![\"indian](\"\/wp-content\/uploads\/2016\/06\/indian-flag.png\")
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In the Letters that I have written till date, I have tried to build a logical argument on the basis of data. Given this context, this Letter is different from the usual. The idea for this Letter came from a random conversation with a dear friend who works as a writer in the Mumbai film industry.<\/p>\n
Typically, when I write to you, dear reader, I get into a lot of detail with numbers, graphs and tables, in order to explain a single issue. While it is important to have a good understanding of individual issues that plague the Indian economy, at the same time it is important to have a Big Picture understanding as well.<\/p>\n
As they say, getting into too much detail about any issue leads to a situation where you can miss the wood for the trees. To set this right, in this piece I will try and explain what I see are the biggest problems which are likely to hold the Indian economy back in the years to come and how they are linked with each other, the 7-8 per cent official economic growth rate notwithstanding.<\/p>\n
I have written this Letter in the form of a conversation I had with my friend. Of course, this is not the real conversation I had. Real conversations cannot be as well-structured as any writeup can be. Nevertheless, in an ideal world this is the conversation I should have had, if the idea was to explain to my friend India\u2019s economic situation, the way I see it.<\/p>\n
So here we go.<\/p>\n
It has been many years since I walked the lanes of Versova, a quaint suburb of Mumbai, where the rich strugglers of the Indian film industry also stay along with the stars. (The poorer ones stay in Oshiwara). A 15-minute walk from a coffee shop and I am at my friend\u2019s place.<\/p>\n
As soon as he opens the door, one of the two cats he has, jumps on me. Funnily, I don\u2019t recall the name of the cat. \u201cHe is just trying to be friendly, Sir!\u201d my friend says. Once upon a time I had a morbid fear of cats. But living in a building which is full of cats, this fear has gone away.<\/p>\n
I went in and made myself comfortable on the sofa and had a cup of black coffee, which my friend had made. Like any normal Indian I like a dash of sugar in my coffee (though I am perfectly fine with sugarless tea). This is something my friend finds a little odd. \u201cWho puts sugar in black coffee?\u201d he asks rather animatedly. And I ended up with sugarless black coffee, which as they say is an acquired taste. Now that is something that you say when you don\u2019t like something and are trying to fit in.<\/p>\n
After an hour of talking about films and politics, we somehow end up talking about the Indian economy, of all things. This, even though I make it a point not to talk shop when I am with friends.<\/p>\n
And honestly, I don\u2019t recall how I ended up talking about one million Indians entering the workforce every month, India\u2019s so called demographic dividend. \u201cSo, you know one million Indians are entering the workforce every month,\u201d I said. \u201cThis means 1.2 crore during the year, which is half of Australia\u2019s population.\u201d<\/p>\n
\u201cWhat is the big deal asked my friend?\u201d asked my friend. \u201cAs people age, at some point of time they need to start making a living and enter the workforce.\u201d<\/p>\n
\u201cTrue. But as they enter the workforce, they need to find jobs, which they currently aren\u2019t.\u201d<\/p>\n
\u201cAh. Jobs. Yes. I once had a job, you know, with a newspaper,\u201d my friend said, getting a tad melodramatic.<\/p>\n
\u201cYes. You did,\u201d I said. \u201cSo, there are 1.2 crore individuals Indians entering the workforce every year and there are very few jobs being created for them. And that is a huge problem.\u201d<\/p>\n
\u201cBut I remember reading somewhere last year that India\u2019s rate of unemployment was just 5 per cent.\u201d<\/p>\n
\u201cYes,\u201d I replied.<\/p>\n
\u201cHow do you reconcile this with the fact that those entering the workforce are not finding jobs?\u201d my friend asked.<\/p>\n
\u201cOh, that is because of the way unemployment is calculated. There are two methods. In one method, anyone who has been employed for 183 days is considered employed. As per this method the rate of unemployment is 5 per cent. In another method, anyone who has been employed for the last 30 days is considered employed. As per this method, the rate of unemployment is even lower at 3.7 per cent. Hence, you could be unemployed for a major part of the year and still be considered employed.\u201d<\/p>\n
\u201cAh, this is that classic statistics are like bikinis point\u2026\u201d<\/p>\n
\u201cYes. Interestingly, only 60 per cent of Indians who are looking for a job through the year are able to find one. The figure is close to 52 per cent in rural India. This tells you the real state of India\u2019s unemployment scenario rather than the rate of unemployment, which clearly doesn\u2019t.\u201d<\/p>\n
\u201cYeah, it does. So, what is the real state of India\u2019s unemployment. Are there any estimates for that?\u201d<\/p>\n
\u201cA recent report titled\u00a0OECD Economic Surveys India<\/a>\u00a0puts the rate of unemployment among India’s youth between the ages of 15 and 29 at more than 30 per cent. These youths are neither employed nor in education or training,\u201d I replied.<\/p>\n \u201cBut tell me something what\u2019s wrong with people working in agriculture after all bharat ek krishi pradhan desh hai <\/em>(India is a country where the main activity of people is farming),\u201d said my friend, coming up with a clich\u00e9.<\/p>\n \u201cIn agriculture, across the generations the plot sizes of land have become smaller and smaller. You know, the average size of the plot was around 2.82 hectares in 1970-1971 and by 2010-2011 this had fallen to 1.16 hectares. The 2010-2011 data point is the latest data point that is available, and since then the plot sizes for agriculture would have fallen even more,\u201d I explained. (one hectare = 2.5 acres).<\/p>\n \u201cHow do you remember so many data points,\u201d my friend asked.<\/p>\n \u201cYou forget this is a quasi-fictional conversation my friend,\u201d I replied. \u201cAnd we are both characters in the hands of the writer, who also happens to be me.\u201d<\/p>\n \u201cAh. So, agriculture is no longer as viable as it used to be,\u201d said my friend, getting back to the point.<\/p>\n \u201cYes. Hence, people need other kinds of jobs.\u201d<\/p>\n \u201cYes, that is clear.\u201d<\/p>\n \u201cInterestingly that explains why several land-owning castes across the country which includes Jats in Haryana, Patels in Gujarat, Marathas in Maharashtra and Kapus in Andhra Pradesh want reservations in government jobs. With size of agriculture plots falling across generations, agriculture is no longer as viable as it used to be. Hence, they want government jobs.\u201d<\/p>\n \u201cSo, what kind of jobs are a majority of this individuals entering the workforce good for?\u201d my friend asked.<\/p>\n \u201cIf I were to talk like an economist, India\u2019s natural comparative advantage is in low-skilled jobs.\u201d<\/p>\n \u201cCome on. I know you never went anywhere near an Economics text book. Try talking in simple English.\u201d<\/p>\n \u201cOur school education system has been totally screwed up over the years, with the learning outcomes coming down dramatically,\u201d I said, speaking in simple English. \u201cMadhav Chavan, of the Pratham Education Foundation estimates that in the period of the ten years up to 2015, 10 crore children completed primary school without the ability to do some basic reading and mathematics. This makes it very difficult for a lot of people to get into any kind of an office job or even a semi-skilled job, which requires the ability to read, write or do some basic maths,\u201d I explained.<\/p>\n \u201cOh, that doesn\u2019t leave much scope for anything but low-end labour jobs.\u201d<\/p>\n \u201cYes. When move people move from agriculture they first move towards low-end construction jobs.\u201d<\/p>\n \u201cSo why isn\u2019t the same happening in India?\u201d<\/p>\n \u201cBecause there isn\u2019t as much construction happening as there should.\u201d<\/p>\n \u201cMeaning?\u201d<\/p>\n \u201cCompanies aren\u2019t expanding because they have borrowed a lot of money and are finding it difficult to repay the bank loans they have taken on. That means less construction. In fact, all the large borrowing by corporates has also left India\u2019s government owned public sector banks in a mess. They are also not in a mood to lend to corporates.\u201d<\/p>\n \u201cBut what about the government, construction isn\u2019t just about corporates. India has an extremely poor physical infrastructure, which only the government can build and improve.\u201d<\/p>\n \u201cYes, you are right. The government has been spending money on developing physical infrastructure and that does create jobs in construction. But there is only so much that the government can spend every year without ruining its finances.\u201d<\/p>\n \u201cWhat about real estate?\u201d asked my friend, a question that I was waiting for. \u201cConstruction happens there as well.\u201d<\/p>\n \u201cYes, real estate is one sector that can actually create jobs for the low-skilled workers who are entering the workforce or moving away from agriculture.\u201d<\/p>\n \u201cSo, what is the problem?\u201d<\/p>\n \u201cThe eight biggest cities form the largest part of the real estate market in the country. And the price rise in real estate in these 8 cities has made most homes being built very expensive and beyond what most people can afford. In fact, this has now reached a stage where the real estate builders aren\u2019t building new stuff and at the same time they are having a difficult time trying to sell off what they had built. Hence, things have more or less come to a standstill.\u201d<\/p>\n \u201cBasically, the real estate sector is in a moribund state,\u201d my friend stated.<\/p>\n \u201cYes, that is the right word to be used.\u201d<\/p>\n \u201cWhat can revive the sector?\u201d<\/p>\n \u201cA fall in prices and a massive one. But that hasn\u2019t happened for a while even though prices have not gone anywhere in the last few years.\u201d<\/p>\n \u201cWhy is that not happening?\u201d<\/p>\n \u201cThere are multiple reasons for the same,\u201d I replied. \u201cMost Indian real estate companies\u00a0are fronts for the ill-gotten wealth of politicians. The builders who operate as fronts have promised a certain rate of return to politicians, and hence, are not able to cut prices. This is one possible explanation. Another explanation that keeps getting offered is the fact that the builders and politicians have made a lot of money over the years, and hence, are in no hurry to cut prices to sell the real estate inventory of homes that has been built up.\u201d<\/p>\n \u201cThat\u2019s too generic,\u201d my friend replied. \u201cYou need to be a little more specific than just that.\u201d<\/p>\n \u201cWe need to understand the influx of black money in real estate in a little more detail. The question is why does a builder take a portion of the payment when he sells a flat or a house, in black, i.e., in cash? I think it is very important to understand this. He takes a payment in cash because he needs to make payments in cash. He needs to pay his suppliers in cash. But more importantly he needs to pay politicians and bureaucrats in cash.\u201d<\/p>\n \u201cNow that is getting interesting.\u201d<\/p>\n \u201cUnless a builder has politicians and bureaucrats in his pocket, it is very difficult for him or her to be in the business of real estate, given how complicated the regulations governing the sector are in state after state, in India. The speed money paid to politicians and bureaucrats essentially helps builders stay in the game. And this speed money cannot be paid in cheque or through NEFT\/RTGS\/IMPS and so on. It has to be paid in cash.\u201d<\/p>\n \u201cYes.\u201d<\/p>\n \u201cAnd this cash can only come from the buyer who is buying the flat or the homes that the builder has built. Hence, genuine buyers turn their white money into black, every time they buy a house to live in. And then there are investors who are looking to put their black money to some use. For them real estate remains the best mode of investment. And this black money also ensures that prices don\u2019t fall.\u201d<\/p>\n \u201cYes. This makes sense.\u201d<\/p>\n \u201cThe politician other than seeking a bribe in the form of cash needs cash to fight elections. Fighting elections in India has become a very expensive proposition over the years. Even in a municipal election in a big city, a serious candidate has to spend a crore or two, with the risk of not getting elected. Where does a lot of this money come from? From real estate. This also explains why the rules and regulations governing real estate in states across India remain so convoluted. This allows state level politicians to demand their cut every time a new real estate project is proposed. It also explains why real estate has not been brought under the ambit of Goods and Services Tax.\u201d<\/p>\n \u201cHmmm.\u201d<\/p>\n \u201cSo, the point is that unless electoral financing in India is cleaned up, the real estate sector won\u2019t get cleaned up. Unless real estate sector gets cleaned up, construction in the sector won\u2019t pick up. And unless construction picks up, the sector won\u2019t be able to create any jobs. And unless there are jobs in this sector, many of the one million Indians entering the workforce every month will continue to remain unemployed. India\u2019s so called demographic dividend might turn into a demographic disaster.\u201d<\/p>\n \u201cNow that was very interesting,\u201d my friend said.<\/p>\n \u201cInteresting. But a tad simplistic as big picture conversations are.\u201d<\/p>\n \u201cAnd how do I get into the details?\u201d<\/p>\n \u201cYou can read my new book India\u2019s Big Government\u2014The Intrusive State and How It is Hurting Us<\/a>,\u201d I replied.<\/p>\n By then the kebabs <\/em>had come and it was time to eat.<\/p>\n The column originally appeared on Equitymaster<\/a> on April 27, 2017.<\/p>\n","protected":false},"excerpt":{"rendered":" In the Letters that I have written till date, I have tried to build a logical argument on the basis of data. Given this context, this Letter is different from the usual. The idea for this Letter came from a random conversation with a dear friend who works as a writer in the Mumbai film … <\/p>\n Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"qubely_global_settings":"","qubely_interactions":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30,77],"tags":[],"qubely_featured_image_url":null,"qubely_author":{"display_name":"Vivek Kaul","author_link":"https:\/\/vivekkaul.com\/author\/vivekkaul\/"},"qubely_comment":0,"qubely_category":"Equitymaster<\/a> Vivek Kaul's Diary<\/a>","qubely_excerpt":"In the Letters that I have written till date, I have tried to build a logical argument on the basis of data. Given this context, this Letter is different from the usual. The idea for this Letter came from a random conversation with a dear friend who works as a writer in the Mumbai film…","jetpack_sharing_enabled":true,"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/5057"}],"collection":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/comments?post=5057"}],"version-history":[{"count":0,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/posts\/5057\/revisions"}],"wp:attachment":[{"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/media?parent=5057"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/categories?post=5057"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vivekkaul.com\/wp-json\/wp\/v2\/tags?post=5057"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}