Thank you Mr. Singh!

As I write this article on my Macbook, sipping on a Pepsi, with a Blackberry beeping by my side and a pair of Levis thrown into the laundry bag, I realize how much I have to thank Manmohan Singh for.

For before he brought about those face-changing economic reforms in India, almost exactly two decades ago, there was no Coca Cola or Pepsi. For a Levis or electronics manufactured outside of India, I would have had to request my Uncle in the US to get those on his next trip to India, of course at the cost of hefty custom duties.

The 1991 reforms truly changed the Indian economic landscape, opening it to the world by easing import restrictions and tariffs.  Additionally, bureaucracy was greatly reduced and the License Raj done away by introducing competitiveness through the private sector.

Truly, the Indian growth story since 1991 is impressive if not remarkable. From a forex reserve holding accounting for less than 2 weeks of imports, we are today the country the 7^th highest accumulation of forex reserves in the world. In terms of GDP (PPP terms) we have moved up 5 places to being the 4^th in the world and have seen exports as a percentage of GDP more than treble.  With double-digit GDP growth rates expected going forward, India is touted as the next economic superpower.

Of course, much more remains to be done before we do actually attain that super power status. Many issues are to be addressed-more than 40% of out population lives on less than $1 per day, corruption is rampant, education is far from universal and the rest.

However, even as we do work on these issues, we must take this moment to stop and celebrate our success in these twenty years. And yes, as we raise the toast, how can we forget the man who got it all going? Thank you Mr. Singh!

The changing economics of luxury goods

Luxury goods have a high level of income elasticity and are classified as Veblen goods. The latter implies that for luxury goods, people associate price with quality, and hence their preference for buying such goods increases as a direct function of price. Handbags, luxury cars, high-end watches are some examples of luxury goods.

Globally, the economics of luxury goods has been changing rapidly, especially since the crisis. The growth in the digital and online market, increased IP protection, new royalty rules and the shift in consumer demand toward more ‘usable’ goods have all be transforming the luxury goods industry.

The most obvious change however, has come from the shift of luxury market from the developed countries in North America and Western Europe, to emerging economies. According to a study by Bain & Co., while US, the world’s largest luxury market, is expected to grow by 8% to about 52bn euros in 2011, China is expected to see close to 25% year-on-year growth. At this pace growth, Greater China (including Taiwan, Macau and Hong Kong) is expected overtake Japan as the world’s 2nd largest market for luxury goods by the end of this year.

This increased penetration of luxury goods in emerging economies has interesting socio-economic implications. As the Veblen good classification makes clear, luxury goods are meant primarily for conspicuous consumption or more simply to ‘show-off’.

In developing countries, where there is stark and growing gap between the rich and the poor, this may breed social unrest.

This has particularly come to light due to recent reports about the elite in North Korea flouting the ban on import of luxury goods. According to South Korean officials, while the food shortage-ridden North Korea spent $ 46 million on importing food staples, it also spent $10 million on luxury goods between the January to May of this year. The ban was imposed by the UN in light of the extensive food aid guaranteed to North Korea.

 In a somewhat similar measure, in May this year, Chinese officials, in their words, concerned about growing ‘hedonism’ within the country, banned any advertisements highlighting lavishness and aristocratic lifestyles.

Indeed, such measures raise questions about whether other countries in the world, which suffer from stark income inequalities, should pose similar restrictions.

To answer this we need to address fundamental questions about human rights, ways to achieve social equality and responsibility of the elite towards society. While these are all matters of lengthy debate, we urge that you give this some thought before you head out to purchase your next Jimmy Choo or LV!

In our next post, we shall look more closely at the luxury goods industry in India and understand where that’s headed..do keep a look!

The Luxury story in India

The roots of the luxury goods industry in India date long back in time. The land of Rajas and Maharajas, India was renowned for its opulence. Jacques Cartier visited India in 1911 in pursuit of fine pearls and persuaded a number of Maharajas to reset their jewels using Cartier designs. However, with unrest in the country, the market for luxury goods almost ceased to exist post independence. During the License Raj, when Income Tax rates were as high as 90%, anyone who could own high-end luxury products was perceived as devil.

Today, India with 126,000 HNIs (High Networth Individuals) and another 3 million households earning above 10 lakhs, is truly ready to consume luxury. The base is huge and the market promising, according to Confederation of Indian Industry (CII). The highly uneven distribution of income in India means that wealth is concentrated in small pockets- with the wealth held by the 100 richest Indians being comparable to that held by the 400 richest in mainland China.

The luxury market in India, despite the high potential remains surprisingly small. While China, makes up 10% of the global luxury market while India accounts for less than 1% according to data by Altagamma.

With the issue not on the demand side, it is the high import tariffs (30%-40%) and restrictions on FDI that keep several foreign luxury retailers off India shores and constrain supply.

Another constraining factor has been a lack of upmarket spaces where luxury boutiques may set shop. Decades ago, when luxury brands forayed into the Indian territory they had to make do with the five star hotels’ shopping arcades due to lack of decent luxury retail infrastructure in the country. While this problem has been resolved partly with the set up of two dedicated locations for luxury products — the DLF Emporio mall in Delhi and the UB City Mall in Bangalore —there is nothing akin to a New York’s Fifth Avenue or a London’s Bond Street in the country.

Making matters worse, while brands pay exhorbitant rentals for a retail space at luxury malls, their sales remain low as they get many customers who visit the shops simply to get a feel of the luxury products without an intention to make a purchase. This is because many of the elite Indian choose to shop abroad to escape the custom duties, while foreign visitors stick to shopping arcades in five star hotels.

For most brands today, meeting immediate sales targets is not the objective. Most of them are here with long-term plans, hoping that conditions will get more favourable over time and they will be able to capitalize to the Indian Growth Story. However, whether India does go the China way, remains to be seen.

Society and economics: Revisiting the causes behind the Greece crisis

With Greece again back in the news, it is interesting to understand some non-obvious factors that were behind the crisis.

The Greece crisis, as wide reported, is attributed to the growing public deficit and thereby debt in the country. This prompted downgrading of the credit ratings of Greece by leading agencies, pushing up the yield on Greek bonds.

At the root of the spiraling deficits were fundamental weaknesses within the economy. While factors such as unrestrained spending and cheap lending have been widely discussed, there are some unusual theories to the causes of the Greece crisis that are interesting to explore.

Philomila Tsoukala, an associate professor at Georgetown University, suggests that the Greece crisis has it’s origins in the fact that private sector is comprised mostly of family-owned businesses with over 75% of businesses being family owned. In such businesses, there are no minimum wages and wives often work for husbands for free.

This structure has two major implications. For one, it has kept down wages. In fact in Greece, real wages have grown at a much slower rate than the growth in productivity. This has led to reduced consumption, investments and thereby reduced GDP growth. The second major implication is that this family structure has hindered competition and innovation, pushing down wages.

In another interesting viewpoint, Dimitris Georgakopoulos, head for taxation Ministry of Finance, traces the Greece crisis back to the 400-year-long Ottoman rule over Greece, where people evaded taxes in resistance. Indeed, tax evasion and corruption lie at the heart of the Greek crisis, with cheating on taxes being a common norm. Independent sources indicate that Greece loses between € 50 - €70 billion in revenue due to tax evasion each year.

A third explanation of the crisis, as argued by prominent writer and journalist Robert D. Kaplan, is that the crisis was dictated by fate, and stems from Greece’s geographical position. He highlights that Europe’s main troubled economies-Italy, Spain, Portugal and of course, Greece, are all located in the south.

These Mediterranean countries were characterized large landholdings, which lend to an inflexible social order and prominence of statism and autocracy. This is reflected in fact that Greek politics for the last half-century have been dominated by the Karamanlises and the Papandreous families. Kaplan argues that culture of autocracy dictated and even today has a bearing on the economic success of Greece, leaving is lagging behind other countries that were more “humanized”.

These points of view are interesting in order to understands how societal structure and norms have an influence on economic success and how economic growth is linked closely to community behaviour and structure created over centuries.

While we may now have some idea of how the Greek crisis was truly caused, recent incidents indicate that the crisis is far from being resolved. In our next post, we shall look at bailout packages being proposed for Greece and what impact are they going to bring about…watch out for that! 

What does the second Greece bailout mean?

“Greece is about to default and the Euro Zone has just come up with a comprehensive plan to bail it out. "

Does that sound familiar? It should. For just last May, international authorities agreed to a €110bn bailout, and now it’s time for a second round of bailout, this one as hefty as €120bn.

The way the bailout plan is structured, however, suggests that second round may not be the last. The Greek debt is about to touch 160% of its GDP, and the debt by all measures seems unsustainable. The government has been running deficits and needs external funding to cover the deficits and meet payments on debt. The only sustainable solution out of this mess for the Greek economy is getting back to growth.

However, the bailout plans all stress on austerity through reduction in spending and raising money through taxes- the plan is in fact to raise over €14bn over the next 5 years. Keynesian economics stresses on the importance of demand and consumption in order to promote growth, and such stress on austerity and low spending in the Greece economy is only likely to weaken the economy further.

Moreover, the plan fails to tackle some core political issues vital to restore growth. For instance, while the Hellenic Railways, which loses about €3mn a day, is due to be privatized, there is no clarity on how the staff strength would be reduced or costs cut. It is to be recalled that in 2009, Goldman Sachs and Morgan Stanley had pitched the Greek government on a plan to overhaul the system, by laying off half of it’s 7000 workers and taking on about €8bn but that did not go through in the election year. There also seem to be no strong measures against political lobbyists who often benefit most from the government’s excessive spending.

With weaknesses in the bailout plan, what thus appears immediately is a viscous cycle of bailout-austerity-low consumption-staggered growth-bailout.

While the markets at large may be responding positively to the measure, such a bailout brings us to a more fundamental economic question. Is Greece actually free-riding on the economic strength of other countries in the Euro Zone? Do the second Greece bailout send a poor message to other countries in the Euro Zone than they too may thus free ride? If so should actually be allowed to default or asked to leave the Euro Zone, as a punishment for it lax economic policies?

We shall look at some of these issues in our upcoming posts..do keep a look out!