Will a Keynesian Road Building Programme Put India On the Growth Path?


When in trouble, politicians and countries go back to the British economist John Maynard Keynes. Keynes in his magnum opus The General Theory of Employment, Interest and Money suggested that the way out of a low-growth or recessionary economic environment was for someone to spend more. In such a situation, citizens and businesses were not willing to spend more, given the state of the economy. So, the only way out of this situation was for the government to spend more on public works and other programmes.

The Indian government has decided to do just that. On October 24, 2017, the finance minister Arun Jaitley, announced a Rs 6.92 trillion ($107 billion assuming one dollar equals Rs 64.7) road building programme for 83,677 km of roads, over the next five years.

Out of this, the Bharatmala Pariyojana is to be implemented with Rs 5.35 trillion being spent on it for building 34,800 kilometre of roads. Economist Mihir Swarup Sharma writes in a column on NDTV: “Bharat Mala” is basically a reworked and updated form of the National Highways Development Programme that is almost two decades old.” The programme has been in the works for a while now. In fact, in an answer to a question raised in the Rajya Sabha, the upper house of Indian Parliament, the government had said: “The Public Investment Board has cleared the proposal for BHARATMALA Pariyojana Phase-I in its meeting held on 16 June 2017.”

In fact, there is nothing new about this. The Narendra Modi government, in the past, has shown a tendency to portray old schemes as new ones.

Let’s leave that aside and concentrate on how this programme will be implemented. The government said that substantial delegation of powers has been provided to the National Highways Authority of India and other authorities and government departments.

Over and above the Bharatmala Pariyojana, roads of length 48,877 km will be built under other current with an outlay of Rs .57 lakhs crores.

This road building should help a significant portion of the one million youth entering the Indian workforce every month, find jobs. A large portion of this workforce is unskilled and semi-skilled and road building projects will help cater to this completive advantage of access to cheap labour, that India has. Just the Bharatmala Pariyojana is expected to create 14.2 crores mandays of jobs, according to the government.

The government plans to raise finance for these road projects through a variety of measures. For the Bharatmala Pariyojana, Rs 2.09 trillion will be raised as debt from the financial market. Rs 1.06 trillion will be mobilised as private investments through the public private partnership. The remaining Rs 2.2 trillion will be provided out of accruals to the central road fund, toll collections of National Highways Authority, etc.

For the other road projects Rs 0.97 trillion will come from the central road fund and Rs 0.59 million will come from the annual budget expenditures of the government in the years to come.

Hence, on paper this sounds like a fool proof idea. The government will build roads. It will employ many people in the process and pay them. This income when spent will spur the businesses as well as the economy and India will grow at a fast-economic growth rate. QED.

Only, if things were as simple as that.

The government plans to build a total of 83,677 km of roads over five years. This implies building 16,735.4 km of roads on an average in each of the five years. Is that possible? Let’s look at the record for the last three years.

In 2014-2015, the government built 4,410 km of roads in total. In 2015-2016, this jumped to 6,061 km in total. In 2016-2017 (up to December 2016), the government had built 4,699 km of roads. This data is from the annual report of the ministry of road transport and highways. A report in The Hindustan Times suggests that in 2016-2017, the government built 8,200 km of roads. If the government has to achieve the road building target that it has set for itself over the next five years, it has to more than double the speed at which built roads in the last financial year. And then maintain it for five years. This, seems like a tall order.

Over and above this, acquiring land to build roads will not be an easy task. Nitin Gadkari, the minister of Road Transport and Highways told the Press Trust of India in an interview that even though land acquisition is “tough and complicated“, “it is not a problem for the ministry as farmers and others were making a beeline to offer their land for the highway projects after enhanced compensation.”

But this is not going to anywhere as easy as the minister made it sound. Take the case of the Delhi-Mumbai Industrial Corridor which was announced almost a decade back. While work has started on it, most of the corridor is still plagued by land acquisition issues.

To conclude, building roads to drive economic growth is a very old idea. In fact, it was put in action even before Keynes wrote about it in an indirect sort of way in The General Theory of Employment, Interest and Money.

While Keynes was expounding on his theory, it was al­ready being practiced by Adolf Hitler, who had deployed 100,000 workers for the construction of the Autobahn, a nationally coor­dinated motorway system in Germany which was supposed to have no speed limits.

Hitler first came to power in 1933. By 1936, the German economy was chugging along nicely, having recovered from a devastating slump and unemployment. Italy and Japan had also followed a similar strategy.

How well will things work out in the Indian context? It will all depend on how well the government is able to execute the building of roads. The good bit is that Nitin Gadkari, one of the better performing ministers in the Modi government, is in charge. The bad part is that good execution is not something India is known for.

The column originally appeared on BBC.com on October 28, 2017.

Lower Cash to GDP Ratio is a Reason to Worry, Not Celebrate

rupeeTime flies.

In 10 days time, it will be a year, since the prime minister Narendra Modi, made his rather “infamous” decision to demonetise Rs 500 and Rs 1,000 notes.

One of the claimed successes of demonetisation has been that the cash to gross domestic product (GDP) ratio has come down. In a speech made on October 4, 2017, Modi said: “Demontisation के बाद Cash to GDP Ratio अब 9 प्रतिशत पर आ गया है। (after demonetisation, the cash to GDP ratio has come down to 9 per cent.”

Let’s take a look at Figure 1, it plots the currency in circulation (a measure of cash in the financial system) on a weekly basis, from the week before demonetisation was announced.

Figure 1: 

Figure 1 clearly tells us that currency in circulation has still not come back to the level it was before demonetisation was announced. As on October 20, 2017, the currency in circulation was at 91.6 per cent of the currency in circulation as on November 4, 2016, four days before demonetisation was announced.

Now let’s calculate the currency in circulation to GDP ratio (cash to GDP ratio). As on March 31, 2017, the cash to GDP ratio had stood at 8.8 per cent. How did things look as on June 30, 2017? The cash to GDP ratio had improved to 9.9 per cent of the GDP.

How did things look before demonetisation? As on March 31, 2017, the cash to GDP ratio had stood at 12.2 per cent. Currently, it must be a little over 10 per cent of GDP (the exact figure can be calculated only once the GDP number as on September 30, 2017, becomes available).

This fall in cash to GDP ratio is being passed off as an achievement and the fact that nation as a whole has become more honest. As Modi said in the speech referred to earlier in the piece: “भाइयों और बहनों, इस सरकार ने देश में संस्थागत ईमानदारी को मजबूत करने का काम किया है। ये सरकार के अथक परिश्रम का ही परिणाम है कि आज देश की अर्थव्यवस्था कम Cash के साथ चल रही है। (Brothers and sisters, this government has worked to strengthen the institutional honesty of the country. It is due to the tireless hard-work of this government that today the country’s economy is running on less cash.)”

There are two points being made here. The first point is that less cash in the financial system means more honesty. The second point is that it is because of the hard work of the government that the country is running on less cash. Let’s take the second point first.

When PM Modi decided to demonetise Rs 500 and Rs 1,000 notes, in one shot he made 86.4 per cent of the currency in circulation useless, overnight. This impacted the economic activity in the country, given that bulk of the economic transactions in India (anywhere from 80 per cent to 98 per cent, depending on which estimate you believe) are carried out in cash.

This slowdown in growth of economic activity has continued. Ultimately, economic activity translates into economic growth.

For the period of three months ending March 2017 and June 2017, the non-government part of the GDP (which forms around 90 per cent of the GDP) has grown by a little over 4 per cent. When growth in economic activity slows down, the growth in currency in circulation is bound to be impacted as well.

So, yes, the hard work of the government has led to a lower cash to GDP ratio, but at the cost of slowing down economic activity. Hence, claiming this as success, is more of trying to build a narrative around demonetisation being successful, rather than being an actual success of any sort.

Another point that needs to be looked at here are digital transactions. Take a look at Figure 2. It plots the total value of digital transactions over a period of time. It does not take RTGS transactions (which are over Rs 2 lakh and are usually carried out by banks to settle among themselves) into account.

Figure 2: 

As Figure 2 clearly tells us, the total value of digital transactions is now lower than the months running up to demonetisation. This basically tells us that digital transactions haven’t replaced cash transactions. Hence, economic transactions which were earlier carried out in cash are still being carried out in cash.

This buttresses the point I made earlier about the cash to GDP ratio coming down because economic transactions are not growing at the same rate as they were growing earlier. Hence, a lot of money continues to remain deposited in banks. And this means a slower growth in currency in circulation, and as a result a lower cash to GDP ratio.

Now let’s talk about a lower cash to GDP ratio meaning that the country has become more honest. This is something I have addressed earlier as well, in February. Take a look Figure 3. It basically plots the cash to GDP ratio of different countries.

Figure 3: 

Take a look at Figure 3. Japan has the highest cash to GDP ratio at 19.4 per cent. India is nearly half of that at around a little over 10 per cent? Is India a more honest nation than Japan? As per the Transparency International’s Corruption Perception Index for 2016, Japan is the twentieth least corrupt country in the world. India stands at the 79th position, despite having a much lower cash to GDP ratio.

Or take the case of Brazil, which has a cash to GDP ratio of 3.31 per cent. Like India, it is the 79th least corrupt country in the world. Then there is the Eurozone (country’s which basically use euro as their currency). Their cash to GDP ratio is higher than that of India. Is the Eurozone more corrupt than India?

Hence, the link between a low cash to GDP ratio and low corruption is basically very weak. It is basically something that the Modi government has invented in order to build a positive narrative around demonetisation.

To conclude, there is enough data to suggest that a lower cash to GDP ratio is a reason to worry and not a reason to celebrate. Hope, the Modi government, at least internally realises this.

The column originally appeared on Equitymaster on October 30, 2017.

Anti-Black Money Day: Dear PM Modi, Is the Govt Really Serious About Tackling Black Money?


The Bhartiya Janata Party (BJP) led National Democratic Alliance (NDA) government will celebrate November 8, as the anti-black money day. On November 8, last year, the Narendra Modi government had demonetised Rs 500 and Rs 1,000 notes. This was seen as an attack on the huge amount of black money in the Indian financial system.

In the end, it turned out to be a legal money laundering scheme and nothing else.
After demonetisation, the prime minister Modi has continued to maintain a stance against black money in almost all his public posturing. All this posturing reminds me of a line from the Salman Khan starrer Wanted: “Ek baar jo maine commitment kar di, phir main apne aap ki bhi nahi sunta (Once I have committed to something, then I don’t even listen to myself).

Nevertheless, how serious is the Modi government and the prime minister himself about tackling the black money menace? Recently, the prime minister was in Gujarat and in a bid to reach out to the traders who have conventionally supported the BJP in the state, over the few decades, he said:In the last few months, 27 lakh additional people have registered themselves for this indirect tax [i.e. the Goods and Services Tax]… No businessmen wants to indulge in tax evasion. But tax rules, system, tax officials and even politicians are forcing them to do it…I know, that those who are joining have fear that their past records will be checked. I assure you that no tax officials will be allowed to open past records of those who want to come in the mainstream.”

What is the prime minister saying here:  A bunch of people have been afraid of coming on to the Goods and Services Tax system because the declarations they make now and in the months to come, will give the government a good idea about the kind of money they were making in the past. The government also has the details on the kind of tax they have paid in the past [if at all any]. Hence, it is clearly in a position to estimate the total amount of taxes that were not paid in the past.

The prime minister was simply trying to assure the people of the state of Gujarat that the past records will not be checked and they won’t get tax demands from the government.
This assurance raises a number of questions:

a) Does the law of the land change, simply because there is an assembly election in the state?

b) Is the commitment to eliminating the black money menace limited to only those states and only those times, when there are no assembly elections happening?

c) Also, does this mean that tax officials are supposed to turn a blind eye to the past shenanigans of people who should have paid tax, and haven’t, because the prime minister has made an assurance during the course of an election speech?

I have always maintained in my writing that prime minister Modi and the BJP aren’t serious about eliminating the menace of black money. And this is one of the things they like to talk about to build a narrative around the point of the government being serious about eliminating corruption and black money. The voters like to hear such things and the politicians are giving it to them.

Let me explain this point in a little more detail. You and I have been getting emails and smses almost every day asking us to link our Aadhar card to our bank accounts. We have also been getting smses asking us to link our Aadhar card to our mobile numbers. It is almost impossible to carry out any transaction with the government without an Aadhar card.

At the same time, no identification is needed to donate money to a political party. Why is that the case? Why can’t the Aadhar card be linked to every donation made to a political party as well. What is stopping the government from doing that? Almost everyone has an Aadhar card now.

If the idea is to eliminate black money, why aren’t donations to political parties linked to Aadhar. In fact, to take this argument even further, why are political parties allowed to collect donations in cash, in this day and age. If the idea is to encourage digital
transactions, why can’t PM Modi and the BJP, set an example on this front and ensure that the BJP takes only digital donations.

A lot of the donation to the political parties at the state level comes from the builders and the real estate companies. Because these donations are made in cash, builders need to carry out a part of their real estate transactions in cash as well. (This is not to say that all the cash that they collect is handed over to politicians unless of course the builder is a politician himself).

To conclude, there is enough evidence to suggest that PM Modi and the BJP are not serious about tackling the black money menace. If they were they would first start with genuinely reforming political donations.  And this leads me to believe that tackling the black money menace, like many other things, is just another talking point for PM Modi and the BJP.

(This was just a glimpse. If you want to know how big the black money problem is in India and how we can tackle it, there is a long chapter in my book India’s Big Government. The good news is that the book is available at a huge discount on Amazon till Friday, 27th October. The Kindle version is going at Rs 199, against a maximum retail price of Rs 749, and the paperback is going at Rs 499, against a maximum retail price of Rs 999).

The column originally appeared on Equitymaster on October 26, 2017.

India’s Real Estate Conundrum


Economic forecasting is a difficult business. It is even more difficult when one has to answer something as specific as: “when will home prices become affordable?”

Almost, anyone interested in buying a home currently knows that home prices are expensive. This, despite the fact that homes aren’t selling, and builders are sitting on a large number of unsold homes. But, they don’t seem to be in a hurry to cut prices.

Conventional economic theory suggests that when something is not selling, prices need to be cut, to attract prospective buyers.

But this does not seem to apply in the case of Indian real estate. Why? In the period between 2002 and 2012, real estate prices in India went up at a break neck speed. A significant portion of the real estate transactions was carried out in black.

Hence, while buying a home 20-30 per cent of the price had to be paid in black (i.e. in the form of cash). The money that the builders made in this form, has ensured that they continue to be liquid i.e. they have enough cash going around to meet their day to day expenses.

In the process, they are in no hurry to cut prices. But builders are not the only one who have a stake in this real estate game. Over the years, many individuals have become real estate investors as well. ”

Real estate returns across the country have either been very low or in negative territory, over the last few years. Also, once we take the risk involved in owning real estate and inflation, into account, investing in real estate starts to make financial sense only when the returns are greater than 10 per cent per year. Now that kind of return has been elusive on this investment.

Hence, the question is why are real estate investors holding on to the homes they bought as an investment, even when that investment is really not throwing up any return. It would simply make more sense for them to sell the home and invest the money somewhere else. Even something as simple as a fixed deposit is likely to earn more.

But before we figure out why these investors are not selling, let me tell you a little story. Recently, I was in Bali for a small family holiday. I wanted to buy a wooden carving, which I had taken a fancy to. The seller’s asking price was 6,00,000 Indonesian rupiah (around Rs 3,000). I started at 2,00,000 rupiah (Rs 1,000) and stuck to it. The seller kept dropping his price, till he came down to 2,50,000 rupiah (Rs 1,250).

After that we kept haggling for a good five minutes, but he stuck to his price. He wouldn’t drop it further, come what may. He had become “anchored” to that number, due to some reason. And this anchor ensured that finally I had to up the price I was willing to pay to 2,50,000 rupiah and seal the deal.

Anchoring is a very important concept in real estate. In his book A Man for All Markets, Edward O Thorp writes: “Anchoring is a subtle and pervasive aberration in investment thinking. For instance, a former neighbour, Mr Davis (as I shall call him), saw the market value of his house rise from his purchase price of $2,000,000 or so in the mid-1980s to $3,500,000 or so when the luxury home prices peaked in 1988-1989. Soon afterward, he decided he wanted to sell and anchored himself to the price of $3,500,000.

Mr Davis became anchored to this price of $3.5 million. The trouble was that home prices started to fall pretty soon. But Mr Davis had become anchored to the high price and he wouldn’t sell.

The Indian real estate investors are going through a similar phase right now. They are anchored on to the high real estate prices they saw nearly five to six years back. The trouble is no buyer is willing to buy at that kind of price.

In fact, this psychological dimension in real estate, makes it even more difficult to predict, when home prices will become affordable, despite it being very clear that real estate prices are due for a huge correction.

The column originally appeared in Bangalore Mirror on October 25, 2017.

No shortcuts to solving India’s job crisis


In the recent past, India’s jobs crisis has come to the fore. There is no specific reason for it, given that India has had a jobs crisis for a while now, with the media discovering it only recently.

As per the OECD Economic Survey on India released earlier this year, close to 30 per cent of India’s youth (individuals in the age group 15-29) are neither employed nor in education or training. Data from the Labour Bureau suggests that only three out of five Indians who are looking for job all through the year, find one. In rural India, only half of the individuals looking for a job all through the year, are able to find one.

Long story short—India has a jobs crisis. And it has been there for a while, despite the media discovering it only recently.

Arvind Panagariya, while he was the Vice-Chairman of the Niti Aayog, was asked on more than a few occasions, on why India had a jobs problem. As late as August 25, 2017, around a week before his term at the Niti Aayog came to an end, he remarked: “The major impediment in job creation is that our entrepreneurs simply do not invest in labour intensive activities.”

It’s not fair to blame just the entrepreneurs. An entrepreneur will go in areas where he sees value and in the process if he ends up creating jobs, then so be it. The bigger question is why have entrepreneurs stayed away from labour intensive activities.
Given India’s population, the country’s natural comparative advantage should have been in large-scale, labour intensive manufacturing. But the sectors like automobiles, engineering goods, pharmaceuticals and software, where we have done well, are both capital and skilled labour intensive.

As far as labour intensive sectors like apparels, food-processing and footwear, are concerned, these sectors haven’t really progressed in India. Let’s take the case of apparels. This is a hugely labour-intensive sector. As per an estimate made in the Economic Survey, the sector creates nearly 24 jobs for every lakh of investment. This is a sector which is 80-fold more labour intensive than automobiles and 240-fold more labour intensive than steel.

Apparel exports grew rapidly in the East Asian economies and pulled them out of poverty. As the Economic Survey points out: “The average annual growth of apparel exports was over 20 per cent, with some close to 50 per cent.” In the Indian case textiles and readymade garments exports have more or less stayed flat between 2013-2014 and 2016-2017.

The question is why? The labour costs in India are similar to that of Bangladesh, but cheaper than that of Indonesia, Vietnam and China. But the logistic costs are the highest in India at $7 per kilometre of road transport (to be able to get the merchandise to the ports from where it can be exported).

The logistic costs in China are at $2.4-2.5 per kilometre. In Bangladesh they are at $3.9 per kilometre. In Vietnam, the logistics costs are the same that as of India, but delivery to the east cost of the United States takes 14 days. It takes anywhere between 21 to 28 days from India.  The turnaround time is greater in case of India.

What does not help is the fact that most Indian apparel firms are very small. As per the Ease of Doing Business—An Enterprise Survey of Indian States close to 85 per cent of the firms employ less than eight workers.

As the Survey points out: “At one extreme, enterprises with less than eight work­ers employ more than four-fifths of the apparel work­force in India and less than 1% in China. At the other extreme, nearly 57% of the workforce in China is in enterprises larger than 200 workers but barely 5% in India. The Chinese apparel industry is highly compet­itive with $187 billion in exports compared with just $18 billion for India in 2014.” Hence, the ability of Indian firms to execute large orders is limited.

The apparels sector, which has the potential to create a huge number of jobs, hasn’t been creating them. Most firms in this sector, start small and continue to remain small. One reason for this lies in the fact that historically, labour intensive sectors in India came under small scale industries up until 2000. Clearly, the historical hangover persists.

As the Enterprise Survey of Indian States points out: “The largest enterpris­es—employing more than 200 people—are mostly concentrated in industries like manufacturing of mo­tor vehicles, trailers, transport equipment, pharma­ceuticals and textiles.”

The question is why do firms in labour intensive sectors start small and continue to remain small. The answer to this question lies in something that Jagdish Bhagwati and Arvind Panagariya wrote in India’s Tryst with Destiny: “The costs due to labour legislations rise progressively in discrete steps at seven, ten, twenty, fifty and 100 workers. As the firm size rises from six regular workers towards 100, at no point between the two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra costs of satisfying these laws.”

The point here is that Pangariya knew why entrepreneurs stayed away from labour intensive sectors. Hence, economists also tend to get rhetorical once they are a part of the government.

To conclude, if the government wants to get labour intensive sectors going, then major labour law reforms are necessary. Along with that the logistics costs need to fall. And that can only happen with an improvement in physical infrastructure. There are no short cuts here, really.

The column originally appeared in DNA on Oct 26th, 2017.