This post is (prima facie) an overview and series of observations/facts ranging from what is Economic Development to why India needs more than Double Digit GDP growth?
I sit down to write this post in "POST DEMONETISATION" era, where Indians are no more hesitant to think about what they can contribute to the nation and its prosperity. I will just brush through the concepts of Money and GDP before I move on.
Let's start with definition of Economics (study of human behaviour)
Every human being has wants. As it is popularly said “Wants are unlimited”. His entire endeavour is to satisfy them. But the resources that are available to fulfil them are limited. Economics as defined by Robbins “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”.
Bearing the fundamental rule of life “To live and let others live”, there arose Government as Central Planning unit (of the people, by the people and for the people) to enable people fulfil their wants and ensure that this fulfilment of wants isn’t at the cost of other people. We all know how majority of our wants are fulfilled. (with help of MONEY..isn’t it?)
EVOLUTION OF MONEY
Ancient times had Barter System, whereby people fulfilled their wants by exchanging their produce/service. But it failed miserably primarily due to lack of double coincidence of wants apart from other issues stated below.
1. Lack of Double Coincidence of Wants:
Barter transactions can be possible only when two persons desiring exchange of commodities should have such commodities which are mutually needed by each other. For example, if A wants cloth, which B has, then A should have such commodity which B wants. In the absence of such coincidence of wants, there will be no exchange. However, it is very difficult to find such persons where there is coincidence of wants.
2. Division Issues:
The second difficulty of barter exchange relates to the exchange of such commodities which cannot be divided. For example, a person has a cow and he wants cloth, food grains and other items of consumption. Under such a condition, exchange can be possible only when he discovers a person, who is in need of a cow and has all such commodities, but it is very cumbersome to get such a person.
Similarly the second problem relates to the exchange of such commodities which cannot be divided into pieces, because in this kind of situation, a big commodity like cow cannot be divided into small pieces for making payment of the goods of smaller value.
3. Lack of a Common Measure of Value:
The biggest problem in the barter exchange was the lack of common measure of value i.e., there was no such commodity in lieu of which all commodities could be bought and sold. In such a situation, while facilitating the exchange of a commodity its value was to be expressed in all commodities, such as one yard cloth is equal to ½ kilogram of potato etc. It was a very difficult proposition and made exchange virtually impossible. Now, with the discovery of money, this difficulty has been totally eliminated.
4. Lack of Store of Value:
In a barter economy, the store of value could be done only in the form of commodities. However, since commodities are perishable and they cannot be kept for a long time in the store. Because of this difficulty, the accumulation of capital or store of value was very difficult and without the accumulation of capital, economic progress could not be made. It is because of this reason that as long as barter system continued, significant progress was not made in the world anywhere.
To overcome these difficulties, money was introduced. Initially it took the form of coins made of precious metals. Later it was transformed into paper currency that we see today.
GDP – AS A BEACON FOR POLICY MAKING
Government also needs money to carry out its function as it comprises individuals and also has to carry out activities to enable people fulfil their wants. To ascertain as to how much money is required to be pooled, it needs to estimate how much income is earned by entire country i.e. its individuals (referred to as GDP) and how much needs to be contributed by individuals by way of taxes/duties. After deducting Depreciation to consider capital expense on accrual basis, we arrive at Net Domestic Product to which we add income from abroad (Exports – Imports).
GDP is measure of “Economic Growth”. But GDP doesn’t take into account income distribution among individuals.
ECONOMIC DEVELOPMENT
GDP is not the only indicator that is of pivotal importance to Developing Economies like India. What India needs is MORE THAN DOUBLE DIGIT GDP GROWTH.
India needs Economic Development. Economic development in nut shell is about reduced economic inequality among citizens apart from rise in GDP. (Income tax data – 1% people having 58% wealth: 388 people having wealth of 70% poor). Equitable distribution of wealth apart from the ability to generate wealth on sustainable basis is required for any country.
Fair enough, but how do you achieve it? To put it simply, let’s think of a car. How does it move? On pressing the Accelerator after changing gear from neutral with a clutch? Similarly Economy has got “Factors of Production” which are key levers. When all factors of production are in sync, it will definitely reach destination of economic equality and development. After all PRODUCTIVITY IS EVERYTHING.
HUMAN CAPITAL (Factor of production -1)
Any economy consists of factors of production which produce goods/services to be ultimately consumed by people. That is to say every individual is definitely a consumer of at least one industry. Interestingly, factors of production include “Human Capital”. So an individual who consumes also takes part in producing goods/services (i.e. An individual can be both on the demand side as well as supply side of economy). Real problem arises when only few individuals produce and there are huge population who depend on them. Fortunately, Age of average Indian is around 29 years by 2020 (including me :P). (extract from Wikipedia below)
“India is projected to be the world's most populous country by 2022,surpassing China, its population reaching 1.7 billion by 2050.[6][7][8] Thus, India is expected to become the first political entity in history to be home to more than 1.5 billion people. Its population growth rate is 1.2%, ranking 94th in the world in 2013.The Indian population reached the billion mark in 1998.
India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan; and, by 2030, India's dependency ratio should be just over 0.4”
India has the best possible age profile with 65% below 35 years as it has young workforce potential.
POPULATION IN INDIA
After all “a country is a group of individuals in a geographic boundary”. In India, to arrive at the number of those individuals it takes 10 years (Population Census is published once in 10 years). If that is the case, how can you plan national incomes and expenditure for any particular year accurately, if you are not aware as to how many you have to consider.
For example, consider an example of a marriage invitation. Suppose you have estimated that 500 people will attend for the wedding. Accordingly, you have planned seating and dining capacity for 500. What if 480/520 turn up? 20 Hardly matters, as you have considered that deviation. At the most it will result in delayed activity like some people will have to wait before they can get a seat and dinner. But what if 400/600 turn up? 100 (20% fluctuation) is a big number to deal with. Isn’t it?
Assume in the same example, that you have not appointed any one of your family to receive guests at the gate. Then aren’t you vulnerable for unwanted visitors? Wouldn’t that impact your tally of 500? Bear it in mind that PLANNING is crucial to any activity whether it pertains to a person or a country. Remember, planning requires awareness apart from precision. Awareness as to what can come in your way to destination.
So, Awareness as to what is our population is of pivotal importance to Planning a country’s finances. Having said that let me continue to tell as to what else is relevant before I come up with a solution. Sticking to definition of country as “group of individuals”, country’s efforts are efforts of group of individuals acting independently or collectively in sync towards a common goal (whatever be the name you give to the group – Company, Firm, NGO, Trade Union, Religious, Spiritual etc) So ultimately only when the goals of entire group of people in country are in sync, a country can’t progress. Otherwise, it’s a paradox. One pulling forward and two pulling backward.
MONEY (Factor of production -2)
Money. One of the most common goals for an individual is to earn money. For many, earning money should be effortless whether it be sops, doles etc. One such school of thought proposes “Universal Basic Income (UBI)” to alleviate poverty. Apart from the meeting the basics (food, clothing and shelter), everyone has their own set of things to do.
In this regard, I have conducted a very small Survey among my friends. I asked them “3 things they would do if they were gifted enough money to become richest person in India” in order to predict the responses. One response which is most common and expected one is “to uplift the poor and the needy” and that too by distributing money.
Generally people think that money is created only when paper currency/coins are printed by RBI and/or Govt of India. Few may think that paper/metal can be saved if (eco friendly) a Bank Account is used as it saves time. Then, who is stopping RBI and/or Govt of India to give as much money as possible so that all Indians are on equal footing?
For example, let us now look at what happens if it is done in 2 small villages primarily based on Agriculture.
A) Giffen’s paradox (people chasing costly goods/services like real estate properties, Foreign trips, luxury cars, iphones etc)
B) Backward bending of labour supply (once that people have got enough money, they will no more be willing to work),
apart from inflation and its consequences are few notable consequences of "EASY MONEY".
Moreover, Easy money can lead to activities of betting, gambling, horse races and other unproductive activities.
Let’s look at why cards, betting, gambling, horse races etc are unproductive, though they involve “distribution of money” between winner and loser, because
· Activity which triggered the payment of money (i.e.cards/betting/gambling etc), by definition, is uncertain and dependent on events that are wholly not within the control of participants (supposedly) and doesn’t create any good or service.
· Wants of loser are not satisfied and he is in much worse position than before. How can a loser who pays money to winner be satisfied? That’s obvious. Isn’t it?
· To the winner, it is easy money (money without effort). We all know what happens if money is not hard earned (wasteful expenditure)
Irrespective of the fact, that unproductive activities are SKILL based, they can’t be entertained for simple fact that no good is created/ service is rendered. A developed economy is not the one where people have to shell out 100’s to eat but can get their meal for less than 10. Basics (Food, Clothing and Shelter) are cheaper and available to all though not for Free.
On the other hand, easy money policy (RBI Rate cut) has positive impact for businesses and consumers if the benefits of economies of scale (expansion through debt funding/surplus cashflows due to lower interest) are passed on to consumers through market penetration pricing strategy by enterprises.
But if the production of goods/services is not as per estimation, it’s counterproductive due to inflation (too much money chasing too few goods/services). The writing on the wall is clear. Produce and then consume. Be a “net producer”. That is, produce more than you consume.
So whether FREE MONEY is distributed once or over a time, impact is the same. Vicious cycle of poverty and unemployment can’t be broken with this kind of FREE MONEY/SUBSIDY/UBI initiatives. It needs a vaccine and not anti-biotic which cures temporarily.
So let’s look at a longer route and the one that involves collective efforts. These efforts are to be made both by individuals as well as Government.
ORGANIZATION (Factor of Production - 3)[entrusted to Government of India]
To start with, let me also introduce “Value Chain” and “SIPOC” at this juncture. Every end product/service has a value chain and every component of value chain has SIPOC (suppliers, inputs, process, outputs and customers).
Let me also highlight TiVA (Trade in Value Added) analysis by World Trade Organization for throwing light on decomposition of Gross Exports of a nation.
(Few images to brief about TiVA)
Here is the glimpse of India's Exports decomposition and participation in Global Value Chain as acertained by WTO.
One of the striking observation is the growth of "Domestic VA re-imported into economy". This refers to there are certain inputs/intermediary goods/services which were sent abroad on round trip for processing and re imported to India for production of final goods/services exported. This shows that there are certain parts of Value Chain of those industries which are either absent in India or are not feasible to be carried out in India.
Just imagine what can happen if this exercise of Value chain and SIPOC is compiled electronically for all Indian industries and crunched (along with quantitative details) accordingly so as to identify complex scenario of the economy. By the way, kudos to Indian Government for initiating OGD (Open Government Database) which currently has number of companies, paid-up capital economic activity wise and various other data assets.
That's all for now. I would not be talking about "LAND/NATURAL RESOURCES" as they are not scalable for India. Now that it is not the age of kings and kingdoms where wars are waged to exploit resources of others, let us just utilize the available land/resources sustain-ably. Moreover, for a nation that has earned its independence on the foundations of Peace spread by Mahatma Gandhi it would be against its DNA to capture/loot resources of other countries.
THANKS FOR YOUR TIME!!! I would be soon revealing my 5 step model customized for INDIAN terrain which could enable it to embark the path of Economic Development. You are free to comment below or even reach me at prasad.mssn @ gmail.com
JAI HIND.....!
CAclubindia
