Of Rahul Bajaj and India’s So Called Demographic Dividend

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One of the things that I have recently been asked more than a few times is that why isn’t anyone else talking about the demographic dividend point that I have been making in the recent past.

The basic argument is rather straightforward. At a certain point of time, countries reach a stage where their working population grows much faster than their overall population. This means that there are more people who can earn and spend than those who need to be taken care of.

This trend typically lasts for two to three decades. When the people entering the workforce get jobs and save and spend money, the economy grows at a much faster pace than it has in the past. This faster economic growth helps pull out more and more people out of poverty. This is referred to as the demographic dividend.

An important assumption in the demographic dividend is that people who enter the workforce and are actually looking for jobs, are able to find jobs.

In the Indian case, around one million individuals are entering the workforce every month. This means around 1.2 crore individuals are entering the workforce every year. This will continue to be trend over the next couple of decades. More than 54 per cent of the country’s population is under 25 years of age.

If this demographic dividend needs to be cashed in on, there need to be jobs for these people. Also, if a bulk of these people need to find employment, the jobs need to be in the unskilled and the low-skilled space.

The question is, are enough jobs being generated for the million Indians entering the workforce every month? The answer is no.

This is the basic point I have been making over the last few months. And this has led to the question, as to why others are not talking about it.

While, I have no control over why others are not talking about what I am talking about, it took me a while to understand why people are asking the question.

The way the human brain works, most of us deem something to be important only if more than a few people are talking about it. In this case, it seems I am the only one rattling on and on about an issue. And given that the question is, is it important enough? Or is it something which one cranky guy seems to have gotten into his head. Making that distinction is important. And this is where external validation comes in. Or whether others are also talking about the same thing.

This phenomenon of seeking external validation is clearly visible in the stock market. Most retail money comes in when the markets are at their peak. And most people get totally disillusioned about investing in the stock market once the market has bottomed out.

That’s how human psychology works and I really cannot do much about. The question is why are others not talking about the risk to India’s demographic dividend? For the English language media, it is a question of us and them. People who are not finding jobs are not the ones who read the English language press.

Further, in India, nobody really stays unemployed. People do find a way of doing something. Either they become a part of the agricultural workforce where the disguised unemployment is very high. Or they become what economists Abhijit Banerjee and Eshter Duflo call reluctant entrepreneurs.

Over and above this, we do not have a good regular measure for unemployment. And given that unemployment rarely makes for news unlike a lot of other economic indicators like inflation, index of industrial production, fiscal deficit and so on.

Also, the demographic dividend not working out is a long-term trend. It is not going to have consequences overnight. Having said that, one consequence that has already started to playout is the land-owning upper castes in various parts of the country are now demanding reservations in government jobs.

I guess these are the reasons why others are not talking about this trend. Nevertheless, I recently came across someone who talked about what I have been talking about.

Industrialist Rahul Bajaj, wrote this in the 2015-2016 annual report of Bajaj Auto: “Each year, India is producing an extra 12 million young people of an age that makes them ready for the nation’s workforce. Unfortunately, while there is no doubt that we as a country can increase our GDP growth initially to 8% per annum and then hit a steady-state of around 8.5% for several years, everything seems to suggest that employment will not rise at anywhere close to that rate of growth.”

I don’t really buy the fact that India will be able to grow at a steady rate of 8-8.5 per cent per year, for several years. Very few countries have been able to grow at a rate of six per cent or more for a long period of time. Hence, there is no reason for us to assume that we will grow at 8-8.5 per cent, consistently.

Nevertheless, I agree with everything else that Bajaj has written. As he further writes: “Indeed, all recent data across most manufacturing and service sector activities show that employment elasticities (namely, the percentage increase in employment for a percentage growth in value added) are not only less than unity, but often negative. Matters worsen if you juxtapose significantly greater skill and multi–tasking needs of the future with the inadequate educational and technical abilities of many who are entering the labour force — thanks to years of neglect of our schools, colleges and technical and vocational training institutions. How then can we expect to employ the majority of our youth even when we attain higher growth? And what will this do to inequality and social tensions? I don’t have ready answers. But as a nationalist in his seventh decade, I am concerned.”

All I can say to conclude this is that like Bajaj I am very concerned.

The column originally appeared in Vivek Kaul’s Diary on September 27,2016

The Denominator Neglect

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Among other things, schools teach Mathematics very badly, leading to a situation where most adults don’t understand the practical applications of even fifth standard Mathematics and pay for it in the process.

One such mistake that we make is known as the denominator neglect. As Thomas Gilovich and Less Ross write in The Wisest One in the Room—How You Can Benefit from Social Psychology’s Most Powerful Insights: “The effects of strategically choosing the right scale (i.e. the right denominator) can be dramatic. In one study, respondents judged a disease that kills 1,200 out of every 10,000 afflicted individuals to be more dangerous than one that’s twice as lethal, killing 24 out of every 100.”

This didn’t make any sense. The second disease was clearly more lethal given that chances were that it would kill twice the number of afflicted people than the first one would. But people still found the first disease more dangerous because the number 1,200 is much bigger than the number 24. In the process, they had totally neglected the denominator and made a blunder in arriving at the conclusion that they did.

In fact, a well-known experiment will make the point even clearer. In this experiment participants are given a choice to draw a red marble, out of two urns and win a prize. The first urn contains 10 marbles of which one is red. The second urn contains 100 marbles, of which 8 are red. It doesn’t take rocket science to figure out that the chances of drawing a red marble and in the process winning a prize are higher in case of the first urn. The probability of winning in the first case is 10 per cent and in the second case 8 per cent.

Nevertheless, as Daniel Kahneman writes in Thinking, Fast and Slow: “About 30-40% of student s[basically participants in the experiment]  choose the urn with the larger number of winning marbles, rather than the urn that provides a better chance of winning…Vivid imagery contributes to denominator neglect…When I think of the small urn, I see a single red marble…When I think of the larger urn, I see eight winning marbles.”

And that is how denominator neglect works. In fact, that also explains why different ways of talking about risk vary so much. As Kahenman writes: “You read that “a vaccine that protects children from a fatal disease carries a 0.001% risk of permanent disability”. The risk appears small. Now consider another description of the same risk: “One of 100,000 vaccinated children will be permanently disabled.” The second statement does something to your mind that the first does not: it calls up the image of an individual child who is permanently disabled by the vaccine; the 99,999 safely vaccinated children have faded into the background.”

That is how things work. The larger point is that people concentrate on absolute values in most cases and don’t take the denominator into account. This also explains why people are more likely to spend in a stronger currency than a weaker one. As Gilovich and Ross write: “People are more likely to buy expensive brand-name products when they are priced in a strong currency like the British pound that results in a relatively small price tag (318 pounds for an Apple iPad with retinal display) than when priced in a weak currency like the Mexican peso that results in a relatively large price tag(6,395 pesos for the same iPad).”

This also explains why many Indians buy gadgets when they go abroad. Of course, in many cases, the goods bought abroad are actually cheaper but in many other cases they simply appear cheaper because they are priced in a much stronger currency.

And this is how our lack of understanding of middle-school maths hurts in the decisions that we make in our daily lives.

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

One Lesson from the One Rupee Accounts in Jan Dhan Yojana

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One of the major successes of the Narendra Modi government has been the Jan Dhan Yojana. In fact, in 2015, around 12 crore bank accounts were opened under the scheme at a rapid pace of over 3 lakh accounts per day.

As of September 21, 2016, a total of 24.61 crore accounts have been opened under the scheme. The accounts have a total of Rs 43,347.84 crore under them. Only, around 23.98 per cent of the accounts are zero balance accounts i.e. the accounts have been opened, but there is no money in these accounts.

This is a huge improvement over January 31, 2015, when 67.3 per cent of the accounts were zero balance accounts. Further, there were a total of 12.55 crore accounts that had been opened under the scheme, at that point of time. These accounts had a total of Rs 10,499.62 crore in them. The accounts now have more than four times the money they had in January 2015.  Hence, things have improved significantly.

Earlier this month, The Indian Express reported that: “Bank officials are quietly making one-rupee deposits, many from their own allowances, some from money kept aside for office maintenance. Their ostensible goal: to reduce the branch’s tally of zero-balance accounts.”

Branch managers told the Express that there was pressure on them to show that the zero-balance accounts were falling. And this is why they ended up doing what they did.

The Indian Express further reported that the percentage of accounts with one rupee deposits is fairly significant. Take the case of Punjab National Bank. Of the 1.36 crore accounts that the bank had opened under the Jan Dhan Yojana around 12.97 lakh accounts had deposits of Re 1. The UCO Bank had opened 74.6 lakh accounts under the Jan Dhan Yojana. Of this 11.06 lakh accounts had deposits of Re 1.

While this does not mean that the Jan Dhan Yojana has been unsuccessful, it does take away some its sheen. Also, the fact that the number of zero-balance accounts have come down dramatically since January 2015, cannot be taken that seriously.

There is a lesson that needs to be learnt here. If the government starts following one measure of performance or gives it more importance than others, chances are the measure will be gamed.

One example (though rather extreme) of this played out in communist China under Mao Zedong. Mao wanted agricultural production of China to increase at a very fast pace. He wanted to use the agricultural surplus (whatever was left after the Chinese consumption) to finance ambitious military as well as industrial projects.

As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “Mao’s impossible demands made their way down the bureaucratic ladder, from the government offices in Beijing, through provincial administrators, all the way to the village headmen. The local officials afraid of voicing any criticism and wishing to curry favour with their superiors, concocted imaginary reports of dramatic increases in agricultural output. As the fabricated numbers made their way up the bureaucratic hierarchy, each official only exaggerated them further, adding a zero here or there with a stroke of a pen.

The trouble was that as everyone up the hierarchy padded the numbers, the fictional number of grain production that reached the top was much higher than the actual production. And this had its consequences.

As Harari writes: “Consequently, in 1958 the Chinese government was told that annual grain production was 50 per cent more than it actually was. Believing the reports, the government sold millions of tons of rice to foreign countries in exchange for weapons and heavy machinery, assuming that enough was left to feed the Chinese population. The result was the worst famine in history and the death of tens of millions of Chinese.”

In this case, the government pushing for a particular result to be achieved, led to that result being achieved on paper. In the process, the numbers were believed and the food grains sold off. It eventually led to people dying of hunger.

In the Jan Dhan Yojana case there have been no disastrous consequences. All it has led to is a slightly embarrassed government and that’s about it. Nevertheless, there is a lesson in it for us. If the government puts too much focus on one measure of performance, chances are ultimately that the lower bureaucracy will game the number.

In economics, there is even a law for a situation like this and it’s called the Goodhart’s law (named after economist Charles Goodhart). The Goodhart’s law states that, “when a measure becomes a target, it ceases to be a good measure.” And this is precisely what has happened with the focus on bringing down the zero-balance accounts, opened under the Jan Dhana Yojana.

Also, it is worth reminding here that as more and more government subsidies are paid out as cash to citizens, the number of zero balance accounts will automatically come down in the years to come. Of course, this will take time.

The column originally appeared in Vivek Kaul’s Diary on September 28, 2016

 

Of Karl Marx, Predictions and the Paradox of Knowledge

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One of the pitfalls of writing on economics and finance is being regularly asked to predict how things will eventually turn out to be. Or to put it in Mumbai stock market lingo: “Kya lagta hai? (What do you feel?)”

While speaking on broad trends after one has looked through the numbers is relatively easy (like India has a real estate bubble right now) but predicting when a trend will end and how to profit from it, is very difficult (like when will the real estate bubble burst).

So, I can tell you with great confidence that prices in the real estate sector are in bubbly territory. This statement comes from the fact that the supply of real estate is way higher than its demand.

But if you were to ask me, when will prices crash and reach their lowest level, so that you can time your purchase accordingly, I wouldn’t be able to tell you that. So, in that sense my analysis is a tad useless, given that it doesn’t lead to an actionable information other than the fact that you should not be buying real estate right now. Hence, I am not in a positon to make a confident prediction about real estate or tell you exactly how I see it playing out and how you should go about profiting from it.

There is some doubt in what I write and say, and that shall always be there.

Nevertheless, despite the pitfalls, it pays to sound confident and cocksure about everything in the business of forecasting (if you don’t believe me try watching business TV for a few hours and you will know what I am exactly trying to say here).

As Dan Gardner writes in Future Babble—Why Expert Predictions Fail and Why We Believe Them Anyway: “Researchers have also shown that financial advisers who express considerable confidence in their stock forecast are more trusted than those who are less confident, even when their objective records are the same…If someone’s confidence is high, we believe they are probably right; if they are less certain, we feel they are less reliable.”

What does this mean? As Gardner writes: “This means we deem those who are dead certain the best forecasters, while those who make “probabilistic” calls…must be less accurate.” In the days of the social media and the internet this problem is even more accentuated. Not only are the so-called experts making confident predictions, so is every Jai, Vijay and Ajay.

But the thing is that just because someone is confident doesn’t mean he or she will turn out to be right. One reason is the fact that there are way too many variables at play, and keeping track of all variables and making sense of them, is not an easy task.

This is where the concept of bounded rationality comes in. As The Economist puts it: “Not only can they [human beings] not get access to all the information required, but even if they could, their minds would be unable to process it properly.” This makes making predictions a risky business.

In other cases, the prediction turns out to be wrong simply because people decide to act on it. Take the case of Karl Marx. In the middle of the 19th century, working in London, Marx came up with economic insights, which have caught the imagination of every generation since then. But the thing is that Marx has turned out to be wrong.

As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “[Marx] predicted an increasingly violent conflict between the proletariat [the working class] and the capitalists, ending with the inevitable victory of the former and the collapse of the capitalist system.” In fact, Marx was certain that countries like Great Britain, United States and France, would see an industrial revolution that would spread to other parts of the world.

But Marx turned out to be wrong. Or to put it in a better way, he hasn’t turned out to be right, as yet. Does that mean his basic assertion was wrong? As Harari writes: “Marx forgot that capitalists know how to read. At first only a handful of disciples took Marx seriously and read his writing. But as these socialist firebrands gained adherents and power, the capitalists became alarmed. They too perused Das Kapital, adopting many of the tools and insights of Marxist analysts.”

And once the capitalists read what Marx had written, they started working on ensuring that what he had said does not come out to be true. As Harari writes: “Capitalists in countries such as Britain and France strove to better the lot of the workers, strengthen their national consciousness and integrate them into the political system. Consequently, when workers began voting in elections and Labour gained power in one country after another, the capitalists could still sleep soundly in their beds.”

And that is how Marx went wrong, despite being right. This is the paradox of knowledge. It is very important to understand this in the context of forecasts and predictions that have become an important part of this era that we live in.

As Harari writes: “Knowledge that does not change behaviour is useless. But knowledge that changes behaviour quickly loses its relevance. The more data we have and the better we understand history, the faster history alters its course, and the faster our knowledge becomes outdated.”

And that is something worth thinking about.

The column originally appeared in Vivek Kaul’s Diary on September 20, 2016

 

WHY THE GOVERNMENT CONTINUALLY FAILS TO DELIVER

zeroIn moments of exasperation when talking about India and what we call the system, people often blurt out, “but why isn’t the government doing something about it?”

Take the case of education. As the document titled Some Inputs for Draft National Education Policy of 2016 released by the ministry of human resources development some time back  points out: “The concern for the improvement of education had been at the top of India’s development agenda since independence.”

Despite this concern, India still has the most illiterates in the world. As the Draft National Education Policy document further points out: “The relatively slow progress in reducing the number of non-literates continues be a concern. India currently has the largest non-literate population in the world with the absolute number of non-literates among population aged 7 and above being 282.6 million in 2011.”

This basically means that around in one in four Indians continue to be illiterate. This is nearly seventy years after independence. Over and above this, India also has the maximum number of youth and adult illiterates in the world. The youth literacy rate (15-24 years) is at 86.1 per cent whereas the adult literacy rate (15 years and above) is at 69 per cent.

Further being literate doesn’t mean that the learning outcomes (the ability to read, write and do some basic maths) are in place. Madhav Chavan, the CEO-President of the Pratham Education Foundation estimates that in the period of ten years up to 2015, 10 crore children completed primary school without the ability to do some basic reading as well as mathematics.

So why can’t the government do something about it?

It is widely believed that one reason for this is that the government doesn’t spend enough on education. The various National Education Policies have recommended that the government should be spending 6 per cent of the GDP on education. But over the years, the spending has hovered around 3.5 per cent of the GDP.

Nevertheless, this does not mean enough money is not being spent. As Geeta Kingdon pointed out in a recent editorial in The Times of India, in 2014-2015, the total teacher salary bill for the country stood at Rs 41,630 crore. This amounted to a teacher salary expense of Rs 40,800 per year per child. This is huge.

The trouble is that just spending money on a problem is not a solution. But that is precisely what the various central governments over the years have tended to do. If there is a problem, they launch a new scheme on the basis of a new policy to tackle it and make some budgetary allocation to it.

The trouble is that there are way too many government schemes going around. As Devesh Kapur writes in an essay titled The Political Economy of the State: “Few states have the administrative capacity to access grants from 200 plus schemes, spend money as per each of its conditions, maintain separate accounts, and submit individual reports. This administrative capacity is even more limited in those states where the need is the most. Monitoring is rendered difficult not just because of limitation in the monitors themselves, but the sheer number and dispersion of the schemes across communities and locations.”
And this inability to monitor inevitably leads to corruption with money which has been allocated for a certain cause, getting siphoned off. There is a key lesson here that the central government needs to learn here.

As Kapur writes: “While each centrally sponsored scheme has the resources of a particular central ministry to call upon to aid its design, stipulate conditionalities for disbursement, and so on, the delivery is necessarily by local administration.”

And there is only so much a local administration can do to implement a scheme.

The larger point here is that the central government by trying to achieve too many things by running too many schemes ends up making a mess of the most important things and this includes education, health, agriculture etc.

Hence, if India has to get rid of its most basic problems, the government will have to start concentrating on fewer things. As the old saying goes, perfect is the enemy of the good. And that is well worth remembering.

The column originally appeared in the Bangalore Mirror on September 14, 2016