Of Nida Fazli, David Foster Wallace and Occam’s Razor.

David_Foster_Wallace

बहुत साल हमारे प्रिय मित्र Vijay (जो के दीनानाथ चौहान हाइन नहीं है) ने निदा फ़ाज़ली साहब का एक शेर सुनाया था. बड़ा ही ज़बरदस्त शेर है.

के कुछ तबियत मिली थी ऐसी चैन से जीने की सूरत न हुई, 
जिस को चाहा उसे अपना न सके जो मिला उस से मोहब्बत न हुई.

अभी करीब आधे घंटे पहले, लेखक Mayank Tewari के पसंदिता राइटर David Foster Wallace का लिखा, कुछ पढ़ा.

“I tend to be interested in women that I turn out not to get along very well with. And the ones that I get along very well with, I’m not interested in in a kind of romantic way. So that I’ve got a lot of really good women friends. But I tend to have a really hard time with girlfriends, because the ones I’m attracted to are a lot of fun you know for, in the standard ways, for like a couple of weeks. But in terms of the daily, let’s-go-shopping stuff, that we tend not to get along really well.” (from “Although Of Course You End Up Becoming Yourself: A Road Trip with David Foster Wallace” by David Lipsky)

जो फ़ाज़ली साहब ने दो पंक्तियों में कहा, वही कहने में David Foster Wallace ने छे-सात पंक्तियाँ लगा दी.

अगर आज की सोच लगायी जाये, तो कौन किस से इंस्पायर हुआ होगा? क्या फ़ाज़ली साहब मुंबई की बरसाती रातों में David Foster Wallace को पढ़ते थे?

या David Foster Wallace ने देवनागिरी/उर्दू सीख रखी थी?

दोनों ही इस दुनिया से कूच कर चुकें हैं, इस लिए इस सवाल का जवाब दे पाना मुश्किल है.

पर अगर कांस्पीरेसी थ्योरी से दूर रहे है और Occam’s Razor लगाया जाए, तो शायद दोनों को ये काफी सिमिलर सा ख्याल, अलग अलग ही आया होगा.

अब आप सोचेंगे के ये मैंने क्यों लिखा? तो कभी कभी बैठे बैठे खाली खुरापाती दिमाग में बस ऐसे ही ख्याल आते हैं.

 

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दीन दयाल उपाध्याय रोज़गार योजना

दो एक दिनों से दिल्ली में हूँ और सुप्रीम कोर्ट की कृपा से छींक नहीं रहा हूँ.

पिछले छे आठ महीने से पिताजी जिस सोसाइटी में रहते हैं दिल्ली में, उधर सारी बिल्डिंगों की मरम्मत चल रही है है.
अब आप भी सोचेंगे के किस पुरानी खंडर किस्म की बिल्डिंग में वो रहते हैं. ऐसे तो बिल्डिंग ज़्यादा पुरानी नहीं है, बने हुए केवल दस-बारह साल हुए हैं.

तो फिर मरम्मत क्यों? बिल्डर ने सीमेंट से ज़्यादा रेती मिलाई ? या उसने जहाँ जहाँ ईटें लगानी थी, वहां भूसा भरा? अब ये तो बड़ी आम बात है, इसपर क्या टिपण्णी की जाए.

पर ये भी कहना ज़रूरी है, के वो बिल्डर बहुत बड़ा देश भक्त था (शायद अब भी हो, कौन जानता है).
और देश भकत होने के अलावा वो बहुत दूरदर्शी भी था.

अब आप पूछेंगे कैसे? तो देखिये, जब ये बिल्डिंग पहले बनी तो इस पर काफी लोगों ने काम किया. इस से रोज़गार पैदा हुआ. अब क्योंकि बिल्डर ने रेती ज़्यादा मिलाई और भूसा ज़्यादा भरा, एक दशक के बाद, बिल्डिंग पे फिर से काम हो रहा है. और फिर से काम हो रहा है तो फिर से रोज़गार भी पैदा हो रहा है.  बस रोज़गार ही नहीं, फिर से सीमेंट भी खाईदा जाएगा। उस में रेती भी मिले जाएगी.

और रोज़गार को इस देश को बहुत ज़रुरत है. आसानी से मिलता नहीं.

तो था न हमारा बिल्डर देशभक्त और दूरदर्शी? अब ये अलग बात है के इस बार जो रोज़गार पैदा हो रहा है उस में बिल्डर का एक नया पैसा नहीं खर्च हो रहा है.

अब ये कहाँ की बात हुई, के देश भक्ति भी करें और साथ में पैसा भी खर्च हो? न जी न.

काफी लोग जो अंग्रेजी में मेरा विश्लेषण पढ़ते है, उनका ये कहना के, ये सब तो ठीक है, पर ये बताएं के इसका solution क्या है? लगता है केमिस्ट्री खूब पढ़ी है इन लोगों ने.

अब ये जो कहानी हमने यहाँ बताई है, इस से इस देश के लिए बहुत बड़ा solution निकल सकता है — दीन दयाल उपाध्याय रोज़गार योजना (अरे आप को क्या लग रहा था, के मैंने हैडलाइन बस ऐवें ही आपका ध्यान आकर्षित करने के लिए लगाई है…)

केंद्रीय सरकार और राज्य सरकारों को ये नियम बना देना चाहिए, के हर बिल्डिंग की मरम्मत, पांच साल के बाद होनी चाहिए. इस से रोज़गार पैदा होगा, और वो भी सेल्फ-एम्प्लॉयमेंट वाला, जिसकी आजकल काफी चर्चा है (और बस चर्चा ही है).

अब इस में रिस्क ये है, के बिल्डर लोग सीमेंट कम और भूसा ज़्यादा वाला फार्मूला लगाएंगे, जिस से के कुछ एक बिल्डिंगें बनते बनते ही गिर जाएँगी.

अब इतनी बड़ी जमूरियत है, एक आधी बिल्डिंग तो गिरती रहती है, इस में परेशां होने की कोई खास बात नहीं. बड़े बड़े देशों में अक्सर छोटी छोटी बातें होती ही रहती है.

और अगर बिल्डिंग जल्दी गिरी तो रोज़गार भी जल्दी पैदा होगा.

हाँ हाँ हो सकता हैं, नौ महीने में ही. नहीं तो 2019 तक तो बिलकुल पक्का…

अरे क्या? 2019, 2022 तक स्थगित कर दिया गया है? तो चलिए फिर 2022 ही सही.

How Modi Cherry-Picked Data To Build A Positive Narrative On The Economy

narendra_modi

The prime minister Narendra Modi in a speech yesterday assured the nation that All is Well with the Indian economy, and that there was no reason to worry.

He offered data to sell his argument. Let’s go through some of the data that he offered and see what he told us and more importantly what he did not.

1) The fiscal deficit of the government has fallen from 4.5 per cent of the gross domestic product (GDP) in 2013-2014, when Manmohan Singh was prime minister, to 3.5 per cent in 2016-2017. Fiscal deficit is the difference between what a government earns and what it spends.

Yes, the fiscal deficit has come down. A major reason for this is the fall in oil prices, since Modi took over as prime minister. On May 26, 2014, the day Modi was sworn in as prime minister, the price of Indian basket of crude had stood at $108.1 per barrel. As of October 4, 2017, the price was at $55 per barrel, having fallen to even lower levels during the period.

Oil prices go up and down due to a whole host of reasons and Modi’s government has almost no role to play in it.

The central government has captured much of this fall in price of oil, by increasing the excise duties on petrol and diesel, thereby increasing its earnings, and thereby bringing down the fiscal deficit. As they say, there is a difference between making things simple and making them simplistic.

2) Prime Minister Modi also claimed in his speech that the current account deficit has improved from -1.7 per cent of the GDP in 2013-2014 to -0.7 per cent of the GDP in 2016-2017. The current account deficit is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances. Or to put it in simpler terms, it is the difference between outflow (through imports) and inflow (through exports and foreign remittances) of foreign exchange.

Again, this has primarily been account of fall in the price of oil and thus a fall in the total amount of dollars that India pays for importing oil. India imports around 80 per cent of the oil that it consumes. Hence, Modi’s government has had very little role to play in the fall of the current account deficit.

It further needs to be pointed out that imports are a negative entry in the GDP calculation. So, if imports fall, the GDP rises automatically, assuming everything else stays the same. Falling oil imports are a big reason for the pick-up in the GDP growth, during Modi’s tenure as prime minister.

3) Take a look at the following chart, which was a part of the prime minister’s presentation yesterday.

Source: https://cdn.narendramodi.in/economy_1.pdf

As per this chart, the total foreign exchange reserves have risen by close to $ 60 billion during the period that Modi has been prime minister. In contrast, they were more or less flat when Manmohan Singh was the prime minister. At least that is what the above chart suggests.

This is primarily because of data has been taken from the end of 2011-2012 onwards. What happens if the data would have been taken from the end of 2003-2004 onwards. Manmohan Singh first became prime minister in May 2004.

As of March 31, 2004, the total foreign exchange reserves were at around $113 billion. By March 2014, they had jumped to around $304 billion. This meant an increase of 10.4 per cent per ear on an average. Between April 2014 and September 2017, the growth rate in foreign exchange reserves has been at 8.3 per cent per year on an average.

Hence, foreign exchange reserves accumulated at a much faster rate during Manmohan Singh’s tenure as prime minister. Of course, a bulk of these gains came during the first five years of the tenure, when the forex reserves increased at the rate of 17.4 per cent per year. Between 2009 and 2014, when the Congress led UPA made a mess of the economy, the increase in foreign exchange slowed down dramatically to 3.8 per cent per year on an average.

Basically, who did well, Singh or Modi, on the foreign exchange front, depends on where we start measuring from.

4) Prime Minister Modi further said that the interest rate that the government pays on the money that it borrows has fallen from 8.45 per cent in 2013-2014 to 7.16 per cent in 2016-2017. This has happened primarily due to two reasons. The falling fiscal deficit has led to the government having to borrow lesser in proportion to the size of the economy. With the government borrowing lesser, interest rates have come down.

It is important to remember here that the government has had to borrow lesser because it has increased excise duty on petrol and diesel and captured the bulk of the gain of falling oil prices.

Also, after demonetisation, a huge amount of deposits ended up with banks. These deposits were reinvested into government securities and in the process interest rates on government securities came down.

5) Prime Minister Modi pointed out that food inflation is in negative territory. The question is, is that a good thing? Why is food inflation in negative territory? It is in negative territory because farmers haven’t got the right prices for their produce. This is primarily on account of the fact that agri-supply chains have collapsed in the aftermath of demonetisation, forcing farmers to sell their produce at rock bottom prices.

The thing is there is no free lunch in economics. The collapse in food prices led to farmers demanding a waiving off agriculture loans and that has happened in state after state. It is ultimately expected to cost the nation, in the form of state governments compensating banks, more than Rs 2 lakh crore.

6) Over and above this, the prime minister shared data on a few consumption data points. Car sales, two-wheeler sales and tractor sales have improved, since June, hence, all is well.

What the prime minister did not tell us is the rapid rise in non-oil non-gold non-silver imports, post demonetisation. Take a look at the following chart.

 

Source: Ministry of Commerce and Industry.

Imports also represent consumer demand at the end of the day, even though that demand does not add to the country’s GDP. For example, every time an Indian buys an electronic good manufactured in China, he is adding to the consumer demand but not to the GDP. Of course, he is adding to the Chinese GDP because exports are a positive entry into the GDP formula.

Hence, if we remove the imports of oil, gold and silver, from the total imports number (in dollars), what remains (i.e. non-oil non-gold non-silver imports) is a good indicator of consumer demand.

The above chart tells us that non-oil non-gold non-silver imports have grown at an extremely fast rate after October 2016. They are growing at rates at which they haven’t grown for a couple of years. What is happening here?

Demonetisation destroyed domestic supply chains. Without supply chains products can’t move. This has resulted in consumer demand being fulfilled through imports.

This is clearly visible in the huge growth of non-oil non-gold non-silver imports. What this also means is that as demonetisation destroyed supply chains in India, it also led to a huge job destruction. If goods weren’t moving, there was no point in producing them either. This meant shutdown of firms and massive job losses.

Further, by importing stuff that we used to produce in India earlier, we have helped the manufacturing business in foreign countries and in the process “possibly” helped create jobs there.

Of course, this is something that the prime minister did not tell us in his speech. What he further did not tell us is that:

a) During the course of this financial year between April and August 2017, the total outstanding loans of banks (non-food credit) have shrunk. Only retail loans are growing, loans to industry, agriculture and services have shrunk. This, even though interest rates have fallen. What this clearly tells us is that a large section of the economy is not in a good shape and in no mood to borrow money and that is not a good thing.

b) As on March 31, 2017, 22 out of 27 public sector banks had a bad loans ratio of 10 per cent or more. This basically means that out of every Rs 100 of loans given by these banks, Rs 10 or more of loans had gone bad and weren’t being repaid.
In fact, five banks had a bad loans rate more than 20 per cent, which basically means that more than one-fifth of the loans given by these banks had gone bad and were not being repaid.
This is a problem that has only grown during Modi’s tenure. He and his government have sat on it, and only blamed the previous government for the mess.

c) All the so-called attack on black money has had a very limited impact on the price of real estate. While prices haven’t risen, they haven’t fallen either. This essentially means that homes continue to remain unaffordable for most people.

d) There has been almost no talk on how demonetisation and now the badly implemented GST have played havoc with the functioning and the existence of small and medium enterprises. If small and medium enterprises keep getting destroyed how is the country ever going to create jobs. It is worth remembering here that one million Indians are entering the workforce every year. Where are the jobs for these people?

e) Our primary education system continues to remain in a mess, with most children finding it difficult to read, write and do basic maths. It has been more than 40 months since Modi was elected prime minister, and nothing serious has been done on this front.

f) The non-government GDP has collapsed to 4.3 per cent. The non-government part of the GDP amounts to close to 90 per cent of the economy.

g) The growth rate of industry in general and manufacturing and construction in particular is at a five-year low. The manufacturing part of industry grew at 1.17 per cent during April to June 2017, whereas construction grew by 2 per cent during the same period. Also, it is worth pointing out here that manufacturing and construction together form 82-85 per cent of industry. If these sectors are barely growing, how will any jobs be created?

I can go and on the bad state of the Indian economy, but there is only so much time and only so much space. The trouble with trying to be clever all the time is that ultimately you get found out and more importantly, the nation doesn’t go anywhere.

The first step towards solving a problem is recognising that it exists. The economy has a problem, it is time that the government acknowledged that and worked towards it.

The column originally appeared on Huffington Post on October 5, 2017.

All is well with the economy? Surely you must be joking, PM Modi

narendra_modi

Prime Minister Narendra Modi briefly turned economist, in a speech, a couple of days ago, and in his charismatic and characteristic style told the country that there is no reason to worry, all is well.

He further said that people who were critical of the current economic scenario were spreading pessimism because only after spreading pessimism could they sleep well at night.

Modi offered us a whole host of economic data to show that India continues to do well. On economic growth slowing down to 5.7 per cent during April to June 2017, the Prime Minister had this to say: “Is it the first time that economic growth during a quarter has reached 5.7 per cent?

He then went on to point out: “In six years of the previous government, eight times the economic growth rate had fallen to 5.7 per cent or lower.”

By this logic, nothing that is happening now is a reason to worry because it has, more or less, already happened before. This seems like pretty convoluted logic. Also, it goes back to what the Bharatiya Janata Party (BJP) does every time it is in some sort of a soup: blame the Congress.

In this piece, I will stick to the economic growth point, having made a point-to-point rebuttal of Modi’s cherry-picking of data to build a positive economic narrative, elsewhere.

Let’s look at Figure 1, which basically plots the quarterly (three-month period) gross domestic product (GDP) growth from June 2012 onwards.

Figure 1

Source: Ministry of Statistics and Programme Implementation

What is plotted as June 2012 in Figure 1 is basically the economic growth (GDP growth) during April to June 2012 in comparison to April to June 2011. This is true for all other data points.

The question is why have I taken economic growth from the period of three months ending June 2012 onwards? The answer lies in the fact that the new GDP series that the government started using from January 2015, has data starting from April to June 2011 onwards.

Given this, economic growth can be calculated only from April to June 2012 onwards. It will become clear later in this piece as to why am I making this point.

As is clear from Figure 1, economic growth has been falling from March 2016 onwards. The economic growth has fallen for the last six quarters. This is a real reason for worry. This is something that PM Modi forgot to mention in his big speech. This has never happened before if we were to just look at the new GDP series.

As mentioned earlier, Modi pointed out in his speech: “In the six years of the previous government, eight times the economic growth rate had fallen to 5.7 per cent or lower.”

As can be seen from Figure 1, economic growth has fallen below 5.7 per cent five times. Of this, economic growth fell below 5.7 per cent four times when Manmohan Singh was PM. It needs to be mentioned here that Manmohan Singh was the PM for 10 years, whereas Modi has been for three-and-a-half.

So, how Prime Minister Modi ended up saying that during the previous government “eight times the economic growth rate had fallen to 5.7 per cent or lower”, is a question well worth asking.

Did he use the old GDP series along with the new GDP series? Let’s merge the data from the two series (which is not the right way of going about things, but nonetheless) and see what we get.

Basically, we use GDP growth from the old series between the period of three months ending June 2005 and the period of three months ending March 2012, and after that we use the new GDP series. Take a look at Figure 2.

Figure 2

Source: Ministry of Statistics and Programme Implementation

Even after merging the two series, we get only five instances of growth falling below 5.7 per cent during the previous regime. This makes me wonder, where did Prime Minister Modi’s speech writer get the data from?

Modi had also said in his speech: “The country’s economy has seen quarters when the economic growth rate has fallen to levels of 0.2 per cent, 1.5 per cent.”

This hasn’t happened any time since June 2005 (again, we come to this conclusion only by wrongly merging the two GDP series, but Prime Minister Modi’s speech doesn’t leave us with any other option).

While the new GDP series has been in use from January 2015 onwards, the government hasn’t come up with GDP data based on the series for the period before April to June 2011, up until now.

The reason perhaps lies in the fact that the old GDP series under-declared growth to the extent of 2 per cent. Hence, any economic growth data from before April to June 2011 will basically end up showing the current slow rate of economic growth, in further bad light.

Now let’s take a look at Figure 3.

Figure 3

Source: Author calculations on data from the Ministry of Statistics and Programme Implementation

Figure 3 basically plots the growth of the non-government part of the economy, which typically constitutes 87 to 92 per cent of the economy. The growth of the non-government part of the economy has fallen to around a little over 4 per cent. This extremely important detail did not find a place anywhere in Prime Minister Modi’s speech.

If the non-government part of the economy is growing at such a slow rate, how will jobs for the one million youth entering the workforce every month, ever be created. The situation becomes even more worrisome if we look at Figure 4.

Figure 4

Source: Ministry of Statistics and Programme Implementation

As is clear from Figure 4, the growth rate of industry in general and manufacturing and construction in particular is at a five-year low. The manufacturing part of industry grew at 1.17 per cent during April to June 2017, whereas construction grew by 2 per cent during the same period.

This is a big reason to worry simply because manufacturing and construction have the potential to create new jobs. An estimate made by Crisil Research suggests that in construction, 12 workers are typically required to create Rs 10 lakh worth of output. In case of manufacturing, it is seven workers.

India’s economy has a problem. The sooner the government acknowledges and works towards it, the better it is going to be for all of us. But in this era of post-truth, it is more important for the government to keep spinning things than acknowledge the truth.

The column originally appeared on Newslaundry on October 6, 2017.

Why Most Cars Look the Same

car

A few days back I was at a friend’s party. I was introduced to other men at the party and soon they were all talking about the latest cars to hit the market. This basically played into the stereotype of putting four men in a room and once they are done talking about their jobs, they will be talking about cars.

I find it difficult to be a part of any such conversation because my ability to differentiate between two different car models is fairly limited. Well, I can differentiate between small cars and sedans, and less expensive cars and more expensive cars, but that is where it all ends. Of course, I do recognise the Mercedes Benz logo.

And to be very honest, the only two cars that I can confidently recognise at any point of time are the Ambassador and the Premier Padmini (better known as the Fiat). Both these cars aren’t produced anymore.

This inability to recognise car models gets me into a problem while coordinating with app based cab services. So, unlike others who keep a lookout for the model and colour of the car, I keep lookout for the number of the car.

For a long time, I felt that I was one of the few people who thought that modern cars look very similar. It turns out I was wrong. Cars that are produced these days do look the same. In his book Scale—The Universal Laws of Growth, Innovation and Sustainability in Organisms, Economies, Cities and Companies, Geoffrey West, talks about how different the 1927 Rolls-Royce and the 1957 Studebaker Hawk were from the “relatively boring-looking 2006 Honda Civic or a 2014 Tesla”. The modern cars might be far superior machines than the cars made earlier, but it is difficult to differentiate one from the other, unless you are really into them.

What has happened here? As West writes: “It represents the transition from a primitive trial-and-error, rule-of-thumb approach that served us well for thousands of years towards a more analytic and principled scientific strategy for solving problems and designing modern artifacts ranging from computers and ships to airplanes, buildings, and even companies… Sophisticated computer analysis are now central in the design process… The phrase “computer model” is now an integral part of our vocabulary.” It is also used to design cars.

This has led to an unintended consequence, something which wasn’t really planned for but has happened and become a part of our lives, without us really realising about it.

As West writes: “One of the curious unintended consequences of these advances is that almost all automobiles, for example, now look alike because all manufacturers are solving the same equations to optimize similar performance parameters. Fifty years ago, before we had access to such high-powered computation and therefore less accuracy in predicting outcomes, and before we became so concerned about fuel performance and exhaust pollution, the diversity of car design was much more varied and consequently much more interesting.”

The point being that most companies that produce cars are using more or less the same science to produce it, and given that most cars now look more similar than they did in the past, when trial and error was a part of the solution. Now, it isn’t.

As a result, what we have now are much superior machines, but their sameness makes them all so boring to look at. And cars, after all, aren’t all about acceleration, though some people may not agree on this.

The column originally appeared in the Bangalore Mirror on October 4, 2017.

Bengaluru’s Sriperumbudur Problem

One thing that is common across my friends in Bengaluru, is how much they complain about the city’s traffic. It’s not like the other big cities in India do not have traffic. But it’s just that between 2001 and 2011 (when the last two censuses were carried out).

Bengaluru’s population more or less doubled from around 43 lakh to 84 lakh. The roads and the other physical infrastructure haven’t really been able to keep pace.

But this is not a column about the physical infrastructure in Bengaluru not being able to keep pace with the city’s population. What I want to explore is that if people are so irritated with the city’s traffic eating into their time and lowering their quality of life, why don’t they simply move to a city which has lesser traffic, like Hyderabad or Pune, for that matter.

The answer lies in the fact that Bengaluru does not face what Karthik Shashidhar calls the “Sriperumbudur problem” in his book Between the Buyer and the Seller. For those who don’t know where Sriperumbudur is, it is a small town near Chennai. For many years it was famous as the place where the former prime minister and the Congress leader Rajiv Gandhi was assassinated in May 1991.

In the last few years it has been famous as the place where the telecom giant Nokia first set up a factory and then it shut it down. The Nokia factory used to employ 8,000 employees at its peak. Once the factory shutdown, the skilled workers who used to work there had a tough time finding comparable jobs in Sriperumbudur. Most workers were forced to settle for jobs that paid less and the working conditions were not as good as they were at Nokia.

Almost at the same time that Nokia shutdown it’s factory, Yahoo decided to shutdown its engineering operations in India, which were largely located in Bengaluru. Other companies scrambled to recruit the Yahoo employees. Some even set up dedicated portals to recruit them.

While, the Nokia employees in Sriperumbudur had a tough time finding comparable jobs, the Yahoo employees were lapped up one after the other. As Shashidhar writes: “The market for people building mobiles phones was rather thin in Sriperumbudur, with only one employer (Nokia) and the set of people working there.”

This basically shows the importance of clusters or a group of companies manufacturing a similar product or providing a similar service, being located close to one another. Bengaluru is a cluster of IT companies and the kind of IT jobs that are available in Bengaluru are simply not available anywhere else in the country.

As Shashidhar writes: “[The] cluster tends to attract companies which hope to supply to more than one of these companies. The presence of several companies in the cluster means that the risk of setting up a supplier infrastructure is reduced – the supplier is partly hedged even if one of the manufacturers he supplies to goes bust. The reverse is also true.” This basically makes the labour market liquid.

And this explains why my friends and many other people who keep complaining about the Bengaluru traffic, continue to stay in the city. The quality of work and the job options that they have in the city, they don’t have in other cities.

In fact, industrial clusters have been around for a while. The first industrial clusters happened after the Industrial Revolution started in Great Britain. The textile mills were set up in towns like Manchester and Birmingham and not all over the country. Along similar lines, Detroit emerged as the automobile hub in the United States, where the big three car companies operated out of. Globally, the financial services business is clustered around New York and London.

In India, a bulk of Hindi films are shot in Mumbai. The financial services business is also largely based out of the city. Bengaluru has the IT companies. The hosiery business is based out of cities like Ludhiana and Tirupur.

And this happens because there is a certain logic to the entire thing. Clusters make sense, the huge traffic in Bengaluru notwithstanding.

The column originally appeared in the Bangalore Mirror on Sep 27, 2017.

What ails the Indian economy?

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A blueprint on economic revival is to be submitted to the Indian prime minister Narendra Modi, or so reports the Business Standard newspaper. This comes on the back of the slowest economic growth since Modi took over as the prime minister in May 2014.

For the period between April and June 2017, the Indian gross domestic product (GDP, a reflection of the size of the economy) grew by just 5.7 per cent. Between January and March 2016, the GDP had grown by 9.1 per cent. The last time the economy grew by less than 6 per cent (at 5.3 per cent) was between January and March 2014, when Manmohan Singh was the prime minister.

Also, the GDP growth of 5.7 per cent was achieved with the government spending more than what it usually does. The non-government part of the GDP, which forms roughly around 90 per cent of the economy, grew by a meagre 4.3 per cent.

The industry as a whole grew by 1.6 per cent, with manufacturing and construction growing by 1.2 per cent and 2 per cent, respectively.

We live in a world where any rate of economic growth greater than 2 per cent is considered to be good. But what is true for the West, isn’t really necessarily true for India. India needs to be growing rates of GDP growth faster than 7 per cent, if it has to continue to pull its millions out of poverty.

As Vijay Joshi, an economist at the University of Oxford, writes in India’s Long Road—The Search for Prosperity: “The ‘power of compound interest’ over long periods is such that even a small change in the growth rate of per capita income makes a big difference to eventual income per head.”

And how do things look for India? Where would it end by 2040 at different rates of economic growth? As Joshi writes: “At a growth rate of 3 per cent a year, income per head would double, and reach about the same level as China’s per capita income today. At a growth rate of 6 per cent a year, income per head would quadruple to a level around that enjoyed by Chile, Malaysia and Poland today. If income per head grew at 9 per cent a year, it would increase nearly eight-fold, and India would have a per capita income comparable to an average high-income country of today.”

This explains why high economic growth is so important for India. Another factor that needs to be kept in mind is that 12 million Indian youth are entering the workforce every year. This is India’s so called demographic dividend. But with construction and manufacturing growing at the rates they are, where will the jobs for the demographic dividend come from? The services sector growth continues to remain robust, but the support from industry is necessary, especially construction, given that most of these youth are low on jobs skills.

A major reason for the same comes from the lack of a good basic education. As per the Annual Status of Education Report 2016: “The proportion of children in Std III who are able to read at least Std I level text has gone up slightly, from 40.2% in 2014 to 42.5% in 2016.” Further, “in 2014, for the country 25.4% of Std III children could do a 2-digit subtraction. This number has risen slightly to 27.7% in 2016.” This has how the situation has been since 2010, after the introduction of the Right to Education.

Given this, a large portion of the youth entering the workforce are low on skills. Hence, they need low-skilled jobs which the construction and the real estate industry can provide. Both these sectors are going through a tough phase.

What hasn’t helped are India’s convoluted labour laws and the lack of ease of doing business. This has ensured that even industries like apparel manufacturing, which have the potential to create many jobs, continue to operate on a small scale. A recent report titled Ease of Doing Business—An Enterprise Survey of Indian States, published by the Niti Aayog, a government body, found that 85 per cent of the firms operating in the apparel sector employed less than eight workers. At a broader level, 85 per cent of Indian manufacturing firms are small and employ less than 50 employees.

The government feels that it has done enough to reform the labour laws, and it is the industry’s responsibility now to respond and set up labour-intensive enterprises. But that as the data suggests isn’t really happening.

Over and above this, agriculture which contributes around 15 per cent of the GDP, continues to employ half of the workforce. Exports during the first five months of this financial year (April to August 2017) are lower than where they were in 2013 and 2014.
All these factors have ensured that India has huge underemployment. Numbers from 2015-2016, suggest that only three out of five individuals who are looking for a job all through the year, are able to find one. The situation is worse in rural India, where only one in two individuals looking for a job all through the year are able to find one.

The negative effects of demonetisation have made things worse on the jobs front with many firms operating in the informal sector, which were the real job creators, having to shutdown. The botched-up launch of the Goods and Services Tax (GST), which was supposed to be a good and simple tax and it isn’t, hasn’t helped things either.

The other big worry for India is the mess its largely government owned public sector banks continue to operate in. 17 out of the 21 public sector banks have a bad loans rate of 10 per cent or more ( as of March 31, 2017). This basically means that out of every Rs 100 of loans given by these banks, loans of Rs 10 or more have already been defaulted on. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. One bank (the Indian Overseas Bank) has a bad loans rate of 25 per cent.

These bad loans have primarily accumulated on lending to industry (read crony capitalists) where the overall bad loans rate, stands at 22.3 per cent.

The government has pumped in close to Rs 1500 billion as capital since 2009 to keep these banks going. With the banks continuing to accumulate bad loans and the Basel III norms coming into force from 2019 onward, these banks are going to need billions of rupees as capital in the years to come, to continue to be in operation.

The government clearly does not have this money and they remain reluctant to privatise or even shutdown some of these banks. Also, a major impact of the bad loans has been that the public sector banks are now reluctant to lend to industry.

To conclude, there are way too many structural issues with the Indian economy as of now. If a long-term growth rate of 7-8 per cent per year has to be sustained, these issues need to be tackled on a war footing.

The column originally appeared on the BBC on Sep 26, 2017.