Worry about India

Here is my NYT column from today, on the recent growth slowdown in India.  Excerpt:

Why is India’s economic growth slowing? The causes are varied. They include a less than optimal attitude toward foreign business and investment: recall the Indian government’s reversal of its previous willingness to let Wal-Mart enter the retailing sector. The government also has been assessing retroactive taxation on foreign businesses years after incomes are earned and reported. Another problem is the country’s energy infrastructure, which has not geared up to meet industrial demand. Coal mining is dominated by an inefficient state-owned company and there are various price controls on both coal and natural gas. Over all, the country does not seem headed toward further liberalization and market-oriented reforms.

These problems can be solved. More troubling are the causes that have no easy fix.

Agriculture employs about half of India’s work force, for example, yet the agricultural revolution that flourished in the 1970s has slowed. Crop yields remain stubbornly low, transport and water infrastructure is poor, and the legal system is hostile to foreign investment in basic agriculture and to modern agribusiness. Note that the earlier general growth bursts of Japan, South Korea and Taiwan were all preceded by significant gains in agricultural productivity.

For all of India’s economic progress, it is hard to find comparable stirrings in Indian agriculture today. It is estimated that half of all Indian children under the age of 5 suffer from malnutrition.

Another worry is that India’s services-based growth spurt may have run much of its course. Call centers, for example, have succeeded by building their own infrastructure and they often function as self-contained, walled minicities. It’s impressive that those achievements have been possible, but these economically segregated islands of higher productivity suggest that success is achieved by separating oneself from the broader Indian economy, not by integrating with it.

India also has one of the world’s most unwieldy legal systems, and one that seems particularly hard to reform. On the World Bank’s Doing Business Index, the country ranks 132 out of 183 listed countries and regions, behind Honduras and the West Bank and Gaza, and just ahead of Nigeria and Syria. One undercurrent of talk is that the days of “the license Raj” have returned, referring to the country’s earlier subpar economic performance under a regime of heavy government regulation.


"In the past, many countries engaged in catch-up growth have suddenly slowed and hit plateaus, although economists do not have firmly established theories as to when and why this happened."

It would be interesting to read your take on the non-established theories in this regard.

I always figured that it was easy for a committee or MITI to identify something that you want to copy and then drive everything toward that, including both aiding the leaders and suppressing the interlopers who siphon off talent and funding, but much harder to create a tradition of entrepreneurship out of whole cloth, especially if the catch-up was accomplished by suppressing small scale entrepreneurship and rewarding political connectedness. Japan demonstrated this, China will very soon if it hasn't already.

When you're a country with low wages, there are certain industries that can flourish in your country with some political stability. Foreign companies will often even supply the expertise and capital in exchange for being able to build their plants there.

The problem is that once you grow into a middle-income country, it becomes more difficult. Growing further requires greater use of technology, greater productivity, the know-how to run more advanced businesses and industries, more education - the list goes on. In the mean-time, you're competing with the high-income, high-technology leading countries, and the low-income countries that are now siphoning off some of your industries.

Interesting, but the anti-growth factors cited were entrenched before the recent slowdown. When I look for what causes a change, I tend to look for something else that has changed. IOW, change begets change.
The fact that the BRICs in general are slowing points me to some
exogenous influence and away from some characteristic unique to India.

Thanks for calling attention to this important emerging issue.

I love that you wrote that article and I am going to forgive you for completely missing some of the key reasons for India's sudden downturn. I believe fundamentally what has changed is corruption is now harder to do and people in power are more afraid of getting caught. This includes politicians, businessmen and government officials. Now in a crony socialist state like India, corruption is absolutely as important as engine oil is to a car. You stop putting engine oil in your car there will be trouble. Take the example of the biggest scandal in telecom. A few 100 million dollars might have exchanged hands but the telecom industry was doing brilliantly for everyone including the average poor Indian. Suddenly after the scandal rates are beginning to go up and there is high uncertainty and no one knows what is going to happen.

And realistically most investments made by Indians themselves come from money made through corruption, inherited real estate, father's business and mainly fraudulent means. In a country where a bank gives 10.5% interest on your saving, real estate gives 20% returns, why should anyone bother about actually making a business investment ? And of course then all the other reasons that you mention come into the picture. Everyone is afraid of making a decision trying to be extra cautious to avoid being part of scandals and getting caught.

If I had to rank the fundamental reasons the main that come to my mind are...

1. Government and Political forces only agree on distribution of wealth (which has increased dramatically destroying the work force balance) but no decisions on improving the creation of wealth.
2. Corruption overhang which destroys the actual working of a socialist state.
3. Micro regulations and uncertainty for FIIs ending up in a low risk/reward ratio for foreign investment
4. Broad political uncertainty as in even with such poor performance the next party that will be in power is nowhere clear. This is mainly because of a muslim population (A substantial long term risk which cannot be discussed due to the era of political correctness that we live in) that is possibly now 25% which will not vote for the best non Congress alternative whatever be the case. For example if it was clear Narendra Modi of Gujarat (One of India's best leaders for business but despised for his leadership during the riots ten years ago) would come to power in a year, FIIs would flood India with investments tomorrow.

There needs to be more discussion of India's archaic Civil Service System. The "Indian Administrative Service (IAS)" is a colonial legacy that the nation refuses to let go.

Madan,The youth's interest in the west has to do with their need for vitltiay and colour in their lives. In my humble opinion; with the exception of a handful of people who purely pursue a spiritual ideal and are following purely their soul and nothing else, most people lead a mixed life leaning as much on external things for support as within themselves, they look for support in Mind and Soul. The current generation feels a total disconnect from the embellishments of spiritual life such as rituals and rites, religions and traditions etc; which by the way have long ceased to be embellishments but are now serious ill-habits. Repeating the Gayatri Mantra hundred times a day without sincerely listening to each syllable and striving to know its meaning is to me as insincere as religious' middle-class India's terrible habit of burping out the word OM' after every grand meal! But why in the first place would the youth feel this disconnect with religion, with spiritual life? Obviously because they can't see or haven't experienced the spirit. Their common sense tells them to go after what they can see. So they turn to the west where they find colour and life. True spiritual experiences come to the patient and perseverant individuals, and therefore might for a long while not be for the masses like the Harry Potter books which appeal to the vital and the imagination alone.

Aren't those bank interest rates nominal? Looking around casually, I haven't found a source for the real interest rates which a typical bank consumer might face.

10.5% is the actual peak savings interest rate a legal bank pays in India as of today. Unbelievable but true. Business loans start around 12% and up. Inflation is around 7% +
What I have mentioned is a summary of the inside story of India. The average Economist even in India misses out on the real picture. So you can imagine how most foreigners are going to completely misunderstand India. Tyler is right about this being the story that the world is missing. But I have not seen any of the really hard problems of India being discussed ever in any foreign media outlet.

Indian Swiss bank money would be about 0.5 to 1.0 Trillion dollars. That is about all the investment India really needs for the life of it. With the current corruption protests that money is going to be shy of coming back. This is the real foreign money that wants to come back to India. And that has been now disturbed. When all the world's economies crashed it did not trouble India even a bit. The trouble really started with the numerous corruption scandals and the popular unrest against it.

Anyways I think all this is a temporary problem and I believe somehow India will find its way through this. But India's long term risk is easily the world's biggest long term risk. Just that very few get it. Thats anyways how it is supposed to be.

I was aware of these high interest rates, was just curious about the 'real interest' rate calculation. With your numbers, 10.5% high end nominal rates and 7% inflation, it comes to 3.3% (1.105/1.07~1.033). This is probably much higher than other countries, though I dont have the numbers right now.


It is very revealing that you consider the muslim population a "risk" to be "managed" with whatever methods possible. Isn't it obvious from that statement itself why they vote the way they do? May be they would consider other alternatives if those other alternatives were not primarily interested in hunting and killing them, a "final solution" that Narendra Modi so successfully beta tested in the form of Gujarat Riots, to much praise from his primary vote bank and fueling him to the popularity that he now enjoys.

One the pure economic question, the success of Gujarat is primarily related to the business leadership that the Gujarati diaspora have exhibited for a long time. The economic reforms helped them in expressing this success at home too. This is seen in other areas of India. For example the great success in Bangalore/Hyderabad tech hubs are, I believe, related to the value the middle class in those states placed on engineering education, much before the economic reforms assisted them in expressing that desire on the market place.


Finally some sense.

The odd thing is, the working youth (25 - 40 years of age) appear relatively unperturbed by all this, at least most of my friends did when I just visited. "Come back, this is the land of opportunity, Western economies are dying." "Aren't you worried about the slow down in the Indian economy?" "Nope, all signs are hopeful, at least in what I deal with".

Nice title, by the way. How many job market (or other) papers have we seen dealing with the slowdown in the Indian economy?

Come back, this is the land of opportunity, Western economies are dying

A lot depends on whether you value growth more or absolute levels. A "dying" Portugal (say) is still a huge margin above a "dynamic" India on most metrics.

The job market paper on such a topic would be hard work, no? Why not just pick up some primary education scheme launched in some village and check for p-values?

India needs a Communist revolution. Not that old-fashioned Marxist-Leninist Communism. They need the new type of Communism practiced in China. What's the word for that type?

Export oriented industrialization or the Japanese model.

It worked for the Japanese, Koreans, Taiwanese, and Chinese - but it does have its own risks, particularly the split between the export sector and domestic sector that both Japan and Korea have. Both of them ended up becoming dependent on their export sectors for growth, because their domestic sectors (particularly the service sector) are too inefficient and unproductive to do it.

Japan, Korea, Taiwan, China-all run by strongmen or non-democratic. Model not transferable to India.

Isn't growth slowing in every country?

I have no doubt that India has major problems with how the place is governed and how the economy is structured. And in a worldwide economic slowdown, these features may make the effects of the slowdown worse (or better) in India than in other countries. The slowdown may also make the negative stuff more noticeable.

However, if the entire world economy is slowing down, that probably goes a long way to explaining the lack of growth in any particular country.

"Crop yields remain low"? This Des Moines Register article (http://tinyurl.com/7wtxerp) is somewhat contrary, though it affirms the next parts of the sentence:

"India, long a symbol of hunger and starvation, has a new problem this year. It’s a glut of feedgrains, mostly wheat, that has overwhelmed the nation’s storage and transportation system....
India is becoming an increasing presence in world feedgrains markets as its domestic production soars, as Commodity Online reported last month. The huge crop available this year has been a factor in holding down U.S. corn and wheat prices, which can be undercut by cheaper Indian wheat on world markets."

India is more popular with Western elites than China is, in part because India is following the model of the 21st Century West of how to be wealthy, not the earlier Western models of how to become wealthy: elite higher education, service industries, globalized elites speaking English, etc. China, in contrast, has concentrated on nationalism, manufacturing, building up a broad base of literate workers, and so forth. It seems very outdated to Davos Man.

I would say that China - or at least the Chinese political/economic model where the government takes the lead in economic planning and doesn't take any bullshit from the rubes - is very popular among western elites. Your boy Tom Friedman is maybe the most prominent example of this, but there are many others.

Could you be implying 'The Economist' editors are out of touch by believing India 'will soon outpace China' simply because India's elites speak English and they attended school with them?

See article: http://www.economist.com/node/17147648

'The Economist' editors assure its readers China is at a disadvantage, since a well educated, orderly, obedient, and somewhat authoritarian workforce is susceptible to strong, bad governments.

This possibility will hold China back.

India, on the other hand, is a land made up of innovative, yet uneducated workers, ruled by a weak, corrupt, and uncoordinated government, whose elites speak English and play Cricket. These facts have more consonance, are more palatable, and simply make India better, and therefore, a winner.

Problem with the Chineese model is what is the long term stable solution? Can the pseudo-Communist, authoritarian system sustain itself for ever? Government control seems to be getting weaker and protests more often.

Confucius say let people blow off steam once in a while.

Big countries like India, and USA, suffers from excessive power concentration. Power is taken over by rent seekers, like the handloom industry, often in collaboration with naive do-gooders.

For India it would have been better to remain British. Chris Patten could have been handing over a first world economy to the Indians about now.

Ha Ha Ha. Big difference between British Hong Kong-which served as a middleman between Communist China and the rest of the world and British India.

Nobody has stated the obvious (albeit morally tactless) argument: why worry about India? Or Brazil? On a trade weighted or market weighed basis, these countries by themselves are not significant compared to China vis-a-vis the USA: $2 Trillion nominal GDP for each as opposed to $6 T for China and I bet China does a lot more trade with the USA (and India does probably less than Brazil, with the USA). The EU is worth a nominal $16 trillion dollars. So forget India (or Africa) aside from humanitarian reasons.

I think there is a lack or no mention of India's caste system....which is still being practiced and will continue for the foreseeable future. With this caste system, millions of low rung indians will continue to remain poor and illiterate. I cannot imagine an indian of the pariah caste working together with Reliance industries boss... it'll never happen. That alone, will keep indian growth at the current tread-water status...

without prejudice.

There is only one class in India-the money class. Yes, there is the Hindu caste system, but it is being supplanted by the real class system-money.

India WAS following the Western (or American) model of making money between, say 1991 and 2004. That is when its best growth was seen. Now, it is trying to out-Obama America in terms of Julia-fication of the economy. If you ever want to know what cradle-to-grave government feels like, go to India. Instead of addressing this problem, the Indian government is trying to make tax avoidance illegal. Socialists everywhere are a bunch of out of touch retards who deserve crucification.


I think its important to point out that 6.9%, probably the bottom of the current business cycle, is hardly treading water. Second, the effects of caste are a lot more subtle than you make out. I can't find the paper, but a recent study found that large corporations are more likely to hire low caste workers for political reasons. Moreover, I think you vastly underestimate the willingness of upper caste individuals to work with low caste individuals. For example, Shibulal, one of the founding members of Infosys (India's second largest IT company) is an Ezhava, a caste that is not much different from Paraiyar in rank traditionally. Shiv Nadar, from a caste with the same ritual occupation as the Paraiah, founded HCL India's 4th largest IT company.

Rather than outright discrimination, the main challenge faced by low castes (its not just untouchables. There's really no difference between untouchables and roughly the bottom 50% of castes in terms of socioeconomic status) is about the network you are born with. My family is bania. If I were to have grown up in India, most of my extended family would have been succesful medium sized business owners and professionals. If I were say a baraiya, most of my relatives would have been agricultural laborers, herders and tea stall owners. Its not hard to see who would have a leg up. Moreover, caste identity helps solidify a political culture of rent-seeking where different coalitions organized around caste try to garner as many subsidies and affirmitive action as possible without recourse to any principal. Caste is a highly variegated institution. The influence of caste in Tamil Nadu is very different than in eastern Uttar Pradesh. While I partly agree with the gist of your statement (and I could right a lot more about this if I had time) I don't think you can state caste is the problem the way you do here.

Here are a few thoughts I penned on some key reforms India needs immediately if it is to keep growing: http://sabhlokcity.com/2012/05/what-should-india-do-now-a-three-point-programme/

Outside of the domestic sectors where India's globalised elite dominates - pharma, ICT, medicine etc. - India is going to find it difficult to push through reforms to make the rest of the economy open to naked profit-making. There is huge institutional opposition carried over from the Gandhi-Nehru founding days to the traditional economy being opened up to competition. Protecting domestic workers is seen as being far more important than better outcomes for consumers as a whole.

Added to that, the Indian sub-continent is made up of a number of very varied sub-populations. Some of them have an average IQ comparable to elites in the developed world and thus cluster in globally competitive businesses and institutions. The large mass of people though fall into the 80-90 range. That's not going to get better until nutrition is substantially improved. And that means the country will simply not grow as fast as China - where the average IQ is over 100 - over the next few decades. After that, Chinese growth will slow since it will have a lot fewer younger workers.

Citations on IQ please?

Dangerously close to Nazi-talk about Eugenics

Afzal, M. 1988. Consequences of consanguinity on cognitive behavior. Behavior Genetics, 18: 583-594.

Rao, S.N. and I.K. Reddy. 1968. Development of norms for Raven's Coloured Progressive Matrices on elementary school children. Psychological Studies, 13: 105-107.

Raven, J., J.C. Raven, and J.H. Court. 1996. Standard Progressive Matrices. Oxford, UK: Oxford Psychologists Press.

Sinha, U. 1968. The use of Raven's Progressive Matrices in India. Indian Education Review, 3: 75-88.

Since Tyler mentioned call centers above, it is worth pointing out that the Philippines has long since overtaken India in this industry in terms of number of workers, despite the fact that India has over 10 times the population of the Philippines and has lower wages. I spoke with some Indian friends about this and here were their observations:

1. Indian call centers tend to be located on the outskirts of big cities or in suburban office parks. Since public transport is very limited in these areas and crime is a serious problem, especially for female workers at night, call centers spend a lot of resources on private cars and vans to shuttle workers between home and office. In the Philippines, call centers tend to be centrally located and it is much less dangerous for women to be taking public transportation at night so workers are responsible for getting themselves to and from the office.
2. Philippines generally has stable electricity in most urban areas with black-outs only happening a few times a year in contrast to the almost daily blackouts in Indian urban areas. Blackouts mean offices like call centers must spend money on generators which increases operating costs considerably.
3. Educated Filipinos have an accent that is extremely easy for Americans to understand.

#1 and #2 go directly to the issues of infrastructure, electricity, and law and order. There are almost certainly some more generally applicable lessons for India in this example. Limited electricity, lousy infrastructure and an inability to keep the streets safe (especially for the female half of the population) puts severe limits on business productivity.

Cultures learn.

Usually not as fast as we'd like.

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