One from the Road April 2023

Dispatch from North East India and What do economic models are not capturing

Let me start with introducing one of my engineering batchmates and now a learned friend called Prem. Prem stays in Japan, he is a well read and well-travelled Guy, whom I love to engage in conversations. Reason? Conversations with people like him makes one realise the hole, the gaps in our knowledge and understanding of things. There have been instances, when i got into a debate with him i ended going back learning or searching for new things. This has happened with subjects like literature (my weak area) or somethings deeper like interpretation of characters in a fiction and for that matter even Economics.

During a discussion on how Indian economy has been fairing. He once quoted example of Bangladesh and how being a smaller country, is doing better than India. Per capita income being higher and growing faster than India.

This was in August 2021, having come out of a hard lockdown and landing into a deadlier second wave I had nothing to add except, “we are far larger and diverse than Bangladesh and have our own challenges” but purely on Numbers, he had a point and I was pointless.

Fast forward to Q1 CY2023, during another engaging conversation, this time with my Boss on India vs rest of the world especially western world. We started discussion demise of dollar, decline of western supremacy and their flawed economic models.

The discussion started with a simple question. Let me pose that question to you.

Between a person with INR 50crore of net worth but earns 20,000 a month vs a person with INR 1 crore of Debt and INR 1,00,000 a month of salary, who is richer?

It will be safe to assume the answer to be first person. Now, let’s apply this logic to a Nation. I also posed this question to my CIO. Being another learned person whom I look upto, he had a beautiful explanation from the point of view of Stocks and Flows and tendency of western models to look at flows and give them more weightage.

With that context let’s come back to our neighborhood i.e Bangladesh. They were recently in crisis as they reached out to IMF for $4.5 billion of loan, which IMF agreed on its usual conditions of reforms in return

Now here’s a country supposedly doing better than India just 20 months back asking for loan struggling for growth. How things changed in these 20 months? https://www.thehindu.com/news/international/imf-agrees-45-billion-loan-for-bangladesh-to-combat-economic-crisis/article66117110.ece

Well the per capita income and GDP growth rate are both flow concept and they capture the stocks a country aggregated over years. Thus a lower base (stock) will show higher growth (flow).

Let’s look at it in another way.

(from the time line of Ritesh Jain Cofounder Pine Macro)

A 10% rise in Gold prices can change the wealth of India substantially, a rough estimate is that Indians hold 25000-27000 tons of Gold and this doesn’t include the Gold held by reserve bank of India

https://timesofindia.indiatimes.com/blogs/spreading-light/indian-family-gold-holdings-boon-or-bane/.

I shared my learnings with Prem, my learned friend & engineering batchmate and this aspect wasn’t lost on him. He agreed with the inefficiencies these economic models and the fact that they are force fit. The debate finally settled that it’s the models which are flawed.

While the thoughts shared above spread over last 20 months and kept evolving as I read and travel. New information and findings ensure i revisit and update my understandings considering new facts and change my opinion.

Considering above understandings let me share an interesting learning from my recent trip to North-East of India Assam, Meghalaya and Manipur. We spent one night at Sora or famously known as Cherrapunji. There I saw that the geography (Which has a huge influence on the fate of a country, having written in two OFTRs https://www.dhirubhai.net/pulse/1-from-road-october-2022-v1-pramod-divedi/?trackingId=1IvofiP0TvGe6SfdCBw%2BUQ%3D%3D & https://www.dhirubhai.net/pulse/one-from-road-oct-2022-v2-pramod-dwivedi-cipm/?trackingId=1IvofiP0TvGe6SfdCBw%2BUQ%3D%3D)

Cherrapunji is interestingly a plateau which stands straight rather than rising or having slopes on southern side (like a table top). Famed for its rains. It gets rains from moisture laden air from Bay of Bengal branch of monsoon. These winds move north passing through the mushy plains of Bangladesh, lined with mighty rivers like Padma (Ganga), Jamuna (Brahmputra) & Meghna. They pick more moisture on the way and finally hit these ramrod straight hills of Meghalaya (picture above). Emptying itself thus the name Meghalaya (land of clouds), blessing this land with interesting places like Cherrapunji, the wettest place on earth and Dawki?the cleanest river.

During a family dinner on my last leg of this trip I met a senior Manipur govt official in Imphal. I put the discussion to best use trying to understand issues and situation of neighboring countries like Myanmar and Bangladesh. I was in a passing reference informed that there are no stones in Bangladesh. I was shocked and surprised to know this and a quick google search confirmed this. See for yourself https://www.outlookindia.com/magazine/story/no-stones-in-bangladesh/235239 I know your reaction as I reacted the same way. Now imagine! How do they make roads or houses as stones are basic building blocks. No surprise that stones business from India was worth INR 600 crores in 2019. https://economictimes.indiatimes.com/news/economy/foreign-trade/annual-rs-600-crore-worth-indo-bangladesh-stone-boulder-trade-facing-deadlock/articleshow/69097949.cms?from=mdr

Lets go back to the same question, Does the existing economic models account for these wealth or absence of it ?

As shared in the OFTRs on trade, geography and leadership. The Bangladesh leadership has used the best asset it has, Cheap labor while setting up massive textile infrastructure. While this should be celebrated and learnt from. The moot point is the econometric models can’t account for such a wealth or absence of it or even the measure of leadership which can leverage this wealth or even destroy it.

I though must submit, rather repeat that the models are not wrong, it’s just they hide more than they reveal. Thus, unreliable to a large extent. Thus, these numbers should never be used in isolation to come to a conclusion rather be seen in context always.