May 17, 2008

It's the economics, stupid. Or is it?

Every now and then, after reading something I've written, someone will write me a supercilious note saying something to the effect of: "Bro, you don't have much of a clue about economics, do you?"

They're probably right, too. I don't have much of a clue.

But over the years, I've learned a neat trick. All I need do is use words like "supply" or "demand" or "marginal cost", maybe even "guns and butter", in what I write. Or throw some weighty figures about. Apparently, that's enough to turn superciliousness on its head. The last time I used the trick in an article, someone wrote me a note applauding my "sound economic training." Yes, that's verbatim.

Anyway, consider this passage that I wrote a few years ago in my book The Narmada Dammed. This refers to Kevadia, from where locals were evicted as long ago as 1962, to build a colony for the engineers working on the Sardar Sarovar dam. Specifically, it addresses the compensation paid to them then for being evicted.
    [A particular Gujarat Government report] has an interesting discussion of the oustees from Kevadia Colony ... On pages 14 and 15, we find a defence of the Rs 100-250 per acre that was paid to them in 1962-63. (Was that a fair amount to pay, even in 1962-63?). It was "consistent with similar cases pertaining to this period", we're told. Then there’s this:

    "The value of Rs 200 [in 1962] together with cumulative interest as applicable to Government Securities would be Rs 6,400 in 1992."

    Now the [report] says Kevadia oustees were getting "Rs 7,000 per acre" in 1992 [when they were still getting displaced]. Given that figure, it is hard to escape thinking that after [questions were raised about these amounts], some Gujarat government official was given the task of finding an equation between the 1962 (Rs 200) payment and the one in 1992 (Rs 7,000). The point, of course, was to show that Rs 200 was a fair payment in 1962. And this claim is what that official produced.

    Fair enough? Except that the official, and the authors of the [report], clearly did not expect anyone to actually check their figures.

    For "the value of Rs 200" in 1962 to "be Rs 6,400" (thus multiplied by a factor of 32) thirty years later, the amount of Rs 200 would have had to be invested somewhere that offers an annual interest of 12.25 per cent. The only government security I know that has consistently offered rates that high is the Public Provident Fund. It offered 12 per cent, though that was reduced to 11 per cent in 2000 and to 9 per cent as I write this [and even less today]. The problem: it was instituted only in 1968.

    This is not to say that there are no government securities that might have offered 12.25 per cent over thirty years; only, I don’t know of any. But my ignorance itself raises the question: which of those oustees from Kevadia could have been expected to know about these securities? If they did know, did they, or would they, have invested in them? Is this a reasonable way to explain away the uncomfortable fact that those Kevadia villagers were merely given some cash and told to leave?

    More important, is this a fair equation anyway? To compare rupee amounts from two different years, economists and others typically apply not interest rates from unnamed securities, but inflation: the way prices have risen. So how did prices rise between 1962 and 1992? Not 32 times, try 11. My copy of Tata’s Statistical Outline of India tells me the wholesale price index multiplied just over 11 times between 1962 and 1992 (thus inflation in those years ran at about 8.32 per cent a year).

    That is, Rs 200 in 1962 was worth about Rs 2,200 in 1992. And this is the money comparison the [report] should have made.

    Of course, we can surmise why it was not made: the [report] claims Kevadia oustees are getting "Rs 7,000 per acre now in addition to the payments in 1962." Now Rs 2,200 compares somewhat unfavourably with Rs 7,000. So on seeing this Rs 7,000 in 1992, a Kevadia oustee ... might legitimately ask: if you are willing to pay Rs 7,000 today, why did you offer only Rs 200 in 1962?

    To which the Government of Gujarat would reply, as it has: "The value of Rs 200 in 1962 together with cumulative interest as applicable to Government Securities would be Rs 6400 in 1992." And Rs 6,400, of course, is close enough to Rs 7,000.

    You’ll recall I asked above, parenthetically: was that a fair amount to pay, even in 1962-63? My answer: no.
Question: even with all those numbers, even with judicious use of "inflation" and "wholesale price index", why has nobody written to me to commend my "sound economic training"?

I can think of two good reasons, one of which is that hardly anyone has read my book. What's the second?


Rome Mele said...

Nice post.

Second ? People lack reasons. Some for the first and two, some for the third. Important thing is, they lack reason. Maybe you here, just did !!


Anonymous said...

Well, I have no idea about economics, nor I do not know about this specific case you are talking here, but just an info.
When we bought our land in a place called Thrissur in Kerala, in 1983, it cost 2000 Rs a cent of land. Now it costs 200000 Rs per cent. That is, a hundred times the initial cost. Now, if that land was taken over by Government 25 years back, how much they would have had to pay? Had they paid 2500, and then at 12.5 percent interest, it would have been about 10K now ( hope my calculation is not too wrong). Still one twentieth of current market price.


Dilip D'Souza said...


First of all, if the Govt had paid 2500 in 1983 and the recipient had invested that at 12.5% interest, it would be worth about Rs 47.5K now, not 10K. (Compound interest).

Second, in general land does tend to rise in value faster than other assets.

Anonymous said...

Ok I considered it as simple interest :)

But that is still 1/4th of the market value and I think the point I wanted to make is quite clear.

But those whose land is taken over by government are always on a losing side regards to compensation.