Everybody Loves a Good Interest Rate Cut…Except the Savers

My main life lesson from investing: self-interest is the most powerful force on earth, and can get people to embrace and defend almost anything – Jesse Livermore.

Late in the evening of March 31, the department of economic affairs, ministry of finance, put out a press release saying that the interest rates on small savings schemes for the period April to June 2021, have been cut.

The social media got buzzing immediately. And almost everyone from journalists to economists to analysts praised the decision. It was seen as yet another effort by the government to push down interest rates further.

With the state of the economy being where it is, lower interest rates are expected to perk up economic growth. People are expected to borrow and spend more. Corporates are expected to borrow and expand. At lower interest rates individuals who have already taken on loans will see their EMIs go down, leaving more cash in hand, and they are likely to spend that money, helping the economy grow.

That’s how it is expected to work, at least in theory. Hence, everybody loves a good interest rate cut… except the savers.

On April 1, the social media woke up to the finance minister Nirmala Sitharaman’s tweet announcing that “interest rates of small savings schemes… shall continue to be at the rates which existed in the last quarter of 2020-2021.” She further said that the order had been issued by oversight and would be withdrawn.

Later in the day, the department of economic affairs put out a press release to that effect.

The fact that lower interest rates are good for the economy is only one side of the story. They also hurt the economy in different ways. People who are dependent on interest income for their expenditure (like the retired senior citizens) see their incomes fall and have to cut down on their expenditure. This impacts private consumption negatively. 

While this cannot be measured exactly, it does happen. Also, a bulk of India’s household savings (close to 84% in 2019-20) are made in fixed deposits, provident and pension funds, life insurance policies and small savings schemes. Lower interest rates bring down the returns of all these products and this negatively impacts many savers.

As the economist Michael Pettis writes about the relationship between interest rate and consumption in case of China, in The Great Rebalancing:

“Most Chinese savings, at least until recently, have been in the form of bank deposits…Chinese households, in other words, should feel richer when the deposit rate rises and poorer when it declines, in which case rising rates should be associated with rising, not declining, consumption.”

The same logic applies to India as well, with lower interest rates being associated with declining consumption, at least for a section of the population.

This is not to say that interest rates should be higher than they currently are (that is a topic for another day), nonetheless the fact that lower interest rates impact savers and consumption negatively is a point that needs to be made and it rarely gets made. I made this point in a piece I wrote for livemint.com, yesterday. 

Also, borrowing is not just about lower interest rates. It is more about the confidence that the borrower has in his economic future and the ability to keep paying the EMI over the years. I wrote about this in the context of home loans, a few days back.

This leaves us with the question that why doesn’t anyone talk about the negative side of low interest rates. The answer lies in the fact that they don’t have an incentive to do so. Let’s try and look at this in some detail.

1) Fund managers: Fund managers love lower interest rates because it leads a section of the savers, in the hope of earning a higher return, to move their savings from bank fixed deposits to mutual funds and portfolio management services which invest in stocks. In the process, their assets under management go up. More money coming into the stock market also tends to push up stock prices.

All in all, this ensures that fund managers increase their chances of making more money and hence, they love lower interest rates because their acche din continue.

2) Analysts: Analysts love lower interest rates because it leads a section of the savers, in the hope of earning a higher return, to move their savings from bank fixed deposits to stocks. In order to buy stocks, they need to open a demat account with a brokerage. When the new investors buy stocks, the brokerage earns commissions.

Further, it also means that the interest cost borne by corporates on their debt goes down, leading to higher profits. The stock market factors this in and stock prices go up. Given this, analysts have an incentive to love interest rate cuts.

3) Corporates: Do I need to explain this? Lower interest rates lead to a lower interest outflow on debt that a corporate has taken on and hence, higher profits or lower losses for that matter. This explains why corporate honchos are perpetually asking the Reserve Bank of India to cut the repo rate or the interest rate at which it lends to banks.

4) Banks: Banks love lower interest rates simply because at lower interest rates the value of the government bonds they hold goes up. Interest rates and bond prices are inversely related. Higher bond prices mean higher profits for banks or lower losses in case of a few public sector banks. This is why bankers almost always come out in support of interest rate cuts.

This also explains why the bankers hate the idea of small savings schemes offering higher returns than fixed deposits. Lower interest rates on small savings schemes pushes the overall interest rates in the financial system downwards. 

5) Economists: Most economists are employed by stock brokerages, mutual funds, banks, corporates or think tanks. As explained above, stock brokerages, mutual funds, banks and corporates, all benefit from lower interest rates. If your employer benefits from something, you also benefit in the process. Hence, your views are in line with that.

When it comes to think tanks, many are in the business of manufacturing consent for corporates. Their economists act accordingly. 

6) Journalists: With the media being dependent on corporate advertising as it is, it is hardly surprising that most journalists love interest rate cuts. Further, the main job of anchors on business news channels is to keep people interested in the stock market because that is what brings in advertising. And this can only happen, if stock prices keep going up. In this environment, anything, like interest rate cuts, that drives up stock prices, is welcomed.

Of course, some mainstream TV news channels also run propaganda for the government. So, in their case every government decision needs to be justified. That is their incentive to remain in the good books of the government.

7) Government: The central government will end up borrowing close to Rs 25 lakh crore during 2020-21 and 2021-22. Hence, even a 1% fall in the interest rate at which it borrows, will help it save Rs 25,000 crore. It clearly has an incentive in loving low interest rates. 

The point is everyone mentioned above tends to benefit if interest rates keep going down or continue to remain low. Further, they are organised special interests with direct access to the mainstream media. The savers though many more in number aren’t organised to put forward their point of view.

Also, it is easier to do the math around the benefits of interest rate cuts and low interest rates than its flip side. As economist Friedrich Hayek said in his Nobel Prize winning lecture, there is a tendency to simply disregard those factors which “cannot be confirmed by quantitative evidence” and after having done that to “thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.”

That’s the long and the short of it. 

Women Are Bearing the Brunt of India’s Unemployment Problem

This piece is an extension of a piece on unemployment I wrote sometime back. Nevertheless, you don’t have to read that piece in order to make sense of this.

Honestly, this is probably the most disturbing data driven piece that I have ever written, despite the fact that I started writing on the issue of unemployment more than half a decade back, when it wasn’t very fashionable to do so.

The brunt of India’s unemployment problem is being borne by women. This is not to say that the men are having an easy time. They aren’t, given that many more men enter the labour force than women.

Nevertheless, the proportion of women who are employed and get paid was low to start with, and it has become even lower over the years. This, at a time, when more and more women are going to school and college.

As the All India Survey of Higher Education for 2018-19 points out: “Total enrolment in higher education has been estimated to be 3.74 crore with 1.92 crore male and 1.82 crore female. Females constitute 48.6% of the total enrolment.” But all this education isn’t helping them find paid employment.

Let’s start with the unemployment rate for men and women. The following chart plots this data since January 2016.

Source: Centre for Monitoring Indian Economy.

The above chart tells us several interesting things.

1) The unemployment rate for women is significantly higher than that of men. In February 2021, the unemployment for women stood at 12.39% whereas for men it stood at 6.23%.

2) The unemployment rate for women in February 2021 is much lower than it was in January 2016, when Centre for Monitoring Indian Economy (CMIE) published the unemployment data for the first time. Have things improved? Keep reading to know the answer.

3) The peak unemployment rate for women during covid was 29.22% as of April 2020. The rate has fallen since to 12.39%, as of February 2021. Again, have things improved?

In order to answer the questions raised above, we need to understand how unemployment is defined. (For those who have read the earlier piece I wrote on unemployment, the next few paragraphs may seem like a repetition, which they are. I have repeated these paragraphs, simply because it is important for every piece to stand on its own, so that first time readers can also read and understand it easily).

A person is categorised as unemployed “because of a lack of job and where such a person is actively looking for a job”. The word to mark here is actively. Hence, a person can be categorised as unemployed only if he doesn’t have a job and is searching for one.

As the Centre for Monitoring Indian Economy (CMIE) puts it, a person categorised as unemployed, “should be unemployed on the date of the survey, should be actively looking for a job in the 100 hundred days (approximately three months) preceding the date of the survey and should be willing to take up the job if a job is found.”

They further point out: “A person is considered to be actively looking for a job if such a person has contacted potential employers for jobs, contacted employment agencies, placement agencies, appeared for job interviews, responded to job advertisements, online employment sites, made applications, submitted resumes to potential employers or reached out to family members, friends, teachers to look for jobs from them.”

To put it in short, waiting for a job offer to come, is not considered as actively looking for a job.

Let’s move on and plot the next two charts, the labour participation rate for men and women.

Source: Centre for Monitoring Indian Economy.

Source: Centre for Monitoring Indian Economy.

Before we interpret these charts, we first need to define what labour participation rate is. Labour participation rate is the ratio of the labour force to the population greater than 15 years of age. And what is the labour force? As per CMIE, labour force consists of persons who are of 15 years of age or more, and are employed, or are unemployed and are actively looking for a job.

Now we are in a position to interpret the above two charts. Let’s do that pointwise.

1) The labour participation rate for women is miniscule on the whole. In February 2021, it stood at 9.42%. What does this mean? It means that a very small proportion of women over the age of 15, are employed and get paid for it or are unemployed and are actively looking for. a job. And the tragic part is that this rate is falling. It was at 17.7% in May 2016. Since then it nearly halved.

2) The labour participation rate of men is considerably higher. It was 67.82% in February 2021, even though it has been falling. Hence, two in three men over the age of 15, are employed and are getting paid for it, or are unemployed and actively looking for a job. For women, this ratio is less than one in ten. That’s the difference between the two sexes and it’s huge. 

3) Urban women are in a much worse position on this front. The labour participation rate for urban women stood at 6.56% in February 2021. The rate had peaked at 16.58% in August 2016 and has been falling ever since. What does this mean? It means that it is more difficult for a woman to be employed and get paid, if she is in urban India than in comparison to rural India.

Also, the dramatic fall in the rate since August 2016, tells us that once a woman loses a job or a source of income, it is very difficult for her to get it back. And finally, very few women in urban India are stepping out of their homes to go to work and get paid for it. This has only increased post the spread of covid. The labour participation rate for women was 9.92% in January 2020. It’s not at 6.56%.

4) Now comes the worst part. Between January 2016 and February 2021, the number of women greater than 15 years of age has gone up by 5.41 crore to 49.49 crore. Hence, the number of women who have entered the working age population has gone up by 12.26% (5.41 crore expressed as a percentage of 49.49 crore). On the other hand, the female labour force, has shrunk by 2.75 crore to 4.66 crore. In January 2016, it was at 7.41 crore. This is a collapse of 37% (2.75 crore expressed as a percentage of 7.41 crore).

Let me just repeat this again. While the working age population for women over the last five years has gone up by 12.26%, the female labour force has collapsed by 37.11%. This also explains the fall in unemployment rate for women, given that much fewer women are actively looking for a job. Many women who haven’t been able to find jobs, have stopped actively looking and simply dropped out of the labour force.

Economists have struggled to come up with an explanation for this phenomenon. One possible explanation lies in the fact that the number of jobs available haven’t grown at the pace that could accommodate the new individuals, both men and women, entering the workforce. Hence, in a patriarchal society, men in deciding positions, have offered jobs to other men, forcing women who have searched and not found jobs to stop actively looking for a job and drop out of the labour force altogether.

5) Let’s take a look at the overall population. The working age population, between January 2016 and February 2021, has gone up from 93.85 crore to 105.8 crore, this implies an increase of 11.95 crore. Nevertheless, the number of people employed or unemployed and looking for a job, that is the total labour force, has fallen from 44.76 crore to 42.85 crore, or by 1.91 crore.

Sothe working age population has increased by 11.95 crore between May 2016 and February 2021, but the total labour force as such has fallen by 1.91 crore. What does this really mean?

While, the total labour force has shrunk by 1.91 crore, 2.75 crore women have dropped out of it. This basically means that the number of men in the labour force has gone up.

Hence, the brunt of India’s unemployment problem is being borne by women. Women who lose their jobs find it difficult to find a new one and over a period of time simply drop out of the labour force. Many women who enter the labour force and actively look for jobs, are unable to find one and eventually stop searching and drop out of the labour force.

Given that chances of men finding a job are higher, they continue to look for a job and the situation is not as bad as it is for women. Between January 2016 and February 2021, number of men who crossed the age of 15 and entered the working age population, increased by 6.54 crore to 56.30 crore.

During the same time, the number of men entering the labour force (that is either they were employed or were unemployed and actively looking for a job) increased by 83.62 lakh to 38.19 crore. Hence, in this case of men, the labour force at least hasn’t shrunk.

6) Given that more and more women are dropping out of the labour force, it makes it easier for the men who don’t drop out of the labour force to find a job, from the opportunities that come up. (I am using the word easier here and not easy. Kindly appreciate the difference between the two).

7) Urban women are likely to be more educated, but their labour participation rate is very low. Hence, what that means is that they are unable to utilise their education to work and earn money in the process.

8) Now let’s take a look at how things have been post-covid.  In January 2020, before covid had struck, the working age population had  stood at 103.13 crore. By February 2021, this had jumped to 105.8 crore, a jump of 2.67 crore. Meanwhile, the labour force as of January 2020 stood at 44.24 crore. It has since shrunk to 42.85 crore, by 1.39 crore. So, post-covid, the working age population has gone up by 2.67 crore, but the labour force has shrunk by 1.39 crore.

How have the women done on this front? The working age population post covid for women has gone up by 92.23 lakh whereas the labour force has shrunk by 78.03 lakh. Again, more women have dropped out of the labour force than men, given that the labour force has shrunk overall by 1.39 crore. Also, do keep in mind that the fact that a lower number and proportion of women enter the labour force in the first place.

To conclude, the world celebrated the international women’s day a few days back (on March 8). On that day, the corporates and the government institutions talked about the importance of the women who worked for them. The social media influencers talked about women. Many women talked about what it means for them to be a woman.

But almost none of them talked about one of the most important issues at hand, the fact that Indian women are bearing the brunt of India’s unemployment problem.

If you are reading this(man or woman) please share it with your friends and family. The first step towards solving any problem is knowing and acknowledging that it exists.

On Confidence

Around mid-November 2020, I spoke to a bunch of macroeconomics students at IIM Ahmedabad on data in economics. After I had spoken, one of the questions asked was how can we use data to say things with absolute certainty (or something along similar lines).

My simple straightforward answer to the question was that we can’t. Over the years, economists had ended up portraying their subject as a science simply because it has a lot of mathematical equations built into it. But macroeconomics was always more of an art. Hence, we could say things with a reasonable amount of confidence, but never with total confidence.

I don’t think the student was convinced about what I said. And I don’t blame him for it because in the world that he lives in, economists, investors, analysts, politicians and just about everyone speaking to the world at large, is saying things with total confidence.

Let’s take the case of economists. Their economic growth forecasts are made to the precision of a single decimal point.

If we talk about investors, they forecast a stock market index reaching a particular level in a certain amount of time, with total confidence.

Analysts forecast the price of a stock or a commodity reaching a certain level at a certain point of time.

And let’s leave politicians out of this. Untangling their confidence levels will take a book.

The trouble is all this confidence comes in a world that keeps rapidly changing, where if we stick to our ideas all the time, we will largely turn out to be wrong.

As Dan Gardner writes in Future Babble—Why Expert Predictions Fail and Why Believe Them Anyway:

“The simple truth is no one really knows, and no one will know until the future becomes the present. The only thing we can say with confidence is that when that time comes, there will be experts who are sure they know what the future holds and people who pay far too much attention to them.”

And people pay far too much attention to experts who predict/forecast/comment confidently simply because confidence convinces. The audience is looking for a buy in and nothing helps get that more than the confidence of the expert talking.

Also, in these days of the social media, many a time we are simply looking for a confirmation of something that we already believe in. If the expert ends up saying something along those lines, he tends to become our go to man. Our echo chambers are really small.

Let’s take the case of the investor Rakesh Jhunjhunwala, a man known to make confident bold statements when it comes to the Indian economy and the stock market. He recently forecast that India will overtake China in the next 25 years. As he put it: “You may call me a fool… but I can tell you one thing – India will overtake China in the next 25 years.”

The media and the investors as usual lapped it up, without putting that simple question to him: How?

The Indian gross domestic product (GDP) in 2019 was at $2.94 trillion. And that of China was at $11.54 trillion (World Bank data, 2010 constant US dollars). What this means is that if Chinese GDP stagnates at its current level for the next 25 years, India still needs to grow at 5.62% every year for the next 25 years to get where China currently is.

So, the chances of something like this happening are minimal, given the current state of things. But Mr Jhunjhunwala might know something that ordinary mortals like you and I, probably don’t.

The funny thing is that the Big Bull, as the media likes to call him, has made similar such forecasts in the past, which have gone horribly wrong. In October 2007, he had forecast that the Sensex will touch 50,000 points in the next six to seven years.

And he is not the only one making such forecasts. In June 2014, the domestic brokerage Karvy had forecast that the Sensex will touch 1,00,000 points by December 2020.

People making a living out of the stock market (or any other market for that matter) have an incentive in saying that future will be better than the present is. Many analysts make a living by simply doing this on the business news TV channels, on a regular basis.

The media looking for bold headlines to run, laps it up. And the investors who are more like sheep ready to be slaughtered, follow the sheep in front of them.

In fact, the trick is to make bold bigger forecasts and not small ones. I mean, if you currently forecast that Sensex is going to touch 55,000 points this year, no one is going to pay interest. But if you say Sensex is going to cross 1,00,000 points by 2023 or 2024, everyone is going to sit up and take interest.

An excellent example of this is Jhunjhunwala’s 2014 forecast on the stock market index Nifty touching 1,25,000 points by 2030.

Of course, if he turns out to be right, everyone will be dazzled by the forecast he had made. If he turns out to be wrong, no one will remember. Did you remember that Karvy had forecast the Sensex touching 1,00,000 points by December 2020? That’s how the game is played.

Big investors are trying to drive up stock prices, so that their investment portfolios can also gain in the process, which is why they publicly need to be seen as being confident.

A similar game is now played on the social media where traders claim to have generated a humongous amount of return in a short period of time. Of course, there is no way to verify this, except believing him or her.

This is accompanied by other confident predictions of how the future is going to be. The idea is to sell some training programme that they are offering. And no one is going to buy a training programme from a trader who doesn’t sound confident.

For the economists, the game is a little different. They tend to treat their pet theories as gospel. So, an economist who believes in free markets will keep parroting the free market line on everything.

As Scott Galloway writes in his excellent book Post Corona—From Crisis to Opportunity:

“The libertarian argument… is that…regulation and redistribution is inefficient, that left to its own devices the market will regulate itself. If people value clean rivers, the argument goes, they won’t buy cars from companies that pollute. But history and human nature shows that this does not work.”

An excellent example of this is the river Ganga in India, which people keep polluting despite the fact that at the same time they look it as a holy river.

Galloway offers a few more examples. “Nobody wants to see children working eighteen hours a day in a clothing factory, but at the H&M outlet, the $10 T-shirt is an unmissable bargain… Nobody wants to die in a hotel fire, but after a long day of meetings, we aren’t going to inspect the sprinkler system before checking in.” The point being that some sort of regulation is necessary.

There is economic theory and then there is how things play out in real life. As Adam Grant writes in Think Again—The Power of Knowing What You Don’t Know: “In theory confidence and competence go hand in hand. In practice, they often diverge.”

Other than continuing to believe in their pet theories, there is one more reason for economists to portray confidence. Over the years, they have sold their subject as a science, if not to others, at least to themselves in their heads. I mean the first step before convincing anyone else is to convince oneself first.

Hence, the economic growth figure is forecast to the precision of one decimal point. I have always wondered about how economic growth, which is something very complex and is impacted by so many factors, can be forecast in such a precise way.

Now, this is not to say that the forecasting economic growth is not important. It is very important, simply because without that governments and corporations won’t be able to plan for the future.

Without knowing the economic growth number for the next year, a government wouldn’t be able to forecast its fiscal deficit or the difference between what it earns and what it spends expressed as a percentage of the country’s GDP. Without forecasting the fiscal deficit, the government wouldn’t know what kind of money it has to borrow in order to meet this gap. Without the government knowing the government’s borrowing target, the country’s central bank won’t be able to set the country’s monetary policy. And so on.

Nevertheless, the world would be a much better place if the economists started forecasting in ranges. Like, in 2020-21, the Indian economy is likely to contract by 8-10% or even 8-9%, rather than saying something as specific like the Indian economy is likely to contract by 8.3%.  In this scenario, the governments could also forecast a range when it comes to their fiscal deficit.

As John Maynard Keynes is said to have supposedly remarked: “It is better to be roughly right than precisely wrong.”

Hence, forecasting ranges and pointing towards the right direction is more important than being extremely precise about the economic growth.

As Tom Bergin writes in Free Lunch Thinking—How Economics Ruins the Economy:

“If economic models or theories can point us in the right direction and give us a reasonable estimate of the scale of a force or impact, they’re helpful. For example, if consumers are building up levels of personal debt that will require ever-rising house prices and wages to sustain – think the United States in 2006 –economists don’t need to tell us exactly how much a drop in GDP this situation will likely result in. If they can simply show the risks are unsustainable and material, this can prompt and inform government action and protect society.”

I learnt this the hard way. In 2013, when I first started writing about real estate, looking at the situation at hand, I started predicting a real estate bust very confidently. In the years to come, I turned out to be partly right, with parts of the country seeing a substantial fall in prices.

But the deep state of Indian real estate (the bankers, the builders and the politicians) essentially ensured that a real bust never really came. Of course, having learnt from this, now I point out more towards the perils of owning real estate at a price you cannot really afford because that is point people looking to buy a house to live in, essentially need to understand.

Also, one can more confidently say that the real estate sector will continue to remain moribund in the days to come, than confidently predict a bust. As far as investors are concerned, the real estate story has been over for a while.

Sometimes the confidence of economists comes from the prevailing narrative. As Daniel Acemoglu and James A Robinson write in Why Nations Fail – The Origins of Power, Prosperity and Poverty:  

“The most widely used university textbook in economics, written by Nobel Prize-winner Paul Samuelson, repeatedly predicted the coming economic dominance of the Soviet Union. In the 1961 edition, Samuelson predicted that Soviet national income would overtake that of the United States possibly by 1984, but probably by 1997. In the 1980 edition, there was little change in the analysis, though the two dates were delayed to 2002 and 2012.”

Of course nothing of this sort happened, and the Soviet Union broke up in December 1991. But those were the days, and the narrative framed around the success of the Soviet style of economics, driven by its Five-Year Plans, was very popular. Samuelson was not the only one to be seduced by it. In fact, an entire generation was.

Interestingly, the economist Phillip Tetlock has carried out extensive research on experts and their predictions. Gardner, from whose book I have quoted above, documents this in Future Babble.

As he writes:

“Tetlock recruited 284 experts— political scientists, economists, and journalists—whose jobs involve commenting or giving advice on political or economic trends…Over many years, Tetlock and his team peppered the experts with questions. In all, they collected an astonishing 27,450 judgments about the future.”

It turned out that the expert predictions were no more accurate than random guesses. As Gardner writes: “Experts who did particularly badly… were not comfortable with complexity and uncertainty. They sought to “reduce the problem to some core theoretical theme.” This means that they had this one big idea and they stuck to it, without trying to realign their view to the new information coming in.

An excellent example of this is all the gold bulls who came out of the woodwork post the financial crisis of 2008. They talked about gold reaching very high price levels (The highest I encountered was $55,000 per ounce).

As a journalist I interviewed many such individuals and the confidence they had in their forecasts was amazing. In that round, gold didn’t even touch $2,000 per ounce. But the audience lapped the interviews I did. Why? Because these experts exuded confidence in their interviews, even though they eventually turned out to be wrong.

In 2012, when I turned into a freelance writer, I exuded the same confidence on gold while writing about it. And when the prices actually started to fall, it sort of struck at a core belief I had developed over the years and it took me a couple of years to get around to the whole thing.

As Grant writes: “When a core belief is questioned… we tend to shut down rather than open up. It’s as if there’s a miniature dictator living inside our heads, controlling the flow of facts to our minds.” This is referred to as totalitarian ego and a decade later I can see this ego among many bitcoin experts, whenever one questions the entire idea of bitcoin as money, and that has me worried.

Now getting back to Gardner and Tetlcok. Experts who did better than the average of the group that Tetlock had recruited had no template or no big idea. They tried to synthesise information from multiple sources.

As Tetlock writes: “Most of all, these experts were comfortable seeing the world as complex and uncertain—so comfortable that they tended to doubt the ability of anyone to predict the future. That resulted in a paradox: The experts who were more accurate than others tended to be much less confident that they were right.”

This explains why most business TV news anchors, podcasters, YouTuber, social media influencers, etc., who are popular, sound very confident. They believe in this one big idea, which sounds sensible to people, irrespective of whether it is right in the real world or not, and they keep hammering it over and over again, to their audience.

It also explains why guys who are normally right about things aren’t really popular with the media or the public at large. This is simply because they are not totally confident about what they are saying. They have their ifs and buts built into what they say and are constantly revising the information in their heads. And as and when they feel like it, they are ready to revise their views as well. This constant revision comes across as lack of confidence to the world at large. Tetlock called such experts foxes and experts who believed in that one big thing as hedgehogs.

The categorisations were from an essay written by political philosopher Isaiah Berlin, in which Berlin had recalled a small part of an ancient Greek poem. “The fox knows many things… but the hedgehog knows one big thing.” After knowing this, it is easy to figure out who is a fox and who is a hedgehog.

As Gardner writes:

“If you hear a hedgehog make a long-term prediction, it is almost certainly wrong. Treat it with great skepticism. That may seem like obscure advice, but take a look at the television panels, magazines, books, newspapers, and blogs where predictions flourish. The sort of expert typically found there is the sort who is confident, clear, and dramatic. The sort who delivers quality sound bites and compelling stories. The sort who doesn’t bother with complications, caveats, and uncertainties. The sort who has One Big Idea.”

Hence, the kind of expert found in the media is the kind of expert who is more likely to be wrong. One of the key findings that emerged from Tetlock’s data was: “The bigger the media profile of an expert, the less accurate his predictions are.”

In a world filled with confident forecasts, this is a very important point that needs to be kept in mind. If we really need to make sense of the world we are in, we need to figure out who the foxes are and follow them, however mentally disconcerting it might be. The hedgehogs need to be discarded.

Revealing the Real Picture Behind India’s Unemployment Problem

BA Kiya, MBA Kiya, 
Lagta Hai Sab Kuch Aiwen Kiya 
— With due apologies to Sampooran Singh Kalra.

The rate of unemployment as of February 2021 stood at 6.9%. This doesn’t sound very high. But the calculation of this figure misses out on a very important nuance. 

Those who follow me on Twitter know that I go by the moniker of Shikshit Berozgar (or educated unemployed). This is basically a joke I crack on myself on not being gainfully employed with a corporate, in the traditional sense of the term.

Nevertheless, on a more serious note, unemployment is a very serious problem in India. In fact, in the recent past, #modi_rojgar_do has been a top Twitter trend. This gives me a reason to look into this economic and social illness which impacts the society at large and the youth in particular, very badly. Of course, nothing is what it seems, which is why it is important to go into details.

I will use unemployment data published by the Centre for Monitoring Indian Economy, which has now been available for a period of five years, hence, will give us a decent long-term trend.

Let’s first look at the unemployment rate over the last five years, starting from January 2016 onward.

Source: Centre for Monitoring Indian Economy.

What does the chart tell us? The unemployment rate has varied quite a bit between January 2016 and February 2021. As of February 2021, the rate of unemployment stood at 6.9%.  Hence, things have improved from April 2020, when the unemployment rate hit a high of 23.52% and nearly one-fourth of the labour force was unemployed. This was when the lockdown enforced by the government was at its peak.

Nonetheless, the unemployment rate is still very high in comparison to the low of 3.37%, which was achieved in July 2017. It needs to be mentioned here that the Goods and Services Tax (GST) came into effect from July 1, 2017 and has been responsible for increased formalisation of the Indian economy. Hence, many informal businesses have been shut down. Formal businesses tend to be more mechanised and hence, employ fewer people, can be one possible explanation for the higher unemployment.

Moving forward if we were to read only the above chart, we are likely to come to the conclusion that the negative economic impact of the covid pandemic and the general slowdown in the Indian economy, over the years, are gone. But there is some nuance we are missing out on here.

While I have shared the unemployment rate in the above chart, I haven’t told you how the term unemployment is defined. A person is categorised as unemployed “because of a lack of job and where such a person is actively looking for a job”. The word to mark here is actively. At the risk of repetition, a person can be categorised as unemployed only if he doesn’t have a job and is searching for one.

As the Centre for Monitoring Indian Economy (CMIE) puts it, a person categorised as unemployed, “should be unemployed on the date of the survey, should be actively looking for a job in the 100 hundred days (approximately three months) preceding the date of the survey and should be willing to take up the job if a job is found.”

They further point out: “A person is considered to be actively looking for a job if such a person has contacted potential employers for jobs, contacted employment agencies, placement agencies, appeared for job interviews, responded to job advertisements, online employment sites, made applications, submitted resumes to potential employers or reached out to family members, friends, teachers to look for jobs from them.”

To put it in short, waiting for a job offer to come, is not considered as actively looking for a job.

It will soon become clear why have I gone into such detail trying to explain what being unemployed exactly means. First let’s take a look at the following chart, which plots the labour participation rate.

Source: Centre for Monitoring Indian Economy.

In fact, this chart is at the heart of the issue of Indian unemployment. As can be seen from it, the labour participation rate has been falling over the years. It was at a peak of 48.47% in May 2016 and fell to a low of 35.57% in April 2020. In February 2021, it stood at 40.5%.

Now what does this mean? Labour participation rate is the ratio of the labour force to the population greater than 15 years of age. And what is the labour force? As per CMIE, labour force consists of persons who are of 15 years of age or more, and are employed, or are unemployed and are actively looking for a job.

What has happened in the last five years? Let’s take the case of May 2016. In May 2016, the population greater than 15 years or what is referred to as working-age population, stood at 94.58 crore. Of this, 45.84 crore individuals formed the labour force, which means they were either employed or were unemployed and actively looking for a job. Hence, labour participation rate, which is the ratio of the labour force to the population greater than 15 years of age, was at 48.47%.

Now what’s the scene in February 2021? The population greater than 15 years stood at 105.80 crore. The labour force stood at 42.85 crore. This implies a labour participation rate of 40.5%.

In simple English, in February 2021, a smaller proportion the working age population is working or is unemployed and looking for a job, than was the case in May 2016.

The working age population, between May 2016 and February 2021, has gone up from 94.58 crore to 105.8 crore, this implies an increase of 11.22 crore.

Nevertheless, the number of people employed or unemployed and looking for a job, that is the total labour force, has fallen from 45.84 crore to 42.85 crore, or by 2.99 crore.

So, the working age population has increased by 11.22 crore between May 2016 and February 2021, but the total labour force as such has fallen by 2.99 crore. This is India’s real unemployment problem, which isn’t reflected in the unemployment rate, and needs a lot more digging.

What is happening here? A very small proportion of the population is studying more and some may also be retiring early. But that hardly explains the scale of this problem. The explanation lies in the fact that more people are simply dropping out of the labour force, because they are not able to find jobs over a period of time and hence, are not actively looking for jobs anymore.

Let’s look at how the situation has changed post-covid. In January 2020, before covid had struck, the working age population had  stood at 103.13 crore. By February 2021, this had jumped to 105.8 crore, a jump of 2.67 crore. Meanwhile, the labour force as of January 2020 stood at 44.24 crore. It has since shrunk to 42.85 crore, by 1.39 crore. So, post-covid, the working age population has gone up by 2.67 crore, but the workforce has shrunk by 1.39 crore.

Clearly, covid has only accentuated the larger unemployment trend India was already going through. In a sense, many jobs have simply been destroyed, leading to people dropping out of the workforce and in the process, making the overall unemployment number look much better than it actually is.

In the conventional definition of unemployment, individuals who are not actively looking for a job and drop out of the workforce, do not get counted, but ultimately, they are also not gainfully employed. And that’s where the problem lies and explains hashtags like #modi_rojgar_do.

If you still haven’t got it, let me share a very simple example. Let’s say the labour force has 100 individuals. The working age population of people above 15 years of age comprises 200 individuals. Hence, the labour participation rate is 50%. Let’s further assume that the unemployment rate is 10%. This means that 10 individuals are unemployed (10% of 100) and are actively looking for a job.

These individuals do not get a job for a while and let’s further assume that four of them stop actively looking for a job. Given this, the labour force size will fall to 96 (100 minus 4). Those categorised as unemployed will fall to six (10 minus 4). The rate of unemployment will fall to 6.25% (6 expressed as a percentage of 96).

So, the rate of unemployment will come down from 10% to 6.25%, nevertheless, the number of people without jobs will continue to remain at 10. The labour participation rate will come down to 48% (96 expressed as a percentage of 200), from the earlier 50%.  This is how the maths will work out.  This is precisely what is happening in India, of course, at a much larger level.

Now let’s take a look at the unemployment rate and labour participation rate among the youth, that is those aged between 20 and 29. This is where things get very interesting.

Source: Author calculations using data from Centre for Monitoring Indian Economy.

As can be seen from the above chart, the unemployment among youth, which was always on the higher side, has gone even higher, in the last five years. It peaked at 40.41% in April 2020, and in February 2021, was still at a very high rate of 25.68%.

What this means is that one in every four Indian youths is unemployed and is actively looking for a job. And that is clearly bad news. The situation has deteriorated over the last five years.

Now let’s take a look at the labour participation rate among youth.

Source: Author calculations using data from Centre for Monitoring Indian Economy.

As is the overall trend, the labour force participation rate among youth has come down dramatically over the years. It peaked at 53.18% in May 2016 and in February 2021, it stood at 45.42%. Of course, one explanation for this is lies in youth spending more years in college. Nevertheless, the broader explanation for this lies in youth dropping out of the labour force given their inability to find a job. Also, even those who are in college are actively looking for a job. Or sometimes college is just an excuse to postpone actively looking for a job. These are points that need to be remembered.

What explains this situation? One reason for this lies in the fact that the investment to gross domestic product (GDP) has fallen over the years from a high of 34.31% of the GDP in 2011-12 and is expected to be at 30.91% in 2020-21. Hence, with a lower investment in the economy, fewer jobs are being created.

Over the last few years, the government has made attempts at formalizing the economy through a harebrained measure like demonetization and a half-baked measure like goods and services tax.

As an August 2018 Mint Street Memo published by the Reserve Bank of India points out:

“The MSME ( micro, small and medium enterprises) sector has witnessed two major recent shocks, viz., demonetisation and introduction of goods and services tax (GST). For instance, contractual labour in both the wearing apparel and gems and jewellery sectors reportedly suffered as payments from employers became constrained after demonetisation (RBI, 2017). Similarly, the introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net.”

This has hit jobs badly as well.

It needs to be understood here that many employees of MSMEs that shut down did not come under the income tax slab. Nevertheless, whenever they make a purchase as a consumer, they do pay some form of indirect tax. This is a point those celebrating the increasing formalisation of the economy, seem to miss out on.

Let’s take a look at a few more trends, starting with female labour participation rate.


Source: Centre for Monitoring Indian Economy.

This is a very disturbing chart. The female labour participation rate has crashed to just 10.89%. In urban India, it was at 6.56% in February. This means more and more women are getting educated but are not working in salaried jobs. In fact, this is a trend that started before 2014 and it has only accentuated since then. As per surveys carried out by the Labour Bureau, the female labour participation rate in 2012-13 and 2013-14 stood at 25% and 28.7%.

Economists have struggled to come up with an explanation for this. One possible explanation lies in the fact that the number of jobs available haven’t grown at the pace that could accommodate the new individuals, both men and women, entering the workforce. Hence, in a patriarchal society, men in deciding positions, have offered jobs to other men. This needs more research, and I will write about it in detail in the days to come.

Another interesting trend is the unemployment rate depending on the education level. The following chart plots the unemployment rate by level of education for February 2021.

Source: Centre for Monitoring Indian Economy.

While I have only shared data for February 2021, this is a trend that has played out over the years.

World over there is a wage premium for education, which means, the more educated you are, the higher your income is likely to be. That might be the case in India as well, but along with that we have another very interesting phenomenon.

The rate of unemployment increases with the number of years of education, with one in every five graduates being unemployed. The fact many graduates are unemployed again explains the popularity of trends like #modi_rojgar_do. The graduates have the time, the energy and the internet bandwidth, to get such an important issue to trend.

The larger explanation for this lies in the fact that graduates tend to wait for that good job, which never really comes. That is a choice that the less educated don’t make.

Let’s now look at a chart which plots the rate of unemployment across different age brackets, for the month of February 2021.

Source: Centre for Monitoring Indian Economy.

The rate of unemployment is highest at the younger ages and as one ages, it comes down dramatically.

The high rate of unemployment for the ages between 15-19 can be explained by the fact that more individuals now spend time in school and go to college. But what about rates beyond that bracket?

The interesting thing is that rate of unemployment in the age category 25-29 stood at 11.53% in February 2021. For the age group, 30-34, it was at only 1.32%. While I have only shared data for February 2021, this is a trend that has played out over the years.

What’s happening here? It seems this is a problem that isn’t just peculiar to India and is prevalent in other parts of the world, including South Africa, Egypt and countries in the Middle East.

A part of the problem, like most disappointments in life, is a mismatch of expectations that the unemployed youth have, and the situation as it prevails.

As Abhijit Banerjee and Esther Duflo write in Good Economics for Hard Times:

“They [i.e. the youth] were told that if they studied hard they would get a good job, meaning mostly a desk job or a teaching job. This was closer to the truth in their parents’ generation than it is today… The growth in government jobs slowed and eventually stopped in the face of budgetary pressures.”

In fact, in the Indian case, the pace of creation of government jobs has slowed down over the years. As far as central public sector enterprises (CPSEs) are concerned, the total number of employees has gone down over the years.

Take a look at the following table.

Employment at CPSEs


Source: Public Sector Enterprises Survey 2018-19.

The number of employees in 2009-10 had stood at 14.90 lakh. It has fallen to 10.33 lakh in 2018-19. This is largely true of the government as a whole. But the fascination for a government job still remains strong and there is an economic incentive for it as well.

As can be seen from the above table, while the number of jobs in CPSEs has come down, the emoluments have gone up. In 2009-10, it stood at Rs 5.89 lakh. In 2018-19, it had jumped to Rs 14.78 lakh. And this is just the emoluments. There are other things that come with a government job, employment guarantee for life, access to good medical facilities, pension in many cases, and so on.

This explains why every few months we get stories in the media about graduates, engineers, post graduates and even PhDs, applying for low-level government jobs like that of peons, sweepers etc.

As Banerjee and Duflo write:

“There are small fraction of jobs that are much more attractive than the rest, for the reasons having nothing to do with productivity. The best example are government jobs… In the poorest countries, public-sector workers earn more than double the average wage in the private sector. And this is not counting generous health and pension benefits.”

What this ensures is that many individuals spend the best part of their youth preparing and writing exams to get into a government job. As Banerjee and Duflo write: “These young people are mostly waiting for jobs they will not get… If the government jobs stopped being quite so desirable, the economy would gain many years of productive labour.”

But given that there are very few government jobs going around at the end of the day, the futility of it all, ultimately hits individuals who cannot see a world beyond a government job. What this basically means is that as people age, they eventually do start working, once their overall expectations fall in line with what is on offer.

So, other than the fact that there aren’t enough jobs going around for anyone, the love of a government job also seems to hold people back.

To conclude, you won’t get to read this anywhere in the mainstream media. Hence, it is very important that you continue supporting my work.

PS: This is not to say that all was well before 2014. It clearly wasn’t. As the Report on Employment-Unemployment Survey of 2013-14 points out: “Full employment was available to only 63.4 per cent of self-employed persons, the figure being as low as 42.1 among ‘casual’ workers.” The government has done away with the publishing of this report, since then. Such big structural problems don’t manifest overnight. If not tackled on a war footing, they only get worse with time and which is what seems to have happened.

You Have Heard the Good News About GDP, Here’s the Slightly Better News

The gross domestic product (GDP) figures for the period October to December 2020 were declared earlier in the day today. GDP is a measure of economic size of a country.

The good news is that the Indian economy is back on the growth path. It grew by 0.41% during the period. While the growth rate itself isn’t great, it comes on the back of six months of a covid led economic contraction. And that’s clearly good news.

But this bit most of you who follow the economy closely on the social media, must have already heard by now. So, let me give you some better news than this good news.

The Indian GDP is measured in two ways. One way is by adding up private consumption expenditure (the money you and I spend buying up things), government expenditure, investment and net exports (exports minus imports). If we leave government expenditure out of the GDP, what remains is the non-government GDP, which forms a bulk of the GDP. In the October to December period, it formed around 90.3% of the GDP.

For the GDP to grow on a sustainable basis, this part needs to grow. Given that the government is a small part of the Indian economy, it can only create so much growth by spending more and more money.

The non-government part of the GDP grew by 0.58% during October to December 2020, after contracting significantly during the first six months of the financial year.

What this tells us is that the private part of the economy recovered quite a bit during the period without the government trying to pump up economic growth. The government expenditure during the period was down by 1.13%. This is the slightly better news I was talking about.

The private consumption expenditure, which forms a major part of the non-government part of the GDP contracted by 2.37%, after having contracted much more, during the first six months of the financial year. This tells us that the consumers are gradually coming back to the market even though some apprehension still prevails. This apprehension is probably more towards going out and spending money in the services part of the economy.

The other important part of non-government GDP is investment. It grew by 2.56% during October to December, which is the best in a year’s time. For jobs to be created, this growth needs to be sustained in the months to come.

The other way of looking at size of the economy is to add up the value added by the various sectors. Of this, the services sector, from hotels to real estate to banking to trade to broadcasting to transport to public administration, form nearly half of the economy. And if economy has to get back on track, it is these sectors that need to get back on track. The services sector grew by 0.98% during the period, though this was better than the contraction seen during the first six months of the year.

Agriculture was the standout sector and it grew by 3.92% during the period. In fact, October to December is the biggest period for agriculture during the year and the sector has done well during its biggest quarter. On the other hand, manufacturing grew by 1.65%.

What this tells us is that the economy is gradually coming back to where it was before covid. It is worth remembering here that even before covid the Indian economic growth was slowing down. All in all, the real challenge for the Indian economy will start in the second half of the 2021-22, once the base effects of the covid led economic contraction are over. As I have said in the past, the economic growth rate during the first half of 2021-22 will go through the roof, but that will be more because of base effect than anything else.

Nonetheless, even with this recovery during the second half of the financial year, the Indian economic growth is expected to contract by 8% during 2020-21. This figure has been revised upwards. The Indian GDP was earlier expected to contract by 7.7% during the year.

The main reason for this lies in the revision of the government expenditure expected during the year. As per the first advanced estimate of the GDP for 2020-21 published in early January, the government expenditure for 2020-21 was expected to be at Rs 17.48 lakh crore. In the second advanced estimate published today, it has been revised to Rs 15.87 lakh crore, a cut of 9.2%.

From the looks of it, the central government is trying to cut down on the targeted fiscal deficit of Rs 18.49 lakh crore for 2020-21. Fiscal deficit is the difference between what a government earns and what it spends.