The Indian Economy Blog

Raj Chetty, an associate professor of economics at the University of California, Berkeley, is the winner of the The American magazine’s 2008 Young Economist Award, a research grant of $100,000 provided by the Searle Freedom Trust.
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To be eligible for the award, economists have to be featured in the magazine’s bimonthly column entitled “The Young Economist,” which profiles talented economists under the age of forty doing groundbreaking original research.
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Chetty, who is twenty-eight, did his undergraduate and PhD work at Harvard, became an assistant professor of economics at Berkeley at age twenty-three and an associate professor at age twenty-seven. [link]

As far as we can tell, Raj’s academic work and the Indian economy haven’t intersected. At least, not yet. The only desi link (apart from his family) we found was this interview in Rediff, which might seem a tad tenuous to some. But, what the heck! This guy is an academic superstar in the making…

The crude oil prices have finally touched $100 per barrel - a psychological barrier and a statistical inanity. The composition of Indian crude basket represents average of Oman & Dubai for sour grades and Brent (dated) for sweet grade in the ratio of 59.8:40.2 since April 2006. The Indian crude basket has touched a high of over $92 in the new year, but is yet to hit the three-figure mark.

India imports about 76 per cent of its crude oil requirements which amounts to an oil import bill of around $50 billion every year. India’s crude oil import bill rose by 3.48% in rupee terms and 16.67% in dollar terms during the first half of the current fiscal year. The appreciation in rupee value by 12.3% this year, the most since at least 1974, has helped partially offset the sharp rise in global oil prices. As per the Government, every one rupee appreciation in the exchange rate of Indian rupee against US dollar will help reduction in the net oil import bill by around Rs 3950 crore. It should help that the rupee is forecast to advance 3.4 percent next year to 38 per dollar by the end of December, according to the median estimate of 22 strategists surveyed by Bloomberg News. (more…)

The Indian Finance Ministry has launched an internship programme.
More details available here - link
Sounds fascinating. If you’re interested, apply soon, since the deadline is nigh — 15 Jan.

A courtesy salaam to Ajay Shah.

Q) Is this the first such internship programme in the Finance Ministry?

How much lower are prices because of the new retailers?

Are clothes and shoes at the malls and new retail stores in India much more expensive than in the United States? It seems that way, to me at least. For instance, during my last visit to Chennai, I bought a pair of Reebok sneakers having left my original pair back home in the US. This darn pair cost me Rs $125 (Rs 5,000) at the Reebok store in India, whereas the exact same pair cost me just $80 in the US. Around this time, a relative gifted me a shirt from ColorPlus. This shirt cost Rs $63 (Rs 2,500) versus $40 (if that) for an identical shirt in the US. I’ve experienced this “sticker shock” every time I’ve visited a store in India over the last two years.

Questions
1) What is your experience of prices in India vis-a-vis other countries, especially South East Asia and East Asia?

2) If prices are high in India, what’s the reason:

a) Brand licensing fees: This might hold for Reebok or Levi’s but certainly not for ColorPlus or Indian brands.

b) Real estate prices/ high rents: Perhaps. However, my guess is that while real estate prices in India have shot up recently, on average, retail space in the US is still more expensive than India. Besides, if rental costs were such a big component of costs, wouldn’t this create a huge opportunity for catalog/ online retailers?

c) Import duties/ tariffs: Hmm? I thought these clothes & shoes were made in India. I’ve bought shirts, trousers and suits in the US that were made in India, which cost me 50% to 70% of what they’d cost me in India.

d) Something else?

Caveats:
1) The only malls/ stores I’ve visited in India have been in Mumbai (Crossroads/ Vama/ some shops in Colaba & Fountain) and Chennai (City Centre/ Spencers/ Westside and a few others). In other words, my knowledge is limited and completely based on sporadic anecdotal evidence.

2) I don’t know much about prices for groceries - vegetables, fruits, grains — which is Reliance’s (initial) target, I think.

How many jobs have the new retailers actually created?

The Wall Street Journal, in an article last month, writes that jobs in India’s booming retail industry are a ticket out of the slums for many. The article, titled Humble Jobs at the Mall Are Lifting Legions of Indians Out of Poverty and told from the viewpoint of three employees of Pantaloon in Mumbai, goes on to say that

Such basic sales jobs, unremarkable and often derided in the West, are providing careers, confidence, and a shot at entering the consumer class to millions (emphasis mine) of impoverished young men and women across India. As their ranks swell, these children of slum dwellers, servants, sweepers and others low on the socioeconomic totem pole are forming a new stratum of workers. They are likely to play an important role in determining the future of the world’s second-most-populous nation.
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Firm data are hard to come by, but available statistics and anecdotal evidence suggest an explosion in service jobs. Over the next three years, says the Images Group, a research and consulting group in India, the retail sector will create more than 2.5 million new jobs in the country. India’s Reliance Industries Ltd. says it will hire close to 500,000 people to staff its new chain of supermarkets. Pantaloon Retail Ltd., India’s largest retailer with annual sales of around $1 billion, hires more than 500 people a month. [link - subscription required]

The story seems very encouraging. However, I’m a tad puzzled at the evidence — it’s rather slender and the three data points don’t jell.

Data point # 1: Pantaloon, India’s biggest retailer is adding 500 people a month (extrapolating, that makes it 18,000 over the next three years. An assumption, here)

Data point # 2: Reliance will add 500,000 new employees.

Data point #3: The Images Group forecasts 2.5 million new jobs in retail over the next three years.

This might seem like a quibble, but are we to believe that

a) Reliance will add 83 times more employees than Pantaloon — 500,000 vs 18,000

b) Pantaloon, India’s biggest retailer will add only 0.72% of the new hires — 18,000 out of a total of 2.5 million, or

c) Reliance alone, with 500,000 new employees, will contribute 20% of the new jobs?

Q) Any hard data available regarding employment growth in India’s retail sector?

Update: Earlier posts on India’s retail industry
– Protect The Chain But At What Cost
– Kirana Will Still Rule
– The Better, Faster Road To Development
– The Wrong Behind
– A Nation Of Self-Employed
– More Bang For the Government Buck
– FDI In Single Brand Retail
– Rice, Roads And Regulations

As another year draws to an end, extracts from two speeches delivered this year — one by an ex-finance minister (who happens to be the current Prime Minister) and another by the current Finance Minister. Both the speeches were delivered to a foreign audience and the extracts reproduced here cover only the hard facts, not the political rhetoric and the palaver.

Let us begin with Dr. Manmohan Singh’s address to the Japanese Business Delegation, on 20 August 2007 -

Today, the Indian economy is in a position to sustain GDP growth rates that are close to 9%. Foreign Exchange reserves stand at over US$ 200 billion. We expect to receive Foreign Direct Investment of about US$ 30 billion this year. Our savings and investment rates are close to 35% of our GDP. Our foreign trade constitutes 33% of our GDP, which is a testimony to India’s growing integration into the global economy.

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Well my advice on this one - the galloping elephant part (you know, we’ve had the Tigers, the Lynxes, and the Giant Panda, and now its the turn of the Thundering Elephant to lead the global economy onwards and upward) - is not to try it. The very least that could happen is you get to fall off. But before we get into the full force of rhetorical frenzy here, I’m afraid that I’m not quite done yet with the Economist India correspondent (following my rather hamstrung attempt to caste myself in the role of Emile Zola at his expense yesterday), since as I said at the end of that post, our sterling correspondent, having failed to overheat anything beyond his own curry-ridden palate, has now moved on to what has to be the macroeconomic story of the year, the seemingly inexorable rise and rise of the Indian rupee.

As he himself says on the matter:

The rupee’s rise may be less dramatic than that of the Philippine peso, Brazilian real or Turkish lira. But it is uncomfortable nonetheless.

Quite so, just like a strong vindaloo without the de-rigueur mango lassi accompaniment a rising currency produces its own kind of dispeptic discomfort. But hold on a second, mightn’t a rising currency in India actually be good news, and in any event inevitable? Nothing it seems is ever considered to be unmitigated good news where India is concerned in the eyes of our valiant correspondant, since everything needs to be tinged with its due and measured dose of schadenfreund. (more…)

Well, here I am, hard at it trying to write a review for this blog of the latest Economist Intelligence Unit country risk report on India (which, worry not, will follow in due course) and what I find myself doing is revving-up on all cylinders to come back and point out some of the facts of this life to all those people who spent their time during the second half of 2006 arguing that India was overheating when it was busily growing away at a mere 8%. In fact India’s growth has not only continued, it has even accelerated slightly since the debate got started, growing at an 8.9% year-on-year rate during the most recent quarter (following 9.1% and 9.3% in the first and second quarters of calendar 2007, respectively). And far from inflation shooting up and away through the roof it is currently not too far from the Reserve Bank of India’s 5% target. Perhaps it is towards China or Russia that people should be directing their attention, or towards Eastern Europe, or even - god forbid - the eurozone, but India it seems is one country where the “great overheating” argument is steadily running out of steam. Of course there is one country which everyone will readily admit is not overheating, and in comparison with the rate of negative price increases they have on their hands in Japan India’s inflation may seem serious, but I think we can safely leave that topic on one side for today.
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Renowned Australian author and economist Stewart Klegg brings a new angle to the India and China debate. He is scathing in his criticism of the Chinese state apparatus while claiming that there are enormous distortions in the Indian growth model due to a small oligarchy atop the system.

India is often compared with China. But China is country with a highly repressive State apparatus. If you wanted to find historical precursors or parallels to China you’d probably would have to look at the Statist Corporatism of the fascist States that flourished in Europe between the first and second World Wars as well as in the case of Portugal and Spain after the war. Well, not really the case of Portugal and Spain, because they were rather backward, agrarian and clerical, but probably something more like German fascism where you have extremely strong State control of the economy and State control of labour.

Why are Chinese consumer goods flooding the world? For two reasons: one is that even though it’s ostensibly a workers State they can’t form unions; the exploitation is very systematic indeed and, of course, the currency markets are structured in such way as to make Chinese goods cheaper globally. India, by contrast, is a democracy. It’s a very imperfect democracy, but all democracies are. So, the State form is wildly, vastly different. The opportunities for getting wealthy in China through connections to the political elites are very, very deep. To the extent that there is a degree of functioning democracy in India, clearly, it’s oligarchy dominated; we can see this in the familiar dominance of some of the parties.

I think this is an interesting point of contrast with China. If you were to ask sophisticated observers of the business scene, people in business schools generally in Europe or Australasia to name at least one Chinese home-developed brand that was going global, they probably couldn’t do it. But you could do that for India. Corus and Tata are very well known, they are projecting modern India, globally. But I think the important difference is that when the Chinese try to develop own brand manufacturing or marketing they tend to buy up companies which have already got some brand recognition elsewhere. There isn’t a sense that the Chinese firms are going from their domestic place to a global positioning on the back of that domestic base, in India that is different. [Tehelka]

Note: I can’t help but point out the lack of editorial rigour at Tehelka. The gentleman referred to in the story is Stewart Clegg(not Klegg), Research Professor at the University of Technology Sydney, prolific author and public and private sector consultant with expertise in management and organisational learning. [Link]

…likely for the Maharashtra government.

The BBC reports that the World Bank is considering the first ever proposal for a loan of $3.5 billion to be disbursed and repaid in rupees and not the US dollar. This is being done to ostensibly counter the fluctuating rupee- dollar rate. However, it needs no saying that a continually strengthening rupee and forecasts of a double-digit Indian economic growth make the proposal extremely lucrative for the World Bank.

The Maharashtra state government is seeking a loan worth some $3.5bn but is concerned about the fluctuations in the value of the dollar.

If approved, it would be the first time the World Bank has agreed to a such a loan in rupees.

The idea is that the loan would be sanctioned in dollars, but would be handed over in rupees.

All repayments would be in rupees too.

This would prevent any changes in the amount to be repaid caused by fluctuating exchange rates. [BBC]

Russell Roberts says

We should be realistic about politicians. George Stigler used to contrast his theory of politics with Ralph Nader’s. In Nader’s view, all of the ugly aspects of government were caused by the wrong people getting elected. If we could just elect better people, then we’d get better policies. Stigler argued that it didn’t matter who the people were—once they got in office, they responded to incentives. They would convince themselves that they were doing the right thing, either because they really thought so or because doing the wrong thing was necessary in order to be able to do the right thing down the line.

Being a Stiglerian in this area, I expect less of my politicians and I am rarely disappointed. Even those politicians we think of as principled, pursue the calculus of the bootleggers and Baptists. Ronald Reagan, an eloquent defender of free trade, imposed “voluntary” quotas on Japanese cars. That is the way the world works.

In the economist’s view of politics, ideology and party matter less than the incentives facing politicians. Political parties in a democracy differ more by the words they use to justify their actions rather than by the actions themselves. Republicans talk about economic freedom and the dangers of big government while making government bigger. Democrats talk about their devotion to labor unions and the dangers of free trade but they rarely push for tariffs and quotas.

[link]

Indians tend to subscribe to the Naderian view with some exceptions.

Q) Are you a Stiglerian or a Naderian?

Removing corruption in India entails a look at ultimate reasons, not proximate causes

Here’s a supposedly novel approach to corruption, the legalization of bribery, courtesy Ajay Shankar Pandey, the Municipal Commissioner of Ghaziabad [Chicago Tribune].

Today, contractors being paid after finishing long-delayed construction projects write the municipality a check for the 15 percent bribe that once would have gone to corrupt city officials. The money, for which the contractors now receive a city receipt, goes to install sewers, roads and lighting in the city’s slums.
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Soon after arriving, the earnest new commissioner called in the city’s contractors, promising they would get the money owed them once they adequately finished their work and that they would no longer have to hand over a cut to his staff.

“I told them my officers are now ready to work in an honest and transparent atmosphere,” he said. The contractors “took it positively. They came back and told me how much they had been paying, 10 percent, 15 percent.”

So Pandey established an official 15 percent city cut on all old contracts, which had been padded to provide it. Bids for new projects, he ordered, should now be written without room for bribe paying.

While Ajay Pandey deserves support and plaudits for his efforts, I’m skeptical that “legalization of bribery” is a sustainable solution. Why is bribery so widespread in India? Here’s a (simplistic) list of the reasons

A: From the demand side

1) Government officials at all levels have the power to make abritrary decisions.

2) Most of the time, there’s very little transparency and openness around these decisions.

3) The compensation levels in government are woefully low, so much so that it’s very difficult for many public servants to “afford morals”. And, of course, politicians have their own fund-raising pressures.

4) The downside to accepting bribes — legal steps (fines/ and or jails), punitive action on the job, peer pressure or public reproach — is minimal.

B: From the supply side

5) Some (many?) companies/ individuals will do whatever it takes to get ahead.

6) Because of 4), even honest firms and individuals are forced to cough up, just to remain in business.

Given this list, what exactly does Ajay Pandey’s solution offer?

City officials — including at least a few former bribe takers — insist they have been inspired, or at least frightened, into changing their old habits.

…the city officers “are very quiet now and not asking for anything. If a contractor asks for anything extra, he can be blacklisted. If an official asks for something, we can report them and they’ll be suspended. There’s nothing going on now”(as per one of the vendors quoted in the article).

Pandey’s measures address reason #4 (partially) by creating a tough supervisory environment and reasons #5 and #6 (partially), by leveling the playing field (sort of) for all companies. Unfortunately enough, until the other deeper reasons, the ultimate causes are addressed, measures such as “legalizing bribery” will at best be a short-term solution that’s likely to hold as long as Pandey is in office. Once he leaves, it will be back to business as usual.

What do you think?

…for the CRPF and the Army in Kashmir.

…compared to the army there is a general feeling in the CRPF ranks that its men are not adequately compensated. It is argued that Jawans are frustrated because their counterparts in the Indian Army doing similar jobs in militancy-infested pockets are better looked after. When TIMES NOW compared the two, this feeling was to a great extent found true.

While an army Jawan fighting militants in Kashmir gets a monthly pay packet of Rs 14,000 and host of other benefits including allowances in the form of disturbed area allowance his counterpart in the CRPF draws a meager pay of Rs 7,500 which includes all the allowances. [TimesNow]

Although the veracity of the report (Rs. 14,000 and 7500 for the same trooper in Kashmir) is debatable, it reminds us of that famous Woody Allen bon mot -

…two elderly women are at a Catskill mountain resort, and one of ‘em says, “Boy, the food at this place is really terrible.” The other one says, “Yeah, I know; and such small portions.” [WikiQuote]

An answer, that is.

Discovered two very cool sites.

– Dr Econ from the the Federal Reserve Bank of San Fransico (one of the regional Feds that makes up the Federal Reserve in the US) and

– Personal Financial Education from the Fed system as well.

Q) Are there any sites like this in India? My guess is that the demand should be tremendous, especially given the twaddle that passes for economics in our colleges.

Update: On the blog front, the only economics/ finance bloggers that I know of are Atanu Dey, Ajay Shah and J. R Varma (all on our blogroll). Any other recommendations?

…to counter the rising rupee.

Professor Kaushik Basu of the Cornell University believes that the rise of the rupee against the dollar is inevitable in the mid-term. He also believes that the sudden collapse of the dollar is unlikely but there is not much that India can do to alter the current dynamics of exchange rates.

In recent days the rupee-dollar exchange rate has been, on average, Rs 39.3 per dollar. A year ago it was 44.7. This means that the rupee has appreciated against the dollar by 13.7% in the last year.

A gentle depreciation of the US dollar over the medium term seems to be unavoidable, given America’s over-spending. The big risk for India and the world is a sudden collapse of the dollar. This is unlikely, since a dollar meltdown is against the interest of all major players, but not impossible. It needs to be understood that the source of the rupee appreciation is, largely, outside of India. Over the last year virtually all major currencies have been appreciating vis-à-vis the US dollar. The euro rose by 14.7%, the pound by 10.4%; the Canadian dollar by 23%, Sweden’s kroner by 13.7% - the same as the Indian rupee. Vis-a-vis all major currencies, outside of the US dollar, the rupee has changed very little. The exception is China.

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Demolishing the myth of “historical ties” and “strategic partnership that has stood the test of time”.

Noted defence analyst Ajai Shukla, in his column for the Business Standard (reproduced on his blog Broadsword ), has highlighted the changing paradigm of the Indo-Russian relationship. He also suggests that India has been unable to come to terms with the altered relationship as the Russians have taken a more hard-nosed approach to their defence exports. The signs are ominous. It seems that India is operating in a timewarp and has been caught in the rhetoric of a historically “special” Indo-Russia relationship.

This perceptional error emanates from a failure to understand the basis of the “special” Indo-Russian relationship. The continued references by Indian officials (and parroted by the Russian officials) to the unique quality of Indo-Russian bipolar relations imply a common perspective in Indian and Russian strategic, diplomatic and economic interests. However, the Indo-Russian relationship has never been “special” when placed in a vacuum, devoid of outside influences. India and Russia have had, and will continue to have, certain common interests that are necessary for the development of a lasting bond; this commonality has not been in itself sufficient to solidify their relationship. Historically the glue in the Indo-Soviet/Russian “special” relationship was United States and western ambivalence towards India and Indian military needs. As the United States’ ambivalence has dissipated and India’s military-industrial complex has moved towards a higher level of self-reliance, the Indo-Russian bond has naturally cloven.

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The situation with the sugar industry has gotten more bizarre, with the Allahabad HC stepping in and mandating that the mills buy sugarcane at Rs. 110 per kilo and start processing. While on first thought, it seems quite funny that the high court is getting into matters it shouldn’t get into, such as fixing of a market price, the situation on the ground is quite grim.

And the main reason for all this is heavy intervention by the state; in my opinion, heavier intervention than what we saw in the bad old days of Indira Gandhi. Back then, the state fixed a price and said “take it or leave it”. Here, even that option doesn’t exist. When the sugar mills didn’t like the state-fixed price of Rs. 125 per quintal, they decided to stop procurement and production. However, the state intervened and didn’t even allow them to do that, and now the HC has ordered them to start production, albeit after sourcing at a lower cost. (more…)

One of the criticisms leveled against India’s SEZ policy is that the zones are too small to make a real difference. But there’s a very big zone that could be an SEZ, especially if the state’s politicians—who are all for ‘autonomy’—decided economic freedom is something that is well in their capacity to achieve. And set an example for the rest of India.

That’s one of the proposals Sushant Singh puts forward in his article on moving towards an endgame in Jammu & Kashmir:

…unemployment among the youth of the valley remains to be adequately addressed. Handing out of doles and packages to the state government and public sector institutions is not the solution. An alternative would be to incent the private sector, perhaps even outside the state, with an offset to employ a certain percentage of people from Jammu & Kashmir.

The idea of converting the entire state into a virtual special economic zone (SEZ) has been mooted. The state has a special status under the Indian Constitution. So do SEZs. What is required is the repositioning the state to one that leverages its special status to achieve socio-economic development.

It would also require a rebalancing the distribution of fiscal transfers from the central government between the public and private sectors.

This will undermine the separatists’ main economic grouse—step-motherly treatment by the Centre and no attempts at development in the state. [Pragati - The Indian National Interest Review]

We have been lamenting quite a bit about how Indian laws do not protect property rights. The reality has been worse than that. The Indian government does not even record property ownership properly. Unclear land titles have been the bane of India’s property market.

Now it turns out that a small step towards recording land titles is being taken.

Rajasthan, Andhra Pradesh and Karnataka are set to directly or indirectly guarantee property titles in urban areas in an effort to make property transactions easier and reduce or prevent most such deals from landing up before the courts.

The move will remove uncertainty surrounding more than half the land deals that happen in India because most property owners do not have a clear title to their holding. It will make it easier for foreign real estate funds to invest in properties here. And it will also provide a boost to the real estate sector and industry in general because unclear titles present a hurdle to efforts to acquire land. According to Anil Baijal, the country’s former urban development secretary, six out of every 10 land transactions in the country end up before the courts.(link via Sruthijith)