"Thinking of disease
constantly will intensify it."
—Swami Sivananda (Indian,
1887-1963)
Word for the day
Vamoose (v)
To leave hurriedly or
quickly; decamp
Malice towards none
Will nature's fury and fire
make Trump rethink his stance of Paris deal?
First random thought this morning
People arguing for TINA favoring Shri Narendra Modi in 2019,
appear totally convinced about the inability of Shri Rahul Gandhi and other
Congress leaders to lead an effective government. Incidentally, most of these
people also strongly believe that the UPA government was controlled and
directed by the Gandhi family from behind the curtains.
Keeping the errors of omission & commission and multiple acts
of corruption committed by various individuals aside for a minute, I would like
to know what Policy Disaster was committed by the UPA government controlled and
directed by the Gandhi family.
If you can't cite any meaningful policy mistake, then logically
you should be afraid of the ability of Gandhi family rather than celebrating
their inability!
Red flags - 5
I had perhaps quoted this before also. Regardless, I find it
extremely pertinent to draw notice of my readers to the following discourse
from Unlearning
Economics.
"First, something which is expected to do a certain job
- whether it's an economic system or the economists who study it - is expected
to do this job all the time. If an engineer designs a bridge, you don't expect
it to stand up most of the time. If your partner promises to be
faithful, you don't expect them to do so most of the time. If your
stock broker promises to make money but loses it after an asset bubble
bursts, you won't be comforted by the fact that they were making money before
the bubble burst. And if an economic system, or set of policies, promise to
deliver stability, employment and growth, then the fact that it fails to
do so every 7 years means that it is not achieving its stated objectives.
In other words, the "invisible hand" cannot be acquitted of the
charge of failing to do its job by arguing it only fails to do its job every so
often.
Second, the argument implies there was no causal link between
the boom and the bust, so the stable period can be understood as separate from
the unstable period. Yet if the boom and the bust are caused by the same
process, then understanding one entails understanding the other. In this case,
the same webs of credit which fuelled the boom created enormous
problems once the bubble burst and people found their incomes scarce relative
to their accumulated debts. Models which failed to spot this process in its
first phase inevitably missed (and misdiagnosed) the second phase. As
above, the job of macroeconomic models is to understand the economy, which
entails understanding it at all times, not just when nothing is going wrong -
which is when we need them least.
As a final note, I can't help but wonder if this argument,
even in its general political form, has roots in economic theory. Economic
models (such as the Solow Growth Model) often treat the boom as the
'underlying' trend, buffeted only by exogenous shocks or slowed/stopped by
frictions. A lot of the major macroeconomic frameworks (such as Infinite
Horizons or Overlapping Generations models) have two main possibilities: a
steady-state equilibrium path, or complete breakdown. In other words, either
things are going well or they aren't - and if they aren't, it's usually
because of an easily identifiable mechanism, one which constitutes a
"notably rare exception" to the underlying mechanics of the model.
Such a mentality implies problems, including recessions, are not of major
analytical interest, or are at least easily diagnosed and remedied by a
well-targeted policy. Subsequently, those versed in economic theory may have
trouble envisaging a more complex process, whereby a seemingly tranquil period
can contain the seeds of its own demise. This causes a mental separation of the
boom and the bust periods, resulting in a failure to deal with either.”
Now let's examine the current Indian economic narrative in this
context.
First, it is an undeniable fact that the long term growth trend of Indian
economy has been on the decline since the global financial crisis. We have seen
a marginal recovery since FY13 (some of it could be contributed to the change
in data series), but the trajectory of long term growth trend is now plateauing.
There is one strong argument that the current stagnation in growth
trajectory is due to a number of economic reform that would result in
accelerated growth in not very distant future.
In particular, reforms like GST, RERA, Bankruptcy Code, greater
Financial Inclusion, and Digitization of Payments, are cited as watershed in
Indian economic history.
I have no doubts whatsoever about the importance of these reforms.
These reforms were indubitably necessary for supporting a higher growth
trajectory. But I find the argument that these reforms per se would
accelerate the growth somewhat fallacious. For example, consider the following:
(a) GST is conceptually
designed to improve "ease of doing business", enhance scalability of
businesses through uniformity and standardization, and enforce compliance.
There is nothing to suggest that GST will lead to higher demand (consumption or
investment), better physical or social infrastructure, more jobs, or even
better profitability of businesses. If at all, it may result in higher net
incidence of taxation on businesses and people. How does GST per se
causes higher growth?
(b) RERA per se
cannot generate demand for housing.
(c) Bankruptcy Code may
accelerate NPA resolution. But how would it improve banks' capital adequacy or
prevent accretion of future NPAs!
(d) Similarly, Financial
Inclusion and Digitization Payments are enabling conditions, not necessarily
growth accelerators.
For my investment strategy, I would therefore overlook the
argument that "these reforms slowed down the growth and these reforms will
only accelerate it in future".
Also read the following:
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