India's most debt-ridden states

India's economy grew the slowest in a decade. The country's GDP growth in first quarter (April-June) slipped to 5.5 per cent from 8 per cent in the corresponding period in the last fiscal.

Meanwhile, the Reserve Bank of India has also sharply lowered this fiscal's economic growth projection to 5.8 per cent, from 6.5 per cent earlier, in view of global and domestic factors like poor investments and subdued demand.

The International Monetary Fund slashed India's 2012 (calendar year) economic growth forecast for India to 4.9 per cent from 6.1 per cent.

To add to the country's economic woes, the debt burden of India's states is also rising.

Maharashtra has the highest debt among all states in India.

Maharashtra's debt is higher than that of states like Uttar Pradesh, West Bengal, Andhra Pradesh and Tamil Nadu, according to the Reserve Bank of India.

Uttar Pradesh is the second most debt-ridden state, followed by West  Bengal.

The World Our Grandchildren Will Inherit

A superb research note from Daron Acemoglu. Well it is amazing to see him churn one paper after the other.

He talks about ten trends which have happened in the last 100 years.

• The rights revolution
• The sweep of technology
• Unrelenting growth
• Uneven growth
• The transformation of work and wages
• The health revolution
• Technology without borders
• Century of war, century of peace
• Counter-Enlightenment in politics
• The population explosion, resources and the environment

Out of the ten, it was rights revolution which was most important. But then all are linked:

The last century has been the age of political rights. Never in our history have so many people taken part in choosing their leaders and having a say in how their societies are governed. To be sure, this unparalleled expansion of civil and political rights remains incomplete. Yet it is profoundly significant, not only due to its transformative impact on the lives of billions, but also because so many other phenomena in recent history are connected to it. The rights revolution is intertwined with diverse trends such as the development of technology; sustained yet uneven economic growth; a general decline in war within recent decades; and a population explosion placing new pressures on our resources and environment.

These trends do not exist independently of one another. Understanding how they interrelate is an important step in any attempt to assess how they will continue. The framework I will use to interpret these trends borrows heavily from my work with James A. Robinson, but also augments it in a number of  important respects.  At the center of my interpretation is the idea that technological change is at the root of economic growth — but that political institutions shape the nature, pace, and spread of technological change. From ancient Rome to the Industrial Revolution and the dramatic economic transformations of the last century, history is littered with examples showing how the development, spread, and use of technology depend on institutions.

In this, I depart from the conventional wisdom in much of social science, which maintains a causal link running from technologies to institutions — and not the other way around, as I am arguing. A popular variant of this conventional wisdom is modernization theory, which posits an inexorable link from prosperity to democracy and political rights. Yet there is no more support for modernization theory in the data than there is for any other form of technological determinism. Globally, countries that have grown more rapidly since World War II, or since the beginning of the 20th century, are no more likely to become more democratic than those growing more slowly, for example.18 I will instead argue that institutional developments, caused by and causing the rights revolution, are the main drivers of the technological and economic changes we have experienced over the last century.

And now most would know hos the story unfolds. Whether you have inclusive or extractive political instis, you create a framework for all the other ten trends.

He then goes onto reflect whether the 10 trends will continue..

He reflects on how China manages to grow despite having extractive political instis:

The expansion of China’s economy over the last three decades is another example of growth produced by extractive institutions, but with a major difference. The onset of technology without borders has meant that the extent and pace of growth under extractive institutions can be greater today than it was in the 19th century, when Germany and Russia went through a process of catch-up. Though the two countries reached higher growth rates than the leading economies of the time, the U.S. and the U.K., their expansions ended quickly, and had been only made possible by deep-rooted changes in the structure of society — changes that ultimately destabilized and upended the regimes in those nations.

By contrast, China has been able to achieve rapid catch-up growth for over three decades, with much more limited threats to its extractive institutions, partly because the nature of technology has changed. In Germany and Russia at the end of the 19th century (or in Japan and South Korea during the second half of the 20th century) catch-up growth involved developing industries, building a domestic market,and undergoing a process of structural, social, and institutional changes — including rapid urbanization and the social and political demands coming with industrialization.

But unlike China, their growth wasn’t built on simply importing technology to produce goods for the world market. In contrast, today, instead of having to develop an entire industry, an emerging market economy can just house some of an industry’s tasks, such as assembly and operation. This has enabled China to grow rapidly by leveraging its cheap and abundant labor force, while also mollifying the internal demands for political changes that earlier societies undergoing catch-up growth had to contend with.

So, technology seems to have allowed China to prosper:

Here we therefore encounter a paradoxical consequence of the technological breakthroughs originating from inclusive institutions: they may aid the continuation of extractive institutions elsewhere in the world. The globalization of production that technology without borders has created may have fueled rapid Chinese growth, but in so doing it may have lessened domestic pressure for institutional changes. In fact, this paradox might be deeper. One phenomenon related to Chinese growth is the fifth trend, the transformation of work and wages, which has helped produce the inequality gap that has opened up within advanced economies.

He says when thinking about technology we should  be aware that it could allow countries to prosper despite having extractive instis. But this cannot continue for a long time and it is just that technology has sort of allowed China to grow for such a long time despite not having the right framework for sustained growth..

An amazing essay… Connects so many dots..

"Mostly Economics"

The Devil Called 'Energy Subsidies'

FOR decades, governments from Egypt to Indonesia have subsidised the price of basic fuels. Such programmes often start with noble intentions—to keep down the cost of living for the poor or, in the case of oil-producing countries, to provide a visible example of the benefits of carbon wealth—but they have disastrous consequences, wrecking budgets, distorting economies, harming the environment and, on balance, hurting rather than helping the poor.

Emerging markets are not the only places that distort energy markets. America, for instance, suppresses prices by restricting exports. But subsidies are more significant in poorer countries. Of the $500 billion a year the IMF reckons they cost—the equivalent of four times all official foreign aid—half is spent by governments in the Middle East and north Africa, where, on average, it is worth about 20% of government revenues. The proceeds flow overwhelmingly to the car-driving urban elite. In the typical emerging economy the richest fifth of households hoover up 40% of the benefits of fuel subsidies; the poorest fifth get only 7%. But the poorest suffer disproportionately from the distortions that such intervention creates. Egypt spends seven times more on fuel subsidies than on health. Cheap fuel encourages the development of heavy industry rather than the job-rich light manufacturing that offers far more people a route out of poverty.

How to save $500 billion and the planet

For all these reasons the benefits of scrapping subsidies are immense. Emerging economies could easily compensate every poor person with a handout that was bigger than the benefits they got from cheap fuel and still save money. In the process, they would help the planet. According to the International Energy Agency, eliminating fossil-fuel subsidies would reduce global carbon emissions by 6% by 2020.

Some emerging-market governments are persuaded by these arguments, and are getting serious about reform (see article). Indonesia raised petrol prices by more than 40% last year, and the front-runner in the upcoming presidential election says he will consider a more comprehensive fuel-subsidy revamp. Iran has just begun the second phase of a big subsidy overhaul, raising the price of petrol, gas and electricity. Egypt’s new president is being pushed towards tackling energy subsidies by a gaping budget deficit. Morocco and Jordan have cut subsidies in the past couple of years. Even Kuwait announced this week that it plans to scrap diesel subsidies.

Yet the politics of reform are exceedingly difficult. Politicians are loth to antagonise the urban elite; insiders benefit (often corruptly) from cheap fuel; ordinary citizens do not believe they will be compensated. Many previous attempts to cut subsidies have been abandoned in the face of popular protests or rising global oil prices. Experience suggests that any attempt to cut subsidies needs to be accompanied by a public-education campaign to explain the costs and inequities of subsidies, to have a clear timetable for gradual price increases and to be supported by targeted transfers to counter the effect of higher fuel prices on poorer people.

Even with better politics and the best-laid plans, it would be a mistake to expect too much too fast. Entrenched subsidies anywhere are devilishly difficult to get rid of. If the oil price rises, so too will the pressure on emerging economies to “protect” their citizens from dearer fuel. But, for the moment, there seems to be a chance to accelerate reform. It is an opportunity not to be missed.

ECONOMIST

Does Europe face the prospect of a lost decade?

Christian Noyer of Banque De France asks this q in a recent speech.

He says lost decade could happen in Europe for two reasons (though adds it is not limited to Europe alone):

Questions about long-term growth are not limited to Europe. What we hear about our continent reflects a more general concern: the possibility of “secular stagnation” in advanced economies. Larry has launched this crucial debate. I don’t know whether he was thinking specifically about Europe, but, of course, this question is very relevant for us.

Secular stagnation rests on the assumption that the natural interest rate is negative. This may happen for two reasons:

• In the short run, we may have a downward shock on demand and an increase in savings resulting from the deleveraging process. I have just explained how we are currently addressing this issue.
• In the longer run, ageing and slower innovation may push up saving rates and bring down the return on capital. Therefore, the ultimate response to the risk of secular stagnation is to improve the return on investment, thus pushing the natural interest rate back into positive territory. Again, this is not only a European problem. But we do have difficulties in this regard. Structural reforms are not easy.

Many, however, are currently being implemented. Italy is abolishing its provinces, generating savings that will allow for a reduction in taxes and liberalising its labour market. France is on the same track and has reduced taxes on its labour costs as well as improving labour market flexibility.

   

He says opposite forces are hitting Europe:

Strangely, in the euro area, growth and inflation are moving in opposite directions. As growth accelerates, inflation keeps going down. This “disconnect” in the Philips curve is puzzling. We must look, then, at the broader picture. Euro area economies have attracted strong capital inflows over the recent months, with two opposite effects on financial conditions: first, easing through lower long-term interest rates. And, second, an appreciation of the euro exchange rate.

It’s not clear whether the overall effect is positive. While nominal conditions are more accommodating in euro area than in the US, real indicators point to a more restrictive stance. We may see a perverse feedback loop develop, with low inflation, increasing real rates, capital inflows and exchange rate appreciation mutually fuelling each other. The financial economy may be heading towards a bad equilibrium that would threaten the real economic recovery.

The situation called for an appropriate policy response and, as you know, the Governing Council has agreed last Thursday on a strong package of four significant measures

India just has an opposite problem. Despite slipping growth, inflation remains high.

What a mess we all are in…All basic macro conditions are all over the place.

From: Mostly Economics, Amol Gupta

From WPI to CPI - Is Calculation Important that Remedy to Price Situation in India?

Post Contributed by Vrusti, Sem IV, Institute of Law, Nirma University

Governor Raghuram Rajan-led Reserve Bank of India will start using consumer prices instead of wholesale prices as the inflation benchmark for valuing the Indian rupee against other currencies, a move that could make it less tolerant of appreciation by the rupee. The Indian rupee's value is set by the market, but the central bank tracks its relative value, known as the real effective exchange rate (REER), as a guidepost. Although the bank does not have a target exchange rate, it does intervene in the market to ease volatility.

Late on Friday, the central bank said in a statement that the consumer price index would now be used to arrive at the rupee's value on a REER basis. That is consistent with its move to make CPI the main inflation gauge, in a shift away from the wholesale price index. Annual CPI inflation in February was 8.10 percent, compared with 4.68 percent for the WPI. The switch to CPI means the rupee was overvalued by around 4 percent in March, based on what the central bank said was a REER of 104.20. A REER of 100 would mean the currency is fairly valued. 

Previously, the rupee was undervalued at a REER of 89.46 in March, based on the WPI inflation benchmark.

The rupee has risen 2.8 percent in 2014. It closed at 60.08 to the dollar on Friday. Rupee appreciation has prompted the central bank to buy dollars in the market, increasing India's foreign exchange reserves by $5 billion in the week ended March 28, the biggest weekly gain in 4 months.

RBI shifts to CPI-based Real Effective Exchange Rate

(PTI) Shifting focus to retail inflation, the Reserve Bank today said it will compute and release Real Effective Exchange Rate (REER) only on the basis of the Consumer Price Index (CPI) as the price index for India from this financial year. "REER index constructed using a CPI for both India and trade partner countries would ensure a higher degree of comparability of former's international competitiveness vis-à-vis trading partner countries," the RBI said in a release. REER indicates movements in exchange rates of the home currency against a basket of currencies of trade partner countries and is considered to be an indicator of international competitiveness.

Since October 2013, the RBI has started providing indicative projections of inflation in terms of the broader CPI-Combined.

"Thus, with greater focus on CPI inflation as primary objective of domestic monetary policy, it is pertinent to have an alternative index of REER based on CPI," RBI said. Till now, in the case of India, the RBI was providing the REER index using the Wholesale Price Index (WPI) for India and CPI for partner countries. The RBI today released a monthly series on CPI-based REER for both six-currency and 36-currency baskets for the period April 2004 to March 2014.

It said from this financial year, only the CPI-based REER would be compiled and released.

The Tale of the Gandhi Cap

A nice piece by M.S.S. Pandian of JNU in recent EPW edition.

He points how the humble Gandhi cap has made a comeback due to Anna movement and AAP surgence to power. But then given AAP’s performance, the rebirth time might be much smaller.

There are two interesting tales on Gandhi cap from history:

Let me share two Gandhi cap stories – both from Maha­rashtra, the home of Anna Hazare. In a prelude to the 1946 provincial election, B R Ambedkar visited Nagpur. Following his visit, a conference was organised to highlight the injustice faced by dalits. As Namdeo Nimgade, an Ambedkarite and a well-known agricultural scientist educated in the US, reminiscences in his autobiography, the dalit leader P N Rajbhoj told the audience, “The Congress Party is systematically trying to divide and rule the various Scheduled Caste groups… In recognition of their deceit, I declare that I will burn the sign of the Congress, the Gandhi cap.”

The gathering made a bonfire of their caps and Nimgade fanned the flames by throwing his father’s cap into the fire.

The election day too was eventful. It witnessed widespread caste violence. Nimgade tells us: “Several unfortunate individuals of all castes were trapped in the wrong place at the wrong time during the riots.”

One of them was an upper-caste man, Bhivapurkar Kosshti. He sought Nimgade’s help to survive the riot and bartered his cap for his life. Nimgade writes: “I felt sorry for him. I said, ‘Brother, if you wear your Gandhi topi here, you will not survive. Please give it to me.’ I took his Gandhi cap and escorted him to Baburao Meshram’s house and hid him there until the riot calmed down…”

From Nagpur, the scene shifts to Bombay, and the period from the 1940s to the 1950s. On the night of 20 November 1955, S K Patil, the president of the Bombay Pradesh Congress Committee, and Morarji Desai, the chief minister of Maharashtra, addressed a public meeting on the sprawling sands of Chowpatty beach. The gathering had no fewer than 1,50,000 people. The next day Bombay witnessed a general strike in demand of a united Maharashtra, egged on by both speakers who were arch enemies of the Samyukta Maharashtra movement.

The meeting was torn asunder, as stones were pelted and the uproar drowned the voices of the speakers. Around 100 people were injured, and half of them sent to hospitals. The next day – the day of the general strike – anyone wearing a Gandhi cap, the sartorial hallmark of Morarji Desai, was attacked.

So clearly in the two examples, those wearing Gandhi cap became the targets of dislike and attack. So there were moments when the humble cap wearers had just the opposite experiences.

The first one is really interesting as Gandhi cap was seen as a symbol of Congress. How AAP made this its own symbol (because Congress forgot it) is an interesting tale..

Other Than Economics !

Sometimes I feel like rejecting all economics related stuff and get onto figuring technology. After all much depends on how the latter can generate economic growth and future opportunities. The action always has been in new emerging technologies and how they can change things..

Edward Jung (earlier at Microsoft and now at Intellectual Ventures) argues why it is time to look at new metrics for economic growth. The problem is much of economic activity is getting centred around digital technology but latter is not being measured properly in traditional indicators:

“If you can’t measure it, you can’t manage it.” That is the wisdom behind metrics like gross domestic product and other aggregate indicators that signal the health of national economies around the world. Policymakers and planners have used these numbers for decades to help them understand how to guide domestic economic growth.

But reliance on GDP and other traditional indicators may be sabotaging a keenly sought goal: the development of thriving innovation economies. Today, some vital parts of the information-technology sector barely register in the national accounts. While GDP measures the market value of all goods and services produced within a country, many stars of the digital age (think Wikipedia, Facebook, Twitter, Mozilla, Netscape, and so on) produce no goods and provide free services.

These same star players also tend to undercut the productivity of traditional businesses. Free navigation apps have shrunk sales for Garmin, the GPS pioneer that was once one of the fastest-growing companies in the United States. Skype is killing the international phone call “one minute at a time.”

These developments point to the need for new growth metrics that recognize new kinds of enterprise. And, because these metrics concern innovation, they should be forward-looking as well. Policymakers need to understand how to establish, manage, and thus measure the conditions that encourage innovators to flock to a region and forge a prosperous future there. Innovation metrics must capture the value of new ideas years before those ideas become profitable in traditionally measured ways.

He says FDI too is a wrong measure as it does not push home country to innovate:

The need for such metrics is especially urgent in the developing world. Emerging economies commonly use foreign direct investment (FDI) as a yardstick to measure progress. That metric makes sense in the early stages of development: poor economies need foreign capital to build factories, train workers, and put money in the pockets of ordinary citizens.

But foreign investment most often goes to low-risk, low-margin projects: iron foundries, cement plants, and so forth. Innovation, by contrast, is a high-risk, high-reward effort. Even big multinationals do not put a lot of money into a new idea at first. Tomorrow’s most disruptive innovation may have no effect on FDI or GDP today.

Thus, for countries like China, India, and Brazil that are trying to jump-start their domestic innovation cultures, FDI targets actually prevent government planners from reaching out to the people and companies that are most likely to take creative approaches to problems.

We need a change in thinking:

So what does valuable innovation look like, in terms of macroeconomic data, years before it gives rise to the next Google, Bayer, Porsche, or Alibaba? What numbers best characterize a thriving innovation ecosystem in its birth stages?

We already know some of the essential ingredients. They include top-level talent, serial entrepreneurs with good track records, start-ups backed by reputable capital, and breakthrough products protected by intellectual-property rights. Analysts at my company recently investigated whether these ingredients could be quantified. Our preliminary results suggest that they can.

hFor example, we learned that five of today’s most successful start-ups in the information-technology sector had two attributes in common by the end of their third year in business: they had filed more than one patent and been funded by more than one top venture-capital firm. In subsequent years, these five companies’ cumulative revenue was six times higher than that of start-ups chosen at random.

Economists could extend such analyses to develop a set of key performance indicators for young innovation economies. Governments could then use these innovation metrics to identify start-ups, talent, and products with the strongest potential for future success. This approach could be applied to any high-tech incubator project – within or beyond the developing world – that currently measures success only in dollars.

Some countries are trying to include technology into the traditional world:

Changing how we think about economic value will not be easy. Yet countries where GDP has been flagging – an ever-increasing cohort – might welcome new metrics that can show signs of real progress. And there is a growing awareness among policymakers and planners that virtual assets like creative talent and entrepreneurial skill make up an increasing portion of a country’s wealth.

The US Bureau of Economic Analysis acknowledged as much last summer when it changed the definition of GDP to represent better the contributions of intellectual property and research and development to productivity and economic vitality. Broader efforts to reform GDP, including initiatives sponsored by the Organization for Economic Cooperation and Development and the European Commission, seek to encompass sustainability, living standards, and other important aspects of a country’s wellbeing. Groups like the Institute for New Economic Thinking are championing the study of innovation economics to provide data and analyses for these efforts.

In fact, metrics that help countries drive innovation could change our very understanding of economic growth. Governments want them, economies need them, and the global community will benefit from them. It is time for macroeconomics to measure up to the ambitions of twenty-first-century innovators.

Not sure whether flagging economies can be innovative.

But yes one gets the broad point. It is ironic that GDP includes things like financial activity which hardly count as real production but fails to incorporate technology which boosts much of it. Infact much of finance is now about technology these days..

I guess the broader question is always this – Why has economics developed into a way where we are pursuing so narrowly defined goals. I mean one did talk about things like technology and innovation earlier via likes of Schumpeter and so on.

Interesting viewpoint..