Analysis of Economic Survey & Budget 2021
The Economic Survey 2020-2021, authored by a team led by chief economic adviser (CEA) Krishnamurthy V Subramanian, focused on the state of different sectors of the economy, the effect of the coronavirus pandemic as well as reforms that need to be taken.
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
@Mishan @Qoqo @Kapiushon may be economics optional ppl can help. so tagging!
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
Very low unemployment levels in japan coupled with labour shortage means that wage levels are stagnant, since firms cannot layoff the workers they are forced to pay minimum wages. also Japan is facing defaltion and they cannot grow without a certain level of inflation which requires disposable income or higher wages, this has formed a cycle of low wages and lower level of growth...This is what i can make from few articles online.
https://www.ft.com/content/0eaf2672-3eb9-11e7-9d56-25f963e998b2
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
Very low unemployment levels in japan coupled with labour shortage means that wage levels are stagnant, since firms cannot layoff the workers they are forced to pay minimum wages. also Japan is facing defaltion and they cannot grow without a certain level of inflation which requires disposable income or higher wages, this has formed a cycle of low wages and lower level of growth...This is what i can make from few articles online.
https://www.ft.com/content/0eaf2672-3eb9-11e7-9d56-25f963e998b2
found another good article;
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
Very low unemployment levels in japan coupled with labour shortage means that wage levels are stagnant, since firms cannot layoff the workers they are forced to pay minimum wages. also Japan is facing defaltion and they cannot grow without a certain level of inflation which requires disposable income or higher wages, this has formed a cycle of low wages and lower level of growth...This is what i can make from few articles online.
https://www.ft.com/content/0eaf2672-3eb9-11e7-9d56-25f963e998b2
found another good article;
Got the point. Thanks bro. But i still wonder, how this can also be the case in India as well! Given india's demographic dividend, supply bottlenecks ensure there is some inflation always, and also we are far from full employment case unlike japan! Also Min wages also not compulsory across all sectors, the one given is also is considerably low! India that's why is more of a stagflation kind of case.. isn't it?
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
Very low unemployment levels in japan coupled with labour shortage means that wage levels are stagnant, since firms cannot layoff the workers they are forced to pay minimum wages. also Japan is facing defaltion and they cannot grow without a certain level of inflation which requires disposable income or higher wages, this has formed a cycle of low wages and lower level of growth...This is what i can make from few articles online.
https://www.ft.com/content/0eaf2672-3eb9-11e7-9d56-25f963e998b2
found another good article;
Got the point. Thanks bro. But i still wonder, how this can also be the case in India as well! Given india's demographic dividend, supply bottlenecks ensure there is some inflation always, and also we are far from full employment case unlike japan! Also Min wages also not compulsory across all sectors, the one given is also is considerably low! India that's why is more of a stagflation kind of case.. isn't it?
agreed.. dont know the reference which the survey is alluding to... will read it once before commenting.
HotBloodPrince,
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
Low wage-growth trap is talked about in the context of growing economies.
The idea is wage-growth in a growing economy must match the growth rate. The mismatch is captured by the idea of low wage-growth trap. The economy grows, but the wages stagnate.
Case of Japan
In the post WWII era, the Japanese economy began to work upon the reconstruction. With a low base effect, the manufacturing sector boomed. The wage rise was significant till the Brettonwoods system existed.(1971)
Under Brettonwoods, since the dollar was benchmark for Yen, Yen performed great with respect to dollar and appreciated. But, the collapse of Brettonwoods was necessitated by high inflationary trends in the dollar. Once the Brettonwoods collapsed, Yen depreciated. In Japan, the businesses kept anticipating the same intensity of growth as in the Brettonwoods era- meaning high growth of wages were expected. That didn't happen as the consumption slumped.
The fruits of "good old Brettonwoods days" tempted the businesses and households to stall investment decisions in the anticipation of future growth. This further deteriorated the economy.
Long story short, now the Japanese economy is seeing negative interest rates. That means bank lending is minimal to zero. Society is ageing that creates the problem of workforce. So, it's a deadly low-wage growth trap.
Case of India
The case of India is different. When we opened up in 1991, the emphasis on service sector meant the manufacturing sector remained impoverished. The wage mismatch in India stems from the "jobless growth". Service sector has not been able to absorb much workforce and the manufacturing sector has not been able to provide wages. This double whammy has laid the foundation for low wage-growth trap in India. Real wage stagnation has long been a reality in the Indian manufacturing sector- thanks to informalisation and contractualisation of labour + other related problems.
Why is it being talked about now?
The Survey highlights the problem in the aftermath ofcorona pandemic. India faces risk of falling into a low wage-growth trap due to following reasons-
- Businesses are risk-averse now
- High-paying jobs were scarce in an already slowing economy. Now, they will be non-existent!
- Structural factors still persist- poor employability. Demographic dividend will remain a utopia.
In this situation, the government has the key to unlock the economy. The low-wage growth trap can only be prevented with a measured expansionary fiscal policy that-
- Promotes business
- Boost consumption that in turn, supports business
- Improve employability of labour
- Makes effort towards formalisation of economy.
- Crowd in private investment.
If not, businesses will hold their cards. So, would the households. Government must generate the positive sentiment that all is well and we are back and running. Japan is a good case study. I'm glad that the Survey recognises this trend and projects a double digit growth. The Budget must build upon it boldly.
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
Low wage-growth trap is talked about in the context of growing economies.
The idea is wage-growth in a growing economy must match the growth rate. The mismatch is captured by the idea of low wage-growth trap. The economy grows, but the wages stagnate.
Case of Japan
In the post WWII era, the Japanese economy began to work upon the reconstruction. With a low base effect, the manufacturing sector boomed. The wage rise was significant till the Brettonwoods system existed.(1971)
Under Brettonwoods, since the dollar was benchmark for Yen, Yen performed great with respect to dollar and appreciated. But, the collapse of Brettonwoods was necessitated by high inflationary trends in the dollar. Once the Brettonwoods collapsed, Yen depreciated. In Japan, the businesses kept anticipating the same intensity of growth as in the Brettonwoods era- meaning high growth of wages were expected. That didn't happen as the consumption slumped.
The fruits of "good old Brettonwoods days" tempted the businesses and households to stall investment decisions in the anticipation of future growth. This further deteriorated the economy.
Long story short, now the Japanese economy is seeing negative interest rates. That means bank lending is minimal to zero. Society is ageing that creates the problem of workforce. So, it's a deadly low-wage growth trap.
Case of India
The case of India is different. When we opened up in 1991, the emphasis on service sector meant the manufacturing sector remained impoverished. The wage mismatch in India stems from the "jobless growth". Service sector has not been able to absorb much workforce and the manufacturing sector has not been able to provide wages. This double whammy has laid the foundation for low wage-growth trap in India. Real wage stagnation has long been a reality in the Indian manufacturing sector- thanks to informalisation and contractualisation of labour + other related problems.
Why is it being talked about now?
The Survey highlights the problem in the aftermath ofcorona pandemic. India faces risk of falling into a low wage-growth trap due to following reasons-
- Businesses are risk-averse now
- High-paying jobs were scarce in an already slowing economy. Now, they will be non-existent!
- Structural factors still persist- poor employability. Demographic dividend will remain a utopia.
In this situation, the government has the key to unlock the economy. The low-wage growth trap can only be prevented with a measured expansionary fiscal policy that-
- Promotes business
- Boost consumption that in turn, supports business
- Improve employability of labour
- Makes effort towards formalisation of economy.
- Crowd in private investment.
If not, businesses will hold their cards. So, would the households. Government must generate the positive sentiment that all is well and we are back and running. Japan is a good case study. I'm glad that the Survey recognises this trend and projects a double digit growth. The Budget must build upon it boldly.
**superlike**
thanks a lot sir. opened my mind completely. What an explanation. too good! :)
AzadHindFauz,
^ what is this low wage - growth trap of japan and how it could take place in India? [Chapter 2, survey vol 1 pg 77]
Low wage-growth trap is talked about in the context of growing economies.
The idea is wage-growth in a growing economy must match the growth rate. The mismatch is captured by the idea of low wage-growth trap. The economy grows, but the wages stagnate.
Case of Japan
In the post WWII era, the Japanese economy began to work upon the reconstruction. With a low base effect, the manufacturing sector boomed. The wage rise was significant till the Brettonwoods system existed.(1971)
Under Brettonwoods, since the dollar was benchmark for Yen, Yen performed great with respect to dollar and appreciated. But, the collapse of Brettonwoods was necessitated by high inflationary trends in the dollar. Once the Brettonwoods collapsed, Yen depreciated. In Japan, the businesses kept anticipating the same intensity of growth as in the Brettonwoods era- meaning high growth of wages were expected. That didn't happen as the consumption slumped.
The fruits of "good old Brettonwoods days" tempted the businesses and households to stall investment decisions in the anticipation of future growth. This further deteriorated the economy.
Long story short, now the Japanese economy is seeing negative interest rates. That means bank lending is minimal to zero. Society is ageing that creates the problem of workforce. So, it's a deadly low-wage growth trap.
Case of India
The case of India is different. When we opened up in 1991, the emphasis on service sector meant the manufacturing sector remained impoverished. The wage mismatch in India stems from the "jobless growth". Service sector has not been able to absorb much workforce and the manufacturing sector has not been able to provide wages. This double whammy has laid the foundation for low wage-growth trap in India. Real wage stagnation has long been a reality in the Indian manufacturing sector- thanks to informalisation and contractualisation of labour + other related problems.
Why is it being talked about now?
The Survey highlights the problem in the aftermath ofcorona pandemic. India faces risk of falling into a low wage-growth trap due to following reasons-
- Businesses are risk-averse now
- High-paying jobs were scarce in an already slowing economy. Now, they will be non-existent!
- Structural factors still persist- poor employability. Demographic dividend will remain a utopia.
In this situation, the government has the key to unlock the economy. The low-wage growth trap can only be prevented with a measured expansionary fiscal policy that-
- Promotes business
- Boost consumption that in turn, supports business
- Improve employability of labour
- Makes effort towards formalisation of economy.
- Crowd in private investment.
If not, businesses will hold their cards. So, would the households. Government must generate the positive sentiment that all is well and we are back and running. Japan is a good case study. I'm glad that the Survey recognises this trend and projects a double digit growth. The Budget must build upon it boldly.
**superlike**
thanks a lot sir. opened my mind completely. What an explanation. too good! :)
Glad you liked it :)
Economic Survey 2021 is highly critical of the audits done by the Reserve Bank of India (RBI), saying events at Yes Bank and Lakshmi Vilas Bank (LVB) showed that the central bank did not spot "ever-greening" carried out in ways other than formal restructuring.
Ever-greening refers to the practice where a bank gives new loans to pay off an old one to help the borrower escape the non-performing assets (NPA) tag.The practice, widely prevalent, is not in line with the spirit of good corporate governance.
The fact that both these banks had to be rescued by the regulator also goes against RBI’s assumption that the private banks should have been able to raise the required capital after the clean-up
The major highlight of the budget is the proposedincrease in the capex- 35% increase compared to FY19-20.
The intent is good, but I'm skeptical about the measures taken to build upon this idea-
- Development Finance Institutionis back. Earlier, ICICI and IDBI as DFIs were failure and had to be converted into banks. Although the capital market is better than it was in the inward economy of the 70s, there is a very strong inertia in the market at the moment towards long-term financing. God knows, how will it generate finances.
- Abad bankwill be set up to ease the burden of NPAs on the banks. The idea is to improve the lending space and make funds available for infrastructure. Now, the NPAs of the bank will be transferred to the bad bank. Shift of ownership of the NPAs? Wouldn't it help to write off corporate loans without attracting public criticism? Swift move!
The growth rate of 11 percent for FY21-22 seems to be good but it is very low compared to other emerging economies. The growth rate is measured year on year based on real prices. So, the contraction of GDP in the 20-21 makes the growth rate look bigger than it actually is. Actually, considering the average growth in GDP for the 2 years 20-22, the average growth rate will come out be approx 2.5 percent which is quite low compared to other economies like China.
The stock market going up like anything maybe just a sentimental overzealous reaction. Also, I think the talk of V shaped recovery in the ES is slightly premature since the growth levels need to be maintained at higher levels for some time before concluding such a recovery pattern. Without job creation and increased income levels, it is difficult to create demand in the economy and without a sustained demand long term growth seems a far fetched idea.
Though the increased capital expenditure seems a good idea, but the implementation aspect still remains a challenge due to long delays in the projects. In this budget, the government has gone for a countercyclical policy approach which is welcome if the implementation issues are addressed as well.
Should the government had loosened the strings more and let fiscal deficit slide further in hope of demand generation by income transfer or tax reduction for a year or it did the right thing?
My question arises as I thought some major Keynesian intervention would come along with infra financing.
Could have;
-50% OF INDIA GDP is based on consumption, focus on capital expenditure based on Keynesian economics would certainly have reinvigorated the animal spirits
-Keynes held thatwhen in slowdown build roads,therefore increasing capex by 35% along with NIP is welcome move .Hence one can argue that more could have been allocated
-Adding to it reinstitution of Development bank to finance slow housing market is also a prudent move; given 60% of indian household savings are in property, vicious cycle of slowdown in housing infra and lack of household investment can be tackled.
-Along with it risk averse pvt banks and npa ridden public banks themselves are not in a position to finance at pre 2015 levels; regular and secure debt by GOI will allow an alternative source of finance.
-Economic survey argues that capex allows for forward and backward linkages which in turn has ability to generate more income(upto 4 times over revenue exp)
Downturn of increasing deficit can be;
-There is no clarity whether increasing debt would be enough to act as a leverage to kickstart subdued consumption.
-There has been increase in revenue exp in india , with 1 rupee invested roi in revenue exp is 0.98 paisa. increasing deficit in this case will merely would lead to inflation without disposable income at hands of people.
-Routes of generating such deficit is also questionable.
-Along with it financing through cess eats away the space for state investment(remember 48% of total state finance comes from centre ) which in turn affects overall growth/investment
these are the only points i can think of right now, but 15 marks ke liye yeh points kaafi hai i guess :P
chamomile,Mauraisles
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