India! I dare you to be rich

Category Archive: Books

Why Godbole’s otherwise sensible book adds no value to India: “Good Governance: Never On India’s Radar”

I'm sorry to have this title for my review of Godbole's book.

The book starts off well enough. A liberal at heart (in the classical liberal sense), Mr. Madhav Godbole (of the 1959 batch – around 23 years senior to me – he must be around 77-78 years old now) says all the right things in the beginning.

I note that Mr. Godbole is a diligent man. He knows the Constitution and the laws very well. Prim and accurate citations of names and laws pepper the book. Very useful as a reference.

I particularly like his opposition to the destruction of freedom of speech and his insistence on the right to property. He says the RIGHT THING about each of these and many other related issues. 

So what's the problem?

Well, he has no vision, no idea how to fix the many problems he has identified.

To test his solutions, I looked at the Administrative Reforms section. I was sorely disappointed. His knowledge of the principles of governance/ incentives is extremely ordinary. While talking about new public management he does not display the clarity of thought to identify the precise solutions we need in India.

His reference to the Second Administrative Reforms Commission's 15 reports (at page 250) is laudatory. I disagree! The reports are A TOTAL WASTE. I'll comment separately on these reports one day. I've never seen more garbage in my life – and so voluminous. There is absolutely no mention of the BASICS in these 15 reports. All superficial and flimsy. But as I said I'll discuss this another day.

I'm afraid I could not have the patience to read every word of his otherwise well-researched book.

The book is a litany of complaints about India and its mis-governance. I have no doubt that each of the points Mr. Godbole makes is valid – as far as the depiction of the current system is concerned.

But why take so much time to say that our system is rotten? Everyone knows it. 

We should be focusing on SOLUTIONS. And ACTING on them.

That's where Mr. Godbole and I part company. I am a solutions man. I ACT TO FIX PROBLEMS, not to describe them, repetitively, in over 250 pages.

I'd still believe the book is worth having on one's library. It is a good description of our many failings in India. A good reference document. Use it sparingly, use it to agitate your mind about the MANY failures of India.

I give this book 3 out of 10. Maybe 3.5. Not a single new value-add I could find to include in the SKC agenda. But Mr. Godbole is a liberal. He should appreciate the agenda, if he gets around to reading it.

Continue Reading

A review of PV Indiresan’s book, Vision 2020. Definitely worth reading.

I’ve finished reading Prof. PV Indiresan’s 2003 book, Vision 2020 and commend it to everyone. I’d rate it 7 out of 10, i.e. definitely worth reading.  (Btw, you can read most of the book on google books.)

My earlier impression of PV Indiresan’s work has changed – for the better.

Overall I find that he has a broadly anti-socialist, anti-Keynesian perspective. That did not make him, however, into a classical liberal, for virtually at no place in his book does he base his ideas on liberty, and often settles into planning/ technocratic approaches. A lack of ideological foundation means that his ideas – often creative – are not always consistent, being also not tested on any fundamental policy framework. He was definitely one of the better policy thinkers India has produced, but I’d argue that his work left much to be desired. Had he incorporated elements of Chanakya’s Arthashatra and FA Hayek, he would have produced the best possible ideas.

This does not mean I have changed my mind about his proposal New Paradigm of Rural Development – to micro-manage rural development (refer to my blog post of 19 March 2014). While this paradigm doesn’t involve too much dabbling by the government, it cannot work without government subsidies. Having said that, there is much good in this proposal that needs to be used by urban/rural planners.

I’d argue that Vision 2020 displays a superior understanding of urbanisation than his (other) proposal on rural development. In the book, he notes that agriculture can’t drive India’s future prosperity, that cities need planning, and that capital-intensive heavy duty infrastructure is critical to kick-start growth. On these issues he makes a lot of sense.

As I showed earlier, he had arrived at state funding of elections as a way to reduce political corruption. And he was ambassador of CCS’s school choice program (although in Vision 2020 he has written almost nothing about the use of markets for procurement of government  services).

Overall, PV Indiresan was 80 per cent of the way towards classical liberalism. I wish he had spent time to form a better understanding of the price system, spontaneous order, self-regulation and competition. But he was an engineer (a brilliant one at that), and expecting engineers to understand economics is a bit of a stretch – the mindset needed for these two disciplines is entirely different. That said, he would definitely have supported the SKC reform agenda and distanced himself from most policies of AAP/Congress/BJP.

Most of his good ideas already form part of the SKC agenda. I’ll polish up a few areas (e.g. infrastructure) to reflect his thoughts.

With this, I’ve now published six blog posts on PV Indiresan, with the previous five of them being:

Below is my summary of his thoughts in Vision 2020. Do refer to the original work to understand better. My copy is fully ‘scratched’, as I have made notes all over the place, often in a moving bus.

OUTSTANDING

General theory:

  • Democracy is not an end in itself (p.106)
  • Income inequality is the natural state of society (p.8)

Economics concepts

  • Supply, demand, marginal effects
  • Price discrimination (p.31)
  • Anti-Keynes (p.94-94, 132-133)

Infrastructure:

  • Infrastructure charities – that build public infrastructure (p.62);
  • How capital intensity creates jobs (p.20-21);
  • capital intensive public goods are better (p.26);
  • against appropriate technology (p.89)
  • How big infrastructure is needed to kickstart an economy (p22);
  • infrastructure to eliminate poverty and create jobs (p.27, 33);
  • how housing and construction can play a big role (p.81)

Urbanisation:

  • opposition to agriculture-led growth (p.84)
  • Need to shift from agriculture to industry and services (p.85)
  • Need for urbanisation (p.42)
  • urban density saves petrol;
  • Need for intense urban planning: (107,108)
  • Planned – Mauritius example (p.45);
  • Housing sector– will create jobs (p.17)

Business friendly:

  • Reduce red tape (p.55) and become more business friendly (p.77);
  • simplification of property transactions (p.76);
  • For small sector: no reservations (p.60) but liberalise credit including micro-credit (p.81)

Economic freedom:

  • Globalisation has benefits (p.58)
  • Labour market flexibility (p.81,82)

Basic governance:

  • Distorted incentives of the bureaucracy (p.136-137, 140)
  • Need to focus on administrative reforms (p.86)
  • Judicial reform (p.87)
  • Need for local governments to raise own taxes (p.147)
  • Need to simplify property transactions (p.76)
  • Administration must take a whole of Government perspective (p.50, 113)

Anti welfarism

  • Why subsidy is bad (and why cost recovery is important) (p.27, 28, 30); against unemployment benefits (p.61)
  • Why government doling out schemes will destroy wealth (97)

NOT AS GOOD

Misunderstanding about the effects of competition (p.58)

Insufficient understanding of economic liberalisation (p.69-71)

PURA/ ring road model: Satellite cities should definitely be supported by infrastructure, though.

POOR

Limited vision for India’s ultimate economic status: Believes the maximum India can achieve is equal to the per capita income of the world average in 2002. (p.106)

Theory of the state entirely unrelated to freedom (intellectuals/ politicians/ planners/ administrators) (p.5)

Poor understanding of costs: states that the cost of water/ waste disposal/ cooking gas connectivity, etc. is 10 times cheaper in rural areas than in urban areas. It is quite the reverse.

Poor understanding of salary structure and incentives of bureaucrats (p.80, 148)

Considers Sweden the best socio-economic system (p.6)

Has a communist/ universal subsidy model for 100 sq m land for each family, school, dispensary (p.13) [This contradicts his anti-subsidy stance elsewhere]

Asks the state to direct credit into consumer goods (p.95)

Thinks that the Planning Commission’s plans mean something (they don’t ) (p.113)

Continue Reading

Why India must move from agriculture to manufacturing and services: Indiresan was very pro-business

This section from Vision 2020 (pages 84-86) was another excellent section (I have a few points which I’ll note separately, below). He notes that AGRICULTURE CANNOT BE THE SOLUTION FOR INDIA’S PROBLEMS.

 It is the opinion in the Planning Commission that the Incremental Capital-Output Ratio (ICOR) is much lower in agriculture than in other sectors of the economy. That means, that for a given investment, agriculture is the best bet for maximizing growth. That has reinforced the view that agriculture, and craft industries alone can maximize both growth and employment.

These arguments are plausible; yet, they raise some uncomfortable questions. One: will this emphasis on agriculture support rapid growth let alone the eight per cent growth sought for the next Plan? Two: considering that we are already sitting on top of a grain mountain, can the country absorb further increase in agricultural production? Three: will agricultural employment satisfy the aspirations of modern day youth who are relatively better educated, and are dreaming of white-collar jobs? Four: is it really impossible for industry and commerce to increase employment? Five: does the assumed scenario truly address the real weaknesses of the Indian economy?

As matters stand, existing farmers are able to produce enough food for themselves and for all others too. Yet, a number of non-farmers are starving because their earnings are too little to afford the price at which the surplus grain of the farmers is being sold. Farmers have no incentive to lower prices because the government buys their surplus at relatively high prices. [Sanjeev: He should have opposed this MSP system, but that’s a different matter]

If the suggested solution of the Planning Commission is accepted, non-farmers will produce even more food for themselves – and for others too.

It is not clear where these new entrants to agriculture will find the land to cultivate. If they do succeed, the market for the existing farmers will shrink. In that case, either the government will have to spend more on subsidy, or let the existing farmers become poorer.

Alternatively, the additional produce may be exported. Unfortunately, grain prices in the world market are low. Even if 10-20 million tons of grain are exported, the realization will be much less than what Indian software industry is generating. Hence, if globalization has resulted in jobless growth, the suggested solution is likely to generate growthless jobs. It will be redistributing poverty rather than creating prosperity.

The logical solution in this case is for non-farmers to raise their productivity in sectors other than agriculture, to earn enough to absorb the agricultural surplus that exists already. Implausible as it may appear, the solution to India’s unemployment conundrum is to create well-paid jobs in industry and services, not more ill-paid ones in farming and handicrafts. World over, prosperity has increased only when employment in agriculture shrinks, not when it increases.

Lack of capital is not the problem why the formal sector is not generating jobs. Banks are flush with funds with no takers. The problem lies with entrepreneurs who are virtually on strike. Those few who like to expand, often prefer to do so in China and elsewhere rather than in India. Like talented professionals, industrialists too are voting with their feet and moving out of India. That is the true cause of tardy economic growth in India.

The accompanying Table summarizes the reasons why Indian industrialists find costs in India so high that it is worth their while to move out of the country.

As the table shows, the issue is not that there is little scope for industrial (and commercial) expansion, but that the prevailing political and administrative environment obstructs such expansion.

Table: Excess Costs of Doing Business in India

Cost Factor Nature of the Problem Cause
Materials High prices Poor infrastructure, over-valued currency, labour costs
Labour Low productivity, militancy Low skills, restrictive labour laws
Interest costs High rates Over invoicing, large scale defaults, poor bankruptcy laws, judicial impedance to recovery of bad loans
Depreciation Technology obsolescence Low investment in R&D
Pre-sale taxes Complex, irrational Conservatism, vested interests and corruption among tax administrators
Post-sale taxes Complex, irrational
Services Unreliable, expensive Artificial shortages, uneconomical service charges
Transaction costs Time delays Complex regulations, corruption
Regulations Multiple agencies, Nitpicking culture, corruption complex, irrational
Overheads Little scope for executives Low self confidence of top managers to innovate

It is clear that Prof. Indiresan was pro-business and not a Luddite.

Continue Reading

PV Indiresan was firmly against Keynesian ‘pump-priming’

I’ve been reading a number of books simultaneously, including PV Indiresan’s Vision 2020. Indiresan, although not trained in economics, seems to have broadly understood a number of economic concepts. He does make a few errors here and there, but he is definitely not socialist, nor Keynesian. Not entirely classical liberal, his views are broadly consistent with classical liberalism.

In particular, he has some harsh words for Keynesians:

For four decades, the government went on a spree creating jobs whether they were needed or not. The prevailing view was that employing people was a good in itself – even if there was no work to do, or the work done was not commensurate with the wages paid.

Keynesians consider themselves expert in this area. Stung by the disastrous loss of competitiveness that resulted from their policies, they have been lying low for nearly ten years. Now, they are back at the centre-stage insisting that pumping money into the economy, and increasing fiscal deficit, is the only remedy for unemployment. Fiscal deficit puts all that money and patronage into the hands of politicians and officials. Neither of them is always wise or even honest.

Applied across the board, as Keynesians would do; pump-priming is like rain, it falls both where it is needed and where it is not, even where it may do much harm. So, the consequences of classical Keynesianism are problematic at best and disastrous at worst. [Vision 2020, p.93]

I’ll summarise his key points separately, but this section was good enough for me to scan, OCR and publish.

Continue Reading

Prof. Indiresan’s excellent promotion of capital intensity for creation of public infrastructure

In my recent India trip, Prof. Jaya Indiresan gifted me Prof. PV Indiresan's book, Vision 2020 and explained to me how I had misunderstood Prof.PV Indiresan's work. I assured her that I'd read every word with great care and also include all useful suggestions in the SKC agenda.

I'll provide overall thoughts on the book in the coming days, but first, let me publish an EXCELLENT article I found (chapter 5). This article demonstrates that Prof. PV Indiresan understood some of the basics of economics reasonably well (in other parts of the book, there are definitely a number of relatively minor issues about his basic understanding of economics, but this particular article is generally very good. I'll comment on those issues separately).

(Btw, on this and in a number of other areas, his work provides deeper insights than Kumraswamy's work which I had recently reviewed. In this particular area, Kumaraswamy is anti-capital intensity. He is wrong. Indiresan is right.)

===

The Low Development Trap

In rural development, the stress is invariably on maximizing employment through labour-saving technology. That appears obvious. However, more jobs are created in capital-intensive cities than in labour-intensive villages. Why does labour-saving high technology ends up creating more jobs than labour-intensive low technology? That is a riddle, which few rural development activists bother to unravel.

Let us take a simple, idealized example: There is a closed economy with a hundred workers each one capable of producing a thousand rupee worth of goods or services. Suppose each worker consumes also the same thousand rupee worth of goods and services. Than all 100 workers will have a market for their services, and there will be no unemployment. If at this stage, suppose a new technology is introduced whereby an activity that employed 50 workers can now be done with only 25. Then, the other 25 become redundant. Therefore, rural development experts conclude that labour saving technology creates unemployment.

That is not true. The remaining 25 workers retained on the job can now be paid Rs.2,000 instead of the Rs.1,000 they were getting earlier. Hence, they are now in a position to buy many new goods and services, which they could not afford earlier. That will create new job opportunities for the 25 that were laid off. The redundant workers may then be redeployed immediately if there is enough slack in the supply system, and production in the wanted items can be raised immediately. If there is no slack, those workers will have to wait until additional production gets established.

In this example, workers in the modernized sector earn twice as much as the others. There are several sectors of the economy like the police, schools, live entertainment and the like where there is no or little scope for productivity improvement. It would be unfair, and even unworkable to deny workers in those sectors fruits of economic growth. Ideally, the benefits of productivity gains in any one sector should be distributed equally to all. In practice, some redistribution takes place. That is how the price of haircuts, and teachers' salaries increase when engineers in the IT sector get fatter salaries even though the productivity of neither barbers nor teachers increase.

This linkage between productivity in the primary and secondary sectors and wages in the service sector leads to peculiar anomalies. In the West, industrial workers get high wages, much higher than in India, because their productivity is much higher. That is understandable. However, it is not obvious why bus drivers in the West too earn much more than in India even though Indian bus conductors handle larger crowds and are several times more productive.

In spite of their higher productivity, Indian bus conductors earn less because wage levels are determined primarily by the productivity in tradable goods and services. Higher productivity in non-tradable goods or services rarely gets reflected as high wages. For that reason, rural wages will be low wherever agricultural productivity is low. Conversely, rural wages will increase when agricultural productivity increases, or when high productivity industry moves to villages, not otherwise. As a rule, our schemes for rural development insist on low productivity agriculture and handicrafts. Thereby, they perpetuate poverty.

Jobs are lost in agriculture and in industry due to increases in productivity. They are compensated by growth in the service sector. As a thumb rule, for every job in industry, three more should be created and supported in the service sector. Our planners have neglected this aspect of development. Thereby, they have stunted growth.

Rural development is limited also because rural markets are small. A cinema theatre is viable only when it can be accessed by tens of thousands of potential customers. The same is true of hospitals and a host of other services. Connectivity to such large numbers of potential customers exists in cities but not in villages. Therefore, such services flourish in cities but not in villages. For that reason, villages do not support jobs in theatres, hospitals, colleges, banks, and the like. In other words, rural jobs are few not so much because of limited demand but because that demand is fragmented.

These are all hurdles. Even when these hurdles are overcome, one additional problem remains. New jobs should be created rapidly – growth rate depends both on the quantum of growth and the rapidity with which that growth is engineered. How fast the economy grows depends on whether investment policy is proactive or reactive.

To appreciate the difference between proactive development and reactive development, consider the way airports come up in India and how they do in China. In our country, the policy is to wait for the airport to get crowded beyond endurance and then debate what to do. That is reactive administration. In contrast, the Chinese have built huge airports in anticipation of future growth. The Chinese invest for the future; Indians invest to correct errors inherited from the past.

In the Chinese scenario, airports start operating much below breakeven level. Initially, they incur substantial losses until demand reaches breakeven level. India avoids that transitory loss but incurs a more permanent one, that of never ending shortages. In India, overcrowding stunts growth; makes it slower than what it need be. In China, Say's Law applies. Excess supply creates its own demand. That accelerates growth; makes it greater than what it would have been otherwise. That is the secret of rapid growth in China, and the cause of tardy growth in India.

This simple example leads us to two styles of development: One, the proactive, where excess production capacity is pre-established in anticipation of future growth. Two, the reactive, capacity is created only after demand manifests itself. The former incurs a finite initial loss. The latter incurs a perpetual loss.

If policy-makers are proactive, invest in anticipation of future growth, and are unafraid to incur transitional loss, growth will be rapid. If they are reactive, wait for market shortages to appear first before investing, and prefer to bear the hardships, lost opportunities and congestion costs of shortages, growth will be slow. The former is the enterprise mode where errors of judgment are accepted as unavoidable. The latter is the bureaucratic mode where procedural errors should be zero but losses can be infinite.

In brief, the factors that restrict rural development both through low wages and by limiting job opportunities are:

1. Villages do not support large markets.

2. Rural development schemes support only low productivity traditional crafts, not high-wage modern industry. No rural development minister would dream of inviting Mr. Tata, or Mr. Narayanamurthy to a village.

3. We have a dual policy: high quality, high cost amenities in cities, and low quality, low cost systems in villages. We deliberately provide substandard schools, healthcare, roads, energy, water, and connectivity in rural areas.

4. As a national policy, whether in villages or in cities, our investments in infrastructure are reactive, not proactive.

Except the first item, these are all artificially created hurdles. Even the first issue of fragmented markets can be remedied by linking a loop of 1520 villages by fast and frequent bus services. That will integrate the separate tiny markets of all those villages, and make them a virtual town. When that step is taken (that will require, as a prerequisite, the construction of a high-speed ring road linking the villages), rural poverty ceases to be a heavenly ordained calamity and becomes a man-made malady.

Then, let us try an experiment. One, let us adopt the Chinese model of infrastructure development – invest first, accept transitional loss as desirable, and construct a ring road linking a suitable set of villages. The cost may be minimized by routing the road as far as possible through uncultivated land, or les fertile space. Let us also establish frequent bus services according to urban norms (say every ten minutes).

We may even stop here. In that case, all the villages situated along the ring road become one market of 50-100,000 customers but without the amenities and services that a town of that population will normally have. That differential between what a town of that size can support, and what these villages actually possess, becomes a Driving Force of development, a business opportunity. Hence, the ring road will attract many new businesses. In course of time, the ring road will attract all that towns will have but isolated villages do not have.

Let us call this the Connectivity Based Development model. Past-experience tells us that in this basic model, businesses will come right up to the edge of the ring road, and even encroach on it. Those encroachments, and the cross-traffic between businesses on either side of the road, will force traffic to crawl. Unplanned construction will erupt on either side. Such unregulated development based solely on road connectivity leads to faster development, but development of low quality. Not only will the development be of low quality, it will also be a self-limiting one – future improvements become quite impossible. That phenomenon, all too common in India, may be described as Low Level Development Trap.

The moral of the story is, connectivity is necessary but not sufficient for quality development. We will discuss next how to remedy this problem.

- April 22, 2002 (69).

Continue Reading

My compilation/ compendium on Adam Smith. Works/ works about him/ my notes. PDF/ Word.

This is a placeholder blog post.

WEALTH OF NATIONS

Nearly 10 years ago I compiled Adam Smith's Wealth of Nations into a word document and uploaded on the internet. That seems to have disappeared over the years during the transfer of my domain from one server to another. Luckily I had a copy on my hard disk so I've uploaded on my server again.

Download here.

PDF version is available here.

THEORY OF MORAL SENTIMENTS

PDF version is available here.

LIFE OF ADAM SMITH

I've converted to Word today.

Download here.

PDF version here.

WISDOM OF ADAM SMITH

I've converted into Word.

Download here.

MY BLOG POSTS ON ADAM SMITH

The exquisite brilliance of Adam Smith

A fascinating look at Adam Smith’s life and philosophy

Adam Smith’s message in a nutshell

Adam Smith’s scathing attack on FOOL doctors and the self-seeking monopoly of the “medical” profession

Adam Smith’s liked being paid directly by students. He detested tenure, as well.

Adam Smith would turn in his grave at Gandhi’s gross misrepresentation of his work

Ayn Rand, Adam Smith and I agree on the virtue of “selfishness”. This is much deeper than you may think.

Hindu capitalism is Adam Smith’s capitalism supercharged

P J O’Rourke is a brilliant communicator. Listen to him explain Adam Smith’s ideas.

Adam Smith’s work was driven by his deep concern for the poor

Nassau Senior, the clear headed economist who cleared up Adam Smith’s errors

Discovery of similarities between Adam Smith’s views on taxation and mine

Adam Smith Pharmacy: Advice on protection of industry

Islamic economics finds that Adam Smith was right

 

Continue Reading