Indian Economy: Oct-Dec 2024

INDIAN ECONOMY: OCT-DEC 2024

The urban employment data has just come out for Oct-Dec 2024. I look at 3 indicators of employment:

1. Worker Population Ratio (WPR)

2. % of workers in industry and services

3. % of regular wage/salaried workers

I make two comparisons - I compare Oct-Dec 2024 with:

a) Oct-Dec 2023 (the same quarter of the previous year)

b) Oct-Dec 2019 (the last normal/pre-Covid Oct-Dec quarter)

The graph shows these comparisons . . .

1. Worker Population Ratio (WPR):

a) This has increased by 0.4% points over the previous year. This is good news.

b) And it has increased by 2.9% points since the pre-Covid period. This is also good news.

2. % of workers in industry and services:

a) This has increased by 0.4% points over the previous year. This is good news.

b) But it is still 0.4% points below the pre-Covid period. This is not good news.

3. % of regular wage/salaried workers:

a) This has increased by 0.7% points over the previous year. This is good news.

b) But it is still 0.6% points below the pre-Covid period. This is not good news.

Thus the Indian economy is recovering from the Covid crisis - but it has not yet recovered fully . . .

India Budget 2025-26: Analysis

INDIA BUDGET 2025-26: ANALYSIS

# Fiscal deficit is decreasing from 4.8% of GDP (2024-25) to 4.4% (2025-26) - a decrease of 0.4% points. This is good.

# Nominal GDP is estimated to grow/increase in 2025-26 by 10.1%.

The 4 Budget components are changing from 2024-25 to 2025-26 like this:

1. Revenue Receipts (good income - ie, taxes)

This is increasing by 11.1% - which is more than the GDP growth rate (10.1%). This is good.

2. Capital Receipts (bad income - ie, loans)

This is *decreasing* by 0.0%. This is very good.

3. Revenue Expenditure (bad spending - salaries, schemes, subsidies)

This is increasing by 3.5% - which is less than the GDP growth rate. This is good.

4. Capital Expenditure (good spending - ie, infrastructure)

This is increasing by 17.4% - which is more than the GDP growth rate. This is good.

So this is a pro-growth and fiscally disciplined Budget . . .

How To Analyse/Evaluate India's Budget

HOW TO ANALYSE/EVALUATE INDIA'S BUDGET

(A framework to analyse/evaluate the Budget)

A. The Budget has 2 flows of money:

1. Inflow (Income) is called 'Receipts'.

2. Outflow (Spending) is called 'Expenditure'.

B. The Budget has 2 types of accounts:

1. Short-term transactions (that do not create assets/liabilities) go into the 'Revenue Account'.

2. Long-term transactions (that create assets/liabilities) go into the 'Capital Account'.

Thus we have:

2 Flows X 2 Accounts = 4 Components

These 4 components are:

1. Revenue Receipts: This is mainly taxes. This does not create any liability for the government. So this is good income.

2. Capital Receipts: This is mainly loans (a liability). Government has to repay this – with interest. So this is bad income.

3. Revenue Expenditure: This consists of salaries, pensions, schemes, subsidies and interest payments. This does not make the economy more productive – so this is bad spending.

4. Capital Expenditure: This is mainly infrastructure (an asset). This makes the economy more productive – so this is good spending.

Thus we have 2 'good' components:

1. Revenue Receipts (good income)

2. Capital Expenditure (good spending)

And 2 'bad' components:

1. Capital Receipts (bad income)

2. Revenue Expenditure (bad spending)

The 4 components must be seen relative to the GDP. So ideally, compared to last year:

1. The 'good' components must increase relative to the GDP.

2. The 'bad' components must decrease relative to the GDP.

That is, ideally:

1. The increase in the 'good' components from last year must be greater than the GDP growth rate (the greater the increase, the better).

2. The increase in the 'bad' components from last year must be less than the GDP growth rate (the lesser the increase, the better).

Finally, the most important number in the Budget is the Fiscal Deficit:

Fiscal Deficit = Spending – Income (excluding loans)

It is expressed as a % of GDP. It must be as low as possible. So the Fiscal Deficit must decrease as much as possible. The greater the decrease, the better.

Thus by:

1. Looking at the Fiscal Deficit

2. Comparing the increase in the four components with the GDP growth rate

We can say how good or bad a Budget is . . .

Caveat: Revenue Receipts must increase by increasing the tax base – not by increasing the tax rates.

India's Informal Sector Workers: PLFS Vs ASUSE

How many informal sector workers are there in India? Two different surveys are giving two very different numbers. The Annual Survey of Unincorporated Sector Enterprises (ASUSE) says it is 12 crore. But the Periodic Labour Force Survey (PLFS) says it is 20 crore!

ASUSE explicitly gives this number. PLFS does not explicitly give this number - but we can calculate it as:

Number of informal workers = % of informal workers among non-agricultural workers X Number of non-agricultural workers

And number of non-agricultural workers = % of non-agricultural workers X Number of all workers

And number of all workers = Worker Population Ratio X Total population

So number of informal workers = % of informal workers among non-agricultural workers X % of non-agricultural workers X Worker Population Ratio X Total population

= 73.2% X 53.9% X 43.7% X 120 crore = 20.7 crore!

A caveat: PLFS defines informal enterprises as proprietary* and partnership* (P & P) enterprises. Whereas ASUSE defines them as enterprises that are not registered under the Companies Acts - so this means not just P & P enterprises, but also self-help groups, cooperatives, societies/trusts, etc. So ASUSE has more enterprises than PLFS. Then ASUSE's number of informal workers must be more than PLFS's. But the opposite is the case here! In fact, PLFS's number is almost twice the ASUSE's number!

The only way to explain this discrepancy is that many (almost half) P & P enterprises (which are considered informal in PLFS) are registered under the Companies Acts - and hence not covered by ASUSE. Also, since registered enterprises will be bigger than unregistered enterprises, the fraction of registered P & P enterprises can be less than half to account for this discrepancy. But it still has to be a large number. So what is the probability that so many P & P enterprises (which PLFS considers informal for a reason) are registered under the Companies Acts? If anybody can explain this discrepancy, I will be grateful . . .

*[Crudely speaking, 'proprietary' means one owner and 'partnership' means a few owners]

Best Movies Of 2024

BEST MOVIES OF 2024

1. Phulwanti

2. Main Atal Hoon

3. Article 370

4. Razakar

5. Gladiator 2

6. Kingdom Of Planet Of Apes

7. Alien: Romulus

RBI, Inflation And Interest Rate

Last week the November inflation number came out at 5.5% - below the upper limit (6%) of the inflation target. So the media is saying that RBI must cut the interest rate. Is this view correct?

The RBI's Bulletin in July said that India's neutral/natural interest rate is around 1.5-2%. What does 'neutral/natural interest rate' mean? The top table illustrates this:

a) When the real interest rate is at the neutral/natural level, it neither decreases nor increases inflation. This is neutral monetary policy.

b) When the real interest rate is above the neutral/natural level, it decreases inflation. This is contractionary monetary policy.

c) When the real interest rate is below the neutral/natural level, it increases inflation. This is expansionary monetary policy.

Currently the inflation and interest rate situation is:

1. Inflation is 5.5% - above the target level (4%). So it must be decreased. That is - real interest rate must be above the neutral/natural level of 1.5-2%. 

2. But the repo rate is 6.5%. So the real repo rate = 6.5% - 5.5% = 1%, which is less than the neutral/natural level (1.5-2%).

3. So monetary policy is actually expansionary - ie, tending to increase inflation!

So to what level must inflation come down to justify a rate cut (in an already expansionary monetary policy)? The bottom table illustrates this. If inflation comes down to 4.5% (Case 1) then the repo rate can be cut to 6.25%. Because then the real repo rate will be 6.25% - 4.5% = 1.75%, which is above the lower limit (1.5%) of the neutral/natural level (1.5-2%) - which it has to be because inflation (4.5%) will still be above the target level (4%). Whereas inflation coming down to even 4.75% will not justify a rate cut (Case 2).

Of course, this is by taking the lower limit (1.5%) of the neutral/natural interest rate (1.5-2%). If we take the upper limit (2%) then inflation has to come down all the way to its target level (4%) to justify a rate cut (Case 3). Even inflation coming down to 4.25% will not justify a rate cut in this scenario (Case 4).

Low Salaries: Law Of Demand And Supply

The internet has many posts criticising the low salaries for:

1. Assistant Professors (like ₹ 35,000/month) in many colleges and universities

2. Fresh engineers (like ₹ 3 lakh/year) in companies like TCS, Wipro and Infosys

Wage is the price of labour. And the most fundamental law of economics is that all prices are decided by demand and supply. High demand or/and low supply leads to a high price/wage. And low demand or/and high supply leads to a low price/wage. Low salaries for Assistant Professors and fresh engineers are simply a reflection of the high supply of these workers.

The average wage of a casual labourer (like farm workers and construction workers) in India is ₹ 400/day. So if a farm/construction worker works 30 days a month, he/she will earn only ₹ 12,000/month - for doing back-breaking work in the hot sun the whole day. Is this fair? Of course, it is not. But the world does not run on fairness - it runs on the laws of economics, especially the law of demand and supply . . .