The truth about the Indian economy – 2/4

On Tuesday morning, 12/9, I woke up to see two pieces in MINT dealing with the new paper by Thomas Piketty and Lucas Chancel on inequality in India. Manas Chakravarty and James Crabtree had written the articles. Interestingly, I learnt from an email sent by James Crabtree that his forthcoming book on India has also been titled, ‘Billionaire Raj’. Unbeknownst to him, Piketty and Chancel have also chosen to name their piece, ‘Indian income inequality, 1922-2014: From British Raj to Billionaire Raj?’. Manas helpfully provided a link to the original paper.

Manas contents himself with summarising the original paper. The paper looks at India’s income trends from 1922 to 2014.  Yes, the data stops with 2014 before NDA came to office. But, you would not guess that from reading James Crabtree’s article. Somewhat unsurprisingly and yet disappointingly, the sub-title of his article is ‘The massive inequality in the country gives the lie to Narendra Modi’s rhetoric—and poses several economic threats’. May be, he did not write it but MINT editors did.

I did not quite get it since the data ended in 2014. For all the rhetoric of poverty and ‘reforms with human face’ it is clear that inequality trends had worsened in India in the years between 2004 and 2014 – the UPA I and II era. Look at any of the charts in Appendix 13 (1 to 4), 14 and 15. Also, take a look at Figure 6 in page 20. Reproduced below. Figure 9 in page 23 is equally dramatic but not reproduced here.

Top 1 percent income share in India

You will get what I say. Inequality trends accelerated under UPA (I & II). That is par for the course in India. Policy discourse/rhetoric is one thing and policy effect is another. Reading James Crabtree’s piece would not give you the impression that the problem became big in the UPA era. That said, UPA’s failure – it not only failed to stem but it also actually witnessed an acceleration in inequality – holds lessons for the current NDA government. Lessons which it has shown no sign of learning from, however.

James Crabtree’s concluding lines are not too far off the mark, however, even though the NDA government is not providing much hope for crony capitalists as the previous government did:

Beyond this a far more radical agenda is needed, to improve basic social services at the bottom, while using competition policy and regulation to stamp out crony capitalism and entrenched corporate power at the top.

For all of his talk of fairness, Modi is doing little of this. If he does not change course, the Billionaire Raj is only going to grow stronger. [Link]

Piketty and Chancel write:

Under Prime Minister Jawaharlal Nehru (in power from 1947 to 1964), India was a statist, centrally directed and regulated economy. Transport, agriculture and construction sectors were owned and administered by the Central Government, commodity prices were regulated and the country had important trade barriers. Nehru’s followers, including Indira Gandhi’s (1966-77 and 1980-1984) prolonged these policies and implemented a highly progressive tax system. In the early 1970s, the top marginal income tax rate reached record high levels (up to 97.5%).

It is difficult to call a top marginal tax rate of 97.5% progressive in many ways, except if one believed in an usurious State.

Once India’s so-called liberalisation started, it did boost average incomes:

Real per adult national income growth, which has more sense from the point of view of individual incomes than commonly used GDP, significantly increased after the reforms. It was 0.7% in the 1970s, 2.5% in the 1980s, 2.0% in the 1990s and 4.4% since 2000 (Figure 1). However, little is known on the distributional characteristics of post-2000 growth.

When national incomes accelerate, top income earners see their incomes rise faster (see their Figure 11 in page 245). But, India is an outlier:

Unequal growth dynamics over the period are not specific to India. Income growth rises the higher up the income distribution one proceeds in China, in the USA and in France as well. India’s dynamics are, however, striking: it is the country with the highest gap between the growth of the top 1% and growth of the full population. It is also interesting to note that bottom 50% of earners grew three times more slowly in China than in India, the middle 40% six times more slowly than their Chinese counterparts, but that the incomes of those at the very top of the Indian have grown at a faster pace than in China.

Looking at figures 12 and 16, it is clear that India did a far better job of distributing its poverty between 1951 and 1980 than it has done distributing its prosperity between 1980 and 2014 (Pages 26 and 29 respectively). At 49%, the middle 40% had a much better share of total income growth in the period between 1951 and 1980 than it had in the period between 1980 and 2014 (23%).

At one level, this should not be surprising. The annual Credit Suisse Wealth report (forget which year – 2015 or 2016) had mentioned that India had extreme wealth inequality. Then, this news report in ‘Business Standard’ in July this year mentioned that the ratio of executive compensation to median worker pay was 1200 times dwarfing the 276 times in America!

What the present NDA government is doing is somewhat similar to the equality that India had achieved before 1980. Everyone was relatively poorer. No one was extremely rich or very very few. This government has so far managed to steer clear of crony capitalism, as far as we know and at least not in a big way. On paper, it is going after big defaulters on public sector bank loans. Even as it hurts (assuming it is true) the big guys, the sad truth is that it may be hurting the small guys more!

The current NDA government has not been able to boost incomes at the lower income strata. If anything, its well-intentioned (or so we believe or that they would like us to believe) policy measures such as the Note-Ban exercise of 8th November  2016 and its implementation of a nation-wide Goods and Services Tax seem to be hurting the rural poor and small businesses more than it is hurting the richer and larger businesses and urban dwellers. In that sense, paradoxically, this government too might be contributing to worsening inequality. It is trying to make up for it with harsh rhetoric directed at the rich and big corporations and tax investigations. In other words, India might be having the worst of both worlds.

The world over, growth vs. distribution trade-off challenge is a real one. One needs to grow the pie to divide it among many. But, growth would see inequality rise as those who are in the centre/core benefit from opportunities that growth throws up before those opportunities percolate to those in the periphery and poor. The big re-distributor is the government with special schemes and subsidies for access to education and health for the poor and low income classes.

This is where India may be failing big. In other words, more than economic policy reforms or more redistribution, India’s challenge in confronting its stark inequality lies in governance reforms and greater accountability in government – both at the Ministerial and at the bureaucratic level. For example, read this interview by Professor Devesh Kapur in THE HINDU in July and weep.

Who will bell the cat?

It needs a politician who is prepared to be in office just for a term or even less but is clear about what he or she needs to do and is determined to do them.

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The Philips Curve

Just came across a headline that linked to an article in Bloomberg on the failure of the Philips curve to predict inflation.  The article, in turn, was based on a new study by the Federal Reserve Bank of Philadelphia. The chart that the Bloomberg article features is this:

Bloomberg_Unemployment and inflation rate_24082017

One look at the chart confirms the following sentences found in the Bloomberg article:

The Philadelphia Fed economists found that rising unemployment was sometimes able to help predict lower inflation, but falling unemployment didn’t help predict higher inflation. They noted that was particularly the case during the 1970s and early 1980s when the Fed responded to runaway inflation by raising rates so high that the U.S. economy fell into recession. [Link]

As one sees the chart carefully, one notices that the inverse relationship between the two lines (blue and white) has broken down in two periods: in the Nineties and in the post-2008 crisis period. The relationship between the unemployment rate and the inflation rate shown in the chart (the PCE inflation rate) had broken down because falling unemployment rate did not trigger higher wages for workers. There are many reasons for it and this blog post alone cannot do justice to them. One catch-all answer was that the 1990s was a period of globalisation that expanded the global pool of labour and hence, wage growth was muted despite the falling unemployment rate.

Post-crisis, the worker uncertainty was high and the unemployment rate remained in double digits in the US until about mid-2010. Its slow descent did not really cause wages to rise, especially since the jobs that replaced the jobs lost were long hours-low pay jobs. Towards the tail end of this period, wages could have risen as globalisation came to a halt. But now, there is another uncertainty for workers – technology.

In short, the failure of the Philips curve to hold over time or the weakening of the relationship posited by the Philips curve could and should be traced to trade, technology and inequality.

The full paper is here.

It can and should be stopped

There is an interview of Dr. Arvind Subramanian (AS for convenience), the Chief Economic Advisor to the Government of India in FT. The interviewer is James Crabtree (‘James’). I know James a little better than I know AS. I had met the latter once in 2010 when we both were invited to the preparatory meeting for the Indo-Chinese Strategic Dialogue, by Mr. Shivshankar Menon, the then National Security Advisor to the Government of India. Of course, he had given a nice blurb to my co-authored book, ‘The Economics of Derivatives’ with Dr. Somanathan. He knows Dr. Somanathan well and respects him.

James now lives in Singapore and I have interacted with him in person and exchange emails from time to time. He is an easy-going chap. He was nice enough to tweet my critical analysis of his analysis of the Uttar Pradesh election results in India in March.

When AS was being considered for the post of CEA, I had checked my own blog posts that referenced him. There were quite a few. I had been blogging for little over six years then. Almost all of the posts had only approving references to his works or views or both. So, I mentioned it to some people whom I thought were closer to the powers-that-be in the ruling dispensation in Delhi.

He has done a very decent job so far. He has made very useful contributions to the progress of the Goods & Services Tax legislation in the country. His annual Economic Surveys are thoughtful and useful for the most part, although I disagree with the consensus view on this year’s Economic Survey, especially with respect to the idea of Universal Basic Income for India. India does not need it. India cannot afford it. Even for the West, it is more a romantic than a useful idea and it is a salve for the consciences of the technology billionaires who are facilitating its destruction of life and society, as we know them. Work is much more than about salaries and handouts are poor substitutes for them. I have more to say on technology later because AS had chosen to mention it, in the interview. Indeed, that is the main and  a large portion of this post.

The only time I disagreed with him and sharply too was on the joint column he wrote for ‘Bloomberg Views’ with Dani Rodrik on the ‘whining’ of Emerging economies on the spillover from the Federal Reserve monetary policy. I thought they were completely on the wrong path. Subsequent research, even from sources like the International Monetary Fund, had confirmed that spillovers are a painful and inevitable reality even for well-run and well-managed emerging economies with sound fundamentals.

Now, back to this interview. It has nice pictures of his pad in New Moti Bagh in Delhi. His Pooja shelf features Shri. Ramana Maharishi. Nice. He has cassettes. So, do I. I do not know what to do with them these days. Even CDs have quickly been replaced by other means of listening.

For the most part, in his interview, he hits the right notes on his boss. That is to be expected. He hits the right notes on India too. The interview is a bit thin on substance though.

James refers to Modi as a leader who brooks no dissent. It would be rather useful to know if any political leader brooks or has brooked public dissent. The real issues are about how they dispose of the dissenter rather than if they allowed them to thrive and that too in public view. So, I am not sure as to the point of it. No politician who makes it to the top in competitive democratic politics will be a front-runner in the competition for the ‘Mr. Nice Guy’ award. That includes the former U.S. President Barack Obama.

For the most part, journalists are either naive or take their readers to be so or it is a bit of both. I am disappointed that James is doing that here.

As for AS’ remarks,

“’Hyper-globalisation is dead, long live globalisation,’ is how I like to put it,” he says. “If you look crudely at the post-war period, 80 per cent of globalisation is driven by technology, 20 per cent by policy. And that 80 per cent, you can’t stop.”

I take issues with that. Well, I winced. At a very philosophical level, many things in the world are processes over which humans have very little or no control. We are mere cogs in the wheel. But, modern societies and governments are organised on the principle that humans are in charge. They choose and decide. Blaming technology is a bit like blaming terrorism or saying that the West is at war with terrorism. That is seemingly clever but a bit daft and stupid.

The world cannot be at war with terrorism. It is at war with terrorists. Period. Nothing more. Nothing less. Narrowing it down further to geographical markers or specific religious markers is also necessary to focus efforts. Euphemism is part of denial and it helps to lull people into believing that something is being done while nothing worthwhile is being done. That is why my eyebrows went up when I read an article in Bloomberg that McMaster advised President Trump against using the phrase, ‘radical Islamic terrorism’ in his Presidential address to the Congress.

Back to technology from terrorism, even though both could be terrorising humans and societies. Technology is deployed and advanced by leaders – political, commercial and scientific – making choices. It does not advance by itself. Some technologies have been shelved and some have been abandoned because their negative externalities were judged to exceed vastly their private benefits or even public benefits.

Several examples would help. The decision by President Nixon to open up to China was a choice. The decision to admit China into WTO even before it became a ‘market economy’ was a choice. The decision to sign the NAFTA was a choice. The decision to repeal Glass-Steagall Act was a choice and so was the decision to legislate the Commodities Futures Modernisation Act in the United States. All of them had consequences. Financial and technological innovations amplified the consequences greatly. Some of the decisions were made without awareness of their fallout on communities, on families and on society. Only economic and commercial considerations, at the aggregate level, were the decisive actors.

That is why Bill Gates was right to propose taxing robots. Obviously, robots do not pay taxes but the companies that are behind them do. The tax may and could even be punitive enough to stop some of the research and advance in the technology. That is not being Luddite. That is being careful about consequences. That is about being honest and humble about forces that one is about to unleash, about which one has no ideas and over which one has no control. That is about recognition of human limitations.

“High-tech hubs were among the five metropolitan statistical areas where the gap between the highest- and lowest-income households expanded the most: two in California, San Francisco and San Jose, as well as Austin and Seattle.” [Link]. The article’s header is a tell-all tale: ‘America’s rich get richer while the poor get replaced by robots’.

Predictably, Larry Summers has objected to Bill Gates’ proposal. Mr. Summers is a very useful weathervane for the direction in which conventional wisdom is blowing. It is usually wrong. Summers’ views are useful for many of us to make up our minds – usually in the other direction. Here is another example. But, that is a different topic.

Political correctness prevents many from admitting to their inability to comprehend the present and the future, especially with respect to such obviously disruptive developments. There is more disruption than progress about them. Tyler Cowen’s article in Bloomberg in February is an example of this unfortunate political correctness. He concludes on that note despite advancing all useful and important arguments against precisely such a stance.

Perhaps, Tyler Cowen, AS and Summers should read an article that appeared in ‘Quartz’ last month. The article is headlined, ‘No one is prepared to stop the robot onslaught. So what will we do when it arrives?’.

The article notes, “In February, the European Union did consider rules that, while not stopping the robots, would have the force of discouraging automation by compelling companies to pay compensating taxes and social security payments for jobs that their robots wipe out. But, EU parliamentary members balked even at this, adopting much milder language that exacts no retribution on the robots or the companies that use them. A pivotal dynamic in the vote seemed to be a reluctance on the part of the deputies to expose themselves to possible ridicule as Luddites.”

That is the problem. Andrew Feenberg, who teaches the philosophy of technology at Simon Fraser University in Vancouver, says, “Doing trade deals and robotics without consideration of the people displaced is insane. The backlash is understandable.”

Feenberg notes, “Societies do have choices with respect to technology.” He is very right.

In sum, this long post is a message to AS that it can be stopped and we, humans, would do well to make choices because we can make them. It is both fashionable and wrong to say that technology cannot be stopped.