Posts Tagged ‘economics’

India on the move

This article was written by me for on the event of the 60th birth anniversary of our nation. 6 years later we seem to be worse off than ever. Some part of the blame lies on the world financial crisis, but a large portion lies within lack of political will and business apathy.

Here is hoping that the next 6 years will see a robust change


2007 has been a momentous year for India. We have seen the stock markets rising and the dollar falling. Consumer spending and salary levels are never before heights. Today’s young Indian is earning a start salary that his father barely managed to before retiring.

India achieved 8.5% GDP growth in 2006, significantly expanding manufacturing. India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers. Economic expansion has helped New Delhi continue to make progress in reducing its federal fiscal deficit. However, strong growth – more than 8 percent growth in each of the last three years (and over 9% in parts of the last year) – combined with easy consumer credit and a real estate boom is fuelling inflation concerns. The huge and growing population is the fundamental social, economic, and environmental problem. Here is a comparative picture of the growth of India’s GDP.

india graph

The 11th Plan

Sector              Growth rate                 Share of GDP
                          2002-07   1997-02     2002-07  1997-02

   Communications   15.0     17.14             2.3        1.7
   Manufacturing       9.82      3.68            16.7      15.3
   Agriculture            3.97     2.06             20.5      24.7

India is moving from an agricultural economy to a service economy surely but steadily. In relative terms, the decline of agriculture in the share of GDP from 24.7 to 20.5. That decline implies that services and manufacturing are gaining share and that implies that we are moving away from a subsistence economy to one in which we may have some hope of improving our lot.
Of course, as a developing economy, agriculture is the core of the economy.  If India is to ever develop. It is only very severely underdeveloped economies have high agricultural sector share of GDP. For instance Albania, Ethiopia, Mali, Nepal, Ghana — economies with agriculture accounting for a large share of the GDP. Australia, France, Germany, US — agriculture accounts for low single-digit shares of the GDP.

The Indian economy on the eve of the 11th Plan is in a much stronger position than it was a few years ago. After slowing down to an average growth rate of about 5.5% in the Ninth Plan period (1997-98 to 2001-02), it has accelerated in recent years and the average growth rate in the Tenth Plan period (2002-03 to 2006-07) is likely to be about 7%. This is below the Tenth Plan target of 8%, but it is the highest growth rate achieved in any plan period. While this performance reflects the strength of the economy in many areas, it is also true that large parts of our population are still living below the poverty line. The percentage of the population below the poverty line is declining, but only at a modest pace.  These problems are more severe in some states than in others, and in general they are especially severe in rural areas.


Oil- The master of the future

Petrol has dominated world economics for long and will continue to do so for the years to come. Oil has formed a large part of India forex outflow. It is however earning refining business which has been offsetting its import bills. In fact, during 2006-07, refined petroleum products formed the largest chunk of total exports overtaking the Gems and Jewellery sector.

The cost effectiveness of refining in India is drawing many global players here. This is because India is logistically well placed for refineries. Besides being a major market for crude oil and petroleum products, it adjoins major demand centres such as China. Also, crude oil from West Asia can easily be brought to refineries in India.

Of late, a number of players have evinced a keen interest in laying pipelines in the domestic market to supply gas to the consumers. For example, Gujarat State Petronet Ltd, a group company of the Gujarat State Petroleum Corporation, plans to connect all 25 districts of the state with 2,200-kilometre high pressure gas pipeline laid down across the state. Reliance will invest US$4 billion to lay a 1,386-kilometer pipeline from Andhra Pradesh to Gujarat. India is also one among the four countries which have the world’s richest gas hydrate reserves.

India ranks sixth in the world in terms of petroleum demand and by 2010, India is projected to replace South Korea and emerge as the fourth-largest consumer of energy, after the United States, China and Japan. The rising price of crude is of great concern to the growth of the Indian economy. India needs to step up its domestic exploration to produce substance instead of wisps of promise that it has been done till now.

The Forex concerns

In recent days the rupee-dollar exchange rate has been, on average, Rs 39.3 per dollar. A year ago it was 44.7. This means that the rupee has appreciated against the dollar by 13.7% in the last year. Put differently, for an Indian the average price of all American goods has fallen by 13.7% and, for Americans, goods from India have become more expensive.

Over the last year virtually all major currencies have been appreciating vis-à-vis the US dollar. The euro rose by 14.7%, the pound by 10.4%; the Canadian dollar by 23%, Sweden’s kroner by 13.7% – the same as the Indian rupee. Vis-a-vis all major currencies, outside of the US dollar, the rupee has changed very little. It is due to our high dollar exposure of our exports (especially software exports which has been driving the economy to a high) that the fall of the dollar has become a cause of concern.

The 3-D Advanage

As Mr Anand G Mahindra, Vice-Chairman and Managing Director, Mahindra and Mahindra, India said in a seminar, he reposed faith in the 3D advantages of India, Democracy, Demography and Durability. Democracy is a prerequisite to a healthy society, polity and economy. India’s demographic advantage is that it has the highest number of people in the working age group and this is going to continue for some time. Durability stems from the fact that India is a peaceful and stable nation despite many internal disturbances. He said that India has the second largest Muslim population in the world peacefully coexisting with the Hindu majority.

Some facts to chew on

  • India is the world’s fourth-largest economy.
  • By 2034, India will be the most populous country on Earth, with 1.6 billion people.
  • India’s middle class is already larger than the entire population of the United States.
  • One out of three of the world’s malnourished children live in India.
  • India is home to the biggest youth population on earth: 600 million people are under the age of 25.
  • India just edged past the United States to become the second-most-preferred destination for foreign direct investment after China.
  • In 1991, Indians purchased 150,000 automobiles; in 2007, they are estimated to purchase 10 million.
  • By 2008, India’s total pool of qualified graduates will be more than twice as large as China’s.
  • By 2015, an estimated 3.5 million white-collar U.S. jobs will be offshored.
  • India is the largest arms importer in the developing world.
  • American corporations expect to earn $20 to $40 billion from the civilian nuclear agreement with India.
  • In 2007, there are 2.2 million Indian Americans, a number expected to double every decade.
  • Twenty-nine percent of India’s population speaks English – that’s 350 million people.

Economics of Terrorism

The terrorist attacks on New Delhi in crowed market areas on a saturaday evening have chilled most Indian to the soul….we are all wondering – are our loved ones safe? Will we be next?

Here are some thoughts on how the econmics of terorism works


Terrorism specifically affects…

• Tourism

• Stock markets

• Trade:bilateral trade 4% 

• Insurancec costs rise, loss to insurers

• Oil markets: reduce Supply (Iraq); reduce Demand (London)

• Foreign direct investment

• Portfolio investment (size and composition)

• Saving and consumption 

• Investment 

• Utility: personal impact costs (life and property;disruption to production; fear and grief; injury; response costs, e.g. medical; etc.)



Terrorism beliefs

Terrorists are not desperately poor uneducated people from the Middle East. A surprisingly large share of them have college and even graduate degrees. Increasingly, they seem to be from Britain, like the shoe bomber Richard C. Reid and most of the suspects in the London Underground bombings and the liquid explosives plot.

This has left the public wondering, Why are some educated people from Western countries so prone to fanaticism? Before trying to answer that question, though, some economists argue that we need to think about what makes a successful terrorist and they warn against extrapolating from the terrorists we catch. It is a problem economists typically refer to as “selection bias.”

Most terrorists really are committed true believers, willing to die for their cause. Within the Muslim world, the researcher found a positive relationship between level of education and support for terrorism — the higher your level of education, the more likely you are to support terrorism against Western (including Israeli) targets. Suicide bombers also tended to be better educated than the average population. 


The economic impact of terrorism

The “impact” part of the attack is trivial from an economist’s point of view (sad, to be sure, and it involves such dicey moral and technical issues as how to value the loss of lives, but nonetheless trivial). 

To understand terrorism we need to analyze its elements:

There are four elements in this definition:

(a)   the inducement of intimidation or fear;

(b)  the use, or threat of use, of extra-normal violence;

(c)   the premeditated character of such violence; and

(d)   the political objective.

 The last element – the political objective – is of particular interest because it requires that terrorists must reveal their identity and that they must communicate their demands.


Bombings are by far the preferred method of terror. The reason, once more, has to do with the cost of the action. Hostage taking is logistically more complex and operationally more risky than is bombing. Bombing is not only cheap for the terrorist but more costly to detect for government (far fewer communications available for interception for instance, making it harder to track down potential bombers). Once more, as theory predicts, a lower cost will attract more activity.

Terrorism is not a “crime of passion.” Contrary to public opinion, terrorists do not take lives indiscriminately. Instead, terrorists are rational: they take lives

deliberately, or else they use the threat of taking lives as a tool of negotiation to achieve their objectives at least-cost

Thank you Radio Islam

The popular South Africian radio – Radio Islam invited me to speak on ecomic issues realed to oil prices on the 3rd of September 2008. It was a pleasure speaking to them on this important issue

The economics of Olympics

It is arguable if the economy of a host country benefits from Olympics….. some data says yes.

It is widely assumed that the Olympics Games have a broad economic impact and that the Games have an unequivocally positive effect on the host country and city. More and more cities are now coming forward as Olympic bidders. The macroeconomic impact of a summer Olympic Games is assumed to be over US$5 billion. The direct impact of investment and visitation is clear if short-term. The broader image benefits would be proven in the longer term: providing a platform for a nation’s corporations to excel and providing a showcase for a city region to attract inward investors.

One way to address this question is to see if other host countries have experienced increases in GDP around Olympic years. Below is a graph of one measure of the boost to GDP that countries receive from hosting the Olympics. (Each point represents the average, over all of the host countries since 1952, rate of growth of GDP in the host country less the 12 year average for that country.)

What this graph suggests is that prior to the Olympics and during the Olympic year GDP growth is higher than average – maximising out at nearly 1.5% above average GDP in the 3rd year before the Olympics. (This number seems consistent with the estimates for Sydney – at least prior to the Olympic year.) However, the graph also suggests that growth rates are lower in the years after the Olympics, than in the years prior.

This data is only suggestive. There is a vide range of economic experiences across countries and the deviations from the mean rate of growth in the graph are most likely not statistically significant. A careful analysis of the data would take into account a wider range of economic data – both in type and in time periods – and would much more careful about the statistical inference. Anybody want to run a VAR and test for a structural break? Source: Data from IMF, Penn World Tables v5.6.

The economics of winning

From BBC we get, after crunching data from five decades of Olympics, two Harvard economists have deduced that cold countries perform better than hot ones in the winter games, and that large states produce more athletes than their smaller neighbours. (No surprise there I could have told you this without any crunching)


Arguably the most interesting parts of their paper are the incidental statistical trivia thrown up by burrowing through five decades of Olympic data.

· Out of all the 241 countries in the Olympic family, fewer than half have ever won a medal of any kind at either the winter or summer games.

· Despite their success at track and field events, all African nations combined still accounted for less than 2% of the total medals haul at the Sydney Olympics.

· On average, there are 9-13 competitors for every Olympic medal awarded; the best chance of winning, however, was enjoyed in 1956-60, when there were a record low of only 6.5 athletes for each gong.

· The countries most disproportionately represented at Olympics – in terms of the number of athletes per head of population – are the Seychelles in summer, and Iceland in winter.

· Rich countries send proportionally more female competitors than poor ones: for every extra $1,000 of GDP, the average nation sends an extra two female athletes.

WSJ reports PricewaterhouseCoopers released a study that estimates China will win 88 medals during the Games this August, followed by the U.S. with 87 and Russia with 79.

Read on Update on the medal tally here

However, the report’s author, PWC’s London-based Head of Macroeconomics John Hawksworth, is quick to point out that China and the U.S. are “basically neck and neck” in competition for the top spot.  So we can watch out and compare if what the economist suggest makes sense or are there going to be some surprises thrown our way.

To read more about the Beijing Olympics click

The Moneyless Walk

BBC reports equipped with only a few T-shirts, a bandage and spare sandals, former dotcom businessman Mark Boyle is set to cross Europe and the Middle East.

On his 9,000-mile trek to Gandhi’s birthplace, he will have to pick his way through war-ravaged Afghanistan.

Mr Boyle, 28, said: “I will be offering my skills to people. If I get food in return, it’s a bonus”

He says he is part of the freeconomy movement – a group which began in the US and aims to bring about a moneyless society.

He plans not to touch any money and is taking no credit cards or travellers’ cheques.

Barter was the first form of money exchange and it is still prevalent in many rural societies to some extend or the other.

Mr Boyle’s experiment might just show inspite of modern money so deeply entrenched, barter may still be an acceptable form of money.