The Indian Economy Blog

(I wrote this after my visit to Shanghai and Beijing in May ’10, as part of my MBA program at Duke. I originally circulated it around with friends and other readers with the title “China is at least 2 generations behind the rest”, but that was just needlessly provocative, and incorrect in many respects. Nevertheless, I remain quite a sceptic on China).

Flawed Economics

Firstly, China’s much vaunted economic growth is on very flimsy foundations. Yes, they were 173rd in world GDP rankings in 1978, and #2 today. But,the economic model in place is – keep currency low, have an unlimited supply of labor, and export to the US/Europe (‘capitalist’ nations). They earn dollars, and also have near total capture of all household savings, which are then funnelled back into the economy, mainly to just build infrastructure, and infrastructure only (there are highways in China, where one can drive for hours and see very fewr cars).
 
The success of this is based on trading with the world’s wealthiest capitalist country through the post-WW2 global trading system, and the US can significantly damage the trade by the stroke of a pen which forces them to revalue (or they close down trade doors, although this is hard for the US to do, given how badly off they are, in their own way). It leads to a ridiculously lop-sided economy, with not much going on (local consumption is almost negligible). The amount of ‘economic waste’ is unbelievable – nearly half of the skyscrapers in Shanghai are absolutely empty.
 
When, and it’s a question of when, and not if, the crash happens – which could be the collapse of exports, the internal property waste bubble bursting, the GDP will see a very severe contraction – which means lots of unemployment, wealth disappearing, and…
 
And that brings me to the most vexing part of the Chinese economic story – contrary to what the world thinks, there is a lot of poverty in China, the kind of degrading, dehumanizing type one associates with Africa, India, and South America, and in much larger numbers – 800 million of them.  In interior China, people live on 1000-1500 RMB a year, which is about 200 RMB a month, or about a dollar a day. 
 
Politics

The government in control – the communist party, get their legitimacy from the fact that they’re providing growth. Simple as that. So what happens when growth stops? Now, Shanghai and Beijing look grand, clean, and Shanghai in particular, is like downtown Manhattan times 100. Of course, it is all economic waste, since none of the skyscrapers are occupied. No forces of demand or supply, no consumption locally of the product (people can’t afford it).
 
And the way they’ve made it happen – any slums that were there get cleaned out, people get evicted. Picture that in Mumbai, think of what you could achieve. Nariman Point would be much more impressive. A lot of Shanghainese remarked that Shanghai was designed as a ‘showcase’, as ‘national pride’, and that once you step out, all the cities/towns look as ‘bad’ as any Indian tier-2 city.
 
Communist rule has destroyed every single institution that is present in a real society – media, government, judiciary, citizens organizations. Private industry cannot flourish – while 70% of China’s GDP is locally produced, it’s actually all government controlled, land is allocated by the government, and all resources/permissions are linked to the government.
 
The government owns everything, and the destruction of all institutions means that the common people have effectively been stripped of all and any means of rising, or of growing personally. A good example of this is in banking - banks exist, but the decisions on who to lend, where to lend, what to lend – nothing is in their hands. Beijing decides all that.
 
No media exists. At our hotel, there was a different newspaper for foreigners and for locals. Locals can’t move where they want, they need permits to move within their country.
 
(There is a broader philosophical issue of what is the point of living like this, but let’s leave that aside for now – as that can be flipped around and asked for India or any other country as well).
 
Society
 
This bit is the most ‘flaky’, but again, worth mentioning, it appears that communism has created a disjointed social network. There are lots of people who feel really rootless, with no grounding (although whether this is more inherent is an open question, as Nehru remarked when confronted how cavalier Zhou Enlai seemed with regards to an all out nuclear conflict between countries as large as China and India). You have a vast population that just lives as hawkers, peasants and workers, under tight-fisted control. And then you have a totally disjointed middle-class, which only cares about wealth, cars, apartments, and property. It’s very tangible, when you talk to the people, to see what has happened. By contrast, China, India even Dubai – seem to have a more connected local population.
 
It’s the combination of all these things – the weak economics, the political backwardness, and the skewed society, which makes me question the China story. And other emerging markets have very major issues and problems (and the less said about the developed markets the better), so its not as if China is in a club of one.

 A quick note on the Olympics: it was a manifestation of all that is wrong with the model. The manic national pride and desire for global (mainly Western and Japanese) respect, and a desire to impress other developing nation trade partners made them embark on the thing, with no respect for the true social and economic cost (which would have happened elsewhere). The unlimited labour supply and total control enabled them to mobilize a large workforce to work, kick people out from places where they needed the land, and just pull it off.

(Cross posted on my blog).

A write-up of mine recently appeared in India Abroad and TCS Daily on Montek Singh Ahluwalia’s talk at the Peterson Institute of International Economics, during the PM’s visit in November.

Here’s the link.

Nouriel Roubini, of the infamous (and silly) Dr Doom moniker, says India might just do OK.

Despite slowing from highs of 8% to 9% growth, India’s economy will grow close to 6% in 2009. Amid domestic and global liquidity crunch, large domestic savings and corporate retained earnings are financing investment. Sluggish labor market and wealth effects have hit urban consumption. But low export dependence, a large consumption base and the high share of employment (two-thirds) and income (one-half) coming from rural areas has helped sustain consumption. Pre-election spending, especially in rural areas, and high government expenditure, are also pluses. Timely monetary and credit measures have played a key role in improving private demand, liquidity and short-term rates and reducing the risk of loan losses. Credit is largely channeled by domestic banks, especially state-controlled ones, which have low loan-to-deposit ratios and little exposure to toxic assets….link

Given Roubini’s track record over the last three years, he’s certainly built some cred. Do you agree with his assessment on India, though?

“For what it’s worth, a key conclusion from the IMF’s new World Economic Outlook is that recessions caused by financial crisis typically end with export booms, with the trade balance improving,on average, by more than 3 percent of GDP. I find this a disturbing result: we’re now suffering from a global financial crisis, which means that the usual driver of recovery will only be available if we can find another planet to export to.”
Paul Krugman

With results still coming in, projections show the United Progressive Alliance is likely to win about 250 seats, making it a shoo-in to form the next government and provide continuity, a stable administration and progress on key economic and corporate reforms.
Wall Street Journal, May 16 2009

Prime Minister Manmohan Singh’s electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country’s economic growth as it struggles to free half a billion people from poverty…..Political stability will make India a more attractive investment destination as Singh, 76, seeks the funds to stimulate Asia’s third largest economy.
Bloomberg, May 18 2009

Many are called, but few are chosen, as the saying goes. But could it just be that this time around, and on a one-off, never to be repeated basis, India might find itself right there in the midst of things, with a 50-50 opportunity to add its name to that select and noble band, the chosen few. After all, someone has to lead the next global charge? The majority of the developed economies are either bogged down in the substantial quantities of debt that they desperately need to pay off, or weighted down by those elderly populations who are weakening consumption growth and leading to export dependence (Germany, Japan…). And as Krugman humorously points out, someone will have to add the extra demand which will allow global trade to start to grow again, so why should India not supply a significant part of this new demand, after all we are more likely to find consumers in India than we are on Mars. (more……. )

The El Dorado for auto-didacts

Salman Khan, a portfolio manager in California has created hundreds of free educational videos, available on his web site, the Khan Academy and on YouTube. These videos cover the basics of banking, finance and the current credit crisis — I saw a couple and they’re quite good.

Even more importantly, there are hundreds of videos on mathematics (algebra, calculus, trignometry, probability and more) and physics. Salman has three degrees from MIT and one from Harvard, so he knows what he’s talking about.

Anyone, anywhere in the world can benefit — all you need is access to the Internet. A good idea, fantastically implemented.

Thank you, Salman for investing all this time and energy.

Kudos to Amit Varma and Reuben Abraham

Amit Varma, India’s foremost blogger and award-winning columnist, has been busy recently.

His first novel, My Friend Sancho releases this week in fine bookstores all across India. Click here for launch details — so far, it’s Mumbai, Delhi, Kolkata, Bangalore and Chennai. If you’re in any of these towns, this is bound to be a fun event. Amit is a delightfully witty and amiable chap, if we say so ourselves.

And, by the way, it appears that we may have to add another adjective while describing the multi-faceted Mr Varma. According to Business Week magazine, Amit is one of the (ahem) 50 most powerful people in India. Who knew?

Blogger Amit Varma brings a particular libertarian point of view to his columns and blog items, but also a risqué sense of humor that keeps readers hooked. He won the 2007 Bastiat Prize for his columns in Indian business paper Mint, and for a select group of Indians, he represents a libertarian, anti-tax and anti-government sensibility that is still quite rare in the country.

Another friend of ours, Reuben Abraham, who is among many other things, a professor at the Indian School of Business has been selected as one of the Young Global Leaders by the World Economic Forum. By the way, Reuben is a true citizen of the world. He visits more countries than almost anyone else we know — we suspect he adds new booklets in his passport twice a year. So, if you’re an IEB reader in Patagonia, rest assured that you’ll get a chance to meet Reuben sooner rather than later.

The Internet may have worked wonders for Obama in the US, but is unlikely to be even half as effective in India

In a nation where a quarter of eligible voters are now between the ages of eighteen and twenty-five, the 2009 elections will see a potential 100 million young Indians heading to the polls for the first time between 16 April and 13 May. This isn’t any old India, as PepsiCo’s recent series of TV commercials suggests, this is “Youngistaan,” the Land of the Young. And just as the demographic reality of India’s youth bulge hasn’t passed soft drinks corporations by, neither has it escaped the attention of India’s political hopefuls. In the run-up to the elections, national and regional parties alike have been anxiously reworking their campaign strategies to appeal to youth – or what the media now chummily refers to as Young India.

At the heart of this drive is Obama-inspired online campaigning. Stirred by the Democrats’ success in the United States, India’s major parties have been eagerly integrating the internet into their election drives.

However, they have two big pan-India challenges to overcome: the myriad languages of India and the limited reach of the Internet. Read more here

Social entrepreneurship inching forward in India, albeit slowly and fitfully : India’s Spirit Of Business Booming

Hygiene doesn’t make it too often to the media. However, as anyone who’s spent more than 24 hrs in India knows, the lack of adequate toilets is a huge, huge issue.

Two links on that subject: Bloomberg – India Failing to Control Open Defecation Blunts Nation’s Growth and a more rigorous analysis from Nimai Mehta -The Preference Bias in Sanitation: Explaining Failures in Public Provision

India’s Underground & Hinterland seem to be the topics du jour :-)

In the Wall Street Journal, Peter Wonacott says India Defies Slump, Powered by Growth in Poor Rural States.

Rama Lakshmi of the Washington Post said as much last month: Vast Rural India Sparkles As an Expanding Market

About 72 percent of India’s billion-plus people live in rural areas. For years, the poverty of rural India was seen as reining in the country’s economic growth. But today, analysts say, rural India is a critical audience for marketers because it has been relatively insulated from the crippling blow of the global slowdown.

India’s rural destiny still depends on good monsoon rains and robust agricultural production, but four years of bumper crops and heavy government investment in rural infrastructure have given birth to what some analysts call an emerging economy within India.

Last month, Patrick Barta of the Wall Street Journal called it The Rise of the Underground.

Given this, it’s not entirely coincidental that The American, the journal of the American Enterprise Institute wonders how Lalu Yadav managed to turn around the Indian Railways, the world’s 2nd largest employer (the Chinese Army is #1) and in doing so, morph from Huey Long to Jack Welch — The Indian Railway King

After 26/11, Jack Welch pointed out that the attacks posed a question for India in terms of its ability to manage itself. China, although under authoritarian rule, had managed to pull off the Beijing Olympics, and assured safety for investors. India faced that question, post 26/11.

Now, with the cancellation of the IPL tournament in India and its move to South Africa, what message has gotten sent out?

Is the “offshoring” of the tournament a signal that the government is unsure of the overall security situation? Is this an indication of how over-stretched and creaky the governance infrastructure is?

What signal does this send to investors? After all, perception is everything, and for really large investments, it is typically “which BRIC ie, Brazil or Russia or India or China” which is often key.

Of course, it is also possible to read too much into one thing. Apparently England also got pushed out because their security would be over-stretched, so the questions raised above need to be qualified.

India’s elections ARE a mammoth exercise, and even more so, with terrorism threats.

What do you think?

IEB reader Suresh Dalai sends us this thoughtful guest post

As with most other places in the world, India is facing a significant economic slowdown that is aggravating an already serious liquidity crisis. The government is finding it increasingly difficult to implement additional fiscal or monetary measures, and as a result, has tried to bring liquidity by lifting FDI restrictions and attempting to lure back foreign investment. But politics is getting in the way. The government cannot allow political expediency to derail the progressive lifting of FDI restrictions, even during tough times like these. Many international companies are still looking to enter the country, despite facing enormous uncertainties about their financial health in their existing markets. With a more open India, they will enter and bring with them a significant amount of capital investment and managerial expertise. This will help India pull out of the recession in the short to medium term and also help establish the conditions to sustain economic growth over the long term. Indian companies will use the additional funds from their foreign partners to keep their staff employed and continue with capital expansion plans. Indian companies with global ambitions will have greater access to world-class infrastructure and managerial knowledge that will enable them to better compete around the globe. With increased competition, Indian consumers will be able enjoy the highest-quality products at the lowest cost.

(more…)

Ila Patnaik and Lant Pritchett discuss the problems facing Indian policy makers

(more…)

Indicorps, an NGO started by siblings Sonal, Roopal and Anand Shah, is a great way for anyone that wants to learn about the changes occurring in India, and even more, be a part of these changes.

Their Grassroots Development Fellowship is open for applications — online application link

The deadline is March 15, 2009 (sorry for the late notice but I’ve been traveling).

Here’s their blurb:

Indicorps offers prestigious grassroots public service fellowship to implement sustainable development projects with community-based organizations across India. As a total-immersion leadership program, Indicorps will encourage you to explore your role as a catalyst of change. Fellowship projects promote both personal growth and collective action towards a secular India that is inclusive, peaceful, and participatory. The program requires a minimum commitment of one year.

The Fellowship starts on August 15, 2009. Housing and food are provided and a small stipend will cover basic living expenses.

The Hidden Flaws In China And India Schools: Jay Mathews in the Washington Post says that “India and China, despite their economic successes, have public education systems that are, in many ways, a sham.”

India: Toward High-End Outsourcing: Vivek Wadhwa in Business Week claims that “companies on the Subcontinent (are taking) the outsourcing industry to a new level of expertise and competitiveness”. Well, with the rupee’s recent fall, presumably even low-end outsourcing is very attractive :-)

The Rise Of Delhi: Suman Bery has an interesting piece in the Business Standard on “the increasing range and intensity of accessible, close to world-class public discourse on issues of public policy on a very broad range of subjects” in Delhi. I suspect that this trend may well accelerate. I certainly don’t see anything remotely close to this in Chennai (during my quarterly visits).

China threat to Indian IT: a piece in the FT talking about how China may well pose a threat to India’s outsourcing industry, esp given the incentives given by the Chinese government

The blogs that barked: How the blogosphere outed the Stanford fraud (in the US and in the Caribbean) before the SEC or mainstream media did. Question for readers: are there any instances of bloggers outing corporate or government fraud in India before the regulators or mainstream media?

If you’re a whistleblower in India and disillusioned by the lack of checks and punitive action, Harry Markopolos’s travails in his attempt to unmask the Madoff Ponzi scheme might sound familiar