The Economy of British India – with Angus Maddison

Angus Maddison is a world-renowned economic historian who is famous for his work on estimating the past GDPs of modern economies by different measures. I won’t go much details into his original work, but the pieces he wrote about Indian subcontinent are worth-reading. In this post, I will try to delve into his assessment of British rule in India (read the Mughal one also). Just to remind you, I am an Indian and Angus Maddison is a British national – so a difference in narratives (bias?) could be present in my write-up.

The Elitist British

The biggest change the British made in the social structure was to replace the warlord aristocracy by an efficient bureaucracy and army. In the first generation, British tried to Westernize India – introduced English education, tried out a few Social efforts and tried to modernize infrastructure. But soon they changed their course. Having failed to Westernize India, the British established themselves as a separate ruling  caste. They did not inter-marry, their kids grew up in separate schools and they socialized with separate clubs where “native” population was absent. Maddison compares -

“The British ruled India in much the same way as the Roman consuls had ruled in Africa 2,000 years earlier, and were very conscious of the Roman paradigm.“

One of the positive sides of the whole thing was that the British never tried to settle down in India and remained low in number. This resulted in low taxation but Maddison described that it benefited the middle class and land-lords but not the bottom-of-the-pyramid peasants.

“There were only 31,000 British in India in 1805 … In 1911, there were 164,000 British … In 1931, there were 168,000. … The British had inherited the Moghul tax system which provided a land revenue equal to 15 per cent of national income, but by the end of the colonial period land tax was only 1 per cent of national income and the total tax burden was only 6 per cent. … Most of the benefits of the lower fiscal burden were felt by landlords, and were not passed on to the mass of the population. In urban areas new classes emerged  under British rule, i.e. industrial capitalists and a new bourgeoisie of bureaucrats, lawyers, doctors, teachers and journalists whose social position was due to education and training rather than heredity. In the princely states, the remnants of the Moghul aristocracy continued their extravagances – large palaces, harems, hordes of retainers, miniature armies, ceremonial elephants, tiger hunts, and stables full of Rolls Royces.”

The System of Exploitation

The main aim of British exploitation was to remit money to Britain. Again, as per Maddison, there were two phases of it. The British East India company had nothing but a short-term-profit-maker attitude while the British Kingdom had a long-term-rent-seeking approach. For example, Robert Clive, the East India Company General took quarter of a million pounds for himself as well as a jagir worth £27,000 a year. (worth mention comment from Maddison – British did not pillage on the scale of Nadir Shah, who probably took as much from India in one year as the East India Company did in the twenty years following the battle of Plassey.)

Comparatively, later on, the remittances became more smooth and systematic -

“the Viceroy received £25,000 a year, and governors £10,000. The starting salary in the engineering service was £420 a year or about sixty times the average income of the Indian labour force … Under the rule of the East India Company, official transfers to the UK rose gradually until they reached about £3.5 million in 18566, the year before the mutiny. In addition, there were private remittances … By the 1930s these home charges (i.e. remittances) were in the range of £40 to £50 million a year …  (also) About a third of the private profit remittances should therefore be treated as the profits of colonialism. ”

Moreover, the Govt of India, which always ran fiscal surplus over the British Kingdom, ran into debts due to spurious reasons. Further, during the World Wars, Govt of India “gifted” (joke!!?) millions of pounds from its reserves to the British Govt. Maddison describes -

“In spite of its constant favourable balance of trade, India acquired substantial debts. By 1939 foreign assets in India amounted to $2.8 billion, of which about $1.5 billion was government bonded debt … (during World Wars) there were two ‘voluntary’ war gifts to the UK amounting to £150 million ($730 million). India also contributed one-and-a-quarter million troops, which were financed from the Indian budget.”

 Where Maddison differs

Maddison differs quite a bit on the topic of Industry. He countered arguments of R.C. Dutt, R Palme Dutt and Nehru on de-industrialization (i.e. the decline of the old handicraft industry without the compensating advance of modern industry) of India with his set of facts. He accepted the facts that the Mughals did have a large industrial base and with British rule and policies it died. But added an important quote -

“Oversimplified explanations, which exaggerate the role of British commercial policy and ignore the role of changes in demand and technology, have been very common and have had some adverse impact on post-independence economic policy”

Maddison argued that the Mogul Indian industry were to produce luxury goods for aristocrats. But after British rule begun, the higher echelons of Indian society were flipped upside down. The British officers and native “copycat” Zaminders had little attraction on the traditional Indian handicrafts. Instead they developed taste of British merchandise. Furthermore, with social changes in Europe, there were a decline in demand of handicrafts overall (not only Indian but also other European ones as well).  Along with that, cheap and better quality textile from Britain occupied Indian market. Maddison agreed that the above incidents probably threw a lot of Indians out of job but he adds that the per-capita textile consumption doubled due to cheap British imports. He explains -

“the displacement effect on hand-loom weavers would have been smaller than at first appears. The hand-loom weavers who produced a third of output in 1940 would have been producing two-thirds if there had been no increase in per capita consumption.”

But he, in the end, agreed that India was the net loser on textile industry due to long term colonial effects -

“In time, India built up her own textile manufacturing industry which displaced British imports. India could probably have copied Lancashire’s technology more quickly if she had been allowed to impose a protective tariff in the way that was done in the USA and France in the first few decades of the nineteenth century, but the British imposed a policy of free trade. British imports entered India duty free, and when a small tariff was required for revenue purposes Lancashire pressure led to the imposition of a corresponding excise duty on Indian products to prevent them gaining a competitive advantage.  … If India had been politically independent, her tax structure would probably have been different. In the 1880s, Indian customs revenues were only 2.2 per cent of the trade turnover, i.e. the lowest ratio in any country. In Brazil, by contrast, import duties at that period were 21 per cent of trade turnover.”

So the fundamental issue was on the “free-trade” without preparedness but not the British policies.

In fact Maddison threw light into a few different aspects of Indian industries. Britain used India as their Asian export Hub and that resulted in Indian industrial gain.

“By the time of independence, large-scale factory industry in India employed less than 3 million people as compared with 12 1/4 million in small-scale industry and handicrafts, and a labour force of 160 million.56 This may appear meagre, but India’s per capita industrial output at independence was higher than elsewhere in Asia outside Japan, and more than half of India’s exports were manufactures.”

So, even though Indian industry was small, it was better off most of its Asian counterparts. However, the industry relied on mostly British skilled workers to fill in the upper ranks and that (along with protective policies) led to a demise of Indian industries post-Independence.

Conclusion

Overall, as per Maddison, British urban economy was better off the Moghul one. It was more productive, modern and focused on  entrepreneurship. On the other hand, the condition of villages worsened because of “extractive” Zaminders, population increase and reduced per-capita land availability. The book overall is a fascinating read and I will probably write up another post to follow up on my evaluations and criticisms of Angus Maddison.

The primary resource - Class Structure and Economic Growth: India & Pakistan since the Moghuls (1971) by Angus Maddison.

The Economy of Mughal India – with Angus Maddison

I read a couple of chapters of Angus Maddison who described Indian economy and its pitfalls quite vividly. Angus Maddison is a world-renowned economic historian who is famous for his work on estimating the past GDPs of modern economies by different measures. I won’t go much details into his original work, but the pieces he wrote about Indian subcontinent are worth-reading.

In short, both Mughal and British empire were significantly “elitist” and “extractive“, i.e. from power to money – everything was in the hands of a few. Contrary to the widespread belief in India, the common mass lived a little above the sustainability level and were hit by periodic natural calamity and crop-failures. The system or the economy in general was built to grind the common people into de-facto slavery. In this blog-post, I will focus on the Mughal rule (read the British one also).

The Elitist Mughals

To start with the Mughal system, Maddison notes -

“India had a ruling class whose extravagant life-style surpassed that of the European aristocracy.It had an industrial sector producing luxury goods which Europe could not match, but this was achieved by subjecting the population to a high degree of exploitation. Living standards of ordinary people were lower than those of European peasants and their life expectation was shorter.”

To expose the elitism in Indian society, he notes that the major export items those India had at that time were “salt-peter (for gunpowder), indigo, sugar, opium and ginger” but the import items were nothing but silver, gold and other precious stones. This highlights that on the national level, India exported items produced by ordinary populace where they imported items for elites only. Maddison went on the compare the European standard of living with the Indian ones -

“In spite of India’s reputation as a cloth producer, Abul Fazl, the sixteenth-century chronicler of Akbar, makes reference to the lack of clothing in Bengal, ‘men and women for the  most part go naked wearing only a cloth about the loins’. Their loincloths were often of jute rather than cotton. In Orissa ‘the women cover only the lower part of the body and may make themselves coverings of the leaves of trees’. They also lacked the domestic linen and blankets, which European peasants of that period would have owned.”

So the common people perished where the wealthy had it all. While average Indians didn’t have cloth to wear on, the Indian muslin were famous in Europe and was noted for aristocracy.

The health condition of common people was equally bad. Indian population almost stagnated for about 2000 years -

“Kingsley Davis has suggested that mortality rates in India were high enough to offset the very high fertility rates, so that there was little increase in population in the 2,000 years preceding European rule.”

The System of Exploitation

There lies the hierarchy and Maddison got it correct. The Indian system worked through the caste hierarchy and the agro-income from the lowest strata of the society used to bubble up as taxes to the upper elites.

“The revenue of the Moghul state was derived largely from land tax which was about a third or more of gross crop production, i.e. a quarter or more of total agricultural output including fruits, vegetables and livestock products which were not so heavily taxed … Total revenue of the Moghul state and autonomous prince-lings and chiefs was probably about 15-18 per cent of national income. By European standards of the same period this was a very large tax burden”

Not only the taxes were high, the tax money were used mostly in “consumption expenditure of the ruling class”.  Maddison further notes that the Jagir system in India was not hereditary and the Jagirs were posted from place to place. So, he “had an incentive to squeeze village society close to subsistence”. The village society was very docile and governed by the rules of caste. That was the primary reason why India was smoothly ruled by outsiders for years as Indians were more concerned about their “karma” as per their “caste” and not to sidestep it for a larger or revolutionary role in the society. One notable absence, as per him, was that Indians rarely tried to take up sea-trade as part of their profession since “religious beliefs inhibited foreign travel and commercial development by Hindus”. Furthermore, caste stagnated the society to new ideas and technology unless they are imposed from the rulers -

“In spite of extensive contact with foreigners, India did not copy foreign technology either in shipping or navigation, or in artillery and military organization, and this is one of the reasons it was conquered by Europeans. ”

On the other hand the revenues from this exploitation channels were put in to the “hoarding precious metals and jewels“ and “construction of palaces and tombs”. The total land-irrigation work undertaken was as little as 5% of the total fertile-land.

On the brighter side though, Maddison mentioned that religious institutes in India did not consume as much money as it did in Europe.

Conclusion

In summary, in spite of a few glitches (I would discuss those later), Maddison probably got to the closest to the reality. There are very few Indian scholarly articles that could now-a-days confirm that Indians on an average were richer than the Europeans or the Arabs at the same time. The perils of elitist economy would be felt sooner than anyone expected – during Industrial revolution. The major Indian produce – things such as muslin – were dependent on aristocrats to buy. In a world where mass-production was much more important than elite products – Indians were bound to lose the trade war. Moreover, the producer lived in perils and he had little incentive to innovate or take his production scheme to the next level. All things necessary to produce a failed state were gathering mass under the lavish Mughal aristocracy. The myth of rich Mughal India is thus just another myth.

The primary resource - Class Structure and Economic Growth: India & Pakistan since the Moghuls (1971) by Angus Maddison.

2014 World T-20 – New Format

I am glad to see a new format being implemented in ICC World T-20 coming edition. There are plus-es and minus-es of every format but I guess the new format raises the probability of the right teams to play in the semis as well as gets rid of redundant matches.

In 2012 edition of World T-20, Ireland complained that they got only a couple of matches and one of it was actually abandoned. The complain from India and New Zealand was that they were too close but eventually missed out on the semifinal berth. I am not sure whether or how much the new format tackles the latter, but I am sure it addresses the former one.

In the new format, six teams from the qualifier will join Bangladesh and Zimbabwe (last two places in World T-20 2012) to play in first round. Popular media is terming this as a qualifier but this will be a part of the main tournament with the fact that top 8 teams from the previous T-20 World Cup will escape it.  In the second part, which will be played in round robin league format, two of the teams from round one will join eight others and form two groups of five each. After this, probably usual semifinal and final will be played among top two of these five member groups.

This will provide an opportunity for the Associate and Affiliate nations to rub their shoulders with lower ranked teams from previous version of World T-20. The first round will probably played in two groups and each of the last two finishers in last edition will be placed in each of one groups. Let’s go over the situation in a bit details -

Qualifier – As usual. Let’s assume the six qualified teams are – Ireland, Afghanistan, Namibia, Netherlands, Scotland and Canada. (Going by 2012 edition of Qualifiers)

Full Teams - West Indies, Sri lanka, Australia, Pakistan, India, England, New Zealand, South Africa, Bangladesh, Zimbabwe (ranked based on position and net run rate in 2012 World T-20)

Preliminary Round -

Group A – Bangladesh, Afghanistan, Namibia, Canada (Team9 with Qual2,3,6)

Group B – Zimbabwe, Ireland, Netherlands, Scotland (Team10 with Qual1,4,5)

Let’s assume Bangladesh and Zimbabwe move to second round.

Second Round

Group A – West Indies, Pakistan, India, South Africa, Bangladesh (Team 1,4,5,8,9)

Group B – Sri lanka, Australia, England, New Zealand, Zimbabwe (Team 2,3,6,7,10)

Semifinal and Final.

So, straightway, Ireland is getting 3 matches with an opportunity to get to the second stage winning probably just one crucial match (against Zimbabwe).

Total matches – 12 in Prelims, 20 in second round and 3 in deciders. (Previously, 12 in prelims, 12 in super eight and 3 in deciders)

I came across Bangladesh cricket fans not satisfied with this new arrangement mostly because Bangladesh will have to walk on tight rope against Afghanistan (possible next challenge in Prelims) and might be actually out of the tournament in case they lose it. However, I am convinced after seeing both teams (and Ireland too) that Bangladesh should have an easy win (so is Zimbabwe) at home soil. The Associate and Affiliate teams are still not up to the mark in the T-20 matches. However, after 2016, when the tournament will take place somewhere outside of subcontinent, things might change. But by 2018 the formats could change too.

The India-like situation (India lost one match and were out of semis) will less likely to happen in this new format given there are five teams instead of four in the revised format group stages. The same way, two tied-matches will less likely to impact semifinal chances (NZ like situation).

Bangladesh Cricket Team Should Tour India

I see there are efforts going on to arrange an India-Bangladesh bilateral series in India. While this should have been arranged years ago, I would say better late than never. We should all welcome the Bangladesh team to India and expect a good competitive series to be played here.

While a lot of people might not consider Bangladesh as a competitor, I would disagree. In the ODI format, recent record of the team is good. This includes back to back wins against India and Sri lanka backed up by another series win against T20 World Champion West Indies. On the other hand, current World Champion India is not doing badly at home too. India is scheduled to visit Bangladesh for a three match ODI series and a reciprocal series in 2013 would be the best fit. The target months could be July/August. India has a Zimbabwe tour (3 ODIs) in July and nothing in August (schedule).

India should ideally arrange a three-match ODI series with Bangladesh. If possible, there should be a couple of practice matches too. Though I would like to see these matches hosted in Eastern India, given the rain factor – Nagpur, Bangalore, Mohali, Hyderabad could be a better venues than Guwahati or Kolkata. However, Kolkata can definitely host a practice match between Bangladesh XI and Bengal XI and you may get a heavy crowd. Similarly, a match between Eastern Zone (current Duleep Trophy Champion) and Bangladesh XI in Guwahati might see a healthy turnaround. The last time these two played, East Zone won it by an innings and 149 runs but the Bangladesh team has improved a lot since then.

The pitch in India generally favors spin and Bangladesh should make good use of their top class left hand spinners. On the contrary, the new ODI rules (two bouncers and 5 fielders inside circle instead of 4) favors fast bowlers. Overall, I am waiting to watch a thrilling series.

IPL and Future of Cricket

IPL is big.

IPL is big in terms of revenue, glamour, supporter-craze and of course in terms of cricketing excellence. The cricket crazy nation of India has probably never seen such a good domestic tournament so far – in any sports.

How popular is IPL? What percentage of popularity of cricket is actually driven by IPL? I started thinking about these questions after talking to grandfather of my kid’s mate. He’s Polish and lives in a village. But, IPL is one of his favorite sporting pass-time, apart from watching soccer. He’s still not so crazy about cricket but was able to tell me about KKR, Shahrukh Khan, Sunil Narine and what not. He enjoys the thrilling finish of T-20 games. But, to the contrary, he doesn’t watch normal ODI cricket.

IPL makes BCCI rich. Prior to IPL, majority(85% as of my latest knowledge) of revenues of all ICC tournaments were equally divided among the member nations. So, all countries were in a sense equal. IPL disrupted the same. They turned that equation upside down. Since IPL stands as Indian domestic league – BCCI pockets the profit from this tournament. That made BCCI one of the richest cricket boards.

That takes me to my first infographic that shows how IPL is climbing the ladder of popularity. Below is the search trend of two keywords – IPL and Cricket. The red one is cricket and the blue one is IPL.

IPL(blue) vs Cricket(red) interests

Worldwide the interest around cricket is growing – but not at the same pace of that of IPL. IPL is a seasonal phenomenon and at its peak, it has overtaken interest on cricket in 2012.

If we concentrate only within India, we’ll see similar phenomenon replicated albeit IPL gaining more prominence compared to Cricket.

Interest on IPL(blue) vs Cricket (red)

IPL is dominating cricket in India.

But don’t miss the point. The pinnacle of all these is the world cup winning moment of India. The IPL peak is hardly 60% of it. So, even though IPL slowly taking over cricketing phenomenon of India, the World Cup stays in its place.

IPL is most popular in West Bengal – probably justifying the recent success of KKR as a team.

Statewise search popularity of IPL

I think its safe to comment that except a very few selected tournaments (such as World Cups), IPL is going to be the most popular cricket tournament in the coming decades. Whether it would enrich Indian cricket or not is a different question and I am not too hopeful on that right now. But the status of stature of IPL as a cricket tournament can only rise in coming future. Any opposition?

N.B. – Click on the images to visit the google trends for those keywords.

Success of Diaspora – Does it imply a success of home country?

There’s a lot of discussion around success of Indian diaspora outside of India. Previously, there were a few examples used to demonstrate that but with the arrival of more clear and concise statistics it’s obvious that Indians abroad are winning. They are ahead in education as well as in average income in the developed countries - wherever they migrated.

However the reason of this success was less discussed and so is its’ implication in India itself. I see Indians outperform immigrants from Bangladesh and Pakistan by a large margin. However when we consider the education index – I see all these countries are quite close, so is their HDI as per UN report. So, what’s going on?

First, let’s see the differences. There are a couple of things in place here. There is a gap between the performance of the country and the performance of diaspora. The gap can be explained by the channels used for immigration. Let me explain with an example. Let’s assume a class has a couple of sections. Let’s say there’s a Math competition between the two. Now representatives of section A is chosen by an exam conducted by the class teacher. The representatives of the section B were picked up randomly. Now, even if the sections show equivalent results in Annual Math exams, in the said Math competition section A will have an advantage. This is because they are using meritocratic channels to choose their representatives, rather than from a random sampling.

There are a couple of major channels used in immigration – the first one is via education and jobs, the second one is via family reunion and marriage. The former one is much more meritocratic channels than the latter. On the other hand, the latter is more “random” than the former. There’s a third non-meritocratic channel in case of USA (Diversity Visa) and that is purely random channel.

My first hypothesis is, the more meritocratic channels are used in a country-to-country migration, more the difference between home country and the diaspora. The theory is simple – people coming in to the foreign land with a work-visa will tend to earn more and will do better in education than one coming through family ties and marriage. Let me call this hypothesis selection bias.

The second hypothesis is more proportion of people comes in as immigrants – the more random the channels become. The simple example of section A and B can be used to explain this one. The section A has 20 students and section B has 100 students. If we choose top 10 from section A and top 10 from section B, we are providing a proportion bias to section B. If the student performance is distributed by a Gaussian curve (assuming meritocracy inside each section) then section B students will have an advantage if we look at their average scores – even if the average of whole class might be the same. Let me call this one proportion bias.

Let’s look at a couple of pictures.

UK Citizenship for people born in India, Pakistan and Bangladesh (2004-2011)

Settlement in UK – Indian, Pakistani and Bangladeshi Nationals (2009-2011)

Now the USA residency distribution.

USA immigration for people born in India, Bangladesh and Pakistan (2010)

So, a couple of observation -

1) Indians get a selection bias advantage in both in USA and UK. In UK, both Pakistan and Bangladesh have almost same selection bias. In USA, Pakistan has a better selection bias than Bangladesh.

2) Indians enjoy a vast proportion bias. India, Pakistan and Bangladesh population are in proportion of 8:1:1 but the number of immigrants in UK is close to 10:8:3. In USA the proportion is a bit better – 11:3:2.5.

Now coming back to the topic, Indians abroad do well because they use meritocratic channels and get a proportion bias. The use of meritocratic channels is prevalent among Indians because of the large presence of MNCs in India. Microsoft in UK or USA will be more comfortable to hire another employee working for the same company in India. However, the similar opportunity is non-existent in either of Pakistan or Bangladesh. So, the success of immigrants has almost nothing to do with the average performance of the home country (though India produces more % tertiary educated people than either of Pakistan or Bangladesh), but with the channels used in immigration.

The funny thing is, the perception of home country abroad is largely based on its diaspora and that creates a positive feedback loop. More Indians doing good abroad will imply more MNCs will hire from India and the loop will continue until the average is hit (which will take time given the population). So, at least for the time being, Indians will enjoy reputation abroad of being high-paid and educated class.

Source -

UK Citizenship Tables

UK Settlement Data

USA Immigration Statistics

Indian STEM students in USA by numbers

STEM – Science, Technology, Engineering and Mathematics.

I compiled a chart of Indian STEM students compared to total foreign-students in United States studying Masters and PhD. The numbers are for the year 2009.

Indian STEM students in USA, 2009

Source - Department of Homeland Security, U.S. Immigration and Customs Enforcement, Student and Exchange as retrieved from this report.

The Chinese Trade Story – Short Version

In the wake of recession in Europe and downgrades by several rating agencies, Indian politicians and media are back to the drawing board to figure out what caused the debacle of last couple of years. Initially, it looked like a recession bypassing us and we are recession-proof. Later, the thought was that the effect would be temporary and probably caused by an international bubbles. Now, its more and more evident that recession has actually exposed Indian under-performance. A lot of the issues currently plaguing India is home-grown and the solutions can be achieved internally. But the media didn’t listen. Neither did the political leadership. So, with a new gun, they are targeting the trade deficit with China to be one of the main culprits. I can see politically things have started moving, both in terms of talks and actions.

Before I delve deeper into the issue, let me present the facts. The first point to note - Trade deficit between the neighbours widened to $40 billion last year. At $17.9 billion, India’s exports to China in 2011-12 were less than a third of the $57.55 billion worth of goods it imported from the country (source). The worrisome factor is – this has a trend. The trade gap is growing, even if we look at the post-recession trend alone. Overall, India is not in a good shape in terms of trade. The deficit is creating pressure on exchange rates and reserves. So, we get a culprit and it turns out to be our favorite – China.

Is it that easy? Probably not. Jyoti Rahman once explained how trade deficit with India might not be that bad for Bangladesh. In this case also, if I look deeper, I see the traces of hints from his writing. What caused this massive trade deficit and what keeps it growing – are the two prime questions I would try to answer at first. If one looks at this chart provided courtesy Wall Street Journal, you can easily identify the three major import items from China. They are (ranked) - Telecom equipment (e.g. ), Equipment for major projects (e.g. Power plant, Mining), Computer related accessories/parts (e.g. Computers, Hard Disks etc.). All these things are known as “Capital Goods”. In fact, overall Capital goods imports are estimated to have crossed $40 billion at present. They were $6.5 billion in 2003-04 (source). So, the growth in import from China is mainly coming from Capital Goods and not from toys (as people often complain).

Now that we have an answer that Capital Goods import from China is the major cause of Trade imbalance with China, we now question, is that a bad thing? To me, the answer is mixed but overall I am leaning towards the answer “No”. Let me explain why I am in favor of Capital Goods import from China.

Capital Goods import is considered to be a good sign for the economy in general. As explained in details in this article, a developing nation imports machinery (or other capital goods) and uses its cheap labor to make items worth of export. As the time proceeds, the country is able to produce more and more export-goods and eventually produce those capital goods close at home. This has happened in China too, as it is described in the figure below. In 1980s, it imported machinery from Japan and Germany to set up its factories where it produces garments/textile and consumer goods to be later exported to North America and Europe. After a while, Japanese and German companies invested in China to produce those machinery to compete rising labor cost close to home and China has eventually become a net exporter of Capital goods. At the same time, Japan and Germany moved to higher value added manufacturing industry (e.g. innovation, design) and China took their former place. Most of these capital goods tagged as “Made in China” are also designed in Japan/Taiwan/Germany.

Stages of China’s trade structure

On the other hand, if one looks at growth rates of Chinese items exported to the rest of the world, one can easily verify that Telecom equipment, Electrical machinery and Office machines are three fastest growing export (that testifies the theory) sectors as of 2004. (source) So, it’s a natural thing in the growth cycle of a developing country and it’s better to get it sooner than later. But isn’t that hurting the competitiveness of Indian companies who build Capital goods also? That’s absolutely true but probably not a big deal. Imagine the early 1990s, when Indians started importing computer and related accessories from rest of the Asia. If Indian Govt decided to curb those and promoted domestic computer manufacturing industries, would we have seen such exponential growth in services export? Probably not. One advantage that India had was that they had no domestic manufacturer of Computers and no jobs were threatened because of cheap Computer import (Leftist brigade might still argue otherwise). There is no dispute that the third highest item in the list of imports from China (Computer and accessories) actually adds value to Indian services industry. The imports related to power plants and telecom are targeted towards another domestic problem – infrastructure.

However, Indian political delegates are talking to China in order to get more market access and remove restrictions. While this is not a bad ploy but the success of such ploy will definitely be limited. India should also push for greater market access in the developed world (such as EU-India FTA), where most of Indian exports should end up. After all, India will continue to have a huge labor advantage against the First world, but probably not against China. If India can fix their perennial infrastructure problem and obtain better access to developed world market, investments will start flowing. More investments are used for more capital goods import and more export of consumer goods and increase in jobs – just as the classical development paradigm suggests. So, the trade deficit with China is not as bad thing as the press suggests and we should probably rethink our perceptions about our constraints.

Additional Reads -

1. This old paper from Jong-Wha Lee argues why Capital goods import is good for long-run growth.

2. This paper from Veeramani relates Capital goods import with labor-productivity.

3. This paper suggests – “access to cheaper capital good imports not only had a positive effect on labor productivity growth for the entire sample period, but has become increasingly important in recent years.”

4. This paper concludes – “we find that for the period from 1980 to 1997, after controlling for trade liberalization, other reforms, and fundamentals, stock market liberalization are associated with a significant increase in imports of capital goods. Both our evidence and the literature’s further suggest that this can be attributed to the consequences of financial integration which allow access to funds and lower the cost of capital in an economy.”

WSJ published an article in the similar tune.

“India’s cabinet last month approved a 21% tariff on imports of power generation equipment into India. … But this is a profoundly short-sighted approach to the trade issue, which ignores what should be the far bigger concern of Indian policy makers—not the trade deficit with China, but the country’s overall infrastructure deficit. India’s chronic shortfall of electricity (witness last month’s blackouts), roads, airports and the like is a major constraint on growth. Imports from China are part of a solution to this problem, not a problem in their own right.

The vast majority of imports from China consist of capital goods such as electrical machinery, nuclear reactors, boilers, ships, boats and items for civil engineering projects. Consumer goods such as toys, footwear and the like account for less than 2% of imports from China. These capital goods tend to come at a lower cost (thanks to the so-called China price), and are made cheaper still by extremely advantageous financing offered by Chinese banks.”

Now Swaminathan Aiyar has come to my support.

“Why have falling import barriers now produced prosperity? Because this encourages specialisation in areas where India is competitive, and discourages wasteful investment in uncompetitive areas.”

Indian Medal Hopes in the London Olympics 2012

Archery has the best chances to fetch India a medal. In the three World Cup events this year, Indian Men bagged two silvers and the Women bagged a Silver and a Gold. The Men’s team is ranked no. 5 in the World, while the Women’s team is ranked second. Archer Deepika Kumari, who won the gold in one of the World Cup events, is highest ranked Archer right now. Even last year, Indians bagged several medals in World Cup events. It’s notable that only recurve Archery is included in Olympics.

Shooting is getting most media coverage this time, due to Bindra’s feat in last Olympics. It’s important to note that the only Indian to be ranked within top 10 in ISSF’s ranking list is Ronjan Sodhi (#10 in Double Trap), no other shooter is in Men’s or Women’s top ten list. However, the competition is intense and performance on the day matters more than consistency in case of shooting. For example, Bindra didn’t get a Gold in WC’s a year before or after he hit the top position in the Olympics 2008, even fellow Gagan Narang had higher ranking and more consistency than what he had. Same way, India did bag a gold and a bronze in 2010 ISSF World Cup despite not having anyone in the top ten ranking. So, we can cross our fingers and wait for the day.

India has a medal hope in Badminton too. Saina is currently ranked 5th and she was the winner of last 4 out of 7 tournaments played. Kashyap (ranked #21), the other contender, doesn’t have ranking to back him, but he reached semis in a couple of recent tournaments. Indian doubles pairs though don’t have any recent glory (last one goes back to 2011 World Championship).

Boxing is another medal hope. In last men’s world cup (2011), India bagged a solitary bronze (Vikas Yadav), as in the last Olympics. But a few others also came close. Devendro Singh, Manoj Kumar and Jai Bhagwan reached QF while Dinesh lost to the eventual Champion. In women’s section though, only Mary Kom has a chance although in the 2012 World Cup she lost in the QF. It’s notable the women’s boxing has only three categories in this Olympics.

What could have been a certain medal, now looks more uncertain in Tennis. The legendary partnership of Bhupathi-Paes is broken but a third rising star in form of Bopanna (ranked #13) can bring a medal for India partnering Bhupathi (ranked #15). In mixed doubles, in form Paes (ranked #5) is partnering Sania Mirza (ranked #18) – who recently had a lot of success with her mixed doubles partner Bhupathi. However chances in Men’s singles and Women’s doubles are slim. This time, matches will be played in Grass which is not the favorite turf for Indians as per the recent performances. There are a couple more factors – a lot of pairs appear in the Olympics who are not traditional doubles player – such as Roger Federar in Olympics 2008. They are a genuine threat to established doubles pairs.

India bagged a bronze in 2008 Olympics when Sushil Kumar had the bronze medal from wrestling. However, the chances of a medal from wrestling this time is not so bright. No Indians finished in top six in their individual categories in World Championship Wrestling 2011. However, in Women’s wrestling, Geeta narrowly lost in QF of 55kg category can can be considered as a medal hope. If you go a year back, Sushil won gold in the same tournament in 66kg category.

Even though a lot of media focus is on Indian hockey and they actually are playing well at times, I don’t expect them to have a podium finish. I will be very happy if Indian hockey team makes through Champions’ League, i.e. finishes within top six. They are currently ranked #10 and a finish within top 6 should be a realistic success story.

In many other events, Indians will just add the numbers and diversity. I don’t expect a medal from Weightlifting, Athletics, Table Tennis, Rowing or Judo. Among these, woman weightlifter Chanu finished 7th in World Cup but the gap between her and the bronze medalist was significant.

From 1984, India have never performed worse than its last outing. If they can maintain that trend, they should at least get a gold and some more  medals. Given India’s population, it might appear that we are under-performing but I believe it has a regional effect. India’s neighbors are doing equally poorly as that of India. So, chances of a rapid recovery is slim, unless we build up some sports infrastructure at home.

Bangladesh vs Myanmar : The Maritime Arbitration – Conclusion

I wrote the article on Bangladesh-Myanmar maritime arbitration while it was in progress. The verdict is out in March and because of busy schedules, I was not been able to put up a decent informative article to follow up on the same. However, since I’m writing a couple of months later, I’ll focus less on the verdict itself, but more on the implications and reactions.

When I wrote about this arbitration, I was in confidence that Bangladesh will get something better than what was on offer by Myanmar’s negotiation on EEZ. But at the same time, I thought Bangladesh would get favorable verdict in continental shelf as well. I was right on the first one, where Bangladesh got better than equidistant but to my surprise, the continental shelf was also split into half. On the territorial waters front, Bangladesh didn’t have a strong claim and they didn’t win it. So, overall it was a mixed verdict for Bangladesh though more of victory and less of defeat.

Image courtesy a news article -

Bangladesh Myanmar settlement map

Why is this a Bangladesh victory?

The decision on EEZ was the most crucial one since that’s where potential of economic recovery of gas and oil resources are. So any shift of maritime boundary should be seen as a big win. The territorial waters are important but only a small part of the dispute. The continental shelf area is far away from the mainlands and more important as a fishing resource than gas-blocks.

The allegations against this common idea are centered around the fact that no major gas blocks from Myanmar are changing hands. One blogger from Myanmar also used the same argument (picture – see the red line for verdict, another source) to explain the same his countrymen. Indian media was also happy to note that Indian stake at Myanmar blocks are intact. To answer this, I would say Myanmar didn’t allocate blocks aggressively to the disputed areas and kept some buffer space in case the verdict didn’t go for them.  So an adjusted line was also out of their allocated blocks.

The second is more important one. A lot of people in Bangladesh argued that Bangladesh lost a proposed area as per their 1974 law named “The Territorial & Maritime Zones Act”. I mentioned it before also that 1974 law didn’t have any basis. It was declared unilaterally based on a floating baseline concept that never made into final UNCLOS in 1982. When the arbitration is fought on a law based in 1982, the local declaration of 1974 doesn’t add much of value. Unfortunately a string of misleading articles has been published in support of this view and I wrote against these claims long back. Bangladesh, understandably, did not argue anything on “floating baseline” in the arbitration and reduced their claim beforehand in order to get a favorable verdict. This strategic move definitely paid off. As I warned in the article before, the opposition will not be convinced of that approach so easily. That’s why most of these arguments are primarily motivated by political calculations.

A third team argued that the delimitation didn’t happen as per “equitable” rules, rather they happened on adjusted equidistant method. However, this allegation is attributed to lack of knowledge only. Equitable allocation often is synonymous with adjusting equidistant allocation with relevant circumstances. The only pitfall here is the adjustment didn’t happen to the extent Bangladesh wanted.

The extent of this victory

There are news sources quoting Bangladesh ministers (Dipu Moni) on getting more than what Bangladesh has asked for. This is not true. ITLOS verdict drew a line in Bay of Bengal to partition the rights of Bangladesh and Myanmar. However, the claims of Indian mainlands and archipelago will have its own claim and the area will be adjusted downwards. From the verdict (pg 141-143, para 499) we see

“The Tribunal notes that its adjusted delimitation line (see paragraphs 337-340) allocates approximately 111,631 square kilometres of the relevant area to Bangladesh”

However, it noted earlier that the relevant area was does not have anything to do with claims.

“The fact that a third party may claim the same maritime area does not prevent its inclusion in the relevant maritime area for purposes of the dis-proportionality test. This in no way affects the rights of third parties.”

And para 462 notes -

“The Tribunal therefore decides that the adjusted equidistance line delimiting both the exclusive economic zone and the continental shelf within 200 nm between the Parties as referred to in paragraphs 337-340 continues in the same direction beyond the 200 nm limit of Bangladesh until it reaches the area where the rights of third States may be affected.”

That means the claims made by the minister is exaggerated and based on wrong assumptions. I found one more scholarly article is quoting the same.

Interestingly, part of news media in Bangladesh assumed that Bangladesh has won as per 1974 claim and published articles/pictures based on those.

Avoiding the effect of St Martin Island on EEZ

While calculating EEZ, it seems that the effect of St Martin Island was not taken into consideration. This means India’s near-equidistant demarcation with Myanmar, Indonesia and Thailand makes sense. For the sea-boundary with those three countries, Indian claim was based on Andaman and Nicobar Islands. These islands would have got same or similar status of that of St Martin, had there been any real arbitration. Of course, someone can also argue that islands of Myanmar and Thailand were also given full effect while drawing the lines.

Some of the opponents in Bangladesh claimed that Bangladesh has lost its partial rights on the same island based on this verdict. That’s again an exaggeration as Bangladesh retained territorial waters surrounding the same island.

Impact on the other Bay of Bengal Case

Bangladesh and India are fighting to fix the rest of the boundary. Unfortunately, due to lack of public domain documents on that case, I won’t write on it. Still, there are few points I can think of  -

1) Bangladesh won’t be able to argue anymore that they don’t have the access to  international waters. That was their crux of argument in ITLOS. Now, they got it by the virtue of this verdict.

2) Bangladesh will be able to argue for similar regime for delimitation, i.e. an angular bisector at the river Haribhanga, that separates India from Bangladesh. However, learning from the court exercise, Bangladesh may also claim an adjusted equidistant line. The adjustment will be claimed showing lower economic status of Bangladesh (LDC country) and higher population density.

3) India will argue for an equidistant line. The proposed adjustment of Bangladesh will be resisted by India citing high-population, limited access of North-East India to sea and concavity of Orissa coast. India may also claim that Orissa and Bihar are India’s poorest states and they depend on the portion of EEZ in contention.

4) The court will probably draw an equidistant line and will make decision (based on strength of arguments) whether to adjust the line.

5) The amount of EEZ in dispute will be much less than that of Myanmar-Bangladesh dispute. The settlement area (area lost or gained) will probably be even less.

6) If Bangladesh doesn’t get satisfactory result from this dispute and if Awami League is running Bangladesh at that time, there will be a claim of treachery from the opposition.

7) The case will also decide on continental shelf delimitation. Now that we know of it in details, I believe the same line drawn for delimiting EEZ, will most likely be extended to delimit the continental shelf also.

Elsewhere

When China and Philippines are facing same or similar issue on sea limit delimitation, Bangladesh and Myanmar settled it in the court. Unlike India, China has said “No” to any court settlement and is pursuing hard-handed solutions to its neighbors and claims it has no obligation to go to the court. The difference of approach is significant since in the new world order, China has been seen as a semi-pole in what we call a Uni-polar world. To know more about the dispute, one can refer to this wiki entry, though the English wikipedia is largely banned in China. Apart from Philippines, Vietnam, Malaysia, Taiwan and Brunei are part of the same dispute.

References

1. International Maritime Boundaries, Volumes 2-3

2. View from Myanmar newspaper – link  and summary

3. The verdict

4. Prothom Alo report

5. Read an old article (second one) and understand what Bangladesh used to claim.

6. China’s invented history link