Entrepreneurship and Jobs in India

India needs more jobs than it is creating. Without enough job creation, its demographic dividend—adding a million people to the workforce every month—will become a disaster. One possible source of job creation is entrepreneurship. Recently, Ejaz Ghani, William Kerr and Stephen O’Connell (GKO) have been systematically exploring this hypothesis for India, in several research articles. What do we learn from their work?

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How Competitive is India?

The latest Global Competitiveness Report of the World Economic Forum ranks India 56 out of 142 countries. This is a much better rank than India gets on the UN Human Development Index or the World Bank’s Ease of Doing Business Index. Is this a good sign about the country’s future growth potential? Probably not.

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Keeping the G20 Real

The G20 wants to change the world. More specifically, the G20 gives national politicians a chance to put forward ambitious global agendas. This is good for their careers. But it can also be good for the world. The balance and weight of the G20 allows it to have some influence on other, older global organisations that may be less able to take a comprehensive view of what needs to be done in today’s risky world. What exactly is needed?

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Europe's Crisis is Political

As Europe’s debt crisis drags on, it is clear that underlying the economic and financial mess is a deeper political problem. The financial problem is clear: private and public sectors in various parts of Europe borrowed more than was sustainable. In this sense, the problem was similar to that of the US; indeed, it was partly created by what was going on in the US. But Europe’s economic problems are compounded by its politics, in ways beyond what a single country would face, even one like the US, with its current dysfunctional polarisation.

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Building a New India

When the UPA came back to power in 2009, with what seemed to be a stronger and more reasonable coalition structure, I was very optimistic. The global economy had dodged the bullet that might have wounded it critically. India had managed to grow robustly, even in the throes of the global crisis. There was a chance for experienced leadership to return and continue its work. Halfway through the government’s term, things appear much less rosy. What has happened and why?

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Diaspora, Development and Democracy

The title of this column is the title of a new book by Devesh Kapur, head of the Center for the Advanced Study of India at the University of Pennsylvania. The book is about how Indians who have emigrated have influenced the country they left behind. It is a fascinating study, broad in scope and full of new insights. Kapur argues that the economic, political, social and cultural consequences of international migration imply a richer framework for thinking about globalisation and related ideas such as ‘openness’, than just focusing on movements of goods and capital. He asks, “Is a country with substantial trade, but with few citizens who move around the world, really more ‘open’ in a broader … sense than a country where trade is more limited but whose citizens live and travel internationally, thus remitting foreign exchange and ideas to a much greater extent?”

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Marc Andreessen on the significance of software

Marc Andreessen, the founder of Netscape, the company which kicked off the original Internet boom, has an interesting article title "Why Software is Eating the World." "Eating" is not meant in a negative sense here -- the article is about how software is used across the economy, in increasingly innovative ways. There's nothing particularly new about what he says, but it's nicely articulated. The punchline for Andreessen is that software is where the US economy can flourish and keep growing. That led me to think that the same implications could hold for the Indian economy. For now I'll just pose that as a question -- the precise benefits of software for the Indian economy will differ from those for the US, but what are those differences? Of course, India's software firms can keep servicing the advanced economies with software services. But what about domestic needs? Something to articulate for India's policymakers and business titans, just as Andreessen has done from a US perspective.

Navigating the Next Crisis

Is a new economic crisis coming? Is it just a playing out of the financial crisis of 2008? What should India’s policymakers do? These may seem like just a tough set of questions from a civil service exam. But they are real challenges that face India's leaders. Unlike their counterparts in the US, Europe and China, India’s leaders actually have significant room to maneuver. What should they do, and why?

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My talk at the Commonwealth Club, San Francisco

Recently I gave a talk on what we can expect for India's economic growth.

You can hear a podcast here

India's National Manufacturing Policy

India’s new National Manufacturing Policy (NMP) is just around the corner. Newspaper reports have provided some glimpses of the thrust of policy changes, with stated goals of creating 100 million jobs and increasing the manufacturing sector share of GDPhttp://www.blogger.com/img/blank.gif from 16% to 25% by 2025. Several innovative proposals have surfaced. One is to provide capital gains tax exemptions to small-scale enterprises, allowing them to raise equity by selling inherited land. Another is to create joint sinking funds in specified manufacturing zones, allowing speedier resolution of payments to labour that loses jobs. Much has been made of greater flexibility for environmental clearances. Unfortunately, this is probably going to result in greater social costs, and may not be the main culprit in constraining manufacturing growth, despite the recent attention given to this issue.

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Did bank nationalization save India?

When India survived the global financial crisis relatively unscathed, several prominent public figures claimed that the country’s public sector banks had been pillars of stability and resilience, contributing to the economy’s strong performance under stress. Indeed, during the crisis, households and firms shifted money from private to public banks, and the latter outperformed the former through those tough times. But what really happened? At the recently held India Policy Forum, Viral Acharya of New York University provided a comprehensive and provocative empirical analysis. No such analysis is perfect, but there is great merit in actually digging into the data, rather than jumping to conclusions and shaping policy without adequate investigation.

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Competition in the Indian Market for Currency Derivatives

In 2009, MCX Stock Exchange (MCX-SX) “informed” the Competition Commission of India (CCI) that the National Stock Exchange of India (NSE) was acting anti-competitively in the nascent market for currency derivatives. Both NSE and MCX-SX provide platforms for trading instruments such as US Dollar-Indian Rupee currency futures of differenhttp://www.blogger.com/img/blank.gift maturities. MCX-SX essentially complained that NSE was using predatory pricing to drive its competitor out of the market, using its dominant overall position in providing trading platforms for financial instruments (especially equities), and resulting deep pockets.

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Getting India to Ten Percent Growth

The 10% growth target for India has had a magical allure. It is hard to say if anyone first held it out publicly as something to strive for realistically, but I do remember Vijay Kelkar as being an early believer. The current Prime Minister has also mentioned this target several times. Yet that double-digit growth rate has remained stubbornly out of reach as a short-term forecast of actual growth. Indeed, it seems that when the Indian economy nears 10% growth, inflation rears its ugly head, and fears of overheating spread. A few years ago, estimates of India’s medium-term potential growth rate tended to be in the 8-9% range. This may be about to change.

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Lady Gaga and Globalization

In the long-standing feverish celebrity culture of the US, pop singer Lady Gaga has scaled new heights. She recently displaced Oprah Winfrey at the top of Forbes magazine’s Celebrity 100 list, and Amazon.com used her latest album as a 99 cent promotion,http://www.blogger.com/img/blank.gif designed to challenge Apple’s dominant iTunes and its looming iCloud music services. The Amazon promotion garnered a Wall Street Journal headline, “Lady Gaga Wars.”

Now Lady Gaga plans to extend her fame to South Asia. In an interview with the WallStreetJournal.com, she said, “The reason I’m going to India now is because I can. I didn’t have the money or the resources before to travel and bring all of my things with me and reach an entire new territory of fans.” The entry strategy includes several Bollywood-style remixes of her songs, and employment of a firm that specialises in producing and distributing entertainment content aimed at South Asians all over the world.

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The Future of the IMF

The arrest and resignation of Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), has captured headlines for days. One of the http://www.blogger.com/img/blank.gifhttp://www.blogger.com/img/blank.gifconsequences of this sudden turn of events has been the clear surfacing of several candidates from developing nations, as well as strong claims from some emerging economy policymakers that Europe should cede its traditional right to the position. An English bookmaker made Turkey’s Kemal Dervis the favourite in early betting, with India’s Montek Ahluwalia not far behind in the odds.

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What Do Investors Know?

Globalization has flattened the world in some ways, but not in others. Many years ago, economists Martin Feldstein and Charles Horioka observed that national savings and investment rates are highly correlated, indicating that investors tended to keep their money at home, rather than diversify globally, even without restrictions on capital flows. Subsequently, other economists documented this ‘home bias’ for portfolios of shares—investors tilt toward holding shares of their own country’s companies.

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The G20 Makes Progress

The recent G20 meetings in February and April have showed that the G20 works. The achievements are not dramatic, but the forward progress is visible, if at a measured pace. Last year, the US had been pressing for rebalancing—basically asking mostly China, but also other current account surplus countries, to adjust their macroeconomic policies to increase their domestic demands and reduce their relative export focus. Those countries argued that the US’s own macroeconomic policies—fiscal and monetary—needed to adjust drastically. Rather than drifting into confrontation and stalemate, this issue has been tackled relatively effectively by the G20.

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A Proposal for Conquering Malnutrition in India

India continues to struggle with how to achieve inclusive growth. A basic problem is that a large portion of the population does not possess the capabilities to participate productively in a modern market economy. A natural policy response is for the government to intervene directly: provide food, jobs, education and credit. India’s problem is that the government’s interventions are often ineffective. It is natural for a developing country government to lack capacity—India’s governmental capacity is actually quite good for its level of development. Making good policy choices is often not about capacity, however, it is about clarity of thought and recognition of realities. The ‘right to food’ campaign needs both.

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Thoughts on Innovation, Entrepreneurship and Growth

These four pieces have a common theme of how to encourage innovation and entrepreneurship in India

India's Missing Growth Driver

India’s Union Budget has been presented, the Economic Survey has been published and attention has returned to day-to-day governance and politics as usual. Stories about big business, big sums of money and large-scale corruption are the ones that grab headlines. Ultimately, though, key policies that will shape India’s future may be suffering from neglect. Sustained inclusive growth requires innovation and job creation across a broad cross-section of the economy. This includes labour-intensive manufacturing, but, more generally, an industrial dynamism that extends beyond large incumbent firms, foreign entrants, or the relatively few recent domestic success stories.

A few years ago, prominent economist Anne Krueger labelled India’s problem that of a “missing middle” in its distribution of firms—a gap between small firms in the unorganised sector, and the large firms that grab headlines in billionaires’ lists and mega-mergers and acquisitions.

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India in 2011: What's Next?

What’s in store for India in the new year? The short-term economic outlook is good. Growth of 9% seems to be a reasonable forecast. Looking ahead, growth rates in this range seem to be sustainable for awhile, based on the assumption that investment stays at about 35% of GDP, and that the efficiency of this investment doesn’t decline compared to recent years. In one way, this is a remarkable achievement. The government has struggled to implement new structural reforms, and to do its core tasks more efficiently; yet the economy remains robust. Perhaps this is a tribute to what stability and reasonably adequate governance can achieve, when the private sector is in a position to take advantage of such an environment. The accelerating recovery in the US will presumably help India’s growth rate as well.

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Innovation and Taxes

India is continuing with major reforms of its tax system. These reforms began with liberalisation, and included cutting tax rates and rationalising enforcement and administration. Tax reform has been an important contributor to the country’s improved economic performance. The latest effort on indirect taxes is the move towards a unified national goods and services tax (GST). On the direct tax front, the new direct taxes code (DTC) Bill has just been tabled in Parliament.

A major guiding principle for tax reform is the goal of reducing distortions in economic activity that taxes can create. Tax rates that are too high, or taxes that apply to narrow groups, are more distortionary than lower rates and broader tax bases. Reforms of indirect and direct taxes are meant to cut down on distortions and improve economic efficiency. Lower rates applied more broadly and evenly, without overlapping taxes or exemptions, are part of the GST and DTC. Another principle, aligned with the first, is simplicity. Simplicity makes tax administration easier and more transparent. The GST and DTC are both simpler than their predecessors.

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Schumpeter and Three Idiots

Economic headlines in India focus on macroeconomic management. Soaring inflation, a burgeoning fiscal deficit or gyrating exchange rates all affect the economy’s health, but prudent macroeconomic policies only go so far. Long-run growth depends on factors like investment, innovation and trade (a different expansion of the initials IIT!), which do not receive as much attention. Investment is perhaps the most basic driver of growth, since capital accumulation raises labour productivity and per capita output. High rates of investment helped East Asia grow at rates never seen before. India, too, has seen higher growth associated with higher rates of investment.

International trade in goods and services has also helped India grow faster. According to economic theory, liberalising trade in goods should have just a one-time effect on output, rather than a permanent effect on growth, but the one-time effect could be spread over decades. Openness to trade also brings new capital and ideas along with products and services, and these can give boost to long-run growth.

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India's Food Future

February has finally brought some relief in the rise in India’s food prices. The government has some breathing room in this dimension—just as well when it is beset by multiple corruption scandals. It is easy to get excited about blatant corruption, or even mismanagement of a specific sporting event or allocation of spectrum. And of course it is justified. It is somewhat harder to achieve the same level of concern about governance of an entire sector, food and agriculture—especially when there are so many possible external villains.

Food price inflation can always be blamed on the weather, on globalisation, on evil speculators, and now also on faster growth in poorer countries. Some of these factors do matter, but they divert attention from past policy failures and from what needs to be done going forward. All of the usual suspects may not be guilty, and the others have been in plain view for some time, so policy making should have already taken them into account.

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Thoughts on the G-20 and the BRICs

Reflections last year on the role of the BRIC countries

Bric-à-Brac or More?

The second Bric summit is just under way at the time of this writing. The grouping was the inspired creation of Jim O’Neill, Goldman Sachs’ chief economist, almost a decade ago. Economic size and growth potential were the main criteria for the grouping of Brazil, Russia, India and China. Other dimensions of size—area and population—correlate as well. Three of the four have nuclear weapons capabilities and the same three are also strategic powers by virtue of size and geography.

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Thoughts on the decline of Europe, prompted by Greece's mess

Greece, the G-20 and India

Greece’s fiscal problems have had ripple effects across Europe, bringing back memories of the autumn of 2008, when a global financial meltdown seemed imminent. At that time, countries such as Hungary and Latvia were the poster children for profligacy and bad risk management. Greece was hiding its fiscal woes at the time, apparently by using currency swaps sold by Goldman Sachs. Now its budget deficit is revealed to exceed 13%, and financial concerns have spread to Portugal, Spain and Italy.

Unlike the 2008 problem countries of Eastern Europe, the new fiscal bad boys are all members of the euro zone. This raises the stakes enormously, since they do not have independent currencies that can depreciate, and their pain becomes the entire euro zone’s problem. How did this come about, and what can be done?


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Two more recent pieces on the G-20 and global rebalancing

What the G-20 Should Do

The upcoming G20 summit takes place at a pivotal moment. The halo of the G20’s response to the financial crisis in 2009 has faded, and it is receiving a lot of flak for not getting things done. In my last column (November 1), I argued that the G20 has an important potential role to play as a manager of current and emerging global risks, including those of climate change as well as financial volatility. For the moment, though, the focus is on global imbalances—the large current account surpluses and deficits that major members of the G20 are running. These imbalances were less of an issue (though still a concern) when the world economy was growing rapidly, and the US, in particular, was booming. The change in US circumstances is therefore a major cause of the new frictions.

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A Guide to Global Rebalancing

The financial crisis rejuvenated the International Monetary Fund (IMF) and the G20, giving each new roles to play in managing the economic mess. New rules for financial regulation and new financial safety nets to promote stability are being developed. Presumably, when the world economy next looks like it is falling off a cliff, the response will be strong and coordinated. It is harder to get agreement on non-crisis tasks. There is some consensus that large current account imbalances (mirrored by large international capital flows) prolonged the run-up to the crisis and made it worse when it hit. In any case, large imbalances are not indefinitely sustainable, because they lead to unsustainable debt positions for borrowers and tricky portfolio decisions for lending countries.

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The Great Indian Growth Debate

Here are two columns about the Sen-Bhagwati contretemps on India's growth

"It's Growth, Stupid -- Or Is Growth Stupid?"

The debate between two of India’s greatest economists, Jagdish Bhagwati and Amartya Sen, is important for India’s policymakers. Are growth targets diverting policy attention from other important development goals? Chief Economic Advisor Kaushik Basu has said the differences are less substantive than they are made out to be, but what is the common ground? Here is my take on the great growth debate.

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Fighting Malnutrition in India

Growth is good. So are health and education. Malnutrition is bad. As I noted in my last column, everyone, including those involved in India’s growth debate, agrees on these things. But differences emerge in recommendations for how to improve India’s human development status. Malnutrition is a good example. One view is that focusing on growth alone diverts attention from tackling problems like malnutrition. Another view is that accelerating growth is crucial to generate the resources for addressing such problems.

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Weighing India's Budget

The recent Union Budget elicited the usual range of responses. Various interest groups commented on the lack of what they would ideally have wanted in terms of tax or expenditure policy changes. Many commentators decried the lack of boldness, or lack of economic reforms, or questioned the realism of the Budget’s financial projections, especially given the looming dangers of high-priced oil.

I want to make three points. First, this is a reasonably good Budget, doing what it is meant to do, laying out the broad contours of tax and expenditure policy for the next year. Second, reforms are continuing, not always smoothly, not always ones that get highlighted in the Budget, and perhaps not comprehensively enough, but continuing nonetheless. Third, the fundamental character of Indian economic policymaking has changed, and for the better.

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