Indian Economy, 5th edition (134 page)

Walras’s law

The idea that the total value of goods demanded in an economy is always identically equal to the total value of goods supplied.

This could be only correct in a barter economy not in an economy which uses currency as the mode of exchange.

Wasting asset

The natural resource which has a finite but indeterminate life span depending upon the rate of depletion (such as coal, oil, etc.).

Weightless economy

The situation of an economy when the output is increasingly produced from intellectual capital rather than physical materials–a shift in production from iron and steel, heavy machines, etc. to microprocessors, fibre optics and transistors, etc. This is the weightless economy i.e., the
new economy
which arrived in the US (specially) by the end of the 20
th
century.

Welfare economics

The branch of economics which is concerned with the way economic activity ought to be organised so as to maximise economic welfare. The idea applies to the welfare of individuals as well as countries.

This is normative economics, i.e., it is based on value judgements. It is also called
‘economics with a heart’.
This focuses on questions about
equity
as well as
efficiency.

It employs value judgements about what
ought
to be produced, how production
should
be organised, the way income and wealth
ought
to be distributed, both in present times and in future. As different individuals in different communities have unique set of value judgements (guided by their attitutdes, religion, philosophy, and politics) it has been difficult for the economists to reach a consensual idea upon which they could advise the governments in policy making, known as the
welfare criteria.
Economists and philosophers have been suggesting their brands of the
welfare criteria
since long–Vilfredo Pareto, Nicholas Kaldor, John Hicks, Scitovsky, Amartya Sen, as the few famous ones.

Wildcat strike

A strike called on by a group of employees without the support of their organised trade union.

Williamson trade-off model

A model for evaluating the possible benefits and detriments of a proposed merger that could be used in the application of a discretionary competition policy. The model was developed by Oliver Williamson.

Winner’s curse

The possibility that the winning bidder in an auction will pay too much for an asset since the highest bidder places a higher value on the asset than all other bidders.

Withholding tax

A tax imposed on the income on a foreign portfolio (investments). This tax is imposed to discourage foreign investments, to encourage domestic investment, and to raise money for the government.

WORKER (CENSUS DEFINITION)

The
first
definition of ‘worker’ by
Census
was given in 1872. Over time the term ‘work’ and ‘worker’ as defined by
Census of India
have undergone several amendments to suit the changing dimensions of work. ‘Work’ is defined as participation in any
economically productive activity
with or without compensation, wages or profit. Such participation may be physical and/or mental in nature. Work involves not only actual work but also includes –

(i)
Effective supervision and direction of work;

(ii)
Part time help or unpaid work on farm, family enterprise or in any other economic activity; and

(iii)
Cultivation or milk production even solely for domestic consumption.

Accordingly, as per Census of India, all persons engaged in ‘work’ defined as participation in any economically productive activity with or without compensation, wages or profit are workers. The Reference period for determining a person as worker and non-worker is one year preceding the date of enumeration.

The Census
classifies
‘Workers’ into two groups namely,
Main Workers
(those workers who had worked for the major part of the reference period, i.e., 6 months or more) and
Marginal Workers
(those workers who had not worked for the major part of the reference period i.e. less than 6 months). The
Main
workers are classified on the basis of Industrial category of workers into the following four categories: (i) Cultivators; (ii) Agricultural Labourers; (iii) Household Industry Workers; and (iv) Other Workers.

[See entry
‘Non-Worker’
also.]

WORKER POPULATION RATIO

The employment-to-population ratio is defined as the proportion of an economy’s working-age population that is employed. As an indicator, the employment-to-population ratio provides information on the ability of an economy to create jobs. Worker population ratio (WPR) is defined as the number of persons employed per thousand persons [WPR= No. of employed persons X 1000/Total population]. Worker Population Ratio is an indicator used for analyzing the employment situation in the country. This is also useful in knowing the proportion of population that is actively contributing to the production of goods and services in the economy.

[
Reference:
NSSO (2005),
Report No. 515, Employment Unemployment Situation in India (Part 1), 61st Round (2004-2005)
]

Workfare

Government programmes which make the receipt of unemployment-related benefits (as unemployment allowance) conditional upon participation in some local work scheme.

X-inefficiency

A graphic representation of the ‘gap’ a firm shows in its actual and minimum costs of supplying its products. As per the traditional theory of supply, firms always operate on minimum attainable costs. As opposed to this,
x
-inefficiency suggests that firms typically operate at higher costs than their minimum attainable costs. This takes place due to many
inefficiencies
(such as organising the works, lack of co-ordination, lack of motivation, bureacratic rigidities etc.). Large corporates usually face this problem as they lack effective competition which could ‘keep them on their toes’.

Yield gap

A method of comparing the performance of bonds and shares in an economy. It is defined as the average returns on shares minus the average returns on bonds.

Zero-coupon bond

A bond bearing zero coupon rate (i.e. no interest) sold at a price lower than its face value and investors getting the face value price at maturity.

Zero-sum game

A situation in the
game theory
when the gains made by winners in an economic transaction is equal to the losses suffered by the losers. This is considered a special case in game theory. Most economic transactions are in some sense
positive-sum games.
But in popular discussion of economic issues, there are often examples of mistaken zero-sum mentality, such as profit comes at the expense of wages, ‘higher productivity means fewer jobs’, and ‘imports mean fewer jobs here.’

Zero tilling

A relatively new farm production process, is a one-time operation in which a small drill places the seed and the fertiliser in a small furrow, saving the farmer a lot of time and other resources. At first utilised in Haryana in 1999–2000, by now it has spread to the other wheat growing states like, Punjab, Uttar Pradesh, Uttarakhand, and Bihar particularly. The technique gives comparatively higher yield (by over 5 per cent) than the conventional wheat farming.

Note:
The concepts of economics as well as the Indian economics have been prepared after consulting some basic sources on the areas which are as follows (for publication details see the other chapters of this book):
Economics
by Samuelson and Nordhaus;
Economics
by Stiglitz and Walsh;
Economics
by P. Dasgupta (Oxford);
A History of Economics
by J.K. Galbraith;
Economic Development
by Smith and Todaro;
Leading Issues in Economic Development
by Meier and Rauch;
International Economics
by Salvatore;
Comparative Economics in a Transforming World Economy
by Rosser and Rosser;
Collins Internet-linked Dictionary of Economics
by Christopher Pass, et.al.;
Oxford Dictionary of Economics
by John Black;
Penguin Dictionary of Economics
by G. Bannock et.al.;
Oxford Dictionary of Business
by J. Pallister and A. Isaacs (eds.);
Economics
by S. Cox, The Economist;
Pocket Economics
by M. Bishop, The Economist;
Pocket Finance
by Tim Hindle, the Economist;
Pocket International Business Terms
by T. Hindle, The Economist;
The End of Poverty
by J. Sachs;
The World is Flat
by Thomas L. Friedman;
The Undercover Economist
by Tim Harford;
Freakonomics
by Levitt and Dubner;
Book of Financial Terms
by Sundararajan;
Guide to Financial Markets
by Marc Levinson;
The Stock Market Dictionary
by P.N. Shroff;
Stock Exchanges and Investments
by Raghunathan;
India Development Report
, Oxford, (various issues);
Economic Survey
, GoI (various issues);
India
, GoI (various issues). as well as various issues of Economist, Time (Asia Edition), Financial Times (London), News Week, Business Week (USA), Financial Express (N. Delhi), Business Line (N. Delhi) and Economic Times (N.Delhi).

An Introduction

This is for the first time, probably, that the Economic Survey includes ‘an introduction’ to it. credit goes to Raghuram G. Rajan, Chief Economic Adviser, Ministry of Finance.

There are
three objectives
for India that are echoed through much of the Economic Survey.

1.
First, India has to revive growth, and that growth has to provide more decent jobs for the many millions who will join the labor force, even while reducing poverty .

2.
Second, India needs to shift from consumption to investment, that is, increase our savings especially government savings and household financial savings, even as we also increase corporate and infrastructure investment.

3.
Third, India needs macroeconomic stabilisation to bring down inflation, the fiscal deficit and the current account deficit.

There are similarities between some of these objectives, as also apparent tensions. For example, rebalancing towards
investment
can potentially raise growth as well as alleviate supply constraints, reduce inflation, and thus achieve macro stabilisation. On the other hand,
fiscal consolidation
is often thought to be detrimental to growth in the short-run. However, this tension may only be apparent. Macroeconomic rigour may, in fact, lead to growth; cutting wasteful subsidies may reduce market distortions, shrink excess consumption, and increase confidence about government finances, all of which can help growth, even in the short-run.

The Survey cites a number of factors responsible for the
recent slowdown
–

i.
First, the boost to demand given by monetary and fiscal stimulus following the global financial crisis was large, even though the economy was already reaching the limits to its potential growth before the crisis. The resulting recovery from the crisis was strong and final consumption grew at an average of over 8 percent annually between 2009-10 and 2011-12. One consequence was strong inflation, and a powerful monetary response that also slowed consumption demand.

ii.
Second, starting in 2011-12, corporate and infrastructure investment started slowing both as a result of policy bottlenecks as well as the tighter monetary policy.

Unfortunately, even as the economy slowed, it was hit by
two additional shocks
:

iii.
A slowing global economy, weighed down by the crisis in the Euro area and uncertainties about fiscal policy in the United States, and

iv.
A weak monsoon, at least in its initial phase.

As growth slowed and government revenues did not keep pace with spending, the
fiscal deficit
threatened to breach the target. With government savings falling, and private savings also shrinking, the current account deficit which is the investment that cannot be financed by domestic savings and has to be financed from abroad also widened. As per the Survey, these are difficult times, but India has navigated such times before, and with good policies it will come through stronger. For the Survey
the way outlies
in –

1.
shifting national spending from consumption to investment, removing the bottlenecks to investment, growth, and job creation, in part through structural reforms,

2.
combating inflation both through monetary and supply side measures,

3.
Reducing the costs for borrowers of raising financing and increasing the opportunities for savers to get strong real investment returns.

Every recent Survey has had a special focus on jobs. Policymakers are usually attentive to short-run economic management issues. But the short run has to be a bridge to the long run. The central long - run question facing India is –
where will good jobs come from?
Productive jobs are vital for growth. And a good job is the best form of inclusion. More than half our population depends on
agriculture
, but the experience of other countries suggests that the number of people dependent on agriculture will have to shrink if per capita incomes in agriculture are to go up substantially. While industry is creating jobs, too many such jobs are low-productivity informal and non-regular jobs in the unorganised sector, offering low incomes, little protection or benefits. Services jobs are relatively high productivity, but conditions for faster growth of productive jobs outside of agriculture, especially in organised manufacturing and in services, even while improving productivity in agriculture. The Survey
calls for reforms
, including the expansion of infrastructure, better and more effective regulation, and improvements in access to land and finance that would encourage the entry and growth of business enterprises. The Survey suggests that unless India undertakes these reforms, it will grow far below potential, and risks fiscal strains and social unrest as more and more people fall behind.

The Survey is both an analytical document, as it tries to understand the current conjuncture in suggesting policy measures as well as a document recording data and government activities. It is both backward looking as well as forward looking.
And it is of the government since most of the authors are government servants, but also distanced from the government as it is meant to take a dispassionate view of the government’s record over the past year and its policies going forward. These aspects of the Survey do not all sit easily together, nevertheless the authors of the survey manage the trade-offs every year.
I hope you get as much out of it as I did.

SUMMARY OF THE SURVEY

GROWTH AND OTHER MACRO AGGREGATES

While India’s recent slowdown is partly rooted in external causes, domestic causes are also important. The strong post-financial-crisis stimulus led to stronger growth in 2009-10 and 2010-11. However, the boost to consumption, coupled with supplyside constraints, led to higher inflation. Monetary policy was tightened, even as external headwinds to growth increased. The consequent slowdown, especially in 2012-13, has been across the board, with no sector of the economy unaffected. Falling savings without a commensurate fall in aggregate investment have led to a widening current account deficit (CAD). Wholesale price index (WPI) inflation has been coming down in recent months. However, food inflation, after a brief slowdown, continues to be higher than overall inflation. Given the higher weightage to food in consumer price indices (CPI), CPI inflation has remained close to double digits. Another consequence of the slowdown has been lower-than-targeted tax and non-tax revenues. With the subsidies bill, particularly that of petroleum products, increasing, the danger that fiscal targets would be breached substantially became very real in the current year. The situation warranted urgent steps to reduce government spending so as to contain inflation. Also required were steps to facilitate corporate and infrastructure investment so as to ease supply. Several measures announced in recent months are aimed at restoring the fiscal health of the government and shrinking the CAD as also improving the growth rate. With the global economy also likely to recover somewhat in 2013, these measures should help in improving the Indian economy’s outlook for 2013-14.

Following the slowdown induced by the global financial crisis in 2008-09, the Indian economy responded strongly to fiscal and monetary stimulus and achieved a growth rate of 8.6 per cent and 9.3 per cent respectively in 2009-10 and 2010-11. However, with the economy exhibiting inflationary tendencies, the Reserve Bank of India (RBI) started raising policy rates in March 2010. High rates as well as policy constraints adversely impacted investment, and in the subsequent two years viz. 2011-12 and 2012-13, the growth rate slowed to 6.2 per cent and 5.0 per cent respectively. Nevertheless, despite this slowdown, the compound annual growth rate (CAGR) for gross domestic product (GDP) at factor cost, over the decade ending 2012-13 is
7.9
per cent.

The moderation in growth is primarily attributable to weakness in
industry
(comprising the mining and quarrying, manufacturing, electricity, gas and water supply, and construction sectors), which registered a growth rate of only 3.5 per cent and 3.1 per cent in 2011-12 and 2012-13 respectively. The rate of growth of the manufacturing sector was even lower at 2.7 per cent and 1.9 per cent for these two years respectively. Growth in agriculture has also been weak in 2012-13, following lower-than-normal rainfall, especially in the initial phases (months of June and July) of the south-west monsoon.

After achieving double-digit growth continuously for five years and narrowly missing double digits in the sixth (between 2005-06 and 2010-11), the growth rate of the
services
sector also declined to 8.2 per cent in 2011-12 and 6.6 per cent in 2012-13. In 2011-12 the sector that particularly slowed within the services sector was Trade, Hotels, and Restaurants, Transport and Communications, and its growth further declined in 2012-13. Activities in this sector, being forms of derived demand, tend to grow at a slower rate with the slowdown of economic activity in the industry and agriculture sectors.

Why has the economy slowed down so rapidly despite recovering strongly from the global financial crisis? A number of factors are responsible for this as per the
Survey
–

i.
The boost to demand given by monetary and fiscal stimulus following the crisis was large. Final consumption grew at an average of over 8 per cent annually between 2009-10 and 2011-12. The result was strong inflation and a powerful monetary response that also slowed consumption demand.

ii.
Starting in 2011-12, corporate and infrastructure investment started slowing both as a result of investment bottlenecks as well as the tighter monetary policy.

iii.
Even as the economy slowed, it was hit by two additional shocks: a slowing global economy, weighed down by the crisis in the Euro area and uncertainties about fiscal policy in the United States, and a weak monsoon, at least in its initial phase.

As growth slowed and government revenues did not keep pace with spending, the fiscal deficit threatened to breach the target. With government savings falling, and private savings also shrinking, the current account deficit (CAD), which is the investment that cannot be financed by domestic savings and has to be financed from abroad also widened.

ASPECTS OF GROWTH

In the last decade, growth has increasingly come from the
services sector
, whose contribution to overall growth of the economy has been
65
per cent, while that of the
industry
and
agriculture
sectors has been
27
per cent and
8
per cent, respectively.

For achieving an annual growth rate of 9 per cent or higher, all the three major sectors of the economy have to perform well. Growth in agriculture, while small in overall contribution, does distinguish years of strong overall growth from years of more moderate growth. The two larger sectors are, of course, important to overall growth. In the high growth years of 2005-06 to 2007-08 as well as in 2009-10 and 2010-11, the rate of growth of both the industry and services sectors was over 9 per cent. Within the industry sector, the manufacturing sector in particular, outperformed most other sectors of the economy in these years. Its growth averaged 11.6 per cent between 2005-06 and 2007-08 and 10.5 per cent for the years 2009-10 and 2010-11. It is clear from the foregoing analysis that for growth to be strong, the contribution from the industry sector, and in particular from the manufacturing sector, has to increase in the years to come. This is also important from the point of view of absorbing surplus labour from the agriculture sector.

The general pattern over recent years has been that, in years of sharply higher growth, GDP growth at market prices exceeds GDP at factor cost and the reverse is true in years of slow growth.
GDP at factor cost is GDP at market prices less indirect taxes plus subsidies.
Part of the reason for the differences in growth at factor costs and at market prices lies in the fact that the growth of indirect taxes tends to fall in a slowdown while the expenditure on subsidies often increases. This reduces the growth of net indirect taxes, which is the difference between the two items, in a slowdown.

The rate of growth in terms of GDP at market prices (at 2004-05 prices, i.e. is the Base Year) is expected to be 3.3 per cent for 2012-13 as against 6.3 per cent in 2011-12 (as per the Advance Estimates of the CSO). The growth rate declined significantly on account of the reduction in investment rate and lower growth of exports vis-à-vis that of imports. The rate of growth of consumption expenditure and particularly that of private final consumption expenditure has generally been more stable than investment, except in 2012-13.

Private Final Consumption Expenditure

Private final
consumption expenditure
accounts for about
three-fifths
of GDP at market prices. An “increase in people’s disposable income tends to reduce the share of food in total consumption” [the National Sample Survey Organisation’s (NSSO) Survey on Consumption. Expenditure provides clear evidence of the downward trend in share of food in total consumption]. As expected, therefore, the growth rate of expenditure on the food, beverages, and tobacco group is lower than that of total private final consumption expenditure, resulting in a reduction in its share from 40 per cent in 2004-05 to 31.2 per cent in 2011-12.

In the current year, private final consumption expenditure has slowed considerably, from 8 per cent in 2011-12 to 4.1 per cent in 2012-13. The rate of growth of production of a large number of consumer durables declined significantly, e.g. private vehicles from 23.2 per cent in April-November 2011 to - 5.6 per cent in April-November 2012. Similarly, the growth rate of production of consumer durables for mass consumption declined from 12.2 per cent in April-November 2011 to 3.3 per cent in April-November 2012.