Trading economy


Horticulture and crafts – the pillars of our economy – is likely to pale into insignificance if compared with the incremental contribution of construction industry to the growth of the State’s domestic product. If we were to look at the State domestic product by industry of origin, construction has almost doubled while agriculture and manufacturing have registered a sharp decline. The entire construction activity is confined to residential houses and shops; on an incremental basis, the diversified and broad-based economy of our State is fast becoming a house-shop economy. It follows, axiomatically, the main driver of this economy, is the private investment at the household level. Neither the public investments, which have all but collapsed in the last decade nor the private enterprise investments is driving the State economy. Not to speak of national corporate investment that is non-existent. The macroeconomics of such an economy are numerous; some positive but largely negative. To put it in simple terms, household income and savings is being used to create physical assets. These are not being intermediated as financial savings through the banking sector to fund private enterprises in the State. These are not even being used to leverage the future income stream to create assets. This reflects very primitive financial intermediations in the economy. At another level, these investments in houses and shops are actually crowding out the resources that could be used for financing productive business activities. In the process what is happening is that an asset bubble is being created. The first indication of which is the extraordinary rise in the land prices. In spite of the fact that there is only a localized demand for land due to restriction on purchase of land by outsiders, the rate of increase in land prices is one of the highest in the country. With land as an asset class being the dominant form of household investment, the State economy is threateningly close to being an economy of land speculators! This asset bubble can get pricked with even the hint of a slowdown in economic growth. The real issue is that most of the household financial investment is being made in physical assets that are not revenue earning but are only “capital appreciating”. In such a situation, the need for an income stream is obvious. It is here that the shops come in as an investment that can provide it; either in the form of rentals of trading and sales income and profit. The economic role of housing is complex. It is influenced by the quantity of the stock of housing; the quality and location of the stock of housing; the rate of new house-building; the price of privately owned housing and how this varies by region and locality, etc. Variations in any or all of these factors separately, or more often in combination, can have economic effects. The housing sector has affected the labour market in our State as majority of the labourers are now from outside the State. This has changed the dynamic of the labour market including the affect on skill supply. The big issue that is emerging now relates to housing affordability. The affect of poor affordability is bound to lead to all forms of urban chaos; from extended commuting to traffic jams. All this calls for a new localized model of the economics of housing which takes into account the specificity of the State economy, its financial architecture and social structure. One of the objectives of such a model should be to design new and sustainable relationship between housing needs of people and the requirements of the State economy. It is important to recognize that the retail shop base economy dominated by convenience stores is not engendering sustainable growth. It is, if anything, strengthening the “missing multiplier” and increasing the “import intensity” of local consumption. Both are acting as dampeners to long term sustainable economic growth. It is also making us more of a trading economy than a producing economy. When this is seen in the context of adverse terms of trade that the economy is condemned to face by virtue of being an exporters of primary commodities and an importer of manufactured goods, the emerging economic structure is highly unviable. The policy challenge is to change this structure through creative incentives and innovative public expenditure policy.