Recently, I have been trying to analyse the positive impact of festivals in Chinese and Indian economies. I have heard innumerable economists talk about the strong fundamentals of the Indian economy compared to that of China's. I agree that currently, the economic fundamentals remain strong in India than in China but that's not to say that the Chinese cannot get their fundamentals strong. In fact many are wondering how China would rebalance its current model of economy from being export-oriented to an economy driven by domestic factors. But from the response that they have shown to the global economic crisis, especially with the introduction of a $587 billion stimulus package (about 14% of their GDP) last year, it seems to me that the first step taken by China is on the right track to shift their focus considerably from exports to domestic private consumption even though the next big challenges for China would be to control inflation, gradual cooling of the economy that now looks like over-heated and sustaining the private consumption even after the stimulus is withdrawn.
China:
Okay, now coming back to the festival spending - China just celebrated its Lunar New Year and according to the data released by the Chinese commerce ministry that was quoted by Xinhua news agency (and I got this from "AFP Reuters" news), shops across China are estimated to have had a total sales of about 340 billion yuan ($49.8 billion) which is 17.2% up from 2009. During this spring festival, consumer spending on food, travel, tobacco, liquor, communication equipments, jewelry and home-appliances have all shown an increase from 2009. So, what we can infer from this is that there is a considerable amount of retail spending by the Chinese consumers during the months of January-February of every year. Apart from this, we can consider the Buddhist festivals in a year that would see some increase in consumer spending. And then there is Christmas which is celebrated since there are considerable amount of Christians in China. Apart from this, there are more lunar festivals in a year that might see an increase in spending by consumers that might be above average but not on a large scale.
India:
Now let's consider India. India is a very diverse nation in religion and culture. And almost every state speaks a different language and have their own culture, tradition and festivals. Now consider this example of a festival in a very generic scale - In January, south India celebrates one of the most important cultural festivals and some northern and north-western states celebrate festivals around the same time. During this time - there is an enormous increase in spending on - textile and food (particularly sugar). Most of the Hindu festival days during this January month are also considered auspicious for any kind of new purchases and new ventures. So January also clocks a good amount of consumer spending in capital goods in many parts of the country. Likewise, a wide array of Hindu festivals are spread throughout the year and throughout the states in differing formats. And around 70-80% of the population being Hindus, there is a drive in consumer spending especially on the retail side. Again, the point to note here is that most of these festivals dictate new clothing and other new "things" since they are considered sacred, auspicious and the "right thing" to do during festival time. Now India has more than 150 million Muslims. And India celebrates the Muslim festivals in a grand way leading to more retail spending, especially during that part of the year when the Hindu festivals aren't seen much. And then India has more than 50 million Christians who celebrate Christmas in December right after some of the most holiest festivals of Hindus and Muslims. Then there are Buddhist festivals, Jain festivals, Sikh festivals and other regional festivals spread almost evenly that makes sure that there is buoyant retail spending.
Apart from this, there are festivals that bring demand (and thereby supply) to certain commodities. One such festival is the "Gold Rush" festival (named differently in each Indian language, so I preferred to use English :) ) where people think that it is auspicious to buy gold on that day. Every year during this day, a good percentage of the nation's 1.1 billion people buy gold. And there are other examples like this.
One more thing that we have to note is that India has more rural population than urban population and rural Indians tend to spend more during festival seasons when measured as a percentage of their incomes. In any country, urban population spends on luxury goods as they get richer whereas majority of the rural population spend when mandated by their culture or religion. And since both China and India has a high percentage of rural population, my analysis shows that this rural spending makes a difference. Even during the worst economic times, consumer spending has been a major contributor to India's GDP.
Consumer spending contributes around 35% to China's GDP whereas it contributes more than 60% to India's GDP.
I might have missed to stress the importance of spending in some more Chinese festivals but I don't think Chinese festivals are evenly spread in a year and even if they are, I don't think it mandates spending like that on the Indian side. So now we see one of the reasons for buoyant consumer spending in India when compared with China especially in the retail sector. And this is another reason why there are hundreds of millions of Indians in retail businesses (many of them are family-run small shops). And this private consumption by all sections of Indians, especially the rural Indians forms one of the main reasons for growth in small businesses across the country and causes economists to say that India has stronger economic fundamentals than China. But this is not to say that the festivals are the only reason - United States has fewer festivals than India but has a society that tends to spend more. I did this comparison to see the reason of why the two nations, China and India, which have the same tendency to save more than spend, differ in consumer spending by such a large difference when measured as a percentage of their GDP. Rural spending in India definitely makes a difference but this is not to say that festivals are the only reason for this difference in consumer spending. There are other reasons but this is what festivals have to do to each nation's economies.
Monday, February 22, 2010
Tuesday, February 9, 2010
Economic growth in India is 'exclusively' for?
Indian economy has been growing at an average of 8% in the past decade. The agricultural sector has clocked an average increase in output from around 2% to 3% in the past decade and agricultural sector contributes about 18% to India's GDP. It is constantly being said that the agricultural output has to grow at 4% per annum to meet the food demand of the country. During a recent panel discussion on the topic "India's Future Agenda" in Davos World Economic Forum, Montek Singh Ahluwalia, the Deputy Chairman of India's Planning Commission, gave a rough calculation as an answer to a question asked by a gentleman from the panel-floor. The question was something like - According to the World Bank, landlessness being the best predictor of poverty in India, what are the steps taken by the government to address poverty? The Deputy Chairman was right to say that giving land to the poor is not the solution and there is not much free land available. Remember, around 70% of India's population of 1.1 billion depend on agriculture for their incomes. Most of them are farmers and most of them live on less than $2 a day. Some farmers might not own land and might actually do farming in the land that is leased. But in any case, the leasing of land should not be the cost-issue that gives them low net-incomes. In fact, most of the land that is leased should be cheaper compared to the output produced by theoretical terms. Okay before I proceed, let me tell you the calculation that the Deputy Chairman gave : With the assumption that the agricultural output is increased to grow at 4% per annum and with the population projected to grow at 1.5% a year while the economy grows at an average of 8%, then the growth per capita will be 6.5%. So now it is essential that people move out of agricultural sector into other sectors (industries) at the rate of 2.5% annually so that the income levels for the people producing 4% agricultural output remains high enough for a good standard of living. Well, when looked from a very generic perspective, I agree with what he is trying to say even though I might have to disagree with the "4%" number because with the Indian middle class growing at a rapid rate and as more number of people move out of poverty due to increasing globalization, more number of people will be willing to consume healthier food in the coming years and in order to meet this demand, agricultural output might have to grow at more than 4% starting from within a decade.
But there are other various points that we have to confront here. First of all, why is the agricultural output so low even when we have so much population working in that sector? And more number of people in agriculture means that more land is cultivated. With so much cultivation, why is the gross national agricultural output growing at such a weak pace? In fact, due to poor monsoon rains, agricultural output is expected to decrease in fiscal 2009-2010. And increasing industrialization is taking away many fertile cultivable lands. The answer to the above questions is a complete lack of investment in the agricultural sector. One poor monsoon season in 2009 and 70% of India's population suffers directly and the rest suffer in the name of food-price inflation. And the policy makers keep thinking of whether this food-inflation would slip into the broader inflation! Huh! While private investments are necessary to achieve higher growth in the agricultural sector, it is the duty of the government to make some essential initial investments in agricultural-infrastructure that will pave way for private investments. It is a national shame that India being an agrarian economy for generations, still depends heavily on monsoon rains every year for desired and needed agricultural output. There is still NO organizational structure put in place to eliminate the middle-men and increase incomes for the farmers. And there is - very low, if not none, investments in agricultural universities and research; very poor transportation-infrastructure in rural India for the farmers to transport their goods; NO cold-storage facilities available to store excess farm-goods; no proper water management techniques to store rain water and inadequate supply of electricity to rural India to carry out irrigation activities. I feel that we could have more output even at present conditions by just facilitating some kind of cold-storage for farm-goods. Almost one-third, if not more, of the farm goods get spoiled before it reaches the market and poor transportation infrastructure is another reason to be blamed here. Speaking in the same forum, Venu Srinivasan, President of CII (Confederation of Indian Industry), spoke about how the poor quality government subsidies like providing urea is actually spoiling the land and affecting the farmers in the longer term even though it might look all good in the short term. (I am not very sure about how correct Mr. Srinivasan's point is). Also, the Public Distribution System (PDS) is enormously flawed. Well, with the expected introduction of national identity card that is due in a few years, I expect the efficiency of the PDS to improve to a certain extent.
It is expected, whether desired or not, that a good chunk of the population will continuously keep moving out of agriculture due to increasing industrialization and low-incomes in agriculture. But if high grade investments are not done in agricultural sector, then we will see a decrease in agricultural output every year while the population keeps growing and this will result in a direct threat to the country's food security. While India keeps moving up the economic ladder it is important that everyone is taken along. What India needs now is not just "growth" but "inclusive growth". Everyone knows that India is a very diverse nation but we do not need a new kind of wide ranging diversity now - in the living standards of the people.
But there are other various points that we have to confront here. First of all, why is the agricultural output so low even when we have so much population working in that sector? And more number of people in agriculture means that more land is cultivated. With so much cultivation, why is the gross national agricultural output growing at such a weak pace? In fact, due to poor monsoon rains, agricultural output is expected to decrease in fiscal 2009-2010. And increasing industrialization is taking away many fertile cultivable lands. The answer to the above questions is a complete lack of investment in the agricultural sector. One poor monsoon season in 2009 and 70% of India's population suffers directly and the rest suffer in the name of food-price inflation. And the policy makers keep thinking of whether this food-inflation would slip into the broader inflation! Huh! While private investments are necessary to achieve higher growth in the agricultural sector, it is the duty of the government to make some essential initial investments in agricultural-infrastructure that will pave way for private investments. It is a national shame that India being an agrarian economy for generations, still depends heavily on monsoon rains every year for desired and needed agricultural output. There is still NO organizational structure put in place to eliminate the middle-men and increase incomes for the farmers. And there is - very low, if not none, investments in agricultural universities and research; very poor transportation-infrastructure in rural India for the farmers to transport their goods; NO cold-storage facilities available to store excess farm-goods; no proper water management techniques to store rain water and inadequate supply of electricity to rural India to carry out irrigation activities. I feel that we could have more output even at present conditions by just facilitating some kind of cold-storage for farm-goods. Almost one-third, if not more, of the farm goods get spoiled before it reaches the market and poor transportation infrastructure is another reason to be blamed here. Speaking in the same forum, Venu Srinivasan, President of CII (Confederation of Indian Industry), spoke about how the poor quality government subsidies like providing urea is actually spoiling the land and affecting the farmers in the longer term even though it might look all good in the short term. (I am not very sure about how correct Mr. Srinivasan's point is). Also, the Public Distribution System (PDS) is enormously flawed. Well, with the expected introduction of national identity card that is due in a few years, I expect the efficiency of the PDS to improve to a certain extent.
It is expected, whether desired or not, that a good chunk of the population will continuously keep moving out of agriculture due to increasing industrialization and low-incomes in agriculture. But if high grade investments are not done in agricultural sector, then we will see a decrease in agricultural output every year while the population keeps growing and this will result in a direct threat to the country's food security. While India keeps moving up the economic ladder it is important that everyone is taken along. What India needs now is not just "growth" but "inclusive growth". Everyone knows that India is a very diverse nation but we do not need a new kind of wide ranging diversity now - in the living standards of the people.
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