essay in Bloomberg is also good reading in this regard. And in a slightly older essay, Greer thinks through the implications of America not doing so well in a all-but-inevitable conflict with China over Taiwan.
  • If you are an Indian reading this blogpost, and are curious about how to think about this conflict from an Indian viewpoint, here are articles you might want to start out with. Here’s Nitin Pai on the issue, here is Shyam Saran, and here is an interview with Pranay over on Scroll on related issues.
  • What else? Well, follow Constantino Xavier on Twitter, and also Hamsini Hariharan, Ananth Krishnan (who also has a Substack on Indo-Chinese relations) and Manoj Kewalramani (ditto). Also Vijay Gokhale! Here is Takshashila Institute’s page on Taiwan, try this search link on for size too.
  • Finally, try using game theory to think through the implications? Use this as a starting point, but have fun (well, as much fun as is possible given the topic!) coming up with outrageous theories, and thinking through the consequences in game theoretic terms.
    There must be a million other things I could have linked to but didn’t. I look forward to adding more, so don’t hesitate to send in links to help that student of mine. Thank you in advance!

Trying to Make Sense of Afghanistan

If you read the newspapers regularly, you’ll have noted that Afghanistan is in the news, again. I’d written two blog posts about Afghanistan last year, before the Covid madness started in right earnest.

Here’s the first of those, and here is the second. Here are other posts on EFE where Afghanistan has been mentioned.

Why are we talking about Afghanistan again? Because, well, plus ça change, plus c’est la même chose.

With the Resolute Support Mission (RSM) — a US-dominated support force — planning to complete the withdrawal process by September 11, another chapter in Afghanistan’s political journey is set to begin.

As always, read the whole thing, please. But the point that I take away, more than any other, is that the last twenty years has mostly been about the Taliban biding its time. And Afghans have been biding their time, in one way or another for a very long time now:

It has customs, and it has traditions, but it doesn’t have rules, and good luck trying to impose them. The British tried (thrice) as did the Russians and now the Americans, but Afghanistan has proven to be the better of all of them.

Splainer had a feature on this yesterday, and just in case you’re not subscribers, I’ll share here some of the links from their write-up about Afghanistan yesterday (and please do consider subscribing, it’s well worth the money!)

That last link, the paper from Carnegie, really is a very good read:

Lastly, John Lewis Gaddis’s warning about history—that it has a “habit of making bad prophets out of both those who make and those who chronicle it”—remains equally true in contemporary times. This paper is based on the premise that the United States will withdraw troops from Afghanistan at some point in the next two years and that the Taliban or parts of the movement, in some form or shape, will be politically represented in Kabul or, at the very least, be more involved than it is at present in Afghanistan’s democratic politics as the troop drawdown is completed. These are the foundational assumptions of our observations and analysis. Should they be wrong, we must be and are prepared to be called poor prophets.

Pretty good propheteering, if you ask me.1

Also, a quote that I liked enough to record in my notes separately:

Assessing risks is a risky business

But outside of all of those links, there is something else that I read today that I wanted to share with you today. This essay/article came out in the Times of India yesterday, and it is an absolute must read:

All such data help ask relevant questions, whose answers can mostly be found through the old-school forms of immersive reporting and fieldwork, neither of which happens much. There is no substitute for the insights one gains from spending time on the ground, talking to voters, to party workers, to local observers and journalists, listening to their woes and views.
This requires greater engagement than asking generic questions at tea stalls or speaking to party spokespersons. Ideally, data work and fieldwork should go hand in hand, as no ground investigation can provide the larger picture without the backing of empirical evidence. Instead of doing that, we move from one election to the next without paying attention to what happens between them.

Again, read the whole thing, but the reason I put this up here is because what Gilles Verniers is speaking about over here can also apply to Afghanistan. Replace the word “election” with “war”, and I argue that is mostly the same story.

Which brings me to my last link for the day:

In the tiny village of Pigish, inhabited by peaceful Shia Ismaili farmers, five busy water mills hum through the autumn harvest season. Just as in medieval Europe, each mill is taxed by the government, and each mill is family owned. Milling is a time-honored profession, passed down through bloodlines for decades, centuries. The farmers push their sacks of wheat to the mills in wheelbarrows. These barrows are often made of rough planks. The people of the Wakhan also construct their own mud-brick houses, hew their own poplar roof beams, stitch their own burlap donkey saddles, braid their own yak hair ropes, carve their own wooden shovels, and build their own stone aqueducts. These handmade surfaces of life make the Wakhan Corridor a pleasure to walk through. Lay your palms on the skin-polished grip of a willow ax handle: The body remembers.

It is one thing to read about the wars in Afghanistan, and the strategies, the geopolitics and all of that. But every now and then, it makes sense to also get a sense of the lives of the people of Afghanistan. Not just this article, please read the entire series of articles based on Afghanistan.

And then the rest of the series, of course. Paul Salopek does truly remarkable work, and no matter how anybody phrases it, that would still be an understatement.

  1. I plan to restrict myself to one bad pun every week. Or try to, at any rate.[]

The Via Negativas of Public Policy

I learnt of the phrase by reading Taleb:

[I]n practice it is the negative that’s used by the pros, those selected by evolution: chess grandmasters usually win by not losing; people become rich by not going bust (particularly when others do); religions are mostly about interdicts; the learning of life is about what to avoid.

And it is wonderful advice of course, always worth keeping in mind: sometimes the best way to learn is by cutting out the bad parts, rather than trying to add in new good ones. There is merit to both, of course – cutting out the bad and adding in the good. But maybe cutting out the bad ideas first is a, er, good idea?

Losing fat before adding muscle is one way to think about it.1

And so also with public policy! Pranay Kotasthane, co-author of Anticipating the Unintended, has a lovely video out on this topic:

Definitely worth a watch, and while I am tempted to list out the eight, I won’t – for at the margin, some of you might be tempted to not watch the video 🙂

But I’ll militate against the spirit of this post, and add one of my own to the list that you’re about to learn: time.

I think a student of public policy ought to avoid short-termism. Fancy pants speak that simply means don’t just think about the short term benefits, but also worry about the long term consequences.

Unfortunately (public policy is hard!) policies have a way of sticking around for long after they’ve outlived their usefulness, but that’s a story for another day.

For the moment, please watch the video 🙂

  1. I’m good at spouting theory, not so good at the practice![]

A Well Played Century

Congratulations to Pranay Kotasthane and RSJ on a well deserved century over at Anticipating the Unanticipated. It is one of the best newsletters out there on matters related to public policy, and I would strongly encourage you to subscribe, in case you haven’t already.

And to borrow a metaphor from cricket commentary, they brought up their century in style, with a fascinating piece about the Bombay Prohibition Act of 1949:

The notorious Bombay Prohibition Act of 1949 was passed when Desai was the state’s Home Minister. To enforce the ban, the government created elaborate compliance machinery, misdirecting the limited policing capacity towards apprehending tipplers instead of protecting victims of other crimes. By the time this act was watered down in 1964, more than four lakh people had been convicted under Prohibition!

The paragraph I excerpted this from begins by saying that the BPA is rather well known, but I must have missed the memo. 4 lakh people – convicted for alcohol consumption. Because, of course, that was the most pressing issue facing a newly independent India: alcohol consumption. Pah.

Please, I implore you, read the entire post to understand how markets work when faced with arbitrary supply constraints in the face of palpable demand. (And a note to Pranay and RSJ: I’m dying a little, because for me, the perfect title for the post would have been Sharaabi Aankhein Gulaabi Chehra)

The post goes on to speak about another piece of genius policy regarding the “sale and holding” of gold, and the impact it had on status within Indian society. I often joke in classes on introductory economics about how Bollywood filmmakers needed unemployment benefits because “ismugglers” as a tribe began to dwindle post liberalization.

Or put another way, there’s a reason the title had to be “Once Upon A Time in Mumbai“.

The post also refers to another excellent blog worth following, written by Nitin Pai, and shows this graphic:


I’d only add one thing here – the second last level (“Unscrupulous and corrupt people become role models because they are successful”) is actually an even bigger problem, because interventions such as bans (and others, to boot: read the whole post) also stop honest people from being successful.

Put another way, Deewar is a great movie, but also a problematic one, because the audience’s Walter Mitty moments were related to Vijay, not Ravi.

There is much more in the 100th post, including a rant on education which I wholeheartedly agree with, but we’ll leave that for another day. Once again, congratulations to Pranay and RSJ, and here’s to the double century: cheers!

Inflation: Oh ’tis problematic. Or is it?

A student messaged last week, asking some questions about inflation and its measurement in India. In particular, they wanted to know about food and its impact on inflation right now.

Well, outsourcing is always and everywhere a good idea, and Vivek Kaul had already answered the question at great length:

What this means is that, despite the end consumers of food paying a higher price, the farmers are largely not benefitting from this rise in food prices, given that they sell their produce at the wholesale level.
This difference can be because of a few reasons.

a) A collapse in supply chains has led to what is being sold at the wholesale level not reaching the consumers at the retail level, thus, leading to higher prices for the consumer.

b) This could also mean those running the supply chains hoarding stuff, in order to increase their profit.

Having said that, the former reason makes more sense given that stuff like vegetables, egg, fish and meat, etc., cannot really be hoarded. Also, hoarding stuff like pulses, needs a specialized storage environment which India largely lacks.

The entire article is worth reading (and so is subscribing to Vivek’s blog, so please do so!). And if you think 2020 isn’t depressing enough already, do read this article, also written by him. A short excerpt follows:

To conclude, the Indian economy will contract during the second half of the financial year. There is a slim chance of growth being flat for the period January to March 2021. Inflation, even though it might come down a little, is likely to remain high due to the spread of the covid pandemic. Hence, India will see conflation through 2020-21.

From a reading-the-tea-leaves perspective, it would seem the RBI actually isn’t that worried about inflation right now (and rightly so!). Here’s an excerpt from an excellent newsletter, Anticipating the Unanticipated that makes this point:

But the RBI wants to signal it is willing to live with inflation running above ‘comfortable’ level in the coming days. The MPC report last week claimed almost 80 per cent of the increase in inflation beyond the 4 per cent target can be attributed to supply chain disruptions and increase in fuel prices. This it believes is a short-term phenomenon and inflation will be in the 5 per cent range next year. This is underlined to give comfort to bond investors to buy government securities without the fear of a near-term interest rate hike to contain inflation. Further, the other step announced by RBI in extending the HTM (hold-to-maturity) limits by another year to March 2022 is to protect any bondholder from the volatility of prices and booking losses on account of it. The overall RBI signal is it doesn’t want the worry of rising inflation and a consequent rate increase to come in the way of growth. It’s focus now is on improving the transmission of rate cuts to the borrowers to stimulate growth.

… and here is Anantha Nageswaran making the same point, but by utilizing a different analysis:

This exercise generates the hypothesis that there is little or no intersection of the household inflation expectations formation and the monetary policy regime. Two, high inflation expectations peaked in September 2014. Similarly, the current high inflation expectations should peak as supply disruptions ease. So, in my view, RBI is betting correctly that the rate of inflation would ease and project policy on hold for the next few quarters. Three, inflation generation process should matter only to the extent that it affects medium-term output and employment generation. For now, other indicators suggest that it is not as disruptive as it was in 2011-13. Therefore, there is no need to turn it into a fetish. The new MPC and the central bank have done well and done good. They should be pleased.

And for the data nerds among you, here is the Inflation Expectations Survey of Households by the RBI (do keep in mind the point Ananta Nageswaran makes about trimmed means in his article). Note that currently at least, not too many people seem to be too worried about persistently high food inflation.

Side note: Jason Furman’s podcast with Tyler Cowen contained this interesting snippet:

FURMAN: GDP could be more meaningful if we measured it better. The inflation rate gets harder and harder to measure over time. So I think the one that probably has deteriorated in meaningfulness is the measure of inflation. Number one, we don’t measure it well, and number two, it’s low enough that it’s hard to get that excited about it.

COWEN: Is that a quality-of-goods problem? Or how we do chaining over time? Where are we going wrong in measuring inflation?

FURMAN: Just more and more of the economy is in areas that are harder to measure the quality of, healthcare being the most notorious.

I’ve said it before, and I’ll say it again: macro is hard.

Finally, here are past EFE articles on inflation.

What Next in Afghanistan? A Podcast This Sunday

As you know, Sundays are usually for videos. But I was unable to find a video that was as informative and thought provoking as this podcast about the recent deal.


Click here to listen to Anand Arni, Pranay Kotasthane and Aditya discuss what’s next in Afghanistan.