Archives: Publication

Two months since India’s two biggest banknotes were invalidated overnight to fight graft things are slowly returning to normal but at a cost to one of Asia’s fastest­growing economies.

In a central Delhi market two men in their 50s are fiddling with smartphones.

Sudhir Sabharwal is buying a stapler from stallholder Rakesh Yadav but no cash will change hands.

It would have been nearly unimaginable a mere three months ago but now using one of India’s many mobile wallet applications is becoming the norm.

“We must go with the Government policy otherwise we’re losing business” Mr Yadav said who admits he only adopted the technology following the withdrawal of India’s major banknotes last November said.

“Before the whole economy ran on cash.”

Announcing the replacement of 1000 and 500 rupee notes India’s Prime Minister Narendra Modi said the objective was to wipe out the so called “black money” which circulates in India’s vast informal economy.

Untaxed and unchecked it greases bureaucratic corruption and denies the Government much­needed revenue.

Short-term pain

Fighting graft is popular but the move has caused immense upheaval and hardship and the cost to India’s economy is now beginning to emerge.

India’s statisticians have cut forecast growth for 2017 from 7.6 per cent down to 7.1 per cent while the World Bank is predicting 7 per cent.

A survey of small and medium businesses estimates they lost a third of jobs and half their revenue in the first month.

The All India Manufacturers’ Organisation which carried out the survey also projected a fall in employment of 60 per cent and loss in revenue of 55 per cent until March 2017.

That is because replacement banknotes are still being printed.

The Government said it was impossible to print adequate replacements while maintaining the necessary secrecy but economist Kanhaiya Singh from Delhi’s National Council of Applied Economic Research said there was another good reason for limiting the cash supply.

“It is forcing the traders and the small manufacturers to shift to the formal economy” he said adding that would enable the Government to better track — and tax — transactions.

Take from the rich?

Elected promising brighter economic prospects for all Mr Modi is gambling his political fortune on convincing Indians the payoff will outweigh the pain.

Mr Modi is framing the policy as a crackdown on the elite and that message seems to be cutting through.

In his first interview since the move Mr Modi pointed to the lack of unrest despite the long queues and disproportionate impact on India’s poor as indicative of general support.

“I was well aware of the magnitude and complexity of the challenge we faced in implementation” Mr Modi told news magazine India Today before stating: “It is no small thing that no significant incident of unrest has taken place in the country.”

Back in the market customer Sudhir Sabharwal has completed his cashless purchase and reflects a similar view.

“Initially there was some problems — standing in the lines getting the money exchanged” he acknowledged.

“But that time — that was the teething time. People are happy now with demonetisation.”

Economist Mr Singh said it would be some time before the macroeconomic impact could be assessed but pointed to taxation revenue as an obvious marker.

But he was also confident that India’s economy would rebound quickly.

The policy will face its first electoral test in major state elections next month while many now expect Mr Modi to turn his attention to India’s notoriously shady gold and property markets.

Much of China’s economic success is due to the rapid growth in its exports. The share of China’s GDP in world GDP quintupled – from 3.62 per cent in 2000 to 14.80 per cent in 2015 – even as India’s share rose from just 1.43 per cent to 2.82 per cent during the same period.

Ironically this sharp divergence in their respective export performance has come despite the fact that while India was a founding member of WTO in 1995 China became a member only in 2001. Theory tells us that trade competitiveness in world markets is a function of comparative advantage; hence this wide divergence in export performance is a bit puzzling. True China’s economy is more than five times larger than Inve a little deeper? After all India has some of the world’s largest reserves of iron ore bauxite and manganese.
dia’s and its manufacturing sector is ten times India’s but do these factors alone explain China’s success in exports? Or does one need to del

China’s growing comparative advantage in export of manufacturing products is well-documented. But what is less well-known is that in many other commodities such as food items agricultural raw materials fuels and ores metals and precious stone India has comparative advantage in the world market. Consequently even as India and China compete fiercely in world markets our export baskets are complementary rather than competitive.

So rather than fear the rise of China as a manufacturing giant India needs to focus on those sectors and products where it has a comparativ
advantage vis-a-vis China. The key therefore is to identify these sectors properly.

It is here that Balassa’s revealed comparative advantage (RCA) index can come to our aid. Using the RCA to assess the comparative advantage of the two countries relative to the world average shows that contrary to widespread belief there are a number of areas where India has a comparative advantage vis-à-vis China.

Thus when it comes to commodities like food agricultural raw materials ores metals precious stones and fuels Indian exports enjoy a distinct advantage vis-à-vis China. It is only in respect of manufactured goods that China has an edge over India. While this is perhaps only to be expected and gels with the widely-accepted view that China is a far more industrially advanced country compared to India what it suggests is that India could beneficially focus.

The graph below gives the RCA index for five main commodity groups during the period 1990-2014. The index is defined as the ratio of two shares. The numerator is the share of country’s total exports of the commodity in question to its total exports. The denominator is the share of the world exports of the same commodity in total exports. To compare the competitiveness of each country in the export of a particular commodity group the RCA index has been computed for five commodity groups viz: (i) all food items (ii) agricultural raw materials (iii) ores metals and precious stones (iv) fuels and (v) manufactured goods

If the RCA Index is 1 for a given sector or product in respect of a given country the percentage share of that sector or product is identical to the world average. When the RCA Index is above 1 the country is said to have a comparative advantage (and can specialise) in that sector or product.

All food items

The analysis reveals that India has a significant comparative advantage over China as the RCA indexes are well above one in the case of ‘all food items’ in all the years under consideration. In 1990 the RCA index for China was 1.37; however it declined to 0.34 in 2014; likewise the RCA index for India too declined but from 1.67 in 1990 to 1.43 in 2014.

Agricultural raw material

In 1990 India’s RCA index for ‘agricultural raw material’ was 1.37 and declined to 0.63 in 2000. It then increased to 1.47 in 2010 and has since remained the same in 2014. In case of China the RCA index for agricultural raw material was 1.17 in 1990 and continuously declined to 0.33 in 2014.

Ores metals and precious stones

The RCA index for India in the case of ‘Ores Metals and precious stones’ is well above 1 in all the years under the study period. India performed much better during the period 2005-2010. China’s RCA index was 0.58 in 1990 and declined to 0.22 in 2014. The RCA index for India is considerably higher than unity indicating that this is a competitive export item for India in the world market. This is not surprising as India has world’s largest reserves of iron ore bauxite etc.

Fuels

India’s comparative advantage in export of ‘fuels’ shows continuous increase with the RCA index rising from 0.26 in 1990 to 1.17 in 2014. In contrast China was at comparative disadvantage throughout the period as the RCA index continuously declined from 0.76 in 1990 to 0.09 in 2014.

Manufactured goods

China has been performing much better in manufacturing sector compared to India. Its RCA index for manufacturing rose from 1.01 in 1990 to 1.45 in 2014 even as the index for India fell from 0.99 in 1990 to 0.85 in 2014.

Thus even as India and China compete fiercely for global markets by focusing on the sectors/products where each one has comparative advantage both countries could simultaneously grow their exports without fearing each other.

Tarujyoti Buragohain is an associate fellow National Council of Applied Economic Research (NCAER) Delhi. Views are personal

Material change matters but perception too determines a feeling of deprivation. Prosperity good governance and a focus on fairness rather than electoral pandering often elicit greater political support

Public discontent is like a chameleon. When we see it we know it must have been hiding in plain sight for a while; but until we spot it we are not even aware of its existence. Until Donald Trump catapulted onto the American political scene it would have been hard to imagine poor workers uniting behind a billionaire who has specialised in taking advantage of the system to avoid paying taxes and fair wages to his employees. Similarly no one took Brexit seriously until election results tapped into lower-class discontent among the British voters. It would be easy for us to say that poverty and declining economic conditions lead to frustration among the poor and revolt against the political elites. But is it really true?

India and Pakistan — a contrast

Poverty in Pakistan fell from nearly 35 per cent in 2001 to 10 per cent in 2013-14. Although Pakistan has recently adjusted its poverty line increasing the poverty ratio to 30 per cent as Ghazala Mansuri of the World Bank notes by all objective standards even the poorest in Pakistan are better off today than a decade earlier. Paradoxically according to the Pakistan Social and Living Standards Measurement Survey about 21 per cent of the households felt that their economic condition had declined over the preceding 12 months while only 12 per cent felt it had improved. India has experienced a roughly similar magnitude of poverty decline from 37 per cent in 2004-05 to 22 per cent in 2011-12. However as the India Human Development Survey (IHDS) organised by researchers from the University of Maryland and the National Council of Applied Economic Research (NCAER) found the proportion of households that felt that their economic condition declined between 2011-12 and 2004-05 was much smaller (about 10 per cent) compared to those who felt it had improved (about 37 per cent).

How do we explain that with similar economic improvements the Indians perceived that their fortunes were improving while the Pakistanis did not? Could this be because there was greater income inequality in Pakistan than in India making individuals keenly aware of their relative rather than absolute poverty? Empirical data does not show that Pakistan was more unequal. World Bank data show that in 2011 42 per cent of the income was held by the top 20 per cent of the population in Pakistan; the comparable figure for India was 44 per cent. At the bottom of the distribution too Pakistan seems marginally better with 9.4 per cent of the income in the hands of the bottom 20 per cent for Pakistani versus 8.3 per cent for India. This suggests that inequality in Pakistan and India was more or less on a par with Indian inequality being marginally higher. Clearly something else was going on something that related to perception a subjective feeling of deprivation rather than objective conditions.

My guess is that this sense of economic deprivation is closely linked to the social and political conditions in which individuals live. Living in a society that is well governed creates a sense of security that is equally if not more important than actual economic advancement. This is where India probably has an edge over Pakistan.

&While lack of comparable data do not allow us to compare Pakistan with India on these subjective factors the IHDS data suggest that at least within India experience of bad governance and grievances about fair treatment shape a feeling of economic marginalisation. Using data from the IHDS the only large panel survey in which the same households were interviewed in 2004-05 as well as 2011-12 we found that even after we took into account objective changes in income and factors such as education and place of residence the nature of governance and social policies played an important role in enhancing or diminishing feelings of economic insecurity.

Physical insecurity spills over into feeling economically insecure. Individuals who have been victims of crime — theft break-in or intimidation — are far more likely to feel that they are downwardly mobile. After we took into account income changes over time and the household’s education as well as place of residence crime victims in the IHDS were about 56 per cent more likely to feel economically worse off in recent years than non-victims. Good public service delivery also created a feeling of well-being. Households that experienced frequent power cuts and did not have power supply for at least 18 hours in a day were 43 per cent more likely to express a feeling of economic insecurity than those who enjoyed consistent power supply.

Fairness and prosperity
A sense of fairness in economic outcomes is also strongly related to perceptions of prosperity. In recent years we have seen an upsurge in the grievances expressed by forward castes who feel that the Other Backward Classes (OBC) are unjustifiably stealing their jobs and
opportunities for college admission. Holding household economic status and education constant forward castes were about 30 per cent more likely to feel that they were worse off in 2011-12 than in 2004-05. In this case it is not surprising that we see greater demand for OBC classification from well-off groups such as Jats Patels and Gujjars.

This is not to suggest that material changes don’t matter and perception alone determines a feeling of deprivation. The IHDS found that after controlling for other factors households whose incomes declined by at least 20 per cent in constant terms between 2004-05 and 2011-12 were 35 per cent more likely to feel that they are worse off compared to those whose incomes stayed the same and 51 per cent more likely than households whose incomes grew by 20 per cent or more. However the magnitude of the impact of actual economic decline on subjective feeling of deprivation was on a par with the governance and fairness concerns enumerated above.

American sociologist Andrew Cherlin notes that a feeling of relative deprivation is what shapes the support for Mr. Trump. Lower class whites acutely feel the loss of privilege their parents enjoyed in a bygone era where black-white differences were large and being white brought greater rewards while the African-Americans were shut out of good jobs. With declining premium of whiteness these same individuals feel beleaguered and support the Republican presidential candidate who capitalises on anti-immigrant and anti-black feelings.

Trust as a defining factor

The IHDS also found that individuals’ perception of their economic progress is associated with a more favourable opinion of politicians. The IHDS asked how much trust and confidence individuals had in each of the three institutions — politicians state government and local government. If individuals responded that they had hardly any confidence in at least one of these three institutions we define them as having an unfavourable opinion of government. Among those who believed that their households were in better economic condition than in the past 56 per cent had an unfavourable opinion of the government; among those whose view of their own economic condition did not change 58 per cent had an unfavourable opinion of the government; and among those who felt they were doing badly 65 per cent had an unfavourable opinion of the government.

These results suggest that prosperity good governance as well as focus on fairness rather than electoral pandering are likely to bring rewards in the form of political support and increased confidence in government. India may well be doing well on these compared to Pakistan at least if we judge by the feeling of economic prosperity among the population but it is of small comfort. When 57 per cent of the population holds an unfavourable opinion of political institutions it is time to re-evaluate what can be done to increase this confidence. If not for the sake of the nation then in the interest of political survival. The difference in confidence in the political system between those who feel they are doing economically well and those who feel left behind is relatively small; but in a climate of political disenchantment this small difference is perhaps enough to create an electoral tsunami.

Sonalde Desai is Professor of Sociology at University of Maryland and Senior Fellow NCAER. Views are personal