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<b>T C A Srinivasa-Raghavan:</b> What the next PM needs but won't get

Everyone is a macroeconomist in India but there are hardly any microeconomists

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T C A Srinivasa-Raghavan New Delhi
Last Updated : Mar 28 2014 | 10:10 PM IST
Assuming, as so many people are doing, that Narendra Modi becomes prime minister in June, and given his managerial style, it seems certain that he will seek a lot of microeconomic advice.

But you know what? He isn't going to get because there are too many macroeconomists in India and too few microeconomists.

When I have asked professional economists about this imbalance, which is the opposite of what exists in other countries, the answer has mostly been a blank stare. Sometimes the charge has been denied.

But the sad truth is that I am right - and the better economists know it.

You can visit the website of practically any think tank, private or public, or the Reserve Bank of India or the finance ministry or any other ministry or any bank or stock exchange such as the National Stock Exchange, the Telecom Regulatory Authority of India or whatever. You will hardly find any microeconomics research papers.

In fact, the field has been left open, by default, to tax experts, most notably from the Big Four. But what they provide is not economic analysis that can help policy. They provide attempts to influence tax policy.

Even in the Economic and Political Weekly, which does have a fair number of well researched articles, the focus is on "developmental", rural and fiscal issues but with a descriptive bias. It is almost as if no one knows the meaning of microeconomic analysis.

Indeed, I would go so far as to say there are very few Indian economists - and I know who they are - who any longer understand, in the true sense of the word, what microeconomics is all about. The reason is simple.

Macro easy, micro hard
Macroeconomics is easy and it is fashionable. It is easy because it has just six or seven variables and anyone can master the inter-relationship between them. The only truly independent variable in it is politics, which was captured by Keynes in the "G" in his famous identity.

But it is ignored by economists in the same way they would ignore gravity. Imagine physicists trying to build a rocket doing that. But that's what the macro guys do.

I will not list out the names because the list is altogether too long. Economists in other countries do far more microeconomics research than ours do. Ours, in fact, do almost zero. You can verify this yourself.

One can anticipate the question that will be asked: are the occasional sectoral studies put out by think tanks - the counterpart of paid news, if you will - not microeconomics?

They are, of course, but even though they are necessary, they are far from being sufficient to qualify as genuine microeconomic analysis. For the most part, they only describe the tables - secondary data whose quality is utterly suspect - in words and then draw some banal conclusions that tend to be more ideological criticisms of policy than something a proper economist would certify as real analysis.

And don't be fooled by the regressions. Those can be, and often are, tweaked in the "appropriate" direction.

Given below are some of the questions that Indian economists need to be answering. It is possible to ask, literally, hundreds of such questions but believe me, only blind luck will get you an answer.

Some examples
n Does anyone know what the income elasticity of demand is for, say, cars or cement, both of which have very high investment and employment multipliers?
n Can anyone tell us what the marginal rate of substitution is of cereals by proteins, for long held to be the main reason for food inflation?
n Will someone specify the effect of reduced/increased competition in an industry (say, aviation after Kingfisher folded up) on the behaviour of the firms in that industry?
n Does anyone know if an industry is capital intensive then what would be the optimum number of firms in that industry for a country like India?
n What is the impact of an increase in diesel prices on the profits of, say, truckers?

No data, no analysis
Until about a decade ago the standard excuse was that there was little or no time-series data. This, it was said, made analysis impossible. But that excuse is wearing thin now and in any case, the absence of enough data need not have prevented theorising as it had done in the west.

Earlier, I mentioned academic fashion as one of the two drivers of Indian research, which is perhaps why Indian economists love to write about the financial markets. But a lot of what they write is pure drivel.

The other area they love is the opposite of fashionable: development, which means the rural and social sector. And guess why: because that is where the heavy funding is.

Perhaps Oscar Wilde was right after all when he said an economist is someone who knows the price of everything but the value of none.
The writer will respond to comments on this column on Monday - see www.business-standard.com

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Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

First Published: Mar 28 2014 | 9:43 PM IST

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