This week saw the protests and discussions on fuel( petrol ) price hike. It was mentioned that middle class will be crushed under the load of inflation/fuel price hike etc. etc...
Frankly none of this is true.
Middle class in India is in fact pampered a lot and subsidized by none other than the poor!
Consider this:
1)Rail travel is subsidized
2)Full Education from school to post graduation and even doctorate is subsidized
3)Fuel including cooking gas , diesel and till recently petrol was subsidized
4)Food is subsidized
5)Water is subsidized in most municipalities.
6)Government Hospitals provide very cheap services
7)Most importantly Even most services are subsidized!
Who is paying all this subsidy? Industry ?
Well it's poor farmers and factory and household worker/bai/butler etc .
How?
Ever wondered how these people earning in the range of 2 to 5,6 thousand Indian rupees make ends meet? How can they live in an expensive cities like Mumbai, Delhi and other Tier 1 and 2 cities with these meager income?
Well they live in slums and make their ends meet . If they start living at the minimum standard of cities and in their own pucca house , their services will become much more costlier.
Hence they actually provide "subsidy" the middle class.
It is a well known fact that Indian farmers do not get enough profit for their produce . Inflation for primary articles has remained stubbornly high since last few years especially food and vegetables.
There is a very simplistic explanation to all this.There has not been enough investment in agriculture in India and the reason for that is that there is not much return.Hence any slight demand uptake leads to high inflation of these commodities.
Again who has benefited the most from the low food prices over last few decades?
Not the farmer which constitutes the most poor of India.
The only way out of this quagmire is increase prices to such a level where it becomes attractive for farmers to produce more and do investment. This will ensure better supply side elasticity in future.
The fuel subsidy which amounts to a 1-1.5 lakh crorers every year. It can simply be diverted from middle class to farmers and poor people .
Now ,There is a very the old thinking ( mindset actually) that out of 1 Rs spent by Government only 15 paise reaches villages ( Rajiv Gandhi's utterances, he was surely not an economist).It is not true. It is possible to ensure that almost all of it reaches the poor.
Subsidize raw material like fertilizers , seeds , pesticides and provide direct account transfer of subsidy, increase budget support to rural employment programs, reduce interest on loans to farmers etc.There are many ways ...
Middle class tends to be a vocal vote bank , but not decisive one.Government will do well to get rid of lopsided subsidy as soon as possible.
Saturday, September 17, 2011
Sunday, April 24, 2011
Economics beyond Demand and Supply
All of us have been taught about the simple demand supply , IS LM Curve etc. etc. in Macroeconomics. Although the principles hold true, I believe they are just one among the many factors that affect economic development.
US economy performed well in 20th century not only because of favorable demand –supply dynamics there were other factors responsible for growth and development. Most Middle east countries have abundant natural resources ( namely OIL) but are way behind in terms on innovation , human development index , Ginni’s coefficient ,literacy , employment etc .England did not have natural resources worth mentioning , but had a supporting social structure which was responsible for it’s dramatic rise in 19th century.
I believe the following factors are as important or more for sustained economic development.
•Social: This is the most important factor for sustained economic development. If a society is open to change, is merit based , encourages innovation , well educated ( merely being literate is not enough), fair , has enough checks and balances to avoid excesses I believe seeds of prolonged economic growth are already sown.
India for one never had a fair society for millenniums together, social movement was restricted,
women largely are not part of workforce; large sections of the society were not permitted to take education and so on. But this just shows how much latent potential Indian society has to aid economic development in coming decades.
•Political: Imagine a political system where politicians do not want people to be educated, economy to develop to perpetuate their rule . There are basically two ways former is the easier way, the tougher one entails economic development and deriving political mileage out of it . Sadly Indian politics in 70s and 80s ( in fact till recently ) was of first type. There is no example of a banana republic doing well economically over longer run.
•International Relations: There are so many countries that have benefitted because of their proximity to certain countries . UK , Japan , Korea benefitted immensely from US. South America is an contrary example. Of course, it is incumbent on politicians of any country that this factor is positive for them, but it may not always be the case.
•Natural Resources: It is said that presence of natural resources greatly contributes to economic development. There are not many examples where natural resources alone can single handedly ensure economic development . There is enough research material that suggest that presence of natural resources Crowds out of Innovation and hence may not be of any help over longer run. Perfect example : Middle East .
•Demographic: Population was considered bane till a decade ago , till a concept called Demographic Dividend arrived . Japan did not have favorable demographics and the economy stagnated since 1990 . I believe It is a very important factor for developed countries. Sadly continental Europe , Japan and to an extent US do not have favorable demographics.
•Geographic: Ask anyone in Land Locked Country and you’ll know how important this factor is . Favorable geography, whether patterns etc. will be positive for any economy. India has a huge advantage on this front .
•Historical: I believe this is a factor that influences social, political factors and hence it only indirectly affects for example, a child born in US or UK gets a head start because of well-developed infrastructure and society as compared to developing countries.
US economy performed well in 20th century not only because of favorable demand –supply dynamics there were other factors responsible for growth and development. Most Middle east countries have abundant natural resources ( namely OIL) but are way behind in terms on innovation , human development index , Ginni’s coefficient ,literacy , employment etc .England did not have natural resources worth mentioning , but had a supporting social structure which was responsible for it’s dramatic rise in 19th century.
I believe the following factors are as important or more for sustained economic development.
•Social: This is the most important factor for sustained economic development. If a society is open to change, is merit based , encourages innovation , well educated ( merely being literate is not enough), fair , has enough checks and balances to avoid excesses I believe seeds of prolonged economic growth are already sown.
India for one never had a fair society for millenniums together, social movement was restricted,
women largely are not part of workforce; large sections of the society were not permitted to take education and so on. But this just shows how much latent potential Indian society has to aid economic development in coming decades.
•Political: Imagine a political system where politicians do not want people to be educated, economy to develop to perpetuate their rule . There are basically two ways former is the easier way, the tougher one entails economic development and deriving political mileage out of it . Sadly Indian politics in 70s and 80s ( in fact till recently ) was of first type. There is no example of a banana republic doing well economically over longer run.
•International Relations: There are so many countries that have benefitted because of their proximity to certain countries . UK , Japan , Korea benefitted immensely from US. South America is an contrary example. Of course, it is incumbent on politicians of any country that this factor is positive for them, but it may not always be the case.
•Natural Resources: It is said that presence of natural resources greatly contributes to economic development. There are not many examples where natural resources alone can single handedly ensure economic development . There is enough research material that suggest that presence of natural resources Crowds out of Innovation and hence may not be of any help over longer run. Perfect example : Middle East .
•Demographic: Population was considered bane till a decade ago , till a concept called Demographic Dividend arrived . Japan did not have favorable demographics and the economy stagnated since 1990 . I believe It is a very important factor for developed countries. Sadly continental Europe , Japan and to an extent US do not have favorable demographics.
•Geographic: Ask anyone in Land Locked Country and you’ll know how important this factor is . Favorable geography, whether patterns etc. will be positive for any economy. India has a huge advantage on this front .
•Historical: I believe this is a factor that influences social, political factors and hence it only indirectly affects for example, a child born in US or UK gets a head start because of well-developed infrastructure and society as compared to developing countries.
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