One Learning from Economic Survey: India’s Future is Pakodanomics

One issue that I have regularly written and discussed in my columns is India’s investment to gross domestic product (GDP) ratio, which has fallen dramatically over the years. The latest Economic Survey gets into great detail regarding this issue and paints, what I would call a very bleak picture of India’s economic future.

India’s investment to GDP ratio “climbed from 26.5 percent in 2003, reached a peak of 35.6 percent in 2007, and then slid back to 26.4 percent in 2017.” This is a huge fall of 9.2 per cent from the peak.

As the Economic Survey points out: “And while it is true that the past 15 years have been a special period for the entire global economy, no other country seems to have gone through such a large investment boom and bust during this period.”

Why has this dramatic fall in investment as a proportion of the overall economy happened? This is something that has been analysed to death. Nevertheless, as the Survey points out: “India’s investment slowdown is unusual in that it is so far relatively moderate in magnitude, long in duration, and started from a relatively high peak rate of 36 percent of GDP. Furthermore, it has a specific nature, in that it is a balance sheet related slowdown. In other words, many companies have had to curtail their investments because their finances are stressed, as the investments they undertook during the boom have not generated enough revenues to allow them to service the debts that they have incurred.”

It is well known that companies tend to invest and expand when they are unable to meet the demand from their current production capacity. The Reserve Bank of India carries out capacity utilisation surveys of manufacturing firms every three months. The latest survey for the period April to June 2017, found that capacity utilisation stood at 71.2 per cent. In fact, capacity utilisation has varied between 70 and 72 per cent for a while now.

As economist Madan Sabnanvis writes in his new book Economics of India-How to Fool all People for all Times: “The capacity utilisation rate has gotten stuck in the region of 70-72 per cent which means two things: first demand is absent, and second, even if it does increase, production can be scaled up without going in for fresh investment.”

While, it is easy to hope that this is something that can be unravelled, history tends to suggest otherwise. The Economic Survey looks at many other countries which, in the past, have gone through what India is currently going through on the lack of investment front. The Survey specifically looks at “cases in which the rate of investment has fallen by at least 8.5 percentage points from its peak over a 9 year period are considered.” It then goes on to find out, “what is the investment rate 11, 14 and 17 years after the peak?”

The results are far from encouraging. As the Survey points out: “Investment declines flowing from balance sheet problems are much more difficult to reverse. In these cases, investment remains highly depressed, even 17 years after the peak… India’s investment decline so far has been unusually large when compared to other balance sheet cases.”

The Survey further points out: “The median country reverses only about 25 percent of the decline 14 years after the peak, and about 40 percent of the decline 17 years after the peak.” This conclusion is based on a sample of 30 countries where the investment to GDP ratio fell by 8.5 per cent from its peak, over a 9-year period. As we have seen earlier, the investment to GDP ratio in the Indian case fell from a peak of 35.6 per cent in 2007 to 26.4 per cent in 2017.

The data points stated above do not give us much hope. It basically means that over a period of 11 years after the investment to GDP ratio peaked, the median country in the sample tends to improve its investment to GDP ratio by 2.5 per cent from the lowest level achieved. As the Survey points out: “A ‘full’ recovery is defined as attainment of an investment rate that completely reverses the fall, while no recovery implies the inability to reverse the fall at all or worse.”

The trouble is in the Indian case, more than a decade has elapsed, and the investment to

GDP ratio has continued to fall.

Take a look at Figure 1.

Figure 1: Count and Extent of Recovery from India-Type Investment Decline*Note: *T is the peak time Period *: A fifty percent recovery implies that the country attained an investment rate that reversed half of the 8.5 percentage point fall. The dots imply the percentage of the total fall that the median country namaged to reverse.

Figure 1, basically points out that over a period of 17 years after the investment to GDP ratio peaked, 10 out of the 28 countries were able to make a recovery of more than 50 per cent. Given that the Indian investment to GDP ratio has continued to fall, this does not give us too much hope. Despite this large fall in investment, India has had to pay a moderate cost in terms of growth. As the Survey points out: “Between 2007 and 2016, rate of real per-capita GDP growth has fallen by about 2.3 percentage points-that is lower than the above 3 percent decline in growth noticed, on average, in episodes in other countries that have registered investment declines of similar magnitudes.”

It is a given that unless this investment slowdown reverses at a very rapid rate, India’s hopes of providing jobs and decent employment opportunities, to a million Indians who are entering the workforce every month and the 8.4 crore Indians who need to be moved out of agriculture to make it economically feasible, remains just that, a hope.

India’s hopes of a double digit economic growth, also remain just a hope. As the Survey points out: “A one percentage point fall in investment rate is expected to dent growth by 0.4-0.7 percentage points.”

What does the Economic Survey think India’s chances are? “India’s investment decline seems particularly difficult to reverse, partly because it stems from balance sheet stress and partly because it has been usually large. Cross -country evidence indicates a notable absence of automatic bounce-backs from investment slowdowns. The deeper the slowdown, the slower and shallower the recovery,” the Survey states.

But given that it is a government document, it ends on a note of hope. “At the same time, it remains true that some countries in similar circumstances have had fairly strong recoveries, suggesting that policy action can decisively improve the outlook,” the Survey states. While this sentence suggests hope, there is nothing in the analysis carried out in the Economic Survey, which gives any hope.

The trouble is that the policy action has had next to no impact on the investment to GDP ratio for more than a decade now. The ratio has simply continued to fall.

So, what does that leave us with? Without an increase in investment there will be very few jobs and employment opportunities being created. Basically, any industry that is set up in any area, first provides jobs to people who work for it. It also creates jobs for the ancillary industries which feed into it. Over and above this, it creates other employment opportunities in the area.

When the IT industry took off in and around Bengaluru, other than providing jobs to engineers, it provided employment opportunities for drivers, cooks, maids, shop keepers, and so on. At the second level, as the engineers earned more, and demanded good residential spaces to live in, it created demand for builders. That in turn created employment opportunities in the construction and the real estate industry. And so cycle worked.

To conclude, the question is what will feed India’s huge demographic dividend of one million youth entering the workforce, every month, if investment doesn’t take off? The only answer right now is: Pakodanomics.

And to distract attention from Pakodanomics, given that it is not a great way to make a living, we will keep having more and more Padmavats, for distraction.

(You can read in detail about pakodanomics here and here).

The column was originally published in Equitymaster on January 30, 2018.

Why Pakodanomics is Not the Answer to Creating Employment


India gave the world zero, and helped Mathematics, which until then was dependent on Roman numerals, leapfrog.

Last week we also gave the world, what I would like to call pakodanomics (I guess even bondanomics would work fine).

In a television interview, prime minister Narendra Modi, said: “If someone opens a ‘pakoda’ shop in front of your office, does that not count at employment? The person’s daily earning of Rs 200 will never come into any books or accounts. The truth is massive people are being employed.”

Thus, prime minister Modi, helped found a new discipline in economics, pakodanomics.

What was prime minister Modi really trying to say here? This entire jobs crisis is being overblown. What is important is employment and not jobs. This, I think, is a fair point, which most people in India do not get, given our fascination for sarkari (i.e. government) jobs. Of course, expecting the government to create employment for one million Indians entering the workforce every month and the 8.4 crore Indians who need to be moved from agriculture to make it economically feasible, is unfair. That point is well taken.

Employment can come in various forms. Even selling pakodas and making Rs 200 per day is employment. Selling pakodas on the street is incidental here. What is more important is that the prime minister of India is saying that people can sell stuff on the street, make money and employment can thus be generated.

There is a basic problem with this argument. Before I get into explaining that problem, a couple of clarifications: a) I didn’t come up with the example of the selling pakodas, the prime minister did. b) The piece is not about the unit economics of pakodawallahs and how much money they make on a given day (I know, dear reader, you know a pakodawallah who is a millionaire). But it is about selling any product on the street to earn Rs 200 per day and the prime minister of our country offering this as an employment opportunity.

At Rs 200 per day, the annual income of an individual selling pakodas (Again, let me repeat here, pakodas are incidental to the entire example. It is about making money by selling stuff on the street) would be Rs 73,000 (Rs 200 x 365 days). This is assuming that he sells 365 days a year. This is an unrealistic assumption, but we will let it be.

The per capita income of an average Indian was Rs 1.03 lakh in 2016-2017. Hence, the individual selling pakodas earns 29 per cent less than the average Indian. If I were to flip this point, an average Indian makes 41 per cent more than the individual selling pakodas. So, clearly there is a problem.

Of course, someone has to earn lower than the average income. But the difference between the average income and the income of the individual selling pakodas is significant. PM Modi’s pakoda seller is not earning much simply because there are too many people out there selling pakodas. At a broader level there are too many Indians selling stuff on streets. This is primarily because there aren’t proper jobs going around. And if there are, people are unskilled to carry them out.

Let’s get into a little more detail by looking at some data. Take a look at Table 1, which deals with the self-employed people in India.

Table 1: Self Employed / Regular wage salaried / Contract/ Casual Workers
according to Average Monthly Earnings 

What does Table 1 tell us? It tells us that nearly half of India’s workforce (46.6 per cent to be exact) is self-employed. Further, 67.5 per cent of India’s self employed make up to Rs 90,000 a year. A little over 41 per cent make only up to Rs 60,000 a year. What does this tell us? It tells us very clearly that self-employment (selling pakodas for example) does not pay well.

Most of India’s self-employed workers make lesser money per year than the average per capita income of the country, which in 2015-2016 (for which the self-employed data is), was Rs 94,130. So, there is a clearly a problem with being self-employed. (The good part is, it is better than being a casual labourer, which is by far worse. But to be self-employed you need some basic capital to start, which many Indians, who end up as casual labourers, don’t).

People in India are self-employed because they do not have a choice. Currently, the government is busy trying to pass of self-employment in India as entrepreneurship, which are two very different things. People in India become self-employed because there are no jobs going around for them. Entrepreneurship, on the other hand, is by choice.

Further, as can be seen from Table 1, getting a job is more monetarily rewarding than being self-employed. Hence, selling pakodas or being self-employed, is not the solution to the problem. It is a symptom of the problem, an indication of the problem and the fact that barely anything is being done about it.

To conclude, zero was a useful invention, pakodanomics isn’t. It’s better to get rid of it as soon as possible and concentrate on the real problem of creating the right environment which will help the real entrepreneurs create genuine employment opportunities for India’s youth.

As I keep saying, the first step towards solving a problem is recognising that it exists.

The column originally appeared in Equitymaster on January 24, 2018.