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GS Paper: Indian Economy

  • [op-ed snap] A road map for robust trade ties

    Context

    The challenge for India and Australia is to transform people-to-people ties into a trade relationship.

    People-to-people the two countries

    • Soft power: Soft power rather than hard economics has traditionally been the driving force behind India-Australia relations.
      • Cricket is a dominant theme that connects the two countries.
      • The Indian diaspora in Australia is a vibrant community that plays a robust role in connecting their country of adoption with their country of origin.

    Trade relationship scenario

    • $31 bn bilateral trade: The trade between the two countries has been at a modest $31 billion, largely composed of resources like coal and other minerals.
    • No progress on FTA: Negotiations on a Free Trade Agreement, which began in 2011, have not moved forward significantly.
    • No progress on coal mining projects in Australia: The problems faced by the Adani Group to begin work on a coal mining project in Queensland did not go down too well with investors from India.
    • India Economic Strategy 2035 by Australia: One of the most widely commended initiatives has been the Australian government’s release of an India Economic Strategy 2035 Report.
      • It observes that no single market over the next 20 years will offer more growth opportunities for Australia than India.
      • It lays down a comprehensive road map for strengthening Australia’s trade engagement with India.

    Development in digital technology and the role of youth

    • Development of new architecture: Meanwhile India-Australia trade has been steadily evolving into a new architecture underpinned by developments in digital technology.
      • There is a rise of a younger generation of entrepreneurs and a noticeable shift in the trade basket from resources to services.
      • Technology and young entrepreneurship make a formidable combination and should set the agenda for the future of bilateral trade relations.
      • About 80% of the Australian small and medium-sized enterprises are managed by young professionals.
      • The young can see issues like immigration and outsourcing with far more equanimity than the older generation.
      • An important role of young Australians: Young Australians are thus emerging as great champions of India-Australia trade relations.

    Scope for engagement in innovation and trade relations

    • Tech. expertise of  Australia: There is also recognition that Australia is a laboratory of ideas, innovation, technology-led growth and university-industry partnerships.
    • Scope for India in innovation and trade: India is a large and demographically young market with a love for innovation and an appetite for new products and services.
      • These synergies should add momentum to a growing engagement in trade relations.

    India’s weakness and Way forward

    • Weakest link and way forward: The weakest link in India’s exports to Australia is in merchandise. India needs to look at three broad areas.
    • First-Focus on Market Research:  Despite globalisation, markets are country-specific and culturally sensitive.
      • Indian companies will need to invest a little more in market research on Australian consumer expectations and lifestyles.
    • Second-Brand creation: Australia is a brand-conscious market while India has not created a single consumer brand of international acceptance.
      • Only when products are visible across the world’s shopping malls and supermarkets displaying their own brands that India will be recognised as a major player in the global markets.
    • Third-Innovation: Innovation is emerging as the single-most-important factor for sustained success in every sphere. Global trade cannot be different.

     

     

  •  [op-ed snap] How to protect trade in a tug of war between nations

    Context

    Developing countries have argued for decades that the rules governing international trade are profoundly unfair. But similar complaints are now emanating from the developed countries that established most of those rules.

    Why are developed countries complaining now?

    • Competition: A simple but inadequate explanation is “competition.”
      • Turning tide: In the 1960s and 1970s, industrialized countries focused on opening foreign markets for their goods and set the rules accordingly.
      • Since then, the tide has turned.
    • Left behind communities in developed countries
      • Cheap labour-an advantage: One reason why emerging-market producers are competitive is that they pay workers less.
      • Job creation in services by developed countries: To replace lost manufacturing jobs, developed economies have been creating jobs in services.
      • Not everyone has moved to the service sector job: Unfortunately, not everyone in developed countries has been able to move to good service jobs.
      • Efforts by the left-behind bring back the manufacturing job: The left-behind former manufacturing communities have a voice in the capital city now, and it wants to bring back manufacturing.
      • Yet this explanation, too, is incomplete. The ongoing US-China trade war is not about manufacturing, it is about services.
    • Services a reason behind US-China dispute: Much of the US dispute with China is not about manufacturing. It is about services.
    • Emerging market competition increasing in services: Although eight of the top ten service exporters are developed countries, emerging-market competition is increasing.
      • New services related rules: This increased competition from emerging markets is prompting a major push by advanced-economy firms to enact new service-related trade rules.
      • An opportunity to protect the developed country producers: The new rules will ensure continued open borders for services. But it will also be an opportunity to protect the advantages of dominant developed-country producers.

    Trade disputes- The combined effects of the two factors

    • There are no easy trade deals anymore.
      • Two conflicting factors: In sum, two factors have increased the uneasiness over international trade and investment arrangements.
      • First-Left behind community: Ordinary people in left-behind communities in developed countries are no longer willing to accept existing arrangements.
      • They want to be heard, and they want their interests protected
      • Second-emerging economy demanding access to service sector: At the same time, emerging-economy elites want a share of the global market for services and are no longer willing to cede ground there. So, there is no easy trade deal anymore.
    • Trade disputes-exercise in power politics
      • High tariffs and ram tactics: Threats of sky-high tariffs to close off markets, for example, and battering-ram tactics to force “fairer” rules on the weaker party.
      • The important difference from the past: One important difference is that the public in emerging markets is more democratically engaged than in the past.
      • Short timed victory: Any success that rich countries have in setting onerous rules for others today could prove pyrrhic.
      • No consensus on the rules: For one thing, it is unclear that there is a consensus on those rules even within developed countries. For example- rules to regulate social media.

    Way forward

    How should developed countries respond to domestic pressures to make trade fairer?

    • Demand lower tariffs from developed countries: For starters, it is reasonable to demand that developing countries lower tariffs steadily to an internationally acceptable norm.
    • Challenge the discriminatory barriers: Discriminatory non-tariff barriers or subsidies that favour their producers excessively should be challenged at the World Trade Organization.
    • Go for less intrusive treaties: To go much beyond these measures—to attempt to impose one’s preferences on unions, regulation of online platforms, and duration of patents on other countries—will further undermine the consensus for trade.
      • Less intrusive trade agreements today may do more for the trade tomorrow

  • [op-ed snap] Examining the slowdown

    Context

    Setting aside the gloomy projections based on short-term economic trends, the long-term and comparative evidence reveal interesting trends about the health of the Indian economy.

    Performance of the Indian economy after 1991

    • Higher growth plateau reached after 1991: After the 1991 economic reforms, the Indian economy reached a higher growth plateau of 7% compared to a prior rate of 3. 85%.
      • The high growth rate during 2003-2011: India witnessed a high growth momentum during 2003-04 and 2010-11 with a period average of 8.45% (GDP with base 2004-05) or 7% (base 2011-12).
      • Ups and downs after 2012: The momentum lost steam in 2011-12 and 2012-13, gradually picked up again gradually to reach the 8% mark in 2015-16, and then started falling consistently to reach 6.63% in 2018-19.
      • Structural dimension? This trend suggests that India’s current growth challenge has a structural dimension as it began in 2011-12.
    • Comparison with China and the world
      • Average at 7.07% after 2011-12: Despite these fluctuations from 2011-12, on average, India clocked a growth rate of  7.07% from 2011 to 2019, a decent figure compared to China’s and the world’s economic growth rates.
      • Whereas like India, the growth of the world economy was fluctuating since 2011, China’s growth declined consistently from 10.64% in 2010 to 6.60% in 2018.

    Why couldn’t India’s growth momentum be sustained after 2010-11?

    • Analysis of five variables: To answer the above question, an in-depth analysis of trends in five key macroeconomic variables was done for two different periods: 2003-04 to 2010-11 and 2011-12 to 2018-19.
      • Consumption.
      • Investment.
      • Savings.
      • Exports.
      • Net foreign direct investment (NFDI) inflows.
    • What emerged from the analysis: The results reveal that compared to 2003-2011, investment and savings rates and exports-GDP ratio declined in the 2011-2019 period.
      • How much the investment declined? The investment rate declined from 34.31% of GDP in 2011-12 to 29.30% in 2018-19.
      • Household vs. corporate sector decline: The investment decline was caused mainly by the household sector and to some extent by the public sector, but not the corporate sector.
      • The decline in investment compensated by NFDI: The slump in the domestic investment rate in the 2011-2019 period was compensated by increased NFDI inflows.
      • On average, NFDI inflow was 1.31% of GDP during 2011-2019 compared to 0.89% during 2003-2011.

    Why tax-cut not help the economy

    • The justified policy of reviving the housing sector: The decline in household sector investment justifies the package of measures introduced by the Central government to revive the housing sector.
    • Why corporate tax cut won’t help much? The questionable policy, however, is the steep cut in the corporate income tax rate from 30% to 22%, aimed at boosting private investment.
      • Given that the corporate investment rate has not eroded severely during 2011-2019, the tax cut would help economic revival.
      • Lost opportunity to spur rural consumption: A part of the largesse offered to Corporate India could have been used to spur rural consumption.

    What the decline in saving rate mean?

    • Importance of savings: The savings rate declined almost consistently from 27% of GDP to 30.51% between 2011 and 2018.
      • This was also caused by a significant fall in the savings of the household sector in financial assets. Corporate savings did not fall.
      • Why the fall in household financial savings needs to be increased? The fall in household financial savings is alarming and needs to be arrested.
      • Savings are required to meet the requirements of those who want to borrow for their investment needs.
      • Saving-investment relation: Lower household savings imply lesser funds available in the domestic market for investment spending.
    • Economic growth powered by consumption: The decline in household savings has pushed up private final consumption expenditure consistently
      • Private final consumption rose from 56.21% of GDP in 2011-12 to 59.39% in 2018-19.
      • Consumption driven economic growth in 2011-19: The increase in private consumption suggests that economic growth during 2011-2019 was powered by consumption, not investment.
      • Investment driven growth during 2003-2011: In contrast, during 2003-2011, growth was powered by investments.
    • So, declining saving rate means a slowdown in the economy may not be due to structural issues.
      • Re-examination of popular view: Thus, the popular view that economic slowdown was caused due to a slowdown in consumption demand needs to be re-examined.
      • There is no concrete evidence to suggest that the economy is facing a structural consumption slowdown.

    Export-GDP ratio decline and what it means

    • Export-GDP decline from 24.54% to 19.74%: India’s exports-GDP ratio declined from 24.54% to 19.74% during 2011-2019.
    • A trend similar to the rest of the world: The decline started from 2014-15, coinciding with a similar trend in the world export-GDP ratio.
      • However, the drop in India’s exports was significantly larger than the world, a cause for concern.
      • The exports- and NFDI-GDP ratio has deteriorated sharply and consistently in China after 2006.
    • Indian economy doing better than China: Sharp decline in China’s export-GDP and NFDI-GDP, together with the consistent fall in China’s GDP growth after 2010, proves that the Indian economy is doing better than China.

    Conclusion

    The popular view that the slowdown in the Indian economy is due to the structural problems needs a re-examination in the view of the decline in investment in tandem with the world.

     

  • Explained: Fiscal Marksmanship

    Over the past few years, many have questioned the government’s fiscal marksmanship.

    What is fiscal marksmanship?

    • Fiscal marksmanship essentially refers to the accuracy of the government’s forecast of fiscal parameters such as revenues, expenditures and deficits etc.
    • In other words, if the difference between what the government projected as the likely tax revenues in the Budget and the actual figures a year later is large then it reflects poor fiscal marksmanship.
    • In the Indian context, this term gained popularity after Raghuram Rajan, then India’s Chief Economic Advisor stressed on fiscal marksmanship in the Economic Survey for the year 2012-13.
    • He had defined fiscal marksmanship as “the difference between actual outcomes and budgetary estimates as a proportion of GDP”.

    Why does fiscal marksmanship matter?

    • The salience of Budget numbers lies in their credibility.
    • The central purpose of publicly disclosing the Budget or the annual financial statement in a democracy and seeking approval from the legislature is to make the policymaking and governance transparent and participatory.
    • Everyone knows that Budget numbers are forecasts and estimates, and as such, unlikely to tally exactly with the actual numbers a year later.
    • But there is an underlying belief among people that when the government states, say, that its revenues will grow by 12% or that its fiscal deficit will remain within the FRBM Act’s mandate as it is based on genuine calculations.
    • However, if these fiscal forecasts turn out to be way off the mark repeatedly, it will undermine the credibility of the Budget numbers and indeed the Budget presentation itself.

    Why is India’s fiscal marksmanship being questioned?

    Typically, the fiscal marksmanship tends to get dented every time the economy faces a bump during the financial year.

    • For instance, as a result of the extent of the Global Financial Crisis in 2008, budget forecasts in the ensuing years did take a hit.
    • The latest trigger has been the wide discrepancy between what the last couple of budgets — first the interim budget for 2019-20 (presented in February 2019) and then the full budget for 2019-20 (presented in July 2019).
    • It expected the nominal GDP growth to be in 2019-20 and what the First Advance Estimates (FAE), released by the Ministry of Statistics and Programme Implementation in January 2020.
    • For instance, the July 2019 Budget expected nominal GDP to grow by 12% in 2019-20 but the FAE expect the nominal GDP to grow by just 7.5% (which by the way is a 42-year low).
    • Since all budget calculations are based on the nominal GDP, it is expected that this wide variance in nominal GDP will reflect across the board in the coming Budget.

    Impact on revenue

    • The government’s revenues are unlikely to grow anywhere close to the last Budget’s expectation.
    • Indeed, the revenue shortfall is expected to be anywhere between Rs 2 lakh crore to Rs 5 lakh crore.
    • As a result, either the fiscal deficit will overshoot from the budgeted number or the expenditure numbers will be much lower than promised.

    Why has fiscal marksmanship worsened?

    • As mentioned earlier, when an economy’s growth slows down (or picks up) sharply within a year, it is possible that the fiscal forecasts for that year go down (or up) substantially.
    • However, such changes do not happen too often.
    • In the recent past, however, there is one structural change that appears to be contributing to poor fiscal forecasts by the government.
    • This structural change was the government’s decision in January 2017 to advance the presentation of the Union Budget by a whole month.
    • Accordingly, the Union Budget for 2017-18 was presented on February 1 instead of the last working day of February (28th or 29th), as was the norm till then.
    • It meant that the First Advance Estimates, which used to come by January end (after taking into account the economic activity of the first three quarters of the financial year), had to be brought out by the start of January.
    • This, in turn, essentially meant that the estimate of the key nominal GDP data for the current year — on the base of which next year’s nominal GDP and other estimates were to be made — had to be made using the first two quarters of the current fiscal year.

    Why didn’t the government course-correct and project slower economic growth in July 2019 when it presented the full Budget for 2019-20?

    • It is unclear why this was not done. But could be two or three possible reasons.
    • One, the FM may have favoured continuity over the Interim Budget estimates instead of providing a starkly different set of estimates.
    • Two, and a related reason, could be that the government did not have enough time to make the adjustment because it may have required redoing the whole Budget afresh.
    • Or third, because perhaps the government did not recognise the severity of the economic slowdown that has been underway.

  • [op-ed snap] Budgeting for jobs, skilling and economic revival

    Context

    With the unemployment rate at 6.1 (2017-18), not just the future of the economy, the future of the country’s youth depends on the Budget.

    Unemployment and other indicators of the economy

    • Unemployment in urban youth: The unemployment rate for urban youth in the 15-29 years category is alarmingly high at 22.5%.
      • These figures, however, are just one of the many problems, as pointed out by the Periodic Labour Force Survey.
    • The decline in labour force participation: The Labour Force Participation Rate has come down to 46.5% for the ‘15 years and above’ age category.
      • It is down to 37.7% for the urban youth. Even among those employed, a large fraction gets low wages and are stuck with ‘employment poverty’.
    • The decline in investment: The aggregate investment stands at less than 30% of the GDP, a rate much lower than the 15-year average of 35%.
    • The decline in capacity utilisation: The capacity utilisation in the private sector is down to 70%-75%.

    Where the Budget should focus to reduce rural employment?

    • Revive demand: The Budget should also focus on reviving demand to promote growth and employment.
      • PM-KISAN and MGNREGA: Schemes like PM-KISAN and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are good instruments to boost rural demand.
      • Unutilised fund: a significant proportion of the budgetary allocation for PM-KISAN will go unutilised.
    • Why income transfers through such schemes matter?
      • Spend most of their income: Farmers and landless labourers spend most of their income. This means that income transfers to such groups will immediately increase demand.
      • Consumes a wide range of goods: Further, rural India consumes a wide range of goods and services; so, if allocation and disbursement are raised significantly, most sectors of the economy will benefit.
      • Immediate result: And such transfer will have the immediate payoff.
    • Allocate to irrigation and infrastructure projects
      • How allocation could matter: Rural unemployment can be reduced by raising budgetary allocation for irrigation projects and rural infrastructures like roads, cold storage and logistical chains.
      • These facilities, along with a comprehensive crop insurance scheme, can drastically increase agricultural productivity and farmers’ income.
      • The decrease in wastage and reduction in inflation shocks: Moreover, by integrating farms with mandis, such investments will reduce wastage of fruits and vegetables, thereby leading to a decrease in the frequency of inflationary shocks and their impact.

    Where the Budget should focus to reduce urban unemployment?

    • Focus on construction and related activities: In urban areas, construction and related activities are a source of employment for more than five crore people.
      • Second only to agriculture: Across the country, the sector’s employment figures are second only to those of the agriculture sector.
      • Construction as the backbone of other sectors:  These projects, along with infrastructure, support 200-odd sectors, including core sectors like cement and steel.
    • Problems with the construction sector:
      • Construction sector at a halt due to legal disputes: Due to the crisis in the real estate and infrastructure sectors, construction activities have come to a grinding halt.
      • At present, many real-estate projects are caught up in legal disputes-between home-buyers and developers; between lenders and developers; and between developers and law enforcement agencies like the Enforcement Directorate.
      • Unsold inventories: The sector has an unsold inventory of homes, worth several lakh crores.
      • Multiple authority as regulator and problem in liquidation: Multiple authorities -the Real Estate Regulatory Authority (RERA); the National Company Law Tribunal (NCLT); and the many consumer courts -have jurisdiction over disputes.
      • Consequently, restructuring and liquidation of bad projects are very difficult, and in turn, is the main source of the problem of NPA faced by the NBFCs.
    • What should be done to increase the demand in the construction sector?
      • Raise the tax exemption limit: To revive demand for housing, the Budget can raise the limit for availing tax exemption on home loans.
      • Use the bailout fund: The ₹25,000-crore fund set up by the centre to bailout 1,600 housing projects should be put to use immediately.
      • The funds should be used to salvage all projects that are 80% complete and not under the liquidation process under the NCLT.
      • Single adjudication authority: Several additional measures can also help. For example, there should be a single adjudication authority.
      • NIP and its significance: The ₹102-lakh-crore National Infrastructure Pipeline (NIP) programme is a welcome step. If implemented successfully, it will boost the infrastructure investment over the next five years by 2%-2.5% of the GDP annually.

    Problems with National Infrastructure Pipeline

    • Problems of 60% investment: The problem is that more than 60% of the planned investment is expected from the private sector and the States.
      • Regulatory certainty a must for the private sector: The government does not seem to realise that for private investment, regulatory certainty is as important as the cost of capital.
      • Regulatory hurdles: Many infrastructure projects are languishing due to regulatory hurdles and contractual disputes between construction companies and government departments.
      • The reason behind the non-availability of private capital: As a result of the regulatory hurdles infrastructure investment has come to be perceived as very risky.
      • This is the major reason behind the non-availability of private capital for infrastructure.
    • Role to be played by the Centre: This is a scenario, where the private sector has very little appetite for risky investments and State finances are shaky due to low GST collection.
      • Responsibility of the Centre: The onus is on the Centre to ensure that the programme does not come a cropper. The budgetary support to infrastructure will have to be much more than the NIP projection at 11% of the GDP.

    Way forward to revive the economy

    • Focus on completing the incomplete projects:
      • Bidding a lengthy process: Bidding and contracting for new roads, highways, railway tracks and urban development projects is a lengthy process.
      • This is also the reason why several infrastructure-linked Ministries like those for civil aviation and roads have not been able to spend money allocated to them in the current fiscal year.
      • Completing the projects a priority: Therefore, rather than earmarking budgetary support for new projects, the focus should be on projects that are currently under implementation so as to complete them as soon as possible.
      • Funding should be front-loaded: That is, funding should be front-loaded. In addition to creating employment, timely completion of infrastructure projects will help increase the competitiveness of the economy.
    • Address the distress in SMEs: The distress among Small and Medium Enterprises (SMEs) is another area of concern.
      • GST anomaly and stuck money: For many products produced by these enterprises, the GST rates are higher for inputs than the final goods. Due to this anomaly, around ₹20,000 crore gets stuck with the government annually in the form of input tax credits.
      • This has increased cost of doing business for SMEs, which employ over 11 crore people.
    • Fill the vacancies in the Government jobs: According to some estimates, there are more than 22 lakh vacancies in various government departments.
      • Focus on vocational training program: The government needs to provide affordable and good quality vocational training programmes.
      • To stop the demographic dividend from becoming a national burden, there is a need to invest heavily in skilling of the youth.
      • Besides, the Budget should give tax incentives to companies and industrial units to encourage them to provide internships and on-site vocational training opportunities.

     

  • [op-ed snap] Where demand has gone

    Context

    That India is in the midst of a serious economic slowdown is no longer in question. The debates are now mostly about what to do about it.

    Where is the GDP growth coming from?

    Fall in consumption expenditure in absolute terms: The leaked National Sample Survey (NSS) consumer expenditure data -shows that real monthly per capita expenditure has in fact fallen in absolute terms between 2011-12 and 2017-18.

    • 8 % decline in a rural area: In rural areas, consumption expenditure decreased by 8.8 per cent.
    • 2% decline in an urban area: While in urban areas it increased by 2 per cent, leading to an all India decline of 3.7 per cent.
    • Where is the growth coming from: If average consumer expenditure is down, then where is the GDP growth coming from?
      • Consumer expenditure contribution: After all, according to National Accounts Statistics (NAS) consumer expenditure is around 60 per cent of the GDP.
      • And given the other contributors to GDP-investment and government spending- are not growing spectacularly, consumer expenditure should be growing rather than decreasing.
      • So, to get an overall 5 per cent growth rate, consumer expenditure should be growing at higher than 5 per cent.
    • NSS vs. NAS- a genuine puzzle: How can consumption expenditure be going down in absolute terms according to the NSS estimates and be growing at more than 5 per cent according to the NAS?
      • Variation in data a norm: That these two types of estimates of consumption expenditure do not match is well-known, and that is the case in other countries as well.
      • The discrepancy at alarming proportions: In the 1970s, consumer expenditure according to NSS estimates was around 90 per cent of consumer expenditure according to NAS, but in 2017-18 it was only 32.3 per cent.
      • Data from two different countries: It is as if we are looking at data from two different countries.
      • One where the consumption expenditure growth is positive and propping up the GDP growth rate and the other where it is actually falling.

    A few inferences that pertain to the state of the economy and the policy options.

    • Reasons for the discrepancy between NSS data and NAS data.
    • First- Presence of large informal sector:
      • 50% contribution to GDP: Informal sector accounts for nearly half of the GDP and employs 85 per cent of the labour force.
      • Guesswork on performance: In national income accounts, growth in the informal sector is estimated by extrapolating from the performance of the formal sector. Which is largely guesswork.
    • Second- Making effects of the expansionary policy less pronounced:
      • Expansionary fiscal policy more effective than appear to be: Because of the presence of the informal sector, expansionary fiscal policy will be more effective than what would appear from official statistics, as a big part of its impact will be felt in the informal sector.
      • Why is it so? The reason is that a big segment of the population is located in the informal sector; they are poorer and tend to spend a much higher fraction of their income on consumption.
      • This group has been seriously affected by the economic slowdown.
    • Third-Results of expansionary policy would be apparent after a delay
      • Apparent effects of policy much worse than what it would be: The effect of an expansionary policy on the budget deficit will look much worse than what it would be since the estimates of its effect on income expansion and tax collection will be largely based on the formal sector.
      • Informal sector boosting the formal sector: Some of the income generated in the informal sector will boost demand in the formal sector through consumer demand for mass-consumption items (for instance, biscuits, as opposed to automobiles).
      • Good medium-term pictures: Therefore, in the medium term, once the engine of the economy starts moving, the income expansion and deficit numbers will look better.
    • Final-Tax cuts will achieve little
      • Only 3-5% population affected: The tax cut will affect barely 3-5 per cent of the adult population.
      • Contribution of taxes in GDP: Income tax revenues amount to around 5 per cent of the GDP and corporate income taxes around 3.3 per cent.
      • Rich tends to save more: Most of the tax is paid by the richest among these groups (the top 5 per cent taxpayers contribute 60 per cent of individual income tax revenue), and the rich tend to spend a smaller fraction of their income (and save more).
      • Little impact on GDP: Irrespective of the number of people affected, and even if they spend the entire increase in their income as a result of the tax cut, the overall economic impact will be small relative to the GDP.
      • The futility of tax cut: Therefore, a tax cut for the rich would be less effective in raising spending compared to an equivalent amount being given to poorer groups who spend a much higher fraction of their incomes.

    Conclusion

    The government should not underestimate the role of the informal sector in the economy. To get the engine of the economy revving, an expansionary fiscal policy that harnesses the energy of the informal sector to boost aggregate demand is the order of the day.

     

     

  • [op-ed of the day] Delhi-Davos disconnect-India must find ways to take advantage of new opportunities

    Context

    Given its increased heft in the global economic order, India ought to be at the leading edge of the current debate of the future of capitalism.

    The emergence of “stakeholder capitalism”

    • Interests of all shareholder: Klaus Schwab, who founded the World Economic Forum 50 years ago, wants capitalists to look beyond their shareholders and consider the interests of all the stakeholders.
      • Long overdue debate: Some hope that the debate on stakeholder capitalism is a long-overdue recognition of the capitalist excesses of recent decades.
    • Generating value for customers: Last August, the Business Roundtable in the US, which brings together some of the top American corporates, said American companies must now generate value for customers.
      • Invest in their employees.
      • Deal fairly with suppliers and support the communities in which they operate even as they service their shareholders.
    • Scepticism over “interests of all shareholders”: Sceptics say that this is a nice way of saying the right things, repackaging old ideas on corporate social responsibility and creating illusions about reforming capitalism.
      • Cynics insist that it will be business as usual for the world’s capitalists.
      • Reflection of deeper crisis: Beyond this divide between optimists and pessimists, the discourse on “stakeholder capitalism” is a reflection of the deeper crisis afflicting the global economy today.

    Three major challenges according to WEF

    • In its annual survey on global risks, the WEF has identified many challenges. Three of them stand out.
    • First Challenge: Polarised politics
      • In the US Trump is unlikely to be defensive.
      • While the dominant sentiments see Trump as the very embodiment of nationalism and populism that are polarising politics around the world.
      • Others point to the structural conditions that have bred these forces.
      • America’s working-class whose wages haven’t risen in decades, whose jobs are less secure than ever rallied behind Trump.
      • Politics in the US: Much the same happened in the British elections last year.
      • Tory leader Boris Johnson won a sweeping mandate by breaking into the working-class strongholds of the Labour Party.
    • Second Challenge: Trade war
      • Trump had a long record of denouncing free trade.
      • Many had hoped that Trump will moderate his anti-globalist rhetoric once in office.
      • Attack on a core principle of globalisation: Trump has taken a pickaxe to the core principles of the globalised economic order – free trade, open borders and multilateralism.
      • Renegotiating the treaties: The US has renegotiated a 25-year old trade agreement with America’s neighbours, Canada and Mexico.
      • The threat of all-out-trade war with China: Trump’s threat of an all-out trade war with China over the last couple of years has led to an interim agreement.
      • The agreement commits Beijing to reduce its trade surplus with the US by importing more.
      • The trade deficit of the US with EU: At Davos, Trump is expected to turn his ire on the EU, which has a near $200 billion trade surplus with the US.
    • Third challenge: Technology
      • War in technology domain: The trade wars among the world’s major capitalist centres is accentuated by the technological revolution, especially in the digital domain.
      • Need for coordination: The Davos report on global risks argues that the realisation of the full potential of new technologies depends on unprecedented coordination among all stakeholders.
      • Digital fragmentation: What is emerging instead is “digital fragmentation” marked by the extension of geopolitical and geo-economic rivalries into the new domain.
      • Digital issues have come to the front and centre of American arguments with Europe.

    Conclusion

    • India must find ways to take advantage of the new opportunities from the unfolding rearrangement of the global capitalist system.

     

  • [op-ed snap] Redesigning India’s ailing data system

    Context

    As official statistics is a public good, giving information about the state of the economy and success of governance, it needs to be independent to be impartial.

    GDP calculation and its significance

    • What is GDP:
      • Assigning a value to products and services: In effect, it adds apples and oranges, tractors and sickles, trade, transport, storage and communication, real estate, banking and government services through the mechanism of value.
      • GDP covers all productive activity for producing goods and services, without duplication.
      • The System of National Accounting (SNA): It is designed to measure production, consumption, and accumulation of income and wealth for assessing the performance of the economy.
    • What is the significance of GDP data?
      • Influence the market: GDP data influence markets, signalling investment sentiments, the flow of funds and balance of payments.
      • The input-output relations impact productivity and allocation of resources.
      • Demand and supply influences prices, exchange rates, wage rates, employment and standard of living, affecting all walks of life.
    • Issues over the present series of GDP:
      • Nominal GDP: The data on GDP are initially estimated at a current price known as nominal GDP.
      • Real GDP: Nominal GDP minus the inflation effect is real GDP.
      • Price Index: There is a way of adjusting inflation effect through an appropriate price index.
      • Pricing series issue with the service sector: The present series encountered serious problems for the price adjustment, specifically for the services sector contributing about 60% of GDP.
      • Absence of price index: There is an absence of appropriate price indices for most service sectors.
      • What the absence of series means: The deflators used in the new series could not effectively separate out price effect from the current value to arrive at a real volume estimate at a constant price.
      • Methodical issue: Replacing Annual Survey of Industries (ASI) with the Ministry of Corporate Affairs MCA21 posed serious data and methodological issues.

    Need for the change in the approach of data collection

    • The approach for the collection of data remains largely the same for long.
      • Price and production indices are constructed using a fixed base Laspeyres Index.
      • The yield rate for paddy is estimated by crop cutting experiments.
      • The organisation of field surveys for collection of data on employment-unemployment, consumer expenditure, industrial output, assets and liabilities continue.
    • Why data collection for yields need to change?
      • Productivity and remunerative price of output are major concerns for agriculture.
      • Data collection from diverse factors: It is necessary to collect data on factors such as soil conditions, moisture, temperature, water and fertilizer use determining yield, the impact of intermediary and forward trade on farm gate price and so on.
      • Israel collects these data for analysis to support productivity.
      • Need to leverage the e-governance: The initiative under e-governance enabled the capturing of huge data, which need to be collated for their meaningful use for the production of official statistics.

    Data Logistics

    • Need of data from the other areas: Along with GDP, we need data to assess-
      • Inclusive growth.
      • Fourth-generation Industrial Revolution riding on the Internet of things.
      • Robotics-influencing employment and productivity.
      • Environmental protection.
      • Sustainable development and social welfare.
    • How to deal with the data inconsistency
      • We need systems which have the capability to sift through a huge volume of data seamlessly to look for reliability, validity, consistency and coherence.
      • Such a system is possible through a versatile data warehouse as a component of big–data technology.
      • Rangarajan Committee recommendation: Setting up of such system has been wanting as thoughtful and well-meaning key recommendations of the Rangarajan Commission and subsequent recommendations from 2006 onwards by successive National Statistical Commissions.

    Way forward

    • The need for a new system: The present national accounting and analytical framework miss out on many important dimensions of the economy.
      • We need a new framework for analysis for such a complex system and evolutionary process.
      • The system needs to take into account automation, robotisation and other labour-replacing technologies affecting profitability, structural change and general welfare.
    • Need to find alternative avenues for the unemployed and jobs lost: In order to inject efficiency and stability, there is a need to have detailed data on how: markets clear, prices are formed, risks build-up, institutions function and, in turn, influence the lifestyle of various sections of the people.
    • Knowing market microstructure: It is also needed to know in greater detail about market microstructure and optimality therein, the role of technology and advanced research, changing demand on human skills, and enterprise and organising ability.
    • Monopoly must be contained:  The loss caused to the economy through monopoly power, inefficient input-output mix, dumping, obsolete technology and product mix must be contained.
    • Ensure distribution of wealth: The consensus macroeconomic framework of analysis assumes symmetric income distribution and does not get into the depth of structural issues.
      • In the changed situation of availability of microdata, there is a need to build a system to integrate the micro with the macro, maintaining distributional characteristics.

    Conclusion

    Data is the new oil in the modern networked economy in pursuit of socio-economic development. The economics now is deeply rooted in data, measuring and impacting competitiveness, risks, opportunities and social welfare in an integrated manner, going much beyond macroeconomics. There is a need for commitment to producing these statistics transparently.

     

     

  • [op-ed snap] When the FRDI Bill Returns

    Context

    The amendments to the FRDI Bill, 2017—now renamed the Financial Sector Development and Regulation (Resolution) Bill, 2019—are being worked out.

    Three crucial issues

    • Specifics are being worked out in the bill on three crucial issues.
      • First issue: The first issue is regarding the increase in the deposit insurance cover of customers.
      • Second issue: To iron out the contentious issues related to the bail-in clause
      • Third issue: To decide whether this resolution framework should apply to the public sector banks.
    • Advantages of the move: At a time when the public sector banks have come under the stress of bad loans, increasing the deposit insurance coverage limit would be a welcome approach.
      • Increasing the depositor’s confidence: The move will reinforce depositors’ confidence in the banking system in general, and the public sector banks in particular.

    The issue of the government “ownership” of the banks and financial stability

    • Ownership of government: The role of the “ownership” of banks towards financial stability is a much-debated issue in the country.
      • RBI is positive about govt. ownership: The Reserve Bank of India (RBI) has attributed a positive role to the government ownership of banks in attaining financial stability.
      • The issue of competitive neutrality: Committee to Draft Code on the Resolution of Financial Firms has blamed govt. ownership for causing a “lack of competitive neutrality” in the financial sector.
      • Need of level playing field: Committee argued for the need of a “level playing field” for both the public and private sector financial firms for the sake of competitive neutrality.
      • The concept of an overarching resolution framework for all financial firms gained traction.

    Would the all-encompassing Resolution Corporation be efficacious?

    • The FRDI Bill, 2017 sought to amend as many as 20 legislations for the diverse financial sector in this country, which is regulated by various institutions, like-
      • RBI for the banks and the non-banking financial corporations.
      • Insurance Regulatory and Development Authority (IRDA) for the insurance markets,
      • Securities and Exchange Board of India (SEBI) for securities markets and mutual funds.
      • The Pension Fund Regulatory and Development Authority for pension funds.
    • The pertinent question
      • The pertinent question is whether an all-encompassing resolution corporation can be really efficacious for the much-discussed financial stability of this country.

     

    Fundamental issues

    • Neutrality of ownership
      • Different motives behind operations: While private financial institutions are predominantly governed by profit motives, for the public sector agencies, various social obligations, such as “financial inclusion,” assume primacy.
      • Reason for commoner’s confidence: It is the sense of the government’s involvement (or ownership) that has forged commoners’ confidence to park their financial savings with them.
      • The move may end up destabilising the financial sector: If the sovereign guarantee and resolving power are taken away from the government domain to some resolution corporation, it may destabilise the financial system.
    • The Bail-in clause
      • Deposit over 1 lakh included in bail-in mechanism: The FRDI Bill 2017 suggests that deposit amounts over and above the cover limit (which currently is at one lakh) will be included in the bail-in mechanism.
      • Further, despite the RBI’s caution against financial instability, short-term debts and uncategorised client assets are also currently under this mechanism.
      • The falling growth rate of deposits: These provisions and the bill per se came against the backdrop of the Financial Stability Report, 2017 that revealed a 3.3% drop in the year-on-year growth rate of deposits for all scheduled banks in the country.

    Conclusion

    In the context of decelerating financial stability, the government needs to undertake these resolution reforms with caution that the reforms do not end-up eroding depositors’ faith in the domestic financial institutions.

     

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  • [op-ed snap] The perils of RBI’s fixation on inflation

    Context

    The RBI’s responsibility to regulate the financial sector may have taken a back seat after the adoption of inflation targeting as the main objective. Has a fixation with inflation rate made the RBI take its eyes off the loan books of the banks?

    Evolution of the role of the Central Banks

    • Maintaining financial stability: The establishment of some of the world’s oldest central banks was inspired by the goal of maintaining financial stability.
      • Harm to the depositors: It was recognised that when private commercial banks fail, whether due to malfeasance or misjudgement, they harm their trusting depositors.
      • Harm to the entire system: But when banks fail they not only harm the depositors they can also take down with them the rest of the financial system.
    • Banks lending to one another: The entire financial system also gets harmed when banks have lent to one another, which is not uncommon.
      • The collapse of credit: In the crisis that ensues, there is a collapse of credit which, in turn, leads to a downturn in economic activity.
    • Lender of last resort: To avoid this, the central bank was conceived of as the lender of last resort.
      • Prevention of run on the banks: Lender of last resort is the one that could pre-empt a run on banks and give them time to put their books back in order.
      • Regulation of banks: However, this was to be accompanied by the adoption of a tough regulatory stance.
      • Whereby the central bank would stay hawk-eyed towards the activities of banks, particularly risky lending.
    • Rise of neo-liberalism and change in a role: With the rise of neoliberalism, the central tenet of which is that markets should be given free play, the regulatory role of central banks took a back seat.
      • Inflation control as primary role: The Central banks came to be primarily mandated with inflation control.

    Inflation targeting and regulation of the financial market by RBI

    • Multiple indicator approach: In India, the RBI had earlier pursued a ‘multiple indicators approach’.
      • What was the multiple indicator approach: The approach involves concern for outcomes other than inflation, including even the balance of payments.
      • Discouraging the approach: Developments in economic theory discouraged ‘multiple indicators approach’.
      • It was argued that having economic activity as an objective of monetary policy leads to higher inflation.
    • Favouring low inflation over lower unemployment: Discouraging the ‘multiple indicator approach’ encouraged low inflation over low unemployment.
    • Inflation targeting as the sole objective of monetary policy: The Indian government also instituted inflation targeting as the sole objective of monetary policy.
      • The fixed target for the RBI: The RBI was permitted to exceed or fall short of a targeted inflation rate of 4% by a margin of 2 percentage points.
    • But have the RBI’s original mandate as a central bank been met?
      • IL&FS crisis: In 2018, within three years of the adoption of inflation targeting goal, a crisis engulfed IL&FS, a non-banking financial company in the infrastructure space.
      • Not a small player: It operated over 100 subsidiaries and was sitting on a debt of ₹94,000 crores.
      • Effects of default: Given this, IL&FS default had a chilling effect on the investors, banks and mutual funds associated with it both directly or indirectly.
      • PMC bank crisis: In 2019, a run on the Punjab and Maharashtra Co-operative Bank had to be averted by imposing withdrawal limits.
      • Outright fraud in PMC case: While in the case of IL&FS, some part of the problem may have been caused by a slowing economy, outright fraud underlay the crisis at PMC Bank.
      • Raghavendra Sahakara Bank case: In early 2020, curbs have had to be placed on withdrawals from the Bengaluru-based Sri Guru Raghavendra Sahakara Bank.
    • Pertinent question
      • Regulatory sector at the backseat? It is not too early to ask if the RBI’s responsibility to regulate the financial sector may have taken a back seat after the adoption of inflation targeting as the main objective.
      • Has a fixation with inflation rate made the RBI take its eyes off the loan books of the banks?

    The recent rise in inflation and shortfall of currency notes

    • Inflation at 7%: At over 7%, the inflation rate in December is the highest in five years.
      • Not cause of concern: This may not be the reason to panic, for the price rise could be seasonal and may well abate.
      • Question on inflation targeting: But it does raise a question on the efficacy of inflation targeting as a means of inflation control.
      • Reason for moderate inflation so far: If the inflation rate was within the intended range so far, that may have been due to both declining food prices and, for a phase, oil prices.
    • The shortfall of notes: The central bank has a monopoly on the issue of notes.
      • There is an absolute shortage of small denomination notes in the bazaars of India.
      • Small-denomination notes are mostly unavailable.

    Conclusion

    While focusing on the inflation, the Central bank also needs to keep the other mandates especially the regulation of the finance sector in check.