RBI's growth optimism

Here is a telling quote from the RBI's Monthly Review of the economy which is in line with the upbeat assessment given by the RBI Governor recently. (Please see my previous post):V

There is increasing evidence that in the post-pandemic years, a trend upshift is taking shape, which is shifting India’s growth trajectory from the 2003-19 average of 7 per cent to the 2021-24 average of 8 per cent or even more, powered by domestic drivers.

The growth forecasts for the global economy are downbeat: global economic growth in the next five years will be below the average of the last two decades. Nevertheless, the RBI seems to suggest India can grow at 8 per cent plus on the strength of "domestic drivers". Does the RBI think the Indian economy can grow at 8 per cent even under conditions of weak global growth? Will that be on account of services exports? 

This does seem to be an altogether new appraisal of India's economic prospects. Economists have been telling us for long that an 8 per cent growth rate is out of the question without robust export growth, say, 15 per cent per annum.

There's one thing, though, that puzzles me. The Monthly Review projects growth of 7.6 per cent in 2024-25 but only 6.4 per cent in 2025-26. Will India move towards an 8 per cent trajectory thereafter or have we already move on to such a trajectory? The RBI may clarify.

 

 

A very important statement from the RBI Governor

The RBI Governor, Mr Shaktikanta Das, recently made a statement that hasn't got the attention it deserved. 

The Governor is quoted as saying:

India is at the threshold of a major structural shift in its growth trajectory, moving towards 8 per cent GDP growth in a sustained manner. We are moving towards an annual growth rate of 8 per cent.

This is by far the most optimistic official statement on the Indian economy in a long time. It is not clear what time frame the Governor has in mind for the growth rate of 8 per cent, whether it is a mediium-term forecast or a long-term forecast- the issue of the word "sustained" does suggest a fairly long time horizon.

The Chief Economic Advisor in the finance ministry has been talking of a sustained growth rate of 6.5 per cent. Many analysts have been talking of the potential for the Indian economy to grow at 8 per cent- provided various "big bang" reforms are carried out. What the RBI Governor is saying- if he has been quoted correctly in the media- is that, on present steam, the Indian economy is moving towards an 8 per cent trajectory. 

Any thoughts on this, anybody?

Unbounded optimism about AI

All of us have been reading about AI could turn into a Frankenstein monster and reduce humans to slaves.Economists have been sceptical about the boost to productivity from AI: the general view is that AI can at best sustain America's productivity growth at 2 per cent, which has been its long-term rate. It can't raise the productivity growth rate.

Along comes an article by computer scientist Ray Kurzweil that suggests that AI is about to open the doors to Paradise on earth in the years to come.  He says AI on the threshold of bring about  a transformation in three areas: energy, manufacturing and medicine.

The way to solve the world's energy problem is to rely on solar energy which is available in abundance. The challenge is to find photovoltaic materials that are inexpensive and increase the storage capacity of batteries. That is a chemistry problem- finding what combination of chemicals and materials will help address these issues. Kurzweil tells us how AI will crack this problem:

...AI can rapidly sift through billions of chemistries in simulation, and is already driving innovations in both photovoltaics and batteries. This is poised to accelerate dramatically. ... Once vastly smarter AGI finds fully optimal materials, photovoltaic megaproejcts will become viable and solar energy can be so abundant as to be almost free. 

Manufacturing will change as energy costs fall and also the costs of labour and raw materials. Robotics will reduce labour costs. It will also reduce raw material extraction costs. As for medicine, AI moleuclar biosimulations will reduce the costs implied in clinical trials and also make possible more effective drugs. We can produce medicines tailored to each individual patient. Away with disease! 

Kurzweil says longevity in the US and UK now grows by an extra six to seven weeks ever year. With AI, we may expect life expectancy to increase by 1 year annually. That means, in 30 years,life expectancy in Canada, for instance, will leap from 85 to 115!

Kurzweil's conclusion is breathaking: "This is AI's most transformative promise: longer, healthier lives unbounded by the scarcity and fraitly that have limited humanity since its beginnings. 

Makes me wonder: why on earth are economists fretting about long-term economic growth rates falling in the next ten years? 

Geopolitical risks shoot up: Russia's redline crossed

Two major conflicts have been going on for a while now, one in Ukraine and the other in Gaza. Neither has impacted the world economy in a major way except for a brief period in 2022 when oil prices rose above $100 a barrel.

But we just don't know how long it will remain that way. There has been progressive escalation in the conflict in Ukraine. It appears that a new and dangerous redline has been crossed. Ukraine sent ATACMS (Army Tactile Missile Systems) into Sevastopol in Russia's Crimean region a few days ago. Four were intercepted and one was blown up, it appears, and the debris fell on people holidaying on a beach, with an estimated five children among those killed. The ATACMS were provided by the US.

Quite recently, the Americans lifted an earlier restriction on American weapons being fired into Russia territory with the proviso that the weapons must be for military targets alone. The relaxation by America came following a broad offensive by Russia that threatened to overwhelm Ukraine's defenses in some parts. Ukraine contended that the only way to thwart the Russians was to disable the artillery and other batteries from which Ukrainian positions were being pounded. The Americans relented.

Whether the proviso was observed in the latest salvo is not clear. Some military analysts say that there is an airfield nearby but it is of little value, so the drones were intended for civilian targets. We don't know, for sure. Regardless, the loss of civilian losses has create fury across Russia and there's a demand for a punitive response.

Intelligence on targets is obtained through American satellites. The programming of the missiles is done by American technicians. The Ukrainian contribution, military analysts say, is to press the button. So it wil be hard for the US to disclaim responsibility. 

Russia summoned the American ambassador and conveyed to her that retaliatory measures would follow. There's now speculation on what these measures would entail. One conjecture is that Russia would declare the Black Sea a ' no fly' zone which means American reconnaisance satellites entering the area would be taken out. That would be an act of war. Others suggest the Russians will arm a range of parties - Iran, North Korea, etc- in ways not done earlier. Yet others say Putin will first take the issue to the UN Security Council and prepare the ground for a Russian response.

Whatever the response, it's clear that we now have a significant escalation. Why the financial markets, including our own, have not taken notice is a a mystery. It's hard to see how the global economy will remain unaffected for much longer. 

Why government should be careful in calling in management consultants

 I re-read this year-old interview with economist, Mariana Mazzucato, and I thought should post it  here.

Mazzucato is an economist who thinks the government is a force for good and that the good that governments do has been obscured by the rise of neo-liberal ideas.  She has co-authored a book, The Big Con, which contends that governments harm themselves by hiring big consulting firms to work for them. We have the usual problems, lack of genuine expertise in the firms and conflicts of interest. 

But the real problem, Mazzucato, contends is that it takes interesting work in government away from civil servants and is hence demotivating to them. The answer to finding expertise is to pay civil servants better and to give them challenging assignments,not oursourcing the work of government to consultants.

Here is an excerpt from the interview for those who can't access the interview:

For the past decade, she has waged a sometimes lonely battle to rehabilitate the state’s reputation as an economic motor. Her new book, The Big Con, written with Rosie Collington, argues that consultancies are hobbling governments’ ability to perform that role. In her office, holding a Diet Coke, she says: “For me, the big wake-up call was Brexit [preparations], because [the consultants] were everywhere.” In 2019-20, the British government spent nearly £1bn on strategy and other consultants — to the despair of some MPs. Mazzucato and Collington also widen their critique to include the Big Four accounting firms, such as Deloitte, and outsourcing companies, which carry out chunks of the state’s core functions.

Banks don't have to fear fintech

For some years now, we have been hearing about the fintech threat to banks, including large banks. It was said that these banks would use the internet or mobile to gather deposits and make loans. Thereby, they would dispense with the need for expensive brick and mortar branches. Moreover, they would provide a vastly superior customer experience- lightning fast transactions, bill payments and shopping that would work far more smoothly than anything the big bank had to offer.

Nothing of the sort has happened thus far, as this article makes clear in the case of the UK. (The UK experience is not unique; fintechs have not unseated banks anywhere). Very few fintechs make money, most of them are burning investor cash in garnerning customers. The three leading fintech ventures in the UK have been Revolut, Monzo and Starling. Ten years  after they started off - and ten years is a long time- only Starling  has turned a profit in the year ended March 2023. The other two hope to make profit in the next accounting year.

These three fintechs may have brought in a decent number of customers but they customers use them only to put through transactions on which the banks make a fee. The fintechs have yet to register a meaningful presence in the core banking functions, namely, making deposits and loans. People are not ready to place their savings in a meanginful way with the fintechs- one sure sign: the fintechs have a very low share of salary accounts. Large banks with their brick and mortar visibility inspire more confidence than fintechs. 

If you cannot take care of the funding side, you can't do much on the lending side either. Without low cost deposits, there is little competitive edge to lending. The ones they can lend to are customers whom the traditional banks won't entertain, that is, high-risk customers. Some fintechs claim to have cracked the problem with analytics and stuff but their high level of non-performing assets tells its own story. 

Finally, banks have not been idle in the face of the supposed fintech threat. They have invested hugely in technology and improvements in the customer interface. Some have got into collaboration with fintechs whereby the banks get the benefit of fancy technology and the fintechs collect a decent fee. 

The bottomline: the threatened disruption of the banking industry has not happened at all. If I were a depositor, I would go with a large bank for a simple reason: I know the authorities will not allow it to fail, so my money is safe. With a fintech, I have no such assurance. If the price I have to pay is that it takes more four seconds more to put through a transaction, I can live with that. 

Sceptical voices about AI's impact on economic growth

Will AI transform growth prospects for the world and usher in an era of greater abundance? That is what business executives and management consultants would have us believe. But serious economists are sceptical. Let me cite a few:

Daren Acemoglu of MIT cited here:

The professor ...... anticipates AI will boost GDP growth by only 0.93 percent to 1.16 percent over the next decade.

But even that figure may be too optimistic, he argues, because productivity estimates come from automating "easy tasks" – future tasks may be more complicated and less amenable to automation. He therefore contends there will be a more modest increase in TFP and GDP in the next ten years – on the order of 0.53 percent and 0.90 percent, respectively.

Nobel Laureate David Romer of NYU quoted here:

We’ve benefited from scaling up compute and ingesting a whole lot of data.... ....Scaling up compute is pretty easy. It’s just more machines, more chips. But what’s going to happen is we’re not going to have enough data. 

Charles I Jones of Stanford in a paper at the Jackson Hole Symposium last year:

*Automation has been ongoing for 200 years — stable growth ◦

*Steam engine, electricity, internal combustion, semiconductors ◦

*Maybe A.I. is the latest great idea that will allow 2% growth to be sustained a bit longer

Jones notes that long-term productivity growth in the US has been stable at 2 per cent. He reckons AI will help maintain that rate at best and prevent it from falling.