Tag Archives | economics

Remembering D V Gundappa

The literary genius of D. V Gundappa(1887 – 1975) is well known among Kannadigas. A cursory visit to any Kannada book shop will reveal DVG’s(as he was popularly known) works  in abundance. His scholarship extended from politics to poetics and he referenced the works of John Stuart Mill and Alexander Hamilton as easily as Kalidasa and Omar Khayyam. In total, he published more than fifty books consisting of 8,000 pages and another 1,500 pages of editorials, reports, speeches, statements and reviews.

Thanks to the great work done by the Gokhale Institute of Public Affairs, Bangalore (GIPA), an institute co-founded by DVG himself, all his editorials and articles that appeared in “Public Affairs”– the monthly journal of the GIPA started in  1949– are digitized.  (Note: You need to install Djvu pdf reader to read all the articles that are linked below).

An article titled Vox-Populi in Economics, written in February 1969, starts with a gem –“Cocksureness is an avoidable risk in every field of human life”– that rings true to this day. The article goes on to explain how cocksureness can be extremely disastrous in economics and how, thanks to socialist pressures, politicians across the world have resorted to pampering people rather than following sound economic principles. The article concludes with a plea to read the following immortal words of Prof. Alfred Marshall:

Students of social science must fear popular approval; evil is with them when all men speak well of them. If there is any set of opinions by the advocacy of which a newspaper can increase its sales, then the student, who wishes to leave the world in general and his country in particular better than it would be if he had not been born, is bound to dwell on the limitations and defects and errors, if any, in that set of opinions; and never to advocate them unconditionally even in an ad hoc discussion. It is almost impossible for a student to be a true patriot and have the reputation of being one at the same time”.

The spectrum of his works had brushes of almost everything related to public life. Examples include —  his scholarly criticism of Indira Gandhi, his nuanced view about religious conversions, about Nehru’s Failures, on linguistic states,  about party and government, the debate about provincialism vs. nationalism, on two Andhra states, the Secular State, of absolutism and tyranny, the philosophies of advaita and bhakti, on the Nationalisation of institutions, on Nehru the statesman, his moving obituary on Nehru among several others. These works are like  time-capsules of a bygone era. Several views that he expressed have stood the test of time; those that are now irrelevant do not seem outlandish as they express genuine scepticism rather than cynicism. His piece on space travel is a good illustration of this. Another noteworthy aspect about DVG was his ability to enrich prosaic topics such as citizenship by displaying the “services that poetry can  provide towards the cause of good citizenship”.

DVG the poet, the journalist, the public intellectual, the polymath is a perfect role-model for anyone who believes that civil criticism can achieve things that bile and vitriol seldom can; it is perhaps this quality of his that we must inculcate the most.

(Edit: All of his works from Public Affairs can be found here)

 

 

 

 

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Making Sense of India’s Latest GDP Figures

The new methodology to compute India’s GDP numbers is more comprehensive, accurate and in tune with international standards

The Ministry of Statistics came out with India’s GDP growth rate figures for the fiscal year 2013-14. Much to everyone’s surprise, the growth rate came out at 6.9 percent, much higher than the anticipated 4.7 percent. The 2.2 percent difference baffled everyone, including the RBI governor Raghuram Rajan, and the Chief Economic Advisor Arvind Subramaniam. The difference has raised a lot of questions and invited skepticism from both within and outside the government. Business newspapers have claimed that radical changes have been introduced in computing the GDP numbers, which explains the more positive numbers.

The Central Statistical Organization has introduced two big changes in computing GDP numbers: base year revision and using GDP at market prices. Before going into the technical aspects of these two changes, it should be mentioned that neither change is radical. The first of them is the change in base year from 2004-05 to 2011-12. The changing of the base year is a rather routine exercise carried out by the statistical offices around the world. In India, the base year has been changed numerous times and will henceforth be changed once every five years[1]. The other change is the adoption of a universal standard: that of using market prices instead of factor costs to make the GDP computations. This is mainly done to keep India’s numbers comparable with the rest of the world.

BASE YEAR CHANGE

Base year analysis is mainly done to eliminate the effects of inflation and to give a more meaningful picture of the data. GDP measures the sum total of all economic activity within a country. This monetary value is first calculated in nominal terms or at current prices. It is then adjusted for inflation or the changes in the general price level over time and is thus, expressed in terms of the general price level of some reference year, called as the base year.  To make this slightly clear, assume that a country is producing only one commodity, say books. So, the GDP of that country would be the total quantity of books produced times the price of the book. Changes in the nominal value of the book over time can happen either due to a change in quantity or a change in prices. Change in real values captures only the change in the quantity of books produced.

Choosing the Base Year: Almost any year can be chosen as the base year, but ideally it should be a recent year to give a more meaningful idea. Since the index number of any series is set to 100 for the base year, it should also be relatively normal. Normal here means the absence of any large aberrations and upheavals in the economy (like extremely high inflation rate or an economy wide downturn).

The base year that was previously used in India was 2004-05. However, since then, there have been significant structural changes to the economy (as in any 10 year period) and a new base year had to be chosen to reflect these changes. The CSO has chosen 2011-12 as the new base year.

GDP AT MARKET PRICES:

The bigger change that has been adopted by the CSO is the change from calculating GDP at factor cost to GDP at market prices. GDP at factor costs is a measure of national income that is based on the cost of factors of production. It is essentially looking from the producers’ side. It does not include the indirect taxes paid by the consumer but includes the subsidies given by the government. GDP at market prices essentially looks at economic activity from the consumers’ angle. It measures GDP at the last step of the transactions, which is the market price paid by the consumer.

It is clearly visible that GDP at market prices is always bound to be higher than GDP at factor cost. Removing subsidies and adding indirect taxes adds a significant part to the GDP numbers (as much as 7% in 2012-13). Thus, moving to GDP at market prices was always bound to give a different number.

Table showing the difference in GDP at factor cost and GDP at market prices (in Rupees trillions)

GDPnumbers

(Source: RBI Database on Indian Economy)

The Growth rates show a significant discrepancy as well. Look at the difference between the two approaches in 2008-09 and 2010-11.

growthrates

(Both tables are based on the previous base year 2004-05).

The move to market prices can broadly be seen as a good move in terms of being comparable with world standards. IMF, World Bank and various international databases apart from the statistical organizations in different countries use the market prices measure. Market prices are usually a more comprehensive measure and give a better picture of economic activity. The CSO has also decided to include a range of previously not included sectors and activity. They have covered more sectors, more amount of financial intermediation, revision of labour activities, then also looked into the organized sector and the unorganized sector activity. It has also expanded its coverage of manufacturing and included under-represented sectors and data from the corporate database of the government in arriving at the growth figure. Overall, economists and statisticians would agree that the changes in the data measurement approaches are in a positive direction. A case in point is a statement by former CSO chief Pronob Sen “What has happened when we moved to the new base year is we’ve actually got better data. Basically if you look for instance in the corporate sector, we were earlier going with the RBI forecast and which were based on 2500 corporates. This time around we are using the MCA21data base which is five lakh companies as compared to 2500. So the quality of data has improved”.

 

However, the skepticism from different corners comes from the fact that the higher GDP growth numbers do not quite tie in well with numbers from other leading indicators of economic activity. For example, Index of Industrial Production numbers are down, so is the rate of gross fixed capital formation (investments). To bridge this gap and understand the discrepancy, we will have to wait a bit longer and wait for the revisions in the data of the other indicators, but for now, there does not seem to be much reason for complaints against this move by the CSO.

 

[1] The base years of the National Accounts Statistics series have been shifted from 1948-49 to 1960-61 in August 1967; from 1960-61 to 1970-71 in January 1978; from 1970-71 to 1980-81 in February 1988; and from 1980-81 to 1993-94 in February 1999. Thereafter it was changed to 2004-05 in 2006.

Anupam Manur is a Research Associate at The Takshashila Institution

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Snapshot of India’s Export Industries

This is written as a small addendum to Pavan’s insightful article on India-US trade. I shall aim to give a small snapshot of these commodities and their significance in the world trade.

IndiaExports

IndiaImports

The charts and tables above give a closer look at the top commodities traded with the US between 2009 and 2013 and their trends. The numbers above each bar represent the change in percentage terms over that period.

With a market share of about US$ 41 billion in 2013, the Gems and Jewelry industry in India is becoming one of India’s top foreign exchange earners. India imported US$ 3.9 billion worth of gem diamonds from the United States in 2013 and exported US$ 7.4 billion. Globally, India imported 163.11 million carats of rough diamonds worth US$ 16.34 billion and exported 36.46 million carats of polished diamonds valued at US$ 20.23 billion in 2013. The difference can be roughly seen as the value added by India. The country exported gems and jewelry worth about US$36 billion in 2013, significantly contributing to India’s foreign exchange earnings.

Exports of pharmaceutical products are also on the rise (132% over 5 years). Globally, the Indian pharmaceutical industry is ranked third largest in terms of volume and 10th largest in terms of value.  During 2013-14, pharmaceutical exports stood at Rs 90,000 crore (US$ 14.55 billion) globally.

The Indian chemical industry is also performing well. Basic chemicals and their related products (petrochemicals, fertilisers, paints, varnishes, glass, perfumes, toiletries, pharmaceuticals, etc.) form a very significant part of the Indian economy and account for about 3 per cent of India’s GDP. The Indian chemical industry is the second largest in the world. In 2012-13, India exported dyes and related products worth US$ 1.32 billion, organic chemicals worth US$ 619 million, and agro chemicals worth US$ 967 million.

Petroleum products mainly refer to India’s plastic industry. In 2012–13, exports of Indian plastics stood at over US$ 7.2 billion and have increased at about 20% each year.

The Indian textile and apparel industry is one of the largest in the world with an enormous raw material and manufacturing base. The present domestic textile industry is estimated at about US$ 33billion and unstitched garments comprise US$ 8.3 billion. The industry is a significant contributor to the economy, both in terms of its domestic share and exports; it accounts for a phenomenal 14 per cent of total industrial production, contributes nearly 30 per cent of the total exports and employs around 45 million people.

Coming over to imports, it is noteworthy that Indian imports of non-monetary gold have reduced since 2012. Non-monetary gold refers to an individual’s purchase of gold as against the gold held in the Reserve Bank’s vaults as a reserve asset. Gold imports peaked in 2012, which severely dented the current account balance and weakened the rupee. In late 2013, the RBI stepped in and took corrective measures like raising the import duties on gold. Generally, when inflation is very high (India’s CPI was about 9-10%), people rush to invest in alternative channels. When bank deposits gave you negative real returns, gold seemed like a good option for investment. The astronomical increase (115200%) in the imports of military aircrafts can be ignored as the data is zero for 2009 and about 1.2 billion in 2013.

Note: Industry specific data has been taken from http://www.ibef.org/exports

 

 

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Bites from the classroom: Part 1

Girisha Shankar reflects on some concepts in the policy space.

International trade: going beyond “win-win”

A very commonly held view is that trading is good and makes everyone involved better off. However, it can also be argued that this kind of trading is good for countries or entities that are on equal footing or for those who produce commodities that are similarly valued. It may not hold good in cases where the two entities (or countries) involved in trade produce goods that are dissimilar in value. For example suppose country A is specialised in growing mangoes while country B is specialised in making cell phones. If the two countries are trading on these, invariably country B stands to gain compared to country A – since the cost of a cell phone is disproportionately higher than that of a mango.

One can argue that apart from the monetary benefits, both countries are actually better off – Country A gets to enjoy cell phones while country B enjoys taste of mangoes. But assuming an extreme case of country A being only specialized in growing mangoes, it would have to work harder and produce more to be able to equal B in value.

One answer to this could be that there is a higher incentive for country A in investing in its competency building for producing something that can match or better the value of a cell phone.

In practice however, this may not always work out this way. Country A may not really be successful in reinventing itself to create something that is comparable in value of a cell phone. Let me take a real life example of the Indian software industry. Most of Indian software houses are engaged in providing services, though these houses know very well that the software products would perhaps fetch far higher income. Even after a quarter century of being in business, there hasn’t been a big success software product story from Indian shores. On the other hand, some of the other countries quickly turned around – e.g. Israel, Cambridge in UK, Dublin in Ireland etc.

In summary, trading can increase the incomes for both countries involved in trading, but the gains may not be similar. So for the countries involved in trading, the outcome may not be exactly win-win, but rather “small win-huge win”.

 

In defense of an incremental approach to policy making

Nandan Nilekani has talked about need for minimalist policy programs, mentioning that they could be helpful in building much needed consensus in formulating the policy. In R V Vaidynathan Ayyar’s book, Public Policymaking in India, Lindlom’s incrementalism talks about a similar approach for policy – taking short steps at a time.

This method is often questioned because it is slow in achieving the desired benefits. Here I would like to introduce an analogy from the software development process that is commonly used. This model is called the iterative development model. It is typically used in times of uncertainty when the customer’s requirements are not very clear. The model essentially builds the software incrementally – at each step producing something that can be demonstrated to the customer to seek feedback. The feedback can be used in the subsequent increments (also known as iterations) for course corrections. This model is very effective in ensuring that the final product converges to what the customer needs. However, this also has an overhead in the multiple iterations involved and multiple consultations with customers – in this case, citizens – which is not always easy.

The environment where the policy gets formulated and finally gets implemented is far more uncertain than a typical software development environment. A comprehensive analysis of the policy problem is unrealistic in such a case. At best, only a part of the problem might be figured out. Secondly, a policy would certainly build on top of something existing already – seldom on a clean slate (Ref: pg 142, Ayyar).

It is also worth noting also that the Government machinery (especially the executive) is quite risk averse such that it has no incentive in introducing something bold rather than attempting to introduce something smaller that is satisficing (Ref: pg 129, 130, Ayyar).

In such cases, the incrementalism referred above is quite useful. Each iteration resulting in a small incremental policy that can be introduced for implementation, feedback taken and suitable corrections made.

Girisha Shankar is an alumnus of Takshashila’s Graduate Certificate in Public Policy. This post is part of a series of opinion snippets. The views expressed here are the author’s.

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