India’s Biggest Blessing

This one is in the context of an entry on HP’s Thin Client at Rajesh Jain’s weblog. In response to a bunch of comments on that entry, Rajesh wrote to me:

I think we will need to create the large domestic markets for the affordable computing solutions.

I totally agree. And I am thankful for one positive factor in India’s favor.

The most significant positive factor in India’s favor is its size. It is what we economists call a “large economy”. Large economies have the luxury of changing parameters which define the market itself. In comparison to that, “small” economies have to take those parameters as given (or ‘exogenous’) or external to them or outside their control. In a way, you can consider a large economy to be have some sort of ‘monopoly power’. Monopolies have the power to change one parameter (price) at will which firms in competitive (or oligopolistic) markets don’t have — the latter are ‘price takers’ in that they cannot dictate prices and take whatever price they can get.

So India is large enough to be able to change ‘world prices’. Suppose you were to create a widget which is suited to Indian conditions. Assume that the cost of production of these widgets exhibit economies of scale — that is, fixed costs are extremely high and marginal costs are very low, and hence average costs continue to decline as the volume produced increases. In such a case, given India’s enormous population, the number of widgets required would be high, and thus the average cost will be appropriately low, and therefore the market clearing price for widgets will be low and quantities will be high.

Now replace ‘widgets’ in the above with whatever — “COMPUTING SOLUTION” for instance. Get the hardware that is appropriate for the Indian market developed and get the software developed for the same. Concentrate on the needs of India alone to begin with. Note that hardware and software meet the criteria of high fixed cost and low marginal cost. Marry the hardware and software to create the computing solution, price it just above average cost, and voila! YOU HAVE LIFT-OFF!!

Do we need to create the large domestic market? If by creating you mean bringing the solution to the market, then yes. However, all the ingredients exist. We just have to judiciously put them in them together using the right recipe. I suspect that we are more than up to that job.

The HRD Madness about Management Schools

For India to emerge from being an impoverished country, some degree of sanity in policy makers must be an absolute precondition. The situation is so bad that one cannot read a paper without being hit in the gut with yet another insane policy being proposed. Take the matter of the Indian Institutes of Management (IIM) and what the Ministry of Human Resource Development (HRD) is proposing.
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Fundamental Change

Francois Gautier is one of my favorite journalists. In rediff.com he asks why the Indian government considers foreigners as cows to be milked. Blatant discrimination against foreign visitors cannot go unnoticed and cannot but have an effect on the volume of foreign tourism.

Who are these bureaucrats that make such brain-dead decisions? How can we bring about a change in their thinking? How can we persuade these cretins about the need to be somewhat intelligent in their policy making? Is there any hope for India if we continue to make idiotic policy choices at every level of our economy?
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The CAT and Transaction Costs

It is important to remind ourselves from time to time what poverty is all about. Poverty has something to do with production. Not exactly the most esoteric bit of knowledge but often it gets forgotten in the shuffle. To produce you need to have what we call factors of production which are usually broadly classified into land, labor, and capital.
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