India, China and the Quest for Atmanirbharta

Atmanirbharta has been the hot political and economic buzzword in India for quite a while now. It means self-reliance in English. Or as the finance minister Nirmala Sitharaman put it in her budget speech:

“Atmanirbharta is not a new idea. Ancient India was largely self reliant, and equally, a business epicentre of the world. Atmanirbhar Bharat is an expression of 130 crores Indians who have full confidence in their capabilities and skills.”

In economic terms it essentially refers to import substitution, which India practiced for almost four decades, after independence, where the idea was to make everything in the country rather than import it.

In political terms, the narrative is directed towards China and our import dependence on the Middle Kingdom. In the recent past, our political tensions with our largest neighbour have escalated and we are trying to hurt it economically by producing more at home, and not importing as much from it as we had done in the past. Also, we have banned many Chinese apps.

The question is where are we going with atmanirbharta. Let’s take a look at the following chart, which plots the total amount of goods imported from China during the period April to January, over the years.

Source: Centre for Monitoring Indian Economy.

The goods imports from China during the current financial year have been the lowest between 2016-17 and 2020-21, at $51.92 billion. Nevertheless, a simple presentation of goods imports doesn’t take into account the fact that India’s goods imports during April 2020 to January 2021 have fallen by 23.1% to $340.9 billion. They stood at $443.22 during April 2019 to January 2020. This fall shows a lack of consumer demand, which has crashed during the course of the year, with the spread of the covid pandemic.

Let’s look at the next chart, which plots what proportion of India’s goods imports came from China, during the period April to January of a financial year, over the years.

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

During April 2020 to January 2021, the proportion of imports coming from China stood at 15.23%. This is the highest in the period considered. Hence, while economic and political narrative maybe moving towards atmanirbharta, the data clearly shows something else. Our dependence on China for goods imports continues, like it was in the past.

There is one more way we can look at data. While we don’t have the full year’s data for 2020-21, we do have that for the years gone by. Hence, we take a look at proportion of full-year imports coming from China, in the next chart.

Source: Centre for Monitoring Indian Economy.
*April 2020 to January 2021.

The above chart makes for a very interesting read. In 1991-92, India barely imported anything from China. Just 0.11% came from China. In the nearly three decades that have followed, the imports from China have exploded. This just shows the rise of Chinese productivity year on year, in comparison to that of India. The proportion of imports coming from China peaked at 16.4% in 2017-18, fell for the next two years, and have risen again this year.

What is the reason for this marginally increased dependence in 2020-21? Ananth Krishnan writing in his terrific book India’s China Challenge – A Journey Through China’s Rise and What It Means for India, quotes Amitendu Palit, an economist at the National University of Singapore, in this context.

As Palit says: “If you look at critical medical supplies, which India has been importing for frontline healthcare workers in the Covid-19 battle, most of these come from China, which is one of the top sources, but, on the other hand, there isn’t a very widely diversified source of countries from which India can actually import these either.”

The larger point here is that China has now become central to many global supply chains and hence, it won’t be easy for India to lower its dependence on China dramatically as far as imports of goods is concerned.

In fact, one area where India has managed to reduce its dependence on China in the last five years, is telecom instruments, as they are categorised in the imports data. Given that the use of landline phones has come down over the years, the category  primarily includes mobile handsets.

Take a look at the following chart. It plots the value of the telecom instruments (read mobile handsets) imported from China, over the years.

 Source: Centre for Monitoring Indian Economy.
*April 2020 to January 2021.

As can be seen, the value of the instruments imported from China has come down over the years, though the 2020-21 full year imports are likely to end up being higher than those in 2019-20. In 2017-18, import of telecom instruments formed a little over a fifth of our imports from China. This fell to 8.67% in 2019-20 and has increased to 10.48% in the current financial year.

To make companies manufacture mobile phones in India, the government has been imposing duties/tarrifs on various goods that go into making of a mobile phone. The idea is to make imports from China expensive and in the process, force companies to manufacture phones in India.

In fact, this strategy has been borrowed from China. As Matthew C Klein and Michael Pettis write in Trade Wars and Class Wars: “Import substitution has succeeded thanks in part to Chinese government policies that have systematically encouraged Chinese businesses to substitute foreign production for domestic production, even when this has raised costs for Chinese consumers.” Of course, unlike India, China does not need to impose duties/tariffs to “direct domestic demand towards domestic production”.

As Klein and Pettis point out: “Executives can simply be told to pick Chinese suppliers over foreign ones… The result is that, unlike many other countries, imports have become less and less important to the Chinese economy since the mid 2000s.”

Also, given that Indian productivity is worse than that of the Chinese, manufacturing in India, comes with a cost. While, mobile handset prices barely rose between 2015 and 2019, the same hasn’t been the case in 2020, when they rose by 7%. Clearly, the cost of atmanirbharta on the mobile handsets front is being borne by the Indian consumer. As I keep saying, there is no free lunch, someone has got to bear the cost.

The government has also come up with the production linked incentive (PLI) scheme in order to help manufacturing companies in India. As Sitharaman said in the budget speech:

“Our manufacturing companies need to become an integral part of global supply chains, possess core competence and cutting-edge technology. To achieve all of the above, PLI schemes to create manufacturing global champions for an Atmanirbhar Bharat have been announced for 13 sectors. For this, the government has committed nearly Rs 1.97 lakh crores, over 5 years starting FY 2021-22. This initiative will help bring scale and size in key sectors, create and nurture global champions and provide jobs to our youth.”

There are multiple problems with this approach. The first being that the government is trying to pick winners. This entire approach smells of how things used to happen before the economic reforms of 1991, with the bureaucrats deciding what businesses should be doing.

Also, this comes at a time when prime minister Narendra Modi has been critical of IAS officers. As he said in February: “Just because somebody is an IAS officer, he is running fertiliser and chemical factories to airlines.” The same babu is now expected to run an incentive scheme for big business.

India’s biggest success stories over the last three decades, software, pharma and automobiles, happened despite the government, and not because of it. So, the idea still should be to make things easier for smaller businesses to grow bigger, which is something that happened beautifully in the IT sector. (This is not to say that the government didn’t help. It did. But it largely didn’t meddle).

In fact, while we think of China as a country with big companies that wasn’t always the case. China’s initial growth in the 1980s and up until the mid 1990s was through the growth of millions of Township and Village Enterprises (TVEs). This is a fact that seems to have been forgotten.

Big companies growing bigger can create some jobs, but not the number of jobs that India requires. As data from the Centre for Monitoring Indian Economy shows, in the last five years India has added 11.77 crore individuals to the working age population.

This means that around 19.76 lakh individuals have crossed the age of 15 on an average every month, over the last five years. Of course, not all of them are looking for jobs but a good chunk are. Even if we assume that around 40% of them are looking for jobs, we end up with around one crore people looking for jobs every year.

Such a huge number of jobs can only be created by small businesses growing bigger and not by big businesses growing bigger, which can only possibly be the icing on the cake.

As an OECD (Organisation for Economic Co-operation and Development) research paper points out:

“SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.”’

In fact, given the obsession the current government has had with scale and formalisation of the economy, small businesses have been hurt through a mind-numbing move like demonetisation and a half-baked goods and services tax.

Further, the globalisation game itself might be changing. While, we might want companies based out of India to become a part of global supply chains, it is worth remembering here that the strategy worked at a certain point of time.

As Krishnan writes:

“China was able to recognize and exploit the opportunities just as global production chains were forming through the opening of the early 1990s… The infrastructure it was able to create through the 1990s enabled ‘a unique and probably unrepeatable combination of low developing country labour costs and good, almost rich country infrastructure.'”

Also, the supply chains that are already in place are not going to shut down and move to India, just because India is now offering incentives. As Apple CEO Tim Cook said in 2017: “The popular conception is that companies come to China because of low labour cost… The reason is because of the skill, and the quantity of skill in one location and the type of skill it is.”

India clearly has a skills problem. A little more than a fifth of Indian graduates are unemployed, and at the same time when companies advertise for personnel, they can’t seem to find enough of them who meet the right criteria. Multiple surveys have found Indian graduates and engineers to be simply unemployable. This is not something that can be set right overnight.

The corporates, not surprisingly, have welcomed the scheme, given that the government is offering “a recurring cash subsidy computed as a fixed percentage of the manufactured sales turnover.” Hence, they clearly have an incentive to do so. In fact, lobbying has already started on this front.

Take the case of the PLI scheme in the electronics and mobile manufacturing, which has been touted as a success, after attracting investments of over Rs 11,000 crore in 2020. As an editorial in The Hindu Business Line points out, the beneficiaries are already asking for a rollover, “citing land acquisition delays, lack of skilled workforce and demand issues post Covid.”

Also, as has been seen in India in the past, once a subsidy is introduced into the government’s budget, it rarely goes away.

Finally, lest I be accused of looking at only negatives (honestly, please go to news.google.com and enter PLI scheme, you will only get positive stories to read), one positive thing could come out of the scheme.

As Palit told Krishnan in the context of China: “When we look at value chains today, let’s say in a post Covid-19 situation, the emphasis on the part of businesses is to make these chains shorter, more resilient, more durable, and locate them closer to demand markets… This is where we often overlook the importance of China. It continues to remain a major source of final demand.” And given this shifting supply chains out of China will be difficult.

This applies to India as well. Given India’s size, it will continue to have a huge source of consumer demand in the years to come. This should encourage companies looking for stable supply chains to have their manufacturing bases in India to cater to its domestic market. And this is where PLI can work its magic.

As Neeraj Bansal of KPMG put it in a recent writeup:

“From raw materials to critical components, the COVID-19 pandemic exposed the reliance of country’s key sectors on a few markets for fulfilling their manufacturing and sourcing requirements. To put things in perspective, India depends on a single market for 70 per cent of its API consumption needs, 85 per cent of smartphone components imports and 75 per cent of television components imports. As global supply chains were swiftly and effectively dismantled as one country after another went into lockdown in 2020, efforts toward bolstering domestic manufacturing gained momentum.”

Nevertheless, there is a corollary to this. As more and more people get vaccinated and the world moves on and goes back to doing things that it always has, this narrative of having manufacturing facilities closer to the demand markets, will keep getting weaker. Hence, India has a couple of years to cash in on it.

Of course, whether India emerges as a country where the products are assembled or major value addition takes place, remains to be seen. Also, prices will go up. Make in India will come at a cost.

IMF Says India Will Be Fastest Growing Economy in 2021, And That’s Good News, But…

The International Monetary Fund (IMF) in the World Economic Outlook update for January 2021, has forecast that the Indian economy will grow by 11.5% in 2021.

If this happens, it will be the fastest that the Indian economy has ever grown. It will also be the first time that the Indian economy will grow in double digits. (Actually, the country did grow by greater than 10% in 2010-11, but that was later revised by the Modi government, once a new set of gross domestic product (GDP) data was published).

The following chart plots the GDP growth over the years. The GDP is the measure of an economic size of a country.

Source: Centre for Monitoring Indian Economy.

It is interesting that the Indian GDP has grown by more than 9% only twice previously, and both these occasions were before the 1991 economic reforms. The economy grew by 9.15% in 1975-76 (post the first oil shock) and 9.63% in 1988-89. Post 1991, the country grew the fastest in 1999-00 when it had grown by 8.85% (after the American sanctions).

Also, among the selected economies for which IMF published data, India will be the fastest growing economy in the world in 2021. China comes in second at 8.1%.


Source: International Monetary Fund.

India growing by 11.5% in 2021 is indeed a big deal, there is no denying that. But there are a few factors that need to be kept in mind here.

First and foremost is the base effect. Before I go into highlighting the base effect in this context, let’s first understand what it means.

Let’s say the price of a stock in 2019 was Rs 100. In 2020, it falls by 50% to Rs 50. In 2021, it is expected to rise to Rs 75. This means a gain of Rs 25 or 50% per share. If we just look at prices of 2020 and 2021, the stock has done fantastically well and gained 50%.

But what we also need to keep in mind is the stock price in 2019, when it was at Rs 100. It then fell massively by 50% to Rs 50 and rose from there. Hence, the stock price rose from a much lower-base. And this lower base was responsible for a gain of 50%. Further, in 2021, the stock continued to be lower than its 2019 price. This is base effect at play.

One way to look at base effect is to look at the GDP growth/contraction forecast by IMF for 2020.

Source: International Monetary Fund.

As can be seen from the above chart, the IMF expects the Indian GDP to have contracted by 8% in 2020. Hence, in 2020, the Indian economy will be among the worst performing economies in the world. Given this, a 11.5% growth in 2021, will come on a massively contracted GDP in 2020. This is a point that needs to be kept in mind.

Also, all the countries which have done worse than India have a per capita income larger than that of India. In that sense they are economically much more developed than India is and their pain of contraction is much lesser than that of India, given that these countries already have access to the most basic economic necessities in life, which many Indians still don’t.

Let’s go into a little more detail on this point. While the IMF publishes real GDP growth data (which we have been discussing up until now), it doesn’t publish constant price GDP, which adjusts for inflation, in a common currency like the US dollar.

To get around this problem, let’s use the constant price GDP data published by the World Bank. On this we apply, the  GDP contraction/growth rates as forecast by the IMF. As per the World Bank, the Indian GDP in 2019 (in constant 2010 $) was $2.94 trillion. In 2020. A contraction of 8% in 2020 would mean a GDP of $2.70 trillion in 2020. A 11.5% rise on this would mean that the Indian GDP is expected to touch $3.01 trillion in 2021, which is around 2.4% better than the GDP in 2019.

Hence, in that sense, the slowing Indian economic growth for the last few years, followed by the covid contraction, has put the Indian economy back by two years. Of course, it can be argued that every country has gone through this. Indeed, that’s true, but that doesn’t make our pain any better.

Also, before saying stuff like India will grow faster than China in 2021, please keep in mind the fact that the Chinese GDP in 2019 was $11.54 trillion (World Bank data), which is much more than that of the India’s GDP.

In 2020, the Chinese economy was expected to grow by 2.3%. This means that the Chinese GDP in 2020 would have grown to $11.81 trillion. In 2021, the Chinese GDP is expected to grow by 8.1% to $12.76 trillion. This means an increase in GDP of $0.95 trillion in just one year. If we compare this increase with the expected Indian GDP of $3.01 trillion in 2021, what it means is that China will end up adding 31.6% of the India’s economy in just one year. Or to put it simply, China will add a third of India’s economy in just one year.

It also means that between 2019 and 2021, the Chinese economy is expected to grow by $1.22 trillion ($12.76 minus $11.54 trillion). During the same period, the Indian economy is expected to grow by $ 0.07 trillion ($3.01 trillion minus $2.94 trillion). Please keep these facts in mind before saying that in 2021 India will grow faster than China.

Between 2019 and 2021, the gap between India and China has grown even bigger and that is a fact that needs to be kept in mind. All numbers and figures need some context, otherwise they are useless and as good as propaganda, which I think will happen quite a lot during the course of the day today.

If you have already read the newspapers and the websites on this issue, you might have seen that almost all of them say that India will grow faster than China in 2021. But almost  no one bothers to mention the fact that China grew faster than India both in 2019 and 2020. Or the fact that China is growing on a significantly larger base (the most important point when we are talking percentages).

At the risk of repetition, you won’t see any such analysis appearing in the mainstream media. So, kindly continue supporting my work. Even small amounts make a huge difference.

China’s Population Control Model is an Outdated and a Bad Idea for India

Hum do hamare ho do,
paas aane se mat roko.
— Indeevar, Rajesh Roshan, Amit Kumar, Sadhana Sargam and Rajesh Roshan, in Jurm (1990).

 Here’s a scene from a middle class Indian drawing room of the late 1980s and early 1990s. Four men are sitting and chatting.

“You know what India’s biggest problem is?” asks the first.

“Our population,” replies the second.

“The government should do something to control it,” says the third.

“Indeed,” affirms the fourth.

Three decades and more later, whether similar conversations continue to happen in the middle class Indian drawing rooms, I have no idea, simply because I haven’t been in one for many years. But some Indians still think in a similar fashion, that is, India has a population problem and that the government should do something to control it, like the way China did. (Okay, we might want to boycott Chinese goods but we don’t have such inhibitions when it comes to their population control policy).

In fact, one such individual, even filed a public interest litigation with the Supreme Court and as reported in the Sunday edition (December 13, 2020) of The Times of India, pleaded that “to have good health; social, economic and political justice; liberty of thoughts, expression and belief, faith and worship; and equality of status and opportunity, a population control law, based on the model of China, is urgently required.” (Ironically, the above paragraph mixes the Preamble of the Indian Constitution with the Chinese population control law). 

This is precisely the kind of lazy thinking that prevails when one forms an opinion on something and continues holding on to it, without looking at the latest data. Let’s look at this issue pointwise, in order to understand that such thinking is totally wrong.

1) There is no denying that India has a large population and that creates its own set of problems, everything from lack of employment opportunities to lack of public infrastructure. But is population control the answer to that? No. Look at the following chart, which plots the total fertility rate of India.


Source: https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=IN

The total fertility rate in 2018 stood at an all-time low of 2.222. This meant that on an average 1,000 Indian women have 2,222 babies during their child-bearing years. The chart has a downward slope, which means that the fertility rate has been falling over the years. This means on an average  Indian women have been bearing fewer children over the decades.

The replacement rate or the total fertility rate of women at which the population automatically replaces itself, from one generation to another, typically tends to be at 2.1. India’s fertility rate is almost at the replacement level.

As per the Sample Registration System Statistical (SRSS) Report for 2018, the total fertility rate in urban India was 1.7 and in rural India was at 2.4. Hence, urban India is already below the replacement rate.

2) The point being that the Indian population is increasing at a much slower pace than it was in the earlier decades. How has that happened?

As Hans Rosling, Ola Rosling and Anna Rosling Rönnlund write in Factfulness—Ten Reasons We’re Wrong About the World – And Why Things Are Better Than You Think:

“Parents in extreme poverty need many children… for child labour but also to have extra children in case some children die… Once parents see children survive, once the children are no longer needed for child labour, and once the women are educated and have information about and access to contraceptives, across cultures and religions both the men and the women instead start dreaming of having fewer, well-educated children.”

Hence, as the infant mortality rate falls due to a variety of reasons, from more women getting educated to a higher economic growth to urbanisation, the fertility rate comes down as well. Take a look at the following chart, which basically plots the infant mortality rate of India over a period of time. The infant mortality rate is defined as the number of children who die before turning one, per 1,000 live births.

Source: https://data.worldbank.org/indicator/SP.DYN.IMRT.IN

The infant mortality rate has fallen from 161 in 1960 to 28.3 in 2019. As more children born have survived and grown into healthy adults, parents have had fewer children. That is one clear conclusion we can draw here.

As the Roslings write: “Every generation kept in extreme poverty will produce an even larger next generation. The only proven method for curbing population growth is to eradicate extreme poverty and give people better lives, including education and contraceptives.”

India’s adult female literacy rate (% of females aged 15 and above) had stood at 25.68% in 1981. It has since gradually improved and in 2018 had stood at 65.79%. As more women have learned to read and write, the infant mortality rate and the fertility rate have both come down.

As the SRSS Report points out:

“On an average, ‘Illiterate’ women have higher levels of age-specific fertility rates than the ‘Literate’. Within the ‘Literate’ group there is a general decline in the fertility rates with the increase in the educational status both in the rural and urban areas, barring a few exceptions.”

Also, faster economic growth post 1991 has helped in bringing down poverty levels and in turn led to a lower fertility rate as well.

In 1960, the total fertility rate was at 5.906. It fell to 4.045 by 1990. By 2018, it had fallen to 2.22. Clearly, the rate of fall has been faster post 1990.

3) Now let’s talk about the China model of population control, which led to one Ashwini Upadhyay petitioning the Supreme Court, pleading that India adopt such a law as well. But before we do that let’s look at the following chart which basically plots the total fertility rate in China over the years.

Source: https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=IN-CN

China’s coercive one-child population control policy was launched in 1979. At that point of time, the Chinese fertility rate was 2.745. The interesting thing is that it had been falling rapidly from 1965 onwards when it had peaked at 6.385.

As Mauro F. Guillén writes in 2030: How Today’s Biggest Trends Will Collide and Reshape the Future of Everything:

“Back in 1965, the fertility rate in urban China was about 6 children per woman. By 1979, when the one-child policy came into effect, it had already declined all the way down to about 1.3 children per woman, well below the replacement level of at least 2 children per woman. Meanwhile, in rural China, fertility hovered around 7 children per woman in the mid-1960s, a number that decreased to about 3 by 1979.”

The point being that in 1979 when Chinese leaders pushed through the one-child policy the fertility rate in urban China was already at 1.3, much lower than the replacement rate. In rural China it was at 3, greater than the replacement rate of 2.1, but it was falling at a very fast rate. Hence, the decision to push through the one-child policy was not a data backed decision but basically politics.

As Guillén writes:

“The policymakers were unaware of the reality that fertility in China had been dropping precipitously since the 1960s, with most of the decrease driven by the same factors as in other parts of the world: urbanization, women’s education and labour force participation, and the growing preference for giving children greater opportunities in life as opposed to having a large number of them.”

Clearly, Upadhyay like the Chinese  before him, did not look at the Indian data before filing the public interest litigation in the Supreme Court and thus wasting the time of the Court as well as that of the government.

4) One of the impacts of the coercive one child policy in China was that parents preferred to have boys than girls. As Guillén writes: “While it was the law, the one-child policy created a gender imbalance of about 20 percent more young men than women, driven by the cultural preference for boys.”

The male-female ratio went totally out of whack. In 1982 there were 108.5 male births per 100 female births. This went up to 118.6 per female births in 2005. It has since fallen to 111.9. This has led to an intensified competition in the marriage market, with many Chinese men being unable to find brides.

As per the Sample Registration System Statistical Report for 2018, India’s sex ratio at birth was 1,000 males to 899 females. This works out to around 111 males for 100 females. Of course, like the Chinese even Indian parents have a cultural preference for a male child, who they believe will take care of them in their old age and also ensure that their family continues.

Imagine the havoc any coercive population control policy could have caused or can still cause, to the sex ratio in India.

In lieu of this fact, it was nice to see that the Modi government responded in an absolutely correct way in the Supreme Court. The health and family welfare ministry told the Court: “India is unequivocally against coercion in family planning… In fact, international experience shows that any coercion to have a certain number of children is counter-productive and leads to demographic distortion.”

Clearly, the government doesn’t want to become a victim of the law of unintended consequence where it wants to do one thing and ends up creating other problems. Kudos to that.

5) The Health and Welfare Statistics of 2019-20 project that India’s total fertility rate will be 1.93 in 2021, which will be lower than the replacement rate of 2.1. It is expected to fall further to 1.80 by 2026-2030.

Of course, a fertility rate of close to the replacement rate doesn’t mean that all states have low fertility rates. Recently, the data for  the first phase of the fifth National Family Health Survey (NFHS-5) was released. This had data for 17 states and five union territories. Among the large states, Bihar was the only state which had a total fertility rate greater than the replacement rate. The total fertility rate of the state stood at 3. (The data for other laggard states like Uttar Pradesh, Rajasthan, Madhya Pradesh etc., wasn’t released in this phase).

A look at the data from Health and Welfare Statistics of 2019-20 tells us that the poorer states which have higher infant mortality rates also have higher fertility rates, most of the times. This evidence is in line with theory.

6) States with a lower fertility rate will not see an immediate fall in population. This is primarily because of the past high fertility rate because of which more people will enter or be a part of the reproductive age group of 15-49. This is referred to as the population momentum effect.

As C Rangarajan and J K Satia wrote in a column in The Indian Express in October: “For instance, the replacement fertility level was reached in Kerala around 1990, but its annual population growth rate was 0.7 per cent in 2018, nearly 30 years later.” Nevertheless, population growth has slowed down and will continue to slow down further.

The larger point here being a growing population is a very important part of economic growth (of course, this is a necessary condition for economic growth but not a sufficient one).

As Ruchir Sharma writes in The 10 Rules of Successful Nations: “Throughout, increases in population have accounted for roughly half of economic growth… The impact of population growth on the economy is very straightforward, and very large. If more workers are entering the labour force, they boost the economy’s potential to grow, while fewer will diminish that potential.”

Many Indian states with a fertility rate lower than 2.1 will start facing the situation where fewer people will enter their workforce, in the next couple of decades. This includes Southern and the Western states. It also includes states like West Bengal, Punjab, Himachal Pradesh and Jammu and Kashmir.

Clearly, these states will need workers from other states to keep filling the gap in their working age population (something which is already happening). Also, as workers from high fertility states move to work in low fertility states, they will see an increase in their incomes. This will have an impact on their own fertility rates, which will fall.

In this scenario, states trying to reserve jobs for locals, is a bad idea in the medium to long-term, though it might work in the short-term by being politically popular. Also, states with lower fertility rates on the whole have higher per-capita incomes. Given that, locals do not always want to take on the low-end jobs. And for that, people from other states need to come in and take on those jobs.

People who move from less developed states to more developed states in India are those who are low-skilled or semi-skilled, largely. Alternatively, they have very high-level skills.

One indirect effect of a rise in migrants in any given state is that migrants spend a part of the money they earn and this leads to the overall increase in demand for goods and services within that state. It also leads to the government earning more indirect taxes.

This works well for the overall economy and the population as a whole though it may not be perceived in that way by the local population. As Abhijit Banerjee and Esther Duflo write in Good Economics for Hard Times: “ Migrants complement, rather than compete with, native labour as they are willing to perform tasks that natives are unwilling to carry out.”

To conclude, India has largely done whatever it had to stabilise its population growth, without resorting to any coercive policies (except for a short-time during the emergency). So, population growth has been slowing down for a while now and will continue to slowdown in the decades to come. In this environment, it is important to learn the right lesson from this entire issue, which is that societal level changes take time but they do happen at the end of the day, if the government keeps working towards it.

Also, going forward, it is important that young workers are allowed to move freely from one part of the country to another in search of an occupation; from the poorer parts to the better off parts.

As Rutger Bregman writes in Utopia for Realists: The Case for a Universal Basic Income: “Opening up our borders, even just a crack, is by far the most powerful weapon we have in the global fight against poverty.”

Of course, Bregman is talking in the context of international migration, with people moving from poorer countries to richer ones. But there is no reason why the same logic can’t apply to moving within the country as well.

Postscript: I just hope the Supreme Court judges are looking at the right data while listening to the PIL.

Why Large Economies Are In a Technical Recession

Almost all large economies in the world, other than China, are in the midst of a technical recession, with their gross domestic product (GDP) having contracted for two or more quarters. On Friday, India became the latest large economy to enter this list. The spread of the covid pandemic and a big fear of a possible second wave, have led to consumers and businesses being very careful in the way they spend their money and saving for a possible rainy day.

What is a technical recession?

When the GDP of any economy contracts for two consecutive quarters, economists refer to the situation as a technical recession. GDP is a measure of economic activity and size of a country. Let’s take the case of the United States. The GDP contracted by 9% between April and June 2020 in comparison with the same period in 2019. It contracted again by 2.9% between July and September 2020. So, as of end September, the American economy was in a technical recession.

If we consider the United Kingdom, the economy has contracted in each of the periods between January to March, April to June and July to September, by 2.1%, 21.5% and 9.6%, respectively. Hence, the country has been in a technical recession since the end of June. The only exception to this has been China, which has grown by 3.2% and 4.9%, respectively, between April and June and July and September.

How is a technical recession different from a recession?

An economic scenario where the economy of a country has been contracting for a long period of time, is referred to as a recession. The trouble is there is no standard definition for how long is long. The National Bureau of Economic Research in the United States defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months”.

Hence, if the current decline in economic activity across countries continues in the months to come, then we can safely say that we are in the midst of a recession. The spread of covid has led to economic activity slowing down. Businesses in order to continue to exist have slashed salaries and/or fired people. Even those who haven’t been fired live with the fear of getting fired. All this has led to a slowdown in people and businesses spending money.

When was the last time the world was in a recession?

Lehman Brothers, the fourth biggest investment bank on Wall Street, went bust in mid-September 2008. Many other financial institutions came under huge financial stress and had to be rescued by the governments and the central banks of the United States and Europe. The trouble spilled from Wall Street to Main Street and a recession hit the Western economies.

The central banks in the Western world printed a huge amount of money to drive down interest rates, in the hope that people will borrow and spend, and businesses will borrow and expand. A lot of this money found its way into stock markets all across the world. The interesting thing is that even in 2020 the central banks are using the same formula. They have printed a lot of money to revive economies. The Federal Reserve of the United States has printed more than $3 trillion between end of February and now.

When did India enter a technical recession?

The Indian economy had contracted by 23.9% during the period April to July. This was the largest contraction among all large economies of the world. It contracted again by 7.5%, between July to September, thus entering a technical recession. Hence, as of end September the Indian economy has been in the midst of a technical recession.

Why has this happened? Private consumption, or the stuff that people buy, and which forms more than half of the Indian GDP, has completely collapsed. Between April and June, it contracted by 26.7%. It contracted by 11.3%, between July and September. As mentioned earlier, this is primarily because of people saving more for a rainy day. This can be gauged from the fact that deposits in the Indian banking system have gone up 6% or Rs 8.1 trillion between end of March, when covid first started to spread in the country, and now.

How can the world get out of this economic mess?

The British economist John Maynard Keynes had a term for a situation like this – the paradox of thrift. When a society as a whole saves substantially more, it hurts the economy, simply because one man’s spending is another man’s income. Hence, in recessionary times, when individuals and businesses are spending less money, the government needs to chip in and spend more money than it usually would have.

This spending puts more money in hands of people. And if they go out there and spend it, it helps in economic revival. The trouble is that thanks to a recessionary environment, tax collections have collapsed. Some governments have resorted to printing more money to finance extra expenditure and hoping to create growth. But not every country has this option because money printing can lead to higher prices or inflation, as a greater amount of money chases the same set of goods and services.

This piece originally appeared in the Khaleej Times on November 30, 2020.

Is Bangladesh’s Per Capita Income “Really” Greater Than That of India?

For a story to go viral on the social media, it needs to be simple and straightforward. In fact, the story should be summarisable in a headline.

The story of Bangladesh’s per capita income overtaking that of India is precisely that kind of story. John Lanchester defines per capita income in his book How To Speak Money as: The total Gross Domestic Product(GDP) of a country divided by the number of people in the country…It is a measure of how rich the country’s citizens are on average.”

In simple terms what this story told us is that the average income of Bangladesh was more than that of India and hence, an average Bangladeshi was richer than an average Indian (Actually, it may not be so. You can understand why I say so here. But that’s what the conclusion drawn was).

No wonder the story got picked up and no wonder it has become viral.

Dear reader, you might be wondering by now if the story is that simple why am I writing about it? The answer will soon become clear.

Let’s first take a look at the following chart. It plots the per capita income of India and Bangladesh.

Bangladesh overtakes India?


Source: International Monetary Fund.

A few days back, the International Monetary Fund published the World Economic Outlook (WEO) for October 2020. It also released a lot of data along with it. The above chart is plotted using data from the database which accompanied the release of the WEO.

As per the above chart, India’s per capita income in 2020 will be $ 1,876.53. In comparison, the per capita income of Bangladesh during 2020 will be $1,887.97. This is around 0.6% more than the Indian per capita income. The difference is very small but there is a difference.

All the song and dance about India versus Bangladesh came from this data point. Everyone picked up this data point, the media, the economists, the analysts, the influencers and finally, the politicians as well.

But what no one bothered to elaborate on is that the WEO data also tells us that India’s per capita income will be higher than Bangladesh between 2021 and 2023, and in 2024,  Bangladesh will overtake India again.

The point is that there is a lot of nuance in this data, which the headline of Bangladesh per capita income overtaking India’s, doesn’t really summarise. But who was bothered. It made for a great story and people ran with it. As the old newspaper cliché goes, if it bleeds, it leads.

Nevertheless, there is one thing that I haven’t told you up until now. What is that? The per capita income in the above chart and what we have been discussing until now, is in nominal terms (or current prices). This basically means that it hasn’t been adjusted for inflation. The inflation in Bangladesh since 2014 has been higher than India. The following chart plots that.

Faster price rise in Bangladesh

Source: International Monetary Fund.

A higher inflation reduces the purchasing power of a currency and that needs to be adjusted for. The International Monetary Fund provides data after adjusting for inflation and purchasing power parity (that is how much does a currency really buy), as well.

Take a look at the following chart, it plots the per capita income of India and Bangladesh, adjusted for inflation, in constant terms.

India is ahead of Bangladesh

Source: International Monetary Fund. Purchasing power parity; 2017 international dollar.

Once we adjust for inflation and purchasing power, the Indian per capita income is higher than that of Bangladesh. The trouble is that by now this story has become too complicated to go viral.

It’s no longer as simple as Bangladesh’s per capita income overtaking India. And India’s per capita income continuing to be higher than that of Bangladesh is not much of a story. I mean after all we are competing with China and not with a puny Bangladesh. (I am saying all this to explain why a certain kind of story in economics tends to go viral on the social media. We all want simple binary explanations that do not tax our minds much).

The story doesn’t end here. There is more to come. While Bangladesh’s per capita income continues to be lower than that of India, it is rapidly catching up. Let’s take a look at the following chart. It plots the ratio of the Indian per capita income to the Bangladeshi per capita income, using data used in the previous chart which has been adjusted for inflation and purchasing power parity.

Bangladesh is catching up


Source: Author calculations on IMF data.

As per this chart, India’s per capita income was 43% more than that of Bangladesh in 2016. The difference has been falling ever since. In 2021, the difference will fall to 20%. This basically means that Bangladesh is rapidly catching up on India.

Bangladesh has been doing better than India on a whole host of non-income indicators.

1) As per the Human Development Index, India’s life expectancy at birth in 2018 was 69.4 years. That of Bangladesh was 72.3.

2) This is primarily because India has a higher mortality rate of children under 5 years. In the Indian case, the mortality rate is 39.4 per 1,000 live births. In Bangladesh it is at 32.4. This means that fewer children die in Bangladesh before achieving the age of five. This explains why average life expectancy in Bangladesh is higher.

3) The child malnutrition rate in Bangladesh (% of children under 5) in Bangladesh is 36.2%. In India it is at 37.9%. A greater proportion of Indian children under the age of 5 are malnourished. Of course, the absolute numbers are much much more in the Indian case.

4) Bangladesh has much higher immunisation rates for diseases like DPT and measles than India. The rate of malaria incidence is higher in India, with 7.7 per 1,000 people being at risk. In case of Bangladesh, 1.9 per 1,000 people are at risk. The rate of tuberculosis incidence is higher in Bangladesh.

5) Interestingly, the current health expenditure in case of Bangladesh is at 2.4% of its GDP. India spends 3.7% of its GDP. But clearly the money is being much better spent in Bangladesh.

6) Bangladesh also does a lot better on a whole host of work and employment indicators. The employment to population ratio in case of Bangladesh is 56.2%. In case of India it is 50.6%. Clearly a greater proportion of Bangladeshi population is employed.

7) This is reflected in the higher labour force participation rate (people of the age of 15 and above it, who are a part of the labour force) of 58.7% in case of Bangladesh. In case of India it is at 51.9%. More interestingly, the labour force participation rate in case of Bangladeshi women is at a much higher 36% against 23.6% in India.

8) 55.5% of the employment in Bangladesh can be categorised as vulnerable employment. In case of India it is at 76.7%. A higher proportion of Indian jobs are at the risk of being lost.

9) 33.4% of the statutory age pension population in Bangladesh gets pension. In India, it is at 25.2%. On the flip side, a higher proportion of non-agricultural employment in Bangladesh is informal (at 91.3% against India’s 74.8%).

10)  43.9% of India’s labour force is employed in agriculture against Bangladesh’s 40.2%. Clearly, Bangladesh has been able to move people away from agriculture into other ways of earning money faster than India. 39.4% of the country’s employment is in the services sector against India’s 31.5%.

11) The sex ratio in Bangladesh (male to female ratio) at 1.05 is better than India’s 1.10. In India there are 100 females per 110 males on an average. In Bangladesh there are 100 females per 105 males on an average.

12) 97.3% of the population in Bangladesh has mobile phone subscriptions. In India it is at 86.9%. Having said that, India’s internet penetration at 34.5% of the population is higher than Bangladesh’s 15%.

13) The Gini coefficient, a measure of income inequality within a country, is lower in case of Bangladesh at 32.4 against India’s 35.7.

14) When it comes to schooling, the expected years of schooling in India stands at 12.3 years. In case of Bangladesh it is slightly lower at 11.2 years. Having said that, the rate of literacy among adults (15 years and older) in Bangladesh is at 72.9% against India’s 69.3%. This, despite the fact that the government expenditure on education in India amounts to 3.8% of the GDP, against Bangladesh’s 1.5% of the GDP. One possible explanation for this lies in the fact that India spends much more on higher education than Bangladesh.

15) The mean years of schooling for females in Bangladesh is at 5.3 years against India’s 4.7 years. On the flip side, the primary school dropout rate in Bangladesh is much higher at 33.8% against 12.3% in India’s case.

16) All the above data has been taken from the Human Development Index. With a score of 0.647 India ranks 129th on the index. Bangladesh on the other hand has a score of 0.614 and ranks 135th on the index. But there is a simple explanation for this. As Swati Narayan wrote in The Indian Express, in February this year: “While, technically, on the Human Development Index, Bangladesh scores marginally less, this is largely because the index merges income and non-income parameters.”

On many non-income indicators (as we have seen above) Bangladesh comes out better than India. Take the case of the Global Hunger Index. India ranked 94th among 107 countries. Bangladesh was at the 88th spot. Both countries have a level of hunger that is serious. But in case of Bangladesh, the situation is a little better. Even the World Happiness Report reported Bangladesh to be a much happier country than India.

17) India’s exports are much more than that of Bangladesh. But when it comes to exporting readymade garments (something that can create a huge number of jobs), Bangladesh has been doing much better than India for a while now. Take a look at the following chart, which compares India and Bangladesh’s garment exports.

Bangladesh beats India

Source: Bangladesh Garment Manufacturers and Exporters Association, Centre for Monitoring Indian Economy and the Dhaka Tribune.

The reasons for this success are explained in this piece I wrote for Mint.

Not for a moment am I suggesting that India is doing worse than Bangladesh on all parameters. It is not. But over the last two decades Bangladesh has managed to narrow the gap on many parameters especially those on the social, health, gender and work front.

If this continues, in the years to come it won’t be difficult for Bangladesh to overtake India’s per capita income, especially if we continue with what has now become the all-encompassing nothing is wrong and all is well rhetoric.

Of course, meanwhile both sides will continue to spin data in ways that are useful to them. The chances that you will see spin with data are more these days than the chance of a ball spinning on a cricket pitch.