Trillion Dollar Economy – no magic required

Reaching $ 5 trillion GDP benchmark is being projected as a landmark milestone for the Indian economy by many in the Government. The latest estimate puts the size of Indian economy, measured as GDP at current market prices, at $2.4 trillion. Does reaching $5 trillion mark reflect a significant achievement or is it really an implicit admission of incipient sluggishness in growth of Indian economy? Let the data speak.
Indian economy registered an average annual growth of 12.8% in GDP (at current market prices) during 17 years – from 2000-01 to 2016-17. During the same period, only in 2 years, the growth rate fell below 8%, the minimum being 7.6%. The 25 percentile growth rate was above two digits at 10.4% and the median rate was 13%.
Given this nominal growth scenario of recent past, dollar value 5 trillion appears to be too modest a goal to be set by the current government. Table 1 gives the projected value of Indian economy till 2035 under various growth rate scenarios. Even if Indian economy grows at the lowest rate achieved during last 17 years, the size of the economy would reach at least 4 trillion US dollar by 2025. If rupee depreciates in mean time the growth in dollar terms would be lower. At 70 rupees per dollar, the size would become only 3.9 trillion dollar by the end of 2025.
A nominal yearly growth rate of 7.6 percent would imply, given 4 % target growth rate notified by the government of India (GOI), a real growth rate of only 3.6 percent. A 10.4 % growth rate would thus imply real growth rate of only 6.4%. Thus if projections of $5 trillion is in nominal terms, then no big achievement is being claimed.
Suppose, all the projections are being made under the assumption of constant prices of 2016-17, then the target average growth for next eight years should be 9%. India has achieved a double digit real growth rate in the last 66 years only once. Even in the last 25 years India clocked a real GDP growth rate greater than 8% only 6 times. So the probability of clocking a real growth rate of more than 8% is as low as 25%. Achieving 9% uniform real growth rate till 2025 with stable rupee-dollar rate might be a chimera. If rupee depreciates to 70 rupees by 2025, we would need an average year over year real growth rate of 11%. It could be a dream worth pursuing but there is no evidence in terms of accelerated investment or growth in productivity that could make the dream a reality.
In summary, reaching 5 trillion USD by 2025 in nominal terms is no big deal – a lower than achievement would be considered a highly disappointing performance. Achieving the same target in real terms could be an enormous challenge- heralding a real structural break in the Indian economy with productivity led growth and not merely by adding more capital and labour.

Table 1: Projected USD Size of Indian Economy under various growth rate scenarios and with constant exchange rate of 63.5                      ($Trillion)

 Distribution Measures based on data from 2000-01 Compound Growth Rate of GDP at current market prices 2025 2030 2035
Minimum 7.6 4.2 6.1 8.9
1st quartile 10.4 5.2 8.6 14.1
Average 12.8 6.2 11.4 20.9
Median 13 6.3 11.7 21.5
Note: Only first decimal value without rounding up has been reported. Projections are based on CSO’s preliminary estimate of GDP at current market prices for year 2016-17.

Note: Only first decimal value without rounding up has been reported. Projections are based on CSO’s preliminary estimate of GDP at current market prices for year 2016-17.

Corporatization of Nations

Reliance Jio Infocomm Ltd, the telecom arm of India’s largest company by market cap (NSE:RELIANCE), plans to create its own cryptocurrency called JioCoin. Supply chain management logistics and loyalty payment with JioCoin are amongst the envisaged uses of JioCoin. Worldwide, many large corporates have already started launching their own private cryptocurrency.  KFC, Burger King and Kodak are the few well-known names that have hitched onto the bandwagon of this currency of the Internet.

Fast-food chain KFC has announced that it will accept  virtual currency for paying bills in its outlets in Canada with the launch of Bitcoin Bucket. A customer can buy this bucket with 0.0011564 BTC, equivalent of CAD $20, according to a company statement. Eastman Kodak has announced last week that it is going to launch its own cryptocurrency KodakCoin in partnership with WENN Digital. Burger King has launched its own cryptocurrency in Russia called ‘WhopperCoin. IBM recently partnered with Stellar and klickex to develop a blockchain-based cross-border payments solution. Stellar is a distributed hybrid Blockchain that facilitates cross-asset transfer of value including payments. Similar to Bitcoin, Lumen is the asset of value issued by Stellar.

This rush by multinational companies to get on board of the cryptocurrency mania camouflages a much larger issue and a potential threat to the current international political order. This threat can be analyzed from various perspectives including political, economic and technological.

Glenda Sluga, a Professor of International History, has written about  the possible unraveling of the current international order from a historical and political perspective: These days, the pulse of the world’s political health is running fast. The general prognosis is terminal, the end of the international world order, as we know it.(here)  Political headwinds which led to such prognosis are easily discernible- rise of “radical nationalism” in USA, “long the axis of modern international society” and, rise of “heteropolarity” in the international power structure.

Beyond this haze of political chaos, a much bigger threat to the existing international world order lies in emergence of private cryptocurrency and its adoption by multinationals. There is no gainsaying the fact the comity of nations defines the current world order. A nation state without its own currency is like the staging of Hamlet without the prince of Denmark. The power of a nation state to tax its citizens would stand highly diminished if large corporates can issue their own currency. Let us see how it would play out in reality.

Alice buys 1000 JioCoins (JC) by paying, say, 20000 Indian rupees. Alice pays 60 JC to Bob for as rent for the apartment she has leased from Bob. Bob buys monthly grocery from the supermarket run by Reliance. Bob uses 250 JC for this purpose.  Bob tops up his Jio mobile with 50 JC. Suppose, Bob works in Reliance Industries and receives 3000 JC every month. Bob pays 750 JC to Reliance Petroleum for purchase of gas for his car. He has purchased his car by taking loan from HSBC by paying EMI of 750 JC every month. This EMI payment is routed through a cryptocurrency exchange run by a Russian bank.  RIL pays IBM India monthly 100 million JC for maintaining its IT infrastructure. IBM may pay RIL is own cryptocurrency for using Jio mobile services in India. Gradually, a complete ecosystem of economic agents can emerge, who will use JC as their preferred currency for all their payment requirements.  It may be seen that the JC to Rupee exchange takes place only when Alice purchased JC. At a certain stage of development JC will acquire its own life, cutting its umbilical record with the fiat currency.

The above description of evolution of JC to encompass a significant slice of economic transactions in its country of incorporation, i.e. India, does not necessarily imply that JC would pose a threat to the  existence, or at least severely restrict usefulness,  of the sovereign currency INR as a fiat money. Initially, INR can continue to be the unit of account within the boundary of India. But if JC emerges as the people’s preferred medium of transactions and store of value, only raw state power can prevent rupee’s passage to oblivion. Be that as it may, the moot question is whether JC would severely dent the Indian state’s capability to tax the economic activities mediated through JC. Given the ability of a cryptocurrency to mask the identity of transactors, imposition of indirect taxes, like goods and service tax, might be a serious challenge for tax administration. If an Indian resident tax payer earns and spends only in JC, fixation of its tax liability would not be an easy task.

If all multinationals including RIL, IBM and others can agree on an exchange platform for conversion of their currencies then the nations of the world would find themselves divested of their defining power to tax and earn seigniorage.  The depth and reach of the large multinationals can be gauged from the fact that in 2016 the Fortune 500 companies had revenue of 27.7 trillion USD while the combined GDP of 198 countries was around 76 trillion USD. Using Output to GDP ratio for US economy, the share of Fortune 500 companies in the worlds’ GDP would work to around 21 percent.   So if these large corporates were to sign off from the current international order with their own currencies, their total GDP would be the second highest, next to USA only. They can usher into a new Bretton Wood regime for their private currencies and significantly reduce the cost of managing exchange rate risk.

Technologically, these large corporates could not but continue to be part of one country or other, at least formally, the emergence of cryptocurrency can unshackle them from this tether of fiat currency and its in-built inflationary bias. If the world economic order get re- arranged on this line, what would happen to the multitude of people who would continue to remain outside the charmed circle of digital economy, can only be a matter of speculation and not an informed guess.

The centenary of Bolshevik Revolution and the fatal attraction of the concept of Class

“The history of all hitherto existing society is the history of class struggles” (Communist Manifesto).   Communist parties everywhere consider this sentence written in 1848 by Marx and Engels as a well-established truth. However, it may also be considered as one of the greatest half-truths ever penned.  This manifesto was the inspiration of those who created, in October 1917, the first state to actuate Marx’s vision of a classless society.  After 100 years, to liken the idea of class struggle as the main driver of human history to a kind of religious baloney may sound blasphemous to many. However, a critical scrutiny of the Soviet Union’s history – from 1917 to its final denouement in 1991- with an open critical mind, would lead most to the same conclusion.

History does not follow a linear path along one single dimension of human progress, be it moral, technological or material. The number of interpersonal or inter-group relationships that would be required to capture the dynamics of a given human society could be quite a many, even if we are able to abstract away many relationships that are inconsequential to the core elements of this dynamics. To expect that one single factor, the conflicting claim on the produce of economic activities, would be sufficient to capture such a complex dynamics for all societies that we know of is highly presumptuous. Without belittling Marx’s enormous contribution to our understanding of the complex relationship between organization of production and technology of production in a market driven economy, his linearized view of evolution of human society reminds us of the caricature of Maurier about the curate’s egg.

But before we deliberate on the sweeping abstraction that Marx imposed on the past, we need to first deconstruct the concept of Class itself.  Marx himself never defined this concept in any rigorous sense. The title of the last chapter of Capital volume 3 is “Classes”. This chapter was prepared and published by Engels in 1894 based on notes left by Marx. In this unfinished last chapter Marx raised the question of definition in the following way.

The first question to be answered is this: What constitutes a class? — and the reply to this follows naturally from the reply to another question, namely: What makes wage-labourers, capitalists and landlords constitute the three great social classes? here  

The answer to this question is given in the next line:

At first glance — the identity of revenues and sources of revenue. There are three great social groups whose members, the individuals forming them, live on wages, profit and ground-rent respectively, on the realisation of their labour-power, their capital, and their landed property. (ibid)

The circularity of his effort to pin down his concept of class to a rigorous one is obvious.  For Marx “landlords” is a class because the source of revenue for every member of this group is same.  Does anyone who owns any quantity of land is a member of this class? What is the threshold? What are the other attributes that we need to make it a workable definition?

To Marx’s credit, he was well aware of the inadequacy of this definition as in the next line itself he raises the immediate problem that this concept gives rise to. Unfortunately he did not finish this chapter to give his solution to this problem.

 However, from this standpoint, physicians and officials, e.g., would also constitute two classes, for they belong to two distinct social groups, the members of each of these groups receiving their revenue from one and the same source. The same would also be true of the infinite fragmentation of interest and rank into which the division of social labour splits labourers as well as capitalists and landlords-the latter, e.g., into owners of vineyards, farm owners, owners of forests, mine owners and owners of fisheries. 

Obviously this definition of class is not only inadequate but fraught with severe inconsistencies. This becomes apparent when we read Marx’s own analysis of the class contradictions afflicting the French society during the period of French coup of 1851 in which Louis-Napoléon Bonaparte assumed dictatorial powers. In fact, in his own words, the essay was written to “demonstrate how the class struggle in France created circumstances and relationships that made it possible for a grotesque mediocrity to play a hero’s part.” here  He then goes on to identify the classes pitted against one single class – that is  the proletariat.

The bourgeois republic triumphed. On its side stood the aristocracy of finance, the industrial bourgeoisie, the middle class, the petty bourgeois, the army, the lumpen proletariat organized as the Mobile Guard, the intellectual lights, the clergy, and the rural population. On the side of the Paris proletariat stood none but itself”. here  (emphasis and underlining are ours).

What is the definition of “middle class”? Are they different from “the petty bourgeois”?  It is apparent that new entities which cannot fit into the abstract definition of class of the Communist Manifesto emerge spontaneously in analysis of actual social upheavals. Subsequently, all his disciples used the concept of class as a basic constituent part of any society in the same fashion a physicist describes the physical world in terms of atoms and molecules. This is axiomatic for a Marxist to consider class as real and observable entity.

  1. P. Thompson wrote the book “The Making of the English Working Class”. The title itself betrays the fragility of the concept of “class” as a primary driver of social dynamics. If a “class” is always in “making” then one’s class position cannot be unambiguous at any point of time. He considers “Class” as “an historical phenomenon” and not as “a “structure”, nor even as a “category”, but as something which in fact happens (and can be shown to have happened) in human relationships.  This relationship takes shape only when “some men, as a result of common experiences (inherited or shared), feel and articulate the identity of their interests as between themselves, and as against other men whose interests are different from (and usually opposed to) theirs.”  Presumably this identity crystallizes only when it is opposed to another group of men having a conflicting set of interests. History shows that there could be a myriad of conflicting interests that could bind people into opposing interest groups.  More importantly, interests that separate a mass of people into two opposing groups needs not be economic nor needs to have a direct link with any production system. We know that people have fought bitterly and violently over ethnic, religious or even linguistic identity.  Furthermore formation of opposing groups with conflicting interests need not be static as the dominant interest change over time.

Going back to Marx’s original view about “class struggles” as the principal driver of the history, it is quite clear that the concept lacks any operational content. This comes out clearly when Marx himself attempts to identify the major factors that precipitated major historical events.

As regards operational contents of Marx’s concept of “class”, it would be apposite to examine the view of Lenin, the architect of the first attempt to consciously and explicitly apply Marx’s concept of “class”. Lenin’s definition of “class” is prima facie quite clear and without much of ambiguity that Marx’s definition entailed.

Classes are large groups of people which differ from each other by the place they occupy in a historically determined system of social production, by their relation (in most cases fixed and formulated in law) to the means of production, by their role in the social organization of labour, and, consequently, by the mode of acquisition and the dimensions of the share of social wealth of which they dispose. Classes are groups of people one of which can appropriate the labour of another owing to the different places they occupy in a definite system of social economy.  (A Great Beginning)

Suppose we want to apply this definition to any group of people from a given society. We would like to locate the class position of any member of this group. What would be the attribute that would capture the fuzzy notion called “relation to means of production”. Is it the occupation of the person? At what level of granularity the occupational status of the person would be considered? Does a cardiac surgeon employed in a top notch metropolitan hospital share the same relation to the social production system with that of a doctor employed in a rural health center, earning a small fraction of the former?  Would a major shareholder of a multinational corporation with 100 thousand employees stand in the same relation to the production system as a capitalist employing 1000 employees, operating only in a regional market of a country would do?  Although a billionaire capitalist and a small factory owner are both earn profit and thereby stand in an exploitative relationship with their workers, can we consider them as member of a “capitalist class in making”?

We also need to understand the existential dilemma that Lenin was confronted with when Bolsheviks seized power in Russia. The “working class” or proletariat did not form the majority of working and oppressed people of Russia of 1917. He had to justify the seizure of power in terms of “class” and “class struggles”. He thus wrote: “In order to achieve victory, in order to build and consolidate socialism, the proletariat must fulfill a two-fold or dual task: first, it must, by its supreme heroism in the revolutionary struggle against capital, win over the entire mass of the working and exploited people; it must win them over, organize them and lead them in the struggle to overthrow the bourgeoisie and utterly suppress its resistance, of whatever kind. Secondly, it must lead the whole mass of the working and exploited people, as well as all the petty-bourgeois strata, onto the road of new economic construction, onto the road to the creation of a new social bond, a new labour discipline, a new organization of labour, which will combine the last word in science and capitalist technology with the mass association of class-conscious workers creating large-scale socialist production.”  These lines can be mouthed by any leader of any country- just replace “socialism” by “our great nation”, “proletariat” by our “ patriots”, “bourgeoisie” by “ domestic traitors”  and “capital” by “our enemies”. The plot remains the same ; only the actors change.

But the attraction of the concept of class does not fade away. When facts reveal the fault lines of a theoretical construct, we can either look for a “scientific revolution” or try to tweak the existing theory to accommodate its fault lines.  That is why Max Weber, not a Marxist of any hues, tried to inject life into the Marx’s concept of class by coining a new term – “class situation”.  The following quote from Weber explains his definition of this new term

In our terminology, “classes” are not communities; they merely represent possible, and frequent, bases for social action. We may speak of a “class” when (1) a number of people have in common a specific causal component of their life chances, insofar as (2) this component is represented exclusively by economic interests in the possession of goods and opportunities for income, and (3) is represented under the conditions of the commodity or labor markets. This is “class situation.”

This definition is as fuzzy as it can be. It allows a social and political historian to identify as many small or large groups of people as they would like to be called as one interest group or “class”. To operationalize this definition, one researcher defined a class called “All service” comprising individuals with occupation declared as “Large Business”, “Professional” and Lower service:”

In fact, history of Bolshevik rule as it unfolded in the post 1917 period is a testimony to the operational emptiness of the concept of class. If anything, it proves that human history so far has been history of struggles between old oppressors and emerging new oppressors.  The role that a group of economic agents bound by common interest would play in that struggle cannot be inferred from their class positions as defined by Marx or Lenin.  Marxists like Eric Ohlin Wright has to, therefore, invent the contradictory class locations of economic agents to somehow accommodate this obvious contradiction that Marx’s concept of class leads to. The root of this fuzziness and complete lack of operational content in Marxian and other related concept of “class” lies in the fact that human nature is more tuned to the biological and thereby existential imperatives of the species than its economic imperatives. A worker in a factory – a card holding member of a communist party- may behave almost exactly in the same way in relation to his homemaker wife as a capitalist owner of the same factory would do. A taxi driver may charge 3 times of normal fare in a flooded city as a capitalist would do when there is scarcity of its products. Transition from one “class location” to another one happens in case of many individuals depending on the circumstances and the underlying instability of such positions is not so negligible as to be of no consequence in social strife and interpersonal conflicts. It is generally observed that poor participate most vociferously and violently in case of ethnic and tribal conflicts. In such cases, how does the “class location” per Lenin explain the behavior of the person? It is utopian to expect that once the workers of a factory become owner of the factory, they would all work together harmoniously and with the common interest in mind. If human nature largely depends on the class location then efficiency and productivity should increase significantly with change of ownership. Under “proletarian dictatorship” all workers would give their best and achieve the maximum productivity given the material condition of production. There is no sufficient historical evidence to support any such assertion.

Based on the historical evidence of changes in political and social regimes since the time we have trustworthy data, it may be safely asserted that human nature has not changed much since the time of  the Old Testament, Chaucer, Homer or Ramayana. If one categorizes the conflicts that informed all these classics and compares them with their modern counterparts, it can be seen that some basic themes have remained the same. That is why it is so easy to transport the themes of Sophocles, Euripides, Kalidasa and Sudraka to contemporary times.

Despite its fuzzy definitional content, very well intentioned serious scholars always fall for the fatal attraction of the concept of “class”. Because of their empathy for fellow human beings, they cannot but  highlight social and economic inequality, deprivation and injustice meted out to one or more groups which get formed in specific time and context. For want of any better term we may call it a “class” – not in Marxian sense.  The root of this empathy lies in human nature. Instinct for survival is the genetic in nature. For a thinking species like homo sapiens, survival is hierarchical. It starts with self and progressively embraces family, clan, tribe and perhaps nation and race. That instinct creates the ground for group formation and ensuing conflict between groups. At the same time, altruism is also etched in the human being’s gene because that would ensure that humanity does not experience the fate of becoming extinct from the face of earth, like the fate that had befell many other species in the past. There lies the fatal attraction for the concept of class.

 

 

 

 

 

Digital Currency- Hype or Future

This is an abstract of the talk that I gave to students of IIM , Indore on 5th October.

The ability of central banks to maintain the value of fiat money came under a cloud in the wake of the financial crisis that hit the developed economies in 2007/08. A libertarian view about privately issued money that always remained in the fringe of mainstream view of money started gaining currency. The computer geeks who hate any centralized authority started toying with the idea of digital currency that could have all the properties of physical cash and could be used as an efficient medium of exchange of values but without the backing of any central authority. A number of attempts to introduce a digital currency backed by cryptography were made before the dominant digital currency of today- Bitcoin- came into existence. Notable amongst them was Digicash invented by David Chaum in 1990. The experiment failed miserably and the eponymous company filed for bankruptcy in 1998.

In October 2008, an unknown programmer, or a group of programmers, under the name Satoshi Nakamoto published a paper titled Bitcoin on a cryptography mailing list and released as open-source software in 2009. The most critical issue that Bitcoin protocol successfully addressed is the problem of double-spending.

The technology as well as philosophy underlying the Bitcoin system traces its root to 3 different disciplines.

Firstly, it is meditated through a particular view of money- money being primarily a medium of exchange. From a monetary perspective, this aspect of Bitcoin makes it a trustworthy and relatively cheap decentralized payment system without any centralized settlement mechanism.

Secondly, it intelligently adapts certain well known features of distributed computing and information systems. Any distributed system has to resolve the problem coordination so that all the system can continue to function as  expected even if one or more nodes fail or start behaving arbitrarily. This issue is also looked upon from another perspective which is known as “state replication”.  A related problem germane to any distributed computing and information system is the Byzantine problem. The problem statement is- how to arrive at a consensus about an input value vi started by a node i, when a maximum of   f nodes have crashed. The proof-of-work mechanism has also originated in the distributed computation and information management area. This mechanism has also been made an integral part of Bitcoin protocol for validation and authenticity of transactions in Bitcoin network

The last and the most important building block of Bitcoin are the methods and tools of Cryptography. At the heart of Bitcoin lies one way function, hashing function, modulo arithmetic, public-private key, digital signature and maintenance of a public ledger of all validated transactions.

This talk would introduce all the building blocks of Bitcoin in a largely non-technical way. It would also highlight the potential fault lines of Bitcoin and why such a technology cannot become a currency proper. The presenter would argue that Central Bank Digital Currency based on the underlying technology of Bitcoin is very much possible. This is the most desirable and probably inevitable future of paper currency