Indian policy paralysis and Abenomics: A case in contrast

All policy decisions taken by the Governments around the world when it comes to their economies, invariably focus on 'GDP Growth'. There is speculation that India is unlikely to hit even a modest 5 percent GDP growth number this year. On the other hand, it seems a turnaround is in the offing for Japan, an economy that had been struggling to come out of an economic rut for more than two decades. It took just an year of 'Abenomics' to bring about a sea change in Japan's fortunes. This may well be an year of highest economic growth for Japan in many years.


Before we move any further into this discussion, let me just define GDP here, for the uninitiated. Gross Domestic Product for an economy refers to the market value of all final goods and services produced in the economy during a given period. The stress here is on the word 'final'. These are the ones that are meant for consumption or use by the end consumer and are not subject to any further transformation for sale. GDP at nominal value refers to the Gross Domestic Product at current prices. To facilitate comparison among GDP values across the years, prices from one of the years are taken as a base and the GDP values for the rest are calculated using the prices for that year. This ensures that we assess the real GDP growth which happens on account of increase in production and not just increase in prices.


Getting back to the contrasting fortunes of the Indian and Japanese economies in the last fiscal year, discounting the fact that our problems are completely different, as Japan struggles with deflation and India with the opposite, the Inflation; How much of the turnaround in Japan can be attributed to political vision? Is there anything in this for India to learn? While analysts claim that 'Japan is indeed back', Is India falling off the radar?


Abenomics, as of now, has been about quantitative easing and a surge in spending by the Government in order to boost consumption. India needs to keep interest rates high in order to tame inflation. This is again debatable as our inflation problems are perhaps more due to supply side issues. This holds particularly relevant for food inflation which requires investment in storage capacities to stem the wastage in food supplies emanating from the lack of facilities for storage. Japan took years to figure out what exactly it needs to do to return to the path of growth. With its huge population, Indian can ill-afford to suffer economic stagnation for decades but we can perhaps do with clear policy initiatives in this regard. If it is GDP growth that is required, should we not be boosting consumption? If it is supply side issues that underscore inflation in India, should we not focus on capacity building. Where will the money come from? Well, if we can afford Food Security bill and a myriad other subsidies, Why not something that builds the base for a better economic growth in the future?

The case in contrast comes in the backdrop of dipping fortunes of Ranbaxy, an Indian Pharmaceutical company acquired by a Japanese firm, Daiichi Sankyo, in 2008. US FDA has placed an import ban on a Ranbaxy facility in Punjab, India. Last year as well, some of Ranbaxy's facilities suffered a similar fate. Food for thought?

Flying Geese Pattern of Industrial Development

 


A model that has often been used to describe the industrial growth in South Asian economies, the flying geese pattern, describes the shifting of industries from advanced economies to the developing ones. The dominance of an industrial sector in a region depends on the availability of required resources, including labour, capital and raw materials for the sector, at low costs in comparison to other regions.

This paradigm, proposed in 1960s by Kaname Akamatsu, suggests that an industry shifts from a developed economy to the developing economies as the nature of resources available in an economy changes over a period of time. This is referred to as dynamism in factor endowment. A trickle down effect is observed in terms of technological know-how from advanced economies to the less developed countries. The inverted V-shape of the flying geese pattern depicts a leading economy and others that gain from a trickle-down effect.

For instance, textile industry is a labour-intensive sector that requires unskilled labour. Decades back, Japan was a leader in the textile industry. With technological advancements, Japan gained strength in skilled labour intensive sectors apart from capital intensive sectors. As generations reaped the benefits of industrialization in the form of high wages, cheap unskilled labour was no longer available at a low cost. Such industries thus thrived in Korea, Taiwan and other South Asian economies which were at early stages of industrial development. This is because unskilled labour was available in plenty and at low wages. As these economies developed and diversified to capital intensive sectors, textile industry flourished in countries such as Bangladesh.

International Standard Industrial Classification

The System of National Accounts (SNA) provides an international standard for compiling economic activity measures. The productive activities that are accounted for under national income accounts are classified as per the International Standard Industrial Classification of All Economic Activities.

This classification categorizes all economic activities as per a 4 level hierarchical structure. For example


1. Growing of Rice as an economic activity is classified as:

Section A                     Agriculture, forestry and fishing

Division 01                 Crop and animal production

Group 011                     Growing of non-perennial crops

Class 0112                    Growing of rice

2. Retail sale of food in specialized stores is classified as:


Section G         Wholesale and retail trade; repair of motor vehicles
Division 47       Retail trade, except that of motor vehicles and motorcycles
Group    472     Retail of food, beverages and tobacco in specialized stores
Class     4721    Retail sale of food in specialized stores


All the productive activities are classified under 21 sections from Section A to U. 

The classification of economic activities is done on the following parameters:

• Input of goods and services
• The process and technology of production
• Characteristics of output
• Use to which the output products are put                 

Standard International Trade Classification

Countries collect data on industrial activity for national income accounting. A record of trade data, in the form of exports and imports, is also maintained. In order to make such data from across the globe comparable, certain rules are adhered to for classification of traded commodities and the economic activities undertaken. Statistics division of United Nation's Department of Economic and Social Affairs has introduced such classifications with the approval of countries from across the world. Revised versions of these classifications have been issued over the years as per requirement.

SITC (Standard International Trade Classification) is a five level classification for segregating different products into specific categories. Revision 4 of this classification was promulgated in 2006. At subsequent levels, products are classified under 10 sections, 67 divisions, 262 groups, 1023 subgroups and 2970 basic headings.

For instance, the code for Peas under this classification is 054.21

This can be explained as follows:

Section                     0   (Food and live animals)
Division                05 (Vegetables and Fruit)
Group                  054 (Vegetables, fresh, chilled, frozen or                  
                                  
simply preserved)

Subgroup             054.2    (leguminous vegetables)
Basic heading        054.21   (Peas)

Detroit Bankruptcy

The city that was once a world-renowned hub of automobile manufacturing is now not just a pale shadow of itself but its reputation is in tatters. The city where Henry Ford etched his placed under the sun as a marketer and businessperson par excellence finds itself in the midst of a Chapter 9 municipal bankruptcy under the US federal law. Detroit's emergency manager Kevyn Orr and its Governor Rick Snyder first filed for bankruptcy in July, 2013. This was the final blow for a city that was once hailed as a top-notch industrial city. Detroit was not in a position to repay its $18 billion debt, nor could it pay for the basic amenities for the city residents. Pension payouts will also take a hit as Detroit needs $3.5 billion to fund the pension as per the provisions for pension in the city of Detroit before it was hit by bankruptcy. Pensioners were not ready to give up easily on this. In December, 2013, a US court ruled that Detroit should be allowed to enter bankruptcy under Chapter 9. The ruling also made it clear that even though Michigan does protect the rights of pensioners, the federal law does not provide for such protection and hence pension rights were not unassailable. Nearly 23,000 of Detroit's population of 700,000 depend on pension.

Reasons for Detroit's decline

1. Single-minded focus on the auto industry

 Detroit's auto industry declined over the years in the face of competition from across the globe. Many of the manufacturing jobs in the US auto industry were also moved to other cities. This remained true even at the time when bailout packages were extended to Chrysler and General Motors. Pension demands on the city's coffers did not adjust in accordance, thereby reaching a point where a third of the city's finances were going towards meeting its pension obligations and the city increasingly remained dependent on the state of Michigan for managing its finances.

2. Racial issues

Law and order situation in the city has been on the decline since 1960's with the city having witnessed instances of rioting and rampant looting. The city's population got segregated along racial lines and politics could do little to blur those lines. Whites and middle class blacks left the city over the years. The city that had a population of more than 1.5 million once, now has about 700,000 residents. The city's mayor in the period 1974-1994, Coleman Young, has often been blamed for polarizing the police force along racial lines. This gave a further push to exodus of Whites from the city and Detroit deteriorated to being one of the most violent cities in United States of America.

Externalities and Pigovian tax

An externality is the impact of the consumption choices made by a person or the production choices made by a firm on other people who are in no way related to these actions. It may also be termed as an unintended consequence. Externalities may be positive or negative.

Instance of a negative externality is the air pollution caused by a vehicle. This air pollution does not affect just the person who was driving but others as well. Decrease in crime rate over the long term owing to better education facilities in an area can be termed as a positive externality.

Pigovian fee or tax was proposed in the early twentieth century by Arthur Pigou, an English Economist. For a firm or an individual involved in an activity which pollutes the atmosphere, the cost of the activity is much smaller than its social cost. In order to introduce a factor that allows for some restraint on such activities, a tax is a valid consideration. This is because the Pigovian fee increases the cost of the activity performed for an individual or a firm.

Meaty Business No More!

I was quite surprised to read that Reliance Retail decided to exit the non-vegetarian products' retail business because this goes against the belief of Reliance's small investors. Growth in animal product's retail trade is second only to that of 'Fruits and vegetables' segment. Reliance's entry into the non-vegetarian food retail business was marked by the opening of 'Delight' stores in 2007. Increasing the number of such stores to nearly a thousand was in the offing but that's an old story now as Reliance Retail has pressed the exit button on this venture. Margins are considerably high in non-vegetarian food retail. This can certainly help the retailers in the organized retail segment in India, as most of these have still not reached the break-even mark in their business and continue to be in the red.

Animal products are accounted under 'Agricultural Output' and make for more than a third of the growth in the segment.

Babaru Keizai

Babaru Keizai, in Japanese, refers to 'Bubble Economy'. It points to the period before the sudden slowdown experienced in Japan in the early 90's. 1980's were characterized by huge investments in the real estate sector and the stock markets, to the extent that organizations in the manufacturing domain preferred to issue debentures and invest the money in stock markets in place of manufacturing. This kind of investment was referred to as 'Zaitech'. A large portion of these debentures were sold abroad. 

Prices in real estate and stock markets drove up the inflation rate in Japan and liquidity decreased considerably in the late 1980's as compared to the start of the decade. Individuals invested their savings while corporations and their pension funds were investing their surplus funds in stock markets; banks were lending for these speculative investments in real estate and stocks.