Thoughts on the Indian Economy

Thinking about assorted economic issues in India.

Sunday, January 25, 2009

Changing Economic Landscapes and Worldviews

I was reading an interesting paper called "Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking." The economists examined whether macro-economic circumstances over an individual's lifetime affects their own economic behavior.
"In particular, we test whether individuals who experienced low stock-market returns are less willing to invest in stocks and express more risk aversion, and whether individuals who lived through high-inflation periods are wary of investing in long-term bonds."

They do an detailed empirical analysis using individual data spanning 40 years, but here's a simple graph that provides interesting evidence.
We see that the stock market participation rates (whether a person has invested in directly held stocks or funds) for the generation that experienced the 1930s Great Depression as young adults ("cohorts 1920s" i.e. born in the 1920s) is significantly less than those born later. The authors do control for confounding factors and things like effects of age or time trends.

I wonder what the implication of India's rapid macro-economic change will be on generations of youth? A 13 year old today, born in 1995 has really experienced a different India. For example, the proliferation of consumer choice-- would teenagers believe that there were basically 4 types of cars, 1 domestic airline, 1 radio station and 2 TV stations 20 years ago?

Exposure to global media and good and a dramatically expanded private sector has changed the landscape of opportunities, ideas and has to have shaped a child's worldview. I think today's Indian teenager has different economic expectations and attitudes towards risk than even just a generation before. Growing up in a booming, globally assimilated economy stirs one's imagination, expands visions, creates ideas encourages entrepreneurship, risk-taking and innovation, all feeding back into more growth and prosperity.

Sunday, January 18, 2009

Cell phones as credit scores?

Can we use cell phone payment records to help fill a bank's informational gap when it assesses risk?

From the point of view of a bank, lack of information about a potential borrower translates into higher risk of default and creates various distortions in credit markets like high interest rates, collateral requirements or credit rationing (borrower wants to borrow more at a given interest rate, but cannot).

Although improving, the financial system in India features considerable barriers to banking services like loans for the poor. Informational and enforcement issues manifest themselves in high fees, minimum deposit requirements, loan ceilings and lengthy loan processing. Beck et al all measure loan affordability by looking at minimum balances required for loans and the fees for these loans.

India has a pretty high minimum loan amount around 25% of GDP per capita of the country and the fees are about 1.5% of that minimum.

As pointed out before, more information about a borrower could reduce credit market distortions. The concept of a "credit score" or "credit report" seen in countries with more developed financial systems is still being implemented. Older institutions that filled in the gap like caste networks are fading due to increased migration and changing social norms.

How about using alternative information, that is information beyond a person's credit history. Specifically, how about using cellphone or utility payment records which would show a consumer's willingness and ability to repay "credit-like" obligations. Almost 300 million people in India use cellphones and if cellphone payment records could supplement credit records, the information base would be much higher. This argument is probably less potent if many of those are "prepaid" vs "postpaid" accounts, but it is still more information, right?

In a research paper called "Give Credit Where Credit is Due", the authors use 8 million credit files in the US containing alternative/nontraditional utility and telecommunication payment information and apply models that lenders use to make various credit decisions. They found including energy utility data increases acceptance rate by 9%, given a 3% target default rate. Minorities and the poor benefit more than expected from nontraditional data: Hispanics saw 22% increase in acceptance rates, 21% for Blacks, 14% for those 25 and younger, 21% for those earning $20K or less. They conclude that this increased data and information decreases credit risk, increases access, improves credit scoring models and reduces bad loans.

Sunday, January 11, 2009

China v India-- Hard Truths

Response to

Gurcharan Das is a very interesting and thought-provoking writer, but I agree that the China v India comparison is comparing apples to oranges at this point. The two countries were very similar in 30 years ago, but their trajectories have hugely deviated since then. One hard truth is that China's government has ensured a much better basic life for its people. Some fundamental indicators pulled from Human Development Report 2007 (

Probability at birth of not surviving to age 40 (% of cohort): (Chi v Ind) 6.8 v 16
Life expectancy at birth: 72.5 v 63.7
Children underweight for age (% under age 5): 8 v 47
Infants with low birthweight (%) : 4 v 30
Adult illiteracy rate (% aged 15 and older) : 9.1 v 39
Population living below $2 a day (%): 34.9 v 80.4

What the next 30 years holds is hard to predict. India’s democracy ensures that it will take care of its basic “roti, kapda, makaan” issues….eventually. And economic hardships are shaking up China’s undemocratic underpinnings. But current human existence in the two countries appears to be very different.