India’s GDP numbers have confounded real economists1 for some time now. The growth is numerically robust but the real experiences do not tally with these high numbers.

I have a hypothesis as to what is happening on the ground. To understand that we need to simplify the reality of Indian economy. Lets dive in.

Jackets & Juices - A simplified economy!

Imagine an economy with just two industries - jackets and juices.

Now imagine that most of the jackets are made in formal economy by corporations or high-turnover professional tailors etc. Therefore the workings of jackets industry is visible to government, appears in most of the reported data and is trackable. There is a small percentage of jackets industry that is artisanal and hence not visible in the data.

Juice industry, on the other hand, is a cottage industry. It is largely informal and most of the production, sales and inventories of this industry is outside the measured economy. Now some small segment of juice industry is actually formalised and involves corporates and hence effectively reports good data.

Estimating the GDP of this Jackets-Juices Economy in theory

By definition, GDP of this economy will be the actual production of jackets and juices in that particular year.

GDP growth will represent how much the production of this year is higher/lower than previous year.

Clearly, just adding number of jackets and juices will not make sense. Hence GDP is measured in value of the jackets and juices produced.

To calculate value we multiply number of jackets and juices produced by its respective price. When we multiply the number of jackets and juices produced in ONE year with the prices of THAT year we get NOMINAL GDP.

NOMINAL GDP of this country may increased over last year in various ways. One, the number of jackets and juices may remain the same but their prices may have increased. OR Two, the number of jackets and juices may have increased but their prices have remained same. OR Any other combination of these two.

But GDP measures only production not prices. We added prices because it did not make sense to add jackets and juices together to get a measurable number. So how do we compare this years GDP with past year’s GDP. To clarify this we introduce a concept of BASE YEAR.

We fix a BASE YEAR arbitrarily - say 2011. We note down the prices of jackets and juices in this year. Now this year we take number of jackets and litres of juices and multiply with 2011 prices. This gives us REAL GDP of this year.

This is all ok if we know the exact number of jackets and number of litres of juices produced this year.

• We know reasonably the number of jackets produced this year because all the factories and tailors report them because they are formal industry. We get their number.

• But we know that some jackets are made by artisans. How to estimate that number? What if it increases suddenly? What if there is a make-your-own-jacket campaign and many people are doing so? To understand this number we do a survey of these artisans all over the country. Again this happens on any random year - say 2018. Based on the survey we get to know that for every 100 jackets produced by the formal industry, 10 are produced by artisans informally.

• We use this equation to estimate the number of jackets in 2025. Now over the years between 2018-2025 things may change so we do that survey after every few years to be certain of our approximations.

Now to juices!

How to estimate the number of litres of juices produced? This is a largely informal industry. So what can we do?

• Survey! Here we undertake a survey and estimate the size of juice industry in one particular year - say 2015.

• Then we compare the size of jacket industry with juice industry in 2015. We conclude that in 2015 juice industry is about the same size as the jacket industry.

• So for every year subsequently, we estimate that juice industry will be the same size as the jacket industry.

• Thus in 2025 too we presume that juice industry will be same size as jacket industry.

• Is it actually so? We wonder. Hence we check with the formal players in the juice industry to check if they are growing in line with the jackets industry. We also do a random survey of very few empanelled juice sellers and check if their sales matches the jacket industry.

After confirming these we compute 2025 GDP

• We take jacket production, adjust it for informal jackets produced

• We assume juice production has changed just as much as jacket production did. We verify the numbers.

• We multiply these with prices of 2011.

• Now we get REAL GDP of 2025!

Estimating the GDP of the Jackets-Juices economy in practice!

Armed with above theory you start meeting Jacket industry people and ask them for jacket production numbers. They look confused - which jackets they ask. Rain jackets, winter jackets, diving jackets, mountaineering jackets, evening jackets, dinner jackets… One jacket company counts thick-twill shirts as jackets. There is confusion about waist coats and vests.

So, to avoid all confusion, you take the units sold, current prices and total sales and you get out of their office. After getting that shock in formal organised Jacket industry you are crestfallen before going to juice industry.

The juice industry sells different juices, concentrates, ready-to-drink, fresh, pasteurised, frozen varieties of juices of different fruits. Even within fruits the prices vary - alphonso mango, Himachal Apples, Florida Oranges, etc. There is confusion if Coconut water is juice or not. Some juice makers are actually selling pulps. Are pulps juice concentrates or are they separate. It makes no sense adding litres of pulp to litres of orange juice. So here too, you take the number of litres, current prices and total sales and leave.

Now how to compute the GDP?

• You get the nominal GDP contribution of 2025 of Jacket Industry by looking at their sales for the year 2025.

• You will apply the approximation of Juice Industry will do just as well. You will confirm it by calling up Juice companies and empanelled juice sellers.

• You will add the two and arrive at the total Nominal GDP for 2025.

• Now you will look at the details for Jackets

  • There will be jackets that are being sold in 2025 but they were not created in 2011, your BASE YEAR. All these can be classified as Speciality Jackets or Other Jackets.

  • You compare the various types jackets sold in 2025 with those in 2011 your BASE YEAR.

• You will do the same exercise with Juices.

• You compare the prices of various types of jackets and juices sold in 2025 with those in 2011 and in 2024. The change in these prices will help you calculate something called the GDP DEFLATOR.

• Now you will estimate the current real GDP by reducing the Nominal GDP by the GDP Deflator.

What I mean is…

GDP calculations are a lot of data manipulation. Even for our simplified Jackets-and-Juices economy we have landed up with so much complexity. A real economy has many products, sub-products, services, valuation of services etc.

That does not mean it is all made up. As Dr. Subir explained to me once, GDP is a statistical analysis that tries to come as close to the reality as it can. It will always have errors and will not EXACTLY measure the real economy. What we want is the process to be true and it should be able to capture the change in the economy effectively. Hence total GDP is one thing but GDP growth is better metric as it eliminates the consistent gaps.

Think of GDP calculations as looking at the economy though a foggy or rainy windscreen. You wont see the road clearly but you should see enough to alert you to what is ahead. At the same time it cannot be bad or broken glass which creates distortion.

With this background let me propose what has happened in India.

Here is my hypothesis:

1. The Total GDP of India is like the GDP with Jackets (formal, relatively easier to estimate and mostly visible) and Juices (informal, not easy to estimate, hardly visible).

2. However, a confluence of forces have impacted the nature of Indian economy since 2011:

   1. Transition from a high-inflation to low-inflation regime. This has affected the price of Jackets and Juices. This is as much a psychological process as it is rational demand-supply decision. I wrote about this back in 2019. This transition, imported goods deflation from China, and fluctuating energy and food commodity prices result in wildly oscillating GDP DEFLATOR.

   2. Financialisation and digitisation: Thanks to JAM trinity, a large part of payments have moved to digital realm. Government is also streamlining taxes (just a bit but right direction) and attempt to reduce unnecessary regulations. This moves the participating industries into formalisation. It also increases the VISIBILITY of their GDP contribution. Thus, in our example, the Juices part of the economy has started becoming more visible. Experts see it as “reduction” in informal sector. I see it as better or more accurate counting.

   3. Nature of the economy has changed: Our consumption pattern (how many jackets and how many types of juices and how much) are changing drastically as more young people become adults. Technology and new realities like pandemics are reshaping our consumption habits. The BASE YEAR does not account for such change.

3. Finally, the formula, the algorithm for calculating GDP, the validation systems, the empanelled sources and methodology for survey to measure informal GDP are showing cracks.

   1. These are not wrong - just old.

   2. But a $4 Trillion economy needs to have better mechanisms to measure the prices of various products and services in a more error-free manner.

   3. IMF realises this when it gave Indian data a “C-grade” implying/positing that India may be under-reporting the correct GDP numbers.

   4. Central Government has taken steps with corrective statistical tools being designed and new GDP series with new BASE YEAR supposed to be announced soon. COVID has delayed some of these developments (for instance census, Consumption Survey, NSSO survey, The Annual Survey of Unincorporated Sector Enterprises (ASUSE), etc.)

4. The VISIBLE GDP has grown very fast (because we are able to count more juices and that small part of Jackets too).

5. The INFORMAL GDP has partly been formalised and partly remains informal. It is growing too. Our capability to estimate it has become better. But since we are using old series we are trying to reduce errors.

6. The adjustment because of the GDP DEFLATOR and the way it is calculated has amplified the GDP growth. As a mathematical corollary, it excessively suppressed the GDP growth previously. Since it is more of mathematical adjustment and hence the on-the-ground euphoria is missing.

7. Consequently, the Total GDP may have grown like usual - i.e. both Jackets and Juices clocking the usual growth.

   1. It seems to be lesser than what the numbers make us believe.

   2. And it may have been higher than what numbers stated in earlier time 2015-2020.

In Sum

The GDP growth conundrum is a misunderstanding. It may correct itself partly just with passage of time (inflation regime adjustment) and mostly with better computational capabilities of new series. But, in the mean time, policy makers need to understand this dynamic. I believe the numbers pushed the RBI into cutting interest rates later than ideal.

I think it would be better to follow Nominal GDP and inflation together along with Real GDP to understand the Indian economy better.

Thank you for reading this far. If you need to dive in more detail refer to notes, readings and references section.

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Notes, Readings, References.

Here are some articles highlighting the discrepancies in GDP reporting. These sources range from academic working papers to financial news analysis, focusing on the disconnect between headline GDP figures and the “ground reality” of the Indian economy.

• India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications [Harvard Kennedy School (Working Paper by Arvind Subramanian)] This seminal paper argues that India’s change in GDP methodology (post-2011) led to a significant overestimation of growth, potentially by 2.5 percentage points annually. It posits that the new method heavily relies on formal sector data (like corporate filings) as a proxy for the informal sector, thereby missing the declines in the real, unorganized economy. [Download here]

• Is India’s Q2 GDP Surge Believable? [The Wire by Arun Kumar former professor of economics at JNU] This December 2025 article, couched in anti-Modi language, questions a specific surge in GDP (8.2%), noting that high-frequency indicators (like diesel consumption and freight traffic) did not match the headline growth. It highlights how the “production side” estimates often decouple from the “expenditure side” due to a lack of real-time data on the informal sector, leading to massive statistical “discrepancies.”

• Beyond The Headlines: A Closer Look At India’s Higher-Than-Expected Q2 Growth [Swarajya by Pramod Hegde] This analysis focuses on the “Deflator” problem. It explains that when wholesale inflation (WPI) is negative, it artificially inflates the “Real GDP” number. The author calculates that this statistical anomaly likely added over 1 percentage point to the headline growth, meaning the “real” volume of economic activity was much lower than the 8%+ figure suggested.

• GDP data revisions—why India still struggles with sharp variations [The Print but article is by AK Bhattacharya, Editorial Director, Business Standard] This article critiques the reliability of the data itself, noting how initial growth estimates are often revised drastically upwards or downwards years later. It suggests that these constant, sharp revisions indicate a struggle to accurately capture economic activity, making the “final” numbers less credible as a real-time policy tool.

Also read

Moneylife Article: How Lower Inflation Lowered Economic Growth with Many Knock-on Effects

Economic Policy Institute has recently updated their Productivity-Pay Tracker and it points to continued divergence between increase in productivity and increase in wages.

But it is not as straight-forward as it looks!

Ideally, an increase in labor productivity should be paired with an increase in wages. However, it IS possible for productivity to rise without any change in labor productivity. How?

At the risk of oversimplification, imagine a simple bread bakery.

Its output relies on various types of labor: skilled bakers and support group ( sales, cleaning, accounts and others). Now, imagine this bakery buys an automated bread-making machine. The machine takes dough, presses a button, and produces perfect loaves.

In this new setup, the bakery still needs the support group, but instead of skilled bakers, they only need a low-cost attendant to operate the machine. The machine itself requires maintenance, which is outsourced, creating new jobs at the machine's manufacturing company.

Fewer people are now needed to produce the same volume of bread. These workers, as a group, may receive a smaller share of the bakery's sales, but since there are fewer of them, they might individually earn more. This is an example of a higher-order economy of scale at play.

The specialized knowledge of the bread-machine makers is highly valuable and commands higher returns. This process can be repeated, leading to gains accumulating with those who possess unique knowledge. For instance, the consulting baker at the bread machine factory would earn far more than an average baker.

So this productivity gain has now created inequality.

We have a super-well-paid consulting baker and many attendants in various bakeries for operating the machines and machine maintenance workers.

Our bakery saw deployment of capital that increased its productivity but also changed the employment profile of the operation. This shift, where technology increases production's capital intensity, leads to a polarization of incomes. On one hand, it amplifies the scale and returns for those with distinctive knowledge - like our consulting baker. On the other hand, it reduces the skill level required for many jobs, consequently lowering the expected income for those working in these jobs.

This change represents a structural shift from an effort-based society to a knowledge-based society. Consequently, those without a college degree or the ability to do "knowledge work" may experience stagnant wages. In this new society, the value of physical effort is reduced, leading to lower pay for jobs that require it.

New Metrics for a New Economy

To truly understand productivity and income changes, we need new concepts. We could measure the "wage content of a job," which would track the wage changes for a standard basket of jobs, similar to how we track a consumption basket for inflation.

Conversely, the "job content of a wage" would measure the value of work that a specific wage can accomplish over time. Measuring these factors would give us a clearer picture of the ongoing economic shifts.

Ultimately, a country's job-profile, and knowledge profile should align with income-profile. If they do, it suggests that capitalism is functioning as it should.

I discuss some of these concepts in my book "Subverting Capitalism and Democracy".

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Imagine the economy as a vast network of pipes, with money flowing like water between income classes. This metaphor reveals the hidden dynamics of wealth distribution, highlighting why some pathways thrive while others wither. In this post, we'll explore the bottom-up, top-down, and inter-class flows, dissect the challenges we face, and propose solutions to restore balance.

The Core Pathways of Money

Money doesn't move randomly in an economy—it follows predictable routes shaped by spending, investment, and production. We can categorize these into three main types:

1. Bottom-Up Pathways: These represent the expenditures of lower- and middle-income groups, channeling money upward to the elite. Think of everyday purchases: groceries, gadgets, and services that ultimately enrich corporations and their shareholders. This flow is resilient because the wealthy invest heavily to keep it smooth—through marketing, innovation, and infrastructure. It's the engine of consumer-driven growth, but it increasingly concentrates wealth at the top.

2. Top-Down Pathways: Here, money trickles from the affluent to the masses via hiring, philanthropy, or luxury spending that creates jobs. However, as inequality widens, these pipes narrow. The ultra-rich spend a shrinking share of their income on goods and services that benefit the bottom tiers, opting instead for assets like stocks or real estate. On a per-capita basis, this flow fails to generate meaningful livelihoods for the masses.

3. Inter-Class Pathways: These facilitate exchanges within similar income brackets, such as middle-class families dining at local restaurants or trading services among peers. While stable, they don't bridge divides and can exacerbate silos.

The Pipes Metaphor: Growth, Stagnation, and Decline

To make this vivid, let's extend the pipes analogy:

• Economic Growth and Innovation: This expands the network—adding more pipes (new industries) and fattening existing ones (increased flows). It's like upgrading a city's water system to handle booming demand.

• Degrowth or Slowdown: Money flows diminish temporarily, perhaps due to recessions. Pipes remain intact but carry less volume.

• Economic Decline: Pipes rust and vanish entirely, as seen in the West when manufacturing jobs migrated to China. Fewer pathways mean reduced opportunities for wealth redistribution.

Job Types and Their Distributional Impact

Different sectors influence these flows uniquely:

1. Traditional Manufacturing: These jobs excel at spreading wealth. Money from lower classes funds production, branching out to middle managers, suppliers, and workers. Pipes are numerous and evenly distributed, with less concentration at the pinnacle.

2. Modern Manufacturing: Automation dominates here, reducing labor needs. Flows are streamlined but skewed—fewer branches, fatter pipes to the ultra-elite (think tech billionaires). Value capture is efficient but exclusionary.

3. Services Sector: This is nuanced:

   • High-End Services (e.g., household staff for the wealthy): Mimic 18th-century aristocratic models—top-down, employing low-wage workers but reinforcing hierarchies.

   • Digital Platforms (e.g., Facebook, TikTok): Bottom-up, where masses pay via attention or micro-transactions, enriching a tiny creator elite.

   • Local Services (e.g., small retail, restaurants): Inter-class, circulating money within middle or lower tiers without upward mobility.

In essence, older industries democratized flows; modern ones concentrate them.

Today's Crises: Clogged and Corroded Pipes

Our economy's plumbing is in disrepair:

1. Bottom-Up Pipes: Concentrated and Bloated

   • Fewer branches mean intermediate classes capture less value.

   • More money surges to the top 1%, widening the gap.

2. Top-Down Pipes: Thinning Out

   • The rich allocate less to lower classes, favoring intra-elite spending (yachts over widespread hiring).

   • Governments have stepped in as the default provider via welfare and subsidies— a band-aid for broken pipes.

Why the government takeover? Private top-down flows have eroded, leaving states to fill the void. But this raises a pivotal question: How do we rebuild these pipes? What value can the bottom offer the top to incentivize direct flows? Solutions might include skill-building programs, inclusive innovation, or policies that reward broad-based hiring. But those are matters for other time.

What are your thoughts on rebuilding these economic pipes? Share in the comments below. Subscribe to RightVIEWS for more insights on economics, society, and beyond.

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Older investors are surprised at the resilience shown by the financial markets in the face of high-risk events like the Iran-Israel war.

Confidence in Government safety net mechanisms

The world has changed since the 2008 financial crisis, and the COVID-19 pandemic only accelerated the shift. Governments and central banks have rolled out an array of tools—direct financial aid, stimulus packages, even whispers of universal basic income—to keep economies afloat. Many in the markets now believe these measures form a robust safety net that can shield us from any future shock. This toolkit, they argue, has been studied, explored and prepared enough to be deployed against any economic shocks. Growth, thus, is now predictable and certain.

But is it? I'm not so sure.

The more I look at it, the more it feels like we're putting lipstick on a pig. Since 2008, much of the economic scaffolding—bailouts, quantitative easing, low interest rates—has been about managing symptoms, not curing the disease. The economy isn't healed; it's just been medicated to look functional. Governments have become adept at massaging statistics to paint a rosier picture than what's on the ground.

Take unemployment, for instance.

Unemployment, for example, is supposedly at historic lows. Sounds great, right? But dig deeper, and the cracks appear. Two shifts in the job market tell a different story.

First, underemployment is rampant. People work jobs that don't match their skills or pay enough to sustain a decent life. Engineers driving cabs, graduates slinging coffee—these aren't anecdotes; they're trends. Second, income polarisation has reached absurd levels. Back in the day, the ratio of a CEO's salary to the lowest-paid worker in a company was about 20:1. By 2008, it had ballooned to 200:1. Today? It's even worse.

And here's the kicker: even this metric is gamed. Companies outsource low-wage jobs—janitors, security guards—so the "lowest-paid worker" on the books isn't the absolute bottom rung. If we compared the CEO's paycheck to the janitor's, both working for the same firm, the ratio would be even more obscene. Globalisation muddies the waters further. Comparing a Nike executive's salary in New York to a Bangladeshi factory worker's wage is meaningless. Yet, no matter how you slice it, the conclusion is stark: the gap between the haves and have-nots is a chasm, and it's growing.

Then there's the issue of asset prices.

Asset prices dictate the quality of life. Housing is the most glaring example. Gone are the days when a single salary could buy a family home. In many cities, even dual-income households struggle to afford a modest place. This isn't just a financial strain—it's a demographic time bomb. Unaffordable homes mean fewer families, lower birth rates, and a shrinking population. The data backs this up: countries with skyrocketing property prices, like Canada or Australia, are seeing fertility rates plummet.

Other assets—stocks, bonds, investment properties—are no less troubling. High asset prices are a double-whammy. On the one hand, they inflate the cost of building your portfolio. At the same time, they increase the risk that this high-cost portfolio will not sustain your retirement. You're paying exorbitant prices for an inadequate stake in an uncertain tomorrow. If prices crash, your nest egg evaporates. If they don't, you're still stuck buying an overpriced future at the expense of your present.

In sum

The belief that financial markets are crash-proof stems from a dangerous complacency. The tools we've developed since 2008—fiscal stimulus, monetary gymnastics—may delay a reckoning, but they don't address the root causes: structural inequality, manipulated metrics, and an over-reliance on inflated asset values. We're not building a stronger economy; we're erecting a house of cards on a shaky foundation.

The real question isn't whether markets can crash but when. No amount of government intervention can paper over the fundamentals forever. Underemployment, income polarisation, and unaffordable assets aren't just economic quirks—they're warning lights flashing red. Ignoring them won't make the next crisis disappear; it'll only make it hit harder.

So, are financial markets crash-proof? Hardly. They're more like a patient on life support—stable for now but far from cured. The sooner we stop treating symptoms and start tackling the disease, the better.

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Donald Trump’s policies have opened a rare window for India to cement its place in global trade and supply chains. This is not the first time such an opportunity has arisen, but unlike previous moments, India is now better positioned to seize it. A look back at India’s journey reveals why this moment is different and how the country can capitalize on it.

India signed GATT on October 30, 1947, effective January 1, 1948, as one of the 23 original contracting parties. But GATT was just a mechanism. We lacked intent and preparation. India’s misguided socialist dreams, protectionist policies and chokehold of license-raj limited its ability to fully leverage this membership.

1991 reforms raised hopes!

The first real chance for India to join global supply chains was after 1991. That time Indian industry was not ready. It was pampered by protectionist regulations. However, threat of competitive forces and lure of the global opportunity woke some players out of their cozy slumber. But it was not easy. At this time, Indian government and polity were busy with other priorities.

• Geopolitical Strain: Pakistan-backed terrorists in Punjab and Kashmir diverted resources and attention.

• Political Instability: The lack of clear election mandates created political uncertainty and turmoil. Frequent changes in government created uncertainty, deterring foreign investment.

• Infrastructure Deficits: India also had poor infrastructure - no good ports, no roads and railways were all multiple gauge. Power was inadequate, water was scarce for people and even less available for industry. With that uncertainty nobody would have brought their manufacturing plants into India.

These conditions made India an unattractive destination for global manufacturing. No multinational would risk setting up plants amid such uncertainty. India’s GATT membership, while significant, did not immediately translate into global supply chain integration due to these domestic constraints.

It took them 1995-96 for Indian corporates to get into the act.

In 1995, GATT was replaced by WTO a more comprehensive global trade agreement.

But just as Indian corporates were getting into the act, geopolitics turned against us. The US and nuclear powers were pushing the world into a Nuclear Test Ban Treaty and other allied agreements. If India signed these agreements, it would be impossible for India to improve and enhance our nuclear weapons. It meant that India had to conduct its own nuclear tests before signing these treaties.

India’s nuclear tests in 1998 triggered severe international sanctions, further isolating the country economically. These sanctions were no joke; they crippled India’s ability to attract investment and technology transfers, stalling progress.

Fixing the basics - 1999-2004

In 1999, India got its first reasonably stable coalition government under PM Vajpayee. While still burdened with sanctions, this government focused on fixing the basics.

• Golden Quadrilateral: A massive highway project connecting India’s major cities.

• Port Development: New and upgraded ports enhanced trade capacity.

• Railway Modernization: Gauge standardization and electrification improved logistics.

These initiatives addressed some of India’s infrastructure woes, aligning with its WTO commitments to facilitate trade. However, global events intervened. The dot-com bubble burst and the 9/11 attacks in 2001 triggered a worldwide economic downturn, dampening India’s momentum.

A Slow Climb: 2003-2009

By 2003-04, India began to gain traction in global markets. The economy entered a sustained growth phase, but skepticism persisted. Companies would not believe when we told them of the impending sustained growth spurt. They were hesitant to trust India’s potential, wary of bureaucratic red tape and corruption.

Despite these challenges, India started carving out a niche in services and select manufacturing sectors, both in services and manufacturing.

Unfortunately, instead of pressing on with reforms the UPA government as busy scamming the wealth out of the Indian economy. All these came to a head when 2008 financial crisis struck.

Banking Missteps and Cleanup

From 2009, political interference in India’s banking sector led to poor lending decisions, saddling banks with non-performing assets (NPAs). It took a decade of reforms, culminating in 2019, to stabilize the financial system.

Just as India was regaining its footing, the COVID-19 pandemic struck, disrupting economic recovery. The substantial erosion of personal finances while fighting COVID has been repaired to a certain extent only now.

The Trump Opportunity

Today, Trump’s policies—likely centered on reshaping global trade dynamics and reducing reliance on certain manufacturing hubs—have created a unique opening for India. Unlike in the 1990s, India now boasts:

• Improved infrastructure, including world-class ports, highways, and a more unified rail network.

• More reliable power situation with last-mile issues also being addressed for remote areas.

• Cheap and effective last-mile telecom infrastructure.

• A stabilized banking sector, post-2019 reforms.

• A burgeoning digital ecosystem and skilled workforce.

• Greater political stability and policy continuity.

These factors make India an attractive destination for companies seeking to diversify their supply chains. The groundwork laid over decades, from Vajpayee’s infrastructure push to recent financial cleanups, positions India to act swiftly.

Seizing the Moment

To fully capitalize on this opportunity, India must:

1. Streamline Bureaucracy: Reduce red tape to attract foreign investment.

2. Invest in Skills: Expand vocational training to meet global manufacturing demands.

3. Enhance Infrastructure: Continue upgrading ports, power, and logistics networks.

4. Promote Stability: Maintain policy consistency to build investor confidence.

So Trump's actions have given us a window where we have the ability and basic groundwork to take advantage of this situation. The question is whether India can move fast enough to turn this window into a lasting gateway.

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How we decide which nations are "rich?" You know how we usually look at things like GDP or GDP per capita? By those metrics, developed countries—like the U.S., Germany, or Japan—are considered wealthy. But are they really rich? I'm not so sure.

Here's why.

So, typically, we measure wealth at a single point in time. The idea is that there's this ideal "basket" of goods and services that the richest nations should have access to—things like top-notch healthcare, reliable electricity, cars, and other comforts. We look at how much a nation earns, how much it needs to spend to get that basket, and the difference is supposed to tell us how rich it is. But that's not the full story.

Let me give you an example to explain what I mean. Imagine a nation where everyone is chronically ill. The median income there is, say, 100 units. But because of their health issues, they need 110 units to get by—10 units for basic needs and 100 units for medications. Now, compare that to other nations where people earn just 20 units but are healthy. Those nations only need 10 units for their needs, so they can save the other 10.

On paper, the first nation might look richer because it has higher income. But in reality, the healthy nations are better off—they're saving money, while the sick nation is borrowing just to keep up. To me, the savers are rich.

A nation of savers is in a much stronger position than a nation of borrowers. If you're saving, you have the flexibility to cut back on non-essentials—like comfort goods—if times get tough. But if you're borrowing, it's a slippery slope. You might lose your job, which means less money for both necessities and comforts, and then it's harder to pay back what you owe. It's tough to turn that around.

I feel like, at any given time, a nation should aim to be a net saver. Sure, during big investment phases—like building infrastructure—savings might be low, but they should still be positive. A nation of savers is just more resilient.

Now, here's another angle: assets.

It's not just about how much a nation earns, but also what it owns—and, more importantly, who owns it. The dispersion of assets within a country matters a lot. Imagine two countries: one where a few people own most of the assets, and another where assets are spread out more evenly among households. To me, the second country feels richer because more people have a stake in the wealth. Median household asset ownership is a better measure than just looking at averages.

And not all assets are the same. I'm talking about income-generating assets—like savings accounts, stocks that pay dividends, or rental properties where the rent covers the mortgage. Those make a nation richer. But stuff like TVs, personal computers used for gaming, or cars you drive for fun? Those are consumption goods. They should be treated as expenses, not assets.

So, a nation with higher net assets—total assets minus debt—at the median level is truly rich. It's not just about having a lot of stuff; it's about having the right kind of stuff (assets and goods), spread out fairly, and being able to save rather than borrow.

And this is important because…

This question goes to the heart of the new economic and social order that is emerging.

The rich nations will be lucrative markets, preferred consumers and their preferences will matter more. Companies and service providers will pay attention to these nations and their rich citizens.

Conversely, the poorer nations will start working to make the products and services to supply to these rich countries. They will “earn” from supplying to the rich countries.

The rich countries will have to step up to help with global challenges - climate change, poverty, pandemics and many other issues.

So now...

The question is who are the rich nations?

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Trump is smart. There is a method to the confusion he unleashes. So we need to find it. Essentially we can classify Trump tariffs into a few buckets.

i] Anti-China Tariffs

A lot of Trump 1.0 policy action went into creating a mutually agreeable reset in terms of US-China relations. Things did not go well and there were quite a few geopolitical showdowns between these two powers. It appears that Xi had made promises to Trump, the US i.e., and reneged on the promises.

So Trump 2.0 is strongly focused against China. He is not even negotiating with them openly. He is ready to negotiate with Putin but not with Xi. That is saying something.

Thus, if you are connected with China, you are going to be on the Tariff list. If you are good with the US, then you get tariffed for the China-related stuff. If you are in bed with China then you get tariffed wholesale.

ii] National Security Tariffs

Trump has recognized the need for certain critical industries and manufacturing capability as core to national security. This has been flagged when certain Chinese components were found in the US F35 fighter jets and even in the British Ships.

In addition, there are certain industries critical to self-reliance. These include Steel, ship building, energy and others. Trump intends to get all of these industries back in the US and he will ensure they are healthy and profitable. We have to expect punitive tariffs on anything threatening this goal.

iii] US Jobs boosting Tariffs

Creating jobs inside the US is critical plank of Trump policy. However, he does not want all jobs. He wants jobs in the industries that already exist in the US. This is protectionism under different name. Trump has eliminated subsidies and programs like CHIPS act and will be relying on tariffs alone to bring these jobs back.

As I explained previously, creating jobs is not easy and tariffs or even encouragements like CHIPS act will not create as many jobs as are required. The manufacturing that comes to the US will be more automated (less labour intensive) and focused on high-end employment where labour competition is low.

iv] Fair-trade or Tit-for-Tat Tariffs

One of Trump’s belief is that countries have taken advantage of the US consumer. He is not wrong though his assessment about mechanics may not be accurate. Nevertheless, countries have artificially kept currency low against the dollar to allow their exporters undue advantages. They have also imposed restriction on domestic consumption keeping wages and other costs artifically lower making their exports competitive artificially. Trump is going after those cases.

This covers much of Asia, Japan and China.

v] Tariffs as a threat

As Kyle Bass points out, there are cases where Trump has used threat of exorbitant tariffs to bring parties to negotiating table. This is applicable to Canada, Mexico and others will soon join this group.

As we progress into the Trump term, we may see threat of such tariffs creep up suddenly directed at particular countries that Trump wants to bring to the table.

vi] Revenue generation

Trump has stated a “balanced budget” as one of his goals. This is not easy as it sounds. The US has been sending money globally for variety of reasons. Trump has cut a few of them - US AID. US donations and financial support is already under scrutiny.

Trump also considers tariffs as means to reduce, if not eliminate, this gap. This is price for accessing the US consumer for global producers.

In Sum

At this point we are simply trying to understand the breadth and scope of Trump tariffs. The nature of tariffs, how they are drafted, how they are implemented and how the target countries and companies react to them will eventually determine their success. Trade economics is very complex and real action is in second and third order effects of every action. So lets not jump to conclusions and analyse these exciting developments dispassionately.

Notes:

Kyle Bass highlighted three in his X-post. But there are more.

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Financial reporters, finance ministry officials, and state government officials often emphasise the amount of foreign direct investment (FDI) they attract. This relentless pursuit of foreign capital is both dangerous and unnecessary.

What is the purpose of FDI?

FDI was necessary for the following reasons:

• Cheap capital and quantum of capital

  • First, the cost of capital in India has remained high. It reflects the prolonged period of high inflation in which we operated until approximately 2018.

  • Second, the balance sheet strength of Indian banks, private investors, and lenders was constrained. This limitation made it challenging to finance large projects through debt, given its lower cost of capital compared to equity. Consortium lending was used to finance big-ticket projects.

  • Third, India has not developed its debt markets very well. It was a pet project of my former super-boss, R Ravi Mohan. Regrettably, following his passing, no one has demonstrated the motivation to advance this. The absence of debt markets hindered smaller investors from supplying more affordable debt capital to corporations.

  • Fourth, the cost of accessing equity markets is impossibly high and a huge barrier to accessing high-risk capital.

    • The result of the stock market scams of 1991 and later was that the regulatory cost for accessing equity capital was very high.

    • Very few corporates could access it. Save for some Reliance companies (Reliance Petroleum Ltd, Reliance Power, RCOM etc.) and some notable others, not many had the muscle to enter the equity markets.

    • The Reliance ADAG group's mismanagement, Ketan Parekh, the NSE, and various other scams has further increased the cost of accessing equity markets.

  • Fifth, the seed investing, private equity, and venture capital sectors were not developed, primarily due to a lack of exit opportunities (an indirect consequence of the reasons above).

  • As a result, Indian corporates were hamstrung when it came to growth or expansion. Capital was not available in the size that made it impactful; it was definitely not available at a cost that was competitive.

  • FDI provided larger sums at quite competitive rates, bypassing the equity and debt markets. Hence, FDI was essential for the survival of many Indian companies.

• Technology or Intellectual Property (IPR)

  • Developing technology requires high risk and patient capital.

    • R&D is one of the most high-risk AND highly resource-intensive activities.

    • As I explained above, with the kind of capital constraints we were operating in, it was impossible to develop high-quality IPRs that could give you bargaining power in international markets.

    • When we speak of globally competitive IPR, probably Bajaj’s DTSI engine comes to mind. Mahindra’s mHawke CRDE was also innovative but actually European, though Mahindra holds the IPR for it.

  • IPR builds upon itself.

    • Once you kickstart the R&D process, you will start accruing benefits gradually.

    • The research pays off over the longer term. This leads to two issues. Indian companies need to work on R&D for more than 10-20 years before they can develop the momentum for IPR breakthroughs. On the other hand, foreign companies can easily bring new IPR-protected products to the market, increasing the risk for Indian R&D investments.

    • The R&D risks can be reduced by having high levels of clarity, predictability and future visibility of about 10-15 years in trade and industrial policy. (Old hands are laughing their bums off…)

    • Imagine that even in the Pharma Industry, where India has significant technical knowledge and companies have big balance sheets, India was not able to deliver a breakthrough drug. It still can’t. The reason is not a lack of talent but that of capital. In an industry where the quantum of capital is a barrier to entry, your large balance sheet players will not pour money into R&D.

    • Rather, they will be busy milking the low-end, cost-arbitrage business. A similar (but not quite the same) story is that of our super-esteemed IT players.

    • Even today, most of the IPR created by Indians is for foreign companies.

  • This chicken-and-egg situation is why we need external technology. And with technology comes money to protect that technology from falling into Indian hands - FDI.

• Employment

  • With corporations keenly focused on wage arbitrage and a lack of financial capacity with the government, there were not many ways to create employment.

  • The rapidly expanding young Indian population seemed like a potential market for foreign players. With the population in the developed world starting to decline, they were in search of volume growth. Older products and technologies could very well satisfy this population at great profit.

  • The China model also provided another template for foreign companies to invest in India. They intended to create factories to serve the developed country's market by exploiting wage arbitrage.

• Thus, this area was an actual win-win for FDI in India.

FDI is not as beneficial as it is touted to be.

Whenever a foreign company invests in India:

• It seeks returns from this company, and the returns are higher than the capital invested. These returns are repatriated to the parent company.

• It creates and owns the technology or intellectual property and India does not get access to it.

• It can bring in automation to negate the employment potential of the FDI investments.

A combination of these factors means that the foreign company is merely accessing the markets of India and, as such, extracting and exporting the value creation to its parent. I have explained various challenges with Multinational corporations, including regulation-shopping, in my 2010 book Subverting Capitalism and Democracy.

But, there is another factor in this argument.

We do not need FDI today.

Let’s delve into this a bit more.

Imagine if, after totally banning all trade, there is Trump 3.0, where all FDI is banned. In such a scenario, how will the US grow? It will do the very same things it has done since the 1900s. It will open the equity and debt markets to domestic investors and improve bank lending for industrial use. That will kick start US growth within its domestic economy.

Why can’t this work for India too? In fact, it can.

• In short, our credit system has been choked, equity is expensive. We do not know how to use equity, debt and banking credit effectively. That is why we are reliant on FDI. But that can change.

• The RBI has choked banking liquidity for quite some time under the name of inflation targeting. This is being eased up now.

• Bank lending has become unnecessarily centralised.

  • This removes personal judgment from the lending decision, which is detrimental.

  • Effective lending relies on both the ability to repay and the intention to repay.

  • A centralised decision cannot assess the intention to repay.

  • In fact, when you remove that assessment, those who do not intend to pay have extremely alluring proposals.

  • The solution is to think of certain employees as loan-portfolio managers. Give them freedom and evaluate them just like you evaluate a portfolio manager. The loans should be tagged with and should follow the loan manager till they are repaid. (I have discussed this solution in certain other fora before).

• Easier access to equity markets

  • In a bid to encourage unqualified investors to invest in equity markets we have made it absolutely impossible for young, dynamic and highly risky companies to access the equity markets.

  • We must understand business means risks, and equity capital is high-risk capital. It should allow the young dynamic companies to take risks while not letting the fraudsters get away.

  • Today, thanks to so many regulations, we have made equity markets as exit avenues for private equity. The PE/Venture Caps have also started financing unsustainable companies that can exit into the market with a bang before falling down as duds. This is fraud by other means and defeats the purpose.

  • It is time to simplify the entry requirements and ease compliance requirements for companies to access equity markets.

• Corporate Bond markets

  • This is another area where debt Mutual Funds, Time Deposits from banks, retirement funds, etc. compete. So, it should be a no-brainer that the simplification of regulations should make it a low-hanging fruit. But it hasn't happened.

  • The main reason was the ineffective resolution of debt claims in case of disputes. Disputes tend to increase the costs and risks for bonds and debt.

  • The Insolvency and Bankruptcy Code has the skeletal framework to resolve it. But the courts are a hindrance both in terms of time and quality of resolution. Assets and capital get tied up and cannot be deployed for productive uses.

  • The way to resolve it is a bit tedious. But if you can free the capital while the claims are being resolved, then you will ease the burden on the economy.

In Sum

India can do without FDI. Yes, FDI is welcome if it is in our interest.

But it is absolutely vital that we unleash the capital we have. IT will allow our capital holders to earn a return and expand our wealth.

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The Reformation was a major Christian movement aiming to reform the practices, beliefs, and structure of the Catholic Church. It was sparked by widespread dissatisfaction with church corruption, such as the sale of indulgences (payments for the forgiveness of sins), etc.

Taxes need a Reformation.

Around a fire many millennia ago, a group of people came together to form a government to perform certain collective duties. This government needed money to perform its duties. This money is the tax.

People know taxes are necessary and that the government needs taxes to run the country. The government surely knows it has the power to extract taxes from the people. But it, quite possibly, does not know that the taxes are for running the country! Otherwise, the government would not be so profligate in spending them. Look at where we are:

The burden of taxes on an individual is exceptional.

1. Income is taxed

2. Purchases are taxed by VAT or GST

3. Our assets like house, car etc. are taxed through property taxes.

4. If assets appreciate, we pay capital gains taxes.

5. If we trade, we pay transaction taxes.

6. We pay a cess on credit card transactions.

The benefits have eroded.

1. In the early years, we could see tax dollars being deployed towards infrastructure development and improvements in quality of life. The satisfaction derived from life improved, and thus, people did not mind paying taxes.

2. Since the start of this century, the pool of beneficiaries has expanded rapidly, the qualifying criteria were relaxed, and the burden on the taxpayer has expanded considerably. There was no additional visible benefit from the paid taxes. Yet, there were no visible disadvantages either. People noted the poor efficiency of spending but there were no pain points.

3. Since the last decade, particularly post-COVID-19, people have been experiencing pain and disadvantage despite paying their fair share of taxes. It is now evident that our taxes are being used to support activities that are clearly against the tax-payers’ interests.

Taxpayers’ interests are compromised.

Governments across the world have embarked upon various schemes:

1. Housing has become unaffordable. From a point where houses were comfortably affordable on one salary are unaffordable on two generous salaries,

2. Inflation for daily goods has spiked. The household salary consumed as daily essentials (not fancy spending) has increased considerably.

3. The cost of education was high, and despite the availability of generous student loans, it remained high and unpayable from the jobs resulting from such an education.

4. On the contrary, the bureaucracy has expanded to its largest and they seem to be paid quite well. They have become a modern nobility.

Reset the tax contract with the government!

The first step towards this is a Tax charter that every government must publish. The charter should include:

• Name of the tax

• What is being taxed

• How (ad valorem, lump sum, etc.)

• How to calculate it

• How to comply with the law

• How to verify compliance

• Which authority has the power to levy this tax

• What is the raison d'etre for this tax?

• Who is it supposed to benefit?

• What initiatives is it supposed to finance?

• When can it be raised?

• When can it be excused through amnesty schemes?

• What are the services citizens are getting in return for the tax paid?

More tax reform suggestions to follow.

Frankly, tax reform is not something we can deal with all in one go. So, over the next year (yes, year), I will submit my suggestions about Tax reforms. I promise not to bombard everyone with tax reform posts. So please do not unsubscribe.

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A few years ago, I saw this race in which an athlete, Heather Dorniden, trips, gets up, and wins the 600-meter race in the 2008 Big Ten Indoor Track Championships.

Heather Dorniden reminds me of India. We, too, fell, got up, and are back running. We are getting closer to the other runners.

We will now compete with South America in terms of per capita GDP and must overtake them.

Importance of GDP and Per Capita GDP

The total national GDP reveals:

• national capability - the different things i.e. breadth and depth, you can do

• national capacity - in what volume you can do those different things

• For instance, India, as the fifth largest economy, could make a sophisticated vaccine for COVID-19, manufacture it at scale and share it with the world.

Per capita GDP reveals the quality of life:

• The condition of your infrastructure (roads, pavements, water logging etc.)

• The condition of your natural resources (air, water, land, etc.)

• Nutrition available to people

• The physical well-being of the people

• Community sense of people

• Another important aspect of this is step and scale change. So when we move from $2000 per capita income to $5000, we will see a certain pace and type of change - say like Test cricket. But when we move from $5000 to $7000, you will see a faster and better pace - say like ODI. From $7000 to $10000 it will be like T20!

So what does this mean?

Over the next 10 years, as India climbs up the per capita GDP ladder, we will see:

• improvements in the quality of our infrastructure (Vande Bharat is an example),

• we will see cleaner rivers (Sabarmati and hopefully Yamuna and Ganga too),

• greener cities, parks and green spaces (some gated communities have started developing this)

• sports grounds and athletic facilities in cities (note how Indian cricket grounds have improved between the 1990s and today).

• We will see more fit people and fewer fat people (consider Europe, not America, as the standard)

• We will see people better styled and well-groomed.

• We will see more community sense (traffic sense, cleanliness etc.)

In sum

Things will get better soon—and things will start getting even better even faster. That does not mean we can sit back and enjoy. It means we will also have to up our game. We will have to move from Test cricket mindset to ODI mindset and then to T20 mindset. It is us; we drive this change. Lets do it!

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Modern economists have argued that Elon and Vivek's DOGE activities and Trump's tax cuts will precipitate a deep recession. Is this statement true? Can we avoid it?

The argument comes from the following equation:

Here:
GDP = Gross Domestic Product
C = Personal Consumption
G = Government Spending
I = Corporate Investment (includs all spending)
(X-M) = Exports - Imports or Net Exports

From this equation, it is clear that if we reduce G, then GDP will decrease. There are second-order effects as well. For instance, as the government reduces spending, investments decline (to that extent), and thus, fewer jobs are created, thus reducing personal consumption (proportionately).

But not all Government spending is the same!

There are four types of government spending:

1. Productive Spending improves efficiency and decreases cost or both. It increases profitability and thus encourages Corporate Investments to go up. For instance:

   1. spending on infrastructure,

   2. defence, etc.

2. Supportive spending reduces people’s loss and ensures they do not fall into poverty. It also includes spending to encourage industries to set up their operations in the country. This includes:

   1. income support to poor families,

   2. tax exemptions for strategic industries

3. Operational Spending represents the costs required to run the government, including salaries, paper, consumables, etc. This includes:

   1. Reasonable Operational Spending including

      1. Salaries

      2. Pensions

      3. Working expenses

      4. consumables

   2. Unreasonable operational spending coming from

      1. unnecessary overstaffing,

      2. too many departments, etc.

4. Wasteful- spending includes the rest. This may include:

   1. Pork-chop benefits,

   2. tax breaks to specific constituencies, etc.

   3. Corruption enabled excess payments, etc.

Cutting some spending will help!

Clearly, we can eliminate some spending without affecting government effectiveness. The question is, what will be the effect of cutting unreasonable operational spending (point 3(b) above) and Wasteful spending (point 4 above)? Since this reduces “G” in our equation for GDP, so it should reduce GDP.

WRONG!

People often do not realise that the Government is financed by taxes or debt.

• Taxes represent part of our earnings that we, individuals, cannot spend.

• Debt repayment represents part of the taxes available to the government that it cannot spend.

When you reduce government spending, you can reduce taxes. This way, you keep the money in the hands of individuals who can spend it better. It also increases the taxes available to the government for high-quality government spending.

It also allows spending to be directed to new and innovative products and services. This creates the foundations of future growth.

BUT Cutting good spending will hurt growth.

If, however, Trump or any reformist cuts the Productive Spending or Supportive Spending, then the growth actually declines. To make matters worse, it also impairs private consumption and corporate investments. Thus, it weakens the foundation of future growth. Economists often call it a “decline of growth potential”.

Cutting good spending is easier because there is less resistance. Bad spending is difficult to cut as you will face opposition from unions, lobbies and interested politicians and constituencies.

So, it is critical to continue or increase the good spending and cut only the bad and wasteful spending.

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The Reserve Bank of India (RBI) is once again confronted with the dilemma of balancing inflation and economic growth. However, this dichotomy is misleading. India stands at a critical juncture where poor policy decisions could have far-reaching and detrimental consequences, surpassing the potential benefits of a conservative approach.

Let us understand some key points when it comes to the inflation-growth trade-off.

There are two ways of tackling high inflation

1. Reduce demand by slowing down the economy by reducing GDP growth OR

2. Increase capacity to pay - by increasing GDP growth higher.

3. Hold it! I am not being facetious. Let me explain. There are two types of growth. Rather, there are two types of economic situations in which inflation happens.

   1. One that happens at full employment, which increases wages and puts pressure on prices to rise. This is the wage-price spiral. Economists also call such growth overheating. Here, inflation is caused by high demand, not supply constraints. You reduce inflation by choking this type of growth.

   2. The second situation is when there is no supply. You can see there is unemployment. When growth happens in such a situation, it actually expands the supply, leading to MORE goods, which reduces prices. It also increases employment, improving the affordability of those goods. You stoke inflation by stifling this growth.

India is stuck in the second situation.

1. We are not at full employment or full capacity. India’s lower employment (below-potential employment) is well known. Our companies, too, are not operating at full capacity. These are clear indications that our growth belongs in the second category.

2. We were and continue to be a country of shortages. Previously, there were shortages and rationing of consumer goods like radios (yes), TVs, scooters, etc. Today, the shortages are mostly in the agricultural domain.

3. We are still a supply-constrained economy. In such an economy, reducing growth by raising interest rates worsens inflation. We need more supply, not less. We need more investment, not less. We need more growth, not less.

This food inflation, too, is different.

1. The present inflation spike has been caused by a lack of supply of vegetables, particularly some specific vegetables like tomatoes, potatoes, onions, etc. However, unlike in the past, the shortage is not perennial but seasonal and episodic.

2. The vegetables that cause the spike are also important. The food spike has come at a very peculiar time - the time of election in Maharashtra. Maharashtra politicians have been financed by agri-middlemen who control these very vegetable supplies.

3. This Food inflation can only be fought using fiscal policy, i.e., with free foodgrain support, etc.

4. Using monetary policy is justified only when there are second-order effects.

   1. Second-order effects refer to higher food prices resulting in demand for higher wages and higher wages resulting in higher prices, hence more inflation.

   2. The recent spike in food prices is not new. Veggie prices have been high for a long time, and despite that, there have been no second-order effects.

   3. As explained above, second-order effects happen in the first type of economic conditions, not in the second type where India is.

But food inflation is stifling growth, right?

1. Yes, in general, high food inflation does stifle growth.

   1. The most common effect of inflation is reduced consumer spending. This reduced spending slows down the consumption side of GDP and results in lower growth. This is an important aspect of inflation, and we need to understand it better.

   2. When our budget is under pressure, we postpone spending on certain goods (phones, TV, clothes, etc.), which is called discretionary spending, and we cannot postpone spending on others (food, medicines, etc., which is non-discretionary spending).

   3. So, the first demand to collapse is that of discretionary items. This is evident when the prices of these items remain low or even reduced. These prices are captured in non-food inflation, which has declined considerably over the past year.

   4. So what happens after people stop consuming discretionary items and are still facing pressure? Can they consume LESS food or take LESS medicines? The quality of non-discretionary items is compromised but people cannot go without these items no matter what the price, you will try to eat.

2. But not always - India’s case is different.

   1. India has been giving food assistance to a large part of the population post-COVID. The Modi government’s decision to extend the post-COVID foodgrain assistance for another five years until 2029 makes a lot more sense. Interesting, isn’t it? This will cushion the poor from food inflation shocks.

   2. There are still longer-term shortages in certain food categories. The supply of food and agricultural products—eggs, grains, millet, fruits, berries, fish, etc.- needs to be expanded greatly.

   3. Veggie inflation, specifically, and food inflation in general, can be reduced and controlled through agri-reforms and the development of market mechanisms in the agricultural value chain. [Refer my paper on Smart Agriculture Management System]

Then why is growth anaemic?

1. The overlooked reasons for below-potential consumption are savings hit after COVID-19. While many commentators have highlighted the GDP impact of COVID-19 in India, not many have done a deep dive. I have some hypotheses about the real impact of COVID-19 that many have missed.

2. As bad as it was, the impact of COVID-19 was less than it could have been. It was thanks to the resilience of Indian families who had built a savings cushion since our growth got some traction in the 1990s.

3. It is critical to note that our Gross savings peaked in 2009 around the Global Financial Crisis. Since then, we have been drawing down our savings thanks to endemic corruption and impairment of the banking system.

4. If you see the chart, just before COVID-19 struck, Indian savings had perked up slightly.

5. Indeed, the timing of COVID-19 could not have been worse. It is amazing that we survived this entire event.

6. In the aftermath of COVID, Indian families will build savings to a comfortable level before the consumption engine fires again. This has nothing to do with veggie inflation specifically.

However, a 6-7% real growth will not be enough.

1. As a leading economist rightly put it, the present growth rate is far below the aspirational growth rate.

2. So what is the aspirational growth rate, and how does it compare with what economists usually call the growth potential (or potential growth rate)?

   1. Simply put, the potential growth rate is the maximum achievable growth rate, considering fiscal, monetary, and macro environment limitations.

   2. The aspirational growth rate is what the population expects our economy to perform so that they can improve the quality of their lives. It is a reflection of their dreams.

3. There is a significant part of this aspiration is created by the social environment.

4. Thanks to all the infrastructure development, social development and exposure to global benchmarks, India’s aspirational growth rate has touched 12-14% real growth year over year. (If not more).

5. The potential growth rate remains addled at around 7% real growth you. This is because of bureaucratic bottlenecks and certain reforms that have been made into a political minefield.

6. In such a backdrop, the actual growth rate of 5.4% or 6% is very underwhelming.

What about Foreign capital and foreign investments?

1. This fascination with foreign capital and foreign investment comes from a misunderstanding of how money is created. This misunderstanding should have been properly addressed by now since the Bank of England gave an excellent paper explaining how commercial banks CREATE money and thus capital.

2. India has since 2014 stifled its banks (first by UPA corruption and then by NDA excess conservatism arising from the suit-boot-ki-sarkar scheme).

3. If we unshackle our banks and investment mechanisms, fast-track our courts (for faster dispute resolution), we will be able to unleash the animal spirits using LOCAL capital.

4. Regulation has also hamstrung the Indian economy. Where the regulators do not understand or are behind the cutting edge, you see the industry thriving - e.g. IT software, content creation, etc.

5. This reveals another dichotomy, where FDI and FII investors are treated better, get access to ministers and decision-makers sooner, and are able to protect their capital and assets than local investors. Modi needs to simplify the entire bureaucracy to help Indians profit from Indian growth.

6. Thus, this has nothing to do with veggie inflation.

Can we first get inflation under control and THEN push growth?

No. Since RBI cannot control this veggie price inflation using monetary policy, it does not mean the RBI should flog the economy into a coma. This is like the “operation is successful, but the patient is dead” scenario.

When you hurt growth, the pathways of economic growth breakdown. It takes a long time to reform them. We have an example before us. If you look at the savings rate chart above, you will note that we have been drawing down on savings since 2008-09. It was only in 2019 that we started to look up. A further choking of the economy may set us back for five, if not ten, more years. We cannot spend a decade with anaemic growth; if the RBI messes up, we will end up spending two decades with anaemic growth.

So it will be a very bad idea for the RBI to sacrifice growth for something it cannot control.

In Sum

The RBI has tied itself up in knots for no reason. There is a clear need to unshackle growth engines and let economic growth ease households' cash flows.

Blind inflation targeting is never a good idea. It is time the RBI woke up.

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I don’t know how many of you worked with the Windows operating system of old. It had its quirks, and you needed to work with the operating system rather than blindly build your programs. If you tried to push the programs to the limit, the whole computer would crash, and you would lose your work. This could happen with inane things - say you opened two Excel files that were linked to each other and had macros and some conditional formatting. (I see some oldies nodding vigorously!)

Economics is the operating system of society.

It is quite like that old Windows operating system - it has its quirks. You got to work with it. Our institutions are like programs; they need to work with the fundamentals of economics. If you mess around, you get the “blue screen of death” or anarchy.

Dharma is the system of principles of society.

If you follow Dharma, you will automatically be on the right path. Dharma is not a religion but a code of duty, which we have discussed in great detail.

Indian Institutions work against the fundamentals.

Indian institutions do not align with Dharmic principles, which is well known. However, they also do not align with the economic fundamentals. For instance,

• RBI is actively working against the poor and unnecessarily keeping the cost of capital too high.

• The Finance Ministry has introduced regulations to simplify taxes, but the paperwork and reporting frequency is so high that entrepreneurs spend 800 man-days per year filing just tax paperwork.

  • GST has around 6-10 returns to be filed every month.

  • There is a lot of ambiguity because of differential GST rates and credit applicable.

  • If there are any discrepancies, the department seeks an explanation from the company as if the company is a tax evader.

• The legal system is a black hole that you will emerge out of after 20 years without decisive resolution even if you were 100% right (for example, if you want eviction of illegal tenants).

• If you are a farmer, you are doomed as everyone including the government is against you.

  • The government wants to acquire your land where they will pay 25% of the current value after 20 years. You can sell the land to the bureaucrats at 70-80% of the value before the acquisition is announced. That bureaucrat gets 2X the value from the government.

  • Everything from seeds, fertilizers, final produce is in the hands of politicians who change the prices or time of delivery (of seeds and fertilizers) as it suits them.

• If you are an industrialist, you are doomed. By the time you get all the permits and licences the industry will change and the opportunity will be lost forever.

That the institutions are working against Indian interests is not an anomaly. The institutions are designed to be working against Indian interests. Their colonial hangover goes to the heart of these institutions. We need a heart transplant and immediately.

India is growing DESPITE this.

The strength of the India story is that India grows despite this. While things are improving, at the current pace, it will take another century to improve to acceptable levels.

I hope we get some department like DOGE to get all the bull-shit eliminated and reorient the bureaucracy and the institutions to work FOR India.

Notes and Readings

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In the last post, we discussed how the RBI's policies hurt the poor more than the rich. In this post, let us examine if RBI is hurting Indian growth.

But before - The Basics

Economists like to compare the economy to a car. So, let us start from there.

If the economy is like a car, we will find that not all wheels run at the same speed all the time. The rich run faster and tend to run away, while the poor tend to lag and drag. Fiscal policy (run by the government, i.e. finance ministry) takes the energy from the rich and brings the poor up to speed (at least ideally). This way, we can keep the whole car (i.e., the economy) running at some decent speed.

But it cannot go as fast as it wants. There is a speed limiter that sets the limit for the maximum speed. The RBI runs the monetary policy (and regulates credit creation) that determines how fast this whole car runs. It is the speed limiter. At times, things get a bit crazy, and the RBI will come in and REDUCE the allowed maximum speed.

I believe the RBI is reducing the maximum speed far too much—so much that our car has to deliberately slow down to avoid crashing.

We are still growing at 7%, so why the big fuss?

There are two parts to this answer.

The current growth is making us struggle harder.

To normal people, growth felt easier in 2004-14 (more so between 2004-2009), and we had to grind harder during 2014-2024. Economists will tell you that the quality of growth between 2014 and 2024 was much better than that between 2004 and 2014. But to normal people, it does not feel that way.

This is because of the psychological effect of nominal GDP. The most quoted GDP growth numbers are REAL GDP. But in real life, we do not experience, feel or understand Real GDP; we experience nominal GDP. When a company grows at 10% every year, that growth is nominal. When we say our salary grew 10% last year, that was nominal growth.

Imagine a person who received a 10% nominal salary rise between 2004-14. With 8% inflation, the real growth was 2%. After 2014, the same 2% real growth with inflation at 2% translates to a 4% salary hike. How many of us would like a 4% salary hike vs a 10% salary hike even when both amount to the same real growth? No wonder the growth seems harder to get.

The main reason is that nominal growth during 2004-2014 was at ~15%, whereas during 2014-2024, it was ~10%. And that made all the difference.

But there is another reason - our growth is way below our potential!

Let us go back to the example of our car. Our car till 2014 was older, needed servicing and would heat up unnecessarily. Like our State Transport bus, everything in this car made noise, except the horn. When this car, I mean the economy was growing at 7%; there was no way this was going any faster. In fact, there was a chance it would break down or crash badly.

However, since 2014, we have made substantial investments in infrastructure, which have eased the bottlenecks. The government investments have targeted productivity and quality of life improvements. In other words, the government has overhauled, turbo-charged, and NoXed this car like on Fast and Furious. This car can now go very, very fast. The only thing keeping this car, I mean this economy, growing at 7%, is the artificial speed limit imposed by the RBI.

The RBI points to inflation, but is inflation the problem?

The RBI points to inflation as the main reason for its policy actions.

Much of the current inflation is caused by a rise in vegetable prices that are highly volatile and dependent on the amount and distribution of rainfall. Some prices have risen because the Government has incentivised them (by imposing import tariffs or promoting exports). These prices cannot be controlled by RBI raising interest rates.

The science of inflation is not so complex. It asks experts to be practical in their decision-making.

The Chief Economic Advisor, V Anantha Nageswaran, has highlighted the need for this practical decision-making in our fight against inflation. His two articles, Why RBI’s inflation regime is Broken and No inflation-targetting Framework is Sacrosanct, are worth reading. He even raises similar points to those we raised in the previous post—if we target the wrong kind of inflation, we will hurt the farmers. Unfortunately, the Mandarins at the RBI choose to ignore this wise advice, possibly in the name of institutional autonomy. The result is that the RBI is restricting the economy to influence the prices of things it cannot influence. It is like killing the patient to lower his fever.

The growth timing matters & now is already too late!

India has a unique window of opportunity, which will shrink by 2050 or 2060. We have a huge working-age population, and the time for growth is now.

This is the time to floor the throttle and rev it up. Holding back this country for some auspicious number to appear on the food inflation board is callous and whimsical and will badly hurt India’s future.

Delaying growth may scare the population into a low-growth mindset, leading to population implosion and entrenched deflation.

In Sum

While in the past, India was trying to make a truck fly, today, we are forcing a plane to drive on the road. If the RBI eases it up, this economy can show real GDP growth of 10-11% and nominal GDP growth of 13-15%. Growth will feel easier once again, and the quality of growth will be much better. Our hopes and dreams can take wing.

Yes, we can still grow slowly, but we want to simply take off. We don’t want your misapprehensions to choke our ambitions. RBI, I hope you are listening.

Also Read

Rahul Deodhar August 2019: How Lower Inflation Lowered Economic Growth with Many Knock-on Effects

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The RBI has kept interest rates on hold, citing high inflation. According to the RBI, growth is robust. It is the RBI’s mandate to keep them between 2-6%, with 4% inflation as a designated target. India's retail inflation accelerated to a 9-month high of 5.49 per cent on an annual basis in September, driven by a persistent rise in vegetable prices and a lower year-ago base. So, the RBI’s actions seem logical. Yet, the reality is not so simple.

Inflation and Expense basket

Inflation (i.e. consumer price inflation) is also the rise in prices of the expense basket of the population. The expense basket is pre-decided based on minimum food requirements, basic services, other products, etc. Weights are attached to the products based on the proportion of consumption. Prices for such a weighted basket are watched closely. Inflation is the change in the price of this basket.

But, just as we have an expense basket, do we have an income basket? The income basket (as a corollary to the expense basket) will be a set of products from which a particular income class derives its income. The income and expense baskets overlap significantly in the lowest-income classes. In other words, the lowest-income classes derive their income from products in the inflation basket. So the expense basket of the economy, i.e. our inflation basket, is the income basket of the poor!

This raises a far more important question - are these people poor just because their incomes are watched and controlled? One can anecdotally refer to farm incomes.

Further, some commodities in the expense basket have more bargaining power, like oil or gasoline. The prices of these items are set externally and cannot be controlled. It depends on whether Iran is going to attack the US or Israel; or Russia is going to attack Ukraine, or such other factors. If this happens, inflation rises to very high levels.

When Inflation rises.

The RBI rushes in like a saviour. It will use every force and every tool at its disposal to strangle and choke the prices of the expense basket so that they rise no more than 4%.

And what of those whose incomes and livelihoods are derived from the products in that inflation basket? They will, therefore, be strangled, choked by the RBI's vice-like grip. They and their future are the necessary sacrifice or maybe a convenient sacrifice to appease the inflation gods. And these analysts will cheer the RBI, sitting in their cosy air-conditioned offices, for they are the high priests in the temples of Inflation gods.

In Sum

Conventional wisdom says that inflation hurts the poor more. Yes, it is true, but only when the source of the inflation is outside their income basket.

When the RBI tolerates explanation, we get various side effects.

• When the RBI tolerates general inflation (in both in food and non-food components), it leaves the poor slightly poorer. If they can raise productivity, they will end up without a loss. If they are lucky, they will even have marginal improvements in their wealth. [Not counting the land price inflation].

• When the RBI targets general inflation (in both food and non-food components), it hurts agriculture-dependent people but relieves the non-agricultural population.

• When the RBI targets food inflation when there is no non-food inflation, it hurts everyone—and it hurts the poor agri-dependent workforce a lot more. This is today’s scenario.

So, we need to re-examine our framework and reconsider targeting food inflation.

In the next post, I will explain how this idiotic pursuit of low inflation deflates animal spirits and subdues growth. Subscribe now to receive it in your inbox.

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The rise of cities as a distinct trend has been on the radar of policymakers for more than four decades. Yet, how cities rise - WHY urbanisation happens, the stages of urbanisation and HOW it happens is not well understood. In this book, I present a hypothesis explaining exactly that.

We start with the definition.

Like many terms in the Real Estate Sector, Urbanisation needs to be clearly defined. In the book Defining the Urban, editors Deljana Iossifova, Christopher Doll, and Alexandros Gasparatos have done excellent work.

WHY urbanisation happens.

We need to understand WHAT attracts people to cities so we can better design those qualities.

I summarise some of the prevailing theories of urbanisation and propose a new theory on why urbanisation happens. I submit that urbanisation brings advantages in four parameters: Fundamental, behavioural, institutional, and economic drivers.

We will note the difference between rural and urban in fundamental drivers, including private resources, public resources, private resources for public use and common resources.

The behavioural differences between rural and urban hold the seeds of urban advantage. Anonymity and Serendipity in cities allow for more risk-taking. But, urban areas are limited-trust environments, leading to weak urban commons. I submit that Jane Jacob's communities and urban commons have the same core.

The differences also relate to institutions and economic drivers. The evolution and deployment of these parameters lead us to the stages of urbanisation. It will enable us to know how to transform a small rural community into an urban city.

Mechanics of Urbanisation

Finally, we will look at my Real Estate Dispersion model (RED Model), which explains how urbanisation happens around Affinity Centres and is influenced by commute—a variable measuring distance as a function of travel time. This gives us the ability to manipulate travel time (by creating infrastructure) and control Real Estate Development.

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Saving is one of human society's core values. Maybe we learnt it from the Ants, unlike the grasshoppers. Or maybe when “woods we passed, we saw the squirrels hide their nuts in the grass”. However we leart it, saving has allowed for all the progress we see today.

Savings were easy in the era of gold money.

It was as easy as hiding your money under the mattress. The money won’t lose value. It was fool-proof if you could protect your money.

Soon, we moved to gold-backed money. Here, our paper money was equal to a certain amount of gold stored in the local bank. We could go right to our bank (usually also goldsmiths) and get our gold. We even bit the gold to check if they gave us the real deal.

Then, we entered the era of regulated banks! Our gold went from local banks to central bank vaults - those in London and Fort Knox in the US. The money was still marked in terms of some weight of gold, but only difference was that we could not get our gold from the bank. Rather we could buy gold from gold-smiths who now were jewellers.

In each of these changes, the weight of gold is reduced. In other words, earlier, we were holding Gold coins. Then, we moved to gold-backed money, and we fixed the price of gold in dollar terms. That rate was lowered slowly (less gold per dollar) until, in 1974, the gold standard was abandoned, and the government moved to fiat money.

The story is that the US Government realised that it had printed more money than the amount of Gold it had in the vaults. No one realised as everything was working just fine; till someone did! Some European countries were holding a lot of US dollars. Some of them, particularly France, realised that the Gold equations do not tally. So they asked the US Government to send them the Gold instead of US Dollars. Other European countries woke up. And that was the end of that.

The US Government went into a panic and, as it usually does, screwed a few countries. US Treasury Secretary John Connally said emphatically - “My view is that the foreigners are out to screw us, and therefore, it's our job to screw them first!”

Normal people wondered how much their money was actually worth in gold terms. That led to a new concept entering the public discourse—inflation, the rate at which money loses value. But normal people were not happy. The normal people were livid. They started the campaigns like “Government is taking our money” and “The government is cheating our savings from us”.

So, the government made a promise to the savers.

The government promised that the inflation rate would be below 2%. They even passed a law saying the US Fed would keep inflation in check and restrict it to 2%. The savings rate was never below 3% (except during World War). This would keep the cost of living from rising more than 2% every year.

So this was the deal. We keep our money in the bank, and it actually appreciates in value rather than staying under our mattress and holding value. If we let banks invest it on our behalf, we get more returns on our money, and the banks will return ALL our money when we want it. You would earn a higher-than-inflation return at a very low risk.

This was a promise to the savers.

That promise has been broken.

Today, earning higher-than-inflation returns at such a low risk is impossible.

The government has broken the way we measure inflation. The inflation today does not reflect the real cost of living. The government says it's 2% or 4%, but in real life, it feels more like 6% or 8% or even more! So we need to earn at least 8% to keep the purchasing power of our savings intact. But the best we can earn with low risk is 4-5%. To earn the additional 4-5% we have to take higher risks.

But the government has broken the way we measure risk too. So to earn a return of 8-10% we end up taking very high risks whereas Globally Systemically Important Financial Institutions (G-SIFIs) can aim for returns of 15-20% easily and if they fail they get bailed out!

So normal people started hiding their money - in homes!

Since you can’t hide paper money under a mattress, you have to invest it somewhere. That was housing. As people earned, they bought houses. Some bought many houses while others bought bigger houses. As a result, housing prices rise.

As housing prices rose, so did rents, fueling inflation. Then, central banks remembered their promise of 2% inflation and jacked up interest rates. Guess who it hurt the most? The poor! With high interest rates, economic growth was squeezed, salaries stagnated, mortgage payments rose, and housing became even more unaffordable.

This created a positive spiral for housing. People started noticing and believing that “house prices never go down.” Thus, a housing boom like no other began. Today, corporates and hedge funds make many housing investments. Today, Blackstone is the biggest landlord in the US. The result is that now housing is unaffordable.

In Sum

The lack of regular, reasonable and low-risk returns has led many to invest in property markets. The resulting frenzy has made homes unaffordable. It leads to late household formations, fewer kids per household and population implosion. It also INCREASES the cost of raising kids and thus makes population growth very hard.

It also created a negative spiral for lower-income households. Whenever inflation rises, central banks slap the economy hard on the face of lower-income households, squeezing their income and prosperity.

We need to rethink our promise. The money contract between the state and the people needs to be renegotiated.

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Modelling is a method for predicting the future based on an understanding of past events. It allows us to predict possible outcomes in various situations. Models are deployed in weather forecasting, financial planning, sales forecasting, traffic estimations, etc.

In simple terms, you develop a model by analysing the data of past events using logic. The model is used to predict possible outcomes. Then, you observe the new data and verify if your model is correct or not. If not, you improve your model and repeat this process.

In modern research, we encounter three important classes of models. Until now, we were limited by computing power and mathematical design limitations. But now, we will be able to tackle new kinds of problems AND old problems, but differently.

Fundamental Models

These are based on modelling the fundamental realities that explain the observable phenomenon. These are often based on immutable laws such as the laws of physics.

Consider Newton's Law of Gravity and Newton’s laws of motion. Using these laws, we were able to model the behaviour of planets. You are also able to back-calculate the position of the planets at any date, and you are able to predict their position at any date in the future. These models allowed us to send a man to the moon.

Statistical /Probabilistic/ Econometric Models

These models are designed to choose the best subset of fundamental variables that explain past events most closely. These models can be improved by adding more of the right variables. However, the models can be misled by adding the wrong type of variables. These models are not seeking the fundamental underlying theory, OR the theory is not immutable and can change with behaviours or feedback loops. Hence, these models are theory-agnostic.

Most models in finance and economics fall in this class.

Agent-based Models

A newer class of models is agent-based models. These were conceptualised in the 1940s (yeas others came before that!) With the growth in computing power, these are now ready to be utilised in many fields.

These models use fundamental models on the individual element. Each element is given rules based on their observed behaviour. Each element is then modelled, and we get a forecast for individual elements. The elements are then aggregated across the entire population.

The model was first used in cellular biology, where each cell was one element. These are becoming increasingly important in social sciences, where a person is the individual element.

The differences

There are critical differences in these three classes of models:

1. Fundamental Models are based on eternal laws. They are like Shruti in the Vedas.

   1. The true test of the model is often how well it predicts the future. Most forecasts are wrong if you consider exact observations. The forecast needs to be directionally correct and closest to the future observation.

   2. Technically speaking, when observed reality deviates from the calculations given by such models, we start looking for variables outside of the model.

   3. That sounds too complicated. So, let me share a story: When scientists used Newton’s laws to calculate Mercury’s orbit, the results didn’t align with actual observations. This discrepancy led them to hypothesize the existence of an unseen planet between Mercury and the Sun, which they named Vulcan, believing it was causing Mercury to wobble. However, Vulcan was never discovered. The anomaly was later resolved by Albert Einstein's Theory of General Relativity, which revealed that Newton’s laws were incomplete in this context. Einstein’s theory provided accurate predictions of Mercury’s orbit, improving our understanding of the forces at play.

2. The statistical/probabilistic/econometric class models are actually error-minimizing models.

   1. As described earlier, we add some more variables to get the model closer to reality. However, sometimes adding relevant variables too INCREASES the error. This anomalous behaviour is a result of our incomplete understanding of the fundamentals.

   2. Now, imagine a case where a new variable becomes influential. In such scenarios, past data is not relevant. That is why most econometric models became confused after COVID affected the economic data unexpectedly.

   3. Since these models are top-down, they ignore many self-cancelling variables. The importance of such variables remains hidden.

3. Agent-based models are incentive optimizing.

   1. The forecasts that result from these models are emergent properties.

   2. The degrees of freedom and variables affecting one element are easier to model than modelling everything all at once. With substantial computing power, we can now aggregate complex individual agent models into a system.

   3. Since these models optimize incentives at the individual level, they are better suited to behavioural analysis and social sciences where the governing laws are not immutable.

   4. Our understanding of social systems is about change drastically.

In Sum

Agent-based models have opened up another avenue for understanding the world. We need to think of ways to incorporate them into our modelling.

Before I close, it is important to note some realities. Most real-life models (not fundamental models) are hybrid models. They mix and match across classes. Because of the ways in which mix-and-match is executed, many errors arise, and much insight is suppressed. So be careful. Remember, the tool you use is a function of many variables, including the class of model you are using.

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Gulzar Natrajan runs an excellent substack called Urbanomics. He recently commented on the decline of the shipping Industry in the US. You can read it here.

Shipbuilding is a critical Industry.

The ability to build ships has been the driver of global power. Therefore, it is important for a country, particularly the US, to maintain industrial dominance in shipping. Even today, the US makes some of the most sophisticated ships (particularly naval ships, submarines, etc.) in the world.

Unfortunately, industrial dominance does not mean producing a few high-end aircraft carriers or submarines. Rather, it means the ability to deliver meaningful volume in terms of the number of ships. The volume creates and spreads the know-how required for innovation.

The US lost this ability long ago.

The centre of shipbuilding has moved across the world.

You can see how the centre of shipbuilding has moved around the world. It also closely matches the economic might of those countries.

• India was a hotbed of shipbuilding till the 1600s.

• The centre of shipbuilding moved to Europe.

  • The UK and Scandinavian countries were the centres of shipbuilding during this time.

  • Even today, almost 80% of icebreaking ships are made in Finland.

• The US was the next centre of shipbuilding.

  • Critical ship-building technologies were transferred to the US during World War I, and by the end of World War II, the US had become the global centre of shipbuilding.

  • The Emergency Shipbuilding Program (late 1940 – September 1945) run by the U.S. Maritime Commission, built almost 6,000 ships. [Source: US Department of Transportation]

• Japan became an important player in Shipbuilding (mainly commercial ships), and by the 1990s, Japan was the largest producer of trading ships.

• By the 2010s, South Korea overtook Japan. Thanks to reform, directed initiatives, and subsidies from the South Korean Ministry of Trade, Industry, and Energy (MOTIE), it became the leader in commercial shipbuilding. South Korea also maintains a healthy naval presence, thus allowing the development of naval ships in addition to its commercial dominance.

• China pursued a state-backed approach to upset South Korea by 2020. Today, China is the leading producer of ships (both commercial and naval). The ascent of China is quite stark.

The change in shipbuilding industry can be noted in through these diagrams

The Decline of US Industry

To understand, let us formulate the issue using the BCG Matrix as a template. The BCG matrix (below) highlights

Usually, the industry kills itself by lobbying!

The easiest way to convert a "Star” into a “Cash Cow” is to get help from politicians. By lobbying politicians, the shipping Industry got the Jones Act in 1920.

CATO Insitute has produced an excellent piece on the Jones Act.

Jones Act aims to ensure adequate domestic shipbuilding capacity and a ready supply of merchant mariners to be available in times of war or other national emergencies. For this, it restricts domestic shipping services to vessels that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-staffed.

This act was a trade barrier for nascent US shipbuilders to catch up to European shipyards. Today, it acts in the reverse manner. It has become a protectionist crutch that prevents US shipbuilders from becoming world-class.

The paradoxical result is that instead of gaining and maintaining shipbuilding, the US is losing inland shipping transportation options and sailing know-how.

Lessons for India

India used to be a dominant shipbuilder before the 1600s. We need to revive shipbuilding industry and become global leader in this industry. I have detailed some ideas in this post.

The main takeaway from the US experience is that there is no substitute for competitiveness. If India has to succeed in the current situation of trade protectionism, we have to be hyper-competitive in terms of technology.

It is time we applied hypercompetitiveness as a strategy across all industries.

Update:

Please check the links in Colin Grabow's comments below.

Notes and References:

• Urbanomics - The Chronicle of an Industrial Decline - US Shipbuilding Industry

• South Korea's Rise as a Global Shipbuilder

• US Department of Transportation

• CATO Insitute on the Jones Act.

• RightVIEWS - Reviving Shipbuilding in India

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Recently, I was prompted on LinkedIn to contribute to an AI-generated article explaining the contrast between R&D innovation and Manufacturing efficiency. The article says, rightly in my view, that BOTH are important. It further says that we need strategic alignment, investment decisions, risk management, and a culture of innovation to balance both. All that is very good in theory.

The real question is HOW to achieve this.

I explained the HOW in detail in my book Understanding Firms - A Manager’s Model of the Firm. In short, the best way to achieve a “Culture of Innovation” etc. is to get the right people in the right places and give them the WHAT and the freedom to work on HOW.

How do we identify the right people?

Every person, in their professional capacity, works in 3 basic orientations - Scouts, Commandos and Bureaucrats.

• Scouts are good at exploring a wider variety of new ideas

• Commandos are good with projects to completion

• Bureaucrats are good at scaling projects to world-class operations.

Scouts should lead R&D Innovation.

Scouts will help create a pool of ideas that can be potential future winners.

• The idea is to identify a pool of needs that can be fulfilled using current or potentially new technology.

• Then, we decide as to what exact need-technology combination we should target.

• Then, we push the technology to satisfy that need.

Steve Jobs was good at this. He understood that we do not take every shiny product or new technology to the people and ask who and how many will buy it. Instead, we look for needs we can fulfil in an exceptional manner.

Once you have the technology, you want to develop the product to address that need. The needs can be met using old technology in a new package (iPod) or a mix of new and old technology (iPhone). Scouts build various prototypes, do cost-benefits, and identify potential revenue streams, service requirements and many such variables till an outline of the product starts emerging.

This is not an easy job. It has a high rejection rate—almost 90% of ideas get dropped just in the initial stage, and many more ideas fall off the radar subsequently. There are many reasons—markets are not ready, technology is not ready, price-point issues, legal issues, patent gridlock, etc. It is not easy to work on projects that almost always fail. But Scouts are wired for this job. Their ultimate success is in the 1% product prototype that can be a winner.

Then, scouts hand over to the Commandos!

Commandos are good at pooling resources/talent from across the firm to create and stabilize the manufacturing/delivery process.

This innovation stage involves many complex activities - bootstrapping, reworking the plans, trial and error, iterations, etc. Sometimes, Commandos return to the drawing board and rework the entire product. The goal is to get the best manufacturing/delivery process working.

When a manufacturing process is first created, some of its efficiency is built into it at the design stage. However, it is not always the most efficient or scalable process. However, Commandos are not best suited to achieve efficiency and scale.

For this, we need the Bureaucrats.

Bureaucrats will streamline the process and scale it.

As the firm becomes comfortable with the manufacturing/delivery process, it can identify inefficiencies and make the process more economical/cost-effective. Further, as the new product becomes more popular, we get economies of scale.

Even after accounting for these benefits, there are efficiency gains to be had. Bureaucrats engage with the stakeholders and rework the process to extract every last bit of efficiency gains.

Leaders define the WHAT.

Leaders do not make the decisions. Scouts, Commandos, and Bureaucrats do. Leaders take responsibility for the failure of those decisions and share the credit with actual decision-makers. They lead because they put their necks on the line for their team.

Leaders also guide and consult on each of these activities. They are the fount of the “innovation culture” through their decisions in identifying these people, backing their decisions and helping them navigate their work more efficiently.

In Sum

Innovation and Manufacturing efficiency are both important. We will achieve both by getting the right people in the right places and giving them the WHAT and the freedom to work on HOW.

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