Factor shares in India’s National Income

The business cycle properties of data in the US says that consumption is much less volatile than the GDP. This suggests that households do engage into consumption smoothing and hence looking at consumption distribution is not a good gauge for what is happening to income distribution. A similar argument can also be made for India and hence the debate on effects of liberalization policies would do better if based on income distribution than just on consumption distribution. C.P. Chandrashekhar and Jayati Ghosh make this point quite well in their recent column in The Hindu Business Line.

According to their analysis the share of wages and salaries in the national income of India has shown a decline since 1991. This decline is evident both as a share of total NDP as well as of Organized sector NDP. It was roughly around 70% for a decade preceding the economic reforms and has declined since to 50% in the year 2009. This might seem surprising given that in the US (and probably most of the developed world ) the share of compensation of employees in national income has remained between 60-70% for last 50 years or so.

The authors suggest this as an evidence for rising income inequality after the economic reforms and I don’t necessarily disagree with that interpretation.This issue is certainly important to look into and might suggests a role for policy intervention.

However, the contrast with the US suggests that there might be some other factors at play causing the shares to settle at different values in both these countries. One reason for this contrast is that the factor shares could reflect the relative factor scarcity. Capital being relatively scarce in developing countries compared to the developed ones, higher overall returns for it might be expected. The other reason might be the declining importance and presence of unions in the Indian organized sector after reforms than before. If one admits that most of the growth of the organized sector has been because of the rising service sector, then this does makes sense. In addition, the continuing rigidity of labor laws might also mean a lower opportunity cost for ones time further reducing the bargaining power of the workers.

Overall, these empirical regularities and differences in factor shares across countries are definitely worth investigating more.

Update- January 24, 2014: The recent issue of QJE has a paper on this issue. Looks like declining labor share is not just an Indian phenomenon. The authors surmise that the relative decline in price of investment goods explains this trend. You can read it here.

Relative Factor Abundance and Food!

Everytime I stand in a line to get my favorite wrap or sandwich I wonder how these food items became my favorite. A couple of years back when I was fresh of the boat, I was taken aback by what I then thought as a sheer lack of developed food culture. I thought all that they do is harvest and stuff it in a bread or wrap it in a tortilla (courtsey the Mexcians!) and put on a great smile while selling it you as food!

Coming from a land which boasts of thousands of years of evolved and complex food culture, it was almost impossible to resist passing a value judgement on the food in US. But it turns out that I was saved by economics again from turing into a ‘desi snob’ when it came to food.

In my class the other day, I was teaching the importance of technology and relative factor abundance in determining how people in different parts of the world do the same things differently. While doing so I realized that I somehow completely missed this point when it came to thinking about food. Now that I get that it seems obvious that producing food is just another economic activity and hence follows the rules of economics.

India being labor abundant than US has a much more labor intensive food culture. Hence food in India is almost always freshly prepared and involves relatively elaborate and complex recipies even when it comes to everyday food. Stocking up the freezers with frozen dinners is completely alien to Indians, even for them who can afford to do so. Reason is simple- labor is cheap, so why eat stale!

In US labor is costly. So no elaborate recipies- just plain simple toss and stuff or just microwave for 10 min. Sure, there must be some complex food recipes that probably see light of the day only on occassions.   Otherwise everything is convinient and clean. It is not that Americans cannot develop a complex food culture and Indians can, but the way food is percieved and processed is just an optimal response to relative factor costs.

In an earlier piece on this blog we already saw why most of the western food is bland . Now we also know why it is so simple. So lets top it off by a new law of food economics- Cheaper the labor relative to capital (closer it is to the spice lands), more elaborate and complex (spicier) is the food culture. Ceteris paribus of course!

Walmart in India-Some more thoughts

I need to qualify my conclusions in the earlier post. There is a possibility that Walmart may not be just another supermarket, where India’s new rich shop,but will also be a recourse of cheap shopping for the lower income groups who currently shop at the smaller grocery stores.

Why do I change my stance? The answer lies in the shopping behavior of an average middle class family in India. The reason they shop in the small grocery stores (kirana dukan as called in Maharashtra) is not only because it is cheap but also because most of these stores provide a credit line to their customers. You shop for a month and clear your dues at the end of the month. At least that’s how the kirana stores do business in most of the parts of my home state.

So it seems if Walmart is able to provide customers a credit line in some form or other, then it could potentially win over the customers who shop at kirana stores. There is still one problem though. Because of proximity to the customers and a personal relationship, it is easier for the kirana store to verify and monitor the credit standing of their customers. Therefore, a kirana store is able to provide credit to a customer who otherwise may find himself without any access to formal credit markets because of his income level. Walmart will have to rely on formal credit markets and still find a way to compete with the kirana stores in offering credit.

Thus, the key issue is whether Walmart will be ready to assume the credit risk to entice the common Indian consumer and change the retail market in India as it did in North America or be happy with a large market share in a still niche market. This indeed will be one of the key determinants of its success in India apart from the supply chain issues.

PS: So now you know why the supermarket on Sinhagad road in Pune closed down. It did not study its customers well. They were not only price sensitive but also credit constrained. Hence, reduction in price or other bundling strategies only worked to a certain extent. The business still remained with the kirana stores.

Walmart in India

Last time I checked Walmart is still going good on its India plans! So the question becomes imprtant. Will Walmart kill all the small retailers as it did in the North America? If you ask me I dont think so. People thought the same thing when retail chains like Sam’s or Food Bazaar cropped up all over India. They said now thats the end of small retailers, at least in urban India. But it turns out thats not the case.
For example, Sam’s Food or the ealrier Food World opened on a road populated by middle and lower middle income groups in Pune. Its venture lasted about an year and then it had to vaccate the premises. On some other road with better income households, all the old retailers are still in business along with Sam’s food.
One might argue that Walmart’s model is different than the exisiting supermarket chains. Its about lower price every day and squeezing costs. However, was it not the case even with McDonalds? Did all the Vada-pav and other small time food vendors go out of the market? Definitely not.
Infact what happened was more interesting. McDonalds, which essentially caters to middle and lower income households in North America, is a fun place to be in for families, kids to collegians in India. When it opened shop in Pune, people dressed up and stood in a line to get a bite of Indianised burgers and other food stuff!
So if Walmart opens shop in India who will go there? Ofcourse people who currently shop in Supermarkets and no small retailer will go out of business.
I agree this is arguement by analogy and hence may or may not hold. However, it seems to be the most likely thing to happen, unless Walmarts revolutionizes the the whole supplty chain. For example if it decides to directly contract with farmers for vegetables and supplying food grains it might be able to lower the prices. But to the extent that families do not care about a few pebbles in the bag of rice from the retailer below the apartment building, Walmart still faces a huge challenge. The prices of Walmart will have to be sufficiently lower to lure the customers who do not value mild variations in quality or are price sensitive.
And then there is this whole issue of how people shop in different societies. Buying behavior in North America is completely different than in India. Will this have any bearing on Walmart’s business prospects?
Well some more thoughts on this later! In the meanwhile if you think of some thing feel free to comment.

Relative Price of Travel

If I tell someone in Pune that you would require to pay 30% more for a bus ride to Mumbai than driving his or her own car on the beautiful expressway, I will be written off as a jerk! And here I am, doing exactly the same thing when I ride the Bonanza Lines to NY City from Storrs.

Let me back up with some figures. NY City is around 145 miles from Storrs. On an average I would have to pay $60 for a round trip ticket on a bus. Whereas if I drive a car with 30 mpg yield I require 10 gallons of gas costing around $30. Add a toll of $5 and the total comes to $35. If the mileage drops then the cost will go up. However, I am assuming that by now we are sane enough to realize that the Japanese are better at making cars! So there it is. I actually pay more than 30% for a bus ride than a ride in a car. In India, a bus ride will cost me less than half of what it would cost to drive a car for the given distance.

This is one of the many conundrums that intrigue me when I compare things back home with that in US. So the million dollar question is how de we reason out this seeming anomaly. Riding a public or a shared vehicle should cost me less than the fancy ride in ones own air-conditioned car. There are economies of scale when it comes to public transport and hence should be cheaper. At least in India that’s hard nosed common sense. But it turns out that common sense is after all indeed not common. It is context specific.

One needs to pry a bit deeper to see the contextual reason in this. An important factor is of course competition. If I take the case of market for travel from Pune to Mumbai (approximately 110 miles apart form each other) there is much more competition than in the market for travel between Storrs to NY city. You have the State rail and road transport, a multitude of private bus operators, cab service and so on. There is a range of service available depending on how deep you want to go in your pockets. This is certainly not the case here. You have a lone Bonanza or Greyhound providing public intercity transportation or you are on your own.

Is this monopoly enough to generate such opposing differentials? May or may not be. However, one can certainly think of some additional factors.

For e.g. owning a car is a much common thing in US than it is in India. People can also afford to place much more value on time and convenience. So a person riding a bus constitutes an anomaly in US. He or she will be charged more exactly for being that and constituting an inelastic demand. This is certainly not the case in India.

For a variety of reasons owning a car is not as common as in US and driving longer distances is even less so. Hence a person choosing to ride a bus is not an anomaly. He is not relatively disadvantaged because he does not have an access to a car ride. It’s a common way of travelling and being relatively poor, people tend to place a lower value on time and convenience.

The cheaper state transport in India also works well to keep the market competitively priced. The presence of the state probably works as in the contestable markets theory.

Can think of any more factors? As they say, take your pick!