Video demonstration

The video illustrated the point made in the post.Importance of lockdown & social distancing in fighting Corona: An Economist's take

The social cost of irresponsible behaviour

The entire world is grappling with covid-19 and India is no exception. The only potent medicine available against covid-19 is self-quarantine and lockdown. There can be a government order towards lockdown, but it also involves self-discipline on the part of the citizen. We have seen instances where people hid their travel history or behaved irresponsibly. Ultimately, such cases end firing up the spread of the virus. Some might feel that quarantine and lockdown are against their basic rights. They might wonder how their movements can affect others. We need to understand the negative externality involved in this process. The externality is a term used in Economics to deal with situations where the behaviour of one individual affects others even when they are not a direct part of this transaction. For instance, cigarette smoke affects people nearby adversely though they are not part of smoking. The smoker will claim that he has paid for the cigarette and now it’s no one’s concern if he smokes. Sadly, he is missing the harm he is causing to the non-smokers. What he has paid for a cigarette is the private cost. The harm done to others due to smoke is the damage to the society that is unaccounted in the price of a cigarette. The sum of damage to society and the private cost gives the social cost. We can use the same concept to explain why self-quarantine and lockdown are needed to stop the menace of covid-19.

 

The above diagram shows the divergence between the private and social costs involved in our social interactions (physical) in the time of corona menace. The downward sloping line shows the incremental benefits an individual receives from social interactions with others. The upward-sloping straight line shows the cost the individual bears when he makes social contacts. It could be the time spent in interactions/movements outside the home. Individuals like to interact so long as the benefit from it (blue line) is more than the costs involved. Since covid-19 is contagious, there is a harmful effect on others in the form of possible transmission of the virus, associated with our movements outside the home. It is the negative externality shown by the rapidly rising red curve. The rapid rise in the curve shows the contagious nature of the harm. The harm increases incredibly quickly in the 2^nd and the 3^rd stage. If we do not abide by lockdown now, we will be shut in the 3^rd stage. In the 3^rd stage, the benefits are below the costs to society line. Society, as a whole, will be completely shut down. Best is to respect lockdown while we are still in the 2^nd stage. The virus spreads in a multiplicative way rather than an additive way. Imagine that Mr X is infected with coved-19 and the symptoms are yet to show up. He meets four other individuals, and three of these also became infected. These three additional infected individuals will interact with, say, four individuals each, and again the probability of passing the infection is 75%. He will end up infecting 12 additional individuals in just two steps of physical interaction.

All this could have been avoided had Mr X got himself tested and stayed at home. Now multiply this number of the countless number of interactions that might be taking place daily. One never knows who will be spreading this infection, and this can end up at our homes also. As a social responsibility, we should discourage those who defy the lockdown. Further, if one feels he has been compromised, one must get tested and follow proper quarantine if the test comes positive. Failing to do so will endanger our loved ones first. Remember, we work so hard for keeping them happy. How can we see them contracting such an infection!

The government has announced a relief package for the marginalized section. There are chances of significant leakages in the booster package. For example, in distributing the food grains, how will we take fingerprint now without fear of spreading the infection? One way out could be to video record all the distribution process at every targeted public distribution shop. It can also be combined with mandatory handwash before and after giving the fingerprint for grains.

The government should also issue e-pass to essential service providers, most importantly, the medical store retails. Failing to do it will discourage the retailers from replenishing the stock of medicines. Just imagine what would happen when there is no stock of diabetes or asthma medicines! It is also needed that the medical store wholesalers keep the supply going for the masks and sanitizers and other life-saving medications.

One may wonder, is there any other way we can help in this situation? Of course, we can. To begin with, everyone must refrain from spreading rumours. Please think twice before forwarding social media messages. Often, they create panic and confusion rather than helping people.

Though the government has the responsibility of helping the destitute, we must also play our part. Everyone should try to help the poor as much as they can and in ways they can. Our Honourable prime minister suggested one way in advising not to deduct salaries of household helps. One’s real character comes out in adversity. Would you like to carry the guilt of not helping someone in such trying times when you could have!

There is another solemn responsibility all of us have: To refrain from hoarding essentials. Please do not dump your house with supplies for the next four months. Have faith; things will change for the better. When we are hoarding the essentials, someone is going to miss their supplies. Now is the time to start thinking about society as one family. Remember that bad times never last forever, but how we behaved during it may become someone’s memory. What memory would you like your children to carry? I guess a good one. So, let’s be responsible and behave responsibly.

  

A video demonstration of the idea discussed here can be found here:
Importance of lockdown & social distancing in fighting Corona: An Economist's take

An exercise with little impact

Expectations from the Budget 2019 of a higher growth trajectory are off and it will be a miracle if the growth rate remains even at 6.5.

Read the full write-up here:

An exercise with little impact 

Reviving the economic growth in India

Some unorthodox and simple suggestions for reviving the Indian economy:

Reviving the economy

We, the Nation

Recently, the Indian Railways reported that about 21 lakh bedroll items worth over Rs 14 crore went missing from the AC coaches during 2017-18. This is baffling when we consider that individuals who could pay for the AC-ticket, can definitely afford to buy these items. It seems they took the writing ‘Railways is your property’ a bit too seriously and conveniently forgot to read the ‘protect it’ part of the whole sentence!
The greatness of a nation is a public good; everyone likes to enjoy it but do not want to contribute towards it. Who would not want to have the honour of being a citizen of a strong and great nation? While we want to take pride that our country is better than others, at the same time, we leave the responsibility of making our nation great to others.

Read more here:

We are the Nation: epaper link

or a more readable one:

We are the Nation: Webpage link

Demonetisation: Some tall claims and not so tall answers

Sufficient time has passed since demonetisation and we can now objectively analyse it. After the RBI report claimed that almost 99% demonetised currency is back with the banks, strange claims and counter-claims started pouring in favour of and against the demonetisation. This write-up examines some such claims from an economist's perspective. You can read this opinion write-up here:

Demonetisation demystified

or here:

Demonetisation demystified 

Sending wrong education signals

This write-up discussed how the education system is sending incorrect signals and that instead of merely being an avenue for employment, teaching jobs should focus on attracting the right talent

You can read the full article here:
https://telanganatoday.com/sending-wrong-education-signals

A Note on NSS Data Extraction 1

Extracting Data from NSS 62nd Round
Using STATA:

First we shall try to extract NSS-data for Consumer Expenditure (62_1.0), which is in ASCII-fixed format using STATA (I used STATA 9).

Step 1: Locate the Folder/CD containing data for NSS-Round 62. It should contain three sub-folders, Nss62_1.0 for Consumer expenditure data, Nss62_2.2 for Manufacturing enterprises data, and Nss62_10 for Employment and unemployment data. We are going to use the folder containing data on Consumer expenditure, i.e., Nss62_1.0.

Step 2: The folder Nss62_1.0 should have four items within it, three folders and one text document (README62_1.0). You can find the State Code for the State of interest by following the path:
Nss62_1.0 → Supporting Documents → Instrn. To Field Staff_62 → Appendix-2.

For Uttar Pradesh, the State code is 09 (It has been changed from 25 in NSS 61st Round).
It is also evident from Appendix II that Uttar Pradesh has been divided into four NSS-Regions. So in this way, we would be concerned with code 091 (signifying the 1st NSS-region in Uttar Pradesh) to 094 (indicating 4th NSS-region in Uttar Pradesh). This would be helpful in data extraction.

Step 3: Locate the “layout_62_1.0” file that is an excel file by following path:
Nss62_1.0 → Supporting Documents → Layout_62_1.0.
We shall call it Layout file for convenience. The Layout file shows various “Levels” containing “Blocks” of the Schedule that was administered to gather the information from respondents. You will notice that there are seven Levels in all. Now starts the real job.

Step 4: Now, we need to extract data for each level separately as their contents differ. For example, the variable of Level 1 would not be there, except initial 17 items (up to HHS No.) Thus, we need to write as many Dictionary files as the number of Levels. This makes us write 7 Dictionary files for extracting the Consumer Expenditure data of Uttar Pradesh.

Following is an example of a dictionary file (for Level 1) for STATA:

dictionary using MH1C01.dat
{
_column(1) str3 CntrcdRndshft %3s
_column(4) str5 LOTFSU %5s
_column(9) str1 Filler %1s
_column(10) str2 Round %2s
_column(12) str3 Schdlno %3s
_column(15) str1 Sample %1s
_column(16) str1 Sector %1s
_column(17) str3 StateReg %3s
_column(20) str2 District %2s
_column(22) str2 Strtmno %2s
_column(24) str2 Substrtum %2s
_column(26) str1 SubRund %1s
_column(27) str1 Subsmple %1s
_column(28) str4 FODSubReg %4s
_column(32) str1 Segmntno %1s
_column(33) str1 SecndStg %1s
_column(34) str2 HHSno %2s
_column(36) str2 Level %2s
_column(43) str2 SlnoInfor %2s "Seriel Number of Informant"
_column(45) str1 Respnscd %1s "Response Code"
_column(46) str1 Survycd %1s
_column(47) str1 Substncd %1s "Substitution Code"
_column(48) str6 DoSurvy %6s
_column(54) str6 DoDespch %6s
_column(60) str3 TCanvs %3s
_column(127) str3 Nss %3s
_column(130) str3 Nsc %3s
_column(133) str10 Mlt %10s
}

Step 5: Once all the seven dictionary files have been written, we would store in a folder, say “NSS extract”.

Step 6: Now we need to write a “do-file” for STATA. I’m pasting below the do-file that I’ve written and used to extract the NSS data for all seven Levels at one go.

infile using "E:\NSS extract\Level1.dct", using("E:\Nss62_1.0\Data\MH1C01.TXT")
drop if StateReg > "094"
keep if Level == "01"
destring, replace
save "E:\How to\Level1.dta", replace
clear

infile using "E:\NSS extract\Level2.dct", using("E:\Nss62_1.0\Data\MH1C01.TXT")
drop if StateReg > "094"
keep if Level == "02"
destring, replace
save "E:\How to\Level2.dta", replace
clear

infile using "E:\NSS extract\Level3.dct", using("E:\Nss62_1.0\Data\MH1C01.TXT")
drop if StateReg > "094"
keep if Level == "03"
destring, replace
save "E:\How to\Level3.dta", replace
clear

infile using "E:\NSS extract\Level4.dct", using("E:\Nss62_1.0\Data\MH1C01.TXT")
drop if StateReg > "094"
keep if Level == "04"
destring, replace
save "E:\How to\Level4.dta", replace
clear

infile using "E:\NSS extract\Level5.dct", using("E:\Nss62_1.0\Data\MH1C01.TXT")
drop if StateReg > "094"
keep if Level == "05"
destring, replace
save "E:\How to\Level5.dta", replace
clear

infile using "E:\NSS extract\Level6.dct", using("E:\Nss62_1.0\Data\MH1C01.TXT")
drop if StateReg > "094"
keep if Level == "06"
destring, replace
save "E:\How to\Level6.dta", replace
clear

infile using "E:\NSS extract\Level7.dct", using("E:\Nss62_1.0\Data\MH1C01.TXT")
drop if StateReg > "094"
keep if Level == "07"
destring, replace
save "E:\How to\Level7.dta", replace

Further Explanation regarding the do-file:
“E” is the drive on your PC where you made the folder for storing the extracted data. It can as well be “C” or whatever.

“NSS extract” is the folder where the “dictionary files” have been stored and where the extracted data would be stored.

“E:\Nss62_1.0\Data\MH1C01” is the path for finding the ASCII-fixed format data. It may differ depending on where one has stored the NSS data which is to be extracted.

“drop if StateReg > “”094” is given to drop all the irrelevant data. When we import data it would also be having data for several other States as they were stored in “MH1C01.txt”. We need here only data for Uttar Pradesh. Remember that Uttar Pradesh has NSS-code 09 and it has been divided into four NSS-regions. So, the data of our interest should be that of Region 1, Region 2, Region 3, and Region 4 in Uttar Pradesh. The “Layout file” has a variable by name “State-Region” that we had named as “StateReg” in our dictionary file. This variable would help us to identify the relevant data for Uttar Pradesh. When we give command “drop is StateReg > “”094”, STATA would drop from its memory the data for all other States except Uttar Pradesh. “094” is the maximum coding that can be applied to the regions of Uttar Pradesh under given data. 094 is enclosed within quotation mark as we have extracted all variables in String format.

“Keep if Level == “X”” makes the STATA to further drop data for all levels except the “Level X” where X can be any whole number between 1 to 7, depending on the level of our choice.

“destring, replace” is used to destring all the data. Remember we have imported data in String format.
So, extract data and have fun...!

N.B. I'm obliged to my mentor who bore the brunt of my experiments with NSS-data for I went to him and discussed my hopelessly frustrating strategies to extract the data at one go...!
This is reposted as per request of so many users.

Poverty estimates in India

We (I alongwith my co-author, Prof. Srijit Mishra) worked on the poverty estimates for India. This article is published in Poverty and Public Policy and provides estimates of poverty and inequality across states as well as for different subgroups of the population for 2004–2005 by using the old and new methods of the Planning Commission. The new method is critically evaluated with the help of some existing literature, and its limitations are discussed with regard to doing away with calorie norm, use of median expenditure as a norm for education when the distribution is positively skewed, difficulty in reproducing results for earlier rounds acting as a constraint on comparisons, and using urban poverty ratio of the old method as a starting point to decide a consumption basket. More importantly, it discusses the implications on financial transfers across states if the share of poor is only taken into account without accounting for an increase in the total number of poor. Despite these limitations, on grounds of parsimony and prudence, the state-specific poverty lines suggested in the new method, as also in the old method, are used to discuss implications on poverty for different subgroups of the population (i.e., NSS regions, social groups, and occupation groups). It also raises concerns on reducing a complex social phenomenon such as poverty to a narrow set of parameters and also its implications on policymaking.
Following are some figures from the same paper:

Find it here: Poverty Estimates in India 

Poverty in India and it's Decompositions: A Critical Appraisal of the New Method

This work was motivates by the report on new poverty lines submitted by the Tendulkar committee.
The Planning Commission recently released poverty estimates across states for rural and urban areas of India for 2009–10 (GoI 2012). A matter of concern raised in the media is low poverty lines leading to a social experiment of living by spending 32 rupees only per day by young persons. There have been discussions in the academia also. This has revived the need to critically evaluate the Report of the Expert Group to Review the Methodology for Estimation of Poverty (GoI 2009). The purpose of this chapter is two-fold. First, we raise some issues with regard to the new method, which also borrows from existing literature, including some earlier work of ours (Pathak and Mishra 2011; also see Mishra 2012).
Second, we use the poverty lines provided by the Planning Commission for rural and urban areas separately to compute the incidence, depth, and severity of poverty and inequality
at the aggregate all-India level as also across states, social groups, religious groups, occupational groups, educationwise, and gender-wise. We also analyse poverty reduction
between 2004–5 and 2009–10 at the aggregate all-India level as also for some sub-groups of the population by looking into sectoral and growth-inequality decompositions. The
differential impact of the growth process between these two time points on poorer and richer sections of society is also visualized through growth incidence curves for rural
and urban India.
The complete paper can be accessed in the Human Development Report, 2012-13, published by the Oxford University Press, India.
Find it here: Poverty in India and Its Decompositions: A Critical Appraisal of the New Method

Poverty and Inequality in Uttar Pradesh: A Decomposition Analysis

Front Cover

Back Cover

Dedicated to my Mentor

My new year started with getting my first monograph published by Lambert Academic Publishing, Germany. This is a revised version of my first working paper written at IGIDR during my post doctoral days. 
My facination with NSS data has an interesting story. When I was pursuing my PhD, I saw some people doing analysis with NSS data and I thought that I should learn this. requested them to initiate me also. People promised and as usual they never kept their promises! And to add a pinch of salt to the story, someone challenged me to work with NSS data when he came to know that I'm going to pursue Post-doctoral research. I requested so many people to initiate me in 'occult science' of NSS data extraction and use but no one buzzed as if they have taken oath not to divulge the secrets of the tread! So, as always, I embarked on this expedition alone and somehow deciphered the hieroglyphs. Seeing my insane zeal toward NSS data, my mentor Srijit later on bestowed me with some insights. Prof. Shovan Ray also encouraged me whenever I was sinking in sea of my self-doubts. Thus came out my first working paper at IGIDR and believe me, it was in such a bad shape that I didn't know what to do with it. But thanks again to my mentor Srijit and another person with a sterling heart, Prof. M.H.Suryanarayana I could improve it considerably. I'm indebted to these people.
I have dedicated this work to Srjit, a very small gesture from my part.
https://www.lap-publishing.com/catalog/details/store/gb/book/978-3-8465-5807-2/poverty-and-inequality-in-uttar-pradesh:-a-decomposition-analysis

Poverty Estimates in India: Old and New Methods, 2004-05

This is a working paper dealing with poverty estimates for India using the Old and New (Tendulkar Committee's) methods and is co-authored with Dr. Srijit Mishra. The Planning Commission has accepted the recommendations of the Tendulkar Committee, though it leaves a lot of questions unanswered. The present paper critically discusses these issues. It also presents poverty incidences, depth and severity estimates at various levels of disaggregation like state-region, social group and occupation group for 2004-05 using the 61st round of NSS data. Someone working on 2004-05 poverty estimates for India (61st round of NSS data) may get references from this paper. I started this paper with two quotes: one is from the Discorsi Politici authored by Francesco Giucciardini, one of the leading writers of the Italian Renaissance. He said, "The poor are a part of necessary furniture of the earth, a sort of perpetual gymnasium where the rich can practice virtue when they are so inclined". The other one is from W. B. Yeats, a great poet. "But I, being poor, have only my dreams; I have spread my dreams beneath your feet; Tread softly because you tread on my dreams..." These quotes were kept purposefully and while reading the paper, one should get it. It can be downloaded from:

http://www.igidr.ac.in/pdf/publication/WP-2011-015.pdf
An alternative link for download is:
http://works.bepress.com/durgesh_chandra_pathak/19/

happy reading...

Union Budget of India 2009: A Tale of Missed Opportunities and Some Gains

The Budget-2009 has struck some right cords but have mostly gone wrong as the player failed to recognise all correct cords in the harp.
Good points:
1. The budget has focussed on rural development, thanks to the belief that NREGA is behind poll-success of UPA. It has hiked allocations to NREGA in an unbelievable manner. I remember when NREGA was being drafted and being discussed for resource allocation, everyone was frowning that it would cost 1% of GDP...! Really, nothing sells in India like poll-success.
2. The abolition of FBT.
3. Rs. 300 crore for Drainage system in Mumbai. When Mumbai comes to satnd still due to waterlogging, India makes substantial economic loses as Mumbai is the financial capital of India.

Weak points:
1. NREGA is widely infested with corruption. So, where would the bumper hike in allocation would reach really...the poor’s pocket (if they have one!) or in accounts of government officials? Also, the government is forgetting that NREGA is just a ‘famine relief’ kind of model and it must be linked with other self-employment schemes to make the poor out of poverty.
2. The government should have raised the tax-exemption limit up to at least Rs. 3 lakhs per annum. The middle class in India is the most populous and prominent consumer class in India that has lot of unfulfilled demand. Tax exemption to this class would have given a big fillip to the aggregate demand in the economy. Does the Finance Minister have any idea how a family of five with monthly income of Rs. 25,000 struggles to make ends meet in a market where pulses are Rs. 75 a kg, Potato is Rs. 15 a kg and so on...!
3. Government should have increased tax rates slightly for the Upper and Upper-middle class. This would have raised enough revenue to more than offset the decrease in tax collections due to tax exemption of the middle classes.
4. Further, the abolition of Tax-surcharge on income more than Rs. 10 lakh is ridiculous. This class spends mostly on foreign-made goods so the Finance Minister is going to boost demand for foreign goods in India...! One more thing, what is more helpful to revive demand in economy: 10 middle class households purchasing washing machines, TV, fridges, AC or one super rich buying a Mercedes...?
5. What is logic behind putting custom duty on Gold and Silver on the one hand and on the other, totally exempting Branded jwellary from production duty...May be the finance ministry wants everyone in India to go for branded items...! Rural households would now find purchase of Gold and Silver costlier. They can't always forego such expenditures as it is customary in weddings. May be finance minister wants to give some more relief to those who are earning in or above bracket of Rs. 10 lakhs.
6. It is really great that the finance ministry has finally recognised the power and need of rural development but from where they are going to meet the expenditure out. Keeping a fiscal deficit as high as 6.8% is going to prove detrimental in time. Government borrowing in market would crowd out the private investment by hiking the rate of interest.
So, the budget-2009 is very good on the part of development of rural India but fails to take some harsh steps in order not to attract wrath of urban rich. This may stand in realisation of the true potential of an otherwise good budget.

Nanoing the way to change

Nano is finally on the scene, thanks to grit of Tata. One day, actually last year, I was traveling in an auto in Mumbai. I started chatting with the driver both to pass time and to get some idea of their thinking. It was just a few months after Tata had unveiled the Nano in Auto-expo. I asked him what do he think about Nano. He said that Tata is doing real good but it would hurt people like him. I asked and he told that now more and more people would shift to buying cars so the people opting for travel in auto would decrease. I was astonished with his sheer calculations but suddenly a thought came to me and I shared it with him also. I wondered if the Government of India can start a scheme under which they provide some loan to the auto-drivers to buy nano and they can repay the loan in installments. Also, the government can give some exchange-value for their auto. This could have following benefits:

1. First and foremost, it would increase the dignity and self-respect of the auto-drivers as they would then become proud owner of a Taxi,
2. It would reduce the emission-problems up to a great extent and thus the air-quality would improve,
3. The Nano project could also become economically viable and sustainable by the bulk purchases from the government. Nano could be seen as something of which India can feel proud (as the world's cheapest car).
4. The aesthetic looks of the cities would improve as the brand-new Nanos would replace the old autos.

So planner! are you listening...?

Countering the Economic Recession: Impact of the Sixth Pay Commission

The economic recession has resulted in pay-cuts and job-cuts also. One of the driving force behind the previous boom was hefty pay-packets of the private sector. Now, since private sector is gripped by a fear psychosis. People are not only forced to accept substantial cut in salary, they're also under constant fear of losing there job any day. This uncertanity has put reins to their habit of extravagant spending . This could've deepened the crisis further due to shrinking demand. But a countervailing force in form of the Sixth Pay Commission came and the government employees got a sudden surge in their purchasing power. They had unsatieated demand and the Sixth Pay Commission made funds available to saturate this demand. This is one of major reasons why India is comparatively less severely affected with the global recession

Job Cut vs. Pay cut: The Prudent Choice

Job Cut vs. Pay Cut: The Prudent Choice[1]
: D. C. Pathak[2]

The world is facing a grave financial crisis these days. Varied responses/opinions have come to deal with this crisis; from extensive bailout plans to job cuts and pay cuts. As this crisis has put a question on the credibility of all economic thinking[i], debate is on over its various implications and the future course of action. Like other countries, India is not immune to this crisis. A decision to cut jobs by the Jet Airways due to the present financial crisis fueled a debate. Though the decision has been reversed, the debate is yet to settle. An issue has come up with Jet’s employees accepting a pay cut in lieu of job cut about the reparability of the two. An article at the website ‘Knowledge@Wharton’ presents varied view on the issue of job cut vs. pay cut in details. The article mainly contemplates the issue from HR point of view. The present article has tried to deal with the economic aspect of the issue.

Before proceeding on to make arguments, it would be better to discuss the assumptions behind the arguments.
Workers from one sector/industry can’t be employed in some other sector/industry due to specialized skills needed. It means, inter-sector/industry mobility of labour is zero.
Job cut implies a zero income, i.e., .
Pay cut implies that the new income stream would be less than the original income stream but would be significantly greater than the . It implies that
4. All workers have some accumulated savings.
5. Savings are a function of income , i.e.,
6. All savings are invested.

Suppose a firm was paying its employees Rs. 100/month. Now it wants to downsize by Rs. 1000. It has two choices: either it go for a job cut of 10 employees or it can go far a pay cut of say, 100 employees, cutting Rs. 10 from each employee’s salary. Other firms in the industry would face the similar choice. Though both options look alike but they affect the employee and the economy differently. In the first case of job cut, the income streams accruing to employees would become zero. So, now they will have recourse to only there accumulated savings. Though number wise the job cut would seem insignificant, but when one considers the hefty pay packets these employees get, it would be quite significant financially. Being a rational consumer, the out-of-job employees would cut his expenditures drastically as he would not want to finish up his all savings. Cut in expenditures would lead to fall in demand. Since the supply would take some time to fall, the result would be a general oversupply of goods leading to a price fall. Falling prices would create a panic among the producers and they would reduce their inventories and may also resort to job cuts if they feel the low demand condition to continue. This situation if left to feed on itself unchecked, would lead to depression in the economy. Also the out-of-job people would not make any saving so that part of money supply would reduce which depend on savings by these people. A fall is money supply means a high rate of interest. A high rate of interest would lead to a fall in investment decision. This chain of events would again lead to depression in the economy.
One can safely assume that the people with pay cut would expect even the worst and therefore wouldn’t draw heavily on their accumulated savings. They will, instead, go far a reduction in consumption expenditure. Even this reduction should be less than that for the out-of-job people. The people with pay cuts would also reduce or in some extreme cases stop making new savings. This would reduce the money supply but by much less extent than for the case of out-of-job people. A comparatively less reduction in money supply implies that the increase in the rate of interest would be comparatively less in case of pay cut. Thus, if all the firms in the economy opt for a general pay cut rather than a general job cut, the chances of the economy falling in grip of depression would reduce. As the employees can’t move across industries owing to specialized skills requirements, a general job cut would create an unused skill-pool. A drawback of specialization is that one loses touch with other common tasks which fall outside the gambit of this sector/industry. Such employees feel the punch the hardest as they found it very hard to get and do well in some other sector/industry. Though they're good at what they know, they're worthless in such a situation, a kind of paradox. Thus, from an economic point of view, a general pay cut is preferable to a general job cut. An across the board pay cut would even motivate the employees by instilling a feeling of oneness and kinship in the firm. This may work miracles as the collective will can attain anything.
Apart from above economic arguments, there are also some other arguments[ii] against job cut. To list a few,
1. As rightly pointed out by an article in Knowledge at Wharton by title 'Job Cut vs. Pay Cut: In a Slowing Economy, What is Better for India?'[iii], losing a job creates an image of incompetence in the mind of family and friends. Even more dangerous is that it would lower the self-esteem of an individual and that can lead to further decline/irreparable damage to his/her self-image and efficiency.
Losing a lucrative job would plunge the person in a quagmire of depression, affecting the mental health of the person and his family/friends.
As an extreme step, the employee may commit suicide also. News about suicide by people due to loss in the stock-market has come recently.




[1] The motivation for this write up came from Roberta Shell’s article in ‘Knowledge@Wharton’.
[2] The author is a Senior Research Fellow at the OKD Institute of Social Change and Development, Guwahati (India).
[i] See “Economics needs a scientific revolution”, an essay by Jean-Philippe Bouchaud in NATURE, Vol 455, 30 October 2008. Also see the blog posting: http://misplacedemphasis.blogspot.com/2008/11/economics-needs-scientific-revolution.html

[ii] Can be assessed at http://durgeshonomics.blogspot.com/2008/11/should-we-cut-jobs-or-downsize-pay.html
[iii] This article can assessed at http://knowledge.wharton.upenn.edu/article.cfm?articleid=4333 and presents varied opinions by several persons.

Who saved us...?

Ever wondered what/who saved India from the global financial turmoil? Our Prime Minister and company would say, it was our strict regulation on banking/financial system. Well said but what were these restriction doing when some people played spoil-sport with our financial system some years ago via share-scams...!
Sorry to say but I've entirely different thinking on the rather safe plight of India in the global financial crisis. India has a vast non-monetaized sector and a staggering army of poor or not-so-rich who could invest in our miraculous innovations in financial sector. How can those who barely meet to square meals, should invest in these. And it was this fact that saved India. If Indian would also have large investment in financial market, they would also have been facing the same crisis even more severely. This is a naked truth whether anyone would like to accept it or not. So, dear fellow economists and dear PM (alongwith your hugh army of think-tanks) your regulation has not saved us but government's failure to erradicate poverty has. Doesn't feel good...sorry, can't help it.

Choosing Among Unequals...! A Solution for Vishisht BTC

In Uttar Pradesh, a new tradition has been started of selecting B.Ed degree holders for a job in Primary Schools and it has been named "Vishisht BTC". Applying their own logic, the ruling governments use variuos criterion to select the candidates. The basic problem is that they have to choose candidates on the basis of merit of their marks in various exams. Now, it is well-established fact that marking is not similar in all universities/colleges. So for a same exam, there can be much inter-university as well as intra-university variation in marks given to students. The point is that student from a college/university where marking is very strict, would always lag behind in the merit and so would have very sparse chances of getting the job. This would lead to adverse selection.
Normalization of scores can be an elegant solution to this problem. For more detailed analysis of the problem, one can refer to the following link:
http://works.bepress.com/durgesh_chandra_pathak/8/