I think Marginal propensity of consumption has played a great role in rescuing our economy from the grim crisis.In urban areas there is a confidence of crisis and liquidity trap situation but their rural counterparts are still spending like past.that is why companies are focusing more on rural market.you see mahindra n mahindra's suv's sales are going down but their tractors are still selling high in rural parts.
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what do you think about the high rural MPC ? ?
Tractors are needed even in crisis, since tractors are necessary to farmers right from ploughing land to carrying the harvest we cannot link the increase in sales of tractors to MPC. MPC is much related to human consumption than retail sales.
Farmers has a tendency to change their old tractors after every 2-3 years.
Farmers has a tendency to change their old tractors after every 2-3 years.
urban people are also used to changed their mobile,four wheelers and durables in every 2-3 months.now why not that happening in cities, you and me know it better.but the question is that ,isn't our 6 lakhs villages have nothing to do with this financial globalization.they don't know what is hedge fund or subprime.we are better because our huge rural population is consuming as it was a year ago.if government have had done their homework in infrastructure, the villages would have done better.
I think hemant, your hypothesis is quite wrong...
First of all, the rural folk change their tractors because of the need.. the mobile, 2 wheelers etc are not the need of the urban folk, those are comforts..
In any crisis, what hits the most is the items whih are sold as comforts. the things, which are need of the people (I mean without which difficult to survive) will always have demand. The elasticity of demand will be less.
In case of urban demand, the elasticity of demand in case of comfort items will be more and more prone to the financial crisis situation.
The other question about our rural folk doing better, you will have to support that with sufficient data.. mere yanking about the same is not enough.
As regards to the MPC of rural areas rescuing our economy that is completely out of question....
our rural infrastructure does not in any way support that..
The other question is should we have consumption led growth or investment led growth.. You talking about higher rural demand bringing india out of financial crisis means two things
1) We have grim crisis
2) Higher consumption by rural will lead to higher GDP...
Please elaborate more on the same....
First of all, the rural folk change their tractors because of the need.. the mobile, 2 wheelers etc are not the need of the urban folk, those are comforts..
In any crisis, what hits the most is the items whih are sold as comforts. the things, which are need of the people (I mean without which difficult to survive) will always have demand. The elasticity of demand will be less.
In case of urban demand, the elasticity of demand in case of comfort items will be more and more prone to the financial crisis situation.
The other question about our rural folk doing better, you will have to support that with sufficient data.. mere yanking about the same is not enough.
As regards to the MPC of rural areas rescuing our economy that is completely out of question....
our rural infrastructure does not in any way support that..
The other question is should we have consumption led growth or investment led growth.. You talking about higher rural demand bringing india out of financial crisis means two things
1) We have grim crisis
2) Higher consumption by rural will lead to higher GDP...
Please elaborate more on the same....
actually you are right,but my point is that we are among least affected countries in the whole world, so whom should be given the credit for this?
our policy makers or our strong economy.i am not telling that only rural MPC is supporting but its also a part of stimulating factor including small to cities. if real estate is slowing then there is already higher demand of low cost housing in these parts.
my other point was that if the rural infrastructure was better then,companies would have done far better in rural areas.
our policy makers or our strong economy.i am not telling that only rural MPC is supporting but its also a part of stimulating factor including small to cities. if real estate is slowing then there is already higher demand of low cost housing in these parts.
my other point was that if the rural infrastructure was better then,companies would have done far better in rural areas.
First of all, I feel that I was bit rude in my post...
Now regarding the affect of the global crisis on the Indian economy, there are multiple factors which led to reduced effect but this crisis if sustained can lead to disastrous results in India too.
First, the reasons for crisis not affecting much:
1) The Indian economy though globalised to some extent was not dependent on exports or imports for their growth. So was insulated to some extent.
2) We did not have full capital account convertibility, so that the FDI did not fly off with the crisis;
3) We lagged in the developments made in the financial sector compared to developed economies, which led to lower use of leveraged products. I will explain this::
The subprime effect was due to under capitalisation on gross basis of the economy. By this I mean to say, the ratio of the value of the leveraged assets with respect to total assets was quite higher in India as compared to developed economies. So the developed economies in the event of meltdown required more capital or physical assets to maintain their networth. In India as the leveraged assets were backed by more assets compared to them, we required lesser capital to maintain our networth. (if you want I can explain this using numbers too..)
This is purely my analysis...
4) As the Indian economy itself is not so organised (I mean to say the banking channels have not reached every nook or corner of India), the moetary effects of the meltdown were not immediately felt. (As banking is not so well entrenched, people maintain cash balances, so the monetary policies--positive or negative have lesser effects..) This also has negative effect in the boom time.
This list may not be exhaustive as there might be other reasons i overlooked...
Now the other things:
1) Yes, the infrastructure levels could be ramped up so that can have positive effect on the economy.
2) The rural economy is besieged with so many problems that any monetary to stimulate would be ineffective. some of the important issues are:
(a) Marginal land holdings leading lower productivity;
(b) Ban on purchase of agri land by non farmers (The policy should have restricted use of agri land for non-agri purposes. A farmer with no capital but lots of land is a sunk cost);
(c) Poor Infrastructure (includes roads, transportation, water, electricity & warehousing facilities);
(d) Improper dissemination of market information leading to profits being pocketed by middlemen which is a small part of the overall transaction costs;
(e) Poor food processing facilities leading to lot of wastage of primary food products;
(f) Banking facilities ineffective as they lend only against security;
There are many more problems..
3) We should have concept like Agri Companies having special recognition and ownership structure.. As agriculture is an activity where the profit margins are very low.
In India, 60 % people are dependent on agri while it contributes less than 35 % to the GDP. this means we are inefficiently utilising our manpower. That excess manpower needs to be diverted to other activities. This may include
1) Horticulture
2) Food Processing
3) Aquaculture
4) Poultry
5) Fish Farming
6) Meat industry..
and related activities.
I still visit small towns and villages and find that they use cowdungs for their fuel purposes. I am comfortable with that use but a bio-gas plant would be more efficient way to utilize that. This simple msg has not reached bigger villages in Maharashtra, how can one be sure that we are utilising our resources more efficiently in other small towns across India?
Stimulating rural economy is a nice idea but very very difficult to implement. Then there are mindset issues, egoes, cultural issues regarding change..
Now regarding the affect of the global crisis on the Indian economy, there are multiple factors which led to reduced effect but this crisis if sustained can lead to disastrous results in India too.
First, the reasons for crisis not affecting much:
1) The Indian economy though globalised to some extent was not dependent on exports or imports for their growth. So was insulated to some extent.
2) We did not have full capital account convertibility, so that the FDI did not fly off with the crisis;
3) We lagged in the developments made in the financial sector compared to developed economies, which led to lower use of leveraged products. I will explain this::
The subprime effect was due to under capitalisation on gross basis of the economy. By this I mean to say, the ratio of the value of the leveraged assets with respect to total assets was quite higher in India as compared to developed economies. So the developed economies in the event of meltdown required more capital or physical assets to maintain their networth. In India as the leveraged assets were backed by more assets compared to them, we required lesser capital to maintain our networth. (if you want I can explain this using numbers too..)
This is purely my analysis...
4) As the Indian economy itself is not so organised (I mean to say the banking channels have not reached every nook or corner of India), the moetary effects of the meltdown were not immediately felt. (As banking is not so well entrenched, people maintain cash balances, so the monetary policies--positive or negative have lesser effects..) This also has negative effect in the boom time.
This list may not be exhaustive as there might be other reasons i overlooked...
Now the other things:
1) Yes, the infrastructure levels could be ramped up so that can have positive effect on the economy.
2) The rural economy is besieged with so many problems that any monetary to stimulate would be ineffective. some of the important issues are:
(a) Marginal land holdings leading lower productivity;
(b) Ban on purchase of agri land by non farmers (The policy should have restricted use of agri land for non-agri purposes. A farmer with no capital but lots of land is a sunk cost);
(c) Poor Infrastructure (includes roads, transportation, water, electricity & warehousing facilities);
(d) Improper dissemination of market information leading to profits being pocketed by middlemen which is a small part of the overall transaction costs;
(e) Poor food processing facilities leading to lot of wastage of primary food products;
(f) Banking facilities ineffective as they lend only against security;
There are many more problems..
3) We should have concept like Agri Companies having special recognition and ownership structure.. As agriculture is an activity where the profit margins are very low.
In India, 60 % people are dependent on agri while it contributes less than 35 % to the GDP. this means we are inefficiently utilising our manpower. That excess manpower needs to be diverted to other activities. This may include
1) Horticulture
2) Food Processing
3) Aquaculture
4) Poultry
5) Fish Farming
6) Meat industry..
and related activities.
I still visit small towns and villages and find that they use cowdungs for their fuel purposes. I am comfortable with that use but a bio-gas plant would be more efficient way to utilize that. This simple msg has not reached bigger villages in Maharashtra, how can one be sure that we are utilising our resources more efficiently in other small towns across India?
Stimulating rural economy is a nice idea but very very difficult to implement. Then there are mindset issues, egoes, cultural issues regarding change..
urban people are also used to changed their mobile,four wheelers and durables in every 2-3 months.now why not that happening in cities, you and me know it better.
Never heard of anyone chaging their cars and washing machines every 2-3 months.
but the question is that ,isn't our 6 lakhs villages have nothing to do with this financial globalization.they don't know what is hedge fund or subprime.we are better because our huge rural population is consuming as it was a year ago.if government have had done their homework in infrastructure, the villages would have done better.
Check out this article on the Wall Street Journal, apparently rural India, by the very nature of it being decoupled from the world economy and due to some government programmes, seems to be coping a bit better
http://online.wsj.com/article/SB123931787215706747.html
Excerpt:
The rural economic rise is recent, with few figures yet available for 2008. In the five-year period ending in 2007, rural Indians' consumer spending grew faster than that of city dwellers, according to Indian brokerage IIFL. Rural India has surpassed urban centers in the number of households earning $2,000 a year, above which families begin to have disposable income.
Nothing to cheer wildly about, but even slow progress is progress