The truth about the Indian economy – 2A/4

I had to change plans and include an Amendment or Appendix or Annexure to the second part because I had received quite a bit of ‘feedback’ to my part 2. Quite why, I am still trying to figure out because the post did not endorse Piketty’s policy prescriptions and it noted with sarcasm that India did a far better job of distributing its poverty than of its prosperity and three, it accused the present government of giving India the worst of both worlds – neither growth nor healthy re-distribution. So, quite why the so-called ‘Economic Right’ had to be riled by the post is beyond me.

Let me clarify or reiterate one more time:


(1) I have no axe to grind and nor am I enamoured of inequality as a problem to be treated, in and of itself.

(2) I hold no brief for Piketty’s explicit or implicit policy recommendations or predilections. His bias for explicitly re-distributive policies does show through in the paper even though he does reiterate that it was purely a data exploration paper.

(3) Addressing crony capitalism is desirable in itself.

(4) There is no danger of this government being captured by Piketty because it has already been taken hostage by one line uttered by an Opposition politician.

(5) My own policy recommendation in the end is to make an omnibus case for administrative and governance reforms and accountability. There can be no disagreement over it, regardless of whether one believed in inequality as a problem in India or not.

Regardless of Piketty’s agenda, the issue merits a debate and then acceptance as serious or rejection as undeserving.

Credit Suisse which, probably, is happier to see wealth accrual in developing economies, has been putting out its own independent research every year (‘Annual Wealth Report’) and they have data on wealth distribution that align with Piketty’s data on income distribution. Credit Suisse would, if anything should be expected to be on the opposite side of Piketty.

While the inclination to oppose the man is understandable, it is not reasonable to oppose his matter if they are data based and if the data are made available, as he has. One can tweak it and show how sensitive his conclusions are to the assumptions one makes on the source of data (survey vs. fiscal) and to the demographic profile.

Also, in our earnestness to dismiss Piketty, we are also unwittingly dismissing the contribution that UPA’s ‘crony capitalism’ might have made to the issue of inequality.

It is actually inequality of opportunity for the scarce resources such as seats in colleges and beds in hospitals are bought with money while public institutions that are aimed at providing them for the ‘middle and bottom deciles’ are failing to do so.

That is where the interview of Devesh Kapur that I had linked in the blog post (Part 2) has salience.

The Asian Development Bank (ADB) brought out a volume in 2009 (“INDIA 2039: An affluent society in one generation’). It was written by the Centennial Group for ADB, including by my friend Manu Baskaran who is as far removed from Piketty as anyone can be, and the report had the following chart on page 35:

Indian Oligarch ratio

Second, recent work by Praveen Chakravarty and Vivek Dehejia – incidentally even the aforesaid report mentions it as far back as in 2009 – has comprehensively documented the spatial inequality in the country.

It is one thing to oppose Piketty’s agenda and it is another thing to dismiss the issue. Even worse is to be pursuing policies, as this government is doing, that are worsening the problem, in the guise of addressing it. ‘Growing the pie’ is important before distributing it. This government is not doing it.

Further, inequality need not be an explicit policy target. But, egregious inequality (not just in those dimensions that Piketty reports them) will be and is a problem.


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.

The truth about the Indian economy – 1/4

In today’s MINT, Niranjan Rajadhyaksha has a short op.-ed., looking at the situation that is prevailing in the Indian economy now versus the situation that obtained in 2002.

Key differences between then and now:

(1) The global economy bottomed in 2002. Boom ensued. (2) That led to an export pick-up. Now, the global cycle is rather mature and the risk is skewed – one of downturn.

(2) Global interest rates were still bottoming in 2002 and remained at bottom for two more years, up to mid-2004. Now, the global rate cycle is either going to be stable or slowly grinding higher. No further stimulus possible.

(3) Global asset prices had become cheap and were ready for vulture and value investors. Emerging assets were amazingly cheap, then. Now is the opposite for advanced country and emerging market assets.

(4) The government did a slew of reforms – cut the administered interest rates; did some big-ticket privatisations, golden quadrilateral was well implemented. This government, on economic policy, is behaving like a deer caught in headlights.

(5) Private sector balance sheets had already de-leveraged and were battle-fit to invest when the global recovery kicked in. That is far from the case now.

Hence, a lot harder now to revive the three things he mentions in the end – ​”​
a strong private sector investment recovery, robust export growth and a higher rate of domestic savings​”.

​Much leadership is required. The government may not be able to do much to revive but it can do a lot to stop hurting the economy. Most things about economics is asymmetric. So is economic policymaking. For the government, it is far easier to hurt than to help the economy.​ Much depends on other players and forces.

They can stop making GST more complicated; they can stop changing rules of the game mid-way through the game; they can stop issuing threats to businesses to stop wailing and start investing. They can do privatisation. They can give ultimatum to banks to clean up or fold up. They can settle some high profile tax cases and create clarity. They can cut corporate taxes and remove exemptions as promised. They can begin by acknowledging that there is a problem.

​Even then, there is no guarantee that the economy would start booming as it did in 2002 in view of the above but these are necessary conditions.

The Doklam triangle

While I was in the U.S., the standoff between India and China in Doklam (in Bhutan) ended abruptly with both sides pulling back their troops and China also removing road construction equipment. On paper, it seemed that India had won the standoff but at least a few have cautioned against any chest-thumping. Correctly so.

This piece in ‘’ drew three lessons from the crisis defusion. One is that “Chinese behavior in territorial disputes is more likely to be deterred by denial than by threats of punishment” Second, denial strategies may be effective, but they have their limitations. Denial is inherently risky….Moreover, denial strategies can only serve to halt adversary action, not to reverse what the adversary has already done….Third, the agreement to disengage suggests that Beijing’s position in crises can be flexible, and perhaps responsive to assertive counter-coercion….Finally, the Doklam agreement, even if it is temporary, tells us that when China confronts a significantly weaker target, such as Bhutan, it will only be deterred by the actions of a stronger third party — in this case, India. …

Prof. Taylor Fravel argues that India did not win the standoff with China. He has his points.  He says,

The frame of winning and losing is misplaced. The genius of the Doklam disengagement is that diplomats defined it in narrow and specific terms, focusing only on the forces at the “face-off site.” Larger issues, such as the location of the tri-junction between China, India and Bhutan, along with China and Bhutan’s competing claims to Doklam, were left off the table. By not disclosing the terms under which the standoff ended, diplomats also allowed each other to save face.

Syed Ata Hasnain writing for Swarajya notes that the issue has been shelved and not solved, in effect. The issue lives to wait another day.

Srinath Raghavan also cautions against triumphalist interpretations in India.

In the context of the Doklam stand-off and its resolution, the BRICS declaration paragraph no. 48 is rather interesting:

48. We, in this regard, express concern on the security situation in the region and violence caused by the Taliban, ISIL/DAISH, Al-Qaida and its affiliates including Eastern Turkistan Islamic Movement, Islamic Movement of Uzbekistan, the Haqqani network, Lashkar-e-Taiba, Jaish-e-Mohammad, TTP and Hizb ut-Tahrir. [Link]

How and why did China agree to name Pakistan based terror organisations in the BRICS declaration? Any explanations welcome.

The Basel Institute on Governance has released its Anti-Money Laundering Index for 2017. Pakistan comes in at 46. India at 88. Singapore is doing better than Switzerland. The best is Finland. The report is here.

In the meantime, Pakistan’s Habib Bank has been ordered out of the United States:

New York’s state banking regulator has slapped a $225m fine on Habib Bank, the biggest bank in Pakistan, and ordered it out of the US after finding a catalogue of flaws in compliance that “opened the door” to the financing of terror.

The Department of Financial Services on Thursday said it was taking drastic action — the first time it has ordered a bank to shut down in the US — because Habib had failed to correct serious weaknesses first identified more than a decade ago. By 2015, the DFS found, the bank’s compliance function was in an even worse state, lacking the most basic of controls on money-laundering and customer screening. [Link]

China linkfest – 10.09.2017

(1) I used to track UK based Fathom Consulting’s China Momentum Indicator. It gives an alternative estimate to the official GDP growth estimates of China. They have updated their indicator and now have a version 2.0. It actually paints the current growth rate of China’s real GDP at 8.2% vs. the official estimate of 6.9%! Over the last two years, the CMI used to track between 2 and 3%vs. official estimates of around 6.5% to 7.0%. Now, the shoe is on the other foot, it seems! [Link]. Fathom Consulting does not think that this is sustainable and attributes the growth re-acceleration to the return of the old economy – borrow, invest in smoke-stack industries. Chris Balding supports that conclusion here.

Interestingly, Moody’s has this to say in a research note that is publicly available on setting up a simple login:

Although the contribution of domestic consumption to GDP growth has gradually been increasing, a core of China’s growth model remains investment funded by credit. [Link]

(2) The Chinese consulate-general has entered a dispute over Taiwanese independence at the University of Newcastle, exposing the increasing influence exerted by Beijing on Australian university campuses. [Link]

(3) John Pomfret, the author of ‘Beautiful country and the Middle Kingdom’ has written an article about the influence of Chinese money in American Universities. You can also notice that there are two counter-reactions. However, an independent piece by Chris Balding seems to vindicate Pomfret. Also, check out this news report on what John Garnaut said about China stirring up patriotism among Chinese students in Australian campuses.  Looks like Pomfret was not exaggerating.

(4) How China is helping Malaysia narrow the military gap with Singapore [Link]

(5) The Communist Party has not just stopped with making inroads into the Chinese corporate world. Even foreign firms operating in China are not out of bounds, it seems. [Link]

(6) On to China’s finances and financial arrangements, it is a perennial story. This report in FT talks of the funds that HNA had amassed from shadow finance sources.  [Link]

(7) Regional banks in China’s rust-belt provinces are driving the rapid expansion of shadow banking in the country, fueling a web of informal lending that poses wider risks to the financial system, according to a study by UBS Group AG. [Link]

(8) Similar to how Universities in the West are succumbing to the lure of Chinese money (by admitting students from PRC and through collaborations onshore in China), investors are buckling to the pressure from China. If Universities are not exempt from the seduction of more money, how can one expect investors to stand up to the money might?

BlackRock and Fidelity backed China’s Communist party writing itself into company law this year, according to disclosures that show some of the world’s largest asset managers voted in favour of ranking the party above the boards of state-owned companies. [Link]

(9) China’s media watchdog has said it will ensure production a flood of new TV dramas singing the Communist Party’s praises over the next five years, just days after one of the country’s top stations was publicly shamed for not toeing the ideological line.

With just over a month to go until the party’s five-yearly national congress, the State Administration of Press, Publication, Radio, Film and Television issued more than a dozen guidelines on TV content on Monday.

The first of the 14 guidelines said the industry would ramp up production of “ a large number of TV dramas that sing the praises of the party, the motherland, the people, as well as its heroes”.

Domestic networks will also set aside prime time for programmes with major revolutionary and historical themes. [Link]

(10) In the light of the above, this cannot be surprising. Indeed, to be expected.

(11) Eswar Prasad writes,

China’s vision of multilateralism will certainly serve China well, allowing it to expand its economic and geopolitical influence in a manner that will become ever harder to resist. Whether this will be good for the world remains to be seen. [Link]

Postscript: Must acknowledge, with thanks, that almost all of the links in this post are courtesy of the Twitter handle of James Kynge (FT).

STCMA – 09.09.2017

Robert Samuleson on the quiet comeback of the American middle class [Link]

James Freeman who writes ‘Best of the web’ for Wall Street Journal seems to agree with Robert Samuelson [Link]

In another column, James Freeman notes,

Governments around the world have managed to manipulate the price of credit and therefore the price of just about everything. [Link]

World unity crumbles according to South China Morning Post, in the face of North Korea threat. Russia opposes sanctions while the United States seems to prefer it to military options for now. [Link]

How to chat up or date an economist? Good fun. [Link]

Nearly half the Americans have had their credit card and few other personal details stolen in a hacking job on Equifax. But, worse, three managers seem to have sold their stock before the news was made public. [Link]

Ajit Ranade on ‘Who killed Dr. Amarapurkar?’. Deplorable [Link]

Tap water has bits of plastic in it. The United States tested worse than others in the survey. [Link]

Seetha Parthasarathy shares the evaluation of the pilot studies on the Direct Benefit Transfer (DBT) programme in India (cash transfer). She is strangely coy about batting for it forcefully despite nearly two-thirds of the public surveyed preferring it over subsidised foodgrains through the Public Distribution System, despite some hiccups with DBT. [Link]

A potentially significant and positive development for Indian banks as the Supreme Court upholds the case of ICICI Bank vs. a defaulting borrower [Link – ht Anirudha]

ECB, Euro and more stimulus

ECB headlines_08092017

The above is a screen shot from the website of Credit Bubble Bulletin ( this morning. Ignore the first headline. Look at the next three. If a central bank raised its GDP growth forecast, it cannot be talking of more stimulus. It is inconsistent. If GDP growth were being revised higher, it is time to remove and not add stimulus. Then, why is the ECB doing it? They are not stupid.

The answer is in the last headline. I think they are concerned about the strength of the EURO. To me, it is surprising. I thought that a strong Euro suits Germany. Germany does not want to stimulate the economy to deflect criticism of its large external surplus. A strong Euro would suit the country fine. If you remember, that is the argument that Mervyn King (former Governor, BoE) made in a speech in May. The Eurozone exchange rate is dysfunctional.

But, notwithstanding the German situation that favours a strong Euro, if the ECB were to resist Euro strength – and that is why they are still talking of continuing with stimulus – then it shows the fragility of the so-called recovery of the peripheral countries – Greece, Italy, Spain, Portugal and France too.

My two cents worth.