Category: Economics

A caveat to India

According to the World Bank (Calculated using Atlas method)India is a low income country along with 53 other countries. Low income countries are countries which have a GNI per capita of less than $876. So the Indian development projects are aided by the International Bank For Reconstruction And Development (IBRD) and the International Development Association (IDA).

On August 1st 2006, the World Bank (WB) approved the Orissa Socio-Economic Development Loan II which provided development aid to the state on Orissa inIndia. The commitment of the entire project was a huge $225 million.

Surprisingly, health, education and the primary sector each gets 10% of the aid. (I was of the opinion that these were the crucial areas where growth is needed.) A greater chunk of aid is going for the development of Public administration, law and justice.

Let’s take a look at the Orissa economy. According to Census 2001
1) The overall literacy rate in the state was 63.61.
2) Sex ratio was 972.

According to the Economic times, ‘Despite its rich endowment of mineral wealth, forests, lakes, rivers and a long coastline facing South-East Asia, Orissa remains among the poorest of India’s major states.’ And also that Orissa has the third highest concentration of scheduled tribes inIndia, accounting for 22.2 per cent of the total population and more than 40 per cent of the total number of poor.’

The aid is flowing in and we are accumulating large external debt which is a burden on the economy as a whole. But I wonder if the outcomes are pro-poor or for that matter even pro-development.

Earlier caveats have been expressed by Dweep and Alex.

Greg Mankiw’s blog: Letting poor nations prosper would be worth a lot more than the equivalent amount in foreign aid.

Amit Bhaduri envisages Development with Dignity

In Amit Bhaduri’s recent book ‘Development with dignity’, he has argued perspicuously the case for a full employment in India. It is a great book to read for economists and non-economists alike. (Amit Bhaduri is internationally famous as an unconventional economist.)
I have listed some of his arguments below.

1) India’s continuation to rely on English has created a linguistic divide and inequality of opportunities between those who know and those who do not know English.

2) He says that agriculture is so overcrowded and devoid of earning in poor states like Bihar and MP, that even selling peanuts on the streets bring more income. There is a very high prevalence of disguised unemployment.

3) ‘India’s immense diversity creates a bewildering variety of identities, and politicians try to manipulate them to their advantage in the game for gathering votes at any cost.’

4) ‘India has given its citizens political rights, but not economic rights to a decent livelihood, with or without economic liberalisation.’

5) ‘Narrow minded policies focussing on ‘cost’ reduction fail to see that cost is a concept defined in a particular social context of contending economic interests.”The worker might think of profit as the ‘cost’ he has to bear for being employed, just as the employer thinks of wage as the ‘cost’ of employing the worker!’

He has shown us unequivocally how to go about the attainment of full employment. He has stressed the need for wider participation in the development process.Moreover, he is of the view than FDI has more positive outcomes for growth than the portfolio investments buy FII’s.
Bhaduri’s main stratagem was ’employment first, with growth as outcome’ and not ‘growth first, and full employment later.’

(The other main attraction of the book is that it comes at a frugal price of 50 INR and it is published by the National Book Trust, India.)

Here is Frontline’s review on the book.

Development: A suspicious Alternative

Recently, I came across an article by Jagdish Bhagwati, a renowned economist at Columbia University. After reading the article I was in a doubtful state of mind.

His main proposal to combat poverty in Africa was ‘If it is hard to think of aid being spent productively in Africa, why not spend elsewhere for Africa”

He was of the view that Africa would not be able to absorb the aid efficiently. So it would be profitable and more pertinent to spend the aid for Africa in Developed countries itself, by conducting research for development of new vaccines and cures for crippling diseases afflicting African nations. I call this proposal strange. Because then Africa for ever after, will’be dependent on these rich nations.

This would further widen the disparities in Income between developing and developed countries. It is a wise plot aimed at reducing aid to developing nations.

He goes further to state that he is against those like Jeffrey Sachs who insists that the aid ought to be spent in Africa itself.

It wouldn’t be difficult to predict the outcome. The rich nations would not have to hesitantly part with the aid, instead they would be able to invest in within their geographical territories itself.

What do you feel about Jagdish Bhagwati’s proposal’

Monetary aggregates

Money

Economists have proposed a functional definition of money, i.e. any object that is generally acceptable in facilitating the exchange of goods and services.
It took me a lot of time to come up with the meanings of the monetary aggregates in the Indian context. This post gives an idea about the composition of various monetary aggregates. These aggregates are commonly used in journals relating to economics, so these definitions will help in comprehending the data better.

What are M1 and M3′

M1 and M3 are standard measures of money supply. Other standard measures are M0 and M4. Each monetary aggregate is ranked according to the degree of liquidity it provides. Monetary aggregates measure the amount of money circulating in an economy.

M0 includes only currency in the hands of the public, banks’ statutory reserve deposits held at the central bank and banks’ cash reserves. In India it is usually referred to as reserve money. It is controlled by the central bank of the country. (Link:RBI)

Narrow money (M1) is the sum of currency in circulation and demand deposits at monetary institutions.

Monetary aggregate (M2) is defined as M1 plus post office savings, bank deposits and residents’ deposits in foreign currency at deposit money banks.

M3 is defined as M2 plus other time deposits with banks. The components of M3 vary between countries. It is also called broad money.

M4 or L is referred to as very broad money. It comprises M3 plus treasury bills, negotiable bonds and pension funds.

Narrow money measures cover highly liquid forms of money (money as a means of exchange) while broad money includes the less liquid forms (money as a store of value).