Predictions: 2023
—RSJ
As promised last week, let’s get going with some predictions for 2023. Pranay likes to keep them very specific (for a good reason), while I get away with broad bets.
Global Economy
The problem with predicting anything on how things will unfold globally is the random big event that upends all forecasts. This has happened in the last three years. The impact of the pandemic waves and the Ukraine war is yet to play out fully. By themselves, it makes for difficult terrain for forecasts. I’m hoping we don’t have another such event during the year.
#1 The trend of securing your supply chain for critical products will get stronger.
Look, it is difficult to disentangle from the globally integrated supply chains that have been a feature of the economic model since the end of the Cold War. But it is clear to most large economies that on issues that concern national security, it will be foolhardy to not plan for worst-case scenarios any longer. And national security could mean anything, really, but I can see on energy and key technology, nations will opt for more secure supply chains with watertight bilateral partnerships than be at the mercy of distributed, multilateral chains. I won’t go as far as calling it ‘de-globalisation’ yet, but this ‘gated globalisation’ is a trend that’s here to stay. What this will mean in concrete terms is there will be a gathering of pace on bilateral treaties among larger economies on these issues that reduces dependence on China or Russia. For India, there are a couple of issues here. How to continue to balance the purchase of oil from Russia for its energy security without inviting sanctions from the west? It has managed this well in the last year. The other issue is to find alternatives to Russian hardware for its defence machinery without rubbing it the wrong way. We have batted for free trades on these pages for a long time. So, it is concerning to see this retreat, but history has shown over time, geopolitics trumps geoeconomics.
#2 The fears of elevated inflation and a recession in the US in 2023 are overblown. The recession is due, but it will come a bit later
I have made the point here earlier too. The Fed has gone overboard on inflation targeting with more rate cuts than necessary and not waiting for their impact to come through. The moderation of inflation in the past few months (though at 3.6 per cent, it is still higher than the target) suggests that the Fed has been partly successful and it should continue to remain hawkish. I am not so sure. It takes time for rate hikes to start impacting demand, and my suspicion is that the current moderation in inflation was due in any case. The impact on rate hikes on subduing demand and growth is yet to play out. My view is that as supply chain issues ease up with China opening up, energy demand going up and the US continuing to be at almost full employment, we might have a 2023 where for the most part, the US inflation will be higher than target, Fed will continue to remain hawkish, and the growth will hold up. This will mean the real risk of recession will be more toward the end of the year than now.
#3 Big Tech will continue to be under the cosh
Three problems look to exacerbate in the tech space in 2023. First, the valuation of ad-driven economic models and the insane optimism about the distributed ledger, crypto, DAO or independent sovereigns (yeah, remember that) will abate. A lot of value has been destroyed in the last year (esp in public markets), and I still think there’s more to go in the private market valuations. This correction will weigh on markets, fund raises and investments into startups. Second, global markets will shrink for Big Tech as more countries will place restrictions on how deep they will allow them to own commerce or payment infrastructure. I half expect India to gradually move all payment and eCommerce arms of Big Tech into a structure that’s domestically controlled and owned in 2023. Third, FTC, with Hina Khan at the helm, will accelerate antitrust and competition law changes to reduce the dominance of Big Tech. Some of these measures will be significant overreach in my opinion, but I see more executive orders in this space. Conversely, I see significant hype building up on AI platforms during the year. Like every hype cycle we will have people going overboard on AI, but I think this is one trend where in the classic sense, we might be overestimating the impact in the near term and underestimating it in the long term. AI will eventually get us a driverless car, but it will get to the mediocre creator economy faster. The jobs under immediate threat aren’t that of cab drivers and factory workers. The average copywriter, reporter and illustrator are in greater peril. It will be interesting to see how these groups who have a greater share of voice in the media will tackle the threat of AI in 2023.
Indian Economy
#1 Greater optimism
I am a bit more optimistic about the broader numbers than most, and I will explain why. I think GDP growth will come in around 6.5 per cent for FY24, and inflation will be around 5 per cent. We might see a couple of rate hikes in the next few months, taking the repo rate to 6.75 per cent, but that will be it. I see even a small possibility of a rate hike cut in the later part of the year to spur growth with an eye on Lok Sabha elections in May ‘24. We have corporate balance sheets that are strong, banks across the board are well provided for, and inflation hasn’t gone out of control. I see domestic consumption to remain strong and exports, in the light of the shift away from China, to be good for manufacturers, and how much ever I might struggle to get behind the PLI scheme, it will yield some short-term benefits. IT exports might be a dampener, but on balance, I see more upside to these predictions. Of course, the risks are another global one-off event, oil prices going up and restrictions on accessing Russian oil and a bad monsoon. But those aside, I foresee India standing out as an outperformer thanks in no part to many cards falling into place for it often without its own efforts. But then why look the gift horse in the mouth?
#2 Digitalisation: Wave 2
There will be a significant push on digitalisation in lending and eCommerce. The UPI infrastructure has revolutionised payments and, along with GST, has accelerated the formalisation of the economy. The benefits of these have so far been more skewed towards the government in terms of tax collections. I think we will see a focused push for the next round of benefits with platforms like OCEN (lending) and ONDC (eCommerce). The data that’s available because of the digital rails, the account aggregator framework that’s live now with banks and the groundwork done in getting small suppliers onboard on ONDC - these prerequisites are now available for the next order benefits of digitalisation for customers. Also, as I mentioned in an earlier point, doing this will also mean shifting the balance of power from Big Tech-owned entities to an open platform or domestically controlled entities. I sense a strong push in this direction in 2023.
#3 The expected capex cycle push from the government will not come.
There are a couple of reasons for it. First, this government has always been careful about fiscal deficit, and it is particular about the risk of the fiscal space. The government has committed to a 4.5 per cent target for the union government deficit in the next 3 years from the current levels, that’s expected to be 6.4 per cent. I see a tightening in the fiscal stance during the year with a gradual reduction in some of the pandemic-related subsidies and better targeting of the benefits improving distribution efficiency. The other reason for a muted capex spend is the likely belief that the private sector credit capex cycle seems to be picking up. These are early days for it, but the data for the past two quarters shows an uptick in corporate credit pickup and an increase in interest costs in the balance sheet. The benefits of the corporate tax cut in 2019 are now seen in strong corporate profits in FY23 for most sectors. That, plus the belief that the rate cycle has almost peaked, could mean the private capex cycle could strengthen during the year. I expect the MSME sector to gain from strength to strength on the back of China+1, PLI-like schemes and easier access to credit because banks are in better shape. MSME is the story of the next decade.
India Political and Social
#1 More of the same
The expected consolidation of opposition forces to counter the BJP isn’t going to happen early enough for it to mount a credible challenge in 2024. There are eight state elections in 2023, and I suspect BJP will see reverses or very close fights in a couple of them where it is the incumbent (MP and Karnataka). But LS elections aren’t any longer an agglomeration of many smaller elections like they used to be pre-2014. So, I don’t see an upheaval in national politics in 2023 that will make a meaningful dent in 2024. This is a pity because we have reached a stage of single-party dominance of polity and media, which isn’t healthy for democracy in the medium term. But it is hard to see opposition consolidation or a credible case that they can make to counter the electoral juggernaut of the BJP at this time. Congress, the other national party, isn’t capable of moving the masses either with its agenda or its leadership. The vacuum in national politics looks set to stay.
#2 More Exit, Less Voice
I have made the point in the past about social fault lines tripping us up while we magically have a growth window that’s opened up for us again. This holds true. The space for opposition or dissent has shrunk; more importantly, even the fight for protecting or broadening that space has gone out. As Hirshman (in Exit, Voice and Loyalty) asked in the context of the relationship between the state and its citizens: the citizen has the choice to either voice their disapproval when dissatisfied or exit from the state. The state would be dependent on citizens if they value their loyalty and would then pursue a policy that listens to their voice. However, if the state doesn’t value it and the citizens know their voice won’t matter, the only option is to exit. For certain sections of our citizenry, we are possibly at this stage of engagement with the state. This scenario might not hurt the majority today, but we would do well to remember it has never been a good idea for the state to not value the loyalty of its citizenry in the long run.
An Excerpt from Missing in Action: Why Should You Care About Public Policy
— A chapter from our upcoming book that releases on 23rd January
Chapter 11: When the State Owns What’s Yours
A typical scene in those old Bollywood films with a rural setting was that of the zamindar standing with his ‘not-so- smart’ (naalayak) offspring on the terrace of their haveli and telling him:
Yahan se jahaan tak tumhari nazar jaati hai, woh saari zameen hamari hai!
[All the land that you can see from here belongs to us.]
In reality, the only zamindar who can make such a claim in modern India is the Indian State.
A fundamental concept underlying economic reasoning and public policy is the property rights system. To an Indian, the phrase ‘right to property’ conjures up the image of a rapacious zamindar exploiting peasants. This narrative has fostered a zero-sum perception—owning property is assumed to have occurred in the context of the violation of someone else’s human rights. This perception has, in turn, meant that the enforcement of property rights has always been weak in India. Once a fundamental right, the right to property under the Indian Constitution was deprecated to a constitutional right by the 44th amendment. Now the State can go about violating an individual’s right over their property, as long as it can couch this takeover is being done under vaguely defined ‘public interest’.
Why Is a Functional Property Rights System Necessary?
A property right is an exclusive authority to determine how a resource is used. This applies not just to land but to any physical or intellectual property such as your phone, your water bottle, or your innovation. Such a right can be held by a person, a group of persons, or the State.
When this exclusive authority over someone’s resources is protected—by the State or society—the owners can be confident of deploying and improving the quality of their owned resource instead of spending their energy in feverishly protecting the resource from being stolen by another entity. Moreover, giving an exclusive authority to someone to enjoy the use of a resource changes the nature of competition itself, bringing it into the realm of social acceptability. For example, without property rights, entities might compete over a common resource by resorting to means such as intimidation, denial, and distancing. But once it is demonstrated that the authority over a resource will be protected, competition shifts to owners improving their offering to win more buyers. Finally, a strong property rights system also enables the exchange and sharing of resources, as resource owners can be confident that their ultimate ownership is secure.
Now this sounds quite theoretical and straight out of an economic reasoning textbook, which this book is not. So, to understand how pivotal the concept of a well-functioning property rights system is, we turn to an Indian story of violation of these rights. By understanding what happens when property rights are denied, we might better appreciate their importance.
Daastaan-e-Sandalwood
The story of sandalwood production in India is as intriguing as it is frustrating. The wood is used for its timber. The oil extracted from its roots is used in perfumes, incense, soaps, and medicines. In India, sandalwood has a special religious significance as well.
As hopeful consumers, many of you would have heard about the astronomical costs of this wood. Many of you would have also heard about brigands such as Veerappan who gained Robinhood status by smuggling sandalwood. Some of you might have been duped into buying ordinary scented wood being passed off as sandalwood. But few of us realize that the strand that connects these stories is misguided State action.
Generally, the price of a commodity is indicative of its natural scarcity, but that’s not the case here. Nearly 90 per cent of the world’s sandalwood resources are available in the three Indian states of Karnataka, Tamil Nadu, and Kerala. And yet, the production of sandalwood in India has declined sharply. In 1965–70, annual production stood at 4000 tonnes. By 1999–2000, it had decreased by half. And by 2019, it had become just 200 tonnes. Other countries supplied a total of 400 tonnes in the same year, while the total global demand is estimated to be nearly 6000 tonnes a year. This massive demand–supply gap has made sandalwood so costly that it is often referred to as ‘red gold’.
The drastic fall in sandalwood supply from India can be explained by a long history of denial of property rights. In fact, State interference in growing, producing, and selling sandalwood has a history of nearly 230 years in India. Here’s how the story goes.
Sandalwood was in huge demand even during colonial times, especially in China. The East India Company— never one to miss a trading opportunity—aimed to exploit the resources in southern India and export them to China. The problem was that much of the sandalwood-growing area fell under the kingdom of Mysore, led by Tipu Sultan. Recognizing the commercial value of this resource, Tipu Sultan forbade his subjects from trading in the wood with the Britishers in 1786. To take this idea further, he decreed sandal as a ‘royal tree’, monopolizing sandalwood trade in 1792. Thus began, out of good intentions, the story of sandalwood’s decline.
Eventually, this sandalwood trade blockade became one of the primary causes of the Anglo-Mysore Wars. Once the Britishers took control, they were only happy to continue the sandalwood trade monopoly. The conception of sandalwood as a source of government revenue strengthened. Fast forward to Independence and we see that such was the lure of the scented wood that subsequent Indian governments followed the same policy of denying property rights to sandalwood growers. Even when the tree was located on private land, it belonged to the state government, and the owner of the land was required to make a declaration of the number of trees on his land. The forest officer could enter any private land and cut the trees and the range forest officer was supposed to give 75 per cent of the value as decided by the officer. Landholders were to be held responsible for damage or theft of any tree even though they had no exclusive authority over it. Violators could be imprisoned and fined. Further, in Karnataka and Tamil Nadu, it was necessary to get a licence to store, sell, and process sandalwood. Possession of sandalwood in excess of twenty kilograms was made an offence.
Unsurprisingly, the complete disregard for property rights meant that no one was interested in growing sandalwood on their land. It became a liability to be gotten rid of rather than an asset to be invested in. After all, who would want to be accountable for a resource whose fruits of labour they cannot enjoy?
The result was a steep fall in production. But the story didn’t end there. Given that the demand for wood was still high, a thriving black market emerged. With supply from cultivators choked off by government policy, smuggling the wood growing in government-controlled forests became a lucrative opportunity. Such were the profits to be made that the government could not protect sandalwood smuggling from these forests. When governments created armies of forest guards and personnel to ‘protect’ the forests, many forest staff colluded with smugglers, further causing the depletion of the resource. Eventually, this smuggling business paved the way for the likes of Veerappan, who moved away from the riskier ‘business’ of killing elephants to the far-more profitable sandalwood smuggling.
After decades of this failed policy of denying property rights, governments recognized their mistake in 2001, when the Karnataka government allowed private players to grow and own sandalwood. Tamil Nadu followed suit in 2002. But this recognition of exclusive authority remains incomplete. The government continued to monopolize demand, which meant that farmers could only sell the sandalwood back to the government. Realizing that this was still a major stumbling block, the Karnataka government further liberalized sandalwood policy in 2009. Now, the growers could sell their wood directly to semi-government corporations such as Karnataka State Handicrafts Development Corporation (KSHDC) and Karnataka Soaps and Detergents Limited (KSDL). Apparently, KSDL offers a non-negotiable sum of Rs 3500 per kg of sandalwood. The company then turns around and sells the product for nearly Rs 16,000. Even today, farmers are not free to sell to other private players or export their produce.
Meanwhile, Australia, which had its own native sandalwood, shifted to the Indian variant in 1998, introduced genetically engineered high-yield varieties, and beat India at its own game. So much so that India now imports Australian sandalwood for the sandalwood oil industry!
The Takeaway
The sad sandalwood story illustrates that denial of property rights took away a shot at prosperity for thousands of ordinary farmers. One of the key components of liberty is economic freedom. Denial of this core freedom to individuals by the State or the society is a cruel act that perpetuates poverty. The State shouldn’t be let off easily when it abridges this basic right.
The hope is that learning from the mistakes of previous generations, many states in India have now adopted liberal policies for sandalwood production. This shouldn’t be seen as isolated policy reform. The principle that needs to be internalized is that the State should focus on the protection of property rights of individuals instead of usurping them.
India Policy Watch: The Old Debate about Colonial Rule in India
Insights on current policy issues in India
— Pranay Kotasthane
Earlier in the month, I chanced upon this Al Jazeera article, in which two historians have a new data point to illustrate the damage inflicted by British colonial rule on India. They find that “Britain’s exploitative policies were associated with approximately 100 million excess deaths during the 1881-1920 period.”
Claims of this nature keep surfacing fairly regularly in our public discourse. In recent times, a reason has been the recurring debate in current-day Britain over the legacy of the British Empire. Even as that country is a much smaller power today and one that continues to be outpaced by other competitors, there is understandably a tendency to indulge in colonial nostalgia. From a realist perspective, the colonial period was indeed Britain’s moment of glory.
In response to this colonial nostalgia, Marxist scholars keep reminding us of numbers and narratives to explain how British rule was ruthless, inhuman, and detrimental to India.
Another reason the debate finds a fresh lease of life is that Indian nationalists of various hues resurface the sone ki chidiya narrative — that India was rich and wealthy before the Britishers came here; it was only the British rule that impoverished us. Some even talk about reparations as a way to address—even if to a small extent—the problematic legacy of colonialism. Shashi Tharoor’s 2017 book Inglorious Empire: What the British Did to India falls under this category. I, too, have caught myself resorting to this trope in casual conversations — the causal chain of reasoning for many of India’s problems intuitively ends up with British Rule.
We now know that these extreme claims are not all accurate. For instance, consider the economic deprivation argument. The oft-repeated claim is that India made up a quarter of the world’s GDP before the Britishers set foot here, and by the time they left, India made up just 4 per cent of the world GDP, a sure sign of loot, plunder, and deliberate deprivation. But now we know better. India’s GDP per capita in 1500 was still $500 (in constant 1900 dollars), far below that of contemporary powers such as China ($600) and Europe ($800). In the pre-industrialised world, GDP was a simple function of the population, as there were minor differences in productivity. We comprised 25 per cent of the world GDP only because India was one political populous unit, not because we were rich. The industrial revolution brought in a step-jump in productivity in Europe, and the divergence in incomes became a giant gap by the 1900s. While it might well be true that some part of the divergence resulted from British policies in India, the contribution of the intellectual, industrial, and social revolutions in Western Europe played a much bigger part in accelerating growth there. Moreover, we also know that the period between 1870 and 1913 saw the fastest growth in pre-independence India.
On the other hand, economic historians such as Tirthankar Roy have repeatedly highlighted that the economic consequences of colonial rule are, at best mixed. His two books on the Economic History of India, covering the periods 1707-1857 and 1857-1947, authoritatively demonstrate three points. One, the Britishers could sweep across the subcontinent because many sections of Indians found them to be the best among all available alternatives. Two, British rule did bring in some benefits as well. Regardless of intentions, policies such as a consolidated tax system and Railways did have positive consequences. And three, it is difficult to estimate if famines and loot were substantially higher in the British era than in the past because comparable data for the latter simply doesn’t exist.
From a consequentialist lens, none of these counterarguments should surprise us. As we know, even the worst of social experiments do have some positives, and even the most well-intentioned policies also make some people worse off. Just like COVID-19 also had some small unexpected positive changes, British rule too had some positive outcomes.
Despite these counter-arguments, the simpler stories that suggest “British plunder doomed India” are likely to stay dominant. That’s because historical accuracy is not the most important consideration while discussing colonialism. Modern Indian nationalism grew out of the shared anti-colonial experience, and putting the blame on the “conniving” Britishers was important for forging unity amongst Indians. So, this narrative is really about nation-building rather than deepening our historical understanding.
In today’s times, the argument for reparations seems anachronistic. India is a bigger (definitely not richer) economy than the UK today. The UK PM himself is of Indian origin. The future prospects of India are far brighter than that of the UK. Given how far India has already come, these reparations arguments do not make any sense beyond an ointment for our emotional wounds.
In fact, doubling down on this colonial loot argument can be counter-productive. India needs the West’s help to increase its own national power vis-a-vis China. Just as China benefited from movements of goods, services, labour and capital from the West, we need them too. The more we keep harking back to emotional arguments against colonialism, the more difficult it becomes to adjust to the reality that the West remains indispensable for India.
People's intentions in the past matter very little for future policymaking.
HomeWork
Reading and listening recommendations on public policy matters
[Article] This Mint article captures the main fallacy behind the sone ki chidiya narrative.
[Article] A good summary of Tirthankar Roy’s two books on the economic history of India.
#196 Roving Bandits