Change the glasses

My friend Bala forwarded me the article by Mr. Chidambaram on the jobs study by Ghosh and Ghosh. This is not so much a rebuttal of his column as a general comment on the controversy.

That those who deny or wish to deny or those picking holes in the work of Ghosh and Ghosh are Modi-detractors is an interesting thing to observe.

It somehow reveals the mindset. If jobs are created in the economy, it must be to the credit of the government and if jobs are not created, it is a poor reflection on the government. That is wrong. Economics is nothing if not asymmetric. Governments have the ability to hurt but not help. Put differently, the government’s ability to hurt the economy far exceeds the government’s ability to help the economy.

Economists will know of ‘necessary and sufficient’ conditions. Only if a particular condition is both necessary and sufficient, will its influence on the outcome by symmetric. Otherwise, it will be asymmetric. Most government actions are in the nature of necessary conditions. If they are not done, it would adversely affect the economy. If they are done, there is no guarantee of positive outcomes because they are only necessary conditions and not ‘necessary and sufficient’ conditions.

Therefore, it would be a fallacy to attribute the results of payroll growth estimated and reported by Ghosh and Ghosh to the NDA government. It may well be the case that this payroll growth that they have estimated has happened in spite of NDA policies. After all, this government has been anything but pro-business. Income tax raids, searches and seizures, the government’s slow response to bank bad loans, its imposition of price controls, its creation of anti-profiteering authority and its failure to honour its promise to lower corporate tax while removing ad-hoc tax exemptions are testimonies to its unhelpful attitude towards enterprises, especially large ones.

So, it would help many commentators to view the work of Ghosh and Ghosh a lot more objectively if they remove the political glasses they wear.

At the same time, the logic of asymmetry would also result in the acceptance of the fact the economic boom of the years between 2004 and 2008 was not the doing of UPA-1 regime but the economic travails of 2010-2014 were the consequence of UPA-2.  It is elementary, my dear Watson. Governments cannot help much but they can hurt. UPA-2 hurt while UPA-1 was simply lucky. RBI Industrial Outlook Survey showed that incorporated manufacturing enterprises really slowed down their hiring or even shed labour in the UPA-2 years between 2011 and 2014. The charts are available in my MINT column.

In fact, if looked at PMI (Purchasing Managers’ indices) surveys of the years between 2011 and 2014, we see that economic activity had decelerated considerably in those years. Therefore, there is reason to believe that CSO growth estimates for those years are vastly overstated. The headline PMI values for those years suggests that there was substantial jobs erosion in those years among both manufacturing and services enterprises. One needs to look at the sub-index on employment to state this with greater confidence. Data are awaited.

Now with politics out of the way, we can examine the work of Ghosh and Ghosh a bit more objectively. They were measuring or attempting to estimate payroll growth in India in 2017-18 in the organised sector which includes the government too. With a very large informal sector, no one claim to know or even estimate job creation in the entire economy in real time. It takes a few years.

Some of the facile criticisms of their work are sloppy because such criticisms give the impression that they had not bothered to even glance through the paper available for free download. Ghosh and Ghosh exclude those who became part of EPFO under the amnesty scheme that the government announced. They only focus on 18-25 year olds. They exclude cases even if one payment was missing. They acknowledge the possibility that an organisation having 19 informal employees could become formal when it hires the 20th employee and start paying into EPFO. Then, the entire 20 would show up as new formal jobs created. They are aware of it. They have two responses to that. One is that they think that this problem is not a significant one and two, they contend – with considerable justification – that their exclusion of those aged 26 and above mitigates this risk of exaggerated statement of job creation.

Now, just to prove the politicization of the argument, let us imagine that all the jobs that Ghosh and Ghosh reckon were created in the formal sector were jobs that already existed as informal jobs and were merely re-labelled as formal sector jobs because they began contributing to EPFO. That would still be a significant development. Economic Survey 2012-13 reported that around 80% of the informal jobs had no written contracts. Obviously, formal jobs with no written contracts cannot exist. So, if several millions of informal jobs had turned formal, then certainly the level of protection that such jobs enjoy has gone up. The compensation and benefits such jobs earn will also have gone up. These will contribute materially to the living standards of not just those holders of formal jobs but also of their families.

Of course, we know that this is only an extreme though experiment and that, in truth, there has been significant payroll growth in the organised sector. How do we know that? First is the work by CLSA. Mahesh Nandurkar, the India strategist at CLSA, had estimated that 900 large listed companies had grown their payroll (not contract hiring) by 4% in 2015-16 and in 2016-17. That is formal jobs creation. That is an increase of 400,000 on corporate payroll.

Second, RBI Industrial Outlook Surveys over the last two years point to a definite uptick both in hiring and in hiring intentions of the manufacturing companies covered in their survey.

Third, if indeed scores of informal jobs were destroyed or lost in 2016-17, wouldn’t the country be under greater siege than it is, now? It must be the case of the dog that did not bark. It did not bark because there was nothing to bark at.

Thus, there are reasonable grounds to assume that Ghosh and Ghosh might have produced reasonable estimates. Critics have made one reasonable comment. They have asked for the data provided to Ghosh and Ghosh to be made public. It is hard to quarrel with that.

Jordan Peterson

Peggy Noonan has an interesting article (ht: Venugopal Ramakrishnan) on the interview of clinical psychologist and social philosopher Jordan Peterson by a British television journalist. From what she writes, I think Peterson’s work resonates with me. I listened to the interview he gave to Cathy Newman of Channel 4. He handled himself exceptionally well.

If you want to be ‘shocked’ at how someone could so deliberately distort the interviewee’s words and if you do not want to watch the interview, you can read an article in ‘The Atlantic’ on the conversation.

I got to know of Jordan Peterson as the person who had interviewed the Google employee James Damore. Sunder Pichai fired him for posing important questions on the culture at Google. Now, Mr. Pichai says he stands by his decision. Well, I suppose, it is too early for a mea culpa. Julian Baggini has a review of his book at FT.

The sub-title of the review is: ‘A YouTube intellectual’s advice on how to live emphasises order and tradition’. That is enough to put any objective reader off. The arrogance of some of these self-styled intellectuals is blinding them to the obvious reality that it is not helping but hurting the very causes that they claim to espouse – so-called liberal values. There is nothing very liberal or liberating about putting down another person. It is cheap and vulgar. It is intolerance. There are far better, more effective and more persuasive ways of critiquing a book’s content or the lack of it.

Cathy Newman of Channel 4 and Julian Baggini have done the greatest disservice to genuinely liberal values and principles.

Peggy Noonan has an answer for Julian Baggini:

When cultural arbiters try to silence a thinker, you have to assume he is saying something valuable.

So I bought and read the book. A small thing, but it improved my morale.

As many readers-commentators in FT have said, the article in ‘The Guardian’ on his book is far more insightful. I could also read what Professor Peterson had to say about the backlash his interviewer from UK’s Channel 4, Cathy Newman, faced.

The last line of that article tells me that he is a liberal:

If Cathy is interested, maybe we could model a conversation. That would be a good thing.

That is the way to foster a dialogue.

Nowcasting India’s GDP and other links

Some of the stories may be at least two weeks old and some may be behind paywalls. Apologies.

Soon, India (or, it already has) will have a model for nowcasting the current quarter GDP growth (ht: Niranjan)

Larry Fink of Blackock supposedly raises the bar on corporate social responsibility, in the companies that his Funds invest in. Good effort.

However, if one read extracts in ‘Vanity Fair’ of a new book that throws a spotlight on the technology companies and their wild parties, among other things, one will have many questions to ask of technology companies, their supposed stances on gender equality, etc.

So, for Larry’s letter to be taken seriously and gain respectability and acceptability,  intellectual honesty, consistency and alignment between precept and practice on the part of the cause-champions are very critical. The slightest chink in the armour would be used to dismiss the entire exercise as a charade.

This article in ‘The Economist’ on Blackrock vs. Blackstone is a bit shallow.

This article by Gillian Tett in FT tells us what the high and mighty were worried about in Davos. Rather predictable. Markets have either discounted or ignored them. As she says, let us focus on what they are not worried about. They were not worried about China. But, the head of the China Banking Regulatory Commission warned of black swans in the financial system. May be, this is what he was referring to. Or, may be, he is worried that the government is not prioritising deleveraging.

Most critics of Trump praise Xi Jinping’s leadership without bothering even for a minute to notice the irony. The article that I have linked could be behind a paywall. But, it refers to the experience of foreign companies and even Embassies losing access to their VPNs in China. It means they have to use the official Chinese gateways to communicate over Internet.

Trump’s speech at Davos had a good line and that is that ‘America First’ did not mean ‘America alone’.

‘Jobs’ data in India

The article below appeared in the online version of MINT on Wednesday. The published version has two useful and interesting charts.


A good starting point

2019 is likely the year of national parliamentary elections in India. In 2018, several states elect their legislative assemblies. Both the years will witness noise than discussion and heat than light. Even research that might have been in the works and published this year or next will be viewed through tinted (or, tainted) glasses. A recent paper by Prof. Pulak Ghosh of the Indian Institute of Management in Bengaluru and Soumya Kanti Ghosh, Chief Economic Advisor of the State Bank of India is an early victim of such a politicised and prejudiced interpretation.

If one searched for their report, one gets a summary and a full report.  The authors have been careful not to claim that their work is the most authoritative one on the state of job creation in India. Nor do they claim that they have come up with a model to estimate job creation in the entire Indian economy: formal, non-formal (or, informal) and agricultural sectors. They are very clear that their work is about whether jobs are being created in the organised sector (emphasis mine). Towards this end, they have looked at data from the Employee Provident Fund Organisation (EPFO), the Employee State Insurance Corporation (ESI) and the National Pension System (NPS).

As far as one can tell, they seem to have erred only on the conservative side. They have made their assumptions clear. They claim that India is on track to create 5.5 million formal sector jobs based on trend in the current financial year, up to November 2017.

My initial reaction was one of scepticism. The first question that came to mind was the reconciliation between job creation and economic growth and job creation and bank credit growth to industry. India’s GDP growth has slowed throughout the financial year 2016-17 and it appears to have bottomed out in the first quarter of 2017-18. In the quarter ending September 2017, there was a slight rebound in economic growth. However, bank credit to industry has not really picked up. Therefore, it would be reassuring if other evidence – direct or indirect – reinforces their estimate of formal job creation.

We examine four angles – job creation by large listed companies, Reserve Bank of India surveys of manufacturing companies, funding constraints for businesses and finally, informal employment.

Healthy growth in job creation by large corporations

First, India does not have a survey of business or commercial establishments as the United States has. So, there is no payroll estimate available from employers. In October last year, the India Strategist (Mahesh Nandurkar) from CLSA India wrote in ‘Business Standard’, “We looked at company annual reports of listed companies and nearly all listed companies give number of employees as at the end of the financial year. This is the most authentic and high frequency (once every year) data that one can get. Our analysis of more than 900 listed companies with a total employee base of 5 million shows that jobs growth has been good at 3.7 per cent during FY17 and 4 per cent in FY16. This is actually in line with the jobs growth seen for these companies over the last 10 years. Thus, at least for this sample, the jobs creation has not slowed down over the last two years.

As Mahesh correctly points out later in the article, these are jobs created directly by India’s large listed companies on their payroll. India’s tax policy and tax system favour capital over labour, unfortunately. Yet, if their payroll growth has been around 4% in the last two full financial years, then it is quite likely that in the overall formal sector (including small but unlisted firms), the overall job creation has witnessed a likely higher percentage growth. Yes, that would be still formal sector jobs even if not necessarily better-paying corporate jobs. Even employees hired by contract labour firms (Teamlease for example) and placed in companies would be counted as formal jobs because EPFO, ESI contributions will have to be made for those workers. The Ghosh-s do not claim that all the formal sector jobs that have been created have been created on the payrolls of the corporate sector. Indeed, they do want India to start measuring corporate payroll.

Hiring and hiring intentions picked up in 2H2017

Second, the Reserve Bank of India conducts several useful Quarterly Surveys. One of them is the Industrial Outlook survey which asks more than thousand businesses (companies) in the manufacturing sector about various aspects of their business conditions from inventory to working capital to exports to imports and to employment conditions.

Two charts are shown below. One goes as far back as the data permit. The other is from the time the NDA government came to office.

chart 1

chart 2

These are net positive responses (increase – decrease of jobs) on employment. The information content of the charts is high. Net hiring by manufacturing businesses fell precipitously from 2011 until 2013 (three years) almost reaching the lows seen in the aftermath of the global crisis of 2008. That is a reason to suspect the economic growth numbers that are now reported for that period. They are too rosy to be credible. The job situation was dire. That is another story for another occasion.

That said, employment situation picked up in 2014 but did not take off until the second half of last year. The uncertainty caused by demonetisation is seen in the data and there was a dip in the second quarter of 207 (April – June). In 2017, hiring intentions have taken off even more impressively than the present employment situation. So, the RBI survey does not negate the picture that the Ghosh-s have painted.

Bank lending was not missed

Third, what about the fact that banks were not lending to industry? In its assessment of the Indian Financial System (‘Financial system stability assessment—press release and statement by the executive director for India’, December 2017), the International Monetary Fund made two observations:

  • The Indian financial system is undergoing a gradual structural shift, with a greater role for non-bank intermediaries and higher recourse to market funding for large corporates.
  •  The financial system is diversifying, with market shares of nonbank intermediaries (notably, mutual funds and nonbank financial companies—NBFCs) and private sector players increasing gradually—albeit from a low base. Banks’ share in credit flows fell from 50 percent during FY2015/16 to 38 percent in FY2016/17, as corporates increased private debt placements and issued commercial paper, replacing bank funding with market sources.”

Clearly, credit-worthy borrowers have been able to tap the market and raise funding. Hence, meagre bank lending growth need not have held back hiring by the formal and incorporated entities that had access to capital markets.

Informal employment – do we know anything?

Finally, what about informal employment? Timely data are not available. One must rely on surveys. Most surveys of informal employment done after demonetisation start with a pre-conceived conclusion and find responses that would validate them. The case in point is a rather interesting study on the response of the community in rural Tamil Nadu to demonetisation (‘Insights on Demonetisation from Rural Tamil Nadu – understanding social Networks and social protection’ – Economic and Political Weekly, December 30, 2017). The authors mention that there was widespread support for demonetisation. Yet, they write in dire tones about its impact. They do not concede the possibility that they may be missing something given the “wide public opinion support” that they acknowledge twice in the report. Second, most non-agricultural jobs in India have no written contract (see Chapter 2, Economic Survey 2012-13). It is more likely the case for informal jobs. Therefore, it is rather difficult to know if, on balance, jobs were created or destroyed in the informal economy.

Clearly, much needs to be done to create good quality jobs in India, from enabling job-seekers with the right and matching skills and attitudes, to lowering the cost of hiring labour, to making hiring workers desirable and to enable hiring in well-paying jobs. The first thing the government can do is to work on creating a better and timely jobs market data. Indeed, yours truly wrote that a useful mission for NITI –Aayog will be to improve India’s economic data to first-world standards. America sets the standard even among developed countries. In this regard, what the Ghosh-s have done is a very good starting point. Critics have to do better than to set up strawmen arguments and knock them down.

Post-script: This is one more example of a comment being made, perhaps, without even reading the work of ‘Ghosh & Ghosh’ because points (2) and (3) are already addressed in their work. Specifically, on point (1), the author should have read what Ghosh and Ghosh wrote:

It is possible that during any year, existing employees less than 19 would come into EPF newly and add to payroll. However, this is a normal event every year and we believe that this figure is not material on net basis as we have excluded first payments from joinees who are 25+years and who could have also joined the payroll for the first time.

One can question their conclusion ‘that this figure is not material’ only if they can show with data that it is material. Of course, they would need access to the data that Ghosh and Ghosh had. That should be done, in the interest of objectivity and unbiasedness. That is about the only criticism that seems valid. The rest is desperation.

‘Jobless’ critics of the jobs data

It is quite fascinating and even intriguing to see the proliferation of articles that are very quick off the block that try to debunk the work of the Ghosh-s. The behavioural or psychological motivation behind the haste to write such articles is an area of study in itself.

The fact is that the Ghosh-s themselves have identified most of the so-called drawbacks and limitations of their work that these experts attempt to point out. They have called for a payroll data report in the country.

It is interesting and even revealing that none of these critics have cited the article by Mahesh Nandurkar that appeared in these pages in October last year that looked at payroll growth of large, listed companies in the last two years and found the growth rate respectable and in line with the growth rate in that segment of the Indian demography that needs jobs.

Even if the government were to take credit for this, we all know that governments can only claim credit, up to a point, for job creation accomplishments. Governments can sometimes hurt economic causes more than they can help them.

But, if we are prepared to blame the government disproportionately for certain performance lacuna of the Indian economy – even where the governments have very limited influence – then we must not deny them their right (justified or not) to claim disproportionate credit for the economy’s achievements.

The anxiety and the urge to deny the government a feeling of satisfaction with respect to job creation dominates objectivity even among the so-called neutral and impartial observers and experts.

Since some Opposition parties are keen to make jobs creation an election issue in 2018 (States) and in 2019 (national Parliament), the anxiety on the part of politically connected and motivated critics to dismiss the work of the Ghosh-s may be understandable (even if not necessarily excusable or defensible). But, that of the so-called experts….?

Let me hasten to add, however, that Mahesh Vyas’ piece was one of the better ones among this lot even though he was only grudgingly fair to the Ghosh-s in his comment on their work.

My detailed examination of the work by the Ghosh-s should be appearing in MINT (only online) shortly. I do not wish to say more and spoil the surprise.

Long-term capital gains tax

Debashis Basu has a brief comment on the merits of imposing a long-term capital gains tax in India. If stocks are held for more than a year, any gains arising out of their sale are exempt from capital gains tax. That is the current position. He quotes from the Kelkar Committee report:

A substantial portion, if not all, of the long-term capital gains on equity represent the value of retained earnings. Since the profits of the company would bear the full burden of the tax, the retained earnings would have also suffered full taxation. Any tax on such long-term capital gains on equity would tantamount to double taxation of the retained earnings.

That capital gains represent the substantial portion of retained earnings is theory or an assumption which has not been borne out at all in the last thirty years globally, including in India. Capital gains are largely a consequence of multiples expansion more than being a reflection of retained earnings.

The authors’ points in the last paragraph are valid. If we have a plethora of rates for capital gains for similar assets and different duration to distinguish between short-term and long-term, they definitely are in need of harmonisation.

But, those are different issues and have nothing to do with the merit of imposing a tax even on long-term capital gains. The author mentions a few other countries that do not levy capital gains tax. He also adds that some of them levy a small percent of tax. It would be interesting if he had also included information on the duration of holding above which capital gains are deemed long-term, even in those countries that either exempt them from tax or tax them minimally.

I believe the arguments to raise the threshold to 3 or 5 years to be deemed long-term and for imposing at least a small tax after that (10%?) are sound and I have made them here.

De-monetisation update 39 – forced formality

Dr. Rammanohar Reddy has a thoughtful piece in ‘Business Standard’ on forcing informal firms to go formal. The author is right. Forced formalisation has not worked. It is a globally recorded fact. He is also right that informality is a consequence of low development and that not all informal activities are illegal or generators of black money.  Most of them are well below the threshold and are operating legally.On large firms not buying from GST-exempt small firms, there can be one caveat, however.

In theory, they should be competitive with their price and that should offset the GST credit advantage that GST paying firms will be able to offer. What the government should do (or, should have done) is to use the ‘moment’ of demonetisation and GST introduction to help formal sector scale up rather than ‘force’ informal firms to become formal by fiat or through threats and disincentives.

It is one thing to make informality less sustainable but another thing to make formality a sustainable form of activity for these firms which are force-migrated to the formal sector. If the latter is not done, they will only fold up, swelling the ranks of the poor and the destitute. Social and economic consequences will follow.

Global evidence is that economic development automatically shrinks the size of formality in relation to the formal sector. Some migrate and some may fold up and some may find employment in the formal sector if they upgrade themselves. But, informal firms do not necessarily disappear. They also add social value to the communities and neighbourhoods.

Gulzar Natarajan and I have written a paper, ‘Post-demonetisation policy agenda’ for Carnegie (India) and it examines these issues in detail.


Industrial Recovery through indigestion

There has been semi-serious and semi-funny news-stories on how the sale of antacids and digestive enzymes including PPI drugs (part of the five digit product code: 21002) had contributed to industrial production growth in India in November. The official press release of IIP for November 2017 is here.

For example, in November, the Index of Industrial Production (IIP) rose 8.4% y/y. Nearly 2% of was contributed by goods in the five digit categories 21001 to 21009. They have a combined weight of just under 5% in the IIP. In other words, nearly 25% of IIP growth in November came through the sale of products encompassing the five digit product codes 21001 to 21009. Interested readers can check out the document put out in March 2017 for the goods that are part of the five digit codes 21001 to 21009, when the revised IIP with a new base year was introduced.  But, the story of antacids and digestive enzymes is more interesting.

Digestive enzymes and antacids (incl. PPI drugs) are part of these products with a weight of 0.22% only. Yet, it has been punching way above its weight in recent months. ‘PPI’ stands for Proton-Pump Inhibitors.

If one went to the website of the Ministry of Statistics and Project Implementation and click on the link to IIP, one can download the last eight monthly press releases of the IIP from April 2017 to November 2017.

In the last eight months, this category has figured every month among the highest contributors to industrial production growth.  Here is the table:

Indigestion contribution to IIP growth

The figures in the second, third and fourth columns are taken from the monthly press releases of IIP. The fifth column is column (3)/column (4).

Well, demonetisation, introduction of GST, the Insolvency and Bankruptcy code, Real Estate Regulation Act, Benami Transactions Act, Introduction of Aadhaar and the insistence on linking Aadhaar to everything else and the rumours spread by mischief makers that the government was angling for depositors’ money in bank accounts could have all contributed to a lot of indigestion and hence the rise in the sale of antacids and digestive enzymes!

Or, it could be that political leaders – that of BJP included – might be suffering from a lot of indigestion because of frequent elections and the anxieties they generate.

Jokes apart, the overall two digit category, ’21’, stands for pharmaceutical products, medicinal chemicals and medicinal shampoos, etc. Its weight is 5% in the IIP.

6-month MA of annual growth in '21' of IIP

In general the annual growth in production of ’21’ – Manufacture of pharmaceuticals, medicinal chemical and botanical products – has picked up since the NDA came to office. It is not as if this big surge in production in pharmaceutical products is to meet exports. Export growth in the category, ‘Chemicals and Related Products’ was 3.0%, 1.4% and 2.4% for the fiscal years 2014-15, 2015-16 and 2016-17.

So, the bulk of the production of medicines is for internal consumption. That is bad news, in a way.  Indians need to pay attention to preventive health – hygiene, sanitation, eating out, eating late, eating fat and rich food, sweets, eating unhealthy food, kept in the open, near open drains with swarming flies, etc. The multiplier benefits of good health for the economy will be tremendous. Even if the product category ’21’ does not contribute to growth in IIP because of that, it will show up in other categories of IIP.

The government too, on its part, should become mindful of the almost unceasing stream of uncertainties and stress it can cause with its excessive zeal on tax revenue mobilisation, on change of rules and regulations midstream (solar industry is a case in point), etc. All these cause stress, indigestion and hence the rise in the sale of antacids and digestive enzymes!

Good health is linked to good governance, stable regulatory environment and ease of doing business.

Demonetisation update 38 – pre-dispositions

Prasanna Viswanathan of Swarajya had shared a good article from Economic & Political Weekly (December 30, 2017) on the impact of demonetisation in rural Tamil Nadu. It was a survey based article. What came out well was the fact that people found a way around the cash ban and yet stuck to cash. That came out well. The second thing is that informal networks got strengthened. The authors strangely note that as a failure of the demonetisation exercise. Far from it. The authors of the demonetisation exercise in the government did not wish to disturb social networks in India!

The other thing that came out – the authors mention it twice – is that there was widespread support for demonetisation. That makes us wonder if the inconveniences and difficulties faced by the public are exaggerated by those who were not well disposed towards the government. If it had caused huge hardship to people, the measure could not have remained popular for too long.

The paper is ‘Insights on demonetisation from rural Tamil Nadu’ – understanding social networks and social protection, Economic and Political Weekly, December 30, 2017, Volume 52.

If the authors of the article were not pre-disposed towards judging the demonetisation as a failure, it would have made for a scholarly article. Pre-disposition makes scholars look silly.

You do not have to look far from this FT article by Larry Summers on the American economy for a classic example of pre-disposition or prejudice making for poor scholarship. If my students had written it, they would have scored very low marks indeed. Just one example: for America, a weak currency is not a reflection of its economic weakness at all. Mr. Summers knows it well but mentions it all the same as reflecting economic fragility because he cannot get himself to say something good about the U.S. economy under President Trump.

While on the subject of the U.S. economy, it was amusing to read that President Obama was claiming credit for the improved performance of the economy in 2017. Well, debatable but would he then take the blame for its sluggishness up to 2016 in almost all parameters of the economy?

Coming back to pre-dispositions, we had one on the other side – this time from Surjit Bhalla. He wrote in ‘Indian Express’ that tax buoyancy had picked up in the current financial year 2017-18, despite the demonetisation. Well, he says, it was because of the demonetisation’s impact on black money that tax buoyancy (more like elasticity- % change in tax collection for a % change in GDP) picked up.

This is problematic. GDP growth slowed down in the first three quarters following demonetisation. That does not establish causality but it is reasonable to think that demonetisation had at least a partial impact on economic growth. If, on top of the growth slowdown, there was increased tax collection, then one has to wonder if it was a good or bad thing. Vigorous tax collection in the middle of an economic growth slowdown might have aggravated the slowdown.

So, I am not sure if improved tax buoyancy in the context of an economic growth slowdown that might possibly have been aggravated by demonetisation (if not caused by it) is cause for celebration.

China and globalisation – part 2

Hardly a minute had passed when I received an email from a friend with the following queries with the clarification that they were not rhetorical statements disguised as questions but genuine questions seeking answers:

So… The $ 11 Trillion question is… Why did the US do it?

At what point did they realise they were enabling some bad habits like currency manipulation and debt addiction and IP theft?

And what have they done about it beyond bluster?

And holding the mirror to oneself is not easy! So, I would like to ask…

How has the US gamed the openness of the international trade and finance regimes in order to secure profit for its corporations… And to push its foreign policy agenda?

I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US. But how do I explain this in a calm, logical and data-driven  manner?

Actually, the last question is a genuine question, not rhetorical. Any insights would be appreciated.

My responses:

I understand your questions and I did not think that it was rhetorical.

Indeed, I hold no brief for American behaviour. I was stating it as a matter of fact. Before Americans, European powers, including the UK, have resorted to such selective patronage of nations and policies, garbed in the rhetoric of open markets.

On currency manipulation too, Western nations are not paragons of virtue. Raghuram Rajan is correct that zero or negative rates too are a form of currency manipulation.

Post-1980s United States is all about capital at the expense of labour and therefore, trade deficits and financial openness were instruments in aid of boosting returns to capital. Combination of lazy and predatory capitalism. Have written on numerous occasions on it and a book is coming out later this year, I hope.

That is what emboldens nations like China to cock-a-snook at the international order because its guardians and creators have turned unilateral and unfair exploiters.

>> I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US.. But how do I explain this in a calm, logical and data-driven  manner? 

Fair question. My responses:

(1) The United States did play by international order for at least two decades, that it helped craft after WW II.

(2) The UK lived up to the rules of the Gold Standard before it demanded others countries do so. It tolerated a painful and long period of deflation to restore competitiveness instead of resorting to devaluation (19th century)

(3) Despite a valid and cynical evaluation of U.S trade imbalance, the fact that it has run persistently large (and even increasing, on occasions) trade deficit is a valid testimony to its relative trade openness. Its M&A track record on foreign companies acquiring American companies is far better than that of China.

(4) After 2008, barring the propping up of SIFI, it did allow its banking sector to restructure. That is why its banking system is arguably more resilient than that of Europe or China’s.

(5) Paul Volcker risked two recessions in two years to control overheating and inflation.

>> ​Why did the US do it? 

I do not think I have answered it. I doubt if John Pomfret too answers it convincingly.

Boils down to several factors:

(1) Japan was becoming too successful for its own good. A counterweight. The U.S. does ensure that its potential rivals balance each other. (Example: Bet on India but make sure that Pakistan is there to keep India checked.)

(2) ‘Capitalising’ China will help neutralise the Soviet Union and also remove the long-term threat of communism

(3) Taiwan was too small to be of benefit to the United States economically – for its financial interests.

(4) Not to leave out a certain naive idealism or hope that getting a potential ‘rogue’ nation into the system will make it a responsible stakeholder and it cannot be a threat to a system (that still largely served Western interests) that it is part of.

Finally, all these are open to debate and different interpretations and weights.