Thread on what happened in India.
This week, Aug 1, we're talking about demand and supply constraints 🧵
This week, Aug 1, we're talking about demand and supply constraints 🧵
Developed countries right now are dealing with a lot of inflation, of course, and there is a widespread sense that fiscal stimulus and the demand side has something to do with this, along with covid-related supply disruptions
By contrast, India did not do much of fiscal stimulus. As former economic advisor K V Subramanian outlines here in this thread, India did much more targeted stimulus (ie food relief, directed transfers), and instead had some supply initiatives
Certain BJP-ruled states relaxed labor laws. There has been some push to relax these nationwide as well, thought that's been delayed.
Tight labor laws are commonly seen as a big hinderance to growth in Indian manufacturing bu.edu
freiheit.org
Tight labor laws are commonly seen as a big hinderance to growth in Indian manufacturing bu.edu
freiheit.org
Now, India's fiscal tightening does not go as far as some (like Raghuram Rajan economictimes.indiatimes.com) would suggest, but is not as loose as many others would recommend instead. What gives?
I think there are three key issues here resulting in fiscal restraint:
• Inflationary concerns (now globally salient)
• Modi in particular, a former state CM, taking a "balanced budget" intuition to federal level
• Sovereignty concerns by populist leaders
• Inflationary concerns (now globally salient)
• Modi in particular, a former state CM, taking a "balanced budget" intuition to federal level
• Sovereignty concerns by populist leaders
What do I mean by that last one? Well, look at what happened in Hungary with Orban.
There, the runup in mortgage debt denominated in foreign currency led to a boost in votes for Orban's party.
news.mit.edu
There, the runup in mortgage debt denominated in foreign currency led to a boost in votes for Orban's party.
news.mit.edu
And the Hungarian populists have been loath to take on much more federal debt either.
-> For emerging countries, avoiding too much debt helps to preserve ones own sovereignty and freedom of action.
-> For emerging countries, avoiding too much debt helps to preserve ones own sovereignty and freedom of action.
We are seeing this play out in India's neighborhood, as Sri Lanka, Pakistan, and now Bangladesh are dealing with the fallout of foreign debt, liquidity troubles, and foreign exchange issues
By contrast, India is moving to push for more trade denominated in rupees with Russia and Sri Lanka
cnbctv18.com
cnbctv18.com
The basic upshot here is that we don't live a purely neoclassical world of free trade and finance.
Every country, but especially countries like India, are facing the pressure to be a bit mercantilist with respect to debt and trade in ways that influence a lot of policy.
Every country, but especially countries like India, are facing the pressure to be a bit mercantilist with respect to debt and trade in ways that influence a lot of policy.
Specifically that means:
• A more circumspect foreign policy (not as much denunciation of Russia)
• Less reliance on demand-side stimulus, more on supply side reforms
• A bit more mercantilism on margin — industrial policy and domestic production initiatives
• A more circumspect foreign policy (not as much denunciation of Russia)
• Less reliance on demand-side stimulus, more on supply side reforms
• A bit more mercantilism on margin — industrial policy and domestic production initiatives
I want to touch on one other supply reform area — housing
India retains really tight building constraints in urban areas, choking growth
India retains really tight building constraints in urban areas, choking growth
On top of zoning, you also have issues related to rent control and weak contract enforcement
Now to address this, one set of policies enables a relaxation of these zoning rules on floor space in exchange for developer charges. This does have the downside of disincentivizing construction
There have been a few other policy initiatives in this area as well to relax zoning; but in general Indian cities remain very poorly zoning and overregulated in ways that impair optimal urban functioning.
Area ripe for more supply side reform
theprint.in
Area ripe for more supply side reform
theprint.in
Finally, to end on a more optimistic note — looks like the cheetah introduction progress is in full swing, and Kuno national park in MP might see some (African imported) cheetahs soon running around
Here's my previous thread in this series; as always feedback is welcome
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