India's Economy Since The Covid Crisis: Rural Vs Urban

INDIA'S ECONOMY SINCE THE COVID CRISIS: RURAL VS URBAN

How has the Indian economy fared since the Covid crisis? The below graphs show two indicators of the health of the economy:

1. % of workers who are in industry + services

2. % of workers who have regular wage/salary jobs

from 2018-19 (the last normal/pre-Covid year) to 2025 - for rural areas and urban areas separately.

1. % of workers who are in industry + services

a) Rural

This decreased from 42.2% in 2018-19 to 38.5% in 2019-20 due to the Covid crisis. Then it increased to 42.8% in 2025 - which is slightly above the pre-Covid level. This is good news.

b) Urban

This decreased from 94.5% in 2018-19 to 93.5% in 2020-21 due to the Covid crisis. Then it *further decreased* to 92.5% in 2025. This is very bad news.

2. % of workers who have regular wage/salary jobs

a) Rural

This decreased from 13.4% in 2018-19 to 12.1% in 2020-21 due to the Covid crisis. Then it increased to 14.1% in 2025 - which is slightly above the pre-Covid level. This is good news.

b) Urban

This decreased from 48.8% in 2019-20 to 46.4% in 2020-21 due to the Covid crisis. Then it increased to 47.6% in 2025 - which is still below the pre-Covid level. This is not good news.

Thus the Indian economy has become a two-track economy: rural and urban. And surprisingly, the rural economy is doing better than the urban economy . . .

Data-source: Periodic Labour Force Survey (PLFS)

Edmund Phelps: Inflation Vs Unemployment

EDMUND PHELPS: INFLATION VS UNEMPLOYMENT

Edmund Phelps, winner of the 2006 Nobel Economics Prize, has passed away. He won the Nobel Prize for "his analysis of the inter-temporal trade-offs in macroeconomic policy". 

Brief bio:

# BA @ Amherst College

# PhD @ Yale University

# Professor @ Columbia University

Some of the most fundamental models/concepts/principles in today's macroeconomics have come from him:

# Expectations-augmented Phillips curve.

# No long-run trade-off between inflation and unemployment.

# Unique equilibrium unemployment rate (where firms raise their wages at the same rate as wages are expected to rise).

# Golden rule of capital formation (to maximise long-run consumption): Optimal savings rate = Capital income / National income.

# Optimal R&D investment rate = The investment rate that yields a return equal to the economy's growth rate (similar to the above principle).

# Time-inconsistent preferences: "I want to save X amount for my children - but my parents want me to save Y amount for my children." Policy implication: Public measures that increase the savings of all generations (like a public pension system) can increase the welfare of all generations.

Major papers:

# The golden rule of accumulation: A fable for growthmen (American Economic Review, 1961)

# Investment in humans, technological diffusion and economic growth (American Economic Review, 1966)

# Phillips curves, expectations of inflation and optimal unemployment over time (Economica, 1967)

# Money-wage dynamics and labor-market equilibrium (Journal of Political Economy, 1968)

# The statistical theory of racism and sexism (American Economic Review, 1972)

Info-source: Nobel Prize Org

West Bengal Election 2026: Analysis

WEST BENGAL ELECTION 2026: ANALYSIS

In the last election (2021) Trinamool Congress won a whopping 216/294 seats (73%) and BJP won only 77 seats (26%). Trinamool with almost a 75% majority looked invincible. But there were two important things:

1. Votes: Trinamool got 48.5% of the votes and BJP got 38.1% - a difference of 10.4% points. A big gap - but not as big as the seats gap.

2. Trend: The bottom graph tells the real story. In 2021, BJP had massively improved its position/performance: from just 10.6% votes in 2016 to 38.1% in 2021 - an increase of 27% points. BJP clearly had the momentum - the only question was: could it sustain its momentum to overtake Trinamool?

The question was answered on Monday: BJP got 45.9% votes (+8% points) and 207 seats (70%). Trinamool got 41.1% votes (-7% points) and only 80 seats (27%). BJP converted its vote gap of -10% in the last election to +5% this time.

In a first-past-the-pole system, a small vote gap can translate into a big seats gap. Trinamool did it in 2021 - and BJP has done it this time . . .

Dhurandhar: The Revenge - Review

REVIEW

Dhurandhar: The Revenge does not have part one's perfection. But what it lacks in perfection, it makes up in fun. So with all its imperfections, it is still one hell of a ride.

If Aditya Dhar had given as much as care to part two's script as he had given to part one's script, then part two would have been an all-time great movie (like part one) and the duology would have been an all-time great cinematic work (like Dark Knight Trilogy). As such, both part two and the duology fall short of all-time greatness. But still, Aditya Dhar and his team have given lovers of India and Indian cinema something to cherish for a very long time . . .

Christopher Sims: VAR Model And Impulse-Response Analysis

2011 Nobel Economics Prize winner Christopher Sims (who passed away yesterday) revolutionised macroeconomics by developing the Vector Auto Regression (VAR) model and impulse-response analysis.

Till the 1970s, macroeconomic analysis involved taking a large system of equations built around a Keynesian macroeconomic model and statistically estimating them. The estimated system was then used to:

1. Interpret time series

2. Make economic forecasts

3. Conduct policy experiments

These large models were successful in explaining the historical data. But in the 1970s, Western countries had high inflation along with low growth and high unemployment. During this period of 'stagflation', the large models started showing instabilities - which created problems.

In 1980, Christopher Sims wrote a paper titled "Macroeconomics And Reality" (Econometrica, 22k+ citations) to solve this problem. He developed a new methodology using a new model called Vector Auto Regression (VAR). VAR is basically a system of N equations of N variables in which each variable is a function of:

1. Its own past values

2. Past values of the other variables

3. Some exogenous shocks.

His methodology has 3 steps:

1. Estimate the VAR model and forecast the macroeconomic variables - by separating unexpected movements in the variables from expected movements.

2. Identification - ie, break down these unexpected movements into structural shocks (ie, shocks that are the fundamental causes of macroeconomic fluctuations).

3. Impulse-response analysis - ie, trace out the dynamic impact of these shocks on subsequent movements in all the variables.

Sims' new methodology revolutionised macroeconomics. Today, VAR model and impulse-response analysis have become the basic tools of macroeconomic analysis. They are used to answer questions like:

1. What causes economic cycles?

2. What are the effects of fiscal policy?

3. What are the effects of monetary policy?

The pic is from Sims' paper. It shows the impulse-response analysis of America's GDP - ie, it shows how GDP is affected by 6 variables: money supply, GDP itself, unemployment, wages, prices and import prices (top to bottom). As you can see, the graphs do not show the confidence intervals. In the 1970s/80s, computers were not very powerful - so it was difficult to calculate the confidence intervals. In recent times, of course, every impulse-response graph shows the confidence intervals . . .

Info-source: Nobel Prize Org

Budget 2026-27 Analysis

BUDGET 2026-27 ANALYSIS

# Fiscal deficit is decreasing from 4.4% of GDP (2025-26) to 4.3% (2026-27) - a decrease of 0.1% points. This is good.

# Nominal GDP is estimated to grow/increase in 2026-27 by 10%.

The 4 Budget components are changing from 2025-26 to 2026-27 like this:

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

This is increasing by 7.2% - which is less than the GDP growth rate (10%). This is bad.

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

This is increasing by 8.8% - which is less than the GDP growth rate. This is good.

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

This is increasing by 2% - which is less than the GDP growth rate. This is good.

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

This is increasing by 22.1% - which is more than the GDP growth rate. This is good.

The low increase in Revenue Receipts is due to the recent GST tax cuts. But overall this is both a pro-growth and fiscally disciplined Budget . . .

Best Movies Of 2025

Best Movies Of 2025

1. Kantara: Chapter 1

2. Dhurandhar

3. Phule

4. 120 Bahadur

5. Haq

6. Tanvi The Great

7. F1

8. Complete Unknown

9. Avatar: Fire And Ash

10. Mission Impossible: Final Reckoning

'Dhurandhar' Movie Review

MOVIE REVIEW

How do you kill a pack of wolves? You send a tiger disguised as a wolf into the wolves' den - and kill them one by one. 'Dhurandhar' is the story of an Indian spy who infiltrates Pakistan's network of mafia gangs, intelligence agencies and terrorist groups - and gives them a dose of their own medicine.

An excellent action-thriller. A grand epic that must be seen on the big screen. A must-watch for every Indian.

Written and directed by Aditya Dhar. Starring Ranveer Singh, Sanjay Dutt, Akshaye Khanna, Arjun Rampal and R Madhavan . . .

Poverty, Job Creation, Growth, Exports & Government Policy

1. Which is the most important problem in economics? Poverty.

2. What is the solution for poverty? Job creation.

3. What leads to job creation? Economic growth.

4. What else leads to job creation? Exports.

5. What more leads to job creation? Government policy.

Now:

a) Poverty is studied by Development Economics.

b) Job creation is studied by Labour Economics.

c) Growth is studied by Macroeconomics.

d) Exports is studied by Trade Economics.

e) Government policy is studied by Public Economics.

But the most interesting thing in economics is the inter-connections among all these different economic forces/phenomena . . .

Nobel Economics Prize 2025: Creative Destruction

How does economic growth happen due to creative destruction? Must the government subsidise the R&D (research & development) of private companies? This year's (2025) Nobel Economics Prize winners Philippe Aghion and Peter Howitt answered these questions in their 1992 Econometrica paper 'A Model Of Growth Through Creative Destruction' (17k+ citations). They derived the equations for the Equilibrium Rate of Creative Destruction (ERCD) for two scenarios:

A. Free market situation (pic: top equation)

B. Social optimal solution (pic: bottom equation)

z* = ERCD = Probability of a firm making a product of better quality (0<z*<1)

('SP' in bottom equation = Social Planner)

α = Marginal cost = Units of intermediate product used to make one unit of final product (0<α<1)

β = Discount factor = Weightage people give to future consumption (0<β<1)

γ = Innovation step size = Increase in product quality (γ>1)

ψ = R&D productivity (ψ>0)

L = Total amount of labour

The two equations are different - so the free market ERCD and the social optimal ERCD are NOT the same. There are 3 differences:

1. Top equation: Numerator's first term has γ. Bottom equation: Numerator's first term has (γ−1) - which is <γ. So bottom equation's z* < top equation's z*. So social optimal ERCD < free market ERCD. Why? Consider an old firm selling a product of a certain quality and making profit P1. Then a new firm innovates and makes a product of better quality. Now this new product will completely replace the old product in the market. Thus the old firm now makes zero profit and the new firm makes profit P2 (P2>P1). So the new firm's incentive to innovate is the entire amount P2. But the gain to society is just the difference in quality between the two products - given by P2-P1 (<P2). Thus firms innovate at a faster rate than is socially optimal. That is, free market ERCD > social optimal ERCD.

2. Top equation: Denominator has an extra +β. So top equation's z* < bottom equation's z*. So free market ERCD < social optimal ERCD. Why? Because the free market ERCD is decided only by the firms trying to maximise their own profits. But society gives weightage to the future, and hence to innovation - thus increasing the social optimal ERCD. And the more this weightage, the more important is innovation - and the higher is the social optimal ERCD.

3. Bottom equation: Numerator's first term has α^[-1/(1-α)]. Since α<1, this term is >1. So bottom equation's z* > top equation's z*. So social optimal ERCD > free market ERCD. This is because monopolistic firms charge too high prices and hence under-use the intermediate products.

Thus #1 makes free market ERCD > social optimal ERCD. And #2 and #3 make free market ERCD < social optimal ERCD. The relationship is decided by the values of the parameters α, β, γ, ψ and L. If free market ERCD < social optimal ERCD, then government must subsidise R&D - in order to increase the ERCD from the free market level to the social optimal level . . .

'Phule' Movie Review

'PHULE' MOVIE REVIEW

An excellent movie about Jyotirao Phule and Savitribai Phule - the great social reformers who uplifted lower-castes and rehabilitated widows in the 1800s. They started schools for lower-caste children (especially girls) and opened shelters for widows. They ignited a revolution in Poona that spread to the whole country. Maharaja Sayaji Rao Gaekwad of Baroda rightly conferred upon Jyotirao Phule the title of 'Mahatma'. Later social reformers like Gandhiji and Ambedkar would draw inspiration from them. 'Phule' is a moving and inspiring story of courage, sacrifice and service. Written/directed by Anant Mahadevan and starring Pratik Gandhi and Patralekha Paul. Pranaam, Jyotirao and Savitribai . . .

GDP And Imports (Or Net Exports)

In 2016, two of Donald Trump's economic advisers wrote a paper titled 'Scoring the Trump Economic Plan'. They were Peter Navarro (an economics professor with a PhD from Harvard) and Wilbur Ross (a businessman). Today, Peter Navarro is Donald Trump's senior trade adviser and Wilbur Ross is America's Commerce Secretary (trade minister).

In it, they wrote:

"The growth in any nation's gross domestic product (GDP) - and therefore its ability to create jobs and generate additional income and tax revenues - is driven by four factors: consumption growth, the growth in government spending, investment growth, and net exports. When *net exports are negative*, that is, when a country runs a trade deficit by importing more than it exports, this *subtracts from growth*."

Now a country's GDP (Gross Domestic Product) is the total economic output produced *inside* that country. This output is consumed by 4 entities: households, firms, government and foreigners - so we have consumption (C), investment (I), govt spending (G) and exports (X) respectively. To get the GDP, we just add these 4 things. But these 4 components also include some things which were made *outside* the country - that is: made in other countries and imported into this country. So these things must be excluded. Hence we subtract imports (M) from these 4 components.

Thus we get the GDP equation:

Y = C + I + G + X - M

or Y = C + I + G + NX (where NX = X - M)

The second form is just for convenience - to reduce the number of terms from 5 to 4. But we are not subtracting imports just from exports - we are subtracting it from all the 4 components. Of course, arithmetically it makes no difference. But the economic meaning is important - and must be understood correctly.

Some people see the '-M' term (or the 'NX' term) and wrongly think that imports *reduce* GDP. This, as we have just seen, is definitely not the case. We subtract imports simply because:

1. They are included in C, I, G and X

2. But they are not made inside the country

So imports do not reduce GDP. And it definitely does not reduce GDP growth either. In fact, research has proved that total trade (exports + imports) increases growth. Therefore Peter Navarro and Wilbur Ross have made a very basic economics mistake . . .

Fun-facts:

# Harvard's economics department is ranked #1 in the world.

# 13 Harvard PhDs have won the Nobel Economics Prize - second only to MIT (14).

# The paper has since then been deleted from Donald Trump's official website.

India's Trade-To-GDP Ratio

The graph shows the trade-to-GDP ratio* versus the logarithm of GDP for 184 countries**. It shows a slight decreasing relationship between the two - as GDP increases, the trade-to-GDP ratio decreases slightly. India is shown by the red dot - and it is below the trendline. That is - its trade-to-GDP ratio (at 45%) is below what it should be as per this relationship (which is 70%). So there is a lot of scope (25% points) for increasing India's trade (both exports and imports) to make it on par with the world's trend relationship . . .

*[Trade = exports + imports]

**[I have left out 9 outliers whose trade-to-GDP ratio is more than 200% - these are small high-trading countries]

Data-source: World Bank

The Effect Of Trade On Growth

THE EFFECT OF TRADE ON GROWTH

Total trade (exports + imports) increases growth. Empirical research has proved this conclusively. But there is no theoretical model that shows this. This is because trade does not increase growth directly - but indirectly. And this indirect relationship between trade and growth is shown by two sets of models: growth models and trade models.

1. Growth models like Romer model and Lucas model show that technology and knowledge increase growth. And an important source of technology and knowledge is trade.

2. Trade models like Ricardo model and Heckscher-Ohlin model show that trade increases specialisation and efficiency. And specialisation and efficiency increase growth.

Thus these two sets of models indirectly show that trade increases growth . . .

Why Trade Is Good (Both Exports And Imports)

WHY TRADE IS GOOD (BOTH EXPORTS AND IMPORTS)

GDP is given by the basic equation:

Y = C + I + G + X - M

or Y = C + I + G + NX

where NX = X - M

These equations *seem* to say that GDP consists of net exports (or trade surplus) and hence:

1. Exports are good

2. Imports are bad

3. Trade surplus is good

4. Trade deficit is bad

1 is correct and 3 is partially correct. But 2 and 4 are fallacies. They are bad in themselves; what is worse is they make people miss an important economic variable: total trade (ie, exports + imports). Research has conclusively proved that total trade has a strong positive impact on economic growth.

Believing fallacies 2 and 4 leads to a zero-sum-game mindset. But trade is not a zero-sum-game. Trade (exports + imports) gives us:

a) A bigger market for our exports

b) Cheap and good-quality products

c) Specialisation and efficiency

d) Knowledge and technology

So we must avoid fallacies 2 and 4 (which are due to a wrong understanding of the GDP equation) and instead look at total trade (exports + imports):

T = X + M

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