What Ails the Indian Economy: An Amateur View

A few Premises

Let us start with a few premises (applicable to economies of ‘civilized’ societies):
1. We need goods and services.
2. We get goods and stuff in return of money we pay.
3. (Usually) we get money in return of something we produce (goods and services) that others ‘demand’.
4. Either we must produce those goods and services, for which demand already exists, or…
5. We must create demand for what we are capable of producing.

The Perfect Economy

In a perfectly running economy:
1. Sufficient resources would exist to produce a sum total of goods and services needed/wanted by all.
2. Sufficient number of people to produce the same goods and services should be available, and
3. Number of people in the labor force (those seeking money in return of goods and services they are capable of producing) must be exactly the same as that required to produce the goods and services required by the same population.

The Imperfect, Collapsing Economy

Let us see how, if any of the above conditions is not fulfilled, the economy would start collapsing.

1. Insufficient resources to produce sum total of goods and services needed/wanted by all

This situation is the easiest to understand. If there were to be insufficient energy sources, land (for industries and food production), water, minerals, etc., it is not difficult to understand how a certain fraction of the population would remain dissatisfied. Depending on what resource would be lacking, the people constituting that fraction would be unhappy, or fall ill, or even die. This kind of insufficiency has further downstream harmful effects, some of which may not even be quantifiable. E.g., there would be increasing collapse of the ethical framework of the society, by which I mean that the idea that – one would gain some good or service only in exchange of some good or service they produce – would be breached (e.g., stealing, extortion, etc.); productivity of the population would go down; new set of previously unrequired drains on resources would be created (hospitals, drugs, medical services, firearms, CCTVs – as an extreme example, etc.). With passing time and each passing generation, the per capita deficit between demand and supply of goods and services will widen for the worse, and that would lead to collapse. Most definitely, Indian economy is faced with shortfall of many vital resources – most prominently, land, energy and water.

Possible solution: To reduce the population. The total amount of resources would remain nearly the same, but the demand would fall, so there would be greater probability of everyone getting what they need/want.

2. Insufficient number of people to produce the goods and services required by the entire population

India definitely does not face this problem. It may seem that in some sectors (e.g., health care, education, law and order, etc.) there are insufficient people, but that would not be an accurate assessment. There are insufficient people to provide the above services either because sufficient number of people could not be trained to provide them or the market could not lure sufficient number of people to provide those services. However from what I have been able to make out, this problem (of insufficient people in the labor force) is perhaps actually present in certain European countries with negative or stagnant population growth, dropping birth rates, and effectively, the proportion of non-productive aging population on the rise.

3. More number of people in the labor force than required to produce goods/services needed by the population (disguised unemployment)

Or in other words, collapse can also occur if the existing labor force with the help of all the technology they have can produce more of goods/services than what would be needed by the population. Here I am trying to elaborate on the concept of ‘disguised’ unemployment. Of the three, this is the most difficult problem to explain. Let me try to give few examples:

1. Baker versus factory. Imagine a ‘factory’ constructed by an entrepreneur ‘E’, who hopes to make profits from selling bread in a town. Imagine 1,000 units of bread are required by the town. Before the factory was constructed, 20 bakers were needed to produce that much bread daily. However now, the factory needs only 5 people to produce that much bread. For purpose of simplicity, let us assume that 5 out of 20 bakers who were initially running bakeries to produce bread, shut their business and take up a job under E. So, what happens to the rest of 15 bakers? They are still capable of producing the bread, however, either people would stop buying bread from them, or each baker would be able to sell much lesser bread than before as at least part of the demand for bread would be satisfied by the factory. If we take this situation to the extreme, each of those 15 bakers needs the bread, knows how to make the bread and is willing to do so, but cannot make money to make or buy the bread because nobody needs his service! But imagine, if there would have been only 5 bakers in the town in the first place who would’ve been sufficiently fulfilling the requirements of bread for the town, this situation would not have arose. On the other hand, let us assume that somehow people would be hesitant to purchase bread made in the factory, then, those working with the bread factory or involved in its construction and maintenance are would not find employment. In either of the cases, when more bread can be made by the available number of people and facilities than is required by the population, there is competition, and individual earning from bread making drops.

2. Multiple mobile service providers. There are many mobile service providers in India. Let us assume for simplicity that there are 10 mobile service providers all over India. It would be safe to assume that if the combined existing infrastructure (mobile towers, wires, satellites, etc. [of course, I have very little understanding of what all goes into it]) of all these mobile companies were to function at their full capacity, lot more data transfer (calls, SMSes, etc.) could be handled without significantly compromising upon the quality of services provided. So, let us presume that of the 10 providers, infrastructure of only 3 would suffice to sustain the present demand on data transfer. [Let me set out a few premises here: (a) the total generated in the country from providing mobile services is dependent on amount of data transfer and would remain constant, (b) when the number of companies is more, at least few of the tasks are such that the work needed to be done increases despite there being no increase in ability to transfer data, and (c) if the revenue of a company increases, the income of individual employees would also increase in the same proportion.] This means, infrastructure provided by the other 7 companies is going waste. It further means that at least few of the services provided by employees are redundant and going waste? E.g., if there were to be only 3 companies instead of 7, there would have been fewer advertising campaigns, or fewer engineers would be required to maintain the fewer mobile towers; likewise, fewer people would have been required to look into the accounts. Now what is the impact of these two things (infrastructure getting wasted and redundancy [competition] among employees of competing companies)? If there would’ve been no redundant infrastructure, there would have been lesser pressure on the individual companies to recover their initial investment. This would’ve had two possible results: first, the companies would be able to have the same profit margin, and yet, the cost to the customers would be reduced, or alternatively, they would be able to have wider profit margin without increasing the cost to end-customer, and at least some of the increased profits would be transferred to the employees. In the second situation, each employee would get better pay than the present situation. The outcome of first situation would be that the individual customers would have more surplus money to buy other things and that would create business opportunities in some other areas, but this kind of analysis would complicate things a lot and I won’t deal further with it. Also, if smaller number of people would be required for attracting customers, maintaining accounts, maintenance of existing infrastructure, etc., with only 3 companies competing with each other as against 10, then all the individual employees would get greater salaries. Thus, the overall impact of having 10 mobile service providers instead of just 3 is that individual employees get lesser pay and/or the individual company owners make lesser profit than they otherwise would have. Another impact, more difficult to quantify, is that the customers have to spend more money on mobile services, which they could have otherwise spent on buying some other goods or services, which perhaps would’ve added to income of some other individuals or would’ve provided them employment.

3. Music in electronic medium. Think of times when it was not possible to ‘record’ music. Meaning, each time people would have the urge to listen to music, then, they would have to assemble at a place and pay the music artistes. So, the income of the artistes would be sort of directly proportional to the number of people wanting to listen to their music and number of times they would want to listen. But of course, now that we can record music and reproduce it at virtually no cost infinite number of times, what happens is that an ensemble of singers and musicians would record their tracks in a music studio, and they get to earn only once. Of course, the reader might point out that each time one buys ‘music’ the patron needs to pay, and part of that money (royalty) goes to the artistes. Piracy of music complicates the matters, but I would not deal with it here. However, let me elaborate upon the situation. Let us assume there are 1,000 people in a town, and all of them are willing to listen to 1 hour of music every day. Which means the demand for music per week is 7,000 man-hours. Let us also assume that each ensemble of singers can perform music for only one hour in a day, and if they were to perform live, they could cater to only 100 persons at a time. This means each group can supply only 700 man-hours of music per week. So, in the old days without the technology to amplify, record and reproduce music, at least 10 groups would have been required in that town to fulfill the music needs of the town. Let us assume that each person would be willing to pay Rs. 100 per hour of music heard. This would mean in an entire week, Rs. 70,000 would be paid for the town’s population, and thus each group would earn Rs. 1,000 per week. But now let us turn to the present situation. Let us assume that the ‘music demand’ and the amount of money people in that town are willing to pay has remained constant, and that means, even if there were to be just one music group in the town, they would have performed one hour of music once (lesser effort), and they would have been able to earn the entire Rs. 70,000 for that week. But now because there are ten groups instead of one, the income of each group would be just Rs. 7,000. So, though it would appear that the income has not decreased because of availability of technology, actually, simply because more number of musicians are available than are required, individual incomes are lower than what they could have been. Of course, what I have stated is too simplistic. Two complicating factors easily come to the mind. First is that though in the past, there were 10 groups in the town, they were not exactly competing with each other. They were the minimum required number of groups to fulfill the music demand. Whereas in the present situation, 9 groups are surplus, and they would compete with each other to provide music at a lower cost, so why would the customer continue to spend Rs. 100 per hour of music heard? And not to forget, once purchased, the original music group would never be required to perform the same track again. So, it is possible that in a week, less than Rs. 70,000 would be generated by the thousand-strong population, and the individual incomes could further drop. The second complication factor is of course that the expectations of the population would increase; they would seek greater variety, and hence artistes serving to greater number of tastes would be in demand. But there would be saturation in demand for different genres. If a population of 1,000 people would seek 10 genres of music, a population of 1 million would at the most seek 20 genres of music, and not 10,000 genres. Thus in summary, in industries like entertainment and news media, unlike the consumables, number of people (artistes) required to fulfill the demands of a population do not increase in the same proportion as the population.

What I have tried to illustrate through the above 3 examples is that as the means of production of goods and services get automated and humans would not be required in the replication, even though their demand would continue to rise in the same proportion (or even greater because of the customers becoming choosy), the number of humans required to meet the same demand would not rise significantly. However, various individuals would compete with each other to provide those good and services, and produce them at a rate lower than their maximum possible rate, and earn lesser than what they would otherwise be capable of earning. There is only so much that the demand for a particular good or service could be increased artificially (by advertising or propagating social fads) with rising standard of living. And even if the demand were to rise, it need not require involvement of too many humans to fulfill them (because of automation).

Possible solution: To reduce the population. With reduction in population, it can be hoped that fewer people would compete with each other to provide the same goods and services, would work at close to their maximum production capacity and would thus earn more.

A Side Note on Impact of Individual Poverty and Level of Ethics in Society

It is very common to see most Indians blame ‘corruption’ for the plight of Indian economy. However, what I would like to point out is that the most Indians would not have qualms associating with individuals they know to be corrupt – as friends, relatives or someone to seek favors from. I am not questioning the morals of the said people. What I am trying to point out is that though the phenomenon of corruption is unacceptable in the society at large, paradoxically, corrupt individuals are acceptable. The reason for this is that the corrupt individuals are more likely to be resourceful. What does this say about our society? I will try to explain the reason for this. When per capita income of the individuals would be less, survival and procurement of basic resources becomes that much more difficult. There is immense competition among individuals living with each other for the same resources. Most societies do have set rules on what means to procure resources, goods and services for oneself are legitimate and what are illegitimate. Most people would gladly follow these rules if following them would not make significant difference to their probability of being able to procure them. However, if they would be so poor because what they seek would be very scarce, it would become increasingly fatiguing to observe restraint and not procure what they want through illegitimate means (stealing and extorting). The growing kids are trained by their parents to maximize their ability to procure what they seek. An environment of mutual distrust, lack of empathy (how can you empathize with someone who wants something you yourself want, but do not possess yet?) and cruelty is created. It becomes almost second nature to at others with suspicion and as competitors. Parents would also teach their kids to consume less and to hoard whatever they could get for future. Also, stratification would be created in the society on lines of haves and have-nots. Those who would be having whatever they need (affluent stratum) would be treated with respect, and others would aspire to be like that. The affluent would know that their position is precarious, and others are in dire need of what they own. Thus the mistrust and antagonism between the two strata would be reciprocal. So, the kids growing in such an environment, even when growing up would have sufficient resources to fulfill all their needs, they would want to hoard more of all that, they would continue to think of using illegitimate means to earn as much as they could. It would take a few generations after poverty would be completely eliminated for the inculcation of mistrust and competitiveness to be removed from nurture. The problem with greater acceptability and willingness to use illegitimate means to fulfill one’s needs is that the overall production of the society decreases. To understand this, just think of a simple example of two towns – ‘A’ and ‘B’ population of 1,000 each. Town A does has sufficient resources and means of production to fulfill the needs of all its residents; furthermore, all the individuals have sufficient money to buy what they need. Thus, in town A, fewer people would be inclined to steal – let us say, just 5 people would be ‘professional’ pickpockets, thieves or dacoits. In contrast, town B has just half the resources of town A, and which means that there would be immense competition among all its residents – for electricity, water, food, etc. They would be lot more willing to steal or physically fight each other to get what they want. Thus, it is possible that instead of 5, 100 people would be professional pickpockets, thieves or dacoits. Which means, 100 people would be lost from the workforce and effective work force would be only of 900 (whereas, it would be 995 in town A).

The Final Solution

I hope I have been able to illustrate above how reducing the population density would reduce the overall demand for scarce resources and various good and services that could be produced using them, would reduce disguised unemployment, and how that would reduce individual poverty and increase purchasing power. Also, as individual poverty would reduce, and respectful means of survival would be possible without resorting to illegitimate means, unethical practices (corruption) would become less acceptable in the society and those indulging in them would be ostracized and/or punished with greater likelihood. Fewer people resorting to illegitimate means of procuring what they want is also likely to increase the productivity of the population.

6 thoughts on “What Ails the Indian Economy: An Amateur View

  1. Ketan,

    thanks for another reasoned out blog post

    how does one reduce population density? total populationis not the same as population density right? which needs reduction?

    The other solution is, increase everybody’s purchasing power.


  2. Thanks, Uberschizo!

    Population density would come down when population reduces (as the total amount of land remains the same). Population in turn would reduce with reduced fertility, increased mortality or increased emigration. Practically, reducing fertility is the only solution.

    I don’t see how purchasing power can be increased for everyone without reducing the number of people competing with each other to purchase what’s produced in the ‘market’ or without increasing what would be available in the market!

  3. Practical solutions for population reduction are SLOW. even if most people in indis stopped having more than one child today, it would be a decade before we see big economic changes.

    increase in purchasing power can be done through social security interventions, public health interventions, market reforms, labor reforms. these will lead to generation of more resources, more stuff to buy. people prefer consuming to producing, there will alway be more produces than consumers.


  4. Hello Ketan, here are my observations on the ideas in your post.

    I think it is well understood that the main problem in India is the mismatch in the supply side for most resources that have stagnated, whereas the demand continues to rise.

    The primary reason for this seems to be terrible inefficiencies in the supply side due to poor production techniques. I think you identify this in

    “2. Insufficient number of people to produce the goods and services required by the entire population”

    When you see 5 employees sweeping the same area in govt. run institutions, as is often the case, what is happening is that what should normally be one person’s job with one person getting paid, ends up being done poorly by 5 people at 5 times the cost. This is the same philosophy behind programs like NREGA that make no effort at producing something valuable. People are paid for building roads and ditches that won’t withstand one monsoon before regressing to previous state, but money has been thrown at the problem with the only possible side-effect being inflation.

    India’s population is not the problem. It is the poor management of all resources by an incompetent and criminally negligent govt. which has a primary intention of having its grubby fingers in every and any possible economic activity, be it building solar panels or agriculture. Indian government is a pervasive and destructive influence on governance.

    “3. More number of people in the labor force than required to produce goods/services needed by the population (disguised unemployment)”

    The consequences of this is a lower-than-expected production of materials to supply the populace.

    The consequences of poor supply of schools, water, roads, toilets (but not cell phones) is because of poor governance engendered by “pro poor” policies that seem to be mostly about cornering political power by conning poor people into supporting populist policies (like Sonia Gandhi and the NAC) to the detriment of all future politics, where no party will be able to roll back these freebies without triggering a revolt among the classes that get used to such entitlements.

    “In a perfectly running economy:
    1. Sufficient resources would exist to produce a sum total of goods and services needed/wanted by all.
    2. Sufficient number of people to produce the same goods and services should be available, and”

    The problem in India is not the lack of resources but the terrible mismanagement by government at all levels — so appalling that almost all of these resources are wasted giving the impression of a lack of resource (which is only true in some cases, but not most of them).

    Point no. 2 is right on the nose — the govt. has shown that it is incompetent at efficiently providing goods and services to the people, and usually only results in massive resource wastage as can be seen daily.

    Just because some bureaucrat pass civil services examinations, does not mean he has the competence to run an airline (air india) or manufacture steel or electricity.
    The Government should leave such enterprise to private parties. But Indira Gandhi and the Congress party have screwed the constitution to make India a “socialist state” — fait accompli for Sonia Gandhi and the NAC and the cretin who is PM to continue pushing these regressive policies in the face of obvious evidence of the serious damage it is causing to India’s long-term well being.

    Hope this did not look like a rant (it isn’t) 🙂

  5. Hi there! This post could not be written
    any better! Reading through this post reminds
    me of my previous roommate! He always kept preaching about this.

    I’ll forward this information to him. Fairly certain he will have a good read. Thanks for sharing!

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