Tag Archives: India

The interesting story of the day is definitely a rapidly “collapsing” Rupee haunted by abnormally high volatility over the past month. I scare quote “collapse” because it’s a term that reflects the Western bias of this conversation. If you’re an American who has invested in emerging market funds hoping for real gains intended for domestic consumption that beat an index well, then, you’ve been screwed. As far as India is concerned the depreciation is  of less concern. Still, Raghuram Rajan has his job cut for him, and I’ve discussed the Indian Rupee in this context before. However, since Paul Krugman blegs to learn what he is missing, I’ll offer a few things that worry me at the moment.

Primarily, like any other developing country with rentier bureaucrats, fuel subsidies are important to India twofold. First as a stimulant for middle class growth that demands transportation and electricity (generators are big); second as a key ingredient to important fertilizers without which the Indian farming model would fail.

Fuel subsidies pose an interesting problem for a country that will meet 90% of its oil needs through imports. (I mistakenly noted that 90% of oil is currently imported. That said, the greater the difference between the current figure and the future one, the worse one unit of depreciation will be). Basically all growth in India’s most important market will be financed from imports henceforth. On the one hand, the decisive role government plays in the energy market almost guarantees that deficits will face an upward pressure, in a time when yields are already rising. The sensible solution would unfortunately involve curtailing the provision of a good necessary for political success.

More importantly, as energy becomes the dominant theme in Indian trade – as it undoubtedly will – India looses the primary benefit of depreciation: exports. When trade structure is such that the cost effect (price of imports) of depreciation trumps the quantity effect (quantity of imports) the beneficial nature of depreciation is removed entirely. Known as the Marshall-Lerner condition, a country technically faces this dilemma when the summed price elasticity of imports and exports falls below one.

Usually, since goods tend to be price inelastic in the short-run, devaluations are not always immediately successful but work over time. Not so for dollar-priced oil. As the value of oil is already buoyed by demand from emerging markets, each point of depreciation for the Rupee is that much worse for its balance and budget. Using data from the International Financial Statistics and Direction of Trade Statistics from the IMF, Yu Hsing estimates that India may not significantly meet the Marshall-Lerner condition. Since the paper might be gated for some of you, I’ll copy the relevant result:

As the US real income declines due to the global financial crisis, the trade balance for Japan, Korea, Malaysia, Pakistan, Singapore, or Thailand will deteriorate whereas the trade balance for Hong Kong or India may or may not deteriorate depending upon whether the relative CPI or PPI is used in deriving the real exchange rate.

India – to my surprise – weathered a depreciation better than some of the other countries studied, but a statistically significant success was predicated on the deflator of choice to determine real interest rates.

While I am not confident that India fails to meet the condition, rising oil prices and domestic demand guarantees the cost and quantity effects may be a little too close for comfort.

That, of course, only considers the total trade balance. As mentioned, government is unlikely to weather the necessary inflation well, especially if Raghuram Rajan decreases liquidity reserve ratios (as he has wanted to do for a while) which would light an upward pressure on already rising yields. The feedback loops formed from a rising deficit, stalling growth, and decreased demand for Rupee bonds will result in unfortunately high interest payments.

A tangential point concerns rentiers like Reliance – owner of the world’s largest refinery – which benefit from rapidly rising prices in an inelastic-demand environment. Its influence in government, along with political concerns will make handling these ridiculously useless subsidies hell for any Democratic government predicated on shaky coalitions.

India has a lot going for it. A falling Rupee hardly highlights any structural problem insofar as its own domestic economy is concerned (but brings to bear important questions about international monetary systems, a discussion for another day). I am largely with Paul Krugman that this is nothing to fret about – we are still talking about a country where people cry about 5% growth – but am only cautiously optimistic regarding the political ramifications from such rapid depreciation. Krugman is right in principle, and sometimes that is not enough.

Indian newspapers are pretty gloomy right now – inflation, laggard growth, and a falling Rupee don’t make for a great  diet. Before I tell you why to be optimistic, I should define my terms. Optimism could be a resurgence to double-digit growth rates. That seems unlikely without a robust recovery in China, America, and Japan. Optimism could be a rapidly falling poverty rate. But that’s a really low bar for poor countries in India’s convergence club. To many here, it could be about India’s relative position to China. But that’s boring. I’ll loosely define optimism as the confidence that a good number of pundits short on India today will be be seen as myopic in five years.

Many standard economic indicators – government surplus, growth, and balance of payment – flatlined or dropped during the crisis and its aftermath. However, these are cyclical trends that have little bearing on future growth. In contrast, China has done exceedingly well in all of the above. But India has, to use a technical term, kicked ass in one indicator: real credit depth.

According to the World Bank, domestic credit provided by the banking system has grown from just over 60% of GDP in 2007 to almost 75% today. For reference, Brazil has flatlined around 95% and China at 140%. India has a long way to go, but the domestic banking system’s resilience to financial crisis and inflation makes a strong case for its structural health. 

India’s relatively shallow credit markets means we have a long way to go, and that’s cause for celebration. Further, India’s credit position relative to Brazil is more a reflection of a gradual, rather than immediate, liberalization of the capital account. Deep and liquid credit markets dampen entrepreneurial barriers to entry and hence encourage competition and innovation. That India’s savings rate has remained steadily high throughout an increase in credit suggests a more efficient allocation thereof. This, a secular trend, is rather more important than a volatile growth rate.

The government has further demonstrated a commitment to price stability, contrary to popular belief. The reason is subtle – the time at which India started offering inflation-indexed bonds (IIBs). There are three main “clubs” of countries that issue such bonds. First, Latin American countries with runaway inflation found IIBs the only entry into long-run capital markets. Second, countries like Britain and Australia which issued IIBs in the 80s and 90s as deliberative action to signal creditworthiness. Finally, America, issued the TIPS only as recently as 1997 as a means to long-run investor welfare. 

People are quick to place India in the first category but, as late as April, the wholesale price index (WPI) had fallen below 5%, less than half its double-digit peak. It’s curious, then, if the government were concerned about the inflation risk premium, why it didn’t issue IIBs in the heyday of price instability. By anchoring expectations before the first auction, India is best approximated by the second group, signaling a willingness to control prices in the long-run.

Relative to other developing countries, India’s vibrant democracy will reinforce bond market confidence as a welfare state emerges. The biggest guarantee American bondholders have against default are its pensioners, and the electoral bloodbath that would result. Therefore, there’s both an economic and political incentive not to default. Most Indians don’t own much wealth, at least not linked to its bonds. However, once a formal savings-based welfare state emerges, India is in a far stronger position than countries like China, which have only an economic incentive to avoid default.

Obstacles to this in the near-term include a deeply underbanked country, but that serves as reason for confidence not pessimism. With emerging electronic money transfer technologies, the financially-excluded are becoming more a low-hanging fruit than a pariah of the country. (This is a big bet, but in the long-run its one I’m more than willing to make. If a majority of the country remains excluded by 2020, call me out). 

Despite political instability in this government, it is likely that in the medium-run India will liberalize retail and finance to a much greater extent. The benefits of retail freedom are immense, as we know from Japan, mostly via indirect “knockback” effects. Larger and scaled firms like Walmart will invest in a deeper supply-chain providing India the cold-chain system which it desperately needs. Furthermore, competitive retail markets demand efficient input markets, thereby “percolating” efficiency through the system. 

Financial liberalization is trickier – even ardent free market economists like Jagdish Bhagwati note that capital accounts are precarious (they learn from 1997, and Indian resilience therein). Most importantly, a clearer statutory central bank independence is necessary. By many stalwarts (including India’s chief economic adviser, Raghuram Rajan), the Reserve Bank of India (RBI) is seen complicit in runaway deficits, by keeping capital reserve requirements high and thereby creating a captive demand for debt.

Recent success in taming inflation convinces me that smarter independence is on the horizon. It’s not unreasonable to expect that India will end preferential lending schemes, thereby capitalizing on the deepest benefits of a liberal economy, which are indeed self-reinforcing. 

Ultimately, a 4.5% growth rate is pretty shabby, and for many the outlook seems bleak. In five years, I imagine (and hope) that all the BRIC bears will wrong. But there’s cause for reason that India’s will be wrongest of all. 


If you’re taught microeconomics in India, teachers will offer bargaining for an auto-rickshaw or buying tea at a chai kadai, as examples of price discrimination. Dress well or hail from a wealthy area, and auto-wallahs are bound to charge you more. All of this may be true, but I have another suggestion that is particularly relevant to cash-intensive economies across Asia. I’m writing this post because I suspect it has rather deep welfare effects.

Chennaiites (who are not blessed with meter-using autos) employ handy heuristics to anchor a negotiation. Maybe “10 rupees a kilometer”. In Bangalore at night it might be “meter plus 50”. Such guesses and tactics – though ephemeral with punishing inflation – underpin many of India’s informal transactions.

But a cash economy lends itself to a price discrimination that requires no thought or design. The market rate for a ride from Adyar to T. Nagar might be 36 rupees. A good number of passengers will have exactly this in cash. It is less likely, though, that wealthier Indians will have anything smaller than a Rs. 50 note. The autowallah will generally have “no change” and hence reap Rs. 14 in supernormal profit.

Similarly, I find myself in a pickle purchasing a Rs. 6 chai with the relatively large notes in my pocket. If I’m lucky, I can pay Rs. 50, and receive four ten Rupee notes in change, loosing Rs. 4 in surplus.

Another mechanism is at play. This post from Tyler Cowen suggests that in a salary negotiation, people who are able to offer precise prices (like $57,500) implicitly convey a deep knowledge of that labor market, increasing their bargaining power. If I carry only larger notes (certainly no paisa coins!), I’m limited in offering only round prices which conveys both a) a possible lack of market knowledge, which would be true and b) a lack of small bills, suggesting a higher reservation price.

Auto-rickshaws, chai kadais, and other informal venues of commerce are still widely used by middle and upper class Indians. The market equilibrium for imperfect conditions would hence otherwise exclude poorer customers (that is the price exceeds marginal cost) In India, it’s also rather difficult (even for an experienced salesman) to estimate reservation prices based solely on one’s clothes and phone. Of course, if you flaunt an iPhone, all hope may be lost, but for the interquartile range of consumers, it is far more difficult.

To this end, the granularity of denomination one carries probably plays a large role in redistribution of welfare. This has broad consequences. The Rs. 14 a driver gains because I carry nothing smaller than a 50 Rupee note is a very significant chunk of his disposable income. Furthermore, government regulation, occupational licensing, and corruption make many such informal venues of commerce monopolistic in nature.

To the extent that these are imperfect markets, frictions from a cash-intensive economy might just approximate socially optimal conditions.

India’s fiscal books need reworking, and it faces longer run structural problems. But the usually excellent Ideas for India published a rather hackneyed proposal for “reforms”. Indeed, a sick patient cannot both suffer from obesity and anorexia, as Sarah Chen might have you believe.

Here’s a synopsis of India’s economy:

▪   5% GDP growth rate down from a double-digit peak.

▪   About a 9% trade deficit, up from 5% in 2006.

▪   Headline inflation just over 7% after hitting the double-digit range recently.

Chen thinks India’s balance of payments is at risk, but also worries that government deficits are crowding out spending, increasing inflation, and decreasing inflation:

Although India’s high fiscal deficit constitutes a key vulnerability, there is no immediate financing problem since it is funded primarily by domestic banks and other non-financial institutions like pension/ insurance funds. However, the high deficit does dampen investment activity as it reduces the availability of credit for private firms. Fiscal consolidation is therefore a pre-requisite for an upturn in the credit cycle.   

The widening current account deficit (CAD) also remains a major source of concern. 

Here’s an accounting identity:

private financial savings + public financial savings + foreign financial savings = 0.

This means in a closed economy, if the government is running deficits, the private sector is ipso facto deleveraged. By extension, growing trade deficit can take the edge of government spending. As Matthew Klein notes:

Similarly, one person’s borrowing is another’s lending. The takeaway is that the private sector as a whole can’t switch from borrowing and spending to repaying debt and saving unless some other entities (foreigners and the government) step in.

The contraction of the current account deficit since 2006 has been helpful in this regard, but insufficient. That’s why the federal government had to run very large budget deficits. These deficits helped the private sector in two ways. First, by spending more than it took in through taxes, the government added to the private sector’s total income, making it easier for people to repay debts and save more. 

Here is Chen (effectively) saying the same thing:

A widening CAD could potentially lead to pressures on the country’s BOP and the currency. Although India’s CAD has been offset by capital account surpluses, nearly three-quarters of the deficit for the past four years was estimated to be funded by more volatile sources of capital, including commercial loans, trade credit and portfolio equity and debt inflows (Figure 5). Considering India’s high CAD, the risk of slowdown in capital inflows will exacerbate the funding risks and currency depreciation pressures. 

First, there’s nothing “has been” about current account deficits being “offset” by capital inflow. This is a tautological rule. It will never not be the case. And, as italicized, it is clear that government deficits are not necessarily crowding out private credit. This isn’t economics, it’s accounting. And no one should be surprised that it’s the case. She continues:

India’s rising CAD raises serious questions about its sustainability, particularly against the backdrop of volatile global conditions and volatile capital flows. 

This again ignores the necessary relationship between capital and current accounts. Global capital conditions are a) not all that volatile, but b) will be “offset” by changes in trade balance. In fact, it’s not even a bad thing that India runs a capital surplus. As the Americans know, it’s a great way to import capital and hence finance much-needed development. But it’s also something simpler. More consumption: something India desperately needs.

And someone has to wonder what this means:

The government has announced a fiscal consolidation path to reduce the fiscal deficit to 3% of GDP by FY 2016-2017 but the details of how it will achieve this are unclear. India’s fiscal deficit remains one of the highest in the region and this limits its ability to use counter-cyclical policy to attenuate the growth slowdown. 

So when international demand crashed collapsing India’s export market, the government stimulated the economy – a “counter-cyclical policy to attenuate the growth slowdown” – and, because it did this, it’s limited in its ability to do it again? Kind of like how I used to skip school when I had a bad headache but, because I skipped school, I was limited in my ability to skip school next time I had a headache. India was apparently too slow in withdrawing its stimulus:

While the approach of stimulating domestic demand via fiscal expansion in 2008 put India’s economy back on track after the global financial crisis, the inertia in withdrawing stimulus had subsequently led to a spike in inflation that prompted monetary policy tightening10, and dampened aggregate demand.

But if India had crushed public deficits too quickly, aggregate demand would remain “dampened”, this time because of fiscal and not monetary policy. It’s a tradeoff between fiscal and monetary policy. The NREGA program is blessed with many problems, but to the extent targeted redistribution is what India wants, fiscal policy can be more effective.

Note none of this is to suggest India should continue to run large fiscal deficits or that inflation isn’t a problem. It’s just when economists note a bunch of truisms as if its something out of the ordinary, it is important to ignore the noise, which is what most of her article is.

P.S. For what it’s worth, India is the only “BRICS” nation in the top 10 of the new Business Profitability Index by Daniel Altman. Me and Altman will both bet on stable net capital flow into India over the next few years. That means a current account deficit. Gasp!

Neil Irwin ponders the long-run effects of financial liberalization in China. Now that China is the primary trade partner with more countries than America, wonks can’t help but wonder the Renminbi’s role in tomorrow’s economy:

The answer has all kinds of consequences: From a U.S. perspective, that includes the question of whether the dollar will remain the bedrock of the world financial center in the decades ahead, or if the renminbi will become a rival for global trade, particularly within Asia.

China reminds us that liberal democracy is no necessary condition for a free market economy. But the financial system is different. In the long-run there are few things more important for deep and liquid bond markets than a free, voting people with strong Constitutional limits on arbitrary power. It’s also important to note that changes in the preferred reserve usually emerge after currency crises. Further, the geopolitics of oil will play a critical role in the Dollar’s future. China’s unwillingness to accept responsibility today will undermine its market position tomorrow.

Let’s consider the two primary risks entailed by coupons; full default or inflation. The Americans, and British before them, can credibly promise not to cheat creditors. Default or debasement is moderated by a democratic electorate that will throw officials out at any hint of default. America’s commitment to liberal democracy is what kept markets calm during the 2011 and 2013 debt ceiling debacle.

This is easily explained by simple public choice or game theory. Rapid devaluation as a means towards greater export-led growth and hence short-run prosperity is a subgame perfect strategy for Chinese leaders. They will be rewarded lavishly by the business community, as they have been for the past decade. America can never credibly threaten to inflation or default because the the majority of debt is owned by voting citizens and pensioners. Further, a strongly independent Federal Reserve is a powerful drag on inflationary politics.

International markets have no faith in the democratic accountability of the National People’s Congress or the independence of the People’s Bank of China. But there are other important reasons involving our friends in the Middle East. For all the sins of America’s adventurous foreign policy, the quid pro quo relationship with major oil exporting countries adds an important dimension to the Dollar’s mandate. Indeed, certain dictators failed to move oil to a “Euro standard” and China’s restrained Middle Eastern diplomacy will earn it no favors.

Even a grand scale increase in China’s trade cannot improve the Renminbi’s position. Here’s why:

  1. Financial liberalization will if anything decrease net exports and hence demand for the Renminbi.
  2. Deepening Chinese exchange markets will allow traders to hold Dollars and exchange as and when needed.
  3. Today, countries with a bad fiscal position borrow in Dollars (the “original sin”) to benefit from lower rates, as inflation risk is negated. There is no chance that the Renminbi will ever play this role.

Shadows Can’t Hide Forever

The not-so-secret truth is China’s shadow banking system is a known unknown unknown. We know it could be dangerous, but we have no idea how dangerous it might be and how rapt China’s economy is thereof. Institutions are, clearly, more important than trade. Consider the Swiss Franc, a currency of outsized importance relative to trade. But international confidence in the highly stable Swiss banking institutions (did I just say that?) keep it alive.

I might even venture to guess that holding Renminbi will become less important as it liquifies. China’s exports are, no doubt, crucial. If I know I can immediately trade on the exchange market as and when needed, it’s not nearly as important I keep it as Reserve.

There’s also a Keynesian Beauty Contest at play. Confidence in America is, in no small extent, aided by confidence in America. Therefore, as I noted, it is unlikely any tectonic shifts on the international finance arena will take place without a massive currency crisis.

India’s Chance

To the extent we discuss vast improbabilities – like a successor to the United States Dollar – it’s worth noting the Indian Rupee is more likely an eventual reserve than the Renminbi. Firmly rooted democratic institutions will build faith in the Rupee. Conditionally:

  1. Indian debt will have to be equitably held and, hence, Indians in general will need to become far richer.
  2. India will need to handle supply-side issues of financial liberalization and inflation.
  3. India will need to become a main trading partner across Asia.

Given its size and commitment to fantastic economic leadership (Kaushik Basu… Raghuram Rajan…) it is not impossible that this will happen before I die. If it does, remember I said this before it went mainstream.

That South India is more developed than the Hindi-speaking North is a common refrain. Literacy rates and per capita income generally bear this out. Indeed, we worry of the barren villages in Bihar, not fertile landscapes across Tamil Nadu. As per the Human Development Indices across India, the South is just over 25% ahead of the All-India average.

And yet, the story is false. Or so is my conclusion after running into a few “Data Stories” of India (looks like Tyler Cowen is interested, too). While the maps give breathtaking life to the real depth of poverty across India, there are fairly rigorous analytics to vindicate my point. While the commonly-used GINI measure of inequality is very intuitive, it’s handcuffed by its inability to decompose the inequality with certain subgroups. A more appropriate measure is the Theil Index, which I talk about in a recent blog post:

The math behind the measure (between 0 and 1) requires a fair understanding of information theory but the idea is lower index implies a higher economic “entropy”.

Your physics teacher might tell you that this is a bad thing but, economically, it’s a little more complex. As Boltzmann showed, entropy increases as predictability of an event decreases. This means the entropy of a fair coin is higher than a biased one. Similarly, in a very equal economy it is very difficult to distinguish between two earners based only on their income. Indeed in a perfectly equal society this is impossible. However, as society stratifies itself, knowledge of ones income conveys far more information (redundancy), thereby decreasing entropy.

Within a system, Theil makes it easy for econometricians to understand the amount of total inequality due to within-group inequality and across-group inequality. If this is a little hard to grasp, think about it this way. If the total differences in economic output remained constant between countries (that is, India is still poor and Norway rich) but income was equally distributed within each country the residual inequality would be the “across-country” inequality. The residual from the converse, where all countries remain as unequal as they were, but world economic output is distributed equally to countries (not people), represents the “within-country” inequality.

And the same reasoning can be scaled-down to consider inequality within and across Indian states. And this is just what a few researchers from the University of Texas did. Before we discuss this, it’s worth considering what high” decomposed, across-state inequality is. A good benchmark is definitely America. While the Northeast and California are generally considered to be richer than the rest, the real turmoil of inequality – at least the public’s eye – is definitely between individuals and not states. Further, the economic relationship between various American regions has been highly volatile, with some sign that growth is picking up most rapidly (in no small part due to extractive oil and gas industries) across “middle America”. Here is a decomposed map of inequality in the United States:


A few accounting points notes here – while the overall measure can never be negative (greyish or black, in the above figure) individual agents can. A below-zero value here indicates that the given county is actually decreasing overall inequality of the country as a whole. The signal, here, is that American states are, broadly, equal. The real inequality stems from the difference between the rich and poor in Manhattan, not between the New Yorker and Iowan.

So back to Galbraith, Chowdhury, and Shrivastava at Texas, we find that across-State inequality in India is pretty low:


The dynamics of this graph are fascinating. For one, the purple line (within state inequality) is far more cyclical with overall inequality than the green line (between state inequality). While both do a fair job signalling inflections, the former represents approximately 90% of the change. Indeed, the contribution of between state inequality has been in relative decline since the 1980s.

While this chart is too fuzzy to derive any grand conclusions, it’s interesting that the correlation across between state and within state inequalities diminished significantly since the piecemeal reforms of the 1980s. While data isn’t available as far back as the ’50s, I suspect liberalization shifted the onus from the state onto the individual. Further, central bureaucrats weren’t able to throttle State growth in the same uneven manner as the years of Fabian regulation.

Of course, this is just mere conjecture. Here’s a graph from the Data Stories:


It’s surprising how relatively rich Bangalore (the blue oasis straight up from the Southern tip) is. Generally, though, almost all of India is as deprived of all the assets indicated above. Now, some might say this isn’t a good depiction of wealth inequality across India because most of the inequality doesn’t stem from the upper-middle class that owns said assets, but among the poor. However, it’s important noting that in terms of total assets, the 5% that owns these assets controls most of Indian wealth. Division of what’s leftover barely moves overall inequality.

On the other hand, in terms of overall standard of living, the South might actually be significantly better:


The big exception is that a good chunk of the North does as well if not better than the South. The cow-belt of India (it’s heartland) does remarkably badly. While this is commonly parsed as the relative wealth of the South, I think it’s the far more equitable distribution of the little that’s leftover after the 5% have taken their share. The above graph depicts what we may call the “poorest of the poor”. To that end, let’s reference this image against the Theil contributions of various states to overall inequality, again from Galbraith et al.:


It should not be hard to see that there’s a fair overlap between the states listed on here (various incarnations of Maharashtra, West Bengal, Bihar, Madhya Pradesh, and Orissa) are the darkest on the map.

This has some important implications for policy making across India. Indians all over (especially in the anxious time before an election) hear of the Gujarat or Bihar “growth models”. Panagariya and Bhagwati in India’s Tryst with Destiny (which I critically review, here) talk about the importance of pro-growth policies. They fairly argue that redistribution alone cannot better the lives of India’s poor.

And while on a national stage this is definitely true, the data above clearly show that the more habitable states (in the economic sense) are not so because of rapid growth rates, but a more equitable distribution of income between the poor and the not-so-poor-but-not-rich. There are a few future research projects, in America, India, and the world that would be very interesting. The Theil Index is, econometrically, a far more robust measure capable of fantastic insight. It would be fascinating to see a study that decomposes a country not into States, but income percentiles to gauge the extent to which each contributes to overall inequality.

I’m guessing, within the United States, there has been an overwhelming shift in the past thirty years away from general inequality to that between the top 5%. In some sense, policy should be targeted to curing not just inequality, but also inequality of inequality.


…So is the name of Jagdish Bhagwati and Arvind Panagariya’s book, subtitled Debunking myths that undermine progress and addressing new challenges. While it lives up to its subtitle well, this forceful argument for trade liberalization fails to match the watershed after which it is named, Jawaharlal Nehru’s famed speech. In many ways, Bhagwati and Panagariya deliver a nicely edited review of literature on India’s growth since its reforms. Even as someone fairly well-read on India’s economic history, the sheer collection of empirics in Bhagwati and Panagariya’s arsenal is baffling – enough to give serious pause to anyone skeptical of free trade.

What Bhagwati et al. deliver in evidence and reason, they lack in insight (the true measure of their fantastic scholarship can be found in the plethora of self-citations riddled throughout the book – while the rest of this review may be critical, I don’t kid, their work is rich and informative). There are precious few comments on the underlying idea of India, and its tryst with destiny. While the thorough treatment of liberalization and its positive effects is much needed in our political discourse, perhaps the American version has a more apt, and humble, title: Why Growth Matters.

The method in which Bhagwati et al. focus their argument also leaves much to be desired. Presumably to magnify the import of their claim, the text is saturated with a vast embellishment of what the Left actually believes. Further, Bhagwati et al. fall prey to the stereotypical liberals (in the Indian sense) who chant growth is good, with little appreciation for nuances or caveats. For example this book has not a mention of hugely depleted aquifers in North India, the condition of our rivers, and that of our skies.

Indeed, when in their favor, Bhagwati et al. readily accept that there are subtleties to every question:

Then again, the causes of suicides are many. This is so even in the case of farmer suicides. It is, therefore, unlikely that a single cause like BT seeds would emerge as the main factor.

I agree completely though, am left wondering, why the same doubt cannot apply to a hugely more complex phenomenon, India’s growth itself. But perhaps the most striking flaw in the book is the devious representation Bhagwati et al. make of economists on the Left. The reader is made to believe that Brad DeLong and Dani Rodrik were somehow content with the level of liberalization before 1991. They, further, claim that DeLong and Rodrik believed that the most important reforms happened during Rajiv Gandhi’s tenure:

Unfortunately, both the statistical assertion by DeLong about allegedly robust pre-1991 growth and its explanation by Rodrik are wrong.

However, in a 2001 paper, here is what DeLong has this to say:

What comes next for India? The governments that followed the Rao government–first the United Front and now the BJP-led coalition–have continued reform and liberalization, albeit not as rapidly as one might have hoped given the pace of economic reform in the first half of the 1990s. But the amount that is still left to be done is staggering. 

Whether Indian real economic growth continues at the rapid pace of the past decade even if reform slows down and government budget deficits continue will tell us much about the resiliency of the growth process.

If Indian real economic growth does continue to be rapid even in the face of erratic public-sector performance, that will suggest to us that the most important factors were those that changed in India in the 1980s. (Emphasis added)

DeLong clearly admits that India is a far cry from a liberal democracy. It’s interesting that Bhagwati et al. paint DeLong’s conditional, predicated on continued successful growth without further reform, as an assertion. Indeed, it is unfair to the reader who does not check the full extent and qualification of DeLong’s opinion.

There is another oddity in criticizing Rodrik and DeLong’s purported belief that the sea-change in liberalization happened during the 1980s, in no small part because Bhagwati et al. make this argument themselves. There are numerous instances in which the authors respond to “critics” that don’t believe growth in the past two decades can be attributed to liberalization, because of high growth rates during the second Gandhi’s tenure as prime minister. Their (correct) reply to this (false) claim is that reform had started silently in the ’80s itself, and the Narasimha Rao policies only deepened the change.

This sort of exaggeration is common throughout the book. For example, the authors claim that:

A common refrain of the left-wing critics is that the post-1991 ‘neo-liberal’ reforms have led to an exponential increase in corruption.

They cite, for this claim, an article from New Age Weekly – the loud-horn of India’s Communist Party. To ascribe a “common refrain” to “left-wing” critics from the most ideologically radical publication in the country is edging on absurd. There are very good reasons to distrust anything and everything Vandana Shiva has to say. There are very good reasons to be skeptical of anti-BT cotton activists. There is very little reason to equate all left-wing thinkers in this category.

A similar vein of disingenuous argument is littered throughout the book. The most striking example to this effect is a graph following the authors’ cliam that:

The difference is so huge between the measured farmer and non-farmer suicide rates that one may question the validity of the data.

Right beneath this claim is a figure depicting the vast difference in the total suicides among farmers and the total population. This would, of course, be expected noting that India is, well, not an entirely agrarian nation. Unfortunately, the placement of this graph would trick a reader merely skimming the book for ideas (as I initially did) – removing credence from their greater point that there is no connection between liberalization and agricultural suicide.

By quibbles with the rest of this book rest on dispute not with the method of their argument, but the argument itself. I am a firm believer in liberal trade policy and, as I’ve mentioned, I believe Bhagwati and Panagariya have done a great service in conveying the sheer absurdity of the argument against. We disagree in large part, however, regarding the role Indian government has to play in its growth. The authors’ divide India’s economic future among tandem tracks:

Track 1: Reforms aimed at accelerating and sustaining growth while making it even more inclusive.

Track 2: Reforms to make redistributive programs more effective as their scope widens.

From the way in which the authors interpret the above goals, Track 1 (labor market reform, land acquisition, infrastructure, and higher education) and Track 2 (direct transfers, public work provision, guaranteed employment, healthcare, nutrition, and elementary education) represent supply-side versus demand-side policies, respectively.

There is a clear, (expected), and understandable preference given to the former. However, the evidence and assumptions of their argument do not hold ground. For one, they believe that any real growth implicitly requires formalization of India’s workforce:

There are many indicators of the inefficiencies that constrict growth. For instance, according to a 2007 Government of India report, the high-productivity formal sector […] employed just 13.7 percent of the workers in 2004. Besides, employees who are in the formal sector are not just small in number but have hardly been growing.

For someone not familiar with the Indian context, let me explain what “formal” and “informal” entail. When I go to a mini-Walmart like grocery shop (think Nilgiris, Reliance Fresh, or Spencer’s), I’m confronted with “formal” workers with absolutely no idea how to use the fancy cash registers at their disposal. It’s not uncommon to wait 5-10 minutes for a simple checkout because of how unbelievably incompetent these workers are.

On the other hand, “informal” includes the roadside bookshop or chai-kadai – where one man is serving about ten people at once, with remarkable quality and efficiency. It includes bookkeepers who make the idiots at formal stores look like a joke – for they can manually search the stacks of novels at their disposal in a tenth of the time it takes a so-called “high-productivity” formal worker to access his computer and direct me to the necessary book.

That Bhagwati et al. so casually assume that the formal sector is superior is just, simply, false. As far as services are concerned, this is evident to anyone who’s spent much time in India. I’m no maudlin sob-story who yearns for the “good old days” or the way “things used to be”. I’m all for technology, liberalization, and modernity – but the evidence that formality somehow aids growth (as far as services are concerned) has yet to be demonstrated. And, if you don’t believe me, I invite you to deal with the useless nuts at your local Spencer’s as opposed to the vegetable cart next door.

In their criticism of the Indian labor market, Bhagwati et al. are eager to repeal even the most sensible laws, including:

  • “Benefits related to sickness, maternity, disability, dependents” for employees earning below Rs. 10,000 a month
  • The right for “trade unions to strike and represent their members in labour courts in disputes with the employer”
  • Limiting “work without a day of rest to ten days”
  • Requiring “Proper disposal of waste”
  • “Extensive provisions for worker safety, including fencing of machines and moving parts, use of goggles to protect against excessive light and infra-red and ultra-violet radiation; precautions against fire; and the weight permitted to be carried by women and young persons”.

While they agree that the real culprit of labor rigidity in India is the Industrial Disputes Act (IDA) which makes it well-nigh impossible for factories to fire workers (and, consequently, hire them) – they seem to have fallen the the supply-side myth that grasped most of the USA during the Reagan era that somehow dismantling every worker protection would lead to increased aggregate supply and, hence, economic growth.

Indeed, the very flippant manner in which they claim these crucial provisions increase the “marginal cost” of labor and hence cause unemployment is ridiculous. The theoretical economic argument against this claim is so obvious. Economists argue that few industries are perfectly competitive (the stock market being one, which explains why it’s so hard to “beat” the market). In imperfect markets, the firm earns significant economic rent. This means that even decreased profit will not cause a reallocation of associated factors of production. In other words, a slightly higher marginal cost of labor will have no effect on employment.

Indeed, the greater cost is not even marginal in nature, but rather fixed. Provision of toilets and flow of water are largely independent of the number of workers employed. Similarly, the basic premise on which Bhagwati et al. approach education is flawed:

In contrast to elementary education, which is also a predominantly social objective and for that reason belongs to the Track II policy agenda, higher education belongs to the Track I agenda.

In other words, better universities somehow have supply-side effects in a way that primary education does not. This is simply not the case. For this to be true, Indian universities would necessarily be bottlenecked due to the huge number of highly-qualified Indian high school graduates. However, there are many private universities that are ready to be filled, suggesting a more broken educational infrastructure than the authors assume. A higher education system that can work independent of a weak primary system would need the flow of skilled immigrants the United States sees. Short of this influx, India needs to fix education from the bottom-up to achieve any sizable supply-side effects the, it seems, holy grail of liberalization advocates.

Overall, India’s Tryst with Destiny is a highly worthwhile read. Bhagwati et al. stick to the point, rendering the book a very short (but informative) read. As the authors are acutely aware, myths and lies about India’s reforms abound, and not just among the intellectual Bengali cafes, but even liberals abroad. Bhagwati and Panagariya make a strong case for continued liberalization. I believe I have made a strong case for my ultimate criticism of the book. As a reader fairly in touch with the beliefs of India’s left-wing, I believe the authors unfairly, and to their disadvantage, exaggerated the claims against liberalization. Indeed, I believe they directly misrepresented the opinion of two very respected economists. As an Indian, there is also a little pang that Bhagwati and Panagariya copyrighted the natal utterance of India – it’s very heart and soul – in a book advocating the ultimate removal of labor protections and unions. Contrary to the authors’ belief, Jawaharlal Nehru would not be all to happy with the thrust of this book.

In light of our most recent budget… my thoughts

Neither of India’s national political platforms can really support visionary thinking; the BJP falls prey to religious and social populism, while the National Congress does so to economic populism. However, urbanization will bring an end to the unfair grip rural India has on national politics. While neither leading candidate for premier, Rahul Gandhi or Narendra Modi, are likely to oversee the same level of liberalization as did the Narasimha Rao government, the defining moment of the next Union Cabinet will be the transition to an urban India. If it facilitates a strong city system, with independent mayors, competitive economic zones, and strong rule of law, the stage will be set for meaningful growth and reform.

Comments appreciated!

When I say that, I mean real capital (you know… that “K” stuff) not this new idea of social or “soft” capital. Last December, I was at Oxford for my interviews. On the last day, before my coach back to Heathrow, I stopped by this little market place. I don’t know what it’s called but it was a cute amalgam of a farmer’s market, a yard sale, and a used book sale.

The books were being sold on an honor code: please put in the box the noted amount for the books you take, we trust that you will not cheat us. I didn’t sit and observe, but I think we can all be sure that most, if not all, people did pay up. (I did, and I don’t think I’m that much more moral than anyone else who was there).

I’ve seen this kind of a set up so many times before – in the United States and Europe, at least. But maybe because this overlapped with those PPE interviews I actually started thinking about the whole system. The transaction between the buyer and the box is predicated on one assumption – trust (or at least a reasonably sufficient amount). If the bookseller did not expect to trust the consumers, he certainly would not have entertained such a exploitable set up.

Maybe this is a naiveté of experiencing a Western upbringing (I’ve never seen anything of the sort in India, where I live today… more on that later), but I venture to say that this degree of trust is not even significant by any means. In modern discourse we may disagree with one another about big things – god, the economy, Donald Trump’s hair – but we run our lives on the assumption that we can trust most people (high school girls don’t count).

We take this so for granted, but the economic payoff of this trust must be incredible (I haven’t done any real reading on this so I won’t say that it is). Because the bookseller can trust his friends, he does not himself have to sell the books or hire someone to do it for him. If his enterprise was full-time, just that he could trust his friends saves him a salary (implicitly his or explicitly his worker’s ) of maybe 30,000 pounds!

Modern supermarkets are more and more equipped with advanced physical capital that allows people to check out their own goods, lest a loud alarm sound. In the end, it achieves (for a much greater cost) nothing more than what simple trust would achieve. Forget “perfect competition” and “perfect information”. Imagine if we had “perfect trust”. The cost of every retailer (which is a huge component of many modern economies). All the structurally unemployed could then work on something of actual use, building something physical, something intellectual. Although their services were one day necessary the modern social structure should no longer demand a guarantor of fair transaction, the cultural capital that we have built should overcome such a need.

The trust of which I speak is not purely of benign intention, and that’s fine. Part of it, of course, is that we are all today part of a panopticon, each of us a guard and a prisoner. Perhaps in more isolated markets we would be more comfortable stealing (I know I would be). However, the gripping anxiety within us should ensure security.

The standard game-theoretic outcome of this all would be chaos. Because regardless of what “you” do, I’m better off if I steal. Then the dominant strategy for both of us would be to steal, and we’d all be a bunch of thieves – set the clock back to early 19th century New York. But I think we cooperate more than we compete, one of the many reasons some Western societies today are richer than the rest. An interesting example, especially pertinent to India, is the new idea of “kakonomics” , or the actual preference for bad outcomes! That’s completely irrational you would think, but the logic goes as such: “I don’t think you’ll do a good job, so I don’t want to do you a good job, but I also don’t want you to do a good job because if you do then I’ll feel bad that I didn’t!”

Madness, you might say, but it’s real. Though the Indian economy has a lot to look forward to, I feel a lot of its economic frailty is due to the fundamental lack of trust, especially among the service organizations. Kakonomics is the  diametrical opposite of trust-based economics, and its results are as such. Instead of hiring one person, we hire five to do the same thing (in the formal sector, at least).

This same thinking can be extended to explain the littered streets and wretched public toilets. However, I don’t at all suggest that this is a cultural flaw. It is more a flaw of the situations in which people have been put (you give them a dirty street, they have no incentive to keep it clean). When there is a positive exogenous shock, people react well. For example, the new Delhi Metro. The same people who spit and litter on the road right outside the metro walk into the metro and guard it as if it’s their greatest creation (there is probably a panoptical force at work, too: you don’t want to be seen littering on clean ground in the presence of so many others). Because it was given to them as a clean, extremely well-built system, people acted as such.

If we could find ways not just to increase trust in the sociological way, but to put that trust to use in daily economic transactions, I think the outcome could be great. I think we have the cultural capital today to revolutionize the way we engage in transaction. Technologists, I’m sure, will find a way to overcome that with complex algorithms and cameras not too far in the future. But there is a fundamentally more human (and therefore better) way of doing it. With this great mutual trust we’ve built over the past many years, the structure of the economy could change as much, if not more, as it did with the advent of the internet.

Would the jobs of many be lost, especially in service-oriented countries like the United States? Certainly so. But the economic development would be tremendous, and this unemployment is only structural in nature. We could then with the great influx of financial capital incident upon us, educate the retailers and salesman for a fraction of the price. Some would become mechanics, some poets, some scientists, some businessmen, some academics, but all more gainfully employed.


As an addendum, before we can look forward to a truly trust-based economy, there are still many instances of cultural erosion. Cultural erosion is markedly different from immorality because it is largely accepted by society, and therefore the human panopticon cannot ensure fair practice. The best example to this effect is the incredible amount of pirating and torrenting on a daily basis.

And the prevalence of such activities doesn’t have to do with wealth, either. I went to an incredibly rich high school, and most of my friends (admittedly including myself, for a while) used to torrent all kinds of software, movies, and games (that they could easily afford). It is, unfortunately, not socially unacceptable. People today still get bootlegged Bollywood/Hollywood movies and shows for a fraction of the price.

This is cultural erosion. You can go to a classy party and talk about some expensive software you just bootlegged. You can’t talk about the Armani suit that you might have stolen. However, the lack of trust in this kind of a situation is also structurally different. At an online store, you don’t need an unskilled-yet-expensive cashier process your orders, the system does that for you. So a “download and I trust you to pay” system isn’t economically necessary to begin with.

I don’t want to discuss the economics of piracy. A lot of people defend it with ridiculous logic such as “I wouldn’t have bought it anyway, so what’s the harm?”  Or, even worse, “These guys are already so rich!”  These people are clearly the idiots who will never come up with anything brilliant themselves. More importantly, by pirating/stealing, one is just driving up the price of those who are rightfully paying, further dis-incentivizing morality.