To Understand Indian Economy, Thalinomics at Rescue

Chief Economic Advisor (CEA) Krishnamurthy Subramaniam presented this year’s Economic Survey assessing the country’s economic, regulatory, governance, and social situation. In order to effectively understand the effects of economic policies, he has coined an indigenous term “Thalinomics“. Let us dive deeper into the situation of the nation and understand why Thalinomics can be an important aspect of this year’s survey.

Crux of the Matter

Overview of the Economy
After dipping to 4.8% in the first half (H1) of 2019-20, India’s GDP is expected to pace up in the second half. India’s Current Account Deficit (CAD) was reduced to 1.5% of GDP in H1. External Debt of India was at 20.1% of the GDP, a slight increase due to inflow of FDI, FII and External Commercial Borrowings (ECBs). The increasing inflow of FII and FDI is supporting the foreign exchange reserves.

Goods and Services Tax (GST) collection per month also soared over INR 1 lakh crore for 5 months till December 2019-20. India’s major trade partners were USA, China, Hong Kong, Saudi Arabia, and UAE.

Inflation increased to 7.35% in December 2019-20 from 3.3% in H1 2019-20. The major driver behind the rise was food inflation, in which vegetables and pulses grew at a faster rate due to delayed rain.

Repo rate was reduced by 110 basis points or 1.1% till December 2019. Non Performing Assets (NPAs) for Scheduled Commercial Banks were unchanged at 9.3% in H1. NPAs for Non-Banking Financial Corporations (NBFCs) were up at 6.3% at the end of H1 from 6.1% at the beginning of the fiscal. Credit Growth in Banks contracted to 7.1% in December 2019 from 12.9% in April 2019.

India is also working towards achieving Sustainable Development Goals (SDGs). India’s forest cover reached 80.73 mn hectare, 24.56% of the country’s total geographical area. India is also heading towards solar revolution through International Solar Alliance (ISA).

Owing to the growth of non-agricultural sectors and lack of mechanization, the share of agricultural sector in the economy is shrinking. On the other hand, Food Processing Industry is growing at an average of 5.06%. The Survey, while keeping in mind the reliance of large section of the population on agriculture, advises the government to keep a track of growing food subsidy bill and of elements and rates under the National Food Security Act.

Index of Industrial Production (IIP) shrank to 0.6% (April-Nov 2019-20) from 5.0% in the same period of 2018-19, indicating a sluggish growth in the Industrial Sector. However, Steel Sector grew rapidly at the rate of 5.2% during April – November this fiscal.

Services sector contributed to nearly two-thirds of the FDI inflow in India, to 55% of the total economy, and to 38% of the exports.

Government expenditure on health, education and other social services sector increased by a percent. Despite the creation of new jobs in both, urban and rural regions, women partition in the workforce reduced in the rural areas.

Fundamentals of Economy
Economic Survey 2019-20 opens with contending the economic idea of the ‘invisible hand‘. It says it is imperative in contemporary times to give the invisible hand the support of ‘hand of trust‘ to collate market forces to achieve a desired target, in India’s case, $5 trillion economy. This can be achieved by:

  • creating equal opportunities for new businesses and creating jobs
  • creating a healthy competition in the market
  • implementing policies and regulation so as to ease doing business
  • reducing excessive government intervention to let the invisible hand work on the economy or the sector
  • strengthening financial intermediaries- banks and NBFCs
  • inculcating the idea of ‘trust as a public good

Extending the argument of removing needless intervention, the Survey also outlines these examples of government intervention:

  • Recurring and uncertain ban on stocking limits under the Essential Commodities Act (ECA), 1955 may have hindered the development of cold storages, and integration of national agricultural markets.
  • Drug Price Control under ECA was aimed at making drugs affordable. However, the outcome has been opposite – regulated and hospital-sold medical drugs became more expensive.
  • Grain Market intervention may have led to an increased subsidy burden on the government and ousting od private players, creating a market inefficiency that hinders longterm growth of the agricultural sector.
  • The government’s debt waivers were rather limiting the credit flow as full beneficiaries consumed less, saved less, and were less productive.


GDP Growth Mis-stated?
Economic Survey also carefully answers the question of overestimation of India’s GDP, the barometer of the economy. Using methods like Difference-in-Difference, the Survey clearly mentions that models that overestimate India’s GDP for the period after 2011, also inflate GDP for nearly 50 other countries as well. Taking into consideration other factors, the Survey states that concerns of inflating India’s GDP are unsubstantial.

Thalinomics – An Indigenous Barometer
K. Subramaniam coins an indigenous term to understand India’s economic development. Thalinomics is simply “the economics of a food plate in India“. According to the Survey, Thalinomics can be a transition towards simplifying the understanding of economic effects. It tries to understand economics and its application through understanding the situation of the affordability of a food plate. One must also note that apart from analyzing food price trends, it is imperative to analyze income trends.

Architecture of the Metric
For the construction of thalinomics metric, it is assumed that two thalis are consumed in a day by a family of five individuals (5 because the average family size is 4.8 as per Census 2011). On the income side, daily wage data from the Annual Survey of Industries (ASI). It calculates affordability of a Vegetarian Thali and a Non-Vegetarian Thali.
The Thalinomics metric is calculated by the mathematical formula:

The Survey revealed that the affordability of both, Vegetarian and Non-Vegetarian Thalis has increased. Household that would have consumed two vegetarian thalis in a day in 2006-07 at 70% of the daily wage could now afford the thali at 50% of the daily wage in 2019-20 (Apr-Oct). And the household that would have consumed two non-vegetarian thalis in a day in 2006-07 at 93% of the daily wage could now afford the thali at 79% of the daily wage. One must note that non-vegetarian thalis cost more.

An average household consuming veg thalis have saved approximately INR 11,000 per year, whereas household consuming non-veg thali saved approximately INR 12,000 per year.

Curiopedia

The invisible hand describes the unintended social benefits of an individual’s self-interested actions, a concept that was first introduced by Adam Smith in The Theory of Moral Sentiments, written in 1759, invoking it in reference to income distribution. The idea of trade and market exchange automatically channeling self-interest toward socially desirable ends is a central justification for the laissez-faire economic philosophy, which lies behind neoclassical economics. In this sense, the central disagreement between economic ideologies can be viewed as a disagreement about how powerful the “invisible hand” is. In alternative models, forces which were nascent during Smith’s lifetime, such as large-scale industry, finance, and advertising, reduce its effectiveness. More Info

Criticism of GDP – Multiple observers have pointed out limitations of using GDP as the overarching measure of economic and social progress. Many environmentalists argue that GDP is a poor measure of social progress because it does not take into account harm to the environment. Although a high or rising level of GDP is often associated with increased economic and social progress within a country, a number of scholars have pointed out that this does not necessarily play out in many instances. Jean Drèze and Amartya Sen have pointed out that an increase in GDP or in GDP growth does not necessarily lead to a higher standard of living, particularly in areas such as healthcare and education. Another important area that does not necessarily improve along with GDP is political liberty, which is most notable in China, where GDP growth is strong yet political liberties are heavily restricted. GDP does not account for the distribution of income among the residents of a country, because GDP is merely an aggregate measure. More Info

The Essential Commodities Act is an act of Parliament of India which was established to ensure the delivery of certain commodities or products, the supply of which if obstructed owing to hoarding or blackmarketing would affect the normal life of the people. This includes foodstuff, drugs, fuel, etc. More Info

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