The Asian Development Bank (ADB) in its recent report has projected a GDP growth of 8.5% for India during the fiscal year 2010-11. This is in line with the Indian government's projections. In the same report, ADB has expressed concerns about the high inflation (currently at 8.5% in August) and appreciation of the "Rupee", the Indian currency.
There is no doubt that there is a surge in capital inflows into India. In general, emerging market shares have been performing at record levels compared to developed economies and there is abundant foreign direct investment (FDI) flow into India. While high inflation is definitely a concern (especially food inflation which remains at record levels - 16.44% for the week ended September 18,2010), I don't see the rupee appreciation, at the current levels, to be a great concern.
While the rupee has appreciated more than 11% in real terms between August 2009 and August 2010, most of the appreciation was due to more-than-normal weakening of the rupee during the early part of the year. This was due to the surge in investments in the US dollar, when investors were fleeing for safety due to uncertain economic conditions. But when we look at it from a multi-year perspective, the nominal appreciation of the rupee should be around 5%-7%, which I see as a positive factor.
Remember, only 15% - 20% of India's GDP is contributed by exports and around 60%-70% is contributed by consumer spending . Now, there is no doubt that some very crucial export areas remain which act as drivers of growth and income for many other non-export sectors of the economy. But I still think that the negative effect on these sectors due to rupee appreciation at current levels is bearable and any short-term negative effects in these sectors could be offset to a certain extent by providing incentives. But when looked from the other angle, a stronger rupee would help to diversify investments in the economy which in the longer run should be able to offset the negative impacts of rupee appreciation in certain export industries.
Also, if a major portion of the capital inflows result in real job creation, thereby fuelling consumer demand, then any resulting inflation could be tackled by standard monetary policy tools.
And if right investments are done, with correct monetary policies in place, then a stronger demand from the Indian consumers is actually a boon to the global economy. From a global macro-economic perspective, we need strong demand from the consumers in the emerging markets during the coming years to fill the vacuum left by the consumers in the developed economies.
All this being said, ADB is concerned about the over-appreciation of the rupee in the coming years. I still do not see any clear signs for that. If foreign investment policies are rightly structured supported by sound monetary and government policies, then a growth in the inflow of foreign money should be balanced by import demands from the Indian consumers in the coming years, apart from an improvement in the quality of exports - all of which I see as a good sign from a global perspective. There are very many global factors involved in this but assuming the current status-quo of global competitiveness of the countries remain, I don't see a reason to worry about the current trends in the appreciation of the rupee.
Source(s):
1. http://www.adb.org/Media/Articles/2010/13337-indian-development-outlooks/
Thursday, September 30, 2010
Monday, September 27, 2010
Commonwealth mess! - Nothing Uncommon
India is hosting the Commonwealth Games (CWG) in less than a week from now but we are not short of criticisms about the preparations for the games. In the past one week, there had been complaints of uncleanliness, security risks, poor quality constructions and an uninhabitable athletes village (and not to mention the allegations of fraud and corruption throughout this preparation).
While all this comes as a shame on the face of every Indian, it does not come as a surprise. On almost every civil program, the Govt. of India has repeatedly failed to deliver or has fallen short of what was promised. And when such a failure occurs, the blame game starts - blame on politicians, blame on bureaucrats, blame on diplomats, blame each other, blame on weather and what not. The bottom line is that no one takes responsibility - and yes it is right that no one could be held accountable because every one acts on their own and the whole structure misses a central governing body which would oversee and take complete responsibility for complex projects like these. Well, the Organizing Committee (OC) of CWG was one such body but when the OC fails to act responsibly and sincerely, someone has to step in to take the OC in hand and keep the ball rolling. But when the "5-years-in-office" politicians are given responsibilities to supervise, everything gets out-of-track from the real objective, as the period (and opportunity) of work is seen in the eyes of "5-years". And in addition to that, India's traditional system of giving power and authority to persons based on influence, connections and seniority rather than skill, performance and merit is completely out of sync with the objective of India - to be an economic super power in the 21st century.
This CWG might have resulted in embarrassment for many Indians but this is a right lesson at the right time for India and Indians. The lessons have to be learnt - the lesson that government is not exempt from the 21st century business principles, the lesson that everyone needs to be accountable to his/her actions, the lesson that government still lacks the skills, resources and experience it needs to do complex projects, the lesson that corruption could not be seen as an everyday expense to the people and an everyday revenue to politicians / bureaucrats / govt.workers (and the list goes on) and the lesson that it is time India acknowledges its shortcomings and lack of experience in certain key sectors.
As an open democratic society, it is time that India acknowledges its weaknesses openly and moves forward with steps to rectify it. Few months back, when I watched an influential Central government minister complain about the outdated laws of the country in a TV channel, I could only laugh - if he complains, what should the people do? If India has to efficiently use its scarce resources, it is time to bring in a new era of work culture in the government and form new independent autonomous bodies, free from political influence, filled with eminent persons, who could oversee complex projects that India is planning to do in the next decade and more and who could be held accountable - accountable to the parliament, judiciary and to the people. Otherwise, there would be an era of wastage of billions and billions of dollars of taxpayers' money through inefficient but complex government programs.
While all this comes as a shame on the face of every Indian, it does not come as a surprise. On almost every civil program, the Govt. of India has repeatedly failed to deliver or has fallen short of what was promised. And when such a failure occurs, the blame game starts - blame on politicians, blame on bureaucrats, blame on diplomats, blame each other, blame on weather and what not. The bottom line is that no one takes responsibility - and yes it is right that no one could be held accountable because every one acts on their own and the whole structure misses a central governing body which would oversee and take complete responsibility for complex projects like these. Well, the Organizing Committee (OC) of CWG was one such body but when the OC fails to act responsibly and sincerely, someone has to step in to take the OC in hand and keep the ball rolling. But when the "5-years-in-office" politicians are given responsibilities to supervise, everything gets out-of-track from the real objective, as the period (and opportunity) of work is seen in the eyes of "5-years". And in addition to that, India's traditional system of giving power and authority to persons based on influence, connections and seniority rather than skill, performance and merit is completely out of sync with the objective of India - to be an economic super power in the 21st century.
This CWG might have resulted in embarrassment for many Indians but this is a right lesson at the right time for India and Indians. The lessons have to be learnt - the lesson that government is not exempt from the 21st century business principles, the lesson that everyone needs to be accountable to his/her actions, the lesson that government still lacks the skills, resources and experience it needs to do complex projects, the lesson that corruption could not be seen as an everyday expense to the people and an everyday revenue to politicians / bureaucrats / govt.workers (and the list goes on) and the lesson that it is time India acknowledges its shortcomings and lack of experience in certain key sectors.
As an open democratic society, it is time that India acknowledges its weaknesses openly and moves forward with steps to rectify it. Few months back, when I watched an influential Central government minister complain about the outdated laws of the country in a TV channel, I could only laugh - if he complains, what should the people do? If India has to efficiently use its scarce resources, it is time to bring in a new era of work culture in the government and form new independent autonomous bodies, free from political influence, filled with eminent persons, who could oversee complex projects that India is planning to do in the next decade and more and who could be held accountable - accountable to the parliament, judiciary and to the people. Otherwise, there would be an era of wastage of billions and billions of dollars of taxpayers' money through inefficient but complex government programs.
Friday, May 21, 2010
Free Trade or Fair Trade
Recently, I followed a debate on Free Trade vs. Fair Trade in "Economist" website. And these days, it is very common to see this topic emerge in many international economic discussions. This debate of free trade versus fair trade is largely misunderstood. People who argue in favor of free trade do not say that the trade should not be fair and most people who say that trade should be fair do not say that trade should not be free. Instead the whole debate is always about which comes first - free or fair? Well, the obvious answer should be "fair". But what is the definition of "fair" here? And how much fair is fair? Who would judge this fairness?
Today we have various international institutions - International Monetary Fund (IMF), World Bank, World Trade Organization (WTO) etc. etc. But most of these institutions are structured to represent political power than to truly facilitate economic equality. These institutions, largely dominated by industrialised nations, and voicing their support in favor of views proposed by developed countries, itself is clearly against the "fair" trade that both industrialised and developing countries want. As an example, IMF, for years has been against capital controls in developing countries. This was like telling the developing countries indirectly to open their markets to foreign investors when at the same time it did not propose policies or solutions on ways to increase access to the markets of the developed countries by poor and developing nations. Since in today's world, globalization has integrated the financial markets and economies of the world more closely, fearing that excessive capital flows to emerging markets may result in an unstable global economic situation, IMF has started to advocate for capital controls in emerging markets.
Now what is fair? - yesterday's proposal to be completely open to capital flows or today's proposal to have capital controls? How much capital control is fair? Who will decide what is fair? How? In what time frame? For years, these questions remain unanswered.
The Doha Round of talks on free trade, started in 2001 and still incomplete, co-ordinated by WTO, to achieve a global multilateral free trade agreement is caught in an argument about "fair" trade. One of the major points of disagreement between developed and developing nations is on the agricultural sector. Industrialised nations want the developing nations to fully open their agricultural markets. But at the same time, the industrialised countries do not want to fully cut their agricultural subsidies that the farmers in these countries enjoy. Why? The answer is - Politics!
As of today, the European Union has the largest agricultural subsidy program under its "Common Agricultural Policy". Wikipedia states that agricultural subsidies and programs represent 48% of the EU's budget, which was 49.8 billion Euros (roughly $60 billion) in the year 2006.
The developing countries are also to blame in this economic game where politics take center stage and not economic welfare of the people. When many times, when we have clear evidence that opening up certain markets will benefit the people, the markets still remain closed purely for political reasons. But in the meantime, millions of people, generations after generations are left poor due to flawed economic policies guided by political factors. The United Nations says that at this moment there are around one billion people without access to proper three meals a day (this is one-sixth of the world's population).
These days, when we read newspapers, we see that there are so many bilateral and regional free trade agreements (FTA) signed between nations to promote free trade. Somehow we might even become successful in concluding the multilateral Doha Free Trade agreement but as long as politics stays the guiding factor for economic agreements, we will only be achieving "free" trade agreements and not "fair" trade agreements.
Today we have various international institutions - International Monetary Fund (IMF), World Bank, World Trade Organization (WTO) etc. etc. But most of these institutions are structured to represent political power than to truly facilitate economic equality. These institutions, largely dominated by industrialised nations, and voicing their support in favor of views proposed by developed countries, itself is clearly against the "fair" trade that both industrialised and developing countries want. As an example, IMF, for years has been against capital controls in developing countries. This was like telling the developing countries indirectly to open their markets to foreign investors when at the same time it did not propose policies or solutions on ways to increase access to the markets of the developed countries by poor and developing nations. Since in today's world, globalization has integrated the financial markets and economies of the world more closely, fearing that excessive capital flows to emerging markets may result in an unstable global economic situation, IMF has started to advocate for capital controls in emerging markets.
Now what is fair? - yesterday's proposal to be completely open to capital flows or today's proposal to have capital controls? How much capital control is fair? Who will decide what is fair? How? In what time frame? For years, these questions remain unanswered.
The Doha Round of talks on free trade, started in 2001 and still incomplete, co-ordinated by WTO, to achieve a global multilateral free trade agreement is caught in an argument about "fair" trade. One of the major points of disagreement between developed and developing nations is on the agricultural sector. Industrialised nations want the developing nations to fully open their agricultural markets. But at the same time, the industrialised countries do not want to fully cut their agricultural subsidies that the farmers in these countries enjoy. Why? The answer is - Politics!
As of today, the European Union has the largest agricultural subsidy program under its "Common Agricultural Policy". Wikipedia states that agricultural subsidies and programs represent 48% of the EU's budget, which was 49.8 billion Euros (roughly $60 billion) in the year 2006.
The developing countries are also to blame in this economic game where politics take center stage and not economic welfare of the people. When many times, when we have clear evidence that opening up certain markets will benefit the people, the markets still remain closed purely for political reasons. But in the meantime, millions of people, generations after generations are left poor due to flawed economic policies guided by political factors. The United Nations says that at this moment there are around one billion people without access to proper three meals a day (this is one-sixth of the world's population).
These days, when we read newspapers, we see that there are so many bilateral and regional free trade agreements (FTA) signed between nations to promote free trade. Somehow we might even become successful in concluding the multilateral Doha Free Trade agreement but as long as politics stays the guiding factor for economic agreements, we will only be achieving "free" trade agreements and not "fair" trade agreements.
Monday, April 26, 2010
World Bank's capital increase
So finally some good news today! The World Bank's shareholders have agreed to raise the bank's lending capital by $5.1 billion. This will come in two separate increases of $3.5 billion and $1.6 billion (by developing countries). With this, the voting share of the developing economies have also gone up (47.19% from 44.06%). China has surpassed Germany, France and UK to become the third largest shareholder with 4.42% voting rights from an earlier 2.77% voting rights. This is really some good news since its been long overdue to increase the lending and voting share of some major developing countries like China. This makes an international body like World Bank look more representative of the international economies in the current global economic scenario.
Also, I am glad that the lending capital is increased. There will be a total capital increase of $86.2 billion for the International Bank for Reconstruction and Development (IBRD). The difference of the total capital increase of $86.2 billion and the operating capital of $5.1 billion is called "callable capital" that can be drawn upon when emergency arises, from the member countries. There are too many projects that depend on World Bank funding in developing and poor countries. And with the world bank committing itself to large amount of funds during the recession, this has strained its resources. And now I hope that the projects in poor countries will continue unabated.
All this said, I would still like to see more improvements in the governance architecture of the IMF and World Bank. Though this capital increase is a good news, we still need more capital down the road and I hope that gets done. Also, some poorer countries have lost some of their voting share due to this re-allocation. I hope this is also corrected down the road. Personally, I think that European countries have far more voting rights than what is needed. If we consider Europe as a whole from an economic standpoint, we have far more European countries with larger voting rights than what should be to represent Europe. I hope this correction is also done in the near future so that we can accommodate more poorer countries in the governing architecture with more voting rights for them.
Sources:
http://www.businessweek.com/news/2010-04-26/world-bank-says-nations-agreed-to-boost-lender-s-capital.html
http://blogs.worldbank.org/meetings/node/616
http://www.nytimes.com/2010/04/26/business/26bank.html
Also, I am glad that the lending capital is increased. There will be a total capital increase of $86.2 billion for the International Bank for Reconstruction and Development (IBRD). The difference of the total capital increase of $86.2 billion and the operating capital of $5.1 billion is called "callable capital" that can be drawn upon when emergency arises, from the member countries. There are too many projects that depend on World Bank funding in developing and poor countries. And with the world bank committing itself to large amount of funds during the recession, this has strained its resources. And now I hope that the projects in poor countries will continue unabated.
All this said, I would still like to see more improvements in the governance architecture of the IMF and World Bank. Though this capital increase is a good news, we still need more capital down the road and I hope that gets done. Also, some poorer countries have lost some of their voting share due to this re-allocation. I hope this is also corrected down the road. Personally, I think that European countries have far more voting rights than what is needed. If we consider Europe as a whole from an economic standpoint, we have far more European countries with larger voting rights than what should be to represent Europe. I hope this correction is also done in the near future so that we can accommodate more poorer countries in the governing architecture with more voting rights for them.
Sources:
http://www.businessweek.com/news/2010-04-26/world-bank-says-nations-agreed-to-boost-lender-s-capital.html
http://blogs.worldbank.org/meetings/node/616
http://www.nytimes.com/2010/04/26/business/26bank.html
Monday, April 19, 2010
Pathetic Poverty
With tears I write, India's new official poverty estimates were just released by the government panel who worked on this. The poverty rate has gone up from 27.5% in 2004 to 37.2% and this puts almost 100 million more people below the UN estimated poverty line of $1.25 a day. So now, a total of 410 million Indians live in poverty. And the malnutrition rate in children in India still stands at a whopping 46% (in China it has come down to 7% after the start of economic reforms). Just to quote a line from the Reuters article - "A third of the world's poor are believed to be in India, living on less than $2 per day, worse than in many parts of sub-Saharan Africa, experts say." I have no strength to write anything beyond this at the moment other than to say a sarcastic "Thanks!" to the Indian elite political class.
Source: "Reuters" which published the numbers from the poverty estimate report.
http://news.yahoo.com/s/nm/20100420/india_nm/india478257
http://news.yahoo.com/s/nm/20100419/india_nm/india477918
Source: "Reuters" which published the numbers from the poverty estimate report.
http://news.yahoo.com/s/nm/20100420/india_nm/india478257
http://news.yahoo.com/s/nm/20100419/india_nm/india477918
Tuesday, March 9, 2010
Reform or Bubble? Choose one
Why is it very important to prevent the banks from speculative trading? Let's consider these facts that are relevant today:
1. America has injected enormous amount of liquidity into the financial system and the interest rates in US are near zero.
2. Asia, especially China and India, seem to be in a comfortable zone (relatively) out of the recession and have started monetary-tightening.
Is there a relationship between American financial system and Asia? Yes there is. With the US interest rates at an all time low near zero and expected to remain low throughout this year, there are huge amounts of capital outflows from US into emerging markets. This capital-outflow is supported by the speculation that emerging markets will do better than the US, atleast in the shorter term. There are good reasons to believe this - economies like China and India have had tremendous growth in recent years, have financially sound banks, have huge foreign reserves and high savings rate. And all these are currently being deployed and will be deployed in their respective economies to promote and support growth.
In both China and India, I expect strong government spending during the coming years. China, I would expect, to spend on factors that would drive consumer-spending. China is already embarking on a $150 billion nation-wide health-care package.
India has plans to spend heavily on its broken infrastructure like roads, ports, bridges, public-transportation etc. India is expected to need $500 billion in the next five years to meet the growing infrastructure demand (and the govt. acknowledges this).
Both China and India have huge savings rate and large amount of foreign reserves that should see the planned investments get implemented. United States is also expected to invest on a large scale in infrastructure related projects to push the economy higher. So all this should ensure a considerable amount of global capital-sector spending.
But the recovery from this recession is very different from the earlier ones. In this recession, the US consumers are hit hard and they are likely to spend less in the coming years. Can this decrease in US private consumption be compensated by an increase in private consumption from Asian economies like China and India? I very much doubt it. In 2007, US consumed $9.7 trillion worth of goods and services which is six times more than the combined consumption of China and India in the same year (source: "The Next Asia" book by Stephen Roach, Morgan Stanley Asia Chairman).
And this time, Asia leads the recovery and US will follow, which means exports are going to be a key for growth in the US in the coming years. Will this mean that America will need a weaker dollar? Well, I am not in favor of this idea. With enormous capital spending expected in the coming years in the world's two most populous nations and other developing countries, a weaker dollar will shoot up the commodity prices to unsustainable levels and that combined with the large liquidity in the US financial system and with low interest rates will make a good recipe for inflation in US.
Now there are two questions that we have to answer here:
1. How are we going to make American exports more competitive?
2. But even before answering the first question, how can we be sure that Asian economies don't get into any kind of economic trouble, which if they, will bring down the world again into recession?
One of the solutions to the second question, which will be a very good first step towards a stable global economy, will be to bring about financial and banking reforms in the US. If the commercial banks are allowed again to get involved in proprietary trading, which is done using the abstract concept called "speculation", then there is high-risk of asset-bubbles forming in Asian economies due to cross-border capital flows. Many Asian economies, especially China and India have some sort of capital-controls but this will not be sufficient to stop the speculative inflows. And this may cause unsustainable shoot-up in real estate and stock prices. At the same time, allowing banks to do proprietary trading will seriously reduce bank-lending in US. This is especially true after the credit-bubble burst. Bank-lending is very much needed now for small businesses and to an extent to consumers in the US. By preventing banks to speculate using depositors' money, we can bring a balance between exports and domestic consumption in US and this will also help reduce the currently unsustainable current account deficit.
Now coming back to question number 1 - how can we make American exports more competitive? The answer to this does not lie in a weaker dollar but instead in increasing productivity. For this to be achieved, US must direct the cheap money available into education, investments to achieve higher energy-efficiency, investments in people, scientific-research and other areas of technology. What the US does NOT want now is the government and Federal Reserve trying to increase the retail-spending of American consumers through cheap money to pre-crisis levels that were already unsustainable, to prop up the economy. Trying to do this may look right now but going back to the old-ways will likely make our economy present us something in the future, which has been presented to us again and again - a "bubble"
1. America has injected enormous amount of liquidity into the financial system and the interest rates in US are near zero.
2. Asia, especially China and India, seem to be in a comfortable zone (relatively) out of the recession and have started monetary-tightening.
Is there a relationship between American financial system and Asia? Yes there is. With the US interest rates at an all time low near zero and expected to remain low throughout this year, there are huge amounts of capital outflows from US into emerging markets. This capital-outflow is supported by the speculation that emerging markets will do better than the US, atleast in the shorter term. There are good reasons to believe this - economies like China and India have had tremendous growth in recent years, have financially sound banks, have huge foreign reserves and high savings rate. And all these are currently being deployed and will be deployed in their respective economies to promote and support growth.
In both China and India, I expect strong government spending during the coming years. China, I would expect, to spend on factors that would drive consumer-spending. China is already embarking on a $150 billion nation-wide health-care package.
India has plans to spend heavily on its broken infrastructure like roads, ports, bridges, public-transportation etc. India is expected to need $500 billion in the next five years to meet the growing infrastructure demand (and the govt. acknowledges this).
Both China and India have huge savings rate and large amount of foreign reserves that should see the planned investments get implemented. United States is also expected to invest on a large scale in infrastructure related projects to push the economy higher. So all this should ensure a considerable amount of global capital-sector spending.
But the recovery from this recession is very different from the earlier ones. In this recession, the US consumers are hit hard and they are likely to spend less in the coming years. Can this decrease in US private consumption be compensated by an increase in private consumption from Asian economies like China and India? I very much doubt it. In 2007, US consumed $9.7 trillion worth of goods and services which is six times more than the combined consumption of China and India in the same year (source: "The Next Asia" book by Stephen Roach, Morgan Stanley Asia Chairman).
And this time, Asia leads the recovery and US will follow, which means exports are going to be a key for growth in the US in the coming years. Will this mean that America will need a weaker dollar? Well, I am not in favor of this idea. With enormous capital spending expected in the coming years in the world's two most populous nations and other developing countries, a weaker dollar will shoot up the commodity prices to unsustainable levels and that combined with the large liquidity in the US financial system and with low interest rates will make a good recipe for inflation in US.
Now there are two questions that we have to answer here:
1. How are we going to make American exports more competitive?
2. But even before answering the first question, how can we be sure that Asian economies don't get into any kind of economic trouble, which if they, will bring down the world again into recession?
One of the solutions to the second question, which will be a very good first step towards a stable global economy, will be to bring about financial and banking reforms in the US. If the commercial banks are allowed again to get involved in proprietary trading, which is done using the abstract concept called "speculation", then there is high-risk of asset-bubbles forming in Asian economies due to cross-border capital flows. Many Asian economies, especially China and India have some sort of capital-controls but this will not be sufficient to stop the speculative inflows. And this may cause unsustainable shoot-up in real estate and stock prices. At the same time, allowing banks to do proprietary trading will seriously reduce bank-lending in US. This is especially true after the credit-bubble burst. Bank-lending is very much needed now for small businesses and to an extent to consumers in the US. By preventing banks to speculate using depositors' money, we can bring a balance between exports and domestic consumption in US and this will also help reduce the currently unsustainable current account deficit.
Now coming back to question number 1 - how can we make American exports more competitive? The answer to this does not lie in a weaker dollar but instead in increasing productivity. For this to be achieved, US must direct the cheap money available into education, investments to achieve higher energy-efficiency, investments in people, scientific-research and other areas of technology. What the US does NOT want now is the government and Federal Reserve trying to increase the retail-spending of American consumers through cheap money to pre-crisis levels that were already unsustainable, to prop up the economy. Trying to do this may look right now but going back to the old-ways will likely make our economy present us something in the future, which has been presented to us again and again - a "bubble"
Monday, February 22, 2010
"Festival"onomy in China and India
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.
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.
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