India. Where does it stand on socio-economic progress?

A quick reflection/introspection of india’s log-jam with socio-economic parameters:

1) Inflation: True inflation based on typical household basket of consumables/expenses over the last 5 yrs is not as rosy as our fin-min/manmohan claims it to be. Would any one agree with only 6% apprecitation in a)rental cost b)transportation cost 3)commodity cost? As per one calc, India’s actual inflation is north of 13%. We claim that china’s GDP is cooked…what do you say about india’s inflation figure..spiced up with obsolete basket-constituents and thier weights.

2) GDP: Our GDP is driven more by domestic demand/consumption rather than exports. Also, investments required to improve/sustain GDP is supported by strong savings growth. This is good news!

But, the sustainability of this GDP is questionable, given the lack of infrastructure needed for this rate of investments. Theoretical GDP growth you can expect from this level of investments ought to be discounted with india-specific factors to come up with a realistic Trend rate for future.

China is more reliant upon exports as bulk of it’s GDP drives from this component and therefore coupled to global consumer spending. Govt also should be publishing or atelast keeping track of the contribution-pattern of various GDP components like agri, consumption, govt. spending, exports to bring these in-line with what we need them to be in future through effective policy, fiscal and/or monetary.

3) Credit: Easy access to cost-effective credit is vital to any industry to survive and compete on a global scale. RBI’s monetary policy to control inflation would bring in increased rates which would put industry at a disadvantage whose cost-of-debt is more than any other emerging economy.

It ought to be allowed to tap into global credit-mkts for cheaper funds to have a level-playing field with global peers. Domestic bond industry also has to be encouraged/improved through fiscal/monetary policy-measures to get /build self-reliant and deeper credit mkts with in india to prevent getting burned in global credit-squeezes like current crisis.

4) Rupee: Over-valued indian rupee has to be controlled through RBI sterilization measures on a continous basis to protect the domestic export-relying sectors like textiles and miliions of jobs linked with those sectors. If china is strongly pegging thier currency to USD and india lets the mkt decide the cross-rates, it would put the entire sectors like textiles in jeopardy and risk being priced-out of global consumer mkts. Passing on the cost is only a luxury with IT sector, but all other sectors depend upon global competetive pricing.

5) Social: Home-ownership is something that a typical middle-class family used to dream and achieve over thier life-time in almost all the job-centers in india, a decade ago. It’s next to IMPOSSIBLE for typical middle-classer entering the job-mkt after education, to even dream about that now. [pls. ignore niche demographics like IT, mgmt jobs and focus on broader job-mkt].

Any country in the world can not claim developed status, until it provide it’s citizens with affordable means of home-ownership. This unfortunate metamorphosis of housing mkt is direct result of twisted-economic-policies with total blindness about these social factors and chasing growth at the expense of permanent loss of fundamental necessities of household.

6) Jobs: Shrinking contribution of agriculture to GDP is in contrast to millions of unskilled labor that still were stuck with that sector. Even as we successfully are shifting some percent of them to mfg jobs, it has to be accelerated by bringing/encouraging sectors that can assimilate this vast demographic of currently unprodutive unskilled workforce there by bringing them out of poverty lines and helping their families to build a better future.

Is credit Growth the key to US economic expansion in the 1990s ?

Is credit Growth the key to US economic expansion in the 1990s than much proclaimed productivty?

Data Analysis:

STEP1:
Take a look at the data at Federal Reserve historical data on consumer credit. The raw data shows over a 90% growth in credit during the ’90s. When one adjusts these values for Department of Labor historical statistics of the Consumer Price Index, one finds that total consumer credit has grown by 70%.

STEP2:
An adjustment needs to be made for growth in real per capita earnings since as real income grows so does the capacity to carry credit. When using that data to adjust the consumer credit values, in the last decade there has been a 30% increase in real individual income for the nation (non-government). Scaling the 70% personal total credit growth against the income growth yields a net 30% growth in real consumer credit carried.

STEP3:

…how much has individual credit really been growing?…
Personal credit amounts are currently about $6k/person according to the aforementioned Federal Reserve data. The average household (2.6 people, $55k/year income … historical data from the Census Bureau household income tables) carries ~ 16 k$ in credit. This is a credit/income ratio of ~ 0.3. Applying this factor to the previously determined 30% credit growth/decade (or ~ 3% growth/year) by straight multiplication, then only about 1%/year would be attributable to credit growth IF the multiplier factor were only equal to 1.

STEP4:
GDP in the US has grown by about 31% in the last decade (see The Bureau of Economic Analysis’ historical data on GDP ), or about 3%/year. Depending upon the multiplier factor, you can see that credit probably makes up a substantial fraction of the GDP growth just by itself.
There is at least one more important factor in the the GDP that we can adjust for in this simplified analysis: population growth in the work force. Between Jan 1, 1990 and Jan 1, 2000, the US population grew from 248 million to 275 million …. (source data Census Bureau’s population statistics ) or about 10%. Assuming the workforce proportion is similar, the GDP adjustment per capita yields a growth rate of about 2%/year.
…What does this all mean?…

Conclusion 1: if the per capita GDP growth rate is ~2%/year, then credit growth–which is an absolute minimum of 1%/year and probably higher–makes up the bulk of the US economic growth in the 1990s.

…but what about productivity?…

Isn’t productivity the source of the economic expansion? Productivity gains between 1990-2000 were about 25% ( Bureau of Labor Standards Productivity Statistics ) and outstripped per-capita CPI-adjusted GDP gains which were about 18%. If GDP gains had exceeded productivity gains, then the increase in credit is a consequence, all else equal. But with the percentages reversed, productivity does not appear to yield as much “gain” (to use an engineering term) on economic growth as one would hope to see.
 
IT WOULD BE QUITE INTERESTING TO DO A KIND OF COUNTER ANALYSIS JUST FOR THE SAKE OF DSICOVERING THE REAL CAUSE OF THIS ECONOMIC GROWTH WITNESSED BY US IN LAST DECADE.

WOULD REALLY LOVE TO SEE PRO-PRODCTIVITY-TRUMPING PERSON TO DO A COUNTER ARGUMENT BASED ON HARD DATA AND FACTS, RATHER THAN THEORETICAL PRODUCTIVITY ARGUMENT!!!!!!!!

ANY ONE UP FOR THIS CHALLENGE???????

India GDP growth? Sustainable?

Growth rate of any economy gets on to an unsustainable state when it gets constrained by short-supply of critical inputs like:

1) When investments demanded by that growth is less than savings.
2) Shortage of labor to support that growth.
3) Adequate infrastructure to handle that growth.

1)Economy Savings and Investments:
The average saving rate in India was 10 per cent in the 1950s, which rose to 17.5 per cent in the 1970s and further to 23.4 per cent in the 1990s. The saving rate was 32.4 per cent in 2005-06.

Gross domestic investment rates increased from 22.9 per cent of GDP in 2001-02 to 33.8 per cent in 2005-06. Pls. note that 95% of the investments were supported by domestic savings.

One would conclude that this rate of investment (~35% of GDP) would easily support ~10% GDP growth in a non-inflationary sustainable mode.
But, WAIT…

2)Labor shortages:
If we look at the composition of our GDP, about 50% of this comes from services with industrial and agriculture contributing ~22% each.
You clearly could see the labor shortage in specific services sectors that could scuttle the above growth estimates.

3)Infrastructure:
This is the most serious impediment that could dampen the above growth estimates as under-capacity in the key infrastructural areas like Roads, Ports and Power has been  knocking out the actual growth you could have versus the growth we’re limited with owing to the bottlenecks.

A serious commitment from govt. in incentivizing the infrastructure investments to attract private players to participate in enhancing these 3 infrastructural areas would definitely debottleneck theese areas and reduce the disparity that currently exists and will be more pronounced in next 2-3 yrs.

Quantification models do exist in the market place that would quantify the discount that has to be applied to growth estimates based on the mismatch/disparity between current infrastructural capacity and growth-demand.

conclusion:
One would be able to (atleast in theory) come up with a reasonable non-inflationary and sustainable growth rate for our economy, with the adequate discounting applied to the estimate based on gap in the supply of critical inputs needed for that level of growth.

NOW…should this GDP come from exports-driven growth or domestic-consumption-driven one is again subject to debate.
…..CHINA is trying to get away from being an overly-export-driven GDP economy to a moderate level by bumping up the consumption rates and bring down huge (40%) savings rates.
…..US, on the other hand is fighting to bump-up it’s domestic savings (It only manged to save 13% of it’s national income last year versus 50% with china). And that’s just looking at national averages that include saving by consumers, businesses, and governments. The contrast is even starker at the household level — a personal saving rate in China of about 30% of household income, compared with a U.S. rate that dipped into negative territory last year (–0.4% of after-tax household income).

We’re luckily in the middle grounds with a reasonably good balance of domestic savings and export-driven share. It has to be mainatained that way to avoid risk of negative

GDP growths in case of sudden drop in exports owing to emerging protectionism in various countries or overly-consumeristic public driving down the savings to US-levels.