Dr. Susmit Kumar, Ph.D.

The US GDP nearly doubled between 2000 ($10.28 trillion) and 2016 ($18.46 trillion) (please see Chart 1), but instead of increasing good paying jobs, the US lost more than 5 million such jobs during the same period (Chart 2) whereas the job growth was in the low-wage sector (Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones, Annie Lowrey, The New York Times, April 27, 2014). Therefore it does not make any sense if someone, especially a US-based economist, tries to claim that if India has 7% growth rate,  there must be [good paying] job growth also. It is said – what you sow, you reap. As India is following the US economic policies, no wonder most of India’s job growth come from low-wage industries.

The US-based economists would never blame trade deficit (or free trade) for massive job losses. Instead they would try to explain the job losses by catchy words like increase in labour productivity. Since 2000, the US has lost a massive number of jobs due to shifting of manufacturing jobs overseas (Chart 2). One can easily explain this massive job loss due to (i) massive trade deficit since late 1990s as shown in Charts 3 and 4, and also (ii) losing more than one-third of its export in the world export market as shown in Table 1. These two losses have nothing to do with the increase in labour productivity in the US.

For an example, please see these articles (these are from premier think tanks and financial websites):

Don’t Blame China For Taking U.S. Jobs, Wolfgang Lehmacher, Fortune, November 8, 2016.

Reality check: US factory jobs lost are due overwhelmingly to increases in productivity and they’re not coming back, Mark J. Perry, American Enterprise Institute, US, January 20, 2017.

Productivity Growth, Not Trade, Is Cutting Manufacturing Jobs, Terry Miller, The Heritage Foundation, November 27, 2007.

In the last couple of years, India had about $130 billion trade deficit a year, which means that Indian economy is losing about $260 billion (considering the loss of associated jobs as explained in my article The Hidden Cost of Imported Items and The Need to Redefine Modi Administration’s “Make in India” Policy”), nearly 13% of $2 trillion GDP, of economic activity (as well as millions of jobs associated with this loss) each year.

In 2009, I attended a conference on Indian economy at a Business School in a Midwest university, which is among the top five business schools in the US. During the first session, I raised the question that yes Indian economy was booming, but its trade deficit had been increasing like the US trade deficit and US could pay it by printing its currency but India would face a crisis down the line. I also mentioned that I had just published a book in 2008 which had discussion about Indian and global economy in detail. They did not give any direct answer. After my question, they changed the format of question from audience (after the first session) - in the first session, you just needed to raise your hand to ask question. But now they asked to submit questions on a piece of paper to the moderator and it would be up to the moderator to choose from the submitted questions. They did this change because any talk about debilitating effects of growing trade deficit on Indian economy would have had ruined the conference whose aim was to present the bright side of economic growth in India.

In fact just after two years of the conference, Indian economy was in the midst of a grave crisis. Due to record trade deficits during 2011-13, the exchange rate of the rupee (vis-à-vis the US dollar) tumbled from 44.17 in April 2011 to 62.92 in September 2013. After the sharp devaluation of the Indian rupee and double digit inflation during 2011-13 due to the high crude oil price, some economists even started to write the obituary of the Indian economy (read: "None of the experts saw India's debt bubble coming. Sound familiar?", The Guardian, UK, August 26, 2013; ‘Fragile Five’ Is the Latest Club of Emerging Nations in Turmoil, New York Times, January 28, 2014). One point worth noting is that Russia and China were not included in the new club of “Fragile Five”. Both Russia and China have been running trade surpluses since the early 2000s. Had high crude oil price persisted for a couple of more years, it was certain that India would have had to go to the emergency ward of the IMF, wiping out its couple of decades of development due to the IMF’s bitter medicine of getting rid of subsidies to balance the budget, significant increase in the interest rate, and selling the crown public sectors to Wall Street bankers at throwaway prices.

Because of high crude oil price in 1980s due to the Iraq-Iran War (1980-88), India had Current Account Deficit (CAD) problem and hence it had to airlift 67 ton gold to London to get $2.2 billion loan from IMF in 1991.

India should learn a lesson by having two CAD crises in two decades, both due to high crude oil price. In future, a similar crisis in Middle East (say Saudi-Iran War, large scale terrorists bombing in Middle East and North African countries (MENA), takeover of some countries in MENA countries by Islamic militants, etc.) would result in higher crude oil price - it will also affect NRI remittance because half of it comes from Middle East.

Chart 1. US GDP (in Billions of USD)

Chart 2.

(source: http://money.cnn.com/2016/03/29/news/economy/us-manufacturing-jobs/index.html)

Chart 3. US Trade Deficit with China

 Chart 4. US Monthly Balance of Trade (1975-2017)

Table 1 (Data source: World Economic Outlook which is published twice a year by IMF)