Author Archives: Anil

About Anil

Amateur Economist trying to understand Economic and Monetory policy in India.

India’s exports won’t grow, and the Modi govt’s idea of tariff hikes is unlikely to help

TN NINAN, The Print

The export- excluding mineral oils- during 2011-12 to 2016-17 have barely changed (from $ 249 billions to $ 243 billions). It is half a decade loss. World trade in recent years have been 3.5%. There was a small hiccup in 2014, but it has since returned to normal. India in current dollar term in these 5 years has grown by 24%.

What can be the reason for this low growth.

TN NINAN argues that poor infrastructure such as electricity and poor roads can not be the reason for the same. Indian exports has growth by 140% in 1990′ and a staggring 397% in the decade to follow.

Nor can blame be placed on high price of INR . In 2011 exchange rate was 45 INR /$ and has depreciated to 65 INR/$.  Only in early 2014 did it stay below 60 for a brief period.

NINAN attempt for answer as follows:

If the explanation for the loss of export momentum lies elsewhere, then no one has figured out what exactly it is. There could be sectoral issues that provide some of the answers, but these are unlikely to be the full story. Perhaps it is simply the case that Indian exporters do not have strong negotiating positions with buyers, and therefore tend to get squeezed out disproportionately when trade hits a rough patch. Whatever the explanation, one can say with confidence that the government’s recent focus on protecting the home market through tariff hikes is unlikely to help exporters. Whether it will serve the cause of import substitution remains to be seen. Even if it does, it will nudge the economy towards higher-cost production, and that is not going to help exports.

Strong argument but needs elaboration why exactly is negotiation power weak.



The economics of Jawaharlal Nehru

Niranjan Rajadhyaksha in mint has this piece on economic thinking and its critics at the time. It is quite a short summary of history of the time and times to come

Nehru was essentially a economic modernist, who believed in industrialisation for poverty elimination. 5-years plans was formulated at the time. Inspite of being highly impressed by the growth in Russia in 30’s and 40’s he regarded socialism rather than communism to be soul of new India.  Niranjan put forward the contributors and critics of the time.

The statistician P.C. Mahalanobis built on a model developed by Russian economist G.A. Feldman to provide a theoretical core to the Second Five-Year Plan. An early discussion of the technical details underlying the Indian plans is available in a survey by economists Jagdish Bhagwati and Sukhamoy Chakravarty in the September 1969 issue of the American Economic Review. A clear analysis of the economics of Nehruvian planning was written in 1997 by Ajit Karnik of Mumbai University, who taught me growth models at university.

The theoretical debates about Indian planning models are numbing. Here, I try to focus on four broad principles in the Nehruvian economic strategy to show how Nehru was a hostage to the development economics consensus of his times, both in terms of its insights as well as its policy flaws.

First, the development economists of the day said that the basic challenge for a poor country such as India was to increase its stock of productive capital as well as absorb modern technology. This was in line with what many other nationalist leaders believed in the decades preceding independence. The Estonian development economist Ragnar Nurksehad put capital accumulation at the very centre of his 1953 book, Problems of Capital Formation in Underdeveloped Countries. A.K. Dasgupta, a renowned scholar who taught Amartya Sen, also argued that the primary challenge was capital accumulation, drawing inspiration from classical rather than Keynesian economics.

Second, the speed at which capital could be accumulated depended on the domestic savings rate. The West Indian Nobel laureate W. Arthur Lewis had succinctly presented the problem in terms of how a poor country can raise its voluntary savings rate from 5% to 20% of national income. In short, the main focus of the development strategy was on increasing savings to create resources for asset creation. The Harrod-Domar model that was popular at the time also sought to explain economic growth in terms of the savings rate and the productivity of capital. It is interesting that you will struggle to find subsidies or entitlements in the Nehruvian plans to lift India out of poverty.

Third, the government was to take the lead in industrialisation. This was very much part of the development consensus of those years. The early success of the Soviet experiment had, unfortunately, enchanted many intellectuals. But there was a deeper historical learning as well. The Russian economic historian Alexander Gerschenkron had argued in his theory of economic backwardness that countries that had not yet industrialised did not have to wait for the right conditions to appear. Gerschenkron had studied the development experience of Europe in great detail. He said that institutional innovation was the way forward for those who were late into the game: Germany had used investment banks to push its initial industrialisation, while Russia had used the state (he was referring to imperial Russia before the communists took over).

The Nehruvian plans had a similar logic of using the state as an entrepreneur as well as providing capital to private industry through special development banks in the absence of deep financial markets. This is the famous quest of controlling the commanding heights of the economy. A more technically correct explanation would be that Nehru wanted the state to dominate the production of capital goods and intermediate goods so that the Indian economy has enough strategic depth to withstand any future attacks on its political autonomy. It is a theme that still resonates in some parts of the Indian policy establishment that worries about the growing role of Chinese equipment suppliers in Indian power and telecom sectors. But it was eventually the shortage of food in the late 1960s that forced India to compromise on its foreign policy in return for wheat shipments.

Fourth, there was a deep suspicion of foreign trade. Some scholars believe that this was the reaction of a country that had initially been colonised by a trading company, while others argue it was a more practical response to the declining terms of trade for underdeveloped countries thanks to falling commodity prices after the end of the Korean War. Much of this export pessimism was based on the work of two economists: the Argentine Raul Prebischand the Briton Hans Singer. There was no export strategy in the Nehruvian plans—a flaw pointed out in 1963 by a young economist named Manmohan Singh. The main focus was on import substitution: make at home rather than buy abroad. This not only meant that India failed to take advantage of an expanding world economy, but also that it remained dependent on foreign aid to fund its essential imports. The decision to go into a cocoon was perhaps the biggest economic flaw of the Nehru years.

The longer-term report card is far less impressive, as is now well known. The Nehruvian economic model had already run out of steam by the time of his death. India was left with an inefficient industrial structure, too much government regulation of its economy, an inability to compete in the global market and inadequate supply of consumer goods. It also put India at the mercy of foreign aid givers—ironical because Nehru believed a strong economy was essential to protect Indian political autonomy.

Many other Asian countries switched their economic development strategy after 1965. India failed to do so. It became a laggard. Nehru was too impressed by the ability of governments to manage complex economies. He failed to see that the enlightened bureaucracy he hoped for would end up as the corrupt inspectors of the licence-permit raj that C. Rajagopalachari and Minoo Masani of the Swatantra Party had presciently warned against very early in the planning era.

Nehruvian planning failed to meet its grand hope despite an encouraging start. But important parts of the vision are still relevant in India today: the central role given to economic growth in the battle against mass poverty, a relentless focus on capital accumulation, a higher savings rate to fund asset creation, strategic depth to the industrial structure and fiscal conservatism. All this is a far cry from what recent profligate governments that claim to follow Nehru have done.


RBI and its high interest rate

Prem Shankar Jha (the wire) blames RBI for low growth in India. He specifically put the blame on SubbaRao and Rajan for sticking to inflation target and bringing down the growth.

“The doctrine that both used to do this – Subba Rao implicitly, but Rajan explicitly – is “inflation targeting”, whose central tenet is that high inflation hurts economic growth, and lowering it automatically restores growth. Both therefore made the control of inflation the one-point agenda of the RBI. This doctrine was cock-eyed to start with, but by 2013 so complete was the RBI’s dominance over the ministry of finance, that no finance minister in Delhi (Arun Jaitley) has dared to take the RBI governor to task or challenge the theoretical basis of his addiction to high interest rates.”

He goes on to argue that inflation targeting was a tool devised by advanced economies to mooch of the saving of poor countries.


The truth is that inflation targeting is not an economic tool to foster growth but a political tool devised by the richest industrialised countries to enable them to continue living far beyond their shrinking means, by drawing, free of cost, upon the savings of less fortunate countries.

Inflation targeting attained the status of a doctrine – a one-stop cure for all developmental ailments – only when it was adopted by the industrialised countries in the 1990s. Its rationale developed out of Britain’s exchange rate crisis in 1992. Britain had been living way beyond its means, with an average inflation rate of 11% and a balance of payments deficit of 8% of the GDP for 20 years from the early seventies. Initially, this caused the pound to depreciate rapidly against the dollar. Then North Sea oil hit the market and the pound recovered till it was once more worth well over two dollars at the end of 1978.

Again I don’t agree with inflation going out of the control. The analysis of Jha is quite comprehensive.




Demonitization-Gurumurthy Take

Gurmurthy piece in The Hindu

His contention:

The balloon of HDN was expanding in dangerous proportions. This needed to be reined, otherwise Indian Economy was doomed by 2021. This was a reset.

The growth during UPA years was jobless growth powered by HDN, via high asset price and high private consumption.

Interestingly he faults Govt late introduction of Income declaration scheme late in the day, otherwise this could have fetched 2-3 lacs Cr in tax.

Now he states 45K Cr is black money is already unearthed and 2.9 lacs Cr in under scanner, the yield is far more than any earlier income declaration.

Following demonetisation, there are 56 lakh more assessees, advance tax receipts have gone up by 42% and self-assessment tax risen by 34%. It has also led to an attack on benami assets. Even as intelligence agencies note a 50% drop in hawala-related calls post demonetisation, nearly 2.24 lakh shell companies that have been used for hawala have been uncovered; 35,000 have been found laundering ₹17,000 crore; one of them, ₹2,484 crore.

Everyone has their numbers.



Did CAG contributed to downturn India Facing

Kapil Sibal scathing piece on ex-CAG.


Presumptive loss is actionable. Actual loss is not. Ironic but true. It seems Rs 2,50,000 crore lost on account of demonetisation is not actionable because the Comptroller and Auditor General of India (CAG) says he cannot go after policy decisions. Also, no-one can be held responsible not just for over 100 lives lost of people forced to stand in queues, but also for the yet untold stories of those who lost loved ones for want of cash in medical emergencies. But his predecessor not only questioned the policy decision of not auctioning spectrum and coal blocks but also conjured up astronomical figures of alleged presumptive loss. I suppose institutional positions change with the change of CAG. Institutions don’t matter, people do. That is why we often witness the ugly spectacle of the National Investigation Agency and the CBI doing a U-turn, depending on the political masters they wish to please.