Economics made easy

Vivek Kaul
Name of the book: Day to Day Economics
Author: Satish Y Deodhar
Pages: 214
Publisher: Random House India
Steve Landsburg wrote The Armchair Economist – Economics and Everyday Life in 1993. The book was the first of its kind and was written in a very simple way to explain the subject of economics to anybody and everybody.
In the just released second edition of the book Landsburg explains his reasons behind writing the book. One day in 1991, he had walked into a medium sized book shop and realised that the shop had around 80 titles on quantum physics and the history of the universe. But it did not have a single book on economics that could be read by even those who did not have an academic background in the subject. This motivated him to write The Armchair Economist and two years later he had a bestseller ready.
The little story tells us a few things about the “dismal science” called economics. Economists over the years have found it very difficult to communicate in a language which everybody can understand. On the flip side people haven’t paid enough attention to the subject even though it impacts them more than other subjects.
But things can only be set right once economists start writing and communicating in a language which everyone can understand. Satish Y Deodhar’s Day to Day Economics attempts to set this situation right. The book explains the economic terms and concepts that get bandied around in newspapers and television channels, in a very simple lucid sort of way, making it accessible to everyone.
What makes the book even better is the fact that Deodhar’s links the economic concepts to political and other events that are happening around us. Too many teachers of economics in the past have taught economics as a theoretical subject full of maths in isolation of what is happening around us. As Deodhar puts it “It…matters whether or not economics is made interesting in the classroom”.
Deodhar, a professor at IIM Ahmedabad, discuses the concept of fiscal deficit and the current state of economic affairs in good detail. Fiscal deficit is the difference between what a government earns and what it spends. For anyone wanting to understand why their equated monthly installments (EMIs) have gone up over the last few years this book is a must read. At the heart of the problem facing the Indian economy is the fact that the government expenditure has gone up at a much faster rate than its revenue. Hence the government has had to borrow more to finance its increased expenditure leaving less on the table for other big borrowers like banks and housing finance companies.
This has meant higher interest rates and higher EMIs. While understanding this will not bring down your EMIs in anyway but you will surely know who is to be blamed for your spiraling EMIs. But more than that you will understand that once a government commits to a certain expenditure, it is very difficult to curtail it. As Deodhar points out “it is difficult to curtail government expenditure once the government is committed to them.” What this obviously means is that your higher EMIs are likely to continue.
The solution as Deodhar rightly points out is collection of more taxes. This can only happen when the Goods and Services Tax, which seeks to replace state and central sales tax, is introduced. Also its time to get rid of the amendment ridden Income Tax Act and replace it with the Direct Taxes Code.
Deodhar explains the concepts of banking and inflation in the same lucid way. That apart a few mistakes seem to have crept in the book. The Foreign Direct Investment allowed in the insurance sector in India is 26% and not 27% as the book points out. Also the book says that banks in India were first nationalized in 1967. That is incorrect. The banks were first nationalized in 1969.
Another point which falls flat is Deodhar’s link between interest rates and the rupee-dollar exchange rate. Deodhar says that when interest rates are high in India, it makes sense for foreigners to lend money in India. When this money comes to India the foreigners have to change their dollars into rupees. This pushes up the demand for rupees and it appreciates in value against the dollar. While theoretically this makes perfect sense, what is happening in India is exactly the opposite. The interest rates in India are high, despite that the rupee has fallen in value against the dollar. This is because India imports most of the oil it consumes. It needs dollars to buy the oil. Hence when the oil companies buy dollars and sell rupees to buy oil, rupees flood the market, leading to its value depreciating against the dollar. At the same time foreigners haven’t been bringing money into India because they are worried about the government’s burgeoning fiscal deficit.
What this clearly tells us is that economics is not a fixed science like physics. Any action can generate different kind of reactions and even stump the best economists. And that is why most economists try and look at various options while explaining things. This lack of clear answers can even frustrate the best of people at times. As the American President Harry Truman once demanded “Give me a one-handed economist. All my economists say, ‘on the one hand…on the other’”.
(The article originally appeared in the Asian Age on September 16, 2012.
(Vivek Kaul is a Mumbai based writer and can be reached at [email protected]