Individual and collective mindsets are not merely passive aspects of an economy but active contributors to its success or failure....

 Individual mentality and psychology significantly influence low GDP growth by affecting decision-making, talent allocation, and societal culture, as evidenced by research on cognitive biases, personality traits, and intelligence levels. Factors like a society's psychological make-up, including personality traits such as conscientiousness and the presence of an entrepreneurship culture, correlate with differences in economic growth. Similarly, the average cognitive ability of a population and the efficient allocation of talented individuals into suitable roles also play crucial roles in a society's economic development.

How mentality and psychology impact economic growth

Cognitive Biases:

Psychological biases can lead to poor economic decisions at the individual and societal levels, which can slow economic growth.

Personality Traits:

Specific personality traits, such as high conscientiousness and traits linked to entrepreneurship, can contribute to a more dynamic economy.

Talent Allocation:

The efficient allocation of talent within a society—where individuals with higher abilities perform more complex tasks—is strongly correlated with higher levels of economic growth.

Average Cognitive Ability:

The overall level of cognitive ability within a population is a significant factor in economic development and can impact innovation and national income.

Leadership and Motivation:

Effective leadership that inspires vision and promotes collective goals can drive economic progress, while power that is used for corruption or control can hinder it.

Societal Mindset:

A society's collective mindset, influenced by psychological factors, can either foster innovation and growth or create an environment of fear and instability.

Psychological factors vs. economic fundamentals

While economic factors like physical capital, labor force, and technology are traditional drivers of GDP growth, incorporating psychological factors provides a more complete understanding of economic differences between regions and cities. Psychological research demonstrates that these individual and collective mindsets are not merely passive aspects of an economy but active contributors to its success or failure.

The period between 2000-2013 witnessed a more rapid increase in productivity.....

Productivity growth in India generally slowed down between the 2000-2013 and 2014-2025 periods, although this is not a uniform trend across all sectors and factors. The earlier period benefited from faster growth in structural change and within-sector productivity, while the latter period saw a slower pace of these factors.

1. Slower Structural Change:

During the early 2000s, India experienced a more significant shift of labor from agriculture to higher-productivity sectors like manufacturing and services. This structural change contributed substantially to overall productivity growth.

However, the pace of this structural transformation slowed down in the later period. The share of agriculture in the workforce decreased, but the shift to higher-productivity sectors was not as dramatic, leading to a smaller contribution to overall productivity growth from structural change.

2. Sectoral Productivity Growth:

While within-sector productivity growth remained a significant driver of overall productivity in both periods, the rate of growth within sectors may have slowed down in certain areas.

The initial surge in information technology (IT) adoption and its impact on productivity may have been more pronounced in the earlier period. As the IT sector matured, the incremental gains from further IT adoption may have become smaller.

Furthermore, the initial gains from economic liberalization and reforms might have been more significant in the earlier period, with subsequent reforms having a less dramatic impact on productivity.

3. Global Economic Conditions:

Global economic growth slowed down in the latter period, impacting India's export-oriented sectors and overall growth.

The global financial crisis of 2008 also had lingering effects on India's economy, potentially affecting investment and productivity growth.

4. Other Factors:

The COVID-19 pandemic and related disruptions also impacted productivity in various sectors during the latter period.

Factors like education and skill development, investment in capital and technology, and management practices also play a crucial role in productivity growth. While these factors have been consistently important, their relative contribution may have varied between the two periods.

In conclusion: The period between 2000-2013 witnessed a more rapid increase in productivity due to a combination of factors including faster structural change, potentially higher gains from IT adoption and economic liberalization, and a more favorable global economic environment. While the latter period (2014-2025) saw continued productivity growth, it was at a slower pace, potentially due to the factors mentioned above.

India faces the challenge of balancing economic growth with inclusive employment generation.....

 Despite working long hours, India's labor productivity remains low, ranking 133rd globally with a GDP per working hour of $8. While Indian employees work an average of 46.7 hours per week (ranking 13th globally for longest working hours), with over half working 49 hours or more, this high input doesn't translate to high output.

India is among the countries with the longest working hours, with many employees exceeding 49 hours per week. Despite the long hours, India's GDP per working hour is significantly lower than many other nations, indicating low labor productivity. The long working hours raise concerns about work-life balance and potential negative impacts on employee well-being. Studies indicate that a significant percentage of Indian employees experience burnout due to work-related stress, according to a survey by MediBuddy and CII.

The situation highlights the need for labor reforms and policies that promote work-life balance and address the issues of burnout and poor lifestyle choices. In India's economic development since 1947, employment has been a crucial but complex variable. While India has seen overall economic growth, achieving a balance between growth and employment, particularly in the initial decades, has been challenging. The employment multiplier, which measures the impact of changes in spending on overall employment, has varied throughout this period, with initial decades showing a smaller multiplier compared to later periods of higher growth driven by productivity increases.

A mixed economy model was adopted, with a focus on industrialization and public sector investment. While there was some employment growth, it was not keeping pace with the growth of the labor force, leading to increased unemployment. The employment multiplier was relatively small, meaning that changes in spending had a limited impact on employment generation. Economic reforms led to higher GDP growth rates, but this growth was often driven by productivity increases in the service sector rather than substantial employment growth in other sectors. The service sector became a major contributor to GDP, but its employment generation capacity was relatively lower compared to manufacturing and agriculture.

The employment multiplier's effectiveness has varied. In the early years, with lower growth rates, the multiplier effect was less pronounced. Later, with higher overall economic growth, the multiplier effect on employment became more noticeable, particularly during the 2000s boom and the Great Recession, according to the World Bank.

India faces the challenge of balancing economic growth with inclusive employment generation. There's a need to create more jobs in manufacturing and other sectors that can absorb the growing labor force. The potential of the tertiary sector to generate more employment opportunities, especially in rural areas, is also being explored, according to the International Labour Organization. Addressing the skills gap and investing in education and vocational training is crucial for ensuring that the workforce is equipped to take advantage of new job opportunities.

India's labor productivity, while demonstrating positive growth, lags behind global benchmarks, especially when measured by GDP per working hour. While some periods have shown strong growth, there are also instances of decline and stagnation, particularly within the manufacturing sector. Several factors, including working hours, infrastructure limitations, and the impact of climate change, contribute to these productivity fluctuations.

India's GDP per working hour is significantly lower than many other countries, ranking 133rd globally, according to the International Labour Organization (ILO). For instance, India's GDP per hour is estimated at $8, while countries like Ireland have a much higher productivity rate, according to TheGlobalEconomy.com. India has experienced periods of rapid productivity growth, but also periods of stagnation and decline, especially in the manufacturing sector.

Longer working hours, while potentially increasing output in the short term, can negatively impact long-term productivity due to factors like fatigue and reduced efficiency. Inadequate infrastructure, such as power outages and transportation bottlenecks, can hinder productivity across various sectors. Extreme weather events and changing climatic conditions can disrupt agricultural yields and industrial output, affecting overall productivity.

The informal sector, which employs a large portion of the Indian workforce, often exhibits lower productivity compared to the formal sector due to factors like limited access to capital and technology. Investing in education, vocational training, and technological advancements can improve labor quality and boost productivity. Policies that encourage risk-sharing between labor and capital, incentivize employment generation, and ensure fair income distribution are crucial for sustainable productivity growth.

The central bank may be more likely to adopt a more accommodative monetary policy.....

 A sustained period of disinflation, such as India experiencing three consecutive months of declining inflation, can positively influence expectations by signaling a stable and predictable economic environment. This can lead to: 1) Anchored inflation expectations: Consumers and businesses may become more confident in the central bank's ability to control inflation, leading to more stable price expectations. 2) Reduced uncertainty: Lower and stable inflation reduces uncertainty about future prices, encouraging businesses to invest and consumers to spend. 3) Favorable monetary policy: Central banks may be more likely to ease monetary policy (e.g., lower interest rates) when inflation is under control, further supporting economic activity.

1. Anchored Inflation Expectations:

When inflation is consistently low, both consumers and businesses are more likely to expect future prices to remain stable.

This anchoring of expectations can be crucial for monetary policy effectiveness, as it can help prevent inflationary spirals where rising prices lead to demands for higher wages, which then further increase prices.

A sustained period of disinflation can enhance the credibility of the central bank, making it easier to manage inflation expectations in the future.

2. Reduced Uncertainty:

High and volatile inflation creates uncertainty about the future purchasing power of money, making it difficult for individuals and businesses to make long-term plans.

A period of disinflation, where prices are rising at a slower rate or even falling, reduces this uncertainty.

This can encourage businesses to invest, as they can be more confident about the future costs of inputs and the potential demand for their products.

Consumers may also be more willing to spend, knowing that their purchasing power is less likely to erode quickly.

When inflation is under control, the central bank may be more likely to adopt a more accommodative monetary policy. This could involve lowering interest rates, which can stimulate economic growth by making borrowing cheaper for businesses and consumers. A sustained period of disinflation can create the conditions for the central bank to take such actions without fear of reigniting inflation. RBI has previously acknowledged the impact of disinflation on household inflation expectations. A recent report from Nomura suggests that India is likely to experience further disinflation in the coming months, with headline CPI falling below the RBI's tolerance band. This could lead to a more accommodative monetary policy stance from the Reserve Bank of India.

A token system could be used for international trade settlements.....

 In the absence of a reserve currency, a token system could be used for international trade settlements by creating a globally accepted digital token that represents a basket of currencies or commodities. This token, potentially managed by a consortium of central banks, could facilitate secure and efficient cross-border payments without relying on a single national currency.

1. Token Creation and Management:

A new digital token, let's call it "Global Trade Token" (GTT), would be created.

The value of GTT could be pegged to a basket of major currencies (e.g., USD, EUR, JPY, CNY) or a commodity like gold.

A consortium of central banks or a neutral international organization could manage the issuance and redemption of GTT, ensuring its stability and value.

2. Token Usage in Trade:

Invoicing and Payment:

Exporters and importers could invoice and settle trade transactions using GTT.

Cross-border Transfers:

GTT could be transferred digitally between parties in different countries, similar to cryptocurrency transactions.

FX Conversion (if needed):

If a country prefers to receive payment in its local currency, GTT could be converted to that currency at the prevailing exchange rate.

3. Advantages of a Token System:

Reduced Reliance on Reserve Currencies:

Eliminates the need for a single currency to act as the global medium of exchange.

Lower Transaction Costs:

Digital transactions can be faster and cheaper than traditional methods involving multiple intermediaries.

Increased Financial Inclusion:

Smaller countries and businesses could participate in global trade more easily, without needing to hold large reserves of a specific currency.

Reduced Currency Risk:

By using a basket-backed token, the volatility associated with a single currency can be mitigated.

Enhanced Transparency:

Digital ledgers can provide a transparent record of all transactions, reducing the potential for fraud or manipulation.

4. Potential Challenges:

Coordination:

Establishing a global token system requires international cooperation and agreement on its structure and management.

Adoption:

Widespread adoption of a new token system can be challenging, especially in the early stages.

Security:

Robust security measures are needed to protect the token system from cyberattacks and fraud.

Regulatory Frameworks:

Clear regulatory frameworks are needed to govern the use of the token and ensure compliance.

A token system, particularly one leveraging distributed ledger technology (DLT) and managed by a consortium of central banks, offers a potential solution for facilitating international trade settlements in the absence of a dominant reserve currency. While challenges exist, the potential benefits in terms of reduced costs, increased efficiency, and greater financial inclusion make it a compelling alternative.

Where the belief itself shapes the reality that unfolds.....

 Both price expectations and demand and supply expectations influence each other, creating a dynamic cycle. While price is directly determined by the interaction of supply and demand, these factors are themselves influenced by expectations about future prices and market conditions. This interplay can lead to a self-fulfilling cycle where expectations, whether accurate or not, can shape future market behavior. The Thomas theorem and Merton's self-fulfilling prophecy are related concepts that explore how beliefs, even if false, can shape reality. The Thomas theorem, formulated by W.I. Thomas and Dorothy Swaine Thomas, states that "if men define situations as real, they are real in their consequences". Merton's self-fulfilling prophecy builds on this, suggesting that a false belief can lead to actions that make the belief come true.

Demand and Supply Determine Price:

In a free market, the equilibrium price is where the quantity of goods buyers want to purchase (demand) equals the quantity sellers are willing to offer (supply).

Expectations Influence Demand and Supply:

Consumers and producers form expectations about future prices, which then influence their current buying and selling decisions.

Example: If consumers expect prices to rise in the future, they may buy more now, increasing current demand. Conversely, if producers expect prices to fall, they may reduce current supply.

Self-Fulfilling Prophecy:

These expectations, even if not initially based on concrete evidence, can become self-fulfilling as they affect actual market behavior.

Example: If many consumers anticipate a price increase and start buying more, their increased demand could indeed push prices up, validating their initial expectation.

Role of Central Banks:

Central banks try to manage inflation expectations by maintaining a credible commitment to price stability. By anchoring expectations, they can influence future price levels.

Example: If people believe the central bank will keep inflation at a target rate, they are more likely to set wages and prices accordingly, making it easier for the central bank to achieve its target.

A self-fulfilling prophecy occurs when an initial expectation, regardless of its accuracy, influences behavior in a way that makes the expectation come true. In the context of a market, if consumers anticipate a price increase and subsequently increase their buying, their heightened demand can indeed cause prices to rise, thus validating their initial expectation. This demonstrates how beliefs, even if unfounded, can shape market dynamics. The process begins with a belief or expectation about a future event, such as a price increase in the market. This expectation then influences the actions of individuals. In the example, consumers might start buying more goods to avoid paying higher prices later, according to Study.com. The increased demand due to the behavioral change can then drive up prices, making the initial expectation a reality. This creates a positive feedback loop where the initial belief, now validated by the market, further reinforces the belief and potentially leads to even more buying, potentially creating a bubble or other market instability. The Thomas theorem, a concept in sociology, highlights that "if men define situations as real, they are real in their consequences" according to Wikipedia. This applies directly to the self-fulfilling prophecy, where the belief itself shapes the reality that unfolds.

Productivity and competitiveness are closely related concepts.....

 Productivity and competitiveness are closely related concepts, with productivity being a key driver of competitiveness. While lower production costs can lead to increased market share, competitiveness is more than just price. It also involves factors like innovation, quality, and access to resources. Domestic competitiveness is crucial, as it contributes to a nation's overall economic strength.

Productivity and Competitiveness:

Productivity is a measure of how efficiently a company or nation uses resources to produce goods and services. Competitiveness, on the other hand, is the ability to generate profits and gain market share, often by offering better value (which can include lower prices but also other factors).

Lower Prices and Market Share:

Reducing production costs and offering lower prices can indeed help companies gain market share and build market power. This is especially true in industries where price is a primary factor for consumers.

Beyond Price:

However, competitiveness is not solely about price. Factors like innovation, product quality, brand reputation, and access to skilled labor also play a significant role. A company with a strong brand or innovative product might be able to charge a premium price and still maintain a competitive edge.

Comparative Advantage:

While comparative advantage (specializing in what a country or company can produce most efficiently) is a factor in international trade, domestic competitiveness also matters. It ensures that a nation's industries can compete effectively both at home and abroad.

The Importance of Domestic Competitiveness:

A country with strong domestic competitiveness is likely to have a more robust and resilient economy, as its industries can adapt to changing market conditions and innovate to stay ahead. This also helps attract investment and create jobs.

Productivity and competitiveness are not different, they are the ability to produce at lower prices, because this how companies achieve market share and build market power. It is not just a matter of comparative advantage, for domestic competitiveness is also important. The rule is to supply at lower cost and prices in order to gain competitive or comparative advantage."