“For what it’s worth, a key conclusion from the IMF’s new World Economic Outlook is that recessions caused by financial crisis typically end with export booms, with the trade balance improving,on average, by more than 3 percent of GDP. I find this a disturbing result: we’re now suffering from a global financial crisis, which means that the usual driver of recovery will only be available if we can find another planet to export to.”
Paul Krugman

With results still coming in, projections show the United Progressive Alliance is likely to win about 250 seats, making it a shoo-in to form the next government and provide continuity, a stable administration and progress on key economic and corporate reforms.
Wall Street Journal, May 16 2009

Prime Minister Manmohan Singh’s electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country’s economic growth as it struggles to free half a billion people from poverty…..Political stability will make India a more attractive investment destination as Singh, 76, seeks the funds to stimulate Asia’s third largest economy.
Bloomberg, May 18 2009

Many are called, but few are chosen, as the saying goes. But could it just be that this time around, and on a one-off, never to be repeated basis, India might find itself right there in the midst of things, with a 50-50 opportunity to add its name to that select and noble band, the chosen few. After all, someone has to lead the next global charge? The majority of the developed economies are either bogged down in the substantial quantities of debt that they desperately need to pay off, or weighted down by those elderly populations who are weakening consumption growth and leading to export dependence (Germany, Japan…). And as Krugman humorously points out, someone will have to add the extra demand which will allow global trade to start to grow again, so why should India not supply a significant part of this new demand, after all we are more likely to find consumers in India than we are on Mars. (more……. )

Here’s an earlier IEB post on Wadhwa’s research — Don’t Try Kicking Sand In America’s Face.

On another note, Sunita Narain’s at it again — after colas, now it’s edible oils. (HT: Amit Varma, via email)

Richard Fisher, President & CEO of the Federal Reserve Bank of Dallas, tells it like it is. Commenting on C-Span about the “Buy America” provisions in the stimulus package:

Protectionism is the crack cocaine of economics. It may provide a high. It’s addictive. And it leads to economic death…We just cannot afford to go down that path. And I hope our senators, Democrats and Republicans, will be very sensible on that front (Link)

Alas, I fear we’re already started going down this slippery slope, whether it’s the “Buy American” guff or this ban on TARP recipients hiring H1-B visa holders (HT for latter link: Mohit Satyanand, via email)

So, as we enter November, and a number of Indian indicators start to improve, it is certainly worth asking ourselves, has India turned the corner? Will India lead the emerging markets charge during the next global expansion?

I am not, I am sure, alone in feeling that this is a distinct possibility, and, indeed, a similar view was expressed only last week by Sharmila Whelan, senior economist at CLSA Asia-Pacific Markets.

“We do expect the Indian business cycle to be the first to bottom in Asia. And, it should, in theory, be first to emerge,” Sharmila Whelan, senior economist at CLSA, said “The worst will be over by mid-2009 and by 2010 you should be able to see the next investment-led business cycle taking root.”

To the two reasons Wehlan offers us as an explanation for why we should expect India to do better than most (and, perhaps of particular nore here, better than China) – the fact that Indian trade constitutes only about 32.5% percent of gross domestic product (only about half the China figure – thus India is better protected from fluctuations in global trade) and the fact that India (unlike say Russia or Brazil) will be a large net beneficiary from falling commodity prices – I would add a third, India’s very favourable demographic profile, which will mean that over the next decade India can continue to draw on the benefits of a young and rapidly growing labour force at just the time when 30 years of once child per family policy starts to bite really hard on the new labour market entrant cohorts in China (for example).

Inflation Screeches To A Halt

India’s inflation held near a five- month low at the end of October, seemingly validating the central bank decision to reduce interest rates to bolster economic growth. Wholesale prices were up 10.72 percent in the week to Oct. 25 from a year earlier after gaining 10.68 percent in the previous week, according to the latest data from the commerce ministry.

Of equal importance is the fact that the weekly rate of inflation (week on week) recently turned negative, as energy and commodity prices drop back, and as a result the wholesale price index has now been dropping for eight consecutive weeks after peaking in the August 30 week.

One of the reasons inflation is weakening is of course the fact that Indian GDP growth has been slowing, and the current growth rate is clearly significantly below the 7.9 per cent rate registered in the second quarter (2008 calendar year) a rate which was already notably lower than the 8.8 per cent one reported for the January to March quarter. But with countries from the US to Germany, to Russia and maybe even China (who knows at this point) falling into or near to negative growth, then even a 7% rate looks decidedly healthy to me. What was it they were saying not so long ago about “Hindu growth”? Better a tortoise than a hare in some contexts, but then again, a 7% tortoise is certainly no mean one.

It is interesting to note in passing that the IMF – in revising their forecast down to 6.3% for 2008 – stated that they consider this level to be considerably below India’s potential growth. For the time being, it seems, the old “overheating” debate has become a thing of the past. These days we all love India, now don’t we?

Ironically, the current global situation is also making India’s measured pace of economic reform look wiser than before. At a time when Western countries are frantically nationalising banking assets, the Indian government’s reluctance to sell more than 49% in its state-owned banks—which control some 70% of banking assets—now seems reassuring. In addition, India has not yet introduced full capital-account convertibility, which protects its currency, while its careful control of foreign borrowings by domestic companies limits dependence on the global financial system. Regulators have also periodically introduced curbs to slow the formation of potential asset bubbles, such as higher provisioning and prudential requirements on real-estate lending.
The Economist

“For India we have marked our forecast down to 6.3% of 2009 calendar year. That is considerably below what we consider to be India’s potential growth,” IMF deputy director for Asia Pacific region, Kalpana Kochhar said. “There is a specific meaning to “potential” – it is the rate at which you can grow without causing inflation. And for India we estimate that to be 7.5% to 8%. Our forecast of 6.3% would put it quite a bit below the potential,”.

Obviously there are still varying forecasts, with the RBI and the central government being rather more optimistic than most, although India’s central bank did reduce its growth forecast on October 24 down to 7.5 percent from 8 percent for the year to March 31. This prediction, if fulfilled, would mean the 2008/09 expansion would be the slowest in four years, but then in the midst of the largest global recession since the 1930s that doesn’t sound so bad, now does it?

Interest Rates Coming Down and Monetary System Stabilising

The Reserve Bank of India cut its benchmark rate on Nov. 1 for the second time in two weeks, joining policymakers across Asia in lowering borrowing costs to shield their economies from the global financial crisis. For the first time since 1997, India’s central bank on Nov. 1 deployed all three of its main tools to shore up growth after inter-bank lending rates climbed to as much as 21 percent. The move seems to have substantially improved liquidity in the financial system, and overnight call rates fell sharply.

The Reserve Bank of India lowered its benchmark repurchase rate to 7.5 percent from 8 percent. At the same time the central bank also reduced the cash reserve ratio to 5.5 percent from 6.5 percent, and and cut the amount of money lenders are required to keep in government bonds to 24 percent from 25 percent.

The RBI is also considering giving an additional 100 billion rupees ($2.1 billion) each as lines of credit to National Housing Bank and Small Industries Development Bank of India, according to Finance Minister Palaniappan Chidambaram speaking during last week. The idea here would be to increase cash flows for mortgages and for small companies.

Rupee Rises Slightly

The rupee climbed 3.8 percent last week to close at 47.66 a dollar at the 5 p.m. in Mumbai on Friday. The increase represents the biggest weekly gain since March 1996, making the rupee currently the best performer among Asia’s 10 most-active currencies outside Japan.

In addition on the foreign currency front, the Japanese Yen is also dropping back slowly against USD, which means that yen “carry” may be slowly starting to recover. A surge in USD-Yen (and hence yen carry) would be another clear sign some key emerging markets we about to start moving, in my view. As we can see from the chart – unless we have more “turmoil” to cope with moving forward – October 24 seems like it represents some kind of turning point.

Stocks Start To Tick Up Again

The Bombay Stock Exchange Sensitive Index has also rebounded, and is up 17 percent since the bottom on Oct. 27. The index added 2.4 percent on Friday. The MSCI core index for India is also up 6.74% so far this month. After all that falling over the last twelve months, it is that little upturn since the start of November (see chart below) that we would like to see consolidate and continue. Of course, this may be yet another false start, and there may be another shoe to drop, but perhaps there are reasons for just a little more optimism at this point.

And the general MSCI Emerging Markets Index also looks as if it may well have turned.

Emerging Bonds Start To Rebound Too

Emerging market bonds have also started to recover, if we look at the JPMorgan EMBI+ chart, we can see what appears to be quite a robust “bounce back”. Of course for some countries (Eastern Europe, Argentina etc) the worst is still not over, but India may well be relatively insulated from too much fall-out here.

Not Much Sign Of A Rebound In Commodities Yet

On the other hand, with growth in the OECD countries likely to be bordering on negative in 2009, and Russia and China both likely to have substantial slowdowns, there are not too many signs at this point of any recovery in commodities, if we look at the Reuters-Jefferies chart.

But since India is a large net commodities importer, this is hardly bad news. Oil prices were sedentary Friday following a large scale sell-off during the week, – and this despite a forecast from the International Energy Agency that put the price of crude at $200 per barrel by 2030. Light, sweet crude for December delivery rose 27 cents to settle at $61.04 a barrel on the New York Mercantile Exchange, although the contract had dropped below $60 in earlier overnight electronic trading for the first time 19 months. This is all now a far cry from June, when oil was trading at $147.

India’s Foreign Exchange Reserves Continue to Fall

India’s foreign exchange reserves declined again at the end of October – for the sixth consecutive week – and fell by $5.532 billion to reach $252.883 billion for the week ended October 31. India’s reserves have fallen by more than $31 billion in the past one month alone, and are now well below their $318 billion April peak. But on the other had they are still substantial and not far different from what they were 12 months ago, following a very substantial rise over the previous nine months. So if they do not fall too much further, then it isn’t evident that there is any real problem at this point.

Sustained dollar selling by the Reserve Bank of India in the forex markets, huge amounts of FII outflow from the domestic equity markets, and the revaluation of the reserves have been the main factors pressurising India’s reserves, but all these factors are symptomatic of the general pressure which has come to bear on “higher risk” emerging market economies as a whole as the financial turmoil and associated uncertainty have raged in the United States and Europe, and there is little real evidence of “India specific” factors at work here, indeed Indian exceptionalism would rather be in the fact that – absent commodity export dependence – India’s reserves have not been taking the same sort of pounding Russia and Brazil’s have.

The Reserve Bank of India (RBI) also said on Friday that it will lend foreign exchange – via foreign excahnge swaps – to banks with overseas operations to help them meet their lending requirements, a move that many Indian banks had been asking for, and which should help ensure adequate funding for their foreign subsidiaries. Following the central bank’s announcement, banks will buy dollars from RBI at the reference rate plus three-month forward premium and will return dollars to RBI after three months, in case of three month swaps.

Additionally, the central bank has also extended a lifeline to banks for funding the swaps by allowing them to borrow through its regular liquidity adjustment facility (LAF). The LAF is the window through which it lends to or accepts money from banks, for the corresponding period at the prevailing policy rate.

Banks borrow through the LAF window by pledging government bonds. They are required to invest at least 24% of their lendable funds in government bonds; this portion of their deposits is called the statutory liquidity ratio, or SLR. In view of the tight liquidity conditions, RBI reduced the SLR by 1% to 24% on 1 November. RBI also said on Friday that if a bank did not hold enough government securities to pledge, it would consider relaxing the SLR requirement if the bank approached it.

The use of swaps helps banks obtain cheaper funds for buying dollars because they can now borrow from the central bank repo window at 7.5%. Previously banks needed to convert their rupee deposits – raised at a rather costlier 10.5-11% – into dollars.

India’s Industry Resists The Global Slowdown

Despite the fact that India’s industrial output plummeted to a 1.3% year on year rate in August, there are some signs that the situation may be improving. The first of these are the September performance indicators for the coal and cement sectors, the rise in which pushed up the growth in output in the core infrastructure industries to 5.1% in September. According to government data made public on Friday, coal production was up by 10.7% in September 2008 while cement production rose by 7.9%.

Core sector growth in August was just 2.3% – and the six core industries have a weight of 26.7% in the index of industrial production (IIP). On the other hand growth in electricity generation remained weakish – at 4.4% – in September. If compared with the growth rate in August this year, electricity generation was the worst performer among the six sectors, with an abysmal growth of 0.8% in August 2008. Of the six core industries (crude oil, petroleum refinery products, coal, electricity, cement and finished carbon steel), only coal and cement really registered strong growth rates in September 2008. So I guess we have to wait till mid-week now to see the complete September figures.

However, despite what may well turn out to be an improvement in September IP over the August number, it does looks very much as if activity at Indian factories fell to its lowest level in three and a half years in October as the global financial crisis and slowing export demand hit the country’s manufacturing sector. The ABN AMRO Bank purchasing managers’ index (PMI), based on a survey of 500 companies, slumped to a seasonally adjusted 52.2 in October, its lowest since the survey began in April 2005 and sharply below September’s 57.3. A reading above 50 signals expansion while a figure below 50 suggests contraction, and the manufacturing PMIs are interesting, since they do offer us a sort of “real time” snapshot of what is actually happening.

“The outlook for the manufacturing sector appears to be bleaker in the backdrop of tough local and global economic conditions,” said ABN AMRO Bank N.V. senior economist Gaurav Kapur.

So the point here would not be that Indian industry is in absolutely perfect condition (it is obvious that it isn’t), but rather that, at a time when global manufacturing generally is taking a huge beating, Indian industry is hanging on in, by its fingernails, but it is hanging on in.

In comparison, the JPMorgan Global Manufacturing PMI posted 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.

Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.

“October manufacturing PMI data reinforce the stark retrenchment that the sector is currently facing, with production, total new business and new export orders all falling at record rates. The latest Output Index reading is consistent with a fall in global IP of almost 8%. The only positive from the surveys was a decline in input prices for the first time since August 2003.”
David Hensley, Director of Global Economics Coordination at JPMorgan

Returning finally to India, perhaps somewhat significantly the export order index in the PMI survey contracted for the first time in the survey’s history, coming in at 49.7 in October, compared with 53 in September. Manufacturers blamed poor global financial and economic conditions for the result. But this should not surprise us too much either, since India’s exports grew at their slowest pace in 18 months in September. Overseas shipments, which constitute about 15 percent of the Indian economy, were up 10.4 percent (to $13.7 billion) from a year earlier, following a 27 percent gain in August. Imports also increased – by 43.3 percent to $24.4 billion, with the result that the trade deficit widened to $10.6 billion.

“The global financial and economic headwinds adversely affected foreign demand for Indian manufactured goods,” said Gaurav Kapur, an economist at ABN Amro Bank in Mumbai. “The growth of total incoming new work to the Indian manufacturing economy lost considerable momentum.”

So, in conclusion, I am not saying that everything in the Indian garden is simply perfect, rather I am simply pointing out that during times which are hard for everyone, India has some advantages to lean back on, and looks set to have a lot less serious downturn than many other emerging economies may experience. So to end, almost where I started, with CLSA’a Sharmla Whelan, I do expect the Indian business cycle to be the first to bottom in Asia, and I would most certainly agree that “it should, in theory, be first to emerge”.

Unorganised and organised retail must coexist and flourish in India…

After almost scaring the Tata Motors away from West Bengal, Mamata Bannerjee has now trained her guns on Reliance Retail. Well, Reliance Retail should be used to being targeted by feisty women politicians. Immediately after coming to power in Lucknow, Ms. Mayawati had earlier undertaken a similar exercise in UP.

All this is taking place when behemoths of international retail are trying to enter the Indian market. Tesco has chosen to come with Tatas, while Reliance has tied up with Wincanton. The big daddy of them all, Wal-Mart is coming to India courtesy the Bharti group.

In the September edition of Pragati-The Indian National Interest Review, Prashant Kumar Singh makes significant observations about the confusion surrounding retail industry in India. He rightly notices that-

The debate over retail in India has been fixated on the growth of organised retail, entry of international retailers and concomitant demise of the traditional retailer. The spectre of ogres like Wal-Mart gobbling small retailers has completely paralysed the government on the policy formulation front; not because of any real concern for small retailers but more out of their perceived political clout. This lack of policy initiatives for boosting and regulating organised retail is unfortunately based on the fallacy that modern retail and unorganised retail are necessarily antagonistic.

…Available data provides sufficient evidence that traditional retail is under no immediate threat from organised retail. With the present rate of growth of organised retail of 45 percent per annum, any structural changes brought about by gradual policy shifts will take at least a decade before unorganised retail feels the heat. This assessment is not to condone continued government stupor towards the unorganised sector on the issues of credit availability, access to distribution channels, and realisation of fair price for the produce. It is, instead, meant to spur the government to initiate concrete measures to support the traditional retailers.

…Given the benefits of organised retail, the role of foreign direct investment (FDI) needs to be analysed. It is fallacious to prescribe FDI as the panacea for all the ills plaguing organised retail. The eagerness of international giants to enter Indian markets can be attributed to saturation of the developed markets and low penetration of formal retail in India. The entry of FDI in retail will tilt the balance between suppliers and retailers, force smaller players to adapt and differentiate, and bring consolidation in the sector. The accompanying direct benefits are substantial: increase in exports due to high level of sourcing from India, incorporation of global best practices, investments in the complete supply chain–especially in technologies relating to cold chain, food processing and IT, increase in product variety and categories, increase in employment, and secondary benefits of modern agriculture and shopping tourism. Moreover, this FDI in retail will arrive without any sops and tax breaks from the government, unlike IT and auto-manufacturing sectors, where state governments have been bending backwards to attract investments.

Prashant Kumar Singh makes a strong case that with the right government policies in place, “the ecosystem of the retail industry in India will then adapt itself to accommodate the two seemingly divergent strands of retailing, evolving into an indigenous Indian retail model”. To read the complete piece titled “Retail in Doldrums“, download the community edition(pdf) of the latest issue of Pragati-The Indian National Interest Review.

Dr Manmohan Singh the prime minister has routinely relied on platitudes (instead of on incentives) to motivate the UPA government’s policies. But he is getting even the platitudes wrong. In a country where the average annual per capita income hovers around an unacceptably low US$1000, he wants people to earn less. Why? Because, according to him, earning less, and expecting to earn less, is a national duty.

By equating a degree of self-sacrifice with national duty, the PM has tried to make a moral argument. He has said that this is what corporates and highly paid executives owed in the endeavour to contain prices and keep the overall growth momentum on track. While this has a populist touch and will appeal to an opinion that is ready to view corporates as “fat cats”, private employment is increasingly the preferred option for most educated persons.

Sectors characterised by “significant market power” in the hands of a few producers have a societal obligation to assist the government in moderating inflationary expectations, the PM rounded off. [TOI]

He has gotten it exactly wrong. The national duty of every citizen is to make as much money as legally possible. Anyone who suggests otherwise cannot have the best interests of the Indian people at heart. Oh, he’s only referring to the top executives, you say? Well, first, depressing wages at the top will cascade down and result in lower earnings for everyone in the pyramid (just as increasing wages at the top will increase wages for everyone). And as a matter of principle, just how does making the rich earn less help the nation? In fact, it does just the opposite. It would have been one thing for Dr Singh to call upon the rich to deepen the culture of philanthropy. But to equate “self-sacrifice” with “national duty” is dangerous nonsense.

Dr Singh shamelessly masks his government’s failure to ensure free, competitive markets—and prevent the build up of significant market power—by claiming that monopolists have societal obligations. That’s dangerous nonsense too. The solution to the build-up of market power is further liberalisation and effective regulatory oversight. Dr Singh’s admission that there are sectors where companies have significant market power calls for moving forward with the economic reform process. Just what happened to the privatisation (okay, disinvestment) agenda?

We have said this before, and we say again: Dr Manmohan Singh has done immense harm to India’s future. The evil that he has done will live long after him. The good was interr’d with P V Narasimha Rao’s bones. Corporate India would do well to ignore the shameless moral poseur. Yes, it’s late in the day for this government. But Dr Singh should go. [See previous calls.]

The events had their share of coverage in the mainstream media– Indian, African and western. However, the landmark event deserves much wider appreciation and analysis than provided by the perfunctory news reports covering the events.

On one hand, western analysts tend to see all major Indian initiatives on Africa, including this summit, through the prism of competition between the burgeoning economies of India and China. On the other hand, many African commentators have warned their own leaders about India’s intentions in what they have disparagingly labelled as a “second scramble for Africa”.

The key drivers for this summit and other Indian initiatives on Africa go beyond the traditional factors raised by most analysts. It is not limited to containing or matching Chinese economic interests in Africa or answering India’s impending quest for energy security. Unlike China, India has had a historical relationship with the African continent for centuries, based on trade with the eastern and southern coasts of Africa. The presence of a large Indian diaspora in Africa for over two centuries also provides India with a unique advantage over its Asian neighbour. India’s quest for energy in Africa, unlike China, is not a core component of the Indian government’s energy security policy; rather, it is part of its bid to diversify energy sources.

So what was the rationale for the India-Africa summit, if not mimicking the China-Africa summit last year? It is an obvious indicator of the renewed drive in the India – Africa story. Current global equations and recent Indian policies indicate that India’s engagement with Africa has shifted from the old issues of colonialism, non-alignment and South–South cooperation to issues of trade and economy.

Ever since India’s economic revival in the mid-nineties, India’s foreign policy has been increasingly driven towards finding export markets, attracting foreign capital and know-how. This policy shift is echoed across Africa as most of the economies there are going through economic reforms and liberalisation. The Indian diplomats have been working overtime to garner support for its quest for a seat in the UNSC in the continent. The Indian stand on the western agricultural subsidies at the WTO negotiations has been in consonance with the views of most African nations.

The recent improvement in India’s economic relations with Africa, however, cannot be attributed solely to the new focused approach of the Indian government. Another factor is the ‘outward-looking’ attitude of India’s private sector. Tempted by the easy availability of capital and driven by the search for new markets, Indian companies have been eagerly targeting those regions in Africa, in which they had shown little interest until recently. The economic boom in India and the success of both home-grown and NRI/PIO (Non-Resident Indian/Person of Indian Origin) companies in Europe and parts of South America have given Indian businesses the confidence to venture into Africa.

Indian companies’ increased activities in Africa have spurred the government to link its diplomacy in the continent more explicitly to its economic requirements. The Indian engagement reflects private-enterprise led bottom-up approach of its economy. In tandem with this policy change, India’s commercial ties with Africa have grown as the India-Africa trade volume has increased by 285 percent to 25 billion U.S. dollars in the last four years.

African countries hold India in high esteem – in particular, on account of its democratic institutions and the manner of its economic growth. India, as a democratic developing country, serves as a role model for these countries and is a source of support in various sectors, especially agriculture, services and small- and medium-scale manufacturing. Above all, it is the new image of India -– that of a leader in the information technology industry, biotechnology and telecommunications -– that has attracted Africa to India.

For their part, African political leaders would like their constituencies to believe that India and Africa are making a joint effort to improve the well-being of their peoples and societies. It is here that India’s real influence in Africa will emanate– from its success in achieving sustained economic growth and lifting many out of poverty in a democratic, post-colonial setting. It is for the Indian political and bureaucratic masters to remember that the right message to an external constituency in such an environment will be only delivered by a continued focus on domestic reforms. The Indian leadership will be judged by its African partners on how India progressively tackles various impediments to its economic growth in fields of infrastructure, education, labour and other roadblocks. It is imperative that India is perceived to be addressing its own developmental challenges successfully; only then will others, including Africa, consider it as an attractive and rightful partner for the future.

Swaminathan Iyer took the words out of this bloggers mouth. The UPA government, he writes “has suddenly shifted from protecting Indian farmers against cheap imports to protecting the consumer by cheapening imports”. He is referring to the ban on rice exports (which follow the export of wheat late last year, followed by the ban on export of maize and pulses).

The April 2008 issue of Pragati called for the government to free the farmers. The UPA government did just the opposite—far from allowing Indian farmers to benefit from selling their produce at record prices, the government is forcing them to sell at artificially low prices. So who is hurting the farmer? And why is silence replacing Sainath? And next year, when farmers find themselves unable to repay their loans, the UPA government—if it is in power at that time—will simply increase payouts and write-offs.

In the end the consumers pay the farmers: only the government gets itself into the equation causing unnecessary leakage and wastage.

Unnecessary? Why, isn’t it at least helping curb inflation? Not quite. As Mr Iyer explains:

The lesson is clear. Curbing exports is a form of national hoarding. If every country tries to hoard food, food prices will naturally rise. Governments would like to believe that hoarding by traders is terrible, whereas hoarding by governments promotes the public interest. But the impact on prices is exactly the same in both cases. Indeed, when governments start to hoard food out of panic, the panic itself stokes further inflationary fears.

That is why I am not optimistic about the Indian government’s anti-inflation package. The government thinks it is improving domestic supplies and hence bringing down prices. In fact the government is adding to the global hoarding problem, and stoking panic too. So, expect food inflation to keep rising in coming months. [TOI]

It’s all very well, you say, but what should the government do when poor people can’t afford food? Well, it should buy food grain at market prices and distribute it to those who need it. That way it will least distort the price signals that farmers receive and allow them to benefit from the good times. And by spending taxpayers money in a targeted manner—only the poor will enjoy cheap food—it will spend less. That is, if the government actually wanted to address the policy challenge, and not flail about paranoid of losing votes.

Here lies the crux of the matter. If use of new seeds, fertiliser use, irrigated land, cropping intensity, and private capital stock growth are not rising fast enough, then where is this credit going? To put it another way, what is the Indian farmer doing with the extra credit if he is not using it in seeds, fertiliser, water, capital or land? [IE]

differential effect of international trade on the demand for human capital across countries has been a major determinant of the distribution of income and population across the globe. In developed countries the gains from trade have been directed towards investment in education and growth in income per capita, whereas a significant portion of these gains in less developed economies have been channeled towards population growth. Cross-country regressions establish that indeed trade has positive effects on fertility and negative effects on education in non-OECD economies, while inducing fertility decline and human capital formation in OECD economies.

The researchers suggest that more than “the geographical and institutional factors, human capital formation, ethnic, linguistic and religious fractionalization, colonialism and globalization”, it is international trade that has had an “asymmetrical effect on the evolution of industrial and non-industrial economies” leading to a remarkable change in the distribution of world income in the past two centuries.

The expansion of international trade in the second phase of the Industrial Revolution enhanced the specialization of industrial economies in the production of industrial, skilled intensive, goods. The associated rise in the demand for skilled labor has induced a gradual investment in the quality of the population, expediting a demographic transition, stimulating technological progress and further enhancing the comparative advantage of these industrial economies in the production of skilled intensive goods. In non-industrial economies, in contrast, international trade has generated an incentive to specialize in the production of unskilled intensive, non-industrial, goods. The absence of significant demand for human capital has provided limited incentives to invest in the quality of the population and the gains from trade have been utilized primarily for a further increase in the size of the population, rather than the income of the existing population. The demographic transition in these non-industrial economies has been significantly delayed, increasing further their relative abundance of unskilled labor, enhancing their comparative disadvantage in the production of skilled intensive goods and delaying their process of development.

The most interesting portion of the paper is Part 6, the one dealing with Historical Evidence, which includes an analysis of the contrasting paths of development of UK and India over the last two centuries.

The evidence demonstrates that during the nineteenth century the UK traded manufactured goods for primary products with India. Consistent with the proposed hypothesis, industrialization in India regressed over this century whereas industrialization in the UK accelerated. The process of industrialization in the UK led to a significant increase in the demand for skilled labor in the second phase of the industrial revolution, triggering a demographic transition and a transition to a state of sustained economic growth. In India, in contrast, the lack of demand for skilled labor delayed the demographic transition and the process of development. Thus, while the gains from trade were utilized in the UK primarily towards an increase in output per capita, in India they were more biased towards an increase in the size of the population.

The concluding remark about the “slow transition of less developed economies into a state of sustained economic growth” is likely to gladden the hearts of most Indians. If “international trade accentuates the initial patterns of comparative advantage” and once India has slowly transited onto the path of sustained growth, then the Indian policy makers can rejoice at having done all the dirty, hard work. The growth trajectories of population, human capital and per capita income will take care of themselves, courtesy the Unified Growth Theory. Is it really that simple?