Unemployment in India. How much?

Despite my best efforts I have not been able to find the unemployment trend in India.
The last official numbers are for 2005-06.

However, I did find some numbers on CIA factbook
According to it-
Population of India (est for 2008) is 1.16bn
Unemployment (est for 2008) is 6.8% i.e. around 7.9 mn unemployed. I think that this number is grossly understated. The unemployment number has to be in double digits.
Here is why-

More than 70% of the population lives in rural parts of India (in approximately 6,30,000 villages)

I came across an article on Indian express that puts the unemployment rate in Urban India and Rural India at 45% and 17% respectively, per the last NSS in 2005-06

Quick maths tells me that at least (17%*70%*1.16bn) + (45%*30%*1.16bn) should be unemployed. This recession has already taken a heavy toll on employment in urban India. Real unemployment has to be much more than the above no. (i.e. 294.6 mn or 25%of the total population). Whoa! I sincerely hope that there is something wrong with my calculation.

Deflation in India?

It's disinflation, not deflation, we're facing now

Last Thursday's inflation numbers -- a drop to 0.44 per cent in the wholesale prices index (WPI) -- brought more worries that cheers. That's because deflation -- a situation where prices, jobs and incomes keep falling on a sustained basis, and the economy keeps contracting -- has become a new cause for worry. Is India on the cusp of a debilitating deflation?

Certainly not, say the experts. "These fears of deflation are unfounded," Pawan Kumar Bansal, Union minister of state for finance, told a news agency.
Read more

Coming soon: Interest rate cuts

India’s Ahluwalia Says “More Room” for Interest Rate Cuts

India’s central bank has “more room” to cut interest rates further to combat economic slowdown and a global recession, according to Montek Singh Ahluwalia, deputy chairman of the nation’s Planning Commission.

Parliamentary elections scheduled for April and May complicate efforts to boost the economy because the government is banned from announcing new fiscal policies or stimulus steps until the voting is finished. Prime Minister Manmohan Singh’s government has backed the monetary stimulus by lowering taxes and increasing spending on infrastructure.

...“The new government when it comes into place probably in early June will almost certainly continue the fiscal stimulus policies we have followed,” said Ahluwalia. “We will use the opportunity, the scope that is available for monetary policies, to support these fiscal policies.”...

.... India’s politicians are one of the “major problems,” Rogers told the Wharton India Economic Forum via videolink from Singapore. The country has the “single worst bureaucracy in the world.” If a person can deal with that, “there are fortunes” to be made by investing in India, Rogers said.
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Some observtions:

1. Good to see that the RBI is looking to cut interest rates. With the inflation reaching near zero level the "Bank" does not have any choice left also. Borrowing has to become cheaper
2. On the fiscal expansion- I didn't realize that the govt is banned from implementing such expansionary fiscal policies. Thus it becomes more important to push for monetary expansion
3. Bureaucracy is bad for any economy. However, what bureaucracy does is that it acts as a friction against a fast moving machine. Higher the friction, slower will the machine run. If there is no friction then the machine will run smoothly and quickly- this can also make it be uncontrollable.

Bureaucracy without corruption is acceptible but bureacracy with corruption is devastating. I think the former is present in India.

Another growth prediction for India - 4.6%

CLSA sees India GDP growth at just 4.6%

Broking house CLSA Asia-Pacific Markets on Wednesday termed India as one of the riskiest markets to be invested in at the moment. The outfit has forecast a GDP growth of 4.6% in 2009-10, and expects the domestic economy to stabilise only by early 2010. Further, it has projected public sector deficit to rise to 14% of GDP in 2009-10, and the rupee to fall to 57 to the dollar by the end of this year.
The broking house, however, has said an Argentina-styled debt crisis was unlikely. “The bulk of Indian government debt is domestically held and Indian banks are eager buyers of government securities. However, not only is the government’s $500-billion infrastructure programme on the back burner, but the spread between private and public sector borrowing costs has widened, bad news for private investment spending,” the note said.
CLSA opines that capital outflows — both portfolio and FDI — could continue for some time. “A rapidly widening budget deficit, coupled with slowing growth, falling investment returns, a substantial current account deficit and growing global risk aversion (which is underpinning the flight to safety into the $) suggest that these trends will continue,” it said.
Source
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CLSA makes some astounding and ridiculous predictions. Here is my take on it-
CLSA has a forecast of 4.6% in 2009-10 and projects that deficit will rise to 14% of GDP. I strongly believe that a forecast of 4.6% is based on the assumption that India’s fundamentals are weak and are further weakening- something I strongly disagree with. Also, if the deficit actually rises to 14% (from current ~5%) then India would not be growing at 4.6% but somewhere around 7%. For the debt/GDP ratio to reach ~14%, India will have to make some huge investments and this is exactly what is required at the moment (although may be not as much predicted by CLSA). So the growth and deficit predictions are counterproductive

All in all- I don't agree with anything that they are saying and I am sure I am not the only one.

Why India should not listen to IMF

IMF wants India to fight slowdown by easing money supply

The International Monetary Fund today urged India to further ease money supply to fight economic slowdown while cautioning that
additional expenditure and more tax reliefs could raise public debt to unsustainable levels.

Commending the steps taken by the Reserve Bank to ease money policy by reducing key policy rates and ratios, the IMF in its annual review of the Indian economy said, "(there is) scope for further monetary easing, in light of projected decline in inflationary pressures and the need to reinforce confidence and sustain bank credit."

Read more

I respect IMF and its opinions. I also understand that IMF's advice will always be biased towards monetary and not fiscal policies. However, I don't think that at this stage India needs to be worried about debt levels. It is a time to invest and ensure that the economy is moving.

A high debt/GDP ratio is never good. However, instead of reducing the numerator (debt) you can also focus on increasing the denominator (GDP).
This is a very uncertain time for the economy. Every govt should adopt a mix of fiscal and monetary policies to tackle the situation.

So...don't listen to IMF- Spend and invest(at least not now)

Perception is reality

The role of expectations is very very important in economics. Expectations plays a key role in driving demand. Expectations are driven by perceptions and perceptions are driven largely by the announcements that you hear. Quite often these announcements are made by leading organizations, economists, or even political leaders.
In short- What these leaders or organizations say actually does play a key role in how the market moves.

Here is an experiment to explain this-
Consider a room with 100 people and assume that they stay there for the next few weeks.
Scenario A
Now, before letting them go tell them that the economy is in a bad shape and soon there will be a financial crisis. What would you expect from these people when they go out in the real world?
I expect them to be bearish about future and share they concern with other people, who in turn will pass on this bad/sad mood to others.
Scenario B
Before letting them go tell them that the economy is growing. Everyone is happy and bullish about future. Go enjoy life.
I would expect them to go out happy spread this happy feeling to others.
Points I am trying to make are the following:
1. If political leaders and economists show optimism/pessimism in their speeches/announcements then this will influence the rate of change (positive or negative)
2. The perceptions are taken to be reality by not some but many individuals. Not every individual will keep a check on how interest rates/inflation/GDP is moving. They will get influenced a lot by what they are hearing

A headline that caught my attention

Buy a house to save more tax
Investment in a house could be the best way to save tax. As prices of residential units have gone up in the range of Rs 50 lakh and over, tax experts say buying a second house for investment purpose will save even more tax than that over the first house you bought for personal use.

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Thank god it was an advice from a tax expert and not from an economist!!


Demand driven by investment needs has different characteristics than the one driven by consumption needs. The demand curve is upward sloping in the former case.

In an investment scenario a vicious cycle starts- Everyone starts demanding goods for investment purposes thinking (hoping) that there will be someone out there who would be willing to buy this good at a higher price. This is also known as greater fools theory.

This is a zero sum game. Somebody has to loose and somebody has to win. Investment returns are dependent on uncertainity on future. Clearly, if everyone knew how prices would change in the future then everybody would become a bear or a bull and their would be no one on the other side.

However, these are VERY uncertain times. As an individual living in such times, I will definitely not be buying any houses in near future!