Month: February 2016

Why Jats of Haryana Want Reservation

Jat_Agitation_for_reservation

I normally do not write on political issues but the recent demand of the Jats of Haryana to be counted as other backward castes(OBCs), is a part of a larger issue that I have been writing about. Hence, this column.

Castes which are categorised as OBCs have 27% reservation in public sector jobs and higher education. The Mandal Commission Report of 1980 had said that OBCs form 52% of the country’s population. In comparison, a survey carried out by the National Sample Survey Organisation in 2006 said that the OBCs form 40.96% of the country’s population.

Jats form 29% of Haryana’s population and own three-fourths of its land media reports point out. As Harish Damodaran writes in a brilliant column in The Indian Express: “The community probably owns three-fourths of agricultural land in Haryana, with the Jat being synonymous with the ‘zamindar’ just as much as the Bania with the trader.”

Given this, why do zamindars actually want reservation? Before I get around to answering this, it is important to understand how Jats ended up owning as much land as they do now.

As Surinder S Jodhka writes in Caste: “One of the most important developmental initiatives taken by the Indian State soon after independence was the introduction of Land Reform legislations. These legislations were designed to weaken the hold of the non-cultivating intermediaries (the so-called landlords) by transferring ownership rights to the tillers of the land.”

And how did this help the Jats? As Jodhka writes: “The Rajputs, traditionally upper-caste and the erstwhile landlords, possessed far less land after the Land Reforms than they had done before. Most of the village land moved into the hands of those who were traditionally identified as tillers of the land, the middle caste groups such as Jats and Gujars.”

This essentially ensured that Jats became what sociologist MN Srinivas called a dominant caste in the state of Haryana. As Srinivas wrote: “A caste may be said to be ‘dominant’ when it preponderates numerically over the other castes, and when it also wields preponderant economic and political power.” (As quoted in Jodhka’s book).

After land came the agricultural revolution which increased the crop yields and in the process increased the economic power of the Jats. Given their numbers, they already had the political power.

This explains why Jats have dominated the politics of Haryana for more than a few decades. It also explains why Manhohar Lal Khattar became the first non-Jat chief minister of Haryana in over two decades. And given that Khattar was a first time MLA with little administrative experience, he was caught napping as the movement built up all over the state.

One theory is that the movement was instigated by those not in power in the state. This might very well be true given the scale it finally reached, but it still doesn’t do away with the fact that Khattar was caught napping.

Now to answer the question that I had raised as to why do Jats wants reservation.

The Agriculture Census of 2010 points out that the average size of an individual holding in Haryana has fallen to 1.57 hectares. In 1995-1996, the average size of individual holding was at 1.74 hectares, a fall of around 10%. This means that the land holdings in Haryana over the years have gotten more fragmented, leaving a lesser area for every farmer to farm on.

This is in line with the broader trend that prevails in the country. As per Agriculture Census of 2010-11: “The average size of holdings for all operational classes (small & marginal, medium and large) have declined over the years and for all classes put together it has come down to 1.16 hectare in 2010-11 from 2.82 hectare in 1970-71.” The situation could have only gotten worse since then. Hence, many more people are dependent on agriculture and farming than should be. This means lower income per capita from agriculture.

In this scenario, the importance of jobs has gone up. Nevertheless, as the Economic Survey released in February 2015 points out: “Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labour force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent.”

The jobs which would have moved people away from agriculture and farming have not materliased. Further, with 49.5% of government jobs being reserved (22.5% for SCs and STs, 27% for OBCs) the Jats (as well as others who fall in the general category) have probably found the competition to get into a government job very tough.

It further needs to be pointed out here that the government jobs at lower levels are significantly better paying than similar jobs in the private sector.

As the Report of the Seventh Pay Commission points out: “To obtain a comparative picture of the salaries paid in the government with that in the private sector enterprises the Commission engaged the Indian Institute of Management, Ahmedabad to conduct a study. According to the study the total emoluments of a General Helper, who is the lowest ranked employee in the government is Rs 22,579, more than two times the emoluments of a General Helper in the private sector organizations surveyed at Rs 8,000-9,500.”

Hence, the IIM Ahmedabad study “on comparing job families between the government and private/public sector has brought out the fact that…at lower levels salaries are much lower in the private sector as compared to government jobs.”

What this clearly tells us is that the reason Jats want to be categorised as OBCs is the same reason why engineers, MBAs and PhDs apply for government jobs at lower levels—they are significantly better paying than similar jobs in the private sector.

Further, what does not help is the fact that Haryana has the worst sex ratio in the country at 879 females for every 1000 males, as per the 2011 census. As Christophe Jaffrelot writes in The Indian Express: “The search for government jobs…is also influenced by their particularly skewed sex ratio. Parents of girls prefer grooms with stable income – those with government jobs are often their preferred choice. With fewer girls compared to boys in these castes, there is competition in the marriage market.”

The Haryana state government has plans of introducing a Bill to grant OBC status to Jats. This won’t go down well with 74 other castes who are already categorised as OBCs in Haryana. To them, Jats are the well-off land-owning people who really do not need any reservation. Also, with Jats forming 29% of the state’s population competition among the OBC aspirants for government jobs will go up significantly. The situation might become easier for the Jats but not for the castes categorised as OBCs as of now. Hence, be ready for another share of agitations.

Further, any attempt to categorise Jats as OBCs will lead to similar demand from other land-owning castes across the country who are seeing difficult days due to their land-holdings shrinking. In fact, similar demands have already been made by the Kapus in Andhra Pradesh, the Marathas in Maharashtra, the Patels in Gujarat (their leader Hardik Patel is currently in jail) and the Gujars in Rajasthan.

In fact, the Rajasthan government has already passed the Rajasthan Special Backward Classes (Reservation of Seats in Educational Institutions in the State and of Appointments and Posts in Services under the State) Bil, 2015. The Gujars are expected to be the main beneficiaries of this Bill.

In fact, at the heart of all this is an issue which I have discussed multiple times in the past. India has more people in agriculture than it needs. These people need to be moved away from agriculture. This needs the creation of many semi-skilled and unskilled jobs, something which is not happening, given that Indian industry is not exactly known to be labour-intensive. And the social consequences of this economic drawback are now coming to the fore.

The column originally appeared in the Vivek Kaul’s Diary on February 24, 2016

Men wear neck-ties just to fit in

neck tie 1

This is a question I have often asked people but never have got a convincing answer for—why do  men wear neck-ties? Come to think of it, why do men like the idea of an expensively priced piece of cloth, hanging from their necks.

Some people have told me that during winters it just makes their necks feel warm. But large parts of India barely have any winter. In sweaty places, neck-ties can actually lead to a lot of itching.

Some others have told me that it makes them look smart. Really? A piece of cloth hanging from your neck makes you look smart?

An interesting response I got from a friend who loves his neck-ties was that ties are to men what earrings are to women. “On a day I am feeling gloomy I wear a grey coloured tie. On a brighter day a red tie or perhaps that yellow tie with red dots that my wife gave me,” he said.

And still some others have told me that it helps them distinguish between office time and personal time. While they are wearing a tie, it’s office time. But the moment they take it off, the office time is over. From a very rational perspective this doesn’t make much sense, but from a psychological one, perhaps it does.

Several financial market types have told me that wearing a tie makes them look like a professional. When they wear a tie their clients feel that they can be trusted. Like a lot of things that the financial market types say, this basically amounts to nonsense.

These days everyone from a door to door salesmen to those selling credit cards wear ties. Now does that inspire confidence among their prospective customers and lead to higher sales? Not really. Also does wearing a necktie lead to higher intelligence or the ability to think about the organisational problems in a better way?

Perhaps the most honest answer I have got is when people have told me that they wear a tie because they want to fit in. They don’t want to stand out in their organisation for the wrong reason of not wearing a neck-tie. They wear ties because everyone else in their organisation does.

I have thought about this issue considerably and come to the conclusion that companies which do not want their employees to do much thinking and carry out the same set of activities over and over again are the ones where the tie-wearing culture prevails (like in banking). Any company or organisation which is trying to innovate and do something new, or make real time decisions, will not insist on its employees wearing ties.

Take the case of the British Medical Association, the professional body for 1,70,000 doctors in United Kingdom. Their dress code policy states very clearly that it is a poor practice to wear neck-ties when providing patient care. Also, bacteria tend to accumulate on ties.

Jonathan Wells writing in The Telegraph newspaper (published in the United Kingdom) points out that innovative companies like Google, Facebook, Ikea and Amazon have banned their employees from wearing neck-ties. In fact, the Facebook chief executive officer Mark Zuckerberg wears t-shirts to even black-tie events.

This further buttresses my point that those who wear neck-ties are just attempting to fit in. In fact, behavioural economist and psychologist Dan Ariely talks about this in Behavioural Economics Saved my Dog. He writes that many professional meetings require a dress code. He on the other hand likes to feel comfortable while giving lectures and so wears what he calls an Indian shirt (he perhaps means what we call a kurta).

And he explains this as follows: “I reckoned that as long as I am wearing clothes from a different culture, no one who is politically correct (and this includes almost everyone in the West) could complain that I’m underdressed. After all, any such critic would be offending the whole subcontinent.” And if Ariely is wearing a kurta he doesn’t have to wear a neck-tie.

It’s a pity that this won’t work in India.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on February 28, 2016

Chinese Growth is Bad for Global Economy

china

In yesterday’s edition of the Diary I talked about how Chinese banks have unleashed another round of easy money, in order to push up economic growth. The Chinese economic growth for 2015 was at 6.9% which is a two-decade low. Many China watchers and economists believe that the real economic growth is significantly lower than this number and is likely to be more in the region of 4-5%.

In order to push up economic growth Chinese banks lent out a whopping 2.5 trillion yuan (around $385 billion) in January 2016, the highest they ever have during the course of a month. This increased borrowing and spending if it continues, as it is likely to, will lead to creation of more capacity in China.
The creation of this excess capacity will provide a short-term fillip to the Chinese economic growth as more infrastructure, homes and factories get built. The trouble is that the Chinese economy is unlikely to absorb the creation of this excess capacity.

As Satyajit Das writes in The Age of Stagnation: “China continues to add capacity to maintain growth. If it is unable to absorb this new capacity domestically, it might seek to increase exports to maintain production and growth. This would exacerbate global supply gluts and increase deflationary pressures in the global economy.” Deflation is the opposite of inflation and essentially means a scenario of falling prices.

Household consumption as a proportion of the Chinese economy has fallen over the years. In 1981, household consumption made up for 51.7% of the gross domestic product(GDP). Starting in 1990, the household consumption as a proportion of the Chinese economy started to fall and by 1999, it was at 45.6% of the GDP.

By 2009, the number had fallen to 35.3% of the GDP. In 2014, the household consumption to GDP ratio stood at 36.6%, not very different from where it was in 2009.

What does this tell us? As Michael Pettis writes in The Great Rebalancing—Trade, Conflict and the Perilous Road Ahead for the World Economy: “In any economy there are three sources of demand—domestic consumption, domestic investment, and the trade surplus—which together compose total demand, or GDP. If a country has a very low domestic consumption share, by definition it is overly reliant on domestic investment and trade surplus to generate growth.” Trade surplus is essentially the situation where the exports of a country are more than its imports.

This is precisely how it has played out in China. In 1981, the Chinese investment to GDP ratio was at 33%. In 2014, the number stood at 46%. What does this tell us? By limiting consumption, the Chinese were able to create savings. These savings were then diverted into investments and the investment created excess capacity in the Chinese economic system. In 1982, the Chinese savings had stood at 35% of the GDP. By 2013, Chinese savings had jumped to 50% of the GDP. The investment to GDP ratio during the same year stood at 48%.

The excess capacity was taken care of by exporting more. And that is how the Chinese economic growth model worked all these years. What this means that with a low consumption rate, the Chinese have always been more dependent on investment and exports to create economic demand. In the 1980s and 1990s, the high rate of investment made immense sense, when China lacked both infrastructure as well as industry. But over the years China has ended up overinvesting and creating excess capacity, and in the process become overly dependent on exports, if it wants to continue to grow at a fast rate.

As Pettis writes: “With consumption so low, it would mean that China was overly reliant for growth on two sources of demand that were unsustainable and hard to control. Only by shifting to higher domestic consumption could the country reduce its vulnerability and ensure rapid economic growth. This is why in 2005, with household consumption at a shockingly low 40 percent of GDP, Beijing announced its resolve to rebalance the economy toward a greater consumption share.”

In 2014, the household consumption to GDP ratio stood at 36.6%. Hence, the shift towards consumption driving economic growth has clearly not happened. The point being that the country is now addicted to the investment-exports driven growth model. In this scenario, every time there is a slowdown in economic growth, China resorts to the tried and tested investment led economic growth model. And the first step in this model is to get banks to lend more.

As Pettis writes: “The decision to upgrade is politically easy to make because each new venture generates local employment, rapid economic growth in the short term, and opportunities for fraud and what economists politely call rent-seeking behaviour, while costs are spread through the entire country through the banking system and over the many years during which the debt is repaid.”

This explains why Chinese banks lent 2.5 trillion yuan in January 2016, the most that they ever have. The trouble is that this round of economic expansion will lead to more excess capacity. And this will lead to a push towards higher exports and in the process hurt the global economy.

As Pettis writes: “China is not currently the engine of world growth. With its huge trade surplus, it actually extracts from the world more than its share of what is now the most valuable economic source in the world—demand. A rebalancing will mean a declining current account surplus and reduction of its excess claim on demand. This will be positive for the world.”

What Pettis basically means is that the Chinese household consumption to GDP ratio needs to go up i.e. the Chinese need to consume more of what they produce. But recent evidence clearly suggests that the Chinese government has no such plans and the investment-exports driven led economic growth strategy is likely to continue.

The column originally appeared in Vivek Kaul’s Diary on February 23, 2016

China Unleashes Another Round of Easy Money

chinaIn 2015, China grew by 6.9%. This is the slowest the country has grown in more than two decades. For a country which has been used to growing in double digits for a very long time, an economic growth rate of 6.9% is very low. Further, there are many economists who believe that even the 6.9% number isn’t correct.

A recent report in the Wall Street Journal quotes, an economics professor Xu Dianqing, as saying “that China’s gross domestic product growth rate might just be between 4.3% and 5.2%”.

The Chinese manufacturing sector which makes up for 40.5% of the economy grew by 6% in 2015. Nevertheless, many underlying indicators like power generation, railway freight movements, steel, cement and iron output, paint a different picture. As the Wall Street Journal points out: “Of some 60 major industrial products, nearly half saw output contract in the January to November period, while railway cargo volume fell 11.9% for all of last year, according to official sources.” (Doesn’t this sound similar to what is happening in India as well?)

Given this, it is only fair to ask how did the Chinese manufacturing sector grow by 6% in 2015? And how did the overall economy grow by 6.9%?

The point being that China is not growing as fast as it was and not as fast as it claims it is. Of course, if economists outside the government can figure this out, the government obviously realises this. Nevertheless, like all governments they need to maintain a position of strength and try and revive a flagging economy.

In the world that we live in, economists and politicians have limited ideas on how to tackle an economy that is slowing down. The solution is to get people to borrow and spend more. In a country like China where the government controls large parts of the economy, it means encouraging banks to lend more.

And that is precisely what has happened. In January 2016, responding to the low economic growth in 2015, the Chinese banks gave out loans worth 2.5 trillion yuan or around $385 billion. This is “a new record for a single month!” point out Dr Jim Walker and Dr Justin Pyvis of Asianomics Macro.

To give you a sense of how big the lending number is, let’s compare it to what the scheduled commercial banks in India lent during a similar period. Between January 8 and February 5 2016, the Indian banks loaned out around Rs 72,580 crore or $10.6 billion, assuming that one dollar is worth Rs 68.7. The way RBI declares lending data of banks, it is not possible to figure out how much the banks lend during the course of any month and hence, I have picked up the nearest comparable period.

The Chinese banks lent around 36 times more than Indian banks during a similar period. Of course, the Chinese economy is bigger than India is one factor for this difference.

A number of explanations have been offered for this huge jump in Chinese lending.  One is the revival of the Chinese property sector. Further, with the yuan depreciating against the dollar in the recent past, many Chinese companies are replacing their dollar debt with yuan debt, in order to ensure that they don’t have to pay more yuan in order to repay their dollar loans in the future.

But these reasons clearly do not explain this huge jump in lending. Chinese banks are lending out so much money because the government wants them to increase their lending dramatically.

The idea, as always, is to get people to borrow and spend money, and companies to borrow and expand, and in the process hope to create faster economic growth. The trouble is that all this borrowing and spending will only add to the excess capacity that already exists in China.

As Satyajit Das writes in The Age of Stagnation: “It would take decades for China to absorb this excess capacity, which in many cases will become obsolete before it can be utilised. Yet China continues to add capacity to maintain growth.”

Further, the credit intensity or the amount of new debt needed to create additional economic activity has gone up in China, over the years. As Das writes: “The incremental capital-output ratio(ICOR), calculated as the annual investment divided by the annual increase in GDP, measures investment efficiency. China’s ICOR has more than doubled since the 1980s, reflecting the marginal nature of new investment. China now needs around $3-5 to generate $1 of additional economic growth; some economists put it even higher at $6-8. This is an increase from the $1-2 needed for each dollar of growth 8-10 years ago, consistent with declining investment returns.”

The point being that China now needs more and more money to create the same amount of growth. And this means the effectiveness of borrowing in creating economic growth has come down over the years. This also means that the chances of money that the banks are lending out now, not being returned, is higher now than it was in the past.

In fact, as Walker and Pyvis of Asianomics Macro point out: “The China Banking Regulatory Commission reported that official nonperforming loans had jumped 51% year to 1.3 trillion renminbi [yuan] by December, now greater than at the last peak in 2009. While small in terms of the total number of loans out there – the bad loan ratio increased from just 1.25% to 1.67% – it is the direction that is bothersome, particularly given the well-publicised concerns over the accuracy of the data (hint: NPLs are much higher than 1.67%).”

Further, the Reuters reports that the special mention loans (loans which could turn into bad loans or what we call stressed loans in India), rose by 37% in 2015. And bad loans and special mention loans together form around 5.5% of total lending by Chinese lending. Indeed, this is worrying.

This huge increase in lending will obviously push up the economic growth in the short-term. But in the long-term it can’t be possibly good for the economy, as it will only lead to the non-performing loans going up and creation of many useless assets which the country really does not require. The current jump in bad loans of banks happened because of the huge jump in bank lending that happened in 2009, after the current financial crisis started.

Whatever happens, in the short-term, the era of “easy money” seems to be continuing in China. And that can’t possibly be a good thing.

The column originally appeared on the Vivek Kaul’s Diary on February 22, 2016.

“India Can’t Possibly Be Growing at Over 7%”

vivekDear Reader,

This is a special edition of the Diary. I was recently interviewed by the Inner Circle newsletter of Bonner & Partners based in the United States.

I am reproducing the complete interview here. These answers are generally themes that I write about and they will give you a good summary of my views on various issues that face Indian economy right now.

Happy Reading!

Vivek Kaul
Inner Circle (IC): Investors expected big things from India’s new prime minister, Narendra Modi, who was sworn into office in May 2014. For a time, at least, those expectations were reflected in a rising Indian stock market. The MSCI India Index surged 24% in 2014. But the “Modi Bounce” peaked early last year. Since then, Indian stocks are down 17% [they have fallen further since the interview happened]. I know you’ve been skeptical of Modi’s ability to push through tough economic reforms. Is he going to prove you wrong in 2016?

When Modi came to power, there was this expectation that he would start what we in India call the “second generation” of economic reforms. The first generation of reforms started in 1991 under prime minister P. V. Narasimha Rao. These were largely focused on opening up product markets – cars, mobile phones, etc. You couldn’t find many of these things in India in the early 1990s, when these reforms were underway. Human desire was limited to buying a Bajaj scooter…or, at best, an Ambassador car.

The other two big, important markets in India – land and labour – were left more or less untouched by this first wave of reforms. So, there was this expectation that Modi would tackle reforms in these two areas.  Also, in the run-up to the election, Modi promised “maximum governance and minimum government.” The maximum governance part is debatable. But the minimum government part has yet to materialize.

Why do you say that?

The government continues to run an extensive network of loss-making businesses. It runs a telephone company that makes huge losses. It runs an airline that makes losses. It is into running hotels. It is into making scooters. There’s a long list of state-owned companies that make losses. And the government continues to take on those losses.

There has been no effort at all to sell those companies or even shut them down. In fact, the Modi government has committed to shutting down just one state-run company – that makes watches! All the other companies continue to operate. Close to where I live, there is a company called the National Bicycle Corporation of India. The company continues to exist.

Is there a lot of corruption and grift going on in these state-run firms? Is that why the government isn’t doing more to shut them down?

There is corruption everywhere in government… in India and elsewhere. To that extent, I’m sure there is corruption in these state-run businesses. But are they surviving because of corruption? I don’t think so. They are surviving because the government wants them to survive.

What keeps them going, then? Why isn’t the government shutting them down?

You know what happens when an unpopular decision is made by the government? There are protests. The media catches on. There’s always a human interest story involved. You know the type of thing – “What will these guys do?”… “They’ve been working here for 30 years”…“They can’t do anything else”… and so on… and so on.

Any government that’s willing to take these state-run companies on has to be prepared to meet these protests head on. For example, say the government decided to shut down our national airline, Air India. The opposition parties would portray it as a national shame… or a national scandal…. then some leftist thinkers will latch on to it. The point is that if the government wants to push through these kinds of reforms, it needs to be firm about it. And that’s not happening.

Why can’t India just chug along as a centrally planned economy? There are people who’d argue that this model of growth is perfectly okay.

Let me give you a concrete example of what I mean…India’s neighbour Bangladesh has a population of about 150 million. But it exports more textiles than India, which has a population almost eight times larger. That’s because an average Indian textile firm employs only about eight people.

As a business, once you hit double digits when it comes to number of employees, you need to follow so many regulations and deal with so much red tape, it just doesn’t make any sense. So, you continue to stay small.

That’s less efficient at a company level. It’s also a major roadblock for the Indian economy as a whole. Because you create employment – and this has been observed the world over – when small companies become big companies. That’s how you employ many, many people. Once businesses are already big, they don’t take on new employees. They even fire people, due to earnings pressure, a squeeze on margins, and competition from leaner, smaller outfits.

Yes…

So, India needs small companies to become big companies. For that to happen, we need better physical infrastructure – more ports, electricity that is reliable, and better roads. We also need better labour laws to make it easier for entrepreneurs to grow their businesses. The Modi government hasn’t delivered on that, except perhaps for roads, where there seems to be some activity happening. That’s bad for job growth… and it’s bad for the economy as a whole.
What else should U.S. investors know about India before deciding whether to invest there?

One big theme I’ve been covering for my readers is the problem with how India calculates its economic growth. The Indian finance minister, Arun Jaitley – who is more or less the official spokesperson for the Modi government – recently boasted that India could shoulder some of the global growth contribution previously made by China.

His comment followed news that Chinese economic growth fell to a 25-year low of 6.9% in 2015. That means, going by the official figures at least, that India is the fastest-growing major economy in the world. From July to September 2015, Indian GDP grew at a pace of 7.4%.

Are you saying you don’t trust the government’s figures?

The gross domestic product(GDP) is ultimately a theoretical construct. For it to be a useful guide for investors, it should reflect economic reality. The Indian GDP numbers aren’t in sync with the reality on the ground in India.

Can you give me an example of what you mean?

Most Indians still can’t afford to buy a car. So, new two-wheeler sales are a better indicator of consumer demand. And two-wheeler sales have gone up by just 1% over the past year. Drill into those numbers a bit further and you’ll find that, although scooter sales have gone up, motorbike sales have gone down.

Why is that important?

Because people in rural India – a major chunk of the population – tend to buy motorbikes instead of scooters because the roads are so bad in rural India that scooters just aren’t an option. That tells us things are not so well at the consumer demand level. Same goes for tractor sales, another good economic indicator for demand in rural India. Tractor sales are down by about 13% over the past year. And liquor sales are also down. Which again tells you that consumer demand is weak.

Give us some more numbers…

Or take railway freight volumes – a good proxy for industrial demand. Railway freight has gone up by only 1% over the course of the past year. This tells us that industrial demand continues to be subdued.

And bank loan growth, another good proxy for consumer demand, has also been in single digits this year – at about 8-9%. That’s around half of what it used to be until a few years back. This tells you that India can’t possibly be growing at over 7%, as the government claims.

Are you saying that the Indian government is fudging the data?

Many investors have come to that conclusion about official Chinese economic data. I don’t think the Indian government is fudging the data. That would be giving too much credit to our bureaucrats. What happened is that last year, India changed the way it calculates GDP. Even though you’ll read in the mainstream press that this new way of crunching the numbers is in line with international norms, something is not right about it. The official numbers just don’t reflect what we’re seeing happen on the ground.

If you calculate India’s GDP by using the old methodology, what you find is that India is growing at a pace closer to 5%. To me, this is a lot more realistic.

Five percent growth is still fast when compared to the rest of the world. A lot of countries would love to be growing at that kind of clip.

That’s true. But for India, it’s not good enough. A significant part of the Indian population continues to live in poverty. Up until the recent slowdown, China grew at an average pace of about 10% for roughly 15 years. Only because China was able to grow at the kind of pace was it able to pull so many people out of poverty.

The worrying thing in India is that close to 13 million people enter the workforce each year. And that’s set to continue until 2030. This is what we call our “demographic dividend.” But if this dividend is not taken care of, it could turn around pretty quickly and hurt us. What your readers need to be aware of is that there aren’t enough jobs right now for that to happen.

Indian economic data, as I said, can be sketchy. But from what we know, the rate of population growth is outpacing the rate of job growth in India. As one of the speakers at the recent Equitymaster conference warned, if that continues to happen, the reaction from India’s poor could make the Arab Spring could look like a joke.

I’m not saying your readers shouldn’t invest a portion of their portfolio in Indian stocks. But they need to be aware that there’s a lot more to the growth story here than they’ll typically read about in the mainstream press. And in my view, at least, the real story on the ground is a lot less bullish for the economy and for the stock market than most people believe.

Thanks, Vivek.

You’re welcome.

This interview appeared in the Vivek Kaul Diary on February 18, 2016