This could be very big and important

The Commerce Minister of India said that the government is actually not setting great store by a weak currency for driving exports. Wow! That is a big policy shift and a mindset shift.

I welcome it, in principle and cautiously.

I hope the move is borne out of conscious confidence and not complacent confidence.

Conscious confidence would address the underlying economic fundamentals that would justify, support and vindicate a strong currency.

Further, global capital flows tend to punish overvalued currencies too much. That is why Dani Rodrik advocates mildly undervalued currencies. Of course, it is not costless. Accumulating foreign exchange reserves is not costless. But, he reckons that it is less costly than being subject to the vicissitudes of global capital flows.

If one had stopped looking up to the exchange rate to bail exports out of inefficiency, then all the more reason to keep inflation under check and that means supply-side reforms and productivity improvement.

Fragmented production – in farms and factories – militate against efficient production. If anything, India’s land is getting more fragmented. That is what a report by the Ministry of Agriculture said. See this:

1.33 Increasing fragmentation of land holdings is a continuing cause for concern. Around 85 percent of the operational holdings in the country are small and marginal, i.e., that is holdings of less than 2 hectares each. Between 2000-01 and 2010-11, the number of marginal holdings increased from 75.41 million to 92.83 million, a rise of 23 per cent and number of small holdings increased from 22.70 million to 24.78 million (9 per cent rise).

By contrast, the medium holdings dropped by 3 per cent and large holdings by almost 11 per cent.

Semi-medium holdings increased by 0.7 per cent, while the number of medium holdings dropped by 3 per cent and the number of large holdings declined by almost 11 per cent.

In terms of the proportion of area under different sized holdings, small and marginal holdings in 2010-11 accounted for 44.6 per cent of the area, while semi-medium and medium holdings accounted for 44.8 per cent of the area and the remaining 10.6 per cent by the large holdings. This is indicative of the significant fragmentation of operational holdings in India.

Medium holdings are getting converted frequently into small and marginal holdings, and no signs of reversal can be seen in the foreseeable future.

It is estimated that the average size of land holding, which at present is 1.15 hectare, is likely to reduce further by 2020-21. [Link – pages 14-15]

The same is true of industries. In general, unregistered micro enterprises dominate the overall factory landscape. Registered enterprises are very small. Of that, medium to large enterprises are a tiny fraction.

Further, the government’s policy priorities in recent months is about distribution than about growing the pie.

Rupee strength induced by an ultra-careful central bank that is perhaps out to prove a point on its independence (in other words, keeping real rate high) and foreign hot money inflows should not be confused with fundamental strength of the economy.

So, I am not sure if the symphony on the strong currency is in sync. really.

Therefore, an in-principle and a cautious welcome.

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2 thoughts on “This could be very big and important

  1. Anantha, I have a serious question and would be glad if you could throw some light on it. How do policy makers measure productivity improvement in India without reliable numbers on labor force and even GDP.

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    1. A good question. Not easy to answer. In India, the problem is acute given the vastness of informal enterprise system where record keeping is absent. So, one has to rely on indirect methods. However, there are some sources. The ASI report does show the productivity (or, the lack of thereof) of the Indian factory sector. In the farm sector, there is yield per hectare and one can also measure productivity of farm labour by dividing output by number of farmers estimated to be in the farm sector.
      In addition, there is ICOR. Incremental Capital Output Ratio. But, with this, one shjould be aware if C is rising or not. If there is no capital investment, ICOR will be low. But, that is not a productivity measure to celebrate, in that case. The context too has to be taken into account. The software sector too has its own productivity measures. One can ask them. Finally, RBI Monetary Policy Report has some interesting charts on labour costs per unit of output, etc., in its chapter on output, growth, etc.

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