Why the fall in oil prices may not be so important for Indian economy

confuzzled dude wrote:http://economictimes.indiatimes.com/articleshow/45587736.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

harharmahadev wrote:[
The author clearly demonstrates a lack of understanding of macroeconomics.  India and Indians will benefit tremendously from a decline in oil prices.  I should write an article on this (if only I got paid to do it).

Western developed countries (like US and Germany) are demand-constrained economies, while Indian economic powerhouses like China and India are supply constrained economies.  If oil prices go down, this will hugely benefit majority of the population.  Think about the auto rickshaw drivers, street vendors, hotels, restaurants, etc etc etc.  Low fuel costs equates to higher income.  Higher per capita income translates to higher protein diet.  This is good news because a vast majority of Indian kids and women are malnourished. 

Agricultural industry is going to benefit tremendously from this as well.  Indian agriculture today is highly inefficient and production capacities are far from achieving economies of scale.  If food prices fall, it will trigger a huge increase in demand (since it is a supply constrained economy).  This tends to spur investment.  If history is a guide, the industry overinvests and then there is a deflationary bust.  We are very very far from that event.  Agricultural investment in India could be extremely profitable, but the hold-up is not economics but government policies.  The policies for investing in agriculture is so screwed up that no large investment house would want to dabble with it.

confuzzled dude wrote:

harharmahadev wrote:[
The author clearly demonstrates a lack of understanding of macroeconomics.  India and Indians will benefit tremendously from a decline in oil prices.  I should write an article on this (if only I got paid to do it).

Western developed countries (like US and Germany) are demand-constrained economies, while Indian economic powerhouses like China and India are supply constrained economies.  If oil prices go down, this will hugely benefit majority of the population.  Think about the auto rickshaw drivers, street vendors, hotels, restaurants, etc etc etc.  Low fuel costs equates to higher income.  Higher per capita income translates to higher protein diet.  This is good news because a vast majority of Indian kids and women are malnourished. 

Agricultural industry is going to benefit tremendously from this as well.  Indian agriculture today is highly inefficient and production capacities are far from achieving economies of scale.  If food prices fall, it will trigger a huge increase in demand (since it is a supply constrained economy).  This tends to spur investment.  If history is a guide, the industry overinvests and then there is a deflationary bust.  We are very very far from that event.  Agricultural investment in India could be extremely profitable, but the hold-up is not economics but government policies.  The policies for investing in agriculture is so screwed up that no large investment house would want to dabble with it.

By agricultural industry, you mean the middlemen? I'm pretty sure that low oil prices aren't going to help farmers as their core expenditure entails cost of fertilizers and labor.

harharmahadev wrote:
You are talking about the current state of the agricultural industry.  Indian agricultural industry is still stuck in the 19th century.  We need to industrialize agriculture.  Industries should be able to acquire large tracts of agricultural land and use advanced farming techniques to gain efficiencies.  They will choose the most efficient and cost-effective process.  As they move towards reaching economies of scale, food prices will fall, demand will increase and companies will be more profitable.  That's what the country needs.

confuzzled dude wrote:

harharmahadev wrote:
You are talking about the current state of the agricultural industry.  Indian agricultural industry is still stuck in the 19th century.  We need to industrialize agriculture.  Industries should be able to acquire large tracts of agricultural land and use advanced farming techniques to gain efficiencies.  They will choose the most efficient and cost-effective process.  As they move towards reaching economies of scale, food prices will fall, demand will increase and companies will be more profitable.  That's what the country needs.

I'm afraid that would turn all the small farmers (90% of total farmers) into daily wages labor. Small farmers in India are entrepreneurs akin to what small business owners are in the US. The real issue with agricultural industry is not productivity or output rather the lack of infrastructure and storage facilities. About 30% of food grains purchased by the government rot in govt storage facilities every year, costing the govt about 44,000 crore rupees.

harharmahadev wrote:

confuzzled dude wrote:

harharmahadev wrote:
You are talking about the current state of the agricultural industry.  Indian agricultural industry is still stuck in the 19th century.  We need to industrialize agriculture.  Industries should be able to acquire large tracts of agricultural land and use advanced farming techniques to gain efficiencies.  They will choose the most efficient and cost-effective process.  As they move towards reaching economies of scale, food prices will fall, demand will increase and companies will be more profitable.  That's what the country needs.

I'm afraid that would turn all the small farmers (90% of total farmers) into daily wages labor. Small farmers in India are entrepreneurs akin to what small business owners are in the US. The real issue with agricultural industry is not productivity or output rather the lack of infrastructure and storage facilities. About 30% of food grains purchased by the government rot in govt storage facilities every year, costing the govt about 44,000 crore rupees.

Contrary to popular belief, farmers will prosper if the government gets out of the way and opens up the agri sector to private industries.  90% of the small farmers are worse than daily wages.  They work for pittance, live in squalor and don't have access to healthcare or education.  If private players enter the market, they will uplift the overall standard of living.

Now, not all of the small farmers will be directly employed in farming.  But when private industry comes in, they create an economy.  They will bring engineers, managers, accountants, contractors, etc.  Then, a secondary economy will spring up - stores, restaurants, plazas, movie theaters, etc.  These new businesses employ more people and that triggers more investment.

confuzzled dude wrote:

harharmahadev wrote:

confuzzled dude wrote:

harharmahadev wrote:
You are talking about the current state of the agricultural industry.  Indian agricultural industry is still stuck in the 19th century.  We need to industrialize agriculture.  Industries should be able to acquire large tracts of agricultural land and use advanced farming techniques to gain efficiencies.  They will choose the most efficient and cost-effective process.  As they move towards reaching economies of scale, food prices will fall, demand will increase and companies will be more profitable.  That's what the country needs.

I'm afraid that would turn all the small farmers (90% of total farmers) into daily wages labor. Small farmers in India are entrepreneurs akin to what small business owners are in the US. The real issue with agricultural industry is not productivity or output rather the lack of infrastructure and storage facilities. About 30% of food grains purchased by the government rot in govt storage facilities every year, costing the govt about 44,000 crore rupees.

Contrary to popular belief, farmers will prosper if the government gets out of the way and opens up the agri sector to private industries.  90% of the small farmers are worse than daily wages.  They work for pittance, live in squalor and don't have access to healthcare or education.  If private players enter the market, they will uplift the overall standard of living.

Now, not all of the small farmers will be directly employed in farming.  But when private industry comes in, they create an economy.  They will bring engineers, managers, accountants, contractors, etc.  Then, a secondary economy will spring up - stores, restaurants, plazas, movie theaters, etc.  These new businesses employ more people and that triggers more investment.

Going by this logic, all the small business owners in the US should shutdown their businesses and start working for big corporations.

harharmahadev wrote:
How did you jump to that conclusion? 

Btw, in the US, several small businesses have had to shut shop or merge with big businesses.  Barnes and Nobles, Starbucks, TJ Maxx - these stores have bankrupted small shops.  The business model for Wal Mart was entirely based upon opening up shop in small towns and take away business from small players.