Yogesh Gupta

Reservoir Engineer, Shell International E&P

This conversation is closed.

Can someone please correct my economics?

In India, 55% population is working in agriculture sector, 20%-25% in service and industry sector, 7-10% in public sector, 10% nearly unemployed.

Though the service and industry sector in India contributes the most to the GDP (55%), population wise it employs the least (20-25%).

If say the developed nations demand less goods and services, this would mean developing nations like India would see fall in exports of goods and services and also see fall in its imports of energy like oil an gas. This would create a surplus of supply in energy sector and costs would go down.

Hence, if the developed nations reduce the import of goods and services from India, I agree it may contribute in less income to nearly 20-25% of the population involved in the service and industry sector, but would help nearly 70% of the population to have an increase in their income as their energy costs (direct and indirect) go down.

The current economic difference between the poor and rich is very high. I believe this slow down will give time to the country to bring about a balance.

In the current economic crisis, many companies let go the most experienced staff or elderly staff and retained the young ones since they are low cost to the company. I believe similar effect will be seen if a slowdown happens in India. The rich elderly executives will be forced retired (can still lead a good life) and on the other hand the 70% population gets a chance to catch up with the rich.

Let me know if i am missing something in my view.

  • Dec 13 2012: Hi Yogesh, some thoughts. First, three points that would need to be proven in your argument: (1) that reduced "developed country demand" would lead to lower (wholesale) energy prices, and (2) that lower energy prices would actually reach the average Indian citizen. That is, is there proof that end-user electricity or fuel prices will be lower?

    3) consider the notion that reduced "developed country demand' would actually lead to reduced (discretionary and non-discretionary) spending in India. In which case, what would be the net economic impact of reduced spending on those who are in the agricultural sector and/or lower levels of personal income?

    Finally, I believe that economic opportunity (or mobility as someone else mentioned) is also needed to reduce the income gap. If a farmer saves $1 per month but cannot find a reasonable investment for it, then it is essentially like hiding that money under the mattress and getting no return. (Internal rates of return and all that.) And here is where governments can be very influential, in providing investment opportunities for low-income folks (such as education, etc.). Highly recommend "Why Nations Fail" as an interesting high-level perspective on this matter. Hope this helps.

    PS fully agree that the world could do with a lot less consumption and a lot more investment in "production / growth" technologies, renewables included.
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      Dec 13 2012: Hello,

      Everytime the price of oil goes up, the government tends to put that load on the citizens partially. Currently they give subsidies on diesel, lpg, etc. So basically they reduce the subsidy when oil prices go up. When economic crisis kicked in, the oil prices went down and the prices of diesel, petrol were reduced..So basically the government did transfer the benefits to the people. Reducing prices in India has become more a political move than reality, so my example above is debatable.

      Together with decrease in energy costs, if organic farming (currently an uproar in India) is also implemented, the farmers would spend much less on fertilizers and energy. There are many government initiatives like cheap life insurances (with returns), micro financing, waiving off interests in drought season, etc to help the farmers. But I agree that education is the only way out in this economically relied world.

      But all this debate started because, i think to reduce emissions, we need to slow down in using fossil fuels, and how will this slow down happen and the approach to slow it down.
      This slow down will have implications on developing countries and this is what i am trying to understand.

      I have written few short blogs where you can understand where are these questions coming from and what i wish to achieve.
      http://yogeshpgupta.wordpress.com/

      Thanks a lot!
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    Dec 12 2012: i see no major flaw in your reasoning. of course, it is never that easy with economics. for example, india runs a huge trade deficit as of now. should international trade drop, india on average would have to cut like 10% of consumption at once. not including the transient period before the new equilibrium is found, which can be anything from bad to devastating.

    let me put it in a different lighting. as of now, the world economy looks like this: the EU and the USA prints money like idiots, and also borrow. it largely benefits them, and of course sets back everyone else. being close in the supply chain to these large consumers gives you a share of the loot. so as of now, for example, americans have a party on borrowed money. the companies delivering the food and the drink make a good money. the companies delivering the ingredients for the food also make some. everyone else pays the bills. in that sense, industrial workers in india probably benefit from the american party, but others just pay the bills. should the party end, this difference would disappear.
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    Dec 13 2012: Well I do not sit with the policy makers on daily basis. :D
    So I am as aware of the companies seriousness as shown in public.

    Renewables at the current stage are not economical and not continous in nature (reliability of sun, wind, etc)
    If you watched HardTalk on BBC with our CEO Peter Voser, you might get a hint to what he is thinking about renewables.

    I feel that even using renewables is not going to help us reduce emissions till we actually reduce our consumption of fossil fuels and also plant more and more trees.
    • Dec 13 2012: Thanks for the hint on the BBC interview. I haven't seen it, but I'll look for it. Generally, I don't trust top-level people. They hide a lot of things. One of the huge companies I worked for sold off a division. The day it was announced to the world, it came as a shock to most employees of that division. But, the rumour mills knew all along.

      We (people) have two contradictory worries... CO₂ and peak-oil, peak-coal, etc. I don't know which of them will hit us first and which will affect us more severely. But if we are hit by peak- oil or coal, we won't have to worry about CO₂. They are both excellent reasons to get into renewables.
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    Dec 12 2012: I have written a blog related to this:

    http://yogeshpgupta.wordpress.com/2012/12/12/donate-or-change/

    appreciate your views!
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    Dec 12 2012: Hello John,

    Yes i agree with your view, but if goods and services are reduced, say 10% people get fired. But then other 70% people would be able to live better with lower energy and food costs.

    I already see there is already movements against corruption and against social barriers in the country. My parents are not really educated but they have educated me and my siblings. But this does not mean the problem is rooted out in all families. Somehow I prefer the slow progress, not to lose culture.

    I believe we are going through the same stage that the developed nations went through in past, like labor abuse, poor health, education slack, etc.
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      Dec 12 2012: Seeing that spices are my favorite imported good from India, I’m thinking that reduction of India exports is also hitting the agriculture sector. A tread worldwide for consumers is to buy straight from the food grower, and with that in mind setting up a grower to consumer system may be a way to improve the agriculture sector’s GDP.

      Look at it this way any savings in lower energy and food cost will be offset by their lower income, due to the reduction in exporting their goods and also the rich reduction in buying their goods. So you end-up with a lose-lose outcome, instead of the lose-win outcome your envisioning.
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        Dec 12 2012: I agree with your view. My main aim is to spread awareness of reduction in use of non essentials. In my own company there is a lot of energy wasted in form of electricity for office lighting. Most of IKEA products are just waste of energy, drive-in ATM's, excessive lighting in trains, fuel drinking cars, etc.

        I myself love eating different food and i do not want you to give up spices. :D
    • Dec 12 2012: Energy cost is set by global demand; firing 10% of the high-earners in India will not make a difference to that, will it? But then these 10% of the people also use the services of other Indians... including servants, taxi drivers, etc. What percent of the population could lose its jobs before it starts adversely affecting those at the bottom? I believe that no one can answer the question. And this, exactly, is the problem with Keynesian economics -- the approach that some Grand Designer can meddle with parameters, in the hope that that will fix the economy. I am now referring to India's yearly budgets and its 5-year plans.

      I am also of the opinion that education will reduce culture. Culture one of the factors that is keeping India underdeveloped. ;-) Europeans had something of a "personal" culture too, about a century ago. But, as people started paying more attention to what is important to their own well-being, this kind of culture became less and less relevant.

      One thing that's different about India, compared to the earlier struggles of developed nations is India's immense population. Assuming that there is no corruption, and the economy is running smoothly, don't you think that if India's trade balance and its own internal supply of fuel is not sufficient to support its population, its population has to reduce to meet its available resources? If the population does not reduce, there will be wide-spread suffering, of the kind we see already. Of course, the suffering now is worsened by the Indians' non-resource-related problems.
  • Dec 12 2012: "if the developed nations reduce the import of goods and services from India, I agree it may contribute in less income to nearly 20-25% of the population involved in the service and industry sector, but would help nearly 70% of the population to have an increase in their income as their energy costs (direct and indirect) go down. "

    Yogesh, I see that you work at Shell International. I don't know if you work entirely for the Indian market or not. But don't you have engineers at your workplace whose service directly contributes to the market in other countries? If the demand for their service goes down, don't you think they'll lose their jobs too? Yes, energy cost will go down, but so will the supply of money.

    EDIT: I notice that I contradicted myself about the cost of energy going down. On looking at it again, I think I was wrong to write that the cost of energy will go down. The cost of energy will go down only to the proportionately to how much of a difference it makes to the global supply/demand.

    "The current economic difference between the poor and rich is very high."
    Two major reasons I can think of: corruption, and lack of education. Both these factors affect the society in very deep manners. For example, the poor state of education also encourages many Indians to think in extremely traditional ways -- boys should jobs, girls should find a nice husband, etc.
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    Dec 12 2012: I too agree that renewable energy is good but i feel reducing the current use of fossil energy is a MUST to tackle the CO2 emissions.

    The problem with this statistic of PPP is that it averages out the result over the whole country. As you rightly guessed, the purchasing power is only with less than 40% people. Nearly 50% population is below poverty line (rural area 6 euros/month and urban 9euros/month by definition of poverty line in India)

    Hence I feel, if energy prices go down, this 50% population below poverty line can afford reasonable food for themselves.

    Also the OPEC is artificially keeping the oil prices high right now and hence it encourages oil companies to find more and more, even though currently there is more supply available than demand.
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    Dec 12 2012: Yes I have been looking at some statistics of Indian economy.People believe that India is benefiting from outsourced jobs of manufacturing and services. But when I see that Indian imports are increasing everyday and exports are decreasing and we never really saw a positive trade deficit ever, except 1 or 2 odd years.

    The unemployment rate never came down, the inflation always went up, the GDP deflator has always grown bigger, CPI (consumer price index) has decreased, the rupee has depreciated.. so what is this India, China boom about?

    So all this uproar about India becoming an economic superpower, etc does not make sense.. what has changed?
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    Dec 12 2012: Hello John,

    Actually I believe there are two ways to CO2 emissions. 1) By bringing in alternate energy which can satisfy the current demands of goods and services or 2) reduce the demands of goods and services.

    For the second way there are two approaches that are possible. 1) economic approach (forcing higher prices, etc)
    2) awareness among common man to reduce its dependency on goods and services.

    I have written more about this second approach of awareness in another blog.
    http://yogeshpgupta.wordpress.com/2012/12/12/donate-or-change/

    I believe awareness approach is more long term solution than economic approach. Let me know what you think about it.
    I do not believe in blame game.. but I have just started writing so may not be very clear in my thoughts.. :)
    • Dec 12 2012: Ample renewable (green) energy is key to any future economy, not only because we need energy directly but also because it allows for more efficient recycling of the finite amounts of metals and phosphorus the Earth has given us. Letting India catch up to the rich countries through higher wages means rich countries have to sacrifice some material prosperity, even if it's something as small as lowering the annual income growth of millionaires. So you are thinking in the right direction.

      India does have a trade deficit but this can likely be covered with the money Indian expats send home to India, so it might not even be a real trade deficit.

      India's PPP (GDP corrected for local prices and inflation) is rising steadily so the whole of India is becoming less poor but it could be that much of the extra money goes to the rich and/or the government and don't forget that if the government fixes a road in front of your house or gives you more medicine you have become less poor even if your personal income didn't go up.
    • Dec 12 2012: I don't understand why India is not focusing more on nuclear energy.
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        Dec 12 2012: I have seen the government pushing for nuclear power plants. There was resistance initially due to fresh Japan tragedy and political influence.

        Though i feel it is a much better source of energy as it takes less space and gives more energy. I have seen wind farms, solar panels, hydro, biogas, etc already in use, but the demand is just too high.
        • Dec 12 2012: Sounds good. I hope the government ramps it up quickly.

          I don't know if you are allowed to reveal it to me, but can you tell me how Shell is doing with renewables? I mean, how seriously do they take it, and how aggressively are they funding research in this domain?
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    Dec 12 2012: Hello John,

    Thanks for your time to explain.

    1) In my current and previous company, they released large part of experienced staff as there was not much work, so they retained less experienced staff mostly.

    2) I actually meant that the 70% will catch up in their own sector.. not joining the already saturated sector of service and industry. Why would the 70% end up spending more power?

    3) Is it better for a country like India to increase its income dependency on service and industry or would it be better if it had improved its agriculture and tourism?
    • Dec 12 2012: "1) In my current and previous company, they released large part of experienced staff as there was not much work, so they retained less experienced staff mostly."

      I see, this happens in the West as well, but only up to a certain level: the executives don't get fired because they are the ones deciding who gets fired.

      "2) I actually meant that the 70% will catch up in their own sector.. not joining the already saturated sector of service and industry."

      I see, well that is certainly possible, but it is limited: there's only so much you can do by lowering the prices of fuel etc...

      "Why would the 70% end up spending more power?"

      I meant they would get more "purchasing power", so you could buy more fuel with one rupee than you can today, that's what you wanted to achieve.

      "3) Is it better for a country like India to increase its income dependency on service and industry or would it be better if it had improved its agriculture and tourism?"

      Most of all India should make sure its people get paid a fair wage: it doesn't matter whether you choose to go for agriculture or industry when Indians get paid less for the same work than people in the West. If you produce more than the rest of the world combined but your workers get paid $2 a day, you'll still be a poor country, so India must increase the minimum wage every year and effectively tax the rich while encouraging other poor countries to do the same. Having said that, the focus should be on industry and services since efficient farming techniques will mean only a small percentage of the population can be employed in agriculture in the future (in the West it's often less than 2%).
      • Dec 12 2012: "so India must increase the minimum wage every year and effectively tax the rich while encouraging other poor countries to do the same"

        That's an excellent way to ruin companies and economies! There is always a balance between the disadvantage of doing business across continents and the advantage of cheap labour. Meddle with the latter, and you'll find that doing business locally looks more attractive.
        • Dec 12 2012: Cheap labor cannot be the future for a country that wants to be a first world country. You have to look at the big picture where the economy has to serve the people, all the people, and not the other way around. Most corporations can afford to increase the wages of their third world workers every year as long as the global economy keeps growing, I mean seriously, for $1 million (less than the average CEO bonus) you can give 25.000 Indian workers a 10% raise.
      • Dec 12 2012: "Most corporations can afford to increase the wages of their third world workers every year as long as the global economy keeps growing"

        Having worked for a few multinationals, I know how much even the offices at low-cost countries compete against each other for lower costs. I am not even talking of competition between companies. Most companies are not charities. The compensation that any employee receives is driven by what benefits each employee brings to the company, along with what is the lowest amount the company can afford to pay to each employee. I might start a software company tomorrow. But if I want Marissa Mayer as my CEO, I must pay her enough to make sure that it is more than what she would get anywhere else. I also would have to make sure that Marissa Mayer benefits the company more than anyone else I could hire as CEO. The same thing applies to unskilled labourers too.

        "You have to look at the big picture where the economy has to serve the people"
        Yup. This attitude is exactly why socialism failed, and why, even now, all the countries that are in trouble, are in trouble. Companies such as GE, Toshiba, Mitsubishi, Siemens, Bosch, etc. have about 100k employees, and are already far too big and diverse to be managed by the best minds that money can buy. Now imagine the country the size of the Netherlands ~16M. And keep in mind, the diversity of such a country too. Add to it, the fact that the people who are running the country did not "develop" the way Jack Welch, or Ken Kobayashi, or their teams did, with proven performance-based promotions, and do not have access to the kind of data that industries have about its own affairs.

        If you still think I have to "... look at the big picture where the economy has to serve the people". I'd say, show me one that is run at least as effectively as an average industry.
  • Dec 12 2012: "If say the developed nations demand less goods and services, this would mean developing nations like India would see fall in exports of goods and services and also see fall in its imports of energy like oil an gas."

    Yes, IF India is a major producer of those goods and services.

    "Hence, if the developed nations reduce the import of goods and services from India, I agree it may contribute in less income to nearly 20-25% of the population involved in the service and industry sector, but would help nearly 70% of the population to have an increase in their income as their energy costs (direct and indirect) go down."

    Yes, that could happen, but you have to be careful not to confuse the income a sector generates with the income of the average worker in that sector, it's entirely possible the workers don't make much more than those in the other 70%, if much of the revenue goes to a small group of rich people.

    "The rich elderly executives will be forced retired (can still lead a good life) and on the other hand the 70% population gets a chance to catch up with the rich."

    Nope, the rich will maintain their positions (I don't know where you got the idea that companies in the West fire executives in favor of younger workers) and the workers in industry and services will see their wages lowered. It's likely the 70% will end up with more purchasing power but it's highly unlikely they'll get to work in the industry and services sectors (because there will be so many more qualified industry and services workers struggling for a job in a shrinking sector), let alone become executives.
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    Dec 12 2012: Hello, I mean that the trade is reduced in all developing countries.. not just India. This is possible if all the developed nations reduce their demands or change behaviors like using the same mobile long enough, not keep changing with every update and other examples like drive in ATM's, etc.

    I also mean, the executives working in the services and industry are doing better economically than the remaining workforce.
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    Dec 12 2012: Do you think people become rich working in companies upto old age and that is reason of RICH vs POOR gap ?
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    Dec 12 2012: You do not understand basic economics.

    The road to prosperity and a higher standard of living for all is through trade. Your notion of reducing trade is the wrong direction.

    You do not care about economic inequality that is a canard used by individuals who are dubious and seeking to better themselves at everyone's expense. What you care about is economic mobility. China's per capita GDP has gone from 500 per year to 7000 per year in the last 10 years that is what you want screw equality you want the chance to improve your lot in life.

    http://www.ted.com/talks/yasheng_huang.html
    • Dec 12 2012: Pat, you are the one making rookie mistakes here: once you get to the level of entire continents with billions of people there's not going to be much of an improvement to be had from economics of scale.

      Income inequality and social mobility are deeply connected, after all, if income inequality is large it is hard for the poorest to pay for an education since the price of education is influenced by how much money the richest are willing to spend to ensure their children an education, also, if larger income inequality makes it easier for existing businesses to suppress upcoming competitors.

      You mention rising GDP (China's GDP is acutally much lower, you cited PPP, which was already 2800 in the year 2002, not 500), but if you do not account for income inequality that rise may be entirely due to a few billionaires getting richer: if Carlos Slim moved to Somalia that would instantly double the country's GDP. This is besides the fact that rising income inequality means workers get a smaller cut of the revenue their labor generates, which is fundamentally unfair.
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        Dec 12 2012: Economies of scale are completely irrelevant to this conversation.

        "Income inequality and social mobility are deeply connected"
        That is the meme and it is complete crap.

        Yet China buys the most Rolls Royce s in the world, they have a purported GDP of around 10 trillion. That would be 10,000 billionaires. Me thinks not...
        • Dec 12 2012: "Economies of scale are completely irrelevant to this conversation."

          No, it's not, trade for trade's sake is pointless: two separate blocks of 3.5 billion people won't fall behind one block of 7 billion people. Unless one of those two blocks sits on all the oil while the other one sits on all the lithium or something like that.

          "they have a purported GDP of around 10 trillion. That would be 10,000 billionaires. Me thinks not..."

          They have a GDP of 7.5 trillion, they also have over a million millionaires and many more who make five figure salaries while there are still hundreds of millions of Chinese who make three or four figure salaries. The point is that you can't know where GDP growth comes from until you have a look at the income inequality figures.
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        Dec 12 2012: As usual what the hell are you talking about.

        "they also have over a million millionaires"

        lets check the math on that, that is at least 2 trillion dollars or 2000 billionaires which is slightly more accurate than 10,000 billionaires. But Forbes estimates only 1153 billionaires in the world, not just China?
        • Dec 12 2012: "lets check the math on that, that is at least 2 trillion dollars"

          Income (which GDP is the sum of) and amount of wealth owned (which the term millionaire applies to) are not the same, so you can't do your "math" like that. My point is that a country where 700 million people make $800 per year and 600 million make $10.000 per year is very different different from a country where most of the 1300 million people make around $5.000 per year, yet they have the same GDP and GDP per capita. The former case is much closer to the real China than the latter. It's just elementary math: when you know X + Y = 2000 but you don't know X / Y then you will never find the values of X and Y. GDP doesn't tell you anything about how the common man lives. In the US, if you increase the incomes of the top 10% of households (household income above $110.000) by 50% you can lower the incomes of the other 90% by 15% and still have GDP growth!
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        Dec 12 2012: So you are hung up on the inequality of it all? There always has been and always will be inequality. It doesn't matter, what matters is income mobility. What matters is that they have the chance to improve themselves.