My new book on Macroeconomics

I started blogging as an undergraduate student, in 2006. Since then, I have written posts about (i) the Indian economy, (ii) history of economic thought, (iii) classical political economy, and (iv) critiques of marginalist or neoclassical economics. In the recent years, most of my writing time has been devoted to articles and book reviews in journals and less to blogging. Although I do frequently wish I could spend more time blogging. 

I am now happy to share that several issues I have written about in this space has significantly helped me in writing my book Macroeconomics: An Introduction (2021), published by Cambridge University Press. The conceptual discussions are situated within the Indian context. 

For a preview, see Google Books

If you have institutional subscription to Cambridge Core, you can access the ebook

The price for the Indian edition is Rs. 495 and will soon be available through Amazon and independent bookstores. 

I had given an early book talk at BITS Pilani, Hyderabad; the video recording is available on my YouTube channel

International pre-orders have opened in many countries; for a list see here

A Review of Jean Dr’ze’s Jholawala Economics

sensesolidarityJean Dr’ze is a familiar name among social science students and researchers. His contributions unarguably have helped improve the state of social programmes in India and have motivated several students to take up social research. In 2013, he co-authored An Uncertain Glory‘with Amartya Sen on the importance of public programmes in achieving social development.

Sense and Solidarity: Jholawala Economics for Everyone (2017, Permanent Black) is his second sole-authored book after No.1 Clapham Road, the Diary of a Squat (1990, Peaceprint, published under a pseudonym) on homelessness in London. The 2017 book is divided into 10 sections: draught and hunger; poverty; school meals; healthcare; child development; employment guarantee; food security; corporate power; war and peace; and a set of miscellaneous essays (of which only one was unpublished, but this has now been published in The Wire). His 2017 book is a collection of his previously published essays, mostly in The Hindu, with a fresh general introduction and a section-wise commentary, which sets out the context. This review post engages only with this fresh material.

Vision

Dr’ze’s vision, like most of the current and future readers of the book, is to ‘create a good society’ (p.3). As he writes, this warrants the abolition of caste and patriarchy. Such a vision requires a progress in ‘ethics and social norms’ (p.3). He titles his approach ‘research for action’ (p.4). This reminds me of Marx, who wrote in the Theses on Feuerbach that: ‘The philosophers have only’interpreted’the world, in various ways. The point, however, is to’change’it.’

It is indeed commendable that Dr’ze along with Reetika Khera and others have been able to conduct field surveys with student volunteers. Moreover, he has participated in several village meetings, public hearings, and social audits (p.9).

Dr’ze’s underscoring of ‘ethics and social norms’ is extremely important today. Many public policy measures try to create policies with appropriate incentives as if they are gods. What we truly lack, to use Adam Smith’s phrase, is good ‘moral sentiments”sympathy, compassion, friendship, care, etc. These cannot and shouldn’t be quantified or reduced to monetary terms. Nor can they be incentivised. It is here that ‘experience’ plays a significant role. Looking at theory and quantitative secondary data is insufficient to capture most of social reality. It is precisely this reason that has led to the critique on men writing about patriarchy and Brahmins writing about Dalits. Not only is the lived experience missing in these instances but also can it never be obtained.

Methods

Dr’ze rightly criticizes the quantitative fetishism found in the community of economists and development studies researchers. And, as if they weren’t enough, the public policy specialists have joined this quantitative bandwagon, or rather the bullet train, as it were. This is not to suggest that we abandon quantitative analysis altogether but rather to use it with great care.

I completely endorse Dr’ze’s recommendation to study literature as a way to understand a society better. He lists the following authors in his book as people who ought to be studied: Bibhutibhushan Bandyopadhyay, Daya Pawar, Laxman Gaikwad, Om Prakash Valmiki, and Shantabai Kamble (p.17). In fact, I strongly think that the economics students would benefit with a compulsory course on ‘Literature for Economists‘ alongside ‘Mathematics for Economists’ in the curriculum.

There is not much that Dr’ze writes on economic theory except his approval of game theory, which is not really a theory but a mathematical method of studying conflict and cooperation. I would go further and argue that there is much to be learnt from the theories of economists such as Smith, Marx, Keynes, Kalecki, and Sraffa. A deep understanding of methods’complexity theory, experiments, field work, game theory, instrumental variables estimation, lived experience, ratio and proportion, regression analysis, textual analysis, etc.’in all their plurality is much needed along with a similar understanding of various theories.

Another important learning from Dr’ze’s book is the need to engage with publicly available data, reports, and legislations. For instance, some of the legislations/programmes mentioned in this book are the Integrated Child Development Services (ICDS), National Rural Employment Guarantee Act (NREGA), National Rural Health Mission (NRHM), National Food Security Act (NFSA), and Right to Information Act (RTI). As voters, we too should be reasonably aware of their key provisions.

Action

Many students pursue social sciences with the intention of making a change in the society. And currently, there is a palpable sense of disappointment and disillusionment among these students. Perhaps, Dr’ze’s approach of ‘research for action’ is one solution. At the very least, such research should be recognized and encouraged by academics and the society at large (particularly, parents). Of course, not everyone might have the means or the luck to pursue this course of action. However, this shouldn’t deter anyone from pursuing good research, which can be in the realms of theory, history, methods, action, or some combination of the four.

To me, the central takeaways from Dr’ze’s book are that as members and analysts of the ‘Indian’ society, we must be sensible in our approach to theory and methods by bringing in pluralism in these two areas. And, more importantly, solidarity warrants collective discussion, engagement, and action, which also aids in the progress of our ‘ethics and social norms’.

Finally, I felt that the book is expensively priced at Rs. 795 (hardback). One hopes for a paperback edition priced around Rs. 250. Although all but one are previously published essays, Dr’ze’s introductory chapter and section-wise commentary provides the readers a peek into his valuable philosophy. I end by wishing for the book to be translated into the many regional languages of India.

I acknowledge Abhigna A. S. for her editorial inputs and Aashish Gupta for alerting me to Dr’ze’s 1990 book.”

The Broken Headlights of the Union Budget 2017

The union budget is an annual planning document of the central government, which lays bare its economic priorities for the upcoming year. Since it outlines expenditure plans and revenue expectations (from tax proceeds), it has a significant impact on everyone, directly or indirectly, in the Indian economy. The consensus on the current union budget is largely that it is a ‘positive and progressive’ budget. Although seemingly it looks like a good budget, it suffers from a deeper malaise ‘ of lacking a robust economic vision.

A government that is committed to economic development cannot not focus on employment generation and reduction of income and wealth inequalities. Further, employment generation has to happen in conjunction with decent wages. The former is an outcome of (both private and public) investment. It needs to be noted that the National Rural Employment Guarantee Scheme (NREGS) is only an employment safety net and not an engine of employment; one must be very careful not to conflate the two. Decent wages call for worker-friendly labour laws and adequate minimum wages. The inequalities of wealth (notably land and financial assets) keep rising unless structural reforms are undertaken, such as land reforms, wealth tax, and capital tax. (To formulate such reforms, information on the personal ownership of assets as well as their social distribution is required. Hence, the publishing of the caste census becomes a socio-economic necessity.)

With respect to wage policy, the variable of socio-economic significance is the real wage and not the market wage. The real wage tells us how much goods and services that a unit of the market wage buys. The real wage is therefore dependent on inflation and the capacity of the worker to access transportation, health services, and a clean environment. The class of economists who ignored real variables at the expense of the apparent ones were labelled as ‘vulgar’ by the economist’philosopher Karl Marx.

In addition, a piecemeal reading of the budget, while appropriate from the standpoint of individuals and firms, is inappropriate from a macroeconomic perspective. This is because the economy is an interconnected system, and one sector’s gain can lead to another’s loss, and multiple sectors can gain simultaneously. More generally, both private and public economic actions have unintended consequences; for instance, while the increased budgetary allocation for physical infrastructure is welcome, what are its effects on the natural environment’

The Indian economy is facing aggregate demand deficiency because of damp rural incomes, stagnant manufacturing, self-imposed fiscal austerity, and weak external demand. Tax cuts (for low-income individuals and MSMEs) and increase in public expenditure (on railways, roads, and the small increase in NREGS allocation) positively affect the aggregate demand, whereas demonetization-induced low activity levels, fiscal consolidation, volatile external conditions, agricultural distress, low real wages, and stagnant manufacturing sector all negatively affect aggregate demand.

On the aggregate supply front, the Indian economy is constrained by low agricultural productivity, poor working conditions for the majority of the population, inadequate physical infrastructure (access to drinking water, electricity, and roads), and environmental degradation. In short, India fares badly in terms of both physical and human capital. While the current budget gives some importance to physical capital, the allocations to human capital are deplorable. Moreover, the negative consequences of physical infrastructure creation on the natural environment and on the displacement of people must be accounted for in the balance sheet of economic development. Therefore, the paltry allocations to improve aggregate supply give us nothing to cheer. And on balance, the current budget significantly falls short of its intended goal of economic development.

Lastly, in his budget speech, the Finance Minister Arun Jaitley repeats the rationale for the demonetisation move of November 2016. He states that post-demonetisation, ‘GDP would be bigger and cleaner’. Moreover, he asserts (without any argumentation) that the demonetisation-induced fall in economic activity is a ‘transient effect’ and that this ‘is not expected to spill over into next year’ (contradicting the more cautious prognosis contained in the current Economic Survey). It seems that the FM is unaware of the concept of hysteresis: the short-term equilibrium can permanently affect the long-term equilibrium. This is part of the reason why mature democracies are extremely intolerant of labour unemployment. However, it is highly unlikely that official data will reflect the long-run adverse effects of demonetisation, because of its inability to adequately capture the economics of the informal sector.

In sum, there is no cause for any celebration but many reasons to be very worried for the economic present and future of India.

An Economic Analysis of the ‘Make in India’ Program

The ‘Make in India’ program webpage states as its objectives the following: (1) to facilitate investment, (2) to foster innovation, (3) to enhance skill development, (4) to protect intellectual property, and (5) to build manufacturing infrastructure. This short blog post focuses of selected aspects of the program as laid out of the webpage and then critically examines them and the economics underlying them.

Selected features of the program from the webpage are outlined in this paragraph. ‘The process of industrial licensing has become simpler and for some, the validity has been extended. There is an impetus to develop industrial corridors and smart cities. The cap of foreign direct investment (FDI) in defence raised from 26% to 49%, with further easing of FDI norms underway in the construction sector. Labour-intensive sectors such as textiles and garments, leather and footwear, gems and jewellery and food processing industries, capital goods industries and small & medium enterprises will be supported. Further, National Investment & Manufacturing Zones (NIMZ) will be set up. Incentives for the production of equipment/machines/devices for controlling pollution, reducing energy consumption and water conservation will be provided.

To summarize, the government will provide incentives for the construction of green technology while at the same time making it easier for firms to get environmental (land) clearances. Setting up industrial zones is a good idea because it reduces transportation costs and common infrastructure can be better streamlined; also, they should be located at a safe distance from populated areas. Investment by foreign companies is beneficial if they these investments entail the learning of new technology and scientific and managerial collaboration. FDI should not be forthcoming solely to exploit the low wages prevailing in India.

Undoubtedly, India needs to revive its manufacturing sector. Globally, Indian manufacturing products need to be competitive. To achieve these two objectives, the present government’s ‘Make in India’ program is necessary. As always, we need to wait and see how the program works in practice. This program is aimed at improving the supply-side of the economy ‘ improving the capacity to supply manufactured products. Creating of physical infrastructure will also have multiplier effects on agricultural and services sector.

Two related issues need to be raised in this context. Firstly, what about economic ‘reforms’ targeted at the demand-side of the economy’ Secondly, isn’t it more prudent to validate the supply of manufactured commodities from domestic demand than foreign demand’ Let us take each of them in some more detail. Raghuram Rajan made the second point in his December 12, 2014 Bharat Ram Memorial Lecture. Ashok Desai, in the Outlook, criticises the previous government for their corruption scandals and economic schemes which, according to Desai, primarily benefited the non-poor and due to their consumption raised the industry and services growth rates.

While supply-side measures are important, we must not lose sight of demand-side measures ‘ such as public investment in health and education. The recent cut in public health expenditure by the current government is indeed very alarming. Equally important is a good labour law framework which ensures good working conditions for workers and a decent minimum wage. This will ensure adequate domestic demand, as our workers will earn above-subsistence incomes and be healthy. If the core institutions of health and education (and clean environment) are also strengthened alongside the labour market ones, then domestic demand-led growth will not be difficult to manage.