Is India the next China? The "Sacred" Productivity Problem

I have been spending more time thinking about India as a result of Modi's governance, investment observations of Indian leadership of American companies and personal interactions with Indians. As a friend of mine noted, "don't try to out trade people who invented numbers."

With that said, last weeks announcement that Prime Minister Nodi was abandoning the attempt to deregulate the agricultural sector. By bowing to the pressure of farmers, Modi has allowed incalculable damage to a people's ability to raise their standards of living. He complained that he "couldn't explain such a sacred thing to some farmers."

The phrase "sacred thing" is delightful. The truth is that gains in productivity fund increases in our standards of living. At the root of these increases are gains in agricultural productivity. While the US economy allowed the Great Depression to painfully shift employment into towns, Argentina stopped the transition. The result is that the US has gone on to gains, while Argentina has the most default-ridden of developed economies.

In the 2015 BRK annual report, Chairman Buffett writes (edited for brevity), "In 1900, America’s work force numbered 28 million. Of these, 40% worked in farming. The leading crop was corn. About 90 million acres were devoted to it and the yield was 30 bushels per acre. Then came the tractor. Today, we devote about 85 million acres to corn,but the yield is more than 150 bushels per acre - a five-fold gain. This is only half the story: The huge increases in output have been accompanied by a dramatic reduction in farmers. Today a tiny 2% of our 158-million-person work force farm - a twenty-fold gain." If farmers had been allowed to dictate (by democratic protests) this process, it is impossible to see how our standards of living would have improved without a basis in this 100-fold gain.

Interestingly, Modi was able to improve and simplify the tax system. Unlike the US which got rolled by the accounting profession into retaining nonsensical complexity, India now has a dramatically simplified system. However, without agricultural gains, India with its democracy seems a far less attractive investment space than China with its autocracy.