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TECH TALK: As India Develops: A Tutorial on Development (Part 4)

March 2nd, 2004 · No Comments

Atanu on Poverty and making India a Stuff Superpower: Poverty is lack of income. What is income? Income is that share of stuff produced that you get to take home for yourself. Let’s not confuse money with income. Income is often denominated in monetary units but in real terms, income is what you get to keep from what is produced overall. Per capita income is therefore a ratio: a ratio of what is produced (the numerator) to the total number of people (the denominator). You can increase income by either producing more or by reducing the number of people. If the rate of growth of production is lower than the rate of growth of the population, you will have a falling per capita income. In time, you would have deepening of poverty.To repeat that point: we are poor because the amount of stuff we produce is low relative to the number of people we have to distribute the stuff to. IT can help increase the amount of stuff produced but IT can never be a substitute for stuff. So India has to become a STUFF SUPERPOWER because we are a PEOPLE SUPERPOWER. If you divide STUFF INFERIORPOWER with PEOPLE SUPERPOWER, you get poverty-ridden India. On the other hand, if you divide STUFF SUPERPOWER with PEOPLE INFERIOR POWER, you get stuff-rich USA.

Atanu writes on Indias biggest advantage its size, and the need to address the domestic market:

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!!

This is at the heart of what the rest of the series will discuss. As India develops, what are the opportunities that are created in the domestic market? And correspondingly, what solutions can we create to help India in the development process? The one thing I strongly believe in is that a handful of Indians with vision and will can make a difference. Once upon a time, we had hoped that our politicians would be this handful. While those hopes have long been belied, they have in the recent past done just about enough to get India rolling (a little) and reduce government involvement in many aspects of life and business. This creates the opportunity for entrepreneurs (and not just inheritors) to thrive.

Tomorrow: The Process

TECH TALK As India Develops+T

Tags: Tech Talk

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