India’s Population Bomb and the Surprising Truth Behind It

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Debates on many issues in India, ultimately boil down to India’s huge population.
During the course of such debates, many educated Indians feel that India’s population is responsible for a bulk of its problems and needs to be controlled.

They are unable to distinguish between India’s huge population and the need to control it. Allow me to explain.

As per the National Health Survey of 2015-2016, the fertility rate in India stood at 2.2. This basically means that on an average 1000 women have 2,200 children, during their child-bearing years. In 1981, it was at 4.5. In 2001, it was 3.1. Slowly but steadily, things have improved on this front.

People have fewer children once they see their children survive. The infant mortality rate, or the number of infants who die before reaching one year of age for every 1,000 live births during the course of a given year, has been falling. In 2016, the infant mortality rate in India stood at 34. In 1996, this had stood at 75.

As Hans Rosling, Ola Rosling and Anna Rosling Rönnlund write in Factfulness—Ten Reasons We’re Wrong About the World – And Why Things Are Better Than You Think: “Parents in extreme poverty need many children… for child labour but also to have extra children in case some children die… Once parents see children survive, once the children are no longer needed for child labour, and once the women are educated and have information about and access to contraceptives, across cultures and religions both the men and the women instead start dreaming of having fewer, well-educated children.”

In the Indian case, while we can debate the well-educated bit, surely parents are having fewer children.

As mentioned earlier, the fertility rate in India stood at 2.2 in 2016. Not surprisingly, poorer states like Uttar Pradesh, Bihar, Rajasthan and a few states in the North-East, have higher fertility rates. These states also have high infant mortality rates.

As the Roslings write: “Every generation kept in extreme poverty will produce an even larger next generation. The only proven method for curbing population growth is to eradicate extreme poverty and give people better lives, including education and contraceptives. Across the world, parents then have chosen for themselves to have fewer children. This transformation has happened across the world but it has never happened without lowering child mortality.”

As the National Health Survey points out: “Women with no schooling have an average 3.1 children, compared with 1.7 children for women with 12 or more years of schooling.”
The replacement rate or the level of fertility of women at which the population automatically replaces itself, from one generation to the other, typically tends to be at 2.1.

Further, given India’s high infant mortality rate, in comparison to the developed countries, the fertility rate is perhaps already at the replacement level.

In fact, the fertility rate in urban India is at 1.8, whereas in rural India, it is 2.4.  Interestingly, as the National Health Survey points out: “Twenty-three states and union territories, including all the states in the south region, have fertility below the replacement level of 2.1 children per woman.”

The broader point here is that India is close to stabilising its population. Of course, this is not going to happen overnight and will take a few decades to pan out. As per the National Population Policy of 2000, India’s population should stabilise at 145 crore in 2045.

Also, the good thing is that India did not adopt a compulsory one child policy like China did. Given the preference for boys, it would have led to selective abortions, like happened in China. This is not to say that selective abortions don’t happen currently, but the situation would have been even worse.

The sex ratio at birth in 2016 was 940 females to a 1000 males. With a one child policy, the sex ratio would have been lower than its current level. And this would have had other repercussions.

To conclude, while India has a huge population, we have clearly reached a stage where the population will stabilise in the next few decades.

The column originally appeared in the Bangalore Mirror on April 25, 2018

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Do Numbers Always Tell the Truth?

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The writer Gregg Easterbrook once said: “Torture numbers, and they’ll confess to anything.” Allow me to explain with an example, on how numbers can be used to muddle the truth.

Nirav Fraud has defrauded the Punjab National Bank of Rs 12,645.97 crore. This is the loan amount that the diamond merchant has defaulted on. On its own the number sounds like a pretty big number, which it is.

But now let me show, how even a number as big as this, can be made to look small, by someone who is looking to muddle the truth.

The question is how big is Nirav Modi’s fraud vis a vis the accumulated bad loans of Punjab National Bank. His fraud is ultimately going to add to the bad loans of the bank.

Bad loans are loans where the borrower has stopped repaying for 90 days or more. The accumulated bad loans of Punjab National Bank stood at Rs 57,519 crore as on December 31, 2017.

Hence, Nirav Modi’s default will add around 22% more to the bad loans number of Punjab National Bank. At this level, the default still seems big. Let’s go a little further.
Now let’s take a look at the bad loans of all banks (i.e. public sector banks + private banks + foreign banks). This stands at around Rs 9,00,000 crore, as on December 31, 2017. Nirav Modi’s default amounts to just 1.4%, which is very small in the overall scheme of things. A big default number now suddenly seems very small.

Let’s look at this in one final way. The average size of a fraud in the case of Indian banking, where the borrower willfully defaulted, was around Rs 3 crore, between 2012-2013 and 2016-2017, a period of five years. In case of Punjab National Bank, the average size of a fraud amounted to Rs 9.6 crore.

When we compare Nirav Modi’s fraud with these figures, we realise how big his fraud is, in the context of borrowing frauds. And this is how Nirav Modi’s fraud needed to be looked at and which is how, thankfully, it is being looked at.

The context is the most important point when trying to make sense of a number. The good thing is that nobody tried to muddle the truth in this case, and it was clear from day one that Nirav Modi’s fraud was a big fraud, from day one. But that is not always the case.

Few years back, in the days after Nirbhaya was battling for her life, I remember reading a news item which suggested that Sweden had one of the highest incidences of rape in the world. The Indian scenario was much better, the newsreport suggested.

Of course, the newsreport totally missed out on the context and muddled the truth. As Hector Macdonald writes in Truth—How the Many Sides to Every Story Shape Our Reality: “Sweden is said to have the second highest incidence of rape in the world, with more than 60 cases reported per 100,000 inhabitants each year (the rate for India is 2 per 100,000). Yet this reflects not only Sweden’s better reporting of sexual crime but also a broader definition of rape.” In India, other than fewer rape victims coming out in the open, the system also works to protect the rapists in many cases.

Or take the case of rates of kidnapping. As Macdonald writes: “Canada and Australia have the highest rates of kidnapping in the world. Really, it’s true. Not because they are more dangerous than Mexico and Colombia but because their governments include parental disputes over child custody in kidnapping statistics.”

The broader point here is that before believing a number, it is important to look at the overall context in which it is being used. As Macdonald writes: “When someone tries to persuade you that a number is especially significant, the first thing to do is to translate it into a more revealing truth that incorporates relevant context.”

Now that of course is, easier said, than done.

The column originally appeared in Bangalore Mirror and Mumbai Mirror on April 11, 2018.

What Donald Trump Can Learn From Adam Smith

The American President Donald Trump wants to make America great again. At the heart of his plan to make America great again lies the idea of encouraging American manufacturers, Trump wants to implement tariffs on imports into America from other countries. He has already implemented tariffs on steel and aluminium.

This method of trying to make America great again by forcing Americans to buy stuff made in America, goes against basic principles of economics.

One of the most quoted paragraphs in economics was written by Adam Smith in a book called The Wealth of Nations. Steve Pinker writes about this in Enlightenment Now—The Case for Reason, Science, Humanism and Progress: “Smith explained that economic activity was a form of mutually beneficial cooperation: each gets back something that is more valuable to him than what he gives up.”

As Smith put it: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”

Hence, exchange is at the heart of any market. Trump is basically trying to clamp down on this exchange, which ultimately makes things cheaper for Americans.

The reason why the United States lost its manufacturing prowess over the years, is simply because other countries produced similar or better goods at a cheaper price. Take the case of China. In 2017, the United States ran a trade deficit of $375 billion (or more than a billion dollars a day) with the country.

Why did the situation come to this? The answer lies in the fact that China produced stuff  that American consumers wanted to buy, at a much more competitive price than the American manufacturers did.

Of course, the American consumer benefited from this because he had to pay a lower price than if he had bought the same thing from an American manufacturer. As Smith had said, “through voluntary exchange, people benefit others by benefitting themselves”.
Americans benefited because of competitive pricing of Chinese goods and the Chinese benefited because they got dollars in return for what they sold. Of course, it needs to be said here that Americans paid paper dollars for tangible goods from China.

These dollars earned by China helped pull many millions  of Chinese out of poverty in a period of around four decades starting in 1978. At the same time, it helped America maintain a lower rate of inflation, though many American jobs were lost due to lack of competitiveness of American firms.

The Chinese companies earned dollars while selling stuff in the United States. But they couldn’t spend these dollars in China because the Chinese currency happens to be the renminbi (also known as the Yuan). They exchanged these dollars with the Chinese central bank, the People’s Bank of China, which gave them renminbi to spend. The Chinese central bank then invested a good portion of these dollars in financial securities issued by the American government and other American institutions.

This flood of dollars from China and other big exporters earning dollars, helped keep interest rates low in America.

Donald Trump is now looking to break this arrangement that has been in place for the past few decades. As economist Ludwig von Mises put it a few centuries after Adam Smith: “If the tailor goes to war against the baker, he must henceforth bake his own bread.”

By imposing tariffs, Trump will force American consumers to buy expensive American goods. And this will not create any jobs. Take the example of steel. Buying American steel will make things more expensive for American car manufacturers.

They will either pass on this increase in cost to the American consumer, who will then have to cut down on expenditure somewhere else. If they don’t do that and decide to maintain the cost, they will have to fire a few employees that they currently employ.
All in all, there are no short-cuts to make America great again. The only way is to be competitive. The sooner Trump understands this, things will be much better.

The column originally appeared in the Bangalore Mirror on March 22, 2018.

How We Pay for Incompetence

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Sometime back I got some plumbing work done. The plumber said the work would take around eight hours or one full day. Once he started working, it took me a couple of hours to figure out that he was basically wasting time and he could easily finish work in four hours.

I confronted him on this and he agreed. The logic he offered for wasting time was very interesting. He said, plumbing was a profession that needed some experience and expertise. He had the necessary experience and expertise and could work faster than the average plumber could. The trouble was whenever he finished worked fast, the customers would dilly dally in paying him, the amount of money, that had been agreed on.

The reason always offered was, “but that hardly took any time”. He found it very difficult to explain to his customers that it barely took any time simply because of his experience and expertise. Hence, over the years, he had come to the conclusion that it simply made more sense to waste time and then get paid the amount that had been agreed on.

Both the customer and the plumber lost out in the process. The plumber by having to waste more time, couldn’t take on more work or he couldn’t spend those extra hours in leisure, if he did not want to work. The customer also had to keep engaging with the plumber for those extra hours. In the process, both of them lost out.

Dan Ariley and Jeff Kreisler discuss a similar story about a locksmith in their book Dollars and Sense—Money Mishaps and How to Avoid Them: “A locksmith once told Dan that when he started his career, he took forever to open a lock, in the process, he often broke it, taking even more time and money to get one properly installed and finish the job… People were happy to pay for all this, and they tipped him well… As he became proficient and opened a lock quickly, without breaking the old lock… customers not only didn’t tip, but they also argued about his fee.”

This is a phenomenon, where we confuse effort and outcome, and in the process award incompetence. Take the case of many people leaving office late, even if they have no work and no reason to hang around. But by hanging around they are just trying to send that signal to their bosses that they are putting in a lot of effort, which hopefully will be rewarded once appraisals come around.

Of course, many bosses confuse this “useless” effort of hanging around, with the employee adding value to the organisation. And once a few employees start doing this in an organisation, almost everyone else has to. In the end, more than rewarding anyone, this just becomes a “nuisance” that everyone needs to follow.

In fact, Dan Ariely carried out a research along with On Amir, on how much would people pay for data recovery. The result was very interesting: “When the data recovery took only a few minutes, willingness to pay was low, but when it took more than a week to recover the same amount of data, people were willing to pay much more. Think about it: They were willing to pay more for the slower service with the same outcome.”

The point being that when effort is more valued than outcome, we end up paying for incompetence. There is a great story about the painter Pablo Picasso, perhaps apocryphal, which shows precisely this. A woman once approached Picasso and asked him to paint her portrait. The painter looked at her, and then with a single stroke, drew her a perfect portrait.

The woman was impressed and told Picasso that he had captured her essence in a single stroke. She asked him: “How much do I owe you?” Picasso asked for $5,000. The woman was aghast. “It only took you a few seconds,” she said. To which Picasso replied: “No, ma’am. It took me an entire life and a few more seconds.”

The column originally appeared in the Bangalore Mirror on Feb 14, 2018.

But What About Bitcoins?

In the last one month, many people have asked me a simple question: “But what about bitcoins?”

Between 2013 and now, the price of a single bitcoin has gone from close to zero to more than $19,000. In fact, in 2017, the price of a bitcoin has gone from less than $1,000 to more than $19,000.

This astonishing price rise has been noticed by people. But before we go any further, let’s understand what is a bitcoin? It’s a digital currency that does not use banks or any third party as a medium. It is governed by a string of cryptographical codes that are not easy to break, as they are believed to be of military grade.

The law of demand basically states that demand for something tends to pick up when the prices are low. But this basic law in economics does not tend to apply to various forms of investments. This includes, stocks, real estate etc. A large bunch of people start entering the stock market only once it has rallied significantly. The same is true about real estate.
Along similar lines, the bitcoin has caught the attention of people at large, only after having risen significantly in price. This is a point well worth remembering.

In late 2008, when the investment bank Lehman Brothers went bust, the Western world plunged into a serious recession. In order to come out of this, the Western central banks led by the Federal Reserve of the United States, the American central bank, decided to print a huge amount of money and pump it into the financial system.

The idea was to increase the supply of money and make it less costly, that is, drive down interest rates. At lower interest rates, people and corporations were more likely to borrow and spend money, and this in turn would help businesses and the overall economy.

At the same time, this power to create unlimited amount of money out of thin air created a fear that if central banks continued with this strategy, sometime in the future paper money would lose the ‘perceived value’ it had.

There was a fear that with such a huge amount of money being printed, it would unleash consumer price inflation, and money would lose value. While, that hasn’t happened, all the money has led to huge asset price inflation, stock markets and real estate markets have risen across the world, as a large chunk of the printed money has found its way into these markets.

Bitcoin was a response to this phenomenon given that unlike paper money it cannot be created out of thin air. The number of bitcoins is finite and it cannot go beyond a limit of 21 million. Hence, people initially bought into it. But, over the last year or two, at least, the people entering it are largely speculators looking to make a quick buck and that has driven up the price as fast as it has.

The trouble is the history of money essentially shows that, even though, all new forms of money are created by the private sector, they are ultimately taken over by the government. The government basically has three powers: 1) The right to “legal” violence. 2) The right to tax. 3) The right to create money out of thin air by printing it.

And this right to create money out of thin air comes from the basic fact that the people accept government money as money, in the economic transactions that they carry out. In the years to come, if economic transactions, that is the buying and selling of things, move towards bitcoins, the governments all over the world are not going to like it.

No government likes any competition against the pieces of paper that it deems to be money. And given this, the governments all over the world will want to crackdown on bitcoins sooner rather than later. What the believers in bitcoins like to say to this is that the virtual currency has been built with this eventuality in mind. How this plays out, only time will tell.

The column originally appeared in the Bangalore Mirror on December 21, 2017.

Why We End Up Buying Things We Normally Wouldn’t

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When I visit a supermarket or a large store to buy grocery, I inevitably end up buying stuff which I wouldn’t otherwise. On some days, it can be products like muffins or a chocolate bar, placed strategically near the billing counter. On other days, it can be a new flavour of ready to eat noodles.

What is happening here? Human beings look at purchasing decisions from the relative value lens. The question is, relative to what.

I buy grocery around once in three weeks. And on most occasions, I end up with a bill of around Rs 4,000-5,000. When I am buying something like a chocolate muffin which costs around Rs 100, it feels like a very small part of the overall bill. (Rs 100 is only 2 per cent of Rs 5,000). It is basically a useless unhealthy purchase, which one can easily buy at an outside bakery for Rs 30-40. But given that it feels like a very small part of the overall price, I simply go ahead and buy it.

The same stands true for the chocolate bars which supermarkets and large grocery stores tend to stock near their checkout counters. As Dan Ariely and Jeff Kreisler writes in Dollars and Sense: Money Mishaps and How to Avoid Them: “Supermarket checkout queues dare us to resist trashy tabloids and sugary sweets, using the same approach.”

This approach is also at work in hotel rooms where soft drinks which are placed inside the refrigerator in the room, are expensively priced. On a visit to Pune earlier this year, I paid around Rs 100 for a soft drink can which at that point of time was generally priced around Rs 30. My calculation was the same. The per day room rent was around Rs 5,000 and a charge of Rs 100 more wasn’t going to make a significant dent to it. Having said that, I would have never paid Rs 100 for a soft drink can, otherwise.

In fact, the same approach is at work in a restaurant, where soft drinks, water bottles and even bottles of wine, are more expensively priced. In fact, wine in a restaurant costs much more than in a wine shop.

As Ariely and Kreisler write: “It’s logical to pay more for the convenience of wine with dinner – we don’t want to take a bite, then have to run to our car to [take a ] swig… – but it’s also a tribute to relative versus absolute value.”

In all these situations we tend to find value in something, which we otherwise wouldn’t, by comparing it to the overall cost. Marketers make use of this and try to sell us things we wouldn’t have bought otherwise. This plays out almost every time one buys electrical goods like a washing machine or a refrigerator or a television or even a laptop.

The salesman on such occasions always tries to sell us something known as an extended warranty. This is a warranty over and above the one which is offered by the manufacturer of the product that we have bought. It is pretty much useless in most cases given that electrical goods these days tend to function well and rarely go bad.

But the pitch is that now that you are spending so much money, why not spend a little more and get yourself an extended warranty.

This approach is also at play when buying a car. As Ariely and Kreisler write: “Car dealers… know that when we’re spending $25,000, additional purchases, like a $200 CD changer, seem cheap, even inconsequential, in comparison. Would you ever buy a $200 CD changer? Does anyone listen to CDs anymore? No and no. But at just 0.8 per cent of the total purchase price, we hardly shrug.”

The overall point being that marketers are a devious lot and if there is a trick out there they can use to sell more, they are most likely to find it and use it. Beware!

The column originally appeared in the Bangalore Mirror on November 22, 2017.

 

Demonetisation–The Unanswered Question

Time flies.

It has been one year since that fateful day last year, when prime minister Narendra Modi, suddenly announced that Rs 500 and Rs 1,000 notes, would be useless, in a matter of few hours.

Modi was lauded for this “brave” decision. In a country, where politicians do not like to take decisions, here was one politician who had decided to make one.

The trouble is that nobody told us on what basis had the decision been taken. Every decision, has consequences, especially a decision as disruptive as demonetisation turned out to be. And given this, there has to be some logic behind why the decision was made in the first place.

It doesn’t take rocket science to understand that if 86.4 per cent of the currency in circulation is made useless overnight, in a country where 80-98 per cent of the transactions happen in cash (depending on which estimate you would like to believe), the buying and selling of things is bound to crash. When economic transactions crash, it leads to a slowdown of the overall economy, which is precisely what happened in India.

As Jean Drèze writes in Sense and Solidarity—Jholawala Economics for Everyone: “For instance, a study by Nidhi Aggarwal and Sudha Narayanan… shows that mandi arrivals of non-perishable agricultural commodities crashed across the board within a week of demonetisation. The declines range from 23 per cent for cotton to 87 per cent for soybean.”

This happened because agricultural markets in India operated in cash and with no cash around, the farmers were in no position to sell what they had produced. The onion market in Lasalgaon (near Nashik, and India’s largest onion market) continues to face this problem, a year later.

Many informal markets crashed in the aftermath of demonetisation and haven’t been able to revive again. The growth of the non-government part of the economy, which forms close to 90 per cent of the economy, for the period April to June 2017, fell to a little over 4 per cent, in the aftermath of demonetisation.

On top of that the total amount of deposits with banks increased dramatically and because of that the interest rates crashed. This hurt many people (especially senior citizens) who depend on interest from deposits for their survival. It also hurt those who use fixed deposits to save for the long-term. At the same time, the fall in interest rates did not lead to an increase in bank lending. In fact, bank lending in the aftermath of demonetisation has crashed.

The question that remains is on what basis was the decision to demonetise taken? Was there any logic to it or was it just taken on a whim? The closest answer to this has come from Arjun Meghwal, a junior minister in the Modi government. He told the Lok Sabha in February 2017: “RBI held a meeting of its Central Board on November 8, 2016. The agenda of the meeting, inter-alia, included the item: “Memorandum on existing banknotes in the denomination of Rs500 and Rs1000 -Legal Tender Status.””

Meghwal passed the buck on to the Reserve Bank of India (RBI). A Right to Information query was filed with the RBI by a correspondent of the Press Trust of India (PTI). In the query, the central bank was asked to provide the minutes of the meeting in which the decision to demonetise Rs500 and Rs1,000 notes was taken. Over and above this, it was also asked to share its correspondence with the Prime Minister’s Office (PMO) and the Finance Ministry, on the issue of demonetisation.

The RBI replied: “The information sought in the query carries sensitive background information including opinions, data, studies/ surveys etc. made prior to the completion of the process of withdrawal of legal tender character of Rs500 and Rs1,000 notes… Disclosure of such information would detriment economic interest of the country from the viewpoint of the objectives sought to be achieved by such decision.”

Basically, the RBI refused to answer the RTI query. And a year later, we still don’t know on what basis was demonetisation carried out.

The column originally appeared in the Bangalore Mirror on November 8, 2017.