Category: India

To Economists: please pay attention to the ‘real’ problems

A talk by Arundhati Roy and watching Peepli Live has motivated the contents of this post largely. I have been forced to rethink what ‘economics’ as a discipline should do in a country like India. How can it contribute to economic growth and human development. It is often forgotten that, economics studies the big black box that transforms the labour of the labourers into commodities for consumption by the labourers. People or rather, people who work, appear at both the ends of the tunnel. The black box or the tunnel consists of varied actors, markets, institutions, laws, power groups, social classes, etc.

Some economists try to make sense of this complex interaction using tools such as game theory, which throws light of certain aspects of the interaction. This in turn is supposed to aid in the design of better institutions. A few study labour, the main actor in the whole economic process. Some look at institutions and how various legal arrangements affect the economic outcomes. It remains to be asked: outcomes for whom’ In this manner, the entire profession of economics has been divided into various sub-disciplines, each specialising in a particular aspect of the economy. And it is evident that communication between the above mentioned sets of economists happen rarely. Very often, the larger picture is forgotten. Each group presents their results with a tremendous sense of certainty, which is entirely misplaced. And, the joke that economists love their ceteris paribus clause comes true here. Except that, the clause in this case, assumes as constant the remaining processes or aspects of the economy!

Who are the real producers in an economy’ What role do farmers (small, marginal and large) play in our society’ Do they live in dignity’ When inflation occurs, do these farmers get more incomes’ Or do the intermediaries pocket the increase’ Are proper institutions in place to provide them with adequate credit’ Can these formal institutions compete with the informal ones, such as money lenders and chitti funds’

It is accepted that farming is not a profitable enterprise any more. Policy makers are calling for industrialisation. They want the farmers to come away from their lands and work in industries. And so arises the slums in and around major cities, where their living conditions are perhaps worse than in the villages. Or, most of them are forced to become construction workers. Urbanisation implies buildings, which creates construction jobs in plenty. Once the space in big cities are exhausted, the urbanisation will take place in small cities. Workers will be in demand. In short, labour migration and increasing labour distress, owing to improper housing conditions will become even more intense. It is time, serious attention is paid to farmers and the role of farming in the development of India.

To conclude, it is time we paid more attention to the condition of India and not blindly follow academic fashions. It is the duty of the civil society and especially, the academicians to study the problems and issues thrown up by the society. When the problems of the majority of the population in India –those who live in the rural areas, those who work in the informal sector and those who are farmers– are forgotten and relegated as ‘deviations from the normal’ or ‘problems of the Indian economy’ and not as characteristics of the society we live in, it is indeed a pitiable situation.

V K R V Rao: The Entrepreneur Economist

The contents of the following post was written over a year ago for an in-house publication. Hence, the tone of the post is different from that of the rest. And since we are more enamoured by American economists these days, this is a timely post, which talks of one of the many great economists India has seen.

V K R V Rao founded Delhi School of Economics (DSE), Institute of Economic Growth (IEG) and Institute for Social and Economic Change (ISEC). These institutions were established so as to impart economics education in India, which would compete with world-famous institutes like LSE, Cambridge, etc. He was also instrumental in establishing the Indian Council of Social Science Research (ICSSR). Apart from establishing these institutes, Rao also served in various administrative positions – Planning Commission Member, Union Cabinet Minister first for Shipping and Transport and then Education and Youth Services. For the services rendered, he was awarded Padma Vibhushan in 1974.

Rao completed his Master’s in economics from Bombay University, where he worked on the taxation of income in India for his Master’s thesis. He then moved on to Cambridge to pursue his PhD, where he became a student of Keynes. For Rao, economics was a social science that would aid in improving the human condition. In Cambridge, he discovered that the tools of government intervention could aid in fulfilling the objective of economic as well as social betterment. And it was Colin Clark who stimulated his interest in statistical demography and national income accounting. However, as Shigeto Tsuru points out in his review of Reflections on Economic Development and Social Change: Essays in Honour of Professor V K R V Rao by C H Hanumantha Rao and P C Joshi published in 1979, Rao had insisted that ‘the blind application of Keynesian formulae to the problems of economic development has inflicted considerable injury on the economies of underdeveloped countries.’ For Rao, economic theory was only a servant of economic policy.

There are three published works by V K R V Rao on national income – An Essay on India’s National Income 1925-29 (1936); The National Income of British India (1940) and India’s National Income 1950-80 (1983). Though V K R V Rao has published on various aspects of economics, his work on India’s National Income is of special interest. This is because of a variety of reasons. Austin Robinson provides one such reason: ‘I myself remember Rao as the brilliant Cambridge undergraduate and research student of almost fifty years ago, who single-handed tackled the almost impossible task of estimating the Indian national income at a time when hardly a single ingredient was known and even guesses involved heroic despatch of countless questionnaires to every corner of India to establish, for example, the milk-yields of she-buffaloes or the average earnings of village barbers.’ An analysis of economic growth and change is possible by studying the National Accounts Statistics (NAS), as Rao has demonstrated in his 1983 book.

Despite the limitations of NAS in India, Rao is able to meaningfully explain the changing structure of the economy through the relative shares of agriculture, industry and services in the gross domestic product (GDP). In addition, he calculates the implicit price deflator so as to understand how much of GDP increase is on account of price rise. Also, implicit price deflators are constructed for the three major sectors to find out how each sector has performed vis-a-vis the others. Savings, capital formation and consumption are also dealt with in detail. V M Dandekar has hailed his 1983 book as ‘a model of scholarship and objectivity particularly coming from one who, during the period, was in the thick of making and implementing policies and programmes for economic development of the country.’

Thus, V K R V Rao was a model economist ‘ a practical man who was well aware of various theories and their limitations in applicability to India. And because he wanted to use economics for policy purposes, he was committed to extensive data collection and data analysis. Also, he was clear that, in practice, economics must interact with other social sciences, especially sociology and anthropology. This is evident from the name of the institute he founded in Bengalooru ‘ Institute for Social and Economic Change.

The Indian Constitution and Human Dignity: for Economists

The field of law and economics is a glamorous one with economists such as Ronald Coase, Gary Becker and Richard Posner. It was Coase who provided the inspiration to law and economics through his introduction of ‘transaction cost economics.’ And Becker was the one who extended the domain of economics to virtually any social phenomena. Issues such as law, crime, marriage, family, etc came to be studied by economists. Although, the tools used never varied. It was the same old microeconomic baggage of neoclassical economics. Suddenly, neoclassical economics started feeling successful all over again. Their theory of value and pricing started explaining various social and cultural processes in the economy. However, this post is not a commentary on law and economics that is practised. For an excellent commentary on its origins and methodology, see the article by William Davies ‘Economics and the ‘nonsense’ of law: the case of the Chicago antitrust revolution’ in Economy and Society published in 2010.

The content of this post certainly falls under the label of law and economics. However, this post discusses certain aspects of the Constitution of India in the the light of economic policies undertaken-that of liberalization. The quotations in this post are from Dr. Durga Das Basu’s Introduction to the Constitution of India, reprinted in December 2009.

Economic Justice

The banishment of poverty, not by expropriation of those who have, but by the multiplication of the national wealth and resources and an equitable distribution thereof amongst all who contribute towards its production, is the aim of the State envisaged by the Directive Principles. Economic democracy will be installed in our sub-continent to the extent that this goal is reached. In short, economic justice aims at establishing economic democracy and a ‘Welfare State’.

The idea of economic justice is to make equality of status meaningful and life worth living at its best removing inequality of opportunity and of status-social, economic and political.

That is, an increase in growth rate is seen as the way to banish poverty. This principle is certainly based on the idea that growth trickles down. As has been witnessed in India, all that liberalization has achieved is ‘jobless growth’. Hence, the need for policy documents to shout for ‘inclusive growth’.

Now, all those who contribute to wealth by being producers are supposed to be compensated. It is on this class, that the burden of development falls. For, they do not have the adequate social and economic voice to demand for ‘just distribution’.

Can India claim social justice just by making opportunities equal’ Equal opportunities perform their function only in an already just and equitable society, and not in countries where inequality of income and wealth is so skewed. Thus, an active intervention is necessary at the level of production as well as distribution of GDP.

Nehru’s idea of Socialism is that ‘every individual in the State should have equal opportunity for progress.’ However, this idea cannot hold any water until the institutions in the State are examined- judiciary, executive, military, private enterprise, unorganised sector, etc. For instance, some groups of people are exploited as producers, where they are paid less than minimum wages. Therefore, as a consumer, they get exploited as well. This then passes on to their access to health, schooling, sanitation, housing, and so on.

Individual Liberty

The Preamble, therefore, says that the State, in India, will assure the dignity of the Individual. ‘All citizens men and women equally, have the right to an dequate means of livelihood, just and humane conditions of work, and a decent standard of life and full enjoyment of leisure and social and cultural opportunities.’

When economists and policy makers talk of ‘inclusive growth’, it is the dignity of the individual which is at stake. Often, India’s characteristics such as high reliance on agriculture, a large percentage of unorganised sector, immobility of labour and the like are labelled as detrimental to India’s growth and development. One cannot help but ask: Whose growth’ Such perceptions by the academia are largely a result of the manner in which human beings figure in micro and macro economics. If you take a moment to think about it, you will realise that poor people-who are a heterogeneous group- is absent from our theoretical edifice. Why’ Who are we analysing’ And to discuss poverty, we have created a sub-discipline called ‘development economics’.

In any case, human dignity appears to be of lesser importance than the computation of growth rates using yearly and quarterly data. We are satisfied to decipher whether stock market exhibits volatility or not’ Or whether market A is co-integrated with market Z. Does this satisfaction come from the fact that stock market data is easily available’ What about the farmers, the child labourers, the migrant labourers who are forced to leave their place and family, of street vendors, and all the others who actually engage in production’

Until dignity of human life features implicitly or explicitly in economics, it will continue to be a lifeless endeavour. Sadly enough, we are taught economics is the study of choice’ Whose choices’ Those who have the ability to choose’ It is time we discarded such economics and re-visited economists such as Adam Smith, Joan Robinson, Amit Bhaduri, and others whose works show a concern for humans.

The ‘Micro-Foundations’ of Economic Survey 2009-10

The Economic Survey 2009-10 is different from its predecessors. Of them, it is chapter two of the publication which deserves special attention. The chapter is titled ‘Micro-Foundations of Inclusive Growth.’ This is no new phrase for economists who have witnessed the recent ‘we want microfoundations’ movement in economics. Traditionally, economic survey analysed trends in income, food production, prices, net exports, and so on without telling the readers about their ‘foundations’. For the first time, microfoundations of macroeconomics (a progeny of the failed neoclassical microeconomics enterprise) makes a loud entry into the analysis of the Indian economy.

One of the first signs of this shift is to be seen on the book cover itself. This has been reproduced below, as it is a matter of great concern.

In 2007-08, the cover page indicated various aspects on the Indian Economy. Coupons equilibrium, something which very few people understand gains entry on the cover page. Why’ Is it to show that economics is scientific and can only be understood by a few’ Or does it mean that economic survey is only for those who know such concepts’ Or does it convey that the economy is in safe hands now, run by competent economists’ One can only wonder. The rest of the post will hover around theoretical explanations and policy suggestions provided in chapter 2. Very often, the proposal outlined below are seen as emnating from the ‘political economy school’. It will be argued that this school is only a variant of neoclassical economics, albeit a superior one.

The chapter starts by emphasising the need to look at the foundations of macroeconomic policies, which have been neglected. The author(s) point out that an ‘enabling state’ is what India needs; a state which provides incentives through proper institutions for the individuals. That is, for policy to be effective, we ‘need to take people to be the way they are and then craft incentive-compatible interventions.’ Under the sub heading of ‘development and distribution’, some space is devoted to the question of futures trade. It is of national concern because very often futures trade tends to make the underlying spot prices volatile. However, it is argued that ‘An enabling Government takes view that if we cannot establish a connection between the existence of futures trading and inflation in spot prices, we should allow futures trade.’ The literature contains mixed views on this issue. Perhaps, it is being suggested that since it cannot be proved conclusively, we must go for futures trade. The rationale provided to pursue futures trade is a dangerous trend. For, economics is unlike sciences where laboratory experiments can be carried out. In any case, what is the percentage of people who invest in futures trade’ And what is the percentage of Indian farmers’

Trickle down effect is said to have taken place in India through injection of demand to the poor through increases in budgetary allocations for anti-poverty programmes. The firming up or increase in prices of food items is presented as evidence for income increases of the poor. This piece of evidence is wrought with methodological as well as conceptual difficulties. Hence, it cannot be argued with such certainty that incomes of the poor have risen. For, if the prices of food items have gone up, their real wage or purchasing power must necessarily be reduced. In effect, there might not have been any notable improvement.

Subsidies are considered essential for India. However, price controls are seen as distortionary and also they result in high levels of corruption. Therefore, it is pointed out that subsidies should take the form of ‘coupons’. This achieves two objectives. (1) Prices are left to the market and (2) Individuals have more choice. Both are hallmarks of neoclassical as well as neoliberal thinking. Hence, the need for Unique Identification (UID) system for improving information. It is argued that the state should not tamper with the ‘preferences’ of the subsidy reciever. Because ‘modern behavioural economics reminds us that there are situations where individuals act against their own interests because of lack of self-control or inconsistencies in their inter-temporal preferences, and so some pateranlistic interventions can be good for them.’ This result cannot be directly imported to a macroeconomic setting, owing to differences in objectives and also, the sum of parts may be more or less than the whole (fallacy of composition).

Apart from such proposals, foreign direct investment (FDI) in the textile and clothing sector is favoured as they ‘can help modernize this industry and aid its integration to the global textile market.’ The introduction of powerlooms have rendered many weavers jobless and most of them have become migrant construction workers. When any sector gains more importance than those employed in that sector, it is a sign that the objective of policy makers is plain ‘numerical growth’ and not employment!

The end of the chapter contains a discussion on ‘social norms, culture and development’ which points out that standard economics has not paid much attention to social and cultural factors. And that game theory and behavioural economics ‘is begining to give us some insights into the formation of customs and behaviour.’ It is argued that though such ‘phychological and sociological determinants’ may not effect short-term economic outcomes, they do affect medium-term and long-term outcomes.

In the following manner, this ‘political economy school’ explains economic issues through concepts such as ineffeciency, information asymmetry, bureacracy and corruption, inventives, incomplete contracts, etc. This school of thought should not be confused with Marxian or Sraffian political economy. This chapter is testimony to the fact that economists believe that economics is a science which has testable propositions and that they result in conclusive results. For the authors hail behavioural economics as though it is a new branch of economics which is the ‘saviour’ of economics. More dangerous is some of the causal connections made in the chapter, as they are not based on any logically consistent theory nor are they borne out of experience. The ‘micro-foundations’ of the economic survey definitely needs a rethinking!