Pradip K Bhaumik and Arindam Banik
The war for the next generation removable digital storage medium, now unfolding in all its viciousness in front of us has all the ingredients of a high drama. Both Toshiba and Sony are aware of the dangerous consequences of losing the war – as well as the benefits of winning it. It is a high stake war.
The consumers have a need to store higher and still higher amount of digital information in a single medium and this need has spawned the development of floppy diskettes, compact discs (CDs), and later digital versatile discs (DVDs). A DVD can store 4.7 GB of data where a CD could store about 700 MB and so you have a whole 3 hour movie stored in a single DVD which otherwise required 3 or 4 CDs. By now, customers’ expectations have gone up where they would expect to have a high resolution movie stored in a single disc. Simultaneously, technologies have also grown further where a single multilayer disc can store up to 100 GB of data enabling storage of high definition movies. The only problem is that we have not one but two competing technologies – both vying for that single slot.
Announced in 2002 by nine companies including Sony, Hitachi and Philips, the Blu-ray technology promises 25 GB on a single layer of a BD disc while the High Definition DVD (HD-DVD), with a storage capacity of 15 GB per layer, was sanctioned by the DVD Forum in 2003. A distinct advantage of HD-DVD for the disc manufacturer is that the stamping machines for regular DVDs require only minor modifications to make HD-DVD discs. Toshiba, a traditional rival of Sony is now ready to compete again in this arena. Between them they have been able to split the whole industry into two opposing camps each claiming the superiority of their standard over that of the other.
Sony seems to have learnt its lesson very well from a similar situation in the seventies when Panasonic with its VHS format for video cassettes, came from behind and overtook Sony even though Sony’s Betamax was arguably technically superior. Sony lost out as it did not share its standard with others while VHS technology was licensed to many among both VCR manufacturers and content providers and soon emerged as the de facto industry standard. This also reminds us of a similar story when Apple computers lost to the Wintel machines despite having a better product.
This time too BD is perhaps technologically superior to HD-DVD but there is an even chance that HD-DVD may turn out to be the eventual winner. Both of these use the low frequency blue laser unlike the red laser used in CDs and DVDs, allowing discs to store data at higher densities required for high definition video storage. Both formats have multiple layer capability and so technically BD can have up to 100 GB capacity in a dual side dual layer BD disc, while Toshiba has already developed a prototype three-layer 45 GB HD-DVD disc. There are differences in the compression technologies used but either format would offer vastly improved picture quality and consumers may not experience significantly different viewing pleasure between the two formats.
As neither format is likely to offer lossless recording, it is possible that a later generation of technology may make these discs also obsolete just as CDs and DVDs may become obsolete after the high definition discs are released in the market.
The ultimate success of either format will not depend only on the storage capacity of the discs. Thanks to a special hard coating developed for BD discs, they can reportedly withstand even screwdriver swipes unlike other optical media like CDs and DVDs which can be damaged even by tissue wipes. BD also claims to have superior security features by way of BD+ and the ROM mark which may make it the content and media companies’ darling. The ROM mark is designed to tie the recorded disc with the specific burner used to prevent large scale copying while BD+ is a safeguard against future cracks and hacks.
HD-DVD is cheaper and easier to manufacture and has product familiarity on its side as it conveys a high definition version of DVD. The lower price of players, recorders and discs would be a significant advantage as would being the first-mover when Toshiba launches its HD-DVD any time now. But Sony’s strength in the content market with its ownership of Hollywood studios, media companies and dominant position in the games market with Playstation cannot be wished away. It thus appears to be an evenly poised war with formidable armies lined up on both sides.
HD-DVD has the backing of the DVD forum, which is an international membership-based organization created to enable the DVD platform grow through technical improvement and innovation. Ironically, Sony Corporation is one of the founding members of the DVD forum but it sponsored the Blu-ray Disc association (BDA) as an alternate forum for BD thus implying that BD incorporates a technology distinctly different from that of DVD. Almost all the global bigwigs among hardware, software, media and content companies are covered between the two with many joining both.
Both sides seem confident about winning in the market where other stakeholders besides the consumer like the manufacturers, content providers, games console producers, computer manufacturers, etc. will also have significant roles. There are reports of Toshiba encouraging low-cost Chinese producers to start making HD-DVD players and recorders. If true, such early commoditization of the product will hurt all. Attempts of mediation and negotiation to avoid such a high-cost war have failed as each side asserts the superiority of its technology and strategy. The absence of a regulator leaves the market as the only arbiter.
From the sidelines, the whole episode may appear as wholly avoidable and costly for the two camps and particularly for the consumers when seen from an Indian perspective still used to notions of guiding hands of the government but for both the warring sides any government role is conspicuous by its absence. The only Indian company in the middle is Moser Baer and it has hedged its position by joining both the DVD forum and the BDA.
The inexorable march of technology is accompanied by destruction of the old giving way to the creation of the new and guided by the principle of survival of the fittest where fitness is as defined by the market. Particularly for Indian companies, it would seem that development of technology is far less risky than launching products based on new technology. For Indian companies with global ambitions, tracking the details of these technology wars would be of immense learning value, as would be for the government and the various regulatory bodies.
Technology-wise, we began with transfer and graduated to assimilation through adoption. Hopefully it will not take many more years for Indian companies to move up to innovation.
Thursday, February 26, 2009
Understanding Bangladesh from a Neighbour’s Door
The Mahajote’s victory in the recent Bangladesh election may be seen as one of the most important event in the history of Bangladesh. It is eventful because when the whole world was busy to project Bangladesh as a breeding centre for Islamic fundamentalism. The outcome is certainly a paradigm shift. This time the Jote has been able to reach across divides of religion, race, gender and politics and unify her country once again after 1971 war of independence. The caretaker government, election commission, civil society and the army also played a contributory role to conduct such a free and fair election. In fact the other developing economies where democracy is fragile and has had constant threat to the nation state may also learn this experience from Bangladesh.
The idea of projecting Bangladesh as a fundamentalist state may bear serious limitations. The country has its strong root. The culture, Rabindranath, Nazrul, Jashimuddin are all important contributors in order to support her claim as a nation state. One can not just ignore this root for just few episodes dictated by few Islamic fundamentalist groups.
The Mahajote’s win may be explained by high expectations because of repeated political failures. The country’s leaders took hazardous task to grow. At home, wrong policies, and selfish policymakers practically ruined the immense prospect of the country. This time, the Jote has successfully reconnected politics to the young and to youthful idealism. Then they have also tried to give them hope from frustration. The rediscovery of the ideals of liberation war has once again invigorated the young population. Thanks to Sector commanders forum for playing such catalytic role. How the new government will fulfill the challenges is remains to be seen.
The agricultural sector is the biggest challenge to the new government. The role of international agencies and their policy advice to the food-deficit economies such as Bangladesh may have played a significant contributory role to the development of the last year’s crisis. Since the mid-1990s, countries that rely heavily on cereal production – particularly rice – were advised by the international agencies that a highly liquid, global market for cereals would be a healthy and desirable development for all. Accordingly, many countries such as Bangladesh got convinced that it would be safe to cover any shortfall in domestic output with purchases from the international market particularly from India, Myanmar, Thailand and Vietnam. As a result the rice and wheat sectors became less protected. Some countries burdened with high cost of production even dismantled export bans and reduced import tariffs. Some International agencies even argued that there is a glut of food production worldwide as evinced from the downward trend in the real price of rice and wheat in the world market and building of huge food stocks in neighbouring India. India too has misunderstood this issue. Her response to last year’s food crisis in Bangladesh was not at all satisfactory. The policy makers in this region now can think of integrating the whole issue of agriculture, starting from uniform implicit and explicit subsidies (output and input) to pricing of output. Any unilateral decision will distort other markets, encourage informal trade and thus impedes the welfare of the people in the region.
Obviously, the old prescriptions of the international agencies have not worked. There is a need to revisit the old models, analyses and policy recommendations. Fresh long-term forecasts of demand of food items, factoring in new uses and new consumption patterns would be needed to estimate if there is a supply-demand gap emerging in the longer term. Investments in agriculture would have to be revived to increase the local production and this should include investments needed for better water management. Finally, out-of-the-box thinking will be needed to come out with new policy recommendations like creation of regional buffer stocks to overcome volatility in production. Or else, it will be the poor in the poorest countries that will suffer the most due to food shortage in future.
For last ten years, the country has produced result in the manufacturing sector. But the potentials still to be explored. Much of the failures may be derived from partisan politics, and the governments in power. People are disappointed by previous governments.
The most dangerous is security threat and tension across borders. Then there are countries who have been working hard to exploit the situation. India can play a pragmatic role here. Take the case of manpower. The training of man power may have immediate impact in order to improve relationship. It appears that there is a strong relationship between investments in human capital and economic growth in the context of Bangladesh. The need to improve the quality of human resources is particularly important for Bangladesh, given its importance in the attraction of foreign direct investment. Although the developing world accounts for a steadily increasing share of world manufacturing (partly driven by lower wages and costs in that world), competitive advantage based on low wages is inherently a transitory phenomenon: sooner or later, developing countries such as Bangladesh will face the need to improve their skill as other lower cost producers emerge (for example, garments).
Many have argued that the level of education is below the performance required to integrate entrants to the labour force. According to them part of the low productivity levels are partly explained by ineffective education. A significant number of populations have been at the highest risk of low academic achievement. The fact that the poor have low levels of education in Bangladesh highlights the need to address educational issues.
There are many different types of public and private training programmes in Bangladesh in order to address issues such as low skill levels and high rate of unemployment rates among youth. In Bangladesh, ineffective training schemes impede an effective labour market for growth. This is due to limited labour market information systems and weak dialogue between public educational institutions and employers. Government programmes in particular have found it difficult to respond to the changing needs of the labour market, and to provide up-to-date equipment because of bureaucratic and fiscal pressures.
India can help Bangladesh in many ways such as developing English speaking population; increase the number of technical and high-tech skilled population. There is a dearth of semi skilled based educational institutes such as repairing cell phones, and Bajaj Scooters.
The prestigious Indian Institute of Technologies (IITs) may also be advised to open in Bangladesh based on public and private partnership. Indeed, this may help to restrict migration then the reduction of poverty . An economically strong democratic Bangladesh may stabilize South Asia. Needless to mention that availability educated workforce with low level of employability may create more problems for both India and Bangladesh.
It seems useful to mention here that the world as we know today will undergo major changes by the middle of this century. The countries that are unable or slow to respond will have to make room for others that can move quicker and innovation will be the key differentiating factor. In the long term, it may even be possible for some economies to survive only on the basis of their capital or technology, but labour alone may be unable to provide this sustenance. By bringing a large part of their population to the economic marketplace, India, Bangladesh and other South Asian nations will set free their innovation potential which has so far not found any route to reach the market. When this happens, the region will surely be a different place.
The idea of projecting Bangladesh as a fundamentalist state may bear serious limitations. The country has its strong root. The culture, Rabindranath, Nazrul, Jashimuddin are all important contributors in order to support her claim as a nation state. One can not just ignore this root for just few episodes dictated by few Islamic fundamentalist groups.
The Mahajote’s win may be explained by high expectations because of repeated political failures. The country’s leaders took hazardous task to grow. At home, wrong policies, and selfish policymakers practically ruined the immense prospect of the country. This time, the Jote has successfully reconnected politics to the young and to youthful idealism. Then they have also tried to give them hope from frustration. The rediscovery of the ideals of liberation war has once again invigorated the young population. Thanks to Sector commanders forum for playing such catalytic role. How the new government will fulfill the challenges is remains to be seen.
The agricultural sector is the biggest challenge to the new government. The role of international agencies and their policy advice to the food-deficit economies such as Bangladesh may have played a significant contributory role to the development of the last year’s crisis. Since the mid-1990s, countries that rely heavily on cereal production – particularly rice – were advised by the international agencies that a highly liquid, global market for cereals would be a healthy and desirable development for all. Accordingly, many countries such as Bangladesh got convinced that it would be safe to cover any shortfall in domestic output with purchases from the international market particularly from India, Myanmar, Thailand and Vietnam. As a result the rice and wheat sectors became less protected. Some countries burdened with high cost of production even dismantled export bans and reduced import tariffs. Some International agencies even argued that there is a glut of food production worldwide as evinced from the downward trend in the real price of rice and wheat in the world market and building of huge food stocks in neighbouring India. India too has misunderstood this issue. Her response to last year’s food crisis in Bangladesh was not at all satisfactory. The policy makers in this region now can think of integrating the whole issue of agriculture, starting from uniform implicit and explicit subsidies (output and input) to pricing of output. Any unilateral decision will distort other markets, encourage informal trade and thus impedes the welfare of the people in the region.
Obviously, the old prescriptions of the international agencies have not worked. There is a need to revisit the old models, analyses and policy recommendations. Fresh long-term forecasts of demand of food items, factoring in new uses and new consumption patterns would be needed to estimate if there is a supply-demand gap emerging in the longer term. Investments in agriculture would have to be revived to increase the local production and this should include investments needed for better water management. Finally, out-of-the-box thinking will be needed to come out with new policy recommendations like creation of regional buffer stocks to overcome volatility in production. Or else, it will be the poor in the poorest countries that will suffer the most due to food shortage in future.
For last ten years, the country has produced result in the manufacturing sector. But the potentials still to be explored. Much of the failures may be derived from partisan politics, and the governments in power. People are disappointed by previous governments.
The most dangerous is security threat and tension across borders. Then there are countries who have been working hard to exploit the situation. India can play a pragmatic role here. Take the case of manpower. The training of man power may have immediate impact in order to improve relationship. It appears that there is a strong relationship between investments in human capital and economic growth in the context of Bangladesh. The need to improve the quality of human resources is particularly important for Bangladesh, given its importance in the attraction of foreign direct investment. Although the developing world accounts for a steadily increasing share of world manufacturing (partly driven by lower wages and costs in that world), competitive advantage based on low wages is inherently a transitory phenomenon: sooner or later, developing countries such as Bangladesh will face the need to improve their skill as other lower cost producers emerge (for example, garments).
Many have argued that the level of education is below the performance required to integrate entrants to the labour force. According to them part of the low productivity levels are partly explained by ineffective education. A significant number of populations have been at the highest risk of low academic achievement. The fact that the poor have low levels of education in Bangladesh highlights the need to address educational issues.
There are many different types of public and private training programmes in Bangladesh in order to address issues such as low skill levels and high rate of unemployment rates among youth. In Bangladesh, ineffective training schemes impede an effective labour market for growth. This is due to limited labour market information systems and weak dialogue between public educational institutions and employers. Government programmes in particular have found it difficult to respond to the changing needs of the labour market, and to provide up-to-date equipment because of bureaucratic and fiscal pressures.
India can help Bangladesh in many ways such as developing English speaking population; increase the number of technical and high-tech skilled population. There is a dearth of semi skilled based educational institutes such as repairing cell phones, and Bajaj Scooters.
The prestigious Indian Institute of Technologies (IITs) may also be advised to open in Bangladesh based on public and private partnership. Indeed, this may help to restrict migration then the reduction of poverty . An economically strong democratic Bangladesh may stabilize South Asia. Needless to mention that availability educated workforce with low level of employability may create more problems for both India and Bangladesh.
It seems useful to mention here that the world as we know today will undergo major changes by the middle of this century. The countries that are unable or slow to respond will have to make room for others that can move quicker and innovation will be the key differentiating factor. In the long term, it may even be possible for some economies to survive only on the basis of their capital or technology, but labour alone may be unable to provide this sustenance. By bringing a large part of their population to the economic marketplace, India, Bangladesh and other South Asian nations will set free their innovation potential which has so far not found any route to reach the market. When this happens, the region will surely be a different place.
Understanding India's Growth
Everyone agrees that India has a long-term growth potential. The recent government data reveals an interesting insight. It shows that despite global melt down India can even grow by 7.1 per cent per annum. The problem is that the major contribution of India’s growth story is due to high labour productivity. That implies skilled workers immense contribution to this growth. The structure of imports also points to a very capital intensive production structure in India. But India urgently needs to create more jobs.
One such option would be to increase the supply of skilled workers and a prerequisite for this would be to raise the general educational standard. In general, the level is below the performance required to integrate entrants to the labour force. The fact that the poor have low levels of education in India highlights the need to address educational issues. Let us not forget that primary education generates the highest rates of return; secondary level has lower returns while the tertiary level has returns higher than that of the secondary level.
Experts argue that skill-biased technological change is responsible for increasing inequality within the top portions of the income distribution. Evidently, most of the growth in inequality between the highest and lowest earners is due to poor educational performance of the unskilled and their quality available in the market. At the household level, ample evidence reveals that the poor face credit constraints which prevent them from investing optimally in their children's education. But this is only part of the story.
On the supply side, the government is equally to be blamed. In the Indian context mostly the government educational institutions are responsible for providing quality education from basic to higher educational level. In general terms they are abysmally poor. At the school level, the difference between the government schools and the private ones is too glaring to be emphasised. Similarly, although there are private institutions offering tertiary education, the regulating bodies are all government controlled. Research and publications wise, the performance of the teachers are abysmally poor even in the leading engineering and management institutes. One will have to struggle hard to find an Indian educational institute among the top 250 in the world. In future the country must compete through the quality of her human capital, her innovation and her research and development. Sound educational institutions will be a basic premise for meeting the challenges of skill-biased technologies. If it is possible, India will definitely be a different place.
One such option would be to increase the supply of skilled workers and a prerequisite for this would be to raise the general educational standard. In general, the level is below the performance required to integrate entrants to the labour force. The fact that the poor have low levels of education in India highlights the need to address educational issues. Let us not forget that primary education generates the highest rates of return; secondary level has lower returns while the tertiary level has returns higher than that of the secondary level.
Experts argue that skill-biased technological change is responsible for increasing inequality within the top portions of the income distribution. Evidently, most of the growth in inequality between the highest and lowest earners is due to poor educational performance of the unskilled and their quality available in the market. At the household level, ample evidence reveals that the poor face credit constraints which prevent them from investing optimally in their children's education. But this is only part of the story.
On the supply side, the government is equally to be blamed. In the Indian context mostly the government educational institutions are responsible for providing quality education from basic to higher educational level. In general terms they are abysmally poor. At the school level, the difference between the government schools and the private ones is too glaring to be emphasised. Similarly, although there are private institutions offering tertiary education, the regulating bodies are all government controlled. Research and publications wise, the performance of the teachers are abysmally poor even in the leading engineering and management institutes. One will have to struggle hard to find an Indian educational institute among the top 250 in the world. In future the country must compete through the quality of her human capital, her innovation and her research and development. Sound educational institutions will be a basic premise for meeting the challenges of skill-biased technologies. If it is possible, India will definitely be a different place.
Wednesday, June 11, 2008
Food crisis and World Bank
The FAO Chief Jacques Diouf recent comments on World Bank and the IMF policies are responsible for dismantling systems to protect farmers has introduced a new chapter to the ongoing debate on food crisis.
It is true that the donor-led policies led to the green revolution, it is equally true that their later policy changes left governments in the developing economies vulnerable to food shocks and troubles.Take the case of Green Revolution that was introduced in the late 1960s and its impact on rice cultivation. Farmers in these economies has had been immensely benefited. Thanks to the introduction wonder seeds such as IRRI-8 and IRRI-20 during Boro (winter) and Aman season (rain-fed). In fact the adoption of new technology averted widespread starvation and helped millions of people to escape hunger. Later, IRRI became the darling of Asian rice growers.
.The wonder seeds is also known as high yielding variety primarily implies use of improved variety of seeds, water, fertilizer and pesticides etc.The cultivation of the same variety during rabi season ( winter) needed deep-tube well, shallow tube well and areas under irrigation projects. The donor agencies played a contributory role in this context since the new variety needed a lot of money requiring credit and supportive investment from the government on flood control and irrigation.
At the later stage it was thought that money saved in subsidy would be reinvested in agriculture, but that did not happen. Interestingly despite the success of green revolution, the contribution of capital increasing land and labour productivity are low because of average savings and capital formation of rural areas are low in certain regions on account of limited average income from agriculture. This should have been considered as an ongoing process.
The World Bank and the USAID then advised the governments to phase out such programmes on the ground that these were not being properly targeted and leakage was high. Take the case of Bangladesh. Reports were prepared with the help of policy entrepreneurs. For example, an IFPRI study funded by the USAID argued that there is a glut of food production worldwide as evinced from the downward trend in the real price of rice and wheat in the world market and building of huge food stocks in neighboring India. Thus emphasis was given on economic efficiency in managing the food programme.
“The emphasis was then that the government can move from a policy of self-sufficiency to self-reliance with the underpinning idea that instead of producing its full requirement of food itself, it can look for import of food grain which was then cheaper on the international market," according to eminent economist Mahabub Hossain . In general the governments in developing economies took the advice and dismantled the food stocking and marketing infrastructure.
In the context of South Asia, public investments in agriculture are declining, and the annual increment to gross capital formation in agriculture is now lower than in the early 1980s. This trend is same across all economies More interestingly, increasing shares of total public expenditure on agriculture are allocated to input subsidies (on fertilizers, electricity, irrigation, and credit, for example), rather than to productivity-enhancing investments such as research and public investment in irrigation.
Experts argue that the differences in yield are due to poor water management. Irrigation, drainage and flood control investments can alter the water regime and in the process the plight of millions of small farmers. In other words, the two issues are inter-related, one with excess water regime and the other with shortage of water regime. Together, they constitute the concept of water management. The high magnitude of poverty in this region is partly explained by poor water management. The problem is that the said policy entrepreneurs are actually confused with the differences.
In the name of cost, agriculture became neglected by many international development agencies such as including the World Bank, IMF and the Asian Development Bank. In addition farmers’ lobby from US, Canada and Australia played a big role in this change of heart of their governments. The farmers' lobbies argued that the dip in international food price led to their ventures unprofitable and influenced their governments to stop funding Green Revolution.
In recent time many developing economies are transforming and in the process this has created shortages in food grains in order to fulfill the demand of new high value agriculture –with fast-growing urban incomes. Now we have new realization that achievement of MDG goal and poverty reductions are correlated.
The said policy entrepreneurs are vocal now for revival of agriculture. But it has huge cost such as starvation, malnutrition and death. Indeed, the governments of low-income food importing countries are beginning to learn a lesson from the present crisis .It is not wise to depend on the international market for food security as food exporting countries shut their doors as and when there is a crisis in the supply side.
It is true that the donor-led policies led to the green revolution, it is equally true that their later policy changes left governments in the developing economies vulnerable to food shocks and troubles.Take the case of Green Revolution that was introduced in the late 1960s and its impact on rice cultivation. Farmers in these economies has had been immensely benefited. Thanks to the introduction wonder seeds such as IRRI-8 and IRRI-20 during Boro (winter) and Aman season (rain-fed). In fact the adoption of new technology averted widespread starvation and helped millions of people to escape hunger. Later, IRRI became the darling of Asian rice growers.
.The wonder seeds is also known as high yielding variety primarily implies use of improved variety of seeds, water, fertilizer and pesticides etc.The cultivation of the same variety during rabi season ( winter) needed deep-tube well, shallow tube well and areas under irrigation projects. The donor agencies played a contributory role in this context since the new variety needed a lot of money requiring credit and supportive investment from the government on flood control and irrigation.
At the later stage it was thought that money saved in subsidy would be reinvested in agriculture, but that did not happen. Interestingly despite the success of green revolution, the contribution of capital increasing land and labour productivity are low because of average savings and capital formation of rural areas are low in certain regions on account of limited average income from agriculture. This should have been considered as an ongoing process.
The World Bank and the USAID then advised the governments to phase out such programmes on the ground that these were not being properly targeted and leakage was high. Take the case of Bangladesh. Reports were prepared with the help of policy entrepreneurs. For example, an IFPRI study funded by the USAID argued that there is a glut of food production worldwide as evinced from the downward trend in the real price of rice and wheat in the world market and building of huge food stocks in neighboring India. Thus emphasis was given on economic efficiency in managing the food programme.
“The emphasis was then that the government can move from a policy of self-sufficiency to self-reliance with the underpinning idea that instead of producing its full requirement of food itself, it can look for import of food grain which was then cheaper on the international market," according to eminent economist Mahabub Hossain . In general the governments in developing economies took the advice and dismantled the food stocking and marketing infrastructure.
In the context of South Asia, public investments in agriculture are declining, and the annual increment to gross capital formation in agriculture is now lower than in the early 1980s. This trend is same across all economies More interestingly, increasing shares of total public expenditure on agriculture are allocated to input subsidies (on fertilizers, electricity, irrigation, and credit, for example), rather than to productivity-enhancing investments such as research and public investment in irrigation.
Experts argue that the differences in yield are due to poor water management. Irrigation, drainage and flood control investments can alter the water regime and in the process the plight of millions of small farmers. In other words, the two issues are inter-related, one with excess water regime and the other with shortage of water regime. Together, they constitute the concept of water management. The high magnitude of poverty in this region is partly explained by poor water management. The problem is that the said policy entrepreneurs are actually confused with the differences.
In the name of cost, agriculture became neglected by many international development agencies such as including the World Bank, IMF and the Asian Development Bank. In addition farmers’ lobby from US, Canada and Australia played a big role in this change of heart of their governments. The farmers' lobbies argued that the dip in international food price led to their ventures unprofitable and influenced their governments to stop funding Green Revolution.
In recent time many developing economies are transforming and in the process this has created shortages in food grains in order to fulfill the demand of new high value agriculture –with fast-growing urban incomes. Now we have new realization that achievement of MDG goal and poverty reductions are correlated.
The said policy entrepreneurs are vocal now for revival of agriculture. But it has huge cost such as starvation, malnutrition and death. Indeed, the governments of low-income food importing countries are beginning to learn a lesson from the present crisis .It is not wise to depend on the international market for food security as food exporting countries shut their doors as and when there is a crisis in the supply side.
Friday, March 21, 2008
Farm Loan Waiver and Agricultural Investment
Arindam Banik and Pradip K Bhaumik
The Rs 60,000 crore agricultural loan waiver by the finance minister has rightly generated widespread debate. The reason goes back to farmers’ debt-related distress and even suicides in India. However, the move has been controversial. If the issue is debt- related misery and distress one must ask why it is so. One can not guarantee that the farmers will not borrow next year. More specifically, long run prospects are sacrificed at the cost of short run gains.
It is established now that the farmer-debtor is generally required to repay his/her debt immediately after the harvest is in. This means that the farmer is trapped in a regressive market mechanism in two ways. First, with no other means to repay the debt, he/she is forced to sell the produce immediately after the harvest – quite often to the creditor or to the creditor's agent – probably at a pre-arranged price or in pre-decided quantities.
Second, sale of crops immediately after the harvest means that the farmer-debtor probably receives less for his/her produce than what he/she could have obtained at a later point in time when the market prices stabilize. As more and more farmer-debtors wish to convert their harvest into cash, the crop prices tend to get further depressed.
While all that has been stated above is true of farmers in general, the case of cash crop farmers deserves special attention. Interestingly, farmers who go for cash crops such as tobacco, sugarcane, or cotton are not the typical small farmers.
They are the ones with relatively large land holdings and risk appetite and for them farming is an act of commerce. The anticipated incentives in the output market are the motivating factors for hard work as well as for high input costs. The results are, however, not always as expected.
During harvest time, supply of crops often overshadows demand and thus price goes down. This is due to the pressure created by both formal and informal lenders for loan repayment immediately after harvest.
As a consequence, not only are marginal input costs higher than the marginal revenue, even average input costs are sometimes higher or just marginally lower than the average revenue, leaving little or no cash surplus for loan servicing.
It is hard to generalize a small farm as one with not more than two hectares of land across the whole of India. Physical land under assured irrigation is much more productive than the area with no assured irrigation. Thus a small farmer with less land but assured irrigation may be financially much better-off than another farmer with much larger land holding but no assured irrigation.
Take the case of Eastern India and some parts of Southern India. The basic unit for organizing production in the rural areas is either the farm or the village, depending on the way in which rural society is structured. In this region agriculture is characterized by small farms in alluvial lowlands, too many people on too little land, production largely for subsistence, and a heavy dependence on cereals and other food staples. Farming with simple handheld tools or ploughs pulled by draft animals is very common. Many farmers are owner-tenants and tenants.
Rice, usually grown under wet conditions, is the staple food crop in this region. Controlled irrigation facilities are poorly developed, yields are often low, and double-cropping (planting and harvesting two crops in one calendar year) is not universally practiced. Although high-yield varieties of wet rice have been introduced since the 1960s, this has not increased production as predicted.
In Northern India irrigation schemes have helped stabilize annual yields and increase overall production, but the average rice yield per hectare in the mid-1990s was only about half that of Japan. Nevertheless, Asian countries produce about 90 percent of the world’s rice. China and India alone account for nearly 60 percent of the world total.
The average rice yield is 2.9 tonnes per hectare in India. In comparison, average rice yield is 6.8 tonnes per hectare in Republic of Korea, 6.2 tonnes in Japan, 6.3 in China, 4.3 in Indonesia, and 3.8 in DPR Korea. A central issue is therefore why productivity has remained so low in India particularly in the eastern region despite availability of modern rice technology.
Experts argue that the above differences in yield are due to poor water management. Irrigation, drainage and flood control investments can alter the water regime and in the process the plight of millions of small farmers. In other words, the two issues are inter-related, one with excess water regime and the other with shortage of water regime. Together, they constitute the concept of water management. The high magnitude of poverty in this region is partly explained by poor water management.
Admittedly, achieving food security has been the overriding goal of agricultural policy in India. The introduction and rapid spread of high-yielding rice and wheat varieties in the late 1960s and early 1970s resulted in steady output growth for foodgrains. Public investment in irrigation and other rural infrastructure and research and extension, together with improved crop production practices, has significantly helped to expand production and stocks of foodgrains.
However, success story due to Green Revolution is waning now. Public investments in agriculture are declining, and the annual increment to gross capital formation in agriculture is now lower than in the early 1980s. This trend is same across all states in India, not just the poorer ones. More interestingly, increasing shares of total public expenditure on agriculture are allocated to input subsidies (on fertilizers, electricity, irrigation, and credit, for example), rather than to productivity-enhancing investments such as research and public investment in irrigation. The share of input subsidies in public expenditure increased from 44 per cent in the early 1980s to 83 per cent by 1990. Private investment in agriculture has increased modestly in recent years, but not enough to fill the gap left by the decrease in public spending.
The economy is transforming and in the process this has created shortages in foodgrains in order to fulfill the demand of new high value agriculture –with fast-growing urban incomes. Thus we need investment to create more fertile land and water. Otherwise the success story of green revolution may disappear shortly. Unfortunately, the agricultural loan waiver would hardly be used to create these investments.
The Rs 60,000 crore agricultural loan waiver by the finance minister has rightly generated widespread debate. The reason goes back to farmers’ debt-related distress and even suicides in India. However, the move has been controversial. If the issue is debt- related misery and distress one must ask why it is so. One can not guarantee that the farmers will not borrow next year. More specifically, long run prospects are sacrificed at the cost of short run gains.
It is established now that the farmer-debtor is generally required to repay his/her debt immediately after the harvest is in. This means that the farmer is trapped in a regressive market mechanism in two ways. First, with no other means to repay the debt, he/she is forced to sell the produce immediately after the harvest – quite often to the creditor or to the creditor's agent – probably at a pre-arranged price or in pre-decided quantities.
Second, sale of crops immediately after the harvest means that the farmer-debtor probably receives less for his/her produce than what he/she could have obtained at a later point in time when the market prices stabilize. As more and more farmer-debtors wish to convert their harvest into cash, the crop prices tend to get further depressed.
While all that has been stated above is true of farmers in general, the case of cash crop farmers deserves special attention. Interestingly, farmers who go for cash crops such as tobacco, sugarcane, or cotton are not the typical small farmers.
They are the ones with relatively large land holdings and risk appetite and for them farming is an act of commerce. The anticipated incentives in the output market are the motivating factors for hard work as well as for high input costs. The results are, however, not always as expected.
During harvest time, supply of crops often overshadows demand and thus price goes down. This is due to the pressure created by both formal and informal lenders for loan repayment immediately after harvest.
As a consequence, not only are marginal input costs higher than the marginal revenue, even average input costs are sometimes higher or just marginally lower than the average revenue, leaving little or no cash surplus for loan servicing.
It is hard to generalize a small farm as one with not more than two hectares of land across the whole of India. Physical land under assured irrigation is much more productive than the area with no assured irrigation. Thus a small farmer with less land but assured irrigation may be financially much better-off than another farmer with much larger land holding but no assured irrigation.
Take the case of Eastern India and some parts of Southern India. The basic unit for organizing production in the rural areas is either the farm or the village, depending on the way in which rural society is structured. In this region agriculture is characterized by small farms in alluvial lowlands, too many people on too little land, production largely for subsistence, and a heavy dependence on cereals and other food staples. Farming with simple handheld tools or ploughs pulled by draft animals is very common. Many farmers are owner-tenants and tenants.
Rice, usually grown under wet conditions, is the staple food crop in this region. Controlled irrigation facilities are poorly developed, yields are often low, and double-cropping (planting and harvesting two crops in one calendar year) is not universally practiced. Although high-yield varieties of wet rice have been introduced since the 1960s, this has not increased production as predicted.
In Northern India irrigation schemes have helped stabilize annual yields and increase overall production, but the average rice yield per hectare in the mid-1990s was only about half that of Japan. Nevertheless, Asian countries produce about 90 percent of the world’s rice. China and India alone account for nearly 60 percent of the world total.
The average rice yield is 2.9 tonnes per hectare in India. In comparison, average rice yield is 6.8 tonnes per hectare in Republic of Korea, 6.2 tonnes in Japan, 6.3 in China, 4.3 in Indonesia, and 3.8 in DPR Korea. A central issue is therefore why productivity has remained so low in India particularly in the eastern region despite availability of modern rice technology.
Experts argue that the above differences in yield are due to poor water management. Irrigation, drainage and flood control investments can alter the water regime and in the process the plight of millions of small farmers. In other words, the two issues are inter-related, one with excess water regime and the other with shortage of water regime. Together, they constitute the concept of water management. The high magnitude of poverty in this region is partly explained by poor water management.
Admittedly, achieving food security has been the overriding goal of agricultural policy in India. The introduction and rapid spread of high-yielding rice and wheat varieties in the late 1960s and early 1970s resulted in steady output growth for foodgrains. Public investment in irrigation and other rural infrastructure and research and extension, together with improved crop production practices, has significantly helped to expand production and stocks of foodgrains.
However, success story due to Green Revolution is waning now. Public investments in agriculture are declining, and the annual increment to gross capital formation in agriculture is now lower than in the early 1980s. This trend is same across all states in India, not just the poorer ones. More interestingly, increasing shares of total public expenditure on agriculture are allocated to input subsidies (on fertilizers, electricity, irrigation, and credit, for example), rather than to productivity-enhancing investments such as research and public investment in irrigation. The share of input subsidies in public expenditure increased from 44 per cent in the early 1980s to 83 per cent by 1990. Private investment in agriculture has increased modestly in recent years, but not enough to fill the gap left by the decrease in public spending.
The economy is transforming and in the process this has created shortages in foodgrains in order to fulfill the demand of new high value agriculture –with fast-growing urban incomes. Thus we need investment to create more fertile land and water. Otherwise the success story of green revolution may disappear shortly. Unfortunately, the agricultural loan waiver would hardly be used to create these investments.
Sunday, January 20, 2008
Skill-biased technological change and quality of education in India
Arindam Banik and Pradip K Bhaumik
The geographical contours of global production of goods and services have seen significant shifts in recent times. This has been caused as much by forces of globalization as by technological changes. In fact, the interaction of the two have caused impacts which are an order of magnitude greater than that of either alone. While globalization has made almost all product markets and all factor markets except labour global, technological change is bringing equally massive upheavals in its wake – all of which is still not fully understood. In the midst of such massive changes, the immobility of labour will perhaps continue and all our policy decisions will have to be based on this given feature of the international political economy for the foreseeable future although even fewer services will need to be produced locally.
Most newer technologies entering the market through newer products as well as newer processes are skill-biased in the sense that they use skilled workers more intensively than the older technology. Economists have found that adoption of new technology is affected by relative supply of skilled workers in the region – regions having a higher supply are likely to be quicker in new technology adoption. Also, the real wages of skilled workers are expected to increase as new skill-biased technology is adopted whereas the wages of unskilled workers may remain unaffected or even fall. The issue of supply of skilled labour has therefore been rendered a subject of immense interest in recent time largely due to the rising inequality in the relative wages of skilled and unskilled labour.
At the firm level or even at the level of the economy, new technology can be developed endogenously through innovation. New technology could also be developed exogenously and adopted later in a local firm. As mentioned earlier, the market for technology is slowly emerging as a global market and newer technologies are improving the product quality, improving productivity and in many cases have superior capabilities. To survive in globalized markets firms have no option but to use global technologies. Being skill-biased, the new technologies have bred increased wage inequalities at household level as well as regional level in the Indian context.
It is observed that new technology accompanies certain forms of inward investment which also brings new ideas and processes to a country. But at the initial stage it benefits the relatively skilled and consequently the relatively well-off. Accordingly, higher-skilled people gain by way of better jobs and higher wages at the expense of the lower-skilled. As a result, the adoption of new technology furthers the wage divide between the skilled and the unskilled. Interestingly, the removal of trade barriers has reduced inequality of different kinds including the skill inequality. Incidentally, with foreign direct investment, the increasing income inequality among various skill levels is emerging as a source of concern.
For rich economies, the net outflows of FDI tend to reduce the relative wages of lower skilled workers, while in poor economies inflows of FDI benefit the highly-skilled. This is also prevalent in the Indian context. For example, a company shifting a call centre from a developed economy to India aggravates inequality in both the economies.
The anti-globalisation lobby will then jump into recommending the policy prescription through protectionism. Such policies may be harmful for both the countries. The developed country firms prohibited from pursuing FDI cannot guarantee long-term employment to uncompetitive workers and in fact may endanger their own survival, the consumers of their product or services will have reduced purchasing power as they buy the same product or service at higher than global prices. Similarly, the relatively poor country stopped from receiving the FDI would have lost the chance of receiving investment, creating output and employment. So suppressing FDI or technological change may not be an ideal case and other options to reduce the wage divide may be called for.
One such option would be to increase the supply of skilled workers and a prerequisite for this would be to raise the general educational standard. In general, the level is below the performance required to integrate entrants to the labour force. Productivity levels in India are generally low partly explained by ineffective education. The fact that the poor have low levels of education in India highlights the need to address educational issues. Let us not forget that primary education generates the highest rates of return; secondary level has lower returns while the tertiary level has returns higher than that of the secondary level.
Experts argue that skill-biased technological change is responsible for increasing inequality within the top portions of the income distribution. Evidently, most of the growth in inequality between the highest and lowest earners is due to poor educational performance of the unskilled and their quality available in the market. At the household level, ample evidence reveals that the poor face credit constraints which prevent them from investing optimally in their children's education. But this is only part of the story.
On the supply side, the government is equally to be blamed. In the Indian context mostly the government educational institutions are responsible for providing quality education from basic to higher educational level. In general terms they are abysmally poor. At the school level, the difference between the government schools and the private ones is too glaring to be emphasised. Similarly, although there are private institutions offering tertiary education, the regulating bodies are all government controlled. Research and publications wise, the performance of the teachers are abysmally poor even in the leading engineering and management institutes. One will have to struggle hard to find an Indian educational institute among the top 250 in the world. In future the country must compete through the quality of her human capital, her innovation and her research and development. Sound educational institutions will be a basic premise for meeting the challenges of skill-biased technologies.
At the primary level the story is even more pathetic. It is not just at the top of the ladder that the rungs are missing – a significant number of schools lack the most basic infrastructure, let alone access to the Internet. In addition non-availability of quality staff aggravates the situation. If we do not quickly upgrade our educational institutions, the demographic advantage that we proclaim so loudly may suddenly appear to be a burden.
The geographical contours of global production of goods and services have seen significant shifts in recent times. This has been caused as much by forces of globalization as by technological changes. In fact, the interaction of the two have caused impacts which are an order of magnitude greater than that of either alone. While globalization has made almost all product markets and all factor markets except labour global, technological change is bringing equally massive upheavals in its wake – all of which is still not fully understood. In the midst of such massive changes, the immobility of labour will perhaps continue and all our policy decisions will have to be based on this given feature of the international political economy for the foreseeable future although even fewer services will need to be produced locally.
Most newer technologies entering the market through newer products as well as newer processes are skill-biased in the sense that they use skilled workers more intensively than the older technology. Economists have found that adoption of new technology is affected by relative supply of skilled workers in the region – regions having a higher supply are likely to be quicker in new technology adoption. Also, the real wages of skilled workers are expected to increase as new skill-biased technology is adopted whereas the wages of unskilled workers may remain unaffected or even fall. The issue of supply of skilled labour has therefore been rendered a subject of immense interest in recent time largely due to the rising inequality in the relative wages of skilled and unskilled labour.
At the firm level or even at the level of the economy, new technology can be developed endogenously through innovation. New technology could also be developed exogenously and adopted later in a local firm. As mentioned earlier, the market for technology is slowly emerging as a global market and newer technologies are improving the product quality, improving productivity and in many cases have superior capabilities. To survive in globalized markets firms have no option but to use global technologies. Being skill-biased, the new technologies have bred increased wage inequalities at household level as well as regional level in the Indian context.
It is observed that new technology accompanies certain forms of inward investment which also brings new ideas and processes to a country. But at the initial stage it benefits the relatively skilled and consequently the relatively well-off. Accordingly, higher-skilled people gain by way of better jobs and higher wages at the expense of the lower-skilled. As a result, the adoption of new technology furthers the wage divide between the skilled and the unskilled. Interestingly, the removal of trade barriers has reduced inequality of different kinds including the skill inequality. Incidentally, with foreign direct investment, the increasing income inequality among various skill levels is emerging as a source of concern.
For rich economies, the net outflows of FDI tend to reduce the relative wages of lower skilled workers, while in poor economies inflows of FDI benefit the highly-skilled. This is also prevalent in the Indian context. For example, a company shifting a call centre from a developed economy to India aggravates inequality in both the economies.
The anti-globalisation lobby will then jump into recommending the policy prescription through protectionism. Such policies may be harmful for both the countries. The developed country firms prohibited from pursuing FDI cannot guarantee long-term employment to uncompetitive workers and in fact may endanger their own survival, the consumers of their product or services will have reduced purchasing power as they buy the same product or service at higher than global prices. Similarly, the relatively poor country stopped from receiving the FDI would have lost the chance of receiving investment, creating output and employment. So suppressing FDI or technological change may not be an ideal case and other options to reduce the wage divide may be called for.
One such option would be to increase the supply of skilled workers and a prerequisite for this would be to raise the general educational standard. In general, the level is below the performance required to integrate entrants to the labour force. Productivity levels in India are generally low partly explained by ineffective education. The fact that the poor have low levels of education in India highlights the need to address educational issues. Let us not forget that primary education generates the highest rates of return; secondary level has lower returns while the tertiary level has returns higher than that of the secondary level.
Experts argue that skill-biased technological change is responsible for increasing inequality within the top portions of the income distribution. Evidently, most of the growth in inequality between the highest and lowest earners is due to poor educational performance of the unskilled and their quality available in the market. At the household level, ample evidence reveals that the poor face credit constraints which prevent them from investing optimally in their children's education. But this is only part of the story.
On the supply side, the government is equally to be blamed. In the Indian context mostly the government educational institutions are responsible for providing quality education from basic to higher educational level. In general terms they are abysmally poor. At the school level, the difference between the government schools and the private ones is too glaring to be emphasised. Similarly, although there are private institutions offering tertiary education, the regulating bodies are all government controlled. Research and publications wise, the performance of the teachers are abysmally poor even in the leading engineering and management institutes. One will have to struggle hard to find an Indian educational institute among the top 250 in the world. In future the country must compete through the quality of her human capital, her innovation and her research and development. Sound educational institutions will be a basic premise for meeting the challenges of skill-biased technologies.
At the primary level the story is even more pathetic. It is not just at the top of the ladder that the rungs are missing – a significant number of schools lack the most basic infrastructure, let alone access to the Internet. In addition non-availability of quality staff aggravates the situation. If we do not quickly upgrade our educational institutions, the demographic advantage that we proclaim so loudly may suddenly appear to be a burden.
Thursday, December 27, 2007
Understanding Stock Market Crash in May, 2006
The financial sector constituting of banks and the securities markets finance economic growth as they channelise savings to investments and thereby decouple these two activities. But, Banks and the Securities Markets are two competing mechanisms to channelise Savings to Investments. The banks have always managed to score over the Securities market, keeping the risk averse psychology of the Indian investor in mind, in terms of guaranteed return and low risk.
On the other hand, the securities markets score over banks in terms of allocation efficiency, as it allocates savings to those investments which have potential to yield higher returns. This inevitably leads to higher returns to savers on their savings and higher productivity on investments to enterprises. Hence to the extent economic growth depends on the rate of return on investments, securities market promotes economic growth.
The Sensex has shown high volatility since the start of the present bull run (March 2003). In the recent times, in the month of May 2006, the BSE Sensex lost 1705 points and the BSE lost around $100 Billion in market capitalization. The Net FII for the same month in BSE was an outflow of Rs. 2488 Crores. During the same month, the Mutual Funds reported a drop in their Assets under Management by around Rs. 45.17 Billion. U.S. Federal Interest Rate, FII Flow, Overheated commodities market, Global Meltdown of the Capital markets were some of the reasons put forth by many analysts for the Sensex plunge of May, 2006. According to recent estimates (as on October 5, 2006), the current foreign exchange reserves are around $150 Billion and the current market value of the FII portfolio is roughly $130 Billion dollars. These astounding figures not only put a big question mark on the stability of the returns of the Indian Capital market, they also add on to the uncertainty about the sustainability of the Indian Growth Story.
Literatures on the empirical investigation about the impact of foreign interest rates on the
economy of emerging markets are now documented. It is thus possible to understand the episodes in the Indian context. On introducing a shock to the Federal Interest Rate an immediate response from the MSCI (Morgan Stanley Capital Index) Index is witnessed. The American Indices have a substantial percentage in the MSCI world index and hence, any shock in the federal rate would effect the domestic US indices and hence the MSCI World Index. The Indian government also reacts in coherence and hence, a significant effect in the MIBOR (Mumbai Interbank Offer rate) can be noticed with the effect staying up to 18-20 months. As interest rates and inflation go hand in hand, even WPI shows a significant reaction to the shock with effect tapering off only after 18 months. Exchange rate, being a managed float, does not show a very significant change but even for this variable, the effect tapers to zero only around the 16th month. Due to the effect on the domestic macro-economic variables, the Index of Industrial Production also shows a significant reaction but the effect on this variable is the shortest lived with the effect minimizing from the 8th month. Finally, it can be viewed that the Sensex also shows a significant response to the shock in US Federal Interest Rate and this can be attributed to the effect of the macro-economic variables on the Capital markets.
It is also possible to study the causes of variation (due the above mentioned variables) in the Sensex returns. The Impulse response functions showed that the shock in the US federal interest rate causes a change in Indian macro-economic variables such as MIBOR, WPI, Exchange Rate and the Index of Industrial Production. The shock introduced to the federal interest rate also produced a significant response from both the BSE Sensex as well as the MSCI World Index. T`he above shows that the MSCI Return followed by the WPI has the maximum effect on the variation of the BSE Sensex. Federal Interest Rate and MIBOR have a gradual and a similar effect on the variation of the BSE Sensex. The exchange rate also has significant effect. The Index of Industrial Production has the least effect on the variation in the BSE Sensex returns.
Hence, it appears that the variation in the Indian Capital markets and the various macro-economic components can be explained by the movements in the US Federal Interest Rate and the World Indices.
The above investigation, of the effect of U.S. economy and Globalization on the Indian economy, can have a plethora of policy implications for India. There can be two schools of thought on this issue as there have been in the past for the effect of globalization. US is the largest and most technologically powerful economy in the world, with a per capita GDP of $42,000. Its GDP in terms of PPP is the highest in the world at $12.36 trillion followed by European Union. India ranks at 6th on this list behind China and Japan. According to the BRIC report (Wilson et al, 2003), of the G6 only U.S. and Japan will be among the top 6 economies by 2050. Currently, India’s export to US has the maximum share of the total Indian exports. The current and the past governments have tried to maintain as well enhance the relationship with U.S. in order to maintain the export led growth and also since, the main growth in the world consumption is U.S. driven (currently, 40% of the total consumer spending in the world is by U.S.).
On the other hand, an overdependence on the U.S. market can have dire implications on India’s growth. The US Federal interest rate has been on the upswing since January 2004, where it was around 1%, to the present where it is around 5.25% (September , 2006). U.S. ranks second in terms of cumulative Foreign Direct Investment (around $5.3 Billion from August, 1991 to July, 2006) after Mauritius in India and also accounts for around 40.5% of the total $25.3 billion FII flow (as on June 30, 2004) into India. May 2006 saw the biggest plunge ever in the Indian Capital markets, which is said to be fuelled by FII outflow (Rs. 8.2 Billion net outflow for May, 2006) following an increase in the U.S. federal interest rate, where a lot of Indians lost their lifetime savings. Conversely, only around $2 billion (up to 2004-2005) direct investments from India are to U.S., which is the maximum outward Indian investments followed by Russia and Mauritius. This, hence, brings in the concept of Immiserizing growth that whether the current growth experienced by the Indian economy is working towards social welfare or not and also questions the sustainability and equitability of the growth experienced in the recent years.
The government needs to take quick as well as gradual policy decisions to make the Indian growth story more domestic sector (Infrastructure, industry etc.) driven than external sector (Trade flow, exchange rates, etc.) driven. The need of the hour is to make the Indian growth story more inclusive. The current Bull Run of the Sensex (post May 2006-November ,2006) has seen only three sectors in the positive zone – Telecom, Infrastructure and Banking. The government needs to formulate policies so as to increase the purchasing power of the Indian consumer. Increase in the domestic demand would help the existing companies to achieve the economies of scale and would also attract new businesses to mushroom. To increase the per-capita consumption expenditure the government can either work towards increasing employment or take some liberal steps for the financial services sector. If the financial services sector policies are made more liberal, new businesses would be encouraged and also consumer demand shall increase (owing to availability of credit at easier terms), thus allowing the existing industries to increase both their bottom line as well as the top line and hence, expand. The government also needs to increase the accessibility and coverage of credit and banking services to the bottom of the pyramid. Out of the total loans passed on by the Banks only 8% are consumer loans compared to 13% and 26% in other developing nations like Thailand and Malaysia. Emphasizing on growth in Domestic savings is also imperative for sustainable and inclusive growth. In 2005-2006, 46% of the household assets were in the form of Bank deposits while around 20% were in real estate and only 5% as shares and debentures. The government needs to take steps for increasing the domestic savings (In 2002-2003, Household savings were 22.65% of the Indian GDP)so that the funds generated can be channelised to the productive sectors to attain the desired growth objectives. This would also help the government achieve the objective of increasing the employment prospects and this further drives in the argument of increasing the financial service sector penetration to attain inclusive growth.
Every developed or developing nation directly or indirectly is dependent on the U.S. because of the consumer base it has. India, cannot escape the effect of globalization and neither can totally immunize itself from it. But, it can learn from the boom-bust stories of the other emerging countries and hence, develop policies and framework to ensure that the higher growth is more inclusive so as to make the growth story sustainable. But, the Indian investor as well as the government would need to brace itself for any harsh reaction following any of the policy decisions targeted towards increased inclusive growth and reduced participation from the foreign institutional investors (Recent Thailand case in context). But, till than one can only expect an appreciating rupee and a Sensex scaling newer heights and also, more volatility as the sensex moves with the mood swings of these Institutional investors.
On the other hand, the securities markets score over banks in terms of allocation efficiency, as it allocates savings to those investments which have potential to yield higher returns. This inevitably leads to higher returns to savers on their savings and higher productivity on investments to enterprises. Hence to the extent economic growth depends on the rate of return on investments, securities market promotes economic growth.
The Sensex has shown high volatility since the start of the present bull run (March 2003). In the recent times, in the month of May 2006, the BSE Sensex lost 1705 points and the BSE lost around $100 Billion in market capitalization. The Net FII for the same month in BSE was an outflow of Rs. 2488 Crores. During the same month, the Mutual Funds reported a drop in their Assets under Management by around Rs. 45.17 Billion. U.S. Federal Interest Rate, FII Flow, Overheated commodities market, Global Meltdown of the Capital markets were some of the reasons put forth by many analysts for the Sensex plunge of May, 2006. According to recent estimates (as on October 5, 2006), the current foreign exchange reserves are around $150 Billion and the current market value of the FII portfolio is roughly $130 Billion dollars. These astounding figures not only put a big question mark on the stability of the returns of the Indian Capital market, they also add on to the uncertainty about the sustainability of the Indian Growth Story.
Literatures on the empirical investigation about the impact of foreign interest rates on the
economy of emerging markets are now documented. It is thus possible to understand the episodes in the Indian context. On introducing a shock to the Federal Interest Rate an immediate response from the MSCI (Morgan Stanley Capital Index) Index is witnessed. The American Indices have a substantial percentage in the MSCI world index and hence, any shock in the federal rate would effect the domestic US indices and hence the MSCI World Index. The Indian government also reacts in coherence and hence, a significant effect in the MIBOR (Mumbai Interbank Offer rate) can be noticed with the effect staying up to 18-20 months. As interest rates and inflation go hand in hand, even WPI shows a significant reaction to the shock with effect tapering off only after 18 months. Exchange rate, being a managed float, does not show a very significant change but even for this variable, the effect tapers to zero only around the 16th month. Due to the effect on the domestic macro-economic variables, the Index of Industrial Production also shows a significant reaction but the effect on this variable is the shortest lived with the effect minimizing from the 8th month. Finally, it can be viewed that the Sensex also shows a significant response to the shock in US Federal Interest Rate and this can be attributed to the effect of the macro-economic variables on the Capital markets.
It is also possible to study the causes of variation (due the above mentioned variables) in the Sensex returns. The Impulse response functions showed that the shock in the US federal interest rate causes a change in Indian macro-economic variables such as MIBOR, WPI, Exchange Rate and the Index of Industrial Production. The shock introduced to the federal interest rate also produced a significant response from both the BSE Sensex as well as the MSCI World Index. T`he above shows that the MSCI Return followed by the WPI has the maximum effect on the variation of the BSE Sensex. Federal Interest Rate and MIBOR have a gradual and a similar effect on the variation of the BSE Sensex. The exchange rate also has significant effect. The Index of Industrial Production has the least effect on the variation in the BSE Sensex returns.
Hence, it appears that the variation in the Indian Capital markets and the various macro-economic components can be explained by the movements in the US Federal Interest Rate and the World Indices.
The above investigation, of the effect of U.S. economy and Globalization on the Indian economy, can have a plethora of policy implications for India. There can be two schools of thought on this issue as there have been in the past for the effect of globalization. US is the largest and most technologically powerful economy in the world, with a per capita GDP of $42,000. Its GDP in terms of PPP is the highest in the world at $12.36 trillion followed by European Union. India ranks at 6th on this list behind China and Japan. According to the BRIC report (Wilson et al, 2003), of the G6 only U.S. and Japan will be among the top 6 economies by 2050. Currently, India’s export to US has the maximum share of the total Indian exports. The current and the past governments have tried to maintain as well enhance the relationship with U.S. in order to maintain the export led growth and also since, the main growth in the world consumption is U.S. driven (currently, 40% of the total consumer spending in the world is by U.S.).
On the other hand, an overdependence on the U.S. market can have dire implications on India’s growth. The US Federal interest rate has been on the upswing since January 2004, where it was around 1%, to the present where it is around 5.25% (September , 2006). U.S. ranks second in terms of cumulative Foreign Direct Investment (around $5.3 Billion from August, 1991 to July, 2006) after Mauritius in India and also accounts for around 40.5% of the total $25.3 billion FII flow (as on June 30, 2004) into India. May 2006 saw the biggest plunge ever in the Indian Capital markets, which is said to be fuelled by FII outflow (Rs. 8.2 Billion net outflow for May, 2006) following an increase in the U.S. federal interest rate, where a lot of Indians lost their lifetime savings. Conversely, only around $2 billion (up to 2004-2005) direct investments from India are to U.S., which is the maximum outward Indian investments followed by Russia and Mauritius. This, hence, brings in the concept of Immiserizing growth that whether the current growth experienced by the Indian economy is working towards social welfare or not and also questions the sustainability and equitability of the growth experienced in the recent years.
The government needs to take quick as well as gradual policy decisions to make the Indian growth story more domestic sector (Infrastructure, industry etc.) driven than external sector (Trade flow, exchange rates, etc.) driven. The need of the hour is to make the Indian growth story more inclusive. The current Bull Run of the Sensex (post May 2006-November ,2006) has seen only three sectors in the positive zone – Telecom, Infrastructure and Banking. The government needs to formulate policies so as to increase the purchasing power of the Indian consumer. Increase in the domestic demand would help the existing companies to achieve the economies of scale and would also attract new businesses to mushroom. To increase the per-capita consumption expenditure the government can either work towards increasing employment or take some liberal steps for the financial services sector. If the financial services sector policies are made more liberal, new businesses would be encouraged and also consumer demand shall increase (owing to availability of credit at easier terms), thus allowing the existing industries to increase both their bottom line as well as the top line and hence, expand. The government also needs to increase the accessibility and coverage of credit and banking services to the bottom of the pyramid. Out of the total loans passed on by the Banks only 8% are consumer loans compared to 13% and 26% in other developing nations like Thailand and Malaysia. Emphasizing on growth in Domestic savings is also imperative for sustainable and inclusive growth. In 2005-2006, 46% of the household assets were in the form of Bank deposits while around 20% were in real estate and only 5% as shares and debentures. The government needs to take steps for increasing the domestic savings (In 2002-2003, Household savings were 22.65% of the Indian GDP)so that the funds generated can be channelised to the productive sectors to attain the desired growth objectives. This would also help the government achieve the objective of increasing the employment prospects and this further drives in the argument of increasing the financial service sector penetration to attain inclusive growth.
Every developed or developing nation directly or indirectly is dependent on the U.S. because of the consumer base it has. India, cannot escape the effect of globalization and neither can totally immunize itself from it. But, it can learn from the boom-bust stories of the other emerging countries and hence, develop policies and framework to ensure that the higher growth is more inclusive so as to make the growth story sustainable. But, the Indian investor as well as the government would need to brace itself for any harsh reaction following any of the policy decisions targeted towards increased inclusive growth and reduced participation from the foreign institutional investors (Recent Thailand case in context). But, till than one can only expect an appreciating rupee and a Sensex scaling newer heights and also, more volatility as the sensex moves with the mood swings of these Institutional investors.
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