Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Everything you need to know about the Indian growth story and the complexities involved in predicting it right. Let’s connect the dots.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Coordinated strategy between government and RBI

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Monitory policy and fiscal policy

Mains level : Paper 3- Monetary and fiscal response.

The article analyses the relation between the response of fiscal authority and monetary authority to get the maximum payoff in the normal circumstance. But the pandemic would require different approach.

Coordination between monetary and fiscal authority in India

  • Coordination between monetary and fiscal authorities has been a thorny issue globally in recent years.
  • If there is perfect coordination between the monetary and fiscal policy then there should be statistically significant negative correlation between the two. 
  • In the Indian context, for the 30-year period till FY2020, relation between the change in the consolidated fiscal deficit and the change in the growth rate of broad money reveals no coordination, substantiating the dominance of fiscal over monetary policy.
  •  Non-coordination between the two in India is also constrained by several policy targets and fewer instruments.

Optimal combination of monetary and fiscal strategy

  • Both the government and the RBI have two options between them — either a contraction or an expansion.
  • Thus, we effectively have four policy options, and each of the options will have a particular benefit.
  • Our endeavour is to find out which policy option can result in a Nash Equilibrium.
  • A Nash equilibrium occurs when neither the government nor the RBI can increase its benefit by unilaterally changing its action.
  • The payoff scenarios are hypothesised as benefits accruing to the government and the RBI separately when they are deciding on either of the policy options: Contraction or expansion.
  •  The government favour an expansionary policy and gets maximum payoffs from a fiscal expansion, either with monetary expansion or contraction.
  • The monetary authority ideally wants to contract the economy to fight inflation and gets maximum payoffs from a monetary contraction.

So, what is optimal combination of fiscal and monetary strategy

  •  If the RBI opts for monetary expansion, the government also opts for expansion as the payoff is higher.
  • But this will compel the RBI to then opt for contraction, since that gives it a higher payoff.
  • Knowing this, the government’s best strategy will be then an expansion — so the outcome will always be a fiscal expansion with a simultaneous monetary contraction.
  •  This is the only Nash equilibrium for this game.

Responding to the pandemic

  • The current pandemic is resulting in behavioural changes of individuals in terms of risk-taking.
  • In the Indian context too, there are behavioural changes in terms of risk-taking.
  • Many of the current companies were also born during the financial crisis, like Uber (2009), Microsoft (1975), Disney (1923), General Motors (1908) and General Electric (1890).
  • Echoing such “procedural rationality” in the current unprecedented circumstances, we thus believe fiscal expansion and monetary expansion is the desirable outcome.

Conclusion

The RBI has been largely successful in communicating to the market about its intentions and we now expect the government to manage expectations with coordinated communication and leave matters of financing the fiscal deficit, through measures like monetisation, to the RBI.

B2BASICS

NASH EQUILBRIUM

Simply put, it is a situation where no player can increase his payoff by deviating alone (from the situation). That is,it is a situation where both players are involved in mutual best replies.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Aiming for wider consumer base and directing public spending accordingly

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Widening consumer base to revive growth

The article suggests the widening of consumer base rather than increasing consumption. To augment that, the government should also direct the spending towards such sectors which would help in broadening of the base.

Prescription for long term growth: Broadening the consumer base

  • India entered the pandemic with declining growth and limited scope for a conventional and large fiscal stimulus.
  • The NSS 68th round consumption survey indicates that in urban India, the top 20 per cent of the population accounted for nearly 55 per cent of discretionary consumption and 45 per cent of all consumption.
  •  The narrow consumption base coupled with uncertainty over the demographic dividend could belie India’s long-term investment attractiveness.
  • With or without the pandemic, the prescriptions for long-term growth remain the same — broaden the consumer base.
  • This broadening of the consumer base should happen through empowering the low and middle-income consumers.

Why can’t the government just spend to revive growth

  • 1) Temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
  • 2) With revenues declined, funding of additional expenditure is through higher borrowings.
  • Any incremental debt should be seen in the context of future investments being hampered due to current consumption.
  • India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year. 

Way forward

  • India needs to broaden its consumer base beyond the top 10-20 per cent of the population to improve long-term growth prospects.
  • To achieve this we will need well-paid employment for the bottom and middle segments.
  • The “safe” group of India’s workforce is extremely small.
  • The PLFS 2018-19 report places around 24 per cent of the workforce in the regular wage/salary category.
  • Within this segment, around 40 per cent do not have a written contract, paid leaves, or security while 70 per cent do not have any written contract.
  • These sharp skews in consumption and labour become a substantial risk for a consumption-led growth in the aftermath of a crisis.
  • The PLFS 2018-19 report indicates that around 50 per cent of the rural non-agriculture workforce.
  • 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.
  • The rebuild and recover phase should aim for a wider consumer base with infrastructure and manufacturing as the two pillars.
  • To make manufacturing easier, the focus should be on labour reforms, fewer/quicker approvals, reducing the compliance burden, and promoting export-oriented sectors.
  • Policies should not become too inward-looking such that export promotion becomes difficult.

Directing public spending and policies appropriately

  • Most public spending should be directed towards roads, railways, infrastructure, healthcare and educational facilities.
  • To promote infrastructure creation along with private sector participation, the government needs to charge an economic price for goods and services such as power, irrigation, and public utilities.
  • Establish the rule of law with minimal interference in pricing, streamline processes for quick approvals and ensure timely payments to private operators.
  • The government should also signal its vision along with a financing strategy through sharper expenditure management, enhanced market borrowings, setting up of a Development Financing Institution, and an asset monetisation programme.

Conclusion

To achieve economic growth of 7-8 per cent the government needs to start addressing large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Private: India’s GDP Contraction

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Mains level : Economic recovery amid coronavirus pandemic

  • India’s GDP for the period April to June 2020 has contracted by 23.9 percent.
  • In other words, the total value of goods and services produced in India in April, May and June this year is 24% less than the total value of goods and services produced in India in the same three months last year.
  • What is worse is that, because of the widespread lockdowns, the data quality is sub-optimal and most observers expect this number to worsen when it is revised in due course.

India’s GDP numbers

Almost all the major indicators of growth in the economy — be it production of cement or consumption of steel — show deep contraction. Even total telephone subscribers saw a contraction in this quarter.

Chart 1: India’s GDP story since economic liberalization. Source: McKinsey and Express Research Group.

Chart 2: Percentage change in key indicators. Source: Ministry of Statistics and Programme Implementation

What contributes to India’s GDP?

GDP measures the monetary value of all goods and services produced within the domestic boundaries of a country within a timeframe (generally, a year).

In any economy, the total demand for goods and services — that is the GDP — is generated from one of the four engines of growth.

  1. The biggest engine is consumption demand from private individuals like us. Let’s call it C, and in the Indian economy, this accounted for 56.4% of all GDP before this quarter.
  2. The second-biggest engine is the demand generated by private sector businesses. Let’s call it I, and this accounted for 32% of all GDP in India.
  3. The third engine is the demand for goods and services generated by the government. Let’s call it G, and it accounted for 11% of India’s GDP.
  4. The last engine is the net demand for GDP after we subtract imports from India’s exports. Let’s call it NX. In India’s case, it is the smallest engine and, since India typically imports more than it exports, its effect is negative on the GDP.

So total GDP = C + I + G + NX

Now, look at Chart 4. It shows what has happened to each of the engines in Q1.

Chart 4: Engines of growth falter. Source: MoSPI and Express Research Group

Reasons for GDP contraction

The biggest engines, which accounted for over 88% of the Indian total GDP saw a massive contraction. They are as follows:

  1. Private consumption — the biggest engine driving the Indian economy — has fallen by 27%.
  2. Investments by businesses: The second biggest engine — investments by businesses — has fallen even harder — it is half of what it was last year same quarter.
  • Net export demand: The NX has turned positive in this Q1 because India’s imports have crashed more than its exports. While on paper, this provides a boost to overall GDP, it also points to an economy where economic activity has plummeted.
  • Govt. Expenditure: Data shows that the government’s expenditure went up by 16% but this was nowhere near enough to compensate for the loss of demand (power) in other sectors (engines) of the economy.

Issues with govt. expenditure

  • Even before the COVID crisis, government finances were overextended.
  • It was not only borrowing but borrowing more than what it should have. As a result, today it doesn’t have as much money.
  • It will have to think of some innovative solutions to generate resources. Chart 4 by McKinsey Global Institute provides ways in which an additional 3.5 per cent of the GDP can be raised by the government.

Why can’t the government just spend to revive growth?

  • First, in all likelihood, temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
  • Second, the fiscal situation was weak even before the pandemic. With revenues having cratered, funding of additional expenditure is through higher borrowings.
  • Any incremental debt should be seen in the context of future investments being hampered due to current consumption.

Implications of GDP decline

  • With GDP contracting by more than what most observers expected, it is now believed that the full-year GDP could also worsen.
  • A fairly conservative estimate would be a contraction of 7% for the full financial year.
  • Chart 1 puts this in perspective. Since economic liberalisation in the early 1990s, Indian economy has clocked an average of 7% GDP growth each year. This year, it is likely to turn turtle and contract by 7%.
  • The worst affected were construction (–50%), trade, hotels and other services (–47%), manufacturing (–39%), and mining (–23%).
  • It is important to note that these are the sectors that create the maximum new jobs in the country.
  • In a scenario where each of these sectors is contracting so sharply — that is, their output and incomes are falling — it would lead to more and more people either losing jobs (decline in employment) or failing to get one (rise in unemployment).

Impact on Economy

The impact of an economic contraction on an average individual isn’t always in a direct way, like job losses or salary cuts. There are indirect ways as well. Let’s take a look at this pointwise.

  • Many companies are encouraging their employees to work from home. This has an impact on those working in the surrounding informal sector leading to a loss of economic activity.
  • If people cut down on consumption, it basically means they are spending less than before. This works in various ways. First, businesses, on the whole, see a fall in revenues and a fall in profits. Hence the employees are bound to be impacted.
  • Many businesses, in order to stay afloat, have fired employees. Some have cut salaries. Some others have rescinded on the job offers they made.
  • Even businesses that are on a strong wicket have given only bare-minimum increments to their employees this year.
  • Many big businesses have publicly announced that they are putting all their expansion plans on the backburner currently. If businesses don’t expand, then a fresh set of jobs don’t get created and hence expenditure.

Getting recovered: Way forward

1.Thinking beyond stimulus

To achieve a stipulated economic growth, the government needs to start addressing some of the traditional sore points such as the large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles.

  • It is easy to prescribe abandoning fiscal prudence or ‘printing money’ to fund spending. But the risk is high compared to the reward.
  • This sets the base for any kind of “stimulus” — it should be well-targeted and have a large multiplier effect.
  • Instead, they argue, that India needs to broaden its consumer base beyond the top 10- 20 per cent of the population to improve long-term growth prospects.
  • This cannot happen with regular doses of consumption stimulus but through creating steady and well-paid employment for the bottom and middle segments.

2.Tax reforms

One area that clearly needs reform is the GST system, which instead of freeing up the Indian economy has acted in a negative way.

3.Improving  Public health infrastructure

Another area that clearly needs reform is India’s public health infrastructure.

  • While these reforms may not lead to immediate benefits they will work well for the economy in the longer-term, something which we shouldn’t miss out on with the current focus on Covid-19.
  • Beyond that, there isn’t much that the government can do. Also, it is worth remembering here that the Indian economy was already in trouble before the pandemic struck.

Raghuram Rajan’s Suggestions

1. Government-provided relief

  • The economist pointed out that the government’s reluctance to do more today seems partly because it wants to conserve resources for a possible future stimulus. “This strategy is self-defeating
  • Rajan said economic stimulus would work as a tonic and  called MNREGA a tried and tested means of providing rural relief which needed to be be replenished as needed.
  • Given the length of the pandemic, more direct cash transfers to the poorest households, especially in urban areas that do not have access to MNREGA, is warranted.

2. Expand resources

  • India could borrow more without scaring the bond markets if it committed to return to fiscal viability over the medium term – for example, by setting future debt reduction targets through legislation and committing to honest and transparent fiscal numbers with a watchdog independent fiscal council.
  • It should prepare public sector firm shares for on-tap sale, to take advantage of every period of market buoyancy.
  • Many government and public sector entities have surplus land in prime urban areas, and those too should be readied for sale.
  • government would have to set aside resources to recapitalise public sector banks as the extent of losses are recognised.

 3. Clear payables quickly, provide rebates to corporations, small firms

  •  Government and public sector firms must clear their payables quickly so that liquidity moves to corporations.
  • Rebates on the corporate income and GST tax depending on firm size would help small viable firms, he said.

4. Plan to deal with financial distress

Government need to plan for financial distress when various entities would be unable to pay as payment moratoria come to an end.

His suggestions to combat this included:

  • a variety of structures to help debtors and claimants reach agreements to restructure obligations,
  • arbitration forums set up to renegotiate claims of various sizes and beefed up civil courts,
  • debt recovery tribunals and the NCLTs to provide rapid back-up judgments.

5. Reforms as stimulus

  • Reforms, even if they are not undertaken immediately, could boost current investor sentiment.
  • The world will recover earlier than India, so exports can be a way for India to grow,
  • His suggestions for this included reversal of recent tariffs increases so inputs could be imported at a low cost and implementation of “long-debated reforms to land acquisition, labor,  power” and in agriculture.

 


References:

https://indianexpress.com/article/explained/gdp-contraction-23-9-the-economics-behind-the-math-6578046/

https://www.deccanherald.com/business/economy-business/gdp-contraction-no-easy-solutions-but-a-chance-for-deep-economic-reforms-883234.html

https://www.newslaundry.com/2020/09/04/explained-how-will-indias-gdp-contraction-impact-you

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Despite the messaging, it is still advantage China

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Providing alternative investment destination to China and policy changes in India

The article examines whether India has been proving a favourable alternative to China or not.

Is India becoming alternate supply source and investment destination?

  • Despite media reports and strong messaging from Washington, fewer U.S. companies than predicted might quit China.
  • Companies focused on the Chinese domestic market rather than as a base for exports will likely remain, at least for now.
  • Those that do leave may not choose India as a relocation destination.
  • Many U.S. companies with experience working with China are not convinced that India has China’s established industrial base and expertise.
  • They also see other Asian countries as more competitive.

India’s strengths

  • Democracy: India’s identity as a democratic “un-China” is one of its strongest selling points.
  • Strong IPR: There is no threat of stealing of intellectual property rights.
  • No coercive tactics: Foreign companies in India are not subject to coercive tactics as in China.
  • Institutions: India’s open and vibrant press, an independent judiciary, and other advantages of democratic governance also provide a contrast to China.
  • Domestic market:India’s well-off domestic market also attracts foreign investors.

Why China is a favoured destination

  • China offers many advantages, such as a manufacturing infrastructure and skill level that allows innovations to move quickly from prototype to product.
  • China’s specialised industrial zones are massive, collocating companies, factories, logistics, and even research and universities.

Way forward

1) Focus on the States

  • India can start by focusing development in those Indian States that have already demonstrated the ability to produce and export in key sectors.
  • Foreign capital could also greatly increase infrastructure funds beyond government spending alone.
  • India might also usefully build up new industrial centres with an eye to geography. [for instance-linking the southeast of the country to supply chains in Southeast Asia]

2) Focus on the policy framework

  • India should take two great steps-
  • 1) Reduce the number of investments needing approval by the Centre.
  • 2)To increase intra-Ministry coordination on foreign direct investment policies.
  • The same coordination could be extended to the appointment of a high-level official or body in the Prime Minister’s Office.
  • This will ensure that all proposed economic policy changes are consistent with the goal of attracting foreign investment.

Conclusion

A policy framework that is transparent, predictable, and provides increased consultations with existing and potential foreign company stakeholders before introducing new Indian economic policies, will play a crucial role in determining India’s foreign investment outlook.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Implications of World Bank halting ‘Doing Business’ report for India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various indicators in Ease of Doing Business index

Mains level : Paper 3- Ease of doing business Index and issues with it

India’s ranking in the World Bank’s ‘Ease of Doing Business’ index has improved spectacularly. However, the World Bank recently halted its publication and announced decision to review and assess data changes for last five years.

Background

  • Citing irregularities of data for a few countries, the World Bank halted its annual publication ‘Doing Business’ report.
  • It will conduct a systematic review and assessment of data changes that occurred subsequent to the institutional data review process for the last five Doing Business reports.

Why India should be concerned

  • Through improved ranking India sought to attract investments to achieve the targets set for ‘Make in India’.
  • India’s success in boosting its ease of doing business ranking is spectacular, to 63rd rank in 2019, up from the 142nd position in 2014.
  • Policymakers celebrated it to signal India’s commitment to “minimum government and maximum governance”.
  • The World Bank decision to audit the ‘Doing Business’ report for the last five years may soon cause discomfort by shining a spotlight on the sharp rise in India’s ranking.
  • Study at the Center for Global Development found that the improvement in India’s ranking was almost entirely due to methodological changes.
  • During the same period, however, Chile’s global rank went down sharply, from 34th position in 2014 to 67th in 2017.
  • The contrasting experience of Chile and India casts doubts on not just the country-level data but also the changes in underlying methodologies.

Does ease of doing business have predictive power?

  • While India’s rank drastically improved, it has meant nothing on the ground.
  • The share of the manufacturing sector has stagnated at around 16-17% of GDP, and 3.5 million jobs were lost between 2011-12 and 2017-18.
  • Annual GDP growth rate in manufacturing fell from 13.1% in 2015-16 to zero in 2019-20, as per the National Accounts Statistics.
  • India’s import dependence on China has shot up.
  • In case of Russia, ease of doing business rank jumped from 120 in 2012 to 20, but without becoming a magnet for investment inflows.
  • China, on the contrary, attracted one of the highest capital inflows but its ease of doing business ranking was low and hovered between 78 and 96 for the years between 2006 and 2017.

Other flaws in the Index

  • The Indicators used for the index are de jure (as per the statute), not de facto (in reality).
  • The data for computing the index are obtained from larger enterprises in two cities, Mumbai and Delhi, by lawyers, accountants and brokers — not from entrepreneurs.
  • The World Bank’s own internal watchdog, the Independent Evaluation Group, in its 2013 report, has widely questioned the reliability and objectivity of the index.
  • The World Bank conducts a global enterprise survey collecting information from companies.
  • There is no correlation between the rankings obtained from ease of doing business and the enterprise surveys.

Lack of theoretical basis: Major flaw

  • There is little in any major strand of economic thought which suggests that minimally regulated markets for labour and capital produce superior outcomes in terms of output and employment.
  • Economic history shows rich variations in performance across countries and policy regimes, defying simplistic generalisations.
  • Such simplistic basis is used under a seemingly scientific garb of the quantitative index to the disadvantage of workers.
  • To meet the ease of doing business targets, safety standards of factories are compromised.
  • For instance, in 2016, the Maharashtra government abolished the annual mandatory inspection of steam boilers under the Boilers Act of 1923 and the Indian Boilers Regulation 1950.
  •  However, no factory has complied with self-certification or submitted the third party certification.

Consider the question “Examine the issues with the World Bank’s ‘Ease of Doing Business Index’?  What are its implications for India?”

Conclusion

It is time the World Bank rethinks its institutional investment in producing the ‘Doing Business’ report. India should do some soul searching as to why the much trumpeted rise in global ranking has failed miserably on the ground.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Economic crisis without culprit

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nominal GDP

Mains level : Paper 3- Economic slowdown caused by pandemic

Contradictions in the present crisis

  • India registered negative economic growth in 1972-73, 1965-66 and 1957-58.
  • All these were drought years.
  • 1957-58 also registered a significant balance of payments (BOP) deterioration and 1979-80 witnessing the second global oil shock following the Iranian Revolution.
  • Farmers harvested a bumper rabi crop last year and public cereal stocks at 94.42 million tonnes as on July 1 were also 2.3 times the required level.
  • There’s no shortage today of food, forex or even savings.
  • Foreign exchange reserves were at an all-time high of $538.19 billion.
  • So, the real GDP decline of 5-10 per cent for 2020-21 would be the country’s first-ever not triggered by an agricultural or a BOP crisis.

“Western style” demand slowdown in India

  • What India has been going through is a full-fledged recession bereft of consumption and investment demand.
  • Households have cut spending.
  • The same goes with businesses. Many have shut or are operating at a fraction of their capacity and pre-lockdown staff strength.
  • This demand-side uncertainty and the resulting economic contraction is something new to India.
  • Banks are also facing a problem of plenty.
  • While their deposits are up 11.1 per cent, the corresponding credit growth has been just 5.5 per cent.
  • At some point when all this reduced spending and investments leads to a further contraction of incomes, it is bound to reduce savings as well.

Why the government is not spending?

  • Solution in such a situation is the spending by the government.
  • There are three probable reasons why government isn’t doing that.

1.Optimism

  • Hope that once the worst of the pandemic is behind us, people will start spending and businesses, too, will spring back to life.
  • However, this assumes the economy wasn’t doing all that badly previously and that the lockdown hasn’t caused too much of permanent damage.
  • The truth is that growth had already slid to 3.9 per cent in 2019-20.

2.State of Government finances

  • In 2007-08 global financial crisis, the Centre’s fiscal deficit was only 2.5 per cent of GDP, whereas it stood at 4.6 per cent in 2019-20.
  •  The space for a fiscal stimulus, in other words, is very limited compared to that time.

3.Sustainability of debt

  •  Between 2007-08 and 2019-20, the Centre’s outstanding debt-GDP ratio has come down from 56.9 to 49.25 per cent.
  • So has general government debt, which includes the liabilities of states, from 74.6 to 69.8 per cent.
  • Economists such as Olivier Blanchard have shown that public debts are sustainable provided governments can borrow at rates below nominal GDP growth (i.e. GDP unadjusted for inflation).
  • The nominal GDP averaged 11.1 per cent during  2014-15 to 2018-19.
  • As against this, the weighted average interest rate on Central government securities ruled between 6.97 per cent in 2016-17 and 8.51 per cent in 2014-15.
  • Only with nominal GDP growth falling to 7.2 per cent in 2019-20, and most likely zero this fiscal, has the Blanchard debt sustainability formula come under threat.

Way forward

  • Government can take lessons from the Vajpayee period when the weighted average cost of Central borrowings more than halved from 12.01 per cent in 1997-98 to 5.71 per cent in 2003-04.
  • In the last four months, yields on 10-year Indian government bonds have softened from 6.5 to 5.9 per cent and even more for states — from 7.9 to 6.4 per cent.
  •  Interest rates will fall further as banks have nobody to lend to.

Consider the question “Examine how covid induced economic recession is different from the past recessions? What are the options with the government to deal with the situation?” 

Conclusion

Governments should borrow and spend. They need worry only about GDP growth, real and nominal.

Sources: https://indianexpress.com/article/opinion/columns/a-crisis-without-villains-6557602/

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The new consumer

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Demand problem and ways to deal with it

The focus of this article is on the behavioural changes in the consumer post Covid. It also suggest the ways to deal with these changes.

Context

  • The consumer during and post-COVID is showing remarkable flexibility, bringing about a paradigm shift in her consumption pattern.

Issue of generating demand

  • Some state governments are busy demanding the opening up of the economy.
  • However, the issue is that the economy does not merely need opening up, but it requires urgent generation of basic demand.
  • That is why consumer behaviour needs to be closely watched.
  • Since the lockdown, the priorities of consumers have seen a drastic shift.

Factors to consider to increase demand

  • 1) The decrease in the purchasing power to buy products needs to be addressed.
  • The government must look at ways like a reduction in taxes which will help the common man.
  • 2) The current scenario has also made all of us go back to the basic needs.
  • Luxury products hold little value. But renting will increase.
  • 3) The emphasis will be on saving for a rainy day, whether in the case of banks or households
  • 4) Aviation, tourism and hospitality sectors have been hit and continue to remain so even after the restrictions are lifted.
  • 5)  e-commerce has shown exponential growth and will continue to do so.
  • 6) With “Vocal for Local” gaining momentum, there’s a huge increase in local apps, local kirana stores, local artisans and brands.
  • 7) Schools and colleges have taken a hit as e-learning and online courses are being preferred.
  • 8) The entertainment industry has been drastically hit. The media and entertainment industry needs to pay heed to this and curate content accordingly.
  • 9) With a lot of people laying emphasis on their health and immunity, there’s been a substantial rise in the consumption of organic, ayurvedic, and immunity-boosting products.
  • Apart from the obvious products, financial and medical insurance will play an important role.
  • 10) Real estate will suffer as no long-term, high investment purchases will be favoured, but renting will increase.

Role of the government

  • 1) People need to be provided with their daily needs — basic essentials such as food, water, housing, and electricity.
  • The government is already taking care of that, but money also needs to be given.
  • 2) Jobs need to be provided through development of infrastructure projects.
  • 3) Farmers need to have insurance for their crops and the infrastructure to sell at the right price.
  • 4) Migrant workers with their livelihoods being disrupted are looking for support,and many are focusing on agriculture as a means of income.

Way forward

  • The government should focus on generating demand for products, and create jobs by improving infrastructure.
  • The government must incentivise spending by offering tax benefits on the amount spent.
  • Government must forget about fiscal prudence this year.
  • Consumers in rural areas are buying more than before.Companies should focus on tapping the rural demand

Consider the question “Demand has been the driver of India’s growth. But the pandemic has dampened it with devastating effect. Agaist this backdrop suggest the measures to be taken by the government to revive the demand.”

Conclusion

With focus on these emerging trends and changing behaviour of the consumers, the government must take steps to bring the economy fast on the tracks.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

How to pay for the stimulus package

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Debt financing versus money financing

The article addresses the issue of apprehensions over money financing. It also compares the option of borrowing from international institutions.

Issues with public spending

  • Greater public spending will increase the fiscal deficit and this expansion has to be financed.
  • Theoretically, it can be financed by higher taxes.
  • But when the economy is in a recession, this option cannot be explored even though the balanced-budget multiplier is one.
  • When the multiplier is one, output expands by exactly the same amount as the increase in government spending.

So, what are the options?

There are two options

1) Issuing debt to the public (Debt financing)

2) Borrowing from the RBI (Money financing)

Borrowing from World Bank and IMF?

This borrowing has 4 issues with it-

  • 1) This borrowing will have to be paid back in hard currency.
  • This would involve India having to earn hard currency by stepping up exports.
  • If a stimulus of approximately 10% of the GDP is envisaged, with exports at 25% of the GDP, it would imply stepping up exports by close to 50%.
  • This would be a herculean task under present circumstances.
  • 2) There is the issue of conditionalities.
  •  It is not obvious what conditionalities will come along with the loan.
  • 3) The loan is bound to take some time to be negotiated, taxing the energies of a government that ought to be engaged in the day to day battle with COVID-19.
  • 4) The external debt is truly national which, arguably, government bonds held by the country’s private sector are not.

Issues with money financing

  • The standard economic argument against money financing is that it is inflationary.
  • However, whether a fiscal expansion is inflationary or not is related more to the state of the economy than the medium of its financing.
  • When resources are unemployed, output may be expected to expand without inflation.

Consider the question “Examine the issues with the money financing of the fiscal deficit.”

Conclusion

There is no reasoned case for denying ourselves the option of money financing to take us back to pre-COVID-19 levels of output and employment.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Gold and forex reserves cannot finance stimulus

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Debt monetisation, RBI balance sheet etc

Mains level : Paper 3-Ways to raise funds to finance the stimulus package

The article analyses the issues with suggestions like printing of currency and using forex reserves to finance the stimulus. They also lead to an increase in government debts.

Context

  • Prime Minister announced a stimulus package of 20 trillion to fight the economic fallout of the covid pandemic.
  • Since then, several unorthodox ideas have been floated to raise funds for it without straining government finances.
  • Among the suggestions are the printing of currency, and using foreign exchange reserves or household gold.

Let’s look at entries in the RBI’s balance sheets

  • On the liabilities side of it is the currency in circulation, commercial bank reserves  and government reserves.
  • On the asset side of it is forex reserves, government securities and gold.
  • The balancing item represents the central bank’s equity and accumulated surplus.

Let’s look at 3 options suggested above and issues with them-

1) Printing currency

  • Doing this would increase the liabilities of the RBI under “currency in circulation”.
  • But it first needs to acquire assets to offset this increase in liability.
  • These assets could be government securities, forex reserves or gold.
  • Thus, one way for the government to finance its expenditure would be to issue government bonds and ask RBI to print currency with which to subscribe to such bonds.
  • This is known as deficit monetization.
  •  It is important to note that for the central bank to print money, the government would have to issue bonds to it.
  • It will increase government debt.

2) Monetisation of gold held by household

  • This would first involve the government buying gold from households in exchange for its bonds.
  • Then, the accumulated gold would be bought by RBI from the government with newly printed currency.
  •  In this case, instead of creating new money to acquire government bonds, RBI would be doing the same to acquire gold.
  • This too involves the Centre taking on additional debt.
  •  Moreover, gold monetization schemes in the past have yielded only mild success.

3) Using RBI’s forex reserves

  • Against every dollar of forex reserves shown by RBI on the asset side, an equivalent rupee amount has already been created on the liability side.
  • This is because whenever RBI acquires foreign currency, it pays for it using the Indian rupee.
  • Thus, no additional currency can be printed against such already-acquired reserves.
  • The only way our forex reserves can be used for generating additional resources is by pledging them to a third party.
  • The pledging of RBI’s assets to raise funds is done only under extreme circumstances, for instance, during the 1991 balance of payments crisis.
  • We are certainly not in a situation that warrants a repeat of an exercise where RBI’s assets, be it gold or forex reserves, have to be mortgaged.

So, what is the way out?

  • There are only three ways to finance government expenditure: taxes, debt and asset sales.
  • Taxes and asset sales can pitch in a bit towards the stimulus bill.

Consider the question “Examine the ways in which government can raise the funds to finance the stimulus package and also discuss the issues with each move.”

Conclusion

There is no escaping the fact that we are staring at a higher build-up of government debt in the future. When we stop harbouring the notion that we can pay the stimulus bill without any deterioration in government finances, we will be able to see the bitter truth: There is no such thing as a free lunch.

Read more about the issue here:

India’s rising Forex Reserves

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Do we need Fiscal Council

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Fiscal Council and why it won't be the solution

Why there is a need for Fiscal Council?

  • With a complex polity and manifold development challenges, India need institutional mechanisms for prudent fiscal practices.
  • An independent fiscal council can bring about much needed transparency and accountability in fiscal processes across the federal polity.
  • International experience suggests that a fiscal council improves the quality of debate on public finance, and that, in turn, helps build public opinion favourable to fiscal discipline.
  • In a globalised world of enormous capital flows, market volatility across the world and especially in emerging markets, in response to monetary policy changes in major economies, and geopolitical tensions that ebb and flow, causing currencies and commodity prices to swing, countries like India need macroeconomic management as an active function round the year.
  • Also, it is supposed to report to the parliament regarding the practicability of government forecasts in the budget. This will make executive more responsible in budget preparation.
  • For the last eight years the projections of the government has fallen short by a consistent 10 percent, leading to fund cuts in the middle of the year. Thus, an independent Fiscal council would evaluate budget proposals and forecasts using objective criteria.
  • This would also boost confidence in global credit rating agencies about government’s fiscal commitment.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

How to counter China

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Policy changes and reforms needed for growth of India

There is no doubt that an economically prosperous India will be well placed to deal with China effectively. So, to achieve this prosperity India urgently needs to embark upon the path of reforms. 

How much China has moved ahead

  • In 1987, both countries’ nominal GDPs were almost equal.
  • China’s economic opening-up has left India behind, contributing to a military imbalance.
  • China’s economy was nearly five times larger than India’s in 2019.
  • Not coincidentally, from rough parity in 1989, China’s military spending last year more than tripled India’s.
  • Heightened vigilance along the LAC demands summoning scarce resources.
  • If India cannot close the economic gap and build military muscle, Beijing may feel emboldened to probe the subcontinent’s land and maritime periphery.

Reforms: Key to progress

  • In 1991, India enacted changes allowing markets to set commodity prices.
  • But it did not similarly liberalise land, labour and capital.
  • Now, the government has delivered mixed messages about a revitalised reform agenda.
  • Some States have temporarily lifted labour restrictions.
  • Some others intend to make land acquisition easier.

But a call for self-sufficiency could do harm

  • India emphasis on self-reliance could inhibit growth and constrain investment in a more vigorous foreign and defence policy.
  • Greater self-sufficiency is desired.
  • Home-grown manufacturing of critical medicinal ingredients or digital safeguards on citizens’ personal data would reduce vulnerabilities.
  • Imposing restriction to help the local defence industry would hamper acquisitions helping balance China.

Competition from other countries

  • China is facing intense scrutiny for its role in the pandemic, geopolitical competition, trade wars, and economic coercion.
  • Businesses are revisiting whether or not to diversify suddenly exposed international value chains.
  • India’s competitors [like Bangladesh, Vietnam] are trying to attract the businesses shifting out form China.
  • These countries are highlighting their regulatory predictability, stable tax policies, and fewer trade obstacles.
  • While India remains outside the Regional Comprehensive Economic Partnership, competitors are wooing companies seeking lower trade barriers.
  • Asian countries are pushing ahead: Vietnam just inked a trade deal with the European Union that threatens to eat into India’s exports.

Way forward

  • India needs increased exports and investments to provide more well-paying jobs, technology.
  • Before committing to long-term, multi-billion investments, companies often want to test India’s market through international sales.
  • Liberalisation remains the tried-and-true path to competitiveness.
  • If India can unite its people and rapidly strengthen capabilities, it will likely discover that it can deal with China effectively.

Consider the question “Do you agree with the view that slowdown in the reforms in land, labour and capital after the reforms of 1991 restricted Indias economic progress? Give reasons in support of your argument.

Conclusion

The choices that India makes to recapture consistent, high growth will determine its future. Bold reforms offer the best option to manage Beijing and achieve greater independence on the world stage.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

How much forex reserve is too much

Note4Students

From UPSC perspective, the following things are important :

Prelims level : India's foreign exchange reserves

Mains level : Paper 3-India's foreign exchange reserves.

India’s foreign exchange reserves touched an unprecedented level. Being reserves, the reserves also represent the lost opportunity. This article examines the reasons for and utility of maintaining huge reserves.

Reasons for surge in the forex reserves

  • The recent forex reserves surge was a result of two things:
  • 1) Foreign institutional investors reinvested in the Indian market in May-June after they exited their positions in panic in March.
  • 2) A global fall in fuel prices has reduced India’s oil import bill, allowing it to save up forex reserves.

But why does India keeps huge forex reserves- 3 possibilities

  • Sufficiency of forex reserves is sometimes measured on how many months’ worth of imports a country can afford.
  • While six months is considered sufficient.
  • The RBI in December 2019 said it had enough to sustain for 10 months, the forex reserves were then $0.4 trillion.
  • Today, the cover is 12 months!
  • This is despite having a sufficient credit line from the IMF, should there be a credit shock.
  • So, there are 3 possibilities for why government maintains such huge reserves.
  • 1) Excess forex reserves are likely the government’s contingency fund, in case the economy suddenly topples.
  • The pandemic has increased the government’s insecurity.
  • 2) Another possibility is that the government is accumulating these reserves as “Plan-B” savings should its strategic disinvestment plans fail.
  • 3) Forex reserves are also likely a way for India now to maintain its global rating.
  • The fundamental use of India’s foreign exchange should be to ensure the Rupee (INR) stability.

Stability of Rupee

  •  Despite steadily rising reserves, INR fluctuated between 77 and 75 against the US dollar in the last two months.
  • INR has become one of Asia’s worst currencies.
  • The RBI may allow it to devalue further to support its balance sheet,
  • Devaluation would enable it to transfer a big chunk of its realised profits as dividend to the starving government.

Lost opportunity

  • It is understandable for oil-rich countries to maintain high forex reserves.
  • A single oil trade hiccup can derail their economy.
  • Economists have theorised that holding high forex reserves is unnecessary.
  • In fact, not using them to finance mega infrastructure projects are lost opportunities.
  • And yet the Indian government has held these reserves in liquid, possibly for its feared D-day.

Perils of using forex reserves as emergency funds

  •  Over-reliance on these floating funds to stimulate the economy might be poorly informed.
  • The potential of these funds to switch direction [i.e. they could exit as fast] should not be underestimated.
  • In March alone, foreign institutional investments in India fell by Rs 65,000 crore.
  • India’s foreign exchange reserves registered this impact.
  • Reversing the dip, investments went up in May and now in June with some big corporate deals.
  • If the government intends to use forex reserves as an emergency fund, it should ensure that they do not shrink just when they are most needed.

Consider the question “India’s foreign exchange reserves touched new height recently. This also giver rise to the argument of lost opportunity. In light of this discuss the utility of maintaining foreign exchange reserves and issue of optimum level of foreign exchange reserves.”

Conclusion

Maintaining high foreign exchange reserves definitely entails cost. The cost-benefit analysis and the lost opportunity must be the basis for deciding the level of the reserves.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Why spending on infrastructure matters

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Aggregate demand, components of India's growth

Mains level : Paper 3- Importance of spending of infrastructure

Spending on infrastructure can help kickstart the economy. This article highlights the importance of spending on infrastructure and suggests ways to find resources.

Gloomy prospects for Indian economy

  • The IMF estimates the global economy to contract by -4.9 per cent this year.
  • It could still contract should the virus not recede in the latter half of 2020.
  • As for the Indian economy, growth has been decelerating for the past eight quarters.
  • Indications by the RBI suggest that growth is contracting for the first time in four decades.
  •  We must address the elephant in the room — the need to further aid a demand recovery as the economy begins to reopen.

Components of Indias growth

  • Growth in the Indian economy has been dominated by the following components respectively-
  • 1) Consumption.
  • 2) It is followed by investments.
  • 3) Government expenditure.
  • 4) Net exports.
  • However, consumption and investment demand have been subdued for the past few quarters, dragging down overall growth.
  • Keynesian theory suggests that for aggregate demand to increase, at least one of the components of GDP needs to expand.

Declining consumption demand

  • These two components were perhaps casualties of a sharp deceleration in credit supply.
  •  The IL&FS debacle in September 2018 only made matters worse.
  • The NBFC sector, suffered from funding crunches leading to a further squeeze in credit supply.
  • Freeze in credit supply impacted consumption demand.
  • This deceleration is likely to exacerbate going forward.

Declining rate of investment

  • Broad-based utilisation levels, as represented by the RBI, dropped to 68.6 per cent in Q3FY20.
  • This is well below the 75 per cent benchmark for new capacity addition, implying suboptimal levels of fresh investments.
  • A higher rate of investments is essential for sustainable economic growth.
  • The deteriorating economic scenario and increasing levels of debt with rating downgrades for industries are likely to aggravate existing problems.

Importance of expenditure on spending on infrastructure

  • Government expenditure is the only exogenously determined element in a Keynesian framework.
  • The positive push required to aid a demand recovery has to come through the government.
  • However, with sparse resources that India has, we must deploy funds that yield a higher return.
  • One key area that can provide the necessary support is infrastructure investment.
  • A study by S&P Global estimates 1 per cent of GDP spend on infrastructure can boost real growth by 2 per cent while creating 1.3 million direct jobs.
  • Historically, countries have used infrastructure to provide counter-cyclical support to the economy.
  • Notably, infrastructure has strong links to growth and with both supply and demand-side features that help generate employment and long-term assets.
  • India already has an upper hand here.
  • Front-loading key projects with greater visibility from the recently announced National Infrastructure Pipeline (NIP) could aid in a quicker recovery.

Special infrastructure bond

  •  India already has several institutions for infrastructure development purposes from the likes of IIFCL, IRFC to more recently NIIF.
  • Taking a cue from China, floating special infrastructure bonds through this organisation to accelerate the funding of the NIP could aid a speedier recovery.
  • Further, taking a page from the New Deal and its Reconstruction Finance Corporation, this institution’s ability for greater leverage can be used to make amends to our credit channels.
  • This ability could also be used for the development of state government and urban local body bond markets.
  • This could help businesses and bankers overcome risk aversion and bring back trust in the system while financing new paths for growth.

Consider the question “Highlight the role of consumption and investment as the two largest contributors to India’s growth and explain how spending on the infrastructure could help revive the economy hit hard by the pandemic”

Conclusion

The exogenous component in the form of spending by the government could step-in in a greater way, perhaps because, it is the only one that can.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

International Comparison Programme (ICP) by World Bank

Note4Students

From UPSC perspective, the following things are important :

Prelims level : ICP, PPP

Mains level : India's GDP related issues

The World Bank has released its ICP report for the reference year 2017. India has retained its position as the third-largest economy in the world in terms of purchasing power parity (PPP), behind the US and China.

Try this MCQ:

Q. The International Comparison Programme (ICP) Report recently seen in news is released by:  IMF/World Bank/OECD/None.

The International Comparison Programme (ICP)

  • ICP is one of the largest statistical initiatives in the world.
  • It is managed by the World Bank under the auspices of the United Nations Statistical Commission.
  • Globally 176 economies participated in the 2017 cycle of ICP. The next ICP comparison will be conducted for the reference year 2021.

The main objectives of the ICP are:

(i) To produce purchasing power parities (PPPs) and comparable price level indexes (PLIs) for participating economies;

(ii) To convert volume and per capita measures of gross domestic product (GDP) and its expenditure components into a common currency using PPPs.

Highlights of the report

  • India accounts for 6.7% or $8,051 billion, out of the world’s total of $119,547 billion of global GDP in terms of PPP compared to 16.4 % in case of China and 16.3 % for the US.
  • India is also the third-largest economy in terms of its PPP-based share in global Actual Individual Consumption and Global Gross Capital Formation.
  • In the Asia-Pacific Region, in 2017, India retained its regional position, as the second-largest economy, accounting for 20.83 % in terms of PPPs.
  • China was first at 50.76% and Indonesia at 7.49% was third.
  • India is also the second-largest economy in terms of its PPP-based share in regional Actual Individual Consumption and regional Gross Capital Formation.

Trends in INR

  • The PPPs of Indian Rupee per US$ at the GDP level is now 20.65 in 2017 from 15.55 in 2011.
  • The Exchange Rate of US Dollar to Indian Rupee is now 65.12 from 46.67 during the same period.

Significance of PPP

  • Purchasing Power Parities are vital for converting measures of economic activities to be comparable across economies.
  • It is calculated based on the price of a common basket of goods and services in each participating economy and is a measure of what an economy’s local currency can buy in another economy.
  • Market exchange rate-based conversions reflect both price and volume differences in expenditures and are thus inappropriate for volume comparisons.
  • PPP-based conversions of expenditures eliminate the effect of price level differences between economies and reflect only differences in the volume of economies.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Tale of two economies

Note4Students

From UPSC perspective, the following things are important :

Prelims level : India's export

Mains level : Paper 3- India's foreign trade and comparison with China

China began heavy investment in infrastructure. This was a key policy decision as it provided employment to millions of people improving their economic status and purchasing power, which was the essential ingredient for industrial progress.ajya Sabha TV programs like ‘The Big Picture’, ‘In Depth’ and ‘India’s World’ are informative programs that are important for UPSC preparation. In this article, you can read about the discussions held in

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What explains the new mark crosses by our Forex reserves

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Forex reserves and exchange rates

Mains level : Paper 3- India's Forex reserves touched ceiling of half-trillion

At first, it seems almost contradictory. And so it is. Our foreign exchange reserves touched new high of $500 billion for the first time, but the time in which this has happened makes it paradoxical. At the time when economies around the world are touching new lows, this rise in the Forex seems all but usual. In this article, you’ll learn about the 4 factors that made it happen.

1. Decreased oil imports

  • Usually, we import a lot of oil.
  • But the payment here is dollar-denominated since very few countries are going to accept our currency (Rupee) as is.
  • So, you have to expend dollars i.e. the foreign exchange reserves to keep the flow of crude oil intact.
  • However, with the nationwide lockdown in place, our import bill has reduced drastically.
  • We simply don’t need as much oil anymore.
  • And considering oil prices have also taken a beating simultaneously, our Forex Reserves have been piling up.
  • Less oil import. More Forex reserves.

2. Dollars coming with foreign investors

  • Contrary to popular opinion, foreign investors have been pouring money into India of late.
  • You could attribute a bulk of these inflows to Reliance Jio.
  • They’ve been enticing investors all over the world and they’ve been doing it at a pace that belies all rational expectations.
  • They’ve raised close to $15 Bn over the course of a few months and it doesn’t look like they’re stopping anytime soon.
  • So technically, dollar inflows have spiked and therefore, Forex reserves get a boost once again.

3. RBI preparing itself for a bad time

  • Another popular explanation is that the RBI is preparing a war chest to stave off future uncertainties.
  • At a time when the world economy is reeling from an unprecedented crisis, it’s perhaps prudent to build up reserves for a rainy day.
  • So the RBI buys gold and dollar-denominated assets using our national currency and builds up the foreign exchange reserves.
  • Inadvertently, this increases the money supply within the economy.
  • There will be more “Rupees” floating around.
  • As more Indian currency keeps entering the ecosystem, the value of the rupee depreciates.
  • And yes, the value of rupee has tumbled recently, but we are not in dire straits yet.
  • But if India’s economy takes a turn for the worse, it becomes incumbent on the RBI to ensure price stability.
  • Imagine the value of the rupee starts fluctuating wildly because of economic uncertainties.
  • The RBI has to intervene.
  • It has to exchange the foreign reserves for the Indian currency.
  • If they keep mopping up the excess Rupees floating in the system, they could ensure the value of the rupee remains stable.
  • So long as the value of the rupee remains stable, prices of commodities will follow the same cue, all things remaining equal that is.
  • Now, there’s still no clear consensus on what kind of reserves we might need if things do go south.
  • Although there have been recommendations made in the past about hoarding too much, it’s still the RBI’s call at the end of the day.

4. The RBI is doing it for the government

  • The RBI can turn a profit if it wants to.
  • And once it does turn a profit, it can transfer a part of the surplus to the government — as dividends.
  • Now if the RBI wanted to offer the government a higher dividend, it has to simply turn a higher profit.
  • One way to accomplish this is to simply let the value of the rupee depreciate. Do not intervene.
  • Do not forego the reserves. Let the rupee tumble.
  • And so long as you don’t intervene, all the dollar-denominated assets you own will be worth more in rupee terms.
  • Consider the hypothetical example-suppose the exchange rate was 1$= Rs. 71 in March 2020, then the rupee loses value and you see the same line item once again in June 2020 will be 1$=Rs. 76.
  • The extra ₹ 5 is treated as a profit. And this profit could be ploughed back to the government.

Consider the question “With the economy in the tailspin amid pandemic, the news of India’s Forex reserves touching the $500 billion mark for the first time provided the semblance of solace. Examine the factors that could explain this increase.”

Conclusion

Though there will always be the debate over the optimum value of the Forex reserves, the new level it reached in such an uncertain time for the economy is, nonetheless, a cause for celebration.

 


Reference Source : https://finshots.in/archive/india-foreign-exchange-reserves/

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Shapes of Economic Recovery

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various graphs and their analysis

Mains level : Economic recovery amid coronavirus pandemic

Predicting recovery graphs, economists have added cool shapes for our information.

The types of graphs mentioned here are the possible indicators of macro-economic recovery. They are the potential hotspots for a prelim question. UPSC can puzzle you with the type of graphs and associated macroeconomic situation.

Try to mirror! How would our economy grow?!

Types of graphs

The shape of economic recovery is determined by both the speed and direction of GDP prints. This depends on multiple factors including fiscal and monetary measures, consumer incomes and sentiment.

  • The best scenario is a V-shaped recovery in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.
  • A pipe graph is a V graph with a longer tail — the recovery isn’t one that happens quickly over one quarter but over two-three quarters.
  • The pipe is different from the Swoosh because in the latter the economy bears the pain for longer.
  • A Zshaped recovery is when a post-lockdown spending surge is so fierce that growth is lifted above the trendline and then after a party settles down to trend. The Z-shaped recovery is the most-optimistic scenario in which the economy quickly rises like a phoenix after a crash.
  • A U-shaped recovery — resembling a bathtub — is a scenario in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels.
  • A W-shaped recovery is a dangerous creature — growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart. The double-dip depicted by a W-shaped recovery is what some economists are predicting if the second wave of COVID comes along and the initial rebound flatters to deceive.
  • The L-shaped recovery is the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.
  • Then, there is the J-shaped recovery, a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.
  • There is also the Swoosh shaped recovery, similar to the Nike logo — in between the V-shape and the U-shape. Here, after falling, growth starts recovering quickly but then, slowed down by obstacles, moves gradually back to the trend-line.
  • Finally, say hello to the Inverted square root shaped In this, there could a rebound from the bottom, the growth slows and settles a step-down.

Why is it important for India?

  • The Indian economy was slowing down even before COVID hit, and the trouble has now been amplified manifold because of the lockdowns.
  • Experts predict a fall of up to 5 per cent in the GDP in FY-21.
  • This is clearly a crisis situation, and our getting out of the hole will depend a great deal on the shape of the economic recovery that will hopefully follow.
  • A Z- or at least V-shaped recovery would be the most preferable. If not, we should at least have a U-shaped recovery or a Swoosh to get back on our feet in a couple of years.
  • A W-shape will bring in much pain before the eventual gain, while an L-shape or the Inverted-square root will make a wreck of the growth train.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: Gross Value Added (GVA) Method

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GDP, GNP, GVA etc.

Mains level : Not Much

The National Statistical Office (NSO) recently released its provisional estimates of national income for the financial year 2019-20. The release also detailed the estimates of the Gross Value Added (GVA).

Try this question from CSP 2011:

Q. In the context of Indian economy, consider the following statements

1. The growth rate of GDP has steadily increased in the last five years.

2. The growth rate in per capita income has steadily increased in the last five years.

Which of the statements given above is/are correct?

(a.) 1 only

(b.) 2 only

(c.) Both 1 and 2

(d.) Neither 1 nor 2

The GVA method

  • In 2015, in the wake of a comprehensive review of its approach to GDP measurement, India opted to make major changes to its compilation of national accounts.
  • It aims to bring the whole process into conformity with the UN System of National Accounts (SNA) of 2008.

What is GVA?

  • As per the SNA, GVA is defined as the value of output minus the value of intermediate consumption.
  • GVA is a measure of the contribution to GDP made by an individual producer, industry or sector.
  • At its simplest, it gives the rupee value of goods and services produced in the economy after deducting the cost of inputs and raw materials used.
  • It can be described as the main entry on the income side of the nation’s accounting balance sheet, and from economics, perspective represents the supply side.

How it has changed income calculation?

  • While India had been measuring GVA earlier, it had done so using ‘factor cost’.
  • GDP at ‘factor cost’ was the main parameter for measuring the country’s overall economic output until the new methodology was adopted.
  • GVA at basic prices became the primary measure of output across the economy’s various sectors and when added to net taxes on products amounts to the GDP.
  • In the new series, the base year was shifted to 2011-12 from the earlier 2004-05.

GVA estimates by NSO

  • As part of the data on GVA, the NSO provides both quarterly and annual estimates of output — measured by the gross value added — by economic activity.
  • The sectoral classification provides data on eight broad categories that span the gamut of goods produced and services provided in the economy.
  • These are: 1) Agriculture, Forestry and Fishing; 2) Mining and Quarrying; 3) Manufacturing; 4) Electricity, Gas, Water Supply and other Utility Services; 5) Construction; 6) Trade, Hotels, Transport, Communication and Services related to Broadcasting; 7) Financial, Real Estate and Professional Services; 8) Public Administration, Defence and other Services.

How relevant is the GVA data given that headline growth always refers to GDP?

  • The GVA data is crucial to understand how the various sectors of the real economy are performing.
  • The output or domestic product is essentially a measure of GVA combined with net taxes.
  • However, GDP can be and is also computed as the sum total of the various expenditures incurred in the economy.
  • It includes private consumption spending, government consumption spending and gross fixed capital formation or investment spending; these reflect essentially on the demand conditions in the economy.

Significance of GVA

  • From a policymaker’s perspective, it is vital to have the GVA data to be able to make policy interventions, where needed.
  • Also, from global data standards and uniformity perspective, GVA is an integral and necessary parameter in measuring a nation’s economic performance.

Issues with GVA

  • As with all economic statistics, the accuracy of GVA as a measure of overall national output is heavily dependent on the sourcing of data and the fidelity of the various data sources.
  • To that extent, GVA is as susceptible to vulnerabilities from the use of inappropriate or flawed methodologies as any other measure.
  • Economists argue that India’s switch of its base year to 2011-12 had led to a significant overestimation of growth.
  • They argued that the value-based approach instead of the earlier volume-based tack in GVA estimation had affected the measurement of the formal manufacturing sector and thus distorted the outcome.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Global Economic Prospects (GEP) 2020 report by World Bank

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GER

Mains level : Not Much

The World Bank has released its Global Economic Prospects (GEP) 2020 report.

Try this PYQ from CSP 2019

Q.) The Global Competitiveness Report is published by the-

(a) International Monetary Fund

(b) United Nations Conference on Trade and Development

(c) World Economic Forum

(d) World Bank

Global Economic Prospects (GEP)

  • GEP is a World Bank Group flagship report that examines global economic developments and prospects, with a special focus on emerging market and developing economies.
  • It is issued twice a year, in January and June.
  • The January edition includes in-depth analyses of topical policy challenges while the June edition contains shorter analytical pieces.

Summary of the report

In a nutshell, the outlook for the global economy for 2020 has darkened, amid slowing activity and heightened downside risks.

1) On poverty

  • The scope and speed with which the COVID-19 pandemic and economic shutdowns have devastated the poor around the world are unprecedented in modern times.
  • Current estimates show that 60 million people could be pushed into extreme poverty in 2020.

2) Policy choices

  • Policy choices made today — include greater debt transparency to invite new investment, foster advances in digital connectivity, and a major expansion of cash safety nets for the poor.
  • The financing and building of productive infrastructure are among the hardest-to-solve development challenges in the post-pandemic recovery.

3) Emerging Market and Developing Economies (EMDEs)

  • EMDEs face health crises, restrictions and external shocks like falling trade, tourism and commodity prices, as well as capital outflows.
  • These countries are expected to have a 3-8% output loss in the short term, based on studies of previous pandemics, as per the analysis.
  • Growth is likely to slow more in commodity-exporting EMDEs than in commodity-importing ones.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Moody’s downgrade India’s Ratings

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Signs of economic slowdown in the country

The Moody’s Investors Service downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to “Baa3” from “Baa2”. It stated that the outlook remained “negative”.

Practice question for mains:

Q. Why India’s GDP growth rate is being labelled an overestimate yet again by the global credit rating agencies? Discuss this in context to the latest downgrade of Indian Economy as highlighted by the Moody’s.

Why this matters?

  • The Moody’s is historically the most optimistic rating agency about India.
  • This downgrade challenges India’s policymaking institutions.
  • They will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth.

What is the reason for this downgrade?

There are four main reasons why Moody’s has taken the decision:

  • Weak implementation of economic reforms since 2017
  • Relatively low economic growth over a sustained period
  • A significant deterioration in the fiscal position of governments (central and state)
  • And the rising stress in India’s financial sector

What does “negative” outlook mean?

  • The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system.
  • These could lead to more severe and prolonged erosion in fiscal strength than Moody’s current projections.
  • The ratings have highlighted persistent structural challenges to fast economic growth such as “weak infrastructure, rigidities in labour, land and product markets, and rising financial sector risks”.
  • In other words, a “negative” implies India could be rated down further.

Is the downgrade because of Covid-19 impact?

No. The pandemic has amplified vulnerabilities in India’s credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year.

Then why did the downgrade happen?

  • More than two years ago, in November 2017, Moody’s had upgraded India’s rating to “Baa2” with a “stable” outlook.
  • At that time, it expected that effective implementation of key reforms would strengthen the sovereign’s credit profile through gradual but persistent measures.
  • But those hopes were belied. Since that upgrade in 2017, implementation of reforms has been relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness.
  • Each year, the central government has failed to meet its fiscal deficit (essentially the total borrowings from the market) target.
  • This has led to a steady accretion of total government debt.

What will be the implications of this downgrade?

  • Ratings are based on the overall health of the economy and the state of government finances.
  • When India’s sovereign rating is downgraded, it becomes costlier for the Indian government as well as all Indian companies to raise funds because now the world sees such debt as a riskier proposition.
  • A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before.
  • The weaker economic growth and worsening fiscal health undermine a government’s ability to pay back.
  • Lower risk is better because it allows governments and companies of that country to raise debts at a lower rate of interest.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Problem of interest rate differential in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Policy rates

Mains level : Paper 3- Why interest differential could be a problem?

Do you remember Operation Twist by the RBI? what was being twisted there? It was the yield curve that was sought to be twisted. It had been aimed at reducing the gap between long term interest rates and short term policy rates. This article explains the impact such gap could have on the economy.

Why long term loans come with a higher interest rate?

  • Long term loans equate to long repayment periods.
  • More uncertainty during these long periods can translate to higher risks.
  • And to compensate for the high risks involved, banks quote higher interest rates when corporates borrow from them to build and operate stuff.
  • However, when banks borrow from the RBI they are borrowing over short intervals.
  • And so they get charged lower interest rates.

So, why banks are keeping interest rates high despite borrowing at low rates from the RBI?

  • Ever so often, the RBI cuts rates in the hopes of making loans more accessible to banks.
  • They are hoping banks will also extend this benevolence to their customers by cutting long term interest rates.
  • But right now, banks are scared.
  • They don’t think the corporates can pay back.
  • So they are keeping long term rates at elevated levels despite borrowing at consistently low rates from the RBI.

What happens when gap between long-term and short term interest rates widen?

  •  Capital wasn’t cheap to begin with for corporate borrowers, and it’s getting more expensive.
  • This comes just as migrant rural workers have been driven out of urban production centers because of shuttered factories.
  • Even if this labor is safely put back on, say, road construction, concessionaires [think private road contractors] might still go bankrupt before completing any projects.
  • That’s because their annuity payments from the government are linked to falling short-term policy rates, whereas their long-term borrowing costs are both high and sticky

To understand the issue of annuity payment and its relation with interest rates, let’s dig deeper into 3 types of models-

1. Build-Operate-Transfer (BOT) Model

  • So, NHAI is the National Highways Authority of India and is largely responsible for building and maintaining roads.
  • Its preferred method to get the job done is to deploy what is called the BOT model.
  • The Build-Operate-Transfer (BOT) model, as the name suggests is a way for NHAI to offload its responsibilities of road building to private contractors.
  • Under BOT model, private contractors build the road, operate it, make money off of collecting toll, and after about 10–15 years, they hand over the road back to NHAI.
  • There aren’t enough private contractors willing to bid for such projects because — hey, maintaining and operating a road is a pain.
  • Why pain?  You have to wait 15 years to recoup all the money you had to pour in to build the damn thing. That’s the pain.

2. Engineering, procurement and Construction (EPC) model

  • Under the EPC (Engineering, Procurement & Construction) model, NHAI pays private contractors first, so that they can help NHAI build the road.
  • The contractor does not operate or collect tolls here.
  • Instead, it can walk away scot-free with money in its coffers once it’s done building the road.
  • But it’s hard for the government to shore up all the resources required upfront.

3. Hybrid Annuity Model (HAM)- The middle path

  •  It’s a nice little mix of both EPC and BOT.
  • Under it, NHAI pays some money upfront in fixed installments usually, 40% of the project cost.
  • And the private contractor does his bit by putting up the rest and finishing the project.
  • However, once the construction is complete, the contractor does not make money off of collecting toll.
  • Instead, he transfers the assets over to NHAI.
  • So its incumbent on the government to pay the rest of the money once the project takes off.
  • And the payments are dependent on the asset created, the performance of the developer, and a few other things.
  • However, since the payouts usually last 15–20 years we need to find a way to determine what kind of money the government pays the contractor every 6 months.
  • And here’s the best way to think about this — So when the government pays the 40% upfront, it’s promising to pay the 60% sometime in the future.
  • It’s money they owe the contractor.

And, here is the crux of the matter

  • So when the repayments, are made, they’ll have to pay the principal and the interest.
  • The interest involves a fixed component (3%) and a variable component.
  • What is varible component? The variable component is effectively the short term policy rates.
  • So if the RBI keeps cutting these short term rates, private contractors get less money per instalment even if their roads are all nice and shiny.
  • And this can’t bode well for them because they probably put up the 60% back in the day by borrowing from another bank.
  • A bank that’s charging them long term interest rates that refuse to come down.

Conclusion

The widening gap between the short term policy rates and long term interest could easily spell the disaster for the entrepreneurs and in turn for the economy as a whole. The government should consider a special package for such entities given the unprecedented situations we found ourselves in.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Understanding the monetisation of deficit

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Relation between bond yield

The RBI could finance the government debt by buying bonds from the secondary market. Or it could directly finance the debt. And both could stoke inflation. But, do they carry the same inflation risk. The answer is an unambiguous ‘No’. So, how monetisation of debt is different from Open Market Operation by the RBI? Read the article to know…

What is Monetised deficit?

  • The Monetised Deficit is the extent to which the RBI helps the central government in its borrowing programme.
  • In other words, monetised deficit means the increase in the net RBI credit to the central government, such that the monetary needs of the government could be met easily.

What monetisation of deficit mean (and doesn’t mean)

  • Monetisation of the deficit does not mean the government is getting free money from the RBI.
  • If one works through the combined balance sheet of the government and the RBI, it will turn out that the government does not get a free lunch.
  • But it does get a heavily subsidised lunch.
  • That subsidy is forced out of the banks.
  • And, as in the case of all invisible subsidies, they don’t even know.

So, is the RBI monetising the debt?

  • It is not as if the RBI is not monetising the deficit now; it is doing so.
  • It is doing so indirectly by buying government bonds in the secondary market through what are called open market operations (OMOs).
  • Note that both monetisation and OMOs involve printing of money by the RBI.
  • But there are important differences between the two options that make shifting over to monetisation a non-trivial decision.

Historical context of the monetisation of debt: An agreement

  • In the pre-reform era, the RBI used to directly monetise the government’s deficit almost automatically.
  • That practice ended in 1997 with a landmark agreement between the government and the RBI.
  • It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO route.
  • The implied understanding also was that the RBI would use the OMO route not so much to support government borrowing.
  • So, the RBI uses OMO as liquidity instrument to manage the balance between the policy objectives of supporting growth, checking inflation and preserving financial stability.

So, what were the outcomes of the agreement?

  • The outcomes of that agreement were historic.
  • Since the government started borrowing in the open market, interest rates went up.
  • HIgh interest rates incentivised saving and thereby spurred investment and growth.
  • Also, the interest rate that the government commanded in the open market acted as a critical market signal of fiscal sustainability.
  • Importantly, the agreement shifted control over money supply, and hence over inflation, from the government’s fiscal policy to the RBI’s monetary policy.
  • The India growth story that unfolded in the years before the global financial crisis in 2008 when the economy clocked growth rates in the range of 9 per cent was at least in part a consequence of the high savings rate and low inflation which in turn were a consequence of this agreement.

What is the reasoning for jeopardising the hard-won gains of agreement?

  • The Fiscal Responsibility and Budget Management Act as amended in 2017 contains an escape clause.
  • Escape clause permits monetisation of the deficit under special circumstances.
  • What is the case for invoking this escape clause?
  • The case is made on the grounds that there just aren’t enough savings in the economy to finance government borrowing of such a large size.
  • Bond yields would spike so high that financial stability will be threatened.
  • The RBI must therefore step in and finance the government directly to prevent this from happening.

No, the situation is not so grim-Look at the bond yields

  • There is no reason to believe that we are anywhere close to the above-mentioned situation.
  • Through its OMOs, the RBI has injected such an extraordinary amount of systemic liquidity that bond yields are still relatively soft.
  • In fact the yield on the benchmark 10 year bond which was ruling at 8 per cent in September last year has since dropped to just around 6 per cent.
  • Even on the day the government announced its additional borrowing to the extent of 2.1 per cent of GDP, the yield settled at 6.17 per cent.
  • That should, if anything, be evidence that the market feels quite comfortable about financing the enhanced government borrowing.

Why worry about monetisation if OMO also leads to inflation?

The following four issues make clear the difference in OMO and monetisation

1. Issue of RBI’s control over monetary policy

  • Both monetisation and OMOs involve expansion of money supply which can potentially stoke inflation.
  • If so, why should we be so wary of monetisation?
  • Because although they are both potentially inflationary, the inflation risk they carry is different.
  • OMOs are a monetary policy tool with the RBI in the driver’s seat, deciding on how much liquidity to inject and when.
  • In contrast, monetisation is, and is seen, as a way of financing the fiscal deficit with the quantum and timing of money supply determined by the government’s borrowing rather than the RBI’s monetary policy.
  • If RBI is seen as losing control over monetary policy, it will raise concerns about inflation.
  • That can be a more serious problem than it seems.

2. Credibility of RBI on curbing inflation

  • India is inflation prone.
  • Note that after the global financial crisis when inflation “died” everywhere, we were hit with a high and stubborn bout of inflation.
  • In hindsight, it is clear that the RBI failed to tighten policy in good time.
  • Since then we have embraced a monetary policy framework and the RBI has earned credibility for delivering on inflation within the target.
  • Forsaking that credibility can be costly.

3. Yield on bond could shoot up anyway

  • If, in spite of above problems, the government decides to cross the line, markets will fear that the constraints on fiscal policy are being abandoned.
  • Perception in the market will be that the government is planning to solve its fiscal problems by inflating away its debt.
  • If that occurs, yields on government bonds will shoot up, the opposite of what is sought to be achieved.

4. Monetisation is not inevitable yet

  • What is the problem that monetisation is trying to solve?
  • There are cases when monetisation — despite its costs — is inevitable.
  • If the government cannot finance its deficit at reasonable rates, then it really doesn’t have much choice.
  • But right now, it is able to borrow at around the same rate as inflation, implying a real rate (at current inflation) of 0 per cent.
  • If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure.
  • We are not there yet.

Consider the question asked in 2019, “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your argument.”

Conclusion

Though OMO and monetisation both leads to inflation, the issues with monetisation have far-reaching consequences. Also, the situation we are in doesn’t yet warrant monetisation which should be seen as a last resort.

Back2Basics:  Open Market operation

  • OMOs are conducted by the RBI by way of sale and purchase of G-Secs to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
  • When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.
  • Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.

 

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Government must fix an upper limit for fiscal deficit

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Need for the stimulus and relief package to in the wake of Covid-19 and issues involved in its size.

D. Subbarao in this article discusses how the government is facing the hard choice of choosing between saving lives and saving the economy. On the government’s response on economic front he argues that the government, unlike the rich countries should keep an upper limit on its spending because of the dangers involved in unrestricted spending.

Why the dilemma is sharpest for India?

  • This dilemma is arguably the sharpest for India.
  • Because of our high population density and poor medical infrastructure, any laxity in prevention can result in a huge health disaster.
  • On the other hand, an extended lockdown will force millions into the margins of subsistence, push small and large firms alike into bankruptcy, seriously impair financial stability and land us in a humanitarian and economic disaster.

Why is the relief package criticised as too little?

  • After the lockdown, the government announced a relief package amounting to 0.8 per cent of GDP, that’s been criticised as being too little.
  • From a study of a sample of countries, the latest issue of The Economist reports that India’s lockdown has been the most stringent while its fiscal relief package is the smallest in proportion to GDP.

What could be the reasons for a cautious approach in the relief package?

  • A possible explanation for the government’s timid fiscal response may be the fear of spooking the market.
  • For years, every economist and analyst has been warning the government of the dire consequences of fiscal irresponsibility.
  • And that warning message must have been so hardwired into the government’s collective mind that it was unable to get over the mental overhang.

We should be aware of the reasons from the macroeconomic point of view that force the government to limit its fiscal deficit. In this case, India government is exercising the caution owing to the same constraints.

Uncertainties in the crisis

  • Uncertainty is a defining feature of every crisis.
  • During the global financial crisis, a big uncertainty around the world was about how much risk there was in the system, where it lay and who was bearing it.
  • The uncertainty of the corona crisis is much deeper.
  • There are far too many known unknowns not to speak of unknown unknowns.
  • Uncertainties in corona crisis: We just don’t know enough about the effectiveness of the lockdowns, the age and gender profile of susceptibility to the virus.
  • We also don’t know about the process of recovery, the tipping point if any for mass immunity, whether the virus will attack in waves.
  • And most importantly, when we might have a vaccine and a cure.
  • Governments are, for the large part, having to fly blind.

Issues over relief and stimulus package

  • There are many issues to be decided and planned on the way forward.
  • A big issue will be an expenditure plan for relief during the crisis and stimulus after some normalcy is restored.
  • Borrow more spend more: Even the most ardent fiscal hawks are now agreed that the government needs to abandon its fiscal reticence, and borrow more and spend more.
  • Even the most extreme monetary purists are agreed that the RBI should fund the government borrowing by printing money.
  • Even the staunchest advocates of financial stability are agreed that more regulatory forbearance is necessary.
  • And virtually everyone is agreed on where additional spending should be directed.

Debate on how much additionally the government should borrow

  • There is disagreement on how much additionally the government should borrow.
  • There are two opposing views in this regard, which are discussed below.
  • 1. Fiscal risk without preset fiscal deficit: One view is that the government should err on the side of taking a fiscal risk without any preset fiscal deficit number.
  • It should simply determine what needs to be done and borrow to that extent, acting as if there were no fiscal constraint at all.
  • In other words, act as per the diktat of the now famous three words — “whatever it takes”.
  • 2. Set a limit: An opposing view is “whatever it takes” is not an option for India.
  • Many analysts have estimated that just the loss of revenue due to the economic shutdown will take the combined fiscal deficit of the Centre and states beyond 10 per cent of GDP.
  • The borrow and spend programme will be in addition to the above loss.
  • Unlike rich countries, we can’t afford to ignore the risks of fiscal excess of that magnitude, no matter the compelling circumstances.
  • What are the risks involved? There will be a heavy price to pay down the road by way of inflation and exchange rate volatility.

From the UPSC point of view you must pay attention to the both the arguments made here, question can be asked in UPSC based on the suggestions and their pros and cons. Both the arguments cited above have their merits and demerits.

Way forward

  • It’s important to keep in mind that we have resources and capability in the near future should there be another wave of the virus later in the year.
  • It will be advisable for the government to fix an upper bound for fiscal deficit and operate within that. For now, the borrow and spend programme should be restricted to 2 per cent of GDP.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A time for extraordinary action

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Stimulus package on the lines of package declared by developed countries is necessary for Indian economy to deal with the pandemic.

Context

The lockdown and other movement restrictions, backed by scientific and political consensus on their inevitability, have directly led to a dramatic slowdown in economic activity across the board. What is its impact on the Indian economy? This question calls for an urgent answer.

The methodology used to estimate the impact

  • We provide an initial, quantitative response, using a methodology that is based on the technique of input-output (IO) models, first elaborated by the economist Wassily Leontief.
  • How the model works: Such models provide detailed sector-wise information of output and consumption in different sectors of the economy and their inter-linkages, along with the sum total of wages, profits, savings, and expenditures in each sector and by each section of final consumers (households, government, etc.).
  • Crucially, it pays attention to intermediate consumption, namely consumption by some sectors of the output of other sectors (as well as consumption within their own sector).
  • Advantage of the model: The key advantage of such a model is that it allows the calculation of the impact of any change in any sector in both direct and indirect terms, which has made this model somewhat ubiquitous in the computation of the economic impact of disasters.
  • This also renders it well-suited to estimating the economic consequences of COVID-19.
  • Regrettably, the last officially published IO table for India was for the year 2007-2008.
  • In our estimates, we use the IO tables for India published by the World Input-Output Database for the year 2014 that updates the IO tables for individual countries using time series of national income statistics.
  • To calculate the impact of the lockdown, there are four different scenarios of the number of workdays lost in different sectors.
  • How daily output loss is calculated? Assuming that the estimated annual output is distributed uniformly across the year, it is possible to calculate the daily output and therefore the daily output loss.
  • The direct and indirect impacts of the lockdown are then estimated using IO multipliers which are assumed to be constant.
  • We then calculate the percentage decline in the national gross domestic product (GDP) of 2019-2020 that this impact amounts to.

What is the impact on various sectors?

  • Loss at 7% to 33% of GDP: Model (see table) shows that the loss of GDP ranges from ₹17 lakh crore (7% of GDP) in the most conservative scenario, where the average number of output days lost is only 13, to ₹73 lakh crore (33% of GDP) in the most impactful scenario, where the number of days of lost output averages 67.
  • In intermediate scenarios of 27 and 47 days of lost output, the GDP decline is ₹29 lakh crore (13% of GDP) and ₹51 lakh crore (23% of GDP), respectively.
  • OECD estimate: These estimates also accord well with other estimates, such as those of the OECD that suggest a 20% loss to GDP for India.
  • Impact of varying lockdown period: Even assuming that sectors will have varying lockdown periods, all sectors face serious losses due to their
  • If we take the scenario where a prolonged lockdown happens, averaging about 47 days across sectors, we find that the mining sector faces the largest drop of 42% in value-added despite that sector itself being shut down for, say, 35 days.
  • The electricity sector sees a 29% fall in value-added, even though it faces no shut down per se.
  • Losses are expected across all sectors in terms of both wage compensation and the availability of working capital.

Incorporation of feedback effect in estimates

  • The linear character of our estimates, intrinsic to IO analysis, does not allow incorporation of feedback effects and assumes that output commences where it left off without further constraints.
  • An attempt has been made to correct for this by using a varying number of days of output loss across sectors, but this is quite possibly inadequate to capture the continuing economic impact.
  • We are faced today with a unique situation where both supply and demand have collapsed in several sectors.
  • Impact on agriculture: In some sectors such as agriculture, the impact may manifest in the delayed fashion, if the anti-COVID-19 measures, or the pandemic itself, affects agricultural operations in the next the kharif season, even if, as reports suggest, much of this year’s rabi has been successfully harvested.
  • The shortfall in export not accounted for: Given the database, we are using and the initial character of our analyses we have also not explicitly accounted for possible shortfalls in exports due to lack of demand elsewhere in the world, as well as the unavailability of intermediate imported goods that are crucial for the Indian economy.
  • Nor are we able to adequately separate the impact on the informal sector, that is partially aggregated with the formal sector in the database that we are using and partially unaccounted for due to lack of data.

Need for the huge stimulus package

  • The most striking feature of even this simple calculation is the all-round pervasive impact on the economy of the anti-COVID-19 measures that we are currently undertaking and that are likely to continue in modified form for a short period.
  • Measures such as debt relief, postponement of revenue and tax collections, immediate relief in cash and kind to the poor, and revamping and scaling up public distribution are all undoubtedly necessary but far from sufficient.
  • Our numbers suggest that the resort to huge stimulus packages that developed countries have already started putting in place is by no means mistaken.

Way forward

  • Package for all the sectors of the economy: We need to compensate and pump cash into the hands of not only wage workers in the formal and informal sectors, and also into the livelihood activities of the informal sector.
  • But businesses too need to be primed with handouts in the case of small and medium enterprises, and with a variety of concessions even in the case of larger businesses.
  • It is critical to preserve the productive capacities of the Indian economy across the board. The annual budget of the current year, already passed, clearly cannot cope with such a massive effort and needs to be revisited by suitable parliamentary measures.
  • Caring too much about fiscal deficit will not be helpful: Redistributing expenditure, seeking to keep the fiscal deficit “under control” as it were, through measures such as cutting back on government salaries, are unlikely to be helpful.
  • Apart from sending the wrong signal to private sector employers, who have so far been exhorted to maintain salaries and wages during the lockdown, it is quite likely to lead to further reduction in demand since the government is the biggest employer in the country.
  • Ensure the key role of the state: Finally, one must note that the current crisis is not a transformatory moment for the Indian economy, even if the scale of the impact and recovery process will undoubtedly push the economy in new directions.
  • But “greening” the economy or more radical transformative measures are not particularly relevant in its current state.
  • What is needed is ensuring the key role of the state to lift up an economy that is in danger of being brought to its knees, and to restore some semblance of its normal rhythm, by an unprecedented scale of state investment.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Restarting the economy after lockdown

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Read the attached story

  (This newscard is the excerpt from an article published in the TOI, authored by former RBI governor Raghuram Rajan. It discusses a series of reformative measures to boost our economy once the lockdown restrictions are eased.)

Context

  • Economically speaking, India is faced today with perhaps its greatest emergency since Independence.
  • The global financial crisis in 2008-09 was a massive demand shock but our financial system was largely sound, and our government finances were healthy.
  • None of this is true today as we fight the coronavirus pandemic.
  • With the right resolve and priorities, and drawing on India’s many sources of strength, it can beat this virus back and even set the stage for a much more hopeful tomorrow.

To begin with: 21 day Lockdown

  • The immediate priority, of course, is to suppress the spread of the pandemic through widespread testing, rigorous quarantines, and social distancing.
  • The 21-day lockdown is a first step, which buys India time to improve its preparedness.
  • The government is drawing on our courageous medical personnel and looking to all possible resources – public, private, defence, retired – for the fight, but it has to ramp up the pace manifold.
  • It will have to test significantly more to reduce the fog of uncertainty on where the hotspots are, and it will have to keep some personnel and resources mobile so that they can be rushed to areas where shortages are acute.

Restarting with caution

  • The 21 day lockdown is about a week ahead to get lifted. It is hard to lockdown the country entirely for much longer periods, so we should also be thinking of how we can restart certain activities.
  • Restarting requires better data on infection levels, as well as measures to protect those returning to work.
  • Healthy youth, lodged with appropriate distancing in hostels at the workplace, maybe ideal workers for restarting.

Pacing up manufacturing

  • Since manufacturers need to activate their entire supply chain to produce, they should be encouraged to plan on how the entire chain will reopen.
  • The administrative structure to approve these plans and facilitate movement for those approved should be effective and quick – it needs to be thought through now.

Most crucial: Ensuring workforce sustenance

  • In the meantime, policymakers need to ensure that the poor and non-salaried lower middle class who are prevented from working for longer periods can survive.
  • Direct transfers to households may reach most but not all, as a number of commentators have pointed out.
  • Furthermore, the quantum of transfers seems inadequate to see a household over a month.
  • The state and Centre have to come together to figure out quickly some combination of public and private participation and DBTs that will allow needy households to see through the next few months.
  • We have already seen one consequence of not doing so – the movement of migrant labour. Another will be people defying the lockdown to get back to work if they cannot survive otherwise.

Gearing up for fiscal shocks

  • Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation.
  • This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year.
  • Unlike the US or Europe, which can spend 10% more of GDP without fear of a ratings downgrade, we already entered this crisis with a huge fiscal deficit, and will have to spend yet more.
  • A ratings downgrade coupled with a loss of investor confidence could lead to a plummeting exchange rate and a dramatic increase in long term rates in this environment, and substantial losses for our financial institutions.

Channelizing expenditures

  • So we have to prioritise, cutting back or delaying less important expenditures, while refocusing on immediate needs.
  • At the same time, to reassure investors, the government could express its commitment to return to fiscal rectitude.
  • The govt. must back up its intent by accepting the setting up of an independent fiscal council and setting a medium term debt target, as suggested by the NK Singh committee.

Boosting up Industries

1) MSMEs

  • Many MSMEs already weakened over the last few years, may not have the resources to survive.
  • We need to think of innovative ways in which bigger viable ones, especially those that have considerable human and physical capital embedded in them, can be helped.
  • SIDBI can make the terms of its credit guarantee of bank loans to SMEs even more favourable, but banks are unlikely to want to take on much more credit risk at this point.
  • The government could accept responsibility for the first loss in incremental bank loans made to an SME, up to the quantum of income taxes paid by the SME in the past year.

2) Large industries

  • Large firms can also be a way to channel funds to their smaller suppliers. They usually can raise money in bond markets and pass it on.
  • Banks, insurance companies, and bond mutual funds should be encouraged to buy new investment-grade bond issuances, and their way eased by the RBI.
  • The government should also require each of its agencies and PSUs, including at the state level, to pay their bills immediately, so that private firms get valuable liquidity.

Looping in everyone’s participation

  • The government should call on people with proven expertise and capabilities, of whom there are so many in India, to help it manage its response.
  • It may even want to reach across the political aisle to draw in members of the opposition who have had experience in previous times of great stress like the global financial crisis.
  • If, however, the government insists on driving everything from the PMO, with the same overworked people, it will do too little, too late.

Conclusion

  • Globally, it is said that India reforms only in crisis.
  • Hopefully, this otherwise unmitigated tragedy will help us see how weakened we have become as a society, and will focus our politics on the critical economic and healthcare reforms we sorely need.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Comparing current crisis with Great Depression, 1929

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Great Economic Depression, Slowdown vs. Depression

Mains level : Impact of the depression on colonial India

 

With the novel coronavirus pandemic severely affecting the global economy, some experts have begun comparing the current crisis with the Great Depression — the devastating economic decline of the 1930s that went on to shape countless world events.

Looming depression ahead

  • Experts have warned that unemployment levels in some countries could reach those from the 1930s era, when the unemployment rate was as high as around 25 per cent in the United States.
  • Currently, unemployment levels in the US are already estimated to be at 13 per cent, highest since the Great Depression.

What was the Great Depression?

  • The Great Depression was a major economic crisis that began in the United States in 1929, and went to have a worldwide impact until 1939.
  • It began on October 24, 1929, a day that is referred to as “Black Thursday”, when a monumental crash occurred at the New York Stock Exchange as stock prices fell by 25 per cent.
  • Though the crash was triggered by minor events, the extent of the decline was due to more deep-rooted factors such as a fall in aggregate demand, misplaced monetary policies, and an unintended rise in inventory levels.
  • In the United States, prices and real output fell dramatically. Industrial production fell by 47 per cent, the wholesale price index by 33 per cent, and real GDP by 30 per cent.

What caused Great Depression?

The causes of the Great Depression are extremely complex and disputed to this day. The three main factors are:

  1. Financial instability and credit cycles: A period of stability encouraged more borrowing and lending than prudent, sowing the seeds for future instability.
  2. Monetary contraction, the gold standard, and bank runs: Monetary policy, driven in large part by the gold standard, tightened credit at the wrong time fueling bank-runs and economic slowdown.
  3. Debt deflation: Excess private debt created a dangerous condition where no one wanted to spend, causing deflation and economic weakening.

Worldwide impact

  • The havoc caused in the US spread to other countries mainly due to the gold standard, which linked most of the world’s currencies by fixed exchange rates.
  • In almost every country of the world, there were massive job losses, deflation, and a drastic contraction in output.
  • Unemployment in the US increased from 3.2 per cent to 24.9 per cent between 1929 and 1933. In the UK, it rose from 7.2 per cent to 15.4 per cent between 1929 and 1932.

Latent outcomes

  • The Depression caused extreme human suffering, and many political upheavals took place around the world.
  • In Europe, economic stagnation that the Depression caused is believed to be the principal reason behind the rise of fascism, and consequently the Second World War.
  • It had a profound impact on institutions and policymaking globally and led to the gold standard being abandoned.

How did Great Depression impact India?

  • The Depression had an important impact on India’s freedom struggle.
  • Due to the global crisis, there was a drastic fall in agricultural prices, the mainstay of India’s economy, and a severe credit contraction occurred as colonial policymakers refused to devalue the rupee.
  • The effects of the Depression became visible around the harvest season in 1930, soon after Mahatma Gandhi had launched the Civil Disobedience movement in April the same year.

1) Rural India mainstreamed into freedom struggle

  • The fallout made substantial sections of the peasantry rise in protest and this protest was articulated by members of the National Congress.
  • There were “No Rent” campaigns in many parts of the country, and radical Kisan Sabhas were started in Bihar and eastern UP.
  • Agrarian unrest provided a groundswell of support to the Congress, whose reach was yet to extend into rural India.

2) INC gained momentum

  • The endorsement by farming classes is believed to be among the reasons that enabled the party to achieve its landslide victory in the 1936-37 provincial elections held under the Government of India Act, 1935.
  • This is marked as a significant event in the history of INC as it flourished the party’s political might for years to come.

Back2Basics

Slowdown vs recession vs depression

  •  Slowdown simply means that the pace of the GDP growth has decreased.  During slowdown, the GDP growth is still positive but the rate of growth has decreased.
  •  Recession refers to a phase of the downturn in the economic cycle when there is a fall in the country’s GDP for two quarters.   It is a period of decline in total output, income, employment and trade, usually lasting six months to a year.
  • Depression is a prolonged period of economic recession marked by a significant decline in income and employment.   It is a negative GDP growth of 10% of more, for more than 3 years.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The sudden return of quantity planning in the wake of covid-19

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3-Applying ways suggested by Keynes in times pandemic. of war to deal with the covid-19

Context

We could take a leaf out of a booklet by Keynes in our effort to tackle some of the challenges posed by the covid-19 pandemic.

The Crisis-Keynesian Mode response mode to pandemic

  • What is the war economy? One of the defining features of a war economy is that economic thinking is focused on quantities rather than prices.
  • Much of the ongoing global response to the covid-19 pandemic is still in crisis-Keynesian mode.
  • What is a crisis-Keynesian response: The nation-state has become the income supporter, financier and consumer of last resort.
  • However, there are also clear signs of war economics as well.
  • Signs of war economics: The decision by US President Donald Trump to use America’s Defense Production Act to force General Motors to make ventilators is one resonant example.
  • Just consider some of the key questions that are being asked right now.
  • How many ventilators are available? Are there ample food stocks? Can more hospital beds be made available? How many masks be produced in the next few weeks? Can the production of testing kits be ramped up? It’s all about quantities, quantities, quantities.

Historical background and impact of a shift in economic strategies

  • Impact persists in subsequent decades: Such big shifts in economic strategies are usually not reversed overnight. Decisions taken in response to a particular emergency tend to remain with us in subsequent decades.
  • World War II example: What happened in India during World War II is instructive. Many of the controls that were introduced during that global conflagration formed the basis of the later interventionist state that sought to control who produces how much. Here are a few examples.

1. Quantitative import controls

  • One of the first moves by the colonial state was to impose quantitative import controls in May 1940.
  • There were two reasons why this was done—to conserve foreign exchange as well as ensure that shipping capacity was used to bring in only what was essential to the war economy.

2. Food rationing

  • Food rationing was also introduced during the war years.
  • Over 700 towns were covered by some rationing scheme or the other by the end of the War.
  • The government also brought in measures to buy surplus grain from farmers at administered prices.
  • Various forms of rent control were also instituted. Most of these controls continued after India gained independence.

3. Balance of payment crisis in 1957

  • India was hit by a balance of payments crisis in 1957.
  • The massive investment thrust in the Second Five Year Plan had severely strained the country’s foreign exchange reserves.
  • The Indian government, once again as a temporary measure, imposed stringent controls on imports.
  • Many of these were quantitative in nature. They survived well into the 1980s.
  • In fact, the entire trade policy approach since the 1957 crisis was to minimize imports in a bid to preserve foreign exchange.

Will the government opt for automatic monetisation of the deficit?

  • Money creation by the RBI to fund deficit: There is now a growing consensus that the Indian government will have to fund part of its growing fiscal burden through money creation by the Reserve Bank of India.
  • What about inflationary consequences? The inflationary consequences will be muted—for now—because the velocity of narrow money is most likely set to fall on account of weak demand conditions under a lockdown.
  • Precedence: The automatic monetization of Indian government deficits was part of the policy playbook after the 1950s till it was thankfully discontinued in 1997.
  • The main instrument for that was ad hoc treasury bills.
  • These were introduced in 1954 as a temporary measure to replenish the cash balances the government maintains with the central bank.
  • What was ad hoc treasury bills? Ad hoc treasury bills were not introduced through any formal law but as an arrangement between mid-level bureaucrats in New Delhi and Mumbai (i.e. RBI).
  • What began as a temporary measure to smoothen government cash holdings had become a near-permanent feature of Indian macroeconomic policy by the 1970s.

The uncertain future

  • Longer the war more profound will be the changes: The longer the global battle against the pandemic lasts, the more profound will be the changes across the economic landscape.
  • In an insightful article in Bloomberg, Andy Mukherjee uses the lessons of history to look into the uncertain future.
  • Among the possibilities he mentions are the contrasting ones of an economy run by robots and algorithms but with little labour, or an economy in which labour has clawed back the power it lost in the second age of globalization.

Managing the resources in the time of war

  • Managing the resources: In 1940, John Maynard Keynes wrote a little booklet How To Pay For The War, Keynes essentially argued that the main challenge was not how to finance the war effort, but how to manage real resources to produce the arms that the UK needed to defend herself.
  • Suppression of consumption: He then argued that war production would necessarily involve suppression of consumption, either through higher taxes or some scheme of deferment.

Conclusion

The war against the covid-19 pandemic is very different from the military war that Keynes was thinking about. Yet, his booklet offers useful lessons on how to think about some of our current challenges—and also about what we can expect once the situation returns to normal.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is Keqiang Index’?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Keqiang Index

Mains level : NA

China’s GDP numbers which are preferably represented by Keqiang Index has been recently seen in news amid coronavirus outbreak.

Keqiang Index

  • Li Keqiang index or Keqiang index is an economic measurement index created by The Economist to measure China’s economy using three indicators, as reportedly preferred by Li Keqiang.
  • It uses three other indicators:
  1. the railway cargo volume,
  2. electricity consumption and
  3. loans disbursed by banks
  • Li Keqiang currently the Premier of the People’s Republic of China, suggest the index as better economic indicator than official numbers of GDP.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

No green shoots of a revival in sight as yet

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Significance of quarterly GDP estimates and revision.

Context

As the third-quarter GDP was marginally higher than the second-quarter figure of 4.5% many concluded that the economic slowdown witnessed during the last six quarters has “bottomed out”. Has it?

What closer examination of data reveal?

  • Estimates revised upwards: A closer reading reveals that the latest data release has revised the estimates of the first two quarters of the current year (2019-2020) upwards to 5.6% and 5.1%, from the earlier figures of 5% and 4.5%, respectively.
  • What the revision mean? The upward revisions have, perhaps unwittingly, changed the interpretation of the current year’s Q3 estimate: the slowdown has continued, not bottomed out; hence, there is no economic revival in sight as of now.

Competing views of the performance

  • The question therefore is why did the current year’s Q1 and Q2 GDP estimates get revised upwards?
    • The answer is this was simply because the corresponding figures for the previous year (2018-2019) got revised downwards.
  • The question over the revision process: Many viewed the revision of last year’s estimates as evidence of lack of credibility of the NSO’s revision process.
  • Questions over the veracity of data: Such doubts are well taken, given the long-standing debate and unresolved disputes on the veracity of GDP figures put out since 2015, when the statistical office released the new series of National Accounts with 2011-2012 as base year.

Why the GDP estimates undergo revisions?

  • Lags in data: As there are lags and unanticipated delays in obtaining the primary data, the GDP estimates undergo several revisions everywhere (except in China).
    • GDP is a statistical construct, prepared using many bits of quantitative information on an economy’s production, consumption and incomes.
  • How frequently is data revised? GDP estimates are revised five times in India over nearly three years.
    • The initial two rounds, the advanced estimates, are prepared mainly using high-frequency proxy indicators followed by three rounds based on data obtained from various sectors.

Quarterly GDP estimates and issues with it

  • Since 1999, quarterly GDP estimates are being prepared, as per the International Monetary Fund (IMF)’s data dissemination standards.
  • Subpar quality: Their quality is subpar as the primary data needed quarterly are mostly lacking.
    • Why quality is subpar? Nearly one-half of India’s GDP originates in the unorganised sector (including agriculture), whose output is not easily amenable to direct estimation every quarter, given the informal nature of production and employment.
    • Hence, the estimates are obtained as ratios, proportions and projections of the annual GDP estimates.
  • Quarterly estimates are extrapolations: In general terms, quarterly estimates of GDP are extrapolations of annual series of GDP. The estimates of GVA by industry are compiled by extrapolating value of output or value-added with relevant indicators.

Way forward

  • Little ground to question the present revisions: There were considerable variations at the sectoral estimates after the revision, which probably contained more noise than information. For now, there is little ground to question the revised estimates based on the publicly available information.
  • Slowdown not bottomed out: If we accept the latest data, it is clear, though in an alarming way, that there has been an undeniable decline in the GDP growth rate over seven consecutive quarters, from 7.1% in Q1 of 2018-2019 to 4.7% in Q3 of 2019-2020.
    • Considering that physical indicators of production, such as the official index of infrastructure output, or monthly automotive sales, continue to show an unambiguous deceleration, the economic slowdown has apparently not bottomed-out.
    • More seriously, the quarterly GDP deceleration comes over and above the annual GDP growth slowdown for four years now: from 8.3% in 2016-17 to 5% in 2019-20 (as per the second advance estimate).
  • Limited primary information: India’s quarterly GDP estimates have limited primary information in them. Their revisions are largely extrapolations and projections of the annual figures. Hence, one should be cautious in reading too much into the specific numbers.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Don’t blame it on NSO

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Revision and estimates of GDP data.

Context

The latest GDP data witnessed significant revisions that have gone largely unnoticed.

The GDP data revision and its criticism

  • Revisions an act of due diligence: In the last few years there has been a lot of noise regarding the data revisions.
    • The need for closer examination: While part of revision requires closer examination, we must be fair to our statistical system as such revisions are, in large part, due diligence and happen globally.
  • Schedule of NSO estimates
    • First estimate: The NSO releases the first estimates of any fiscal year in January.
    • Revises the January’s first estimates in February.
    • And then again in May.
    • Simultaneous revision in February: Simultaneously, it revises the previous year estimates in February, alongside the February data release.
  • Suspicion of statistically protecting the 5% growth: The primary criticism, with the current year’s fiscal data, is that the revisions in February for 2019-20 and the 4th revision in 2018-19 are almost identical, implying that the sanctity of 5 per cent growth was statistically protected.

Examining the criticism purely on the data

  • Precedence of 1st and 2nd quarter revision: There is precedence to the first and second quarter revisions for the current financial year that happen in February.
    • For example, while in the current fiscal, the cumulative downward revision was close to Rs 30,000 crore.
    • In FY19, there was even a greater upward revision of roughly Rs 86,000 crore in February.
  • Is there precedence of such large first-time revisions? Yes, there has been since 2014-15. In 2018-19, the first-time data was revised by a sharp Rs 1.43 lakh crore, while in 2017-18, it was revised by an even larger Rs 1.69 lakh crore.
  • Revision in the same direction: The simultaneous revisions are mostly in the same direction, though different in magnitude, and hence it is unfair to say that the 2018-19 data was revised downwards to protect the 2019-20 numbers.

What was the problem?

  • Uncertainty: The problem has been that the global and domestic uncertainties in 2017-18 and 2018-19 have been so swift that it has been virtually impossible to predict the outcome initially.
    • While in 2017-18, the final estimates were progressively higher.
    • In 2018-19, while the interim estimates were higher, they were drastically scaled-down later as the impact of the NBFC crisis began to unfold.
  • The US example: The US Fed had also missed the possibility of the US economy bouncing back in 2018 on the back of tax cuts when in 2015 it had projected the economy to expand by only 2 per cent, only to change it to 3 per cent in 2018 (almost at par with scale of revisions in India).

Why such unconditional biases arise?

  • Asymmetric loss function: It is common for such unconditional bias to arise due to the fact that the statistical reporting agency produces releases according to an asymmetric loss function.
    • For example, there may be a preference for an optimistic/pessimistic release in the first stage, followed by a more pessimistic/optimistic one in the later stage.
  • Cost factor: Intuitively, one might argue that the cost of a downward readjustment of the preliminary data is higher than the cost of an upward adjustment.
  • This asymmetric loss function is not so relevant at the reporting stage but at the forecasting stage.
  • Interpreting the data revision: A statistical reporting agency like the NSO simply does not have all the data at hand and has to forecast the values of the yet to be collecting data.
    • It is at that moment that the asymmetric loss function comes into play.
    • So, we must be careful about interpreting data revisions by the NSO by attributing ulterior motives as we more often tend to do.

India lagging in the use of data analysis

  • Unlike countries across the world, India is still significantly lagging in its use of data analysis.
    • Methodologies based on thin surveys: Some of the current methodologies of data collection is based mostly on thin surveys.
    • Not supported by the data in public domain: It is also not supported by data available in the public domain that are more comprehensive, less biased and real-time in nature, based on digital footprints.
    • The end result is that we end up publishing survey results that are misleading.

Way forward

  • Development of big data and AI bases ecosystem: We must develop an ecosystem that is high quality, timely and accessible.
    • Big data and artificial intelligence are key elements in such a process.
    • Big data helps acquire real-time information at a granular level and makes data more accessible, scalable and fine-tuned.
  • Use of payment data: The use of payments data can also help track economic activity, as is being done in Italy.
    • Different aggregates of the payment system in Italy, jointly with other indicators, are usually adopted in GDP forecasting and can provide additional information content.

Conclusion

To be fair to both the RBI and the NSO, the volatility of oil prices and structural changes in the economy make the forecasting of inflation and GDP a difficult job indeed. However, we should supplement our existing measurement practices with “big data” to make our statistical system more comprehensive and robust.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Way out lies within

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3-Focus on demand side of the Indian economy instead of focusing all attention on supply-constraints.

Context

Domestic demand must play a greater role in India’s growth story.

Recovery in the Indian economy

  • Sub-5 per cent growth rate: India’s fourth-quarter GDP growth (the calendar year 2019) printed another sub-5 per cent growth rate.
  • Favourable base effect: It would have been lower had it not been for the large downward revisions to previous years’ GDP that statistically boosted the last quarter’s growth rate because of favourable base effects.
  • The decline in GDP stabilised: Policymakers and the market heaved a sigh of relief that the relentless decline over the last three years at least seems to have stabilised around 4-5 per cent.
  • Why some countries prefer sequential growth rate: Because year-over growth rates are so strongly affected by what happened a year ago, most economies (including China) instead publish and conduct policy discussions based on sequential quarterly growth.
    • Better sense of momentum: Sequential growth rates provide a much better sense of the momentum and turning points in activity, which are critical to deciding whether, how much, and when the economy needs policy support.
  • The magnitude of recovery: The growth momentum rose, albeit modestly, from 3.8 per cent in the third quarter of 2019 to 4.1 per cent.
    • Non-farm and non-governmental GDP recovery: More importantly, non-farm and non-government GDP (the closest approximation to non-farm private-sector GDP) bounced much more sharply from 1.6 per cent (and no this is not a misprint) to 4.4 per cent in the fourth quarter.

What is the dominant narrative of the slide in growth?

  • The deceleration in sequential terms: With the revised data, we now know that annual growth over the last four years has slowed from 8.3 per cent to 7 per cent to 6.1 per cent to 4-5 per cent.
    • The decline in non-farm private GDP: In sequential terms, the deceleration was far more dramatic, especially in non-farm private GDP, which after hitting a run rate of 13 per cent in the first quarter of 2016 fell to 1.6 per cent by the third quarter of 2019.
    • The dominant narrative of the cause of slide: The dominant narrative is that India’s woes are just an unfortunate and unintended consequence of demonetisation, the shift to a national GST, and the credit squeeze caused by the bad debt in banks and non-banks.
    • The dominant narrative on recovery: With a bit more fiscal support, some monetary easing, and extended regulatory forbearance to help banks work out their bad debts, these headwinds will fade and India will likely be back to its winning ways.

Why real cause of the slowdown lays somewhere else?

Following factors suggest that answer lies somewhere else.

  • Disruptive but not the drivers of the slowdown: While it is undeniable that facts stated in the dominant narrative had been disruptive, they couldn’t be the drivers of the decline.
    • Slide in growth started even before demonetisation: India’s growth had been sliding since the second quarter of 2016; nearly 6 months before demonetisation and a year before the GST was introduced.
    • By the third quarter of 2016, non-farm private sector growth had already slid to 3.5 per cent.
    • Bad debt problem predates slowdown: Although bad debt hit the headlines in 2016, the overleverage had already begun to tighten bank lending since 2014.
  • Fall in corporate investment- inexplicable cause: More inexplicable is the argument that falling corporate investment is the main culprit for the slowdown.
    • It is true that corporate investment is no longer running at the heady 17 per cent of GDP of the pre-global financial crisis (GFC) days but at a much more sombre 11-12 per cent.
    • However, this outsized adjustment had already taken place by 2010 and since then, corporate investment has flatlined at current levels.

The answer lies in globalisation

It is obvious once one eschews India’s exceptionalism and accepts that it is just another emerging market economy that grew on the coattails of globalisation with the minimal reforms. Globalisation has largely determined India’s fate.

  • Growth in corporate investment and exports: Contrary to a widely held misperception, India is and has been for a long time far more open to the global economy than believed.
    • Rise in corporate investment from 5 to 17%: The limited liberalisation of 1991-92, coupled with the corporate restructuring in the late 1990s, spurred corporate investment to rise from 5-6 per cent of GDP in the early 2000s to 17 per cent of GDP by 2008.
    • Increase in exports: Almost all of this expansion in investment was geared to produce for exports, which grew at an astonishing pace of 18 per cent per year-over-year in this period as global trade expanded at breakneck speed with the entry of China into the WTO in 2001.
    • 12% of GDP to 26% of GDP: Exports as a share of GDP more than doubled from 12 per cent in the early 2000s to over 26 per cent by 2008.
    • Slow growth in private consumption: In contrast, private domestic consumption, which is considered to be India’s great strength, grew only at 6 per cent annually, less than the growth rate of the economy, such that its share in GDP fell from 63 per cent to 56 per cent.
    • The engine of the Indian economy- Export: Since 2012, global trade has floundered and with that so has India’s economy.
    • Indeed, the entire rise and fall of investment, including the quarter-to-quarter twists and turns in it, can be almost fully explained by changes in exports.
    • The Indian economy has long been flying on one engine – exports — and that is now spluttering.

What are the prospects of taking the economy back to its high growth path

  • Unlikely: So will the nascent recovery strengthen and take the economy back to its high growth path? Unlikely on current policies.
  • COVID-19 factor: In the near term, as in now widely feared, the COVID-19 outbreak could turn into a pandemic, sharply reducing global demand and trade.
    • With that, even expectations of a modest 2019-20 recovery to 5.25 per cent growth are under threat.
  • Backlash against globalisation: Over the longer term, it is unlikely that global trade will return to its pre-Global financial crisis growth rates not only because supply chains have stopped expanding in the absence of any material technology breakthrough, but there is also a growing political backlash against globalisation in the developed market that has led to increased trade barriers.

Way forward

  • Search for new sources of growth: India too, like other emerging market economies, needs to face up to the reality that it can no longer depend on global trade to be the only growth driver. Instead, it needs to search and find new sources of growth and that starts with recognising and accepting reality.
  • Let domestic demand play a greater role in the economy: Policymakers need to stop thinking about India as a perennially supply-constrained economy focusing almost all policies and reforms to easing these constraints. Instead, it is time to let domestic demand play a greater role in India’s growth story.
  • Policy changes: The above factors mean that India Inc. needs to shift from producing what foreigners want to produce what residents can afford, it also means that policymakers have to reverse policies that have so far forced households to keep increasing savings (for retirement income, children’s education, healthcare, and housing) through a web of financial repression, regulatory distortions, and public spending choices.
    • It means redesigning India’s infrastructure to look more inward and less outward.
    • Reduce out of pocket expenses: Increasing public provisioning of healthcare and education, reforming insurance regulations to reduce out-of-pocket expenses and eliminating financial repression to raise returns on retirement savings.
    • Merely tinkering with macroeconomic policies will not be enough.

 

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The growth challenge

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Prospects of recovery of Indian economy and indications from demand and supply side.

Context

The focus in the near future should to increase investments and facilitate credit for funding these productive assets so that India’s potential output growth can steadily rise.

Growth prospects of India

  • The NSO forecast at 5%: The latest data from the National Statistical Office (NSO) retained India’s economic growth forecast at 5 per cent for the current financial year.
    • Growth has dropped from 6.1 per cent in the previous year.
  • Fall in nominal GDP: More strikingly, nominal GDP growth has decelerated from an average of 11 per cent during 2016-17 to 2018-19 to 7.5 per cent this year.
    • Lower inflation added to the volume slowdown.
    • The value of India’s GDP for FY20 is estimated at around $2.9 trillion.

Input and output side growth prospects

  • GDP is estimated from both output and demand lenses, using specific economic indicators as proxies for activity in specific sectors.
  • Output side: From the output side, sector-wise estimates were as following-
    • Agriculture sector growth was revised up to 3.7 per cent (up from the 2.8 per cent previously).
    • Agricultural production is expected to improve based on the third advance estimates of the rabi season crops, as well as higher horticulture and allied sector output (livestock, forestry and fishing), which now is significantly larger than conventional food crops.
    • Industrial activity was lowered to 1.5 per cent (from 2.3 per cent earlier).
    • The key concern regarding the continuing slowdown is the increasing weakness in the industrial sector (particularly of manufacturing, whose growth has progressively fallen from 13.1 per cent in FY16 to 5.7 per cent in FY19, and plummeting to 0.9 per cent in FY20).
    • Services output remained largely unchanged at 6.5 per cent.
  • Demand-side: From a demand perspective, the obverse side to the manufacturing slowdown is the even sharper drop in fixed asset investment growth — down sharply from an average 8.5 per cent during FY17 and FY19 to -0.6 per cent in FY20.
    • The causes for this contraction needs to be understood in detail, and we will return to this.

Private consumption- a significant driver of growth

  • Private consumption at 60% of GDP: The other significant driver of growth in India has been private consumption. For perspective, the share of private consumption had averaged 59-60 per cent during FY16-FY20.
  • Government consumption 10% of GDP: Reflecting the higher spending over the last couple of years, the share of government consumption in GDP has risen from an average of 10.5 per cent of GDP over FY12-17 to almost 12 per cent in FY20, resulting in the share of total consumption above 70 per cent.

Drop in the share of nominal investment

  • Drop from 39 % to 30 % of GDP: The really remarkable trend, though, as noted above, is the share of nominal investment in GDP progressively dropping from 39 per cent in FY12 to 30 per cent in FY20.
  • Is it a good sign? Part of this is actually good, reflecting higher Capex efficiency.
    • Slowing household consumption: One narrative underlying the contraction in fresh Capex in FY20 was slowing household consumption growth, which, in nominal terms, fell from an average 11.6 per cent during FY16-19 to an estimated 9.1 per cent in FY20.
    • Disproportionate contribution to lower growth: Though the deceleration prima facie does not seem significant enough to result in a broader economic slowdown of the current magnitude, the high share of household consumption has contributed disproportionately to lower growth.
    • Fall in capacity utilisation: A direct fallout of this is that seasonally adjusted capacity utilisation (based on RBI surveys) had shrunk from 73.4 per cent in the first quarter of FY20 to 70.3 per cent in the second quarter, and this is unlikely to have improved materially in the second half of the year.
    • This is one of the reasons for the low levels of fresh investment.

Reduced flow of credit to the commercial sector

  • Impediment to growth revival: The other cause of the low Capex, more from the supply side, is a much-reduced flow of credit to the commercial sector, and this remains the proximate impediment for growth revival, with signs of risk aversion in lending still strong despite the recent measures by RBI to incentivise credit to productive sectors.
    • Funds from selected sources, over April-January FY20, was only about Rs 9 lakh crore as against Rs 15 lakh crore in the corresponding 10 months of FY19.
  • Bank credit lowest in three months: Growth in bank credit (which is still the largest source of financing) till mid-February 2020 was down to 6.3 per cent — the lowest in three years.
    • Even this is almost wholly driven by retail credit; incremental credit to industry and services over this period was negative.

Investor confidence and coronavirus factor

  • A bright feature of the economic environment: One bright feature in this economic environment is strong foreign investor confidence in India, reflected in both FPI equity and FDI flows.
    • Many borrowers have used offshore sources to refinance or pay down domestic bank loans and debt.
    • A global risk-off environment might restrict even this channel in the near future.
  • Robust corporate bond issuances: Domestic corporate bond issuances have also remained robust, although the dominant set of borrowers still remain public sector agencies and financial institutions.
  • Coronavirus factor likely to moderate the gains: Monthly economic indicators suggest that the growth deceleration has likely bottomed out in the third quarter.
    • The bet has been on reducing inventories and the consequent production ramp-up to replenish stocks. However, the evidence on this is mixed.
    • The coronavirus effects, both concurrent and lagged, will also moderate some of the emerging positive effects of counter-cyclical policy measures of the past six months.
    • If the outbreak does not abate over the next month or so, the complex supply chains of intermediates sourced from China will run dry and add to the already weak system demand.
  • Growth prospects in the next few weeks: Surveys indicate that both business and consumer confidence, which while improving, remain muted. A growth revival, hence, is likely to be only very modest over the next few quarters.

Conclusion

A $5 trillion economy by 2025 is still a worthwhile target and aspirational; coordinated strategies, policies, execution and institutional mechanisms will be needed to move up to a sustained 8 per cent plus growth consistent with achieving the target. The focus in the near future should to increase investments and facilitate credit for funding these productive assets so that India’s potential output growth can steadily rise.

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The $5 trillion arithmetic

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- The ambitious target of $5 trillion economy.

Context

The Indian government has set itself a big target, namely, that the Indian economy will have an aggregate income or gross domestic product (GDP) of $5 trillion by 2024-25.

Lack of clarity

  • There is little effort to take it beyond a slogan.
  • When it comes to targets and aims pertaining to the economy, it is important to have-
    • The officials and advisers go beyond the headline.
    • To lay out the details and the road-map for the target.
  • Matter for investors: For international observers and particularly investors, not to see these details creates doubts about professionalism.

What growth rate is required to reach that target?

  • How long will it take to achieve the target at the present growth rate?
    • In 2018-19, India’s GDP was $2.75 trillion.
    • India’s latest official growth rate happens to be 5 per cent.
    • Target will be reached in 2032-33: Continue in the same fashion to compute the size of the GDP and it becomes clear that the target of $5 trillion will be reached not in 2024-25, but in 2032-33.
  • What is the required rate? Set the target as $5 trillion dollars for 2024-25 the required rate turns out to be 10.48 per cent or, approximately, 10.5 per cent.

Why 10.5 rate is an ambitious target?

  • The only example of any nation growing for six consecutive years at an average annual rate of over 10.5 per cent was China from 2003 to 2009.
  • Can India achieve this rate?
    • From 1947 till now, India’s economy grew at over 10 per cent only twice — in 1988-89 and 2007-8.
    • Of these, the first may be dismissed because the previous year the economy had grown very slowly, by 3.5 per cent.
  • What we can learn from the past growth rate?
    • The only example to learn from: The only example from which we can learn is the remarkable growth in 2007-8, made all the more remarkable by the fact that India had been growing well for several years, starting from 2003.
    • And from 2005, India was actually growing over 9 per cent.
    • What factors played the role in high growth?
    • This was a period of professional fiscal policy and steady effort at building infrastructure.
    • India’s economy was making big news in the international media and investment poured in.
    • India’s investment-to-GDP rate climbed to an all-time record of 39 per cent.
  • Current investment-to-GDP ratio: Our investment-to-GDP ratio has crashed to 30 per cent and this takes time to re-build.
    • If we can get back to a growth rate of 7 per cent we will be lucky.

Can inflation make the target achievable?

  • Combination of real growth and inflation can make it possible: Virtually all serious commentators agree that in purely real terms, the $5-trillion target is unreachable.
    • But maybe we can make it by a combination of real growth and inflation.
    • How the combination will work? One way India can get to the target is if alongside say 7 per cent growth, India has inflation of say 3.5 per cent.
    • Then India’s nominal GDP growth rate will be 10.5 per cent.
  • Why the inflation argument is flawed?
    • The five trillion target is in dollar terms.
    • Inflation will lead to depreciation: Typically, if India has higher inflation than the US, the rupee would depreciate vis-à-vis the dollar to account for that.
    • For the sake of pure arithmetic, assume US inflation is zero, India’s inflation is 10 per cent, and India’s real growth rate is 0.
    • In that case, in rupee terms, India’s economy will grow by 10 per cent. But how much will India’s economy grow in dollar terms?
    • The answer is zero.
    • Why is it so? This is because the rupee will typically depreciate by 10 per cent to match the inflation differential, and so the larger GDP of India in rupee terms, when converted to dollars will show no growth.
  • The other possibility of achieving the target?
    • What if the dollar loses value? But this should immediately make it clear that there is another way of getting to the target.
    • This can happen if the US dollar loses value.
    • We can then get to the target of $5 trillion because that will mean less in real terms.

Conclusion

There are two routes to achieve the target of $5 trillion: A huge policy initiative to boost real growth or the luck of dollar depreciation. The luck of dollar would mean nothing for us in the real term so the best course of action for the government is to seek the first option and try to achieve it.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Key Highlights of Economic Survey 2019-20

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Read the attached story

Mains level : Not Much

 

The Union Minister for Finance & Corporate Affairs, Smt. Nirmala Sitharaman presented the Economic Survey 2019-20 in the Parliament today. The Key Highlights of the Survey are as follows:

Wealth Creation: The Invisible Hand Supported by the Hand of Trust

[Covered in a separate newscard]

Survey posits that India’s aspiration to become a $5 trillion economy depends critically on:

  1. Strengthening the invisible hand of the market.
  2. Supporting it with the hand of trust.

Pro-business versus Pro-markets Strategy

  • Survey says that India’s aspiration of becoming a $5 trillion economy depends critically on:
  1. Promoting ‘pro-business’ policy that unleashes the power of competitive markets to generate wealth.
  2. Weaning away from ‘pro-crony’ policy that may favour specific private interests, especially powerful incumbents.
  • Pro-crony policies such as discretionary allocation of natural resources till 2011 led to rent-seeking by beneficiaries while competitive allocation of the same post 2014 ended such rent extraction.

Strengthening the invisible hand by promoting pro-business policies to:

  1. Provide equal opportunities for new entrants.
  2. Enable fair competition and ease doing business.
  3. Eliminate policies unnecessarily undermining markets through government intervention.
  4. Enable trade for job creation.
  5. Efficiently scale up the banking sector.
  • Introducing the idea of trust as a public good, which gets enhanced with greater use.
  • Survey suggests that policies must empower transparency and effective enforcement using data and technology.

Entrepreneurship at the Grassroots

  • Entrepreneurship as a strategy to fuel productivity growth and wealth creation.
  • India ranks third in number of new firms created, as per the World Bank.
  • New firm creation in India increased dramatically since 2014:
  1. 2 % cumulative annual growth rate of new firms in the formal sector during 2014-18, compared to 3.8 % during 2006-2014.
  2. About 1.24 lakh new firms created in 2018, an increase of about 80 % from about 70,000 in 2014.
  • Survey examines the content and drivers of entrepreneurial activity at the bottom of the administrative pyramid – over 500 districts in India.
  • New firm creation in services is significantly higher than that in manufacturing, infrastructure or agriculture.
  • Survey notes that grassroots entrepreneurship is not just driven by necessity.
  • A 10 percent increase in registration of new firms in a district yields a 1.8 % increase in Gross Domestic District Product (GDDP).

Impact of education on entrepreneurship

  • Literacy and education in a district foster local entrepreneurship significantly:
  1. Impact is most pronounced when literacy is above 70 per cent.
  2. New firm formation is the lowest in eastern India with lowest literacy rate (59.6 % as per 2011 Census).
  • Physical infrastructure quality in the district influences new firm creation significantly.
  • Ease of Doing Business and flexible labour regulation enable new firm creation, especially in the manufacturing sector.
  • Survey suggests enhancing ease of doing business and implementing flexible labour laws can create maximum jobs in districts and thereby in the states.

Divestment in public sector undertakings

  • The Survey has aggressively pitched for divestment in PSUs by proposing a separate corporate entity wherein the government’s stake can be transferred and divested over a period of time.
  • The survey analysed the data of 11 PSUs that had been divested from 1999-2000 and 2003-04 and compared the data with their peers in the same industry.
  • Further, the survey has said privatized entities have performed better than their peers in terms of net worth, profit, return on equity and sales, among others.
  • The government can transfer its stake in listed CPSEs to a separate corporate entity.
  • This entity would be managed by an independent board and would be mandated to divest the government stake in these CPSEs over a period of time.
  • This will lend professionalism and autonomy to the disinvestment programme which, in turn, would improve the economic performance of the CPSEs.

Golden jubilee of bank nationalization: Taking stock

  • The survey observes 2019 as the golden jubilee year of bank nationalization
  • Accomplishments of lakhs of Public Sector Banks (PSBs) employees cherished and an objective assessment of PSBs suggested by the Survey.
  • Since 1969, India’s Banking sector has not developed proportionately to the growth in the size of the economy.
  • India has only one bank in the global top 100 – same as countries that are a fraction of its size: Finland (about 1/11th), Denmark (1/8th), etc.
  • A large economy needs an efficient banking sector to support its growth.

The onus of supporting the economy falls on the PSBs accounting for 70 % of the market share in Indian banking:

  1. PSBs are inefficient compared to their peer groups on every performance parameter.
  2. In 2019, investment for every rupee in PSBs, on average, led to the loss of 23 paise, while in NPBs it led to the gain of 9.6 paise.
  3. Credit growth in PSBs has been much lower than NPBs for the last several years.

Solutions to make PSBs more efficient:

  • Employee Stock Ownership Plan (ESOP) for PSBs’ employees
  • Representation on boards proportionate to the blocks held by employees to incentivize employees and align their interests with that of all shareholders of banks.
  • Creation of a GSTN type entity that will aggregate data from all PSBs and use technologies like big data, artificial intelligence and machine learning in credit decisions for ensuring better screening and monitoring of borrowers, especially the large ones.

Doubts regarding GDP Growth

  • GDP growth is a critical variable for decision-making by investors and policymakers. Therefore, the recent debate about accuracy of India’s GDP estimation following the revised estimation methodology in 2011 is extremely significant.
  • As countries differ in several observed and unobserved ways, cross-country comparisons have to be undertaken by separating the effect of other confounding factors and isolating effect of methodology revision alone on GDP growth estimates.
  • Models that incorrectly over-estimate GDP growth by 2.7 % for India post-2011 also misestimate GDP growth over the same period for 51 out of 95 countries in the sample.

Fiscal Developments

  • Revenue Receipts registered a higher growth during the first eight months of 2019-20, compared to the same period last year, led by considerable growth in Non-Tax revenue.
  • Gross GST monthly collections have crossed the mark of Rs. 1 lakh crore for a total of five times during 2019-20 (up to December 2019).
  • Structural reforms undertaken in taxation during the current financial year:
  • Change in corporate tax rate.
  • Measures to ease the implementation of GST.
  • Fiscal deficit of states within the targets set out by the FRBM Act.
  • Survey notes that the General Government (Centre plus States) has been on the path of fiscal consolidation.

External Sector

Balance of Payments (BoP):

  • India’s BoP position improved from US$ 412.9 bn of forex reserves in end March, 2019 to US$ 433.7 bn in end September, 2019.
  • Current account deficit (CAD) narrowed from 2.1% in 2018-19 to 1.5% of GDP in H1 of 2019-20.
  • Foreign reserves stood at US$ 461.2 bn as on 10th January, 2020.

Global trade:

  • India’s merchandise trade balance improved from 2009-14 to 2014-19, although most of the improvement in the latter period was due to more than 50% decline in crude prices in 2016-17.
  • India’s top five trading partners continue to be USA, China, UAE, Saudi Arabia and Hong Kong.

Exports:

  • Top export items: Petroleum products, precious stones, drug formulations & biologicals, gold and other precious metals.
  • Largest export destinations in 2019-20 (April-November): United States of America (USA), followed by United Arab Emirates (UAE), China and Hong Kong.
  • The merchandise exports to GDP ratio declined, entailing a negative impact on BoP position.
  • Slowdown of world output had an impact on reducing the export to GDP ratio, particularly from 2018-19 to H1 of 2019-20.
  • Growth in Non-POL exports dropped significantly from 2009-14 to 2014-19.

Imports:

  •  Top import items: Crude petroleum, gold, petroleum products, coal, coke & briquittes.
  •  India’s imports continue to be largest from China, followed by USA, UAE and Saudi Arabia.
  •  Merchandise imports to GDP ratio declined for India, entailing a net positive impact on BoP.
  • Large Crude oil imports in the import basket correlates India’s total imports with crude prices. As crude price raises so does the share of crude in total imports, increasing imports to GDP ratio.

Logistics industry of India:

  • Currently estimated to be around US$ 160 billion.
  • Expected to touch US$ 215 billion by 2020.
  • According to World Bank’s Logistics Performance Index, India ranks 44th in 2018 globally, up from 54th rank in 2014.

Direct investments and remittances:

  • Net FDI inflows continued to be buoyant in 2019-20 attracting US$ 24.4 bn in the first eight months, higher than the corresponding period of 2018-19.
  • Net FPI in the first eight months of 2019-20 stood at US$ 12.6 bn.
  • Net remittances from Indians employed overseas continued to increase, receiving US$ 38.4 billion in H1 of 2019-20 which is more than 50% of the previous year level.

External debt:

  • Remains low at 20.1% of GDP as at end September, 2019.
  • After significant decline since 2014-15, India’s external liabilities (debt and equity) to GDP increased at the end of June, 2019 primarily by increase in FDI, portfolio flows and external commercial borrowings (ECBs).

Monetary Management and Financial Intermediation

Monetary policy:

  • Remained accommodative in 2019-20.
  • Repo rate was cut by 110 basis points in four consecutive MPC meetings in the financial year due to slower growth and lower inflation.
  • However, it was kept unchanged in the fifth meeting held in December 2019.
  • In 2019-20, liquidity conditions were tight for initial two months; but subsequently it remained comfortable.

Prices and Inflation

Inflation Trends:

  • Inflation witnessing moderation since 2014
  • Consumer Price Index (CPI) inflation increased from 3.7 per cent in 2018-19 (April to December, 2018) to 4.1 per cent in 2019-20 (April to December, 2019).
  • WPI inflation fell from 4.7 per cent in 2018-19 (April to December, 2018) to 1.5 per cent during 2019-20 (April to December, 2019).

Drivers of CPI – Combined (C) inflation:

  • During 2018-19, the major driver was the miscellaneous group
  • During 2019-20 (April-December), food and beverages was the main contributor.
  • Among food and beverages, inflation in vegetables and pulses was particularly high due to low base effect and production side disruptions like untimely rain.

Cob-web Phenomenon (Cyclical fluctuations in inflation) for Pulses:

  • Farmers base their sowing decisions on prices witnessed in the previous marketing period.
  • Measures to safeguard farmers like procurement under Price Stabilization Fund (PSF), Minimum Support Price (MSP) need to be made more effective.

Volatility of Prices:

  • Volatility of prices for most of the essential food commodities with the exception of some of the pulses has actually come down in the period 2014-19 as compared to the period 2009-14.
  • Lower volatility might indicate the presence of better marketing channels, storage facilities and effective MSP system.

Essential Commodities Act is outdated

  • The Centre’s imposition of stock limits in a bid to control the soaring prices of onions over the last few months actually increased price volatility, according to the ES.
  • The finding came in a hard-hitting attack in the report against the Essential Commodities Act (ECA) and other “anachronistic legislations” and interventionist government policies, including drug price control, grain procurement and farm loan waivers.
  • The Centre invoked the Act’s provisions to impose stock limits on onions after heavy rains wiped out a quarter of the kharif crop and led to a sustained spike in prices.
  • However the Survey showed that there was actually an increase in price volatility and a widening wedge between wholesale and retail prices.
  • The lower stock limits must have led the traders and wholesalers to offload most of the kharif crop in October itself which led to a sharp increase in the price volatility.

Agriculture

  • Agricultural productivity is also constrained by lower level of mechanization in agriculture which is about 40 % in India, much lower than China (59.5 %) and Brazil (75 %).
  • With regard to the agri sector, the Survey argued that the beneficiaries of farm loan waivers consume less, save less, invest less and are less productive.
  • It added that the government procurement of foodgrains led to a burgeoning food subsidy burden and inefficiencies in the markets, arguing for a shift to cash transfers instead.

Food Management

  • The share of agriculture and allied sectors in the total Gross Value Added (GVA) of the country has been continuously declining on account of relatively higher growth performance of non-agricultural sectors.
  • GVA at Basic Prices for 2019-20 from ‘Agriculture, Forestry and Fishing’ sector is estimated to grow by 2.8 %.

Services Sector

Increasing significance of services sector in the Indian economy:

  1. About 55 % of the total size of the economy and GVA growth.
  2.  Two-thirds of total FDI inflows into India.
  3. About 38 per cent of total exports.
  4. More than 50 % of GVA in 15 out of the 33 states and UTs.

Social Infrastructure, Employment and Human Development

  • The expenditure on social services (health, education and others) by the Centre and States as a proportion of GDP increased from 6.2 % in 2014-15 to 7.7 % in 2019-20 (BE).
  • India’s ranking in Human Development Index improved to 129 in 2018 from 130 in 2017:
  • With 1.34 % average annual HDI growth, India is among the fastest improving countries
  • Gross Enrolment Ratio at secondary, higher secondary and higher education level needs to be improved.
  • Gender disparity in India’s labour market widened due to decline in female labour force participation especially in rural areas:
  • Around 60 % of productive age (15-59) group engaged in full time domestic duties.

Sustainable Development and Climate Change

  • India moving forward on the path of SDG implementation through well-designed initiatives
  • SDG India Index:
  1. Himachal Pradesh, Kerala, Tamil Nadu, Chandigarh are front runners.
  2. Assam, Bihar and Uttar Pradesh come under the category of Aspirants.
  • India hosted COP-14 to UNCCD which adopted the Delhi Declaration: Investing in Land and Unlocking Opportunities.
  • COP-25 of UNFCCC at Mandrid:
  1. India reiterated its commitment to implement Paris Agreement.
  2. COP-25 decisions include efforts for climate change mitigation, adaptation and means of implementation from developed country parties to developing country parties.
  • Forest and tree cover:
  1. Increasing and has reached 80.73 million hectare.
  2. 56 % of the geographical area of the country.
  • The numbers of stubble-burning incidents in 2019 were the least in four years, the Economic Survey says.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Strategy for boosting Wealth Creation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Prospects of ethical wealth creation and its redistribution

  • The big idea from the Economic Survey 2019-20 is the need to push towards increasing the number of wealth creators in the Indian economy.
  • The Survey states that to achieve the goal of becoming a $5-trillion economy, the invisible hand of markets will need the support of “the hand of trust”.

Wealth Creation

  • Essentially, this means that regulation and rules in the economy should be such that they make it easy to do business but not turn into crony capitalism.
  • The Survey states: “The invisible hand needs to be strengthened by promoting pro-business policies to:
  1. Provide equal opportunities for new entrants, enable fair competition and ease doing business,
  2. Eliminate policies that unnecessarily undermine markets through government intervention,
  3. Enable trade for job creation, and
  4. Efficiently scale up the banking sector to be proportionate to the size of the Indian economy.”

How can this be done?

  • The Survey introduces the idea of “trust as a public good that gets enhanced with greater use”.
  • In other words, it states that policies must empower transparency and effective enforcement using data and technology to enhance this public good.
  • A key element here is the need to increase the opportunities for new entrants.
  • “Equal opportunity for new entrants is important because… a 10 per cent increase in new firms in a district yields a 1.8 per cent increase in Gross Domestic District Product (GDDP)”.
  • According to the Survey, the right policy mix can boost job creation.

Levers for furthering Wealth Creation

The Survey identifies several levers for furthering Wealth Creation, which are:

  • entrepreneurship at the grassroots as reflected in new firm creation in India’s districts;
  • promote ‘pro-business’ policies that unleash the power of competitive markets to generate wealth as against ‘pro-crony’ policies that may favour incumbent private interests;
  • eliminate policies that undermine markets through government intervention, even where it is not necessary;
  • integrate ‘Assemble in India’ into ‘Make in India’ to focus on labour intensive exports and thereby create jobs at a large scale;
  • efficiently scale up the banking sector to be proportionate to the size of the Indian economy and track the health of the shadow banking sector;
  • use privatization to foster efficiency. The Survey provides careful evidence that India’s GDP growth estimates can be trusted.

Is this push for wealth creators new?

  • This is an extension of what PM said during his Independence Day speech in August last year, where he stressed on the need for the country to view “wealth creators” differently.
  • Those who create wealth for the country, those who contribute in the country’s wealth creation — they all are serving the nation as well.
  • We should not look at wealth creators with apprehension and doubt their intentions; we should not look down upon them.
  • The PM had also said there was a need in the country to give such wealth creators due respect and credit.
  • He had said that this change is required because “If no wealth is created, no wealth can be distributed”.

Focus on Ethical Wealth Creation

  • The Survey emphasised on the importance of ‘Ethical Wealth Creation’, as the key to making India $5 trillion economy by 2025.
  • Krishnamurthy V. Subramanian, the Chief Economic Adviser of Ministry of Finance has done a commendable job in producing a thought-provoking masterpiece on ‘ethical wealth creation.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Economic Survey & its significance

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Economic Survey

Mains level : Economic Survey and its significance

With the Indian economy in the doldrums, this year’s Economic Survey will be keenly watched. The Economic Survey for 2019-2020 will be tabled in Parliament today.

What is the Economic Survey?

  • The Economic Survey is a report the government presents on the state of the economy in the past one year, the key challenges it anticipates, and their possible solutions.
  • One day before the Union budget, the Chief Economic Adviser (CEA) of the country releases the Economic Survey.
  • The document is prepared by the Economic Division of the Department of Economic Affairs (DEA) under the guidance of the CEA.
  • Once prepared, the Survey is approved by the Finance Minister.
  • The first Economic Survey was presented in 1950-51. Until 1964, the document would be presented along with the Budget.
  • For the past few years, the Economic Survey has been presented in two volumes.
  • For example, in 2018-19, while Volume 1 focussed on research and analysis of the challenges facing the Indian economy, Volume 2 gave a more detailed review of the financial year, covering all the major sectors of the economy.

Why is the Economic Survey significant?

  • The Economic Survey is a crucial document as it provides a detailed, official version of the government’s take on the country’s economic condition.
  • It can also be used to highlight some key concerns or areas of focus — for example, in 2018, the survey presented by the then CEA Arvind Subramanian was pink in colour, to stress on gender equality.

Is it binding on the government?

  • The government is not constitutionally bound to present the Economic Survey or to follow the recommendations that are made in it.
  • If the government so chooses, it can reject all suggestions laid out in the document.
  • But while the Centre is not obliged to present the Survey at all, it is tabled because of the significance it holds.

What are the expectations from Economic Survey 2020?

  • At a time when India’s growth has plummeted to a six-year low, the Economic Survey ahead of the Union Budget is expected to offer key insights into the path ahead for the government to revive growth.
  • The conundrum of remaining fixated on deficit targets or making a concerted push towards more expenditure to kickstart growth is one of the key challenges the government is facing.
  • The Survey is expected to shed light on the crucial gaps that the Budget will aim to fill in terms of unemployment, private investment, and a slump in consumption.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

 [op-ed snap] Don’t be deterred by the ‘crowding out’ effect of the fisc

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- The crowding out effect, effects of the Government borrowing on various variables.

Context

Market borrowings of the government do not always squeeze credit for the private sector in India.

What is ‘crowding out’ effect?

  • Increased government spending and borrowing: It refers to how increased government spending, for which it borrows more money, tends to reduce private spending.
    • Why does private spending reduce? This happens because when the government takes up the lion’s share of funds available in the banking system, less of it is left for private borrowers.
    • Relationship with interest rate: Higher borrowing by the government and subsequent crowding out also impacts interest rates in the economy.

How the Government borrowing works and the role of RBI

  • Local borrowing local spending: Typically, the government funds its fiscal deficit by borrowing from the domestic bond market.
    • Its expenditure is also local in nature.
  • Overdraft from RBI: The Reserve Bank of India (RBI) is the official banker to the government-which spends money by first taking an overdraft from the central bank.
    • This overdraft gets repaid through bond market borrowings.
  • Why overdraft? The understanding is that any such government spending should ideally not affect the availability of funds to other borrowers in the market.
  • Excessive borrowing and effects on the interest rate: Excessive government borrowing from the bond market, many cautions, could lead to a rise in interest rates for the government itself and consequently for everyone else in the economy.

Analysis of the effects of borrowing on other variables

  • Analysis of the data reveals the following trends.
  • No impact on other variables: Local borrowing and spending by the Indian government does not impact any other macroeconomic variables like-
    • The availability and cost of funds for other participants in the economy.
    • Inflation.
    • Deposit growth, at the current deficit level—that is, with the state and central combined figure above 6% of GDP.
  • What impacts the interest rate the most?
    • The two most important variables that impacted interest rates were inflation and the repo rate. Which tend to move together.
    • What does it indicate? This clearly indicates that RBI is extremely proactive in the way it manages interest rates.
  • Effects of funds on inflation: Such borrowings that are funded by the central bank could lead to inflation, the same is true for large external inflows to domestic money markets.
    • The foreign borrowings finally get reflected in the country’s foreign exchange reserves, which have a very strong relationship with inflation.
    • Effects on interest rates: Technically, any large inflow of a foreign currency sterilized by RBI does have the potential to move the inflation needle up, thus placing upward pressure on interest rates.
  • Relationship between borrowing and growth: It is clear that government borrowing and spending actually drives GDP growth.
    • Government borrowing should not impact bank lending to companies, as the sums borrowed return to the market almost immediately.
  • How RBI controls bond yield?
    • RBI ensures that bond yields don’t shoot up because of the excessive borrowing, by taking bonds onto its books to be released back into the market in good times.

The uniqueness of the Indian money market

  • Why is it unique? India market is a unique money market, different from the rest of the world, for the following reasons-
    • We have investors who are explicitly required to invest in government debt.
    • Banks, non-banking financial companies, insurers, provident funds, and pension funds are all forced to invest in government debt as a condition for their licence to operate in India.
    • We also find that RBI works towards aiding the government borrowing programme rather effectively, ensuring that interest rates do not change too adversely.

Conclusion

The government should not be excessively worried about the government living beyond its means at this juncture. Government spending being the main driver for the country’s GDP growth, it could be a good way to put the economy on a higher growth trajectory. Perhaps it is time to revisit the entire FRBM framework.

 

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Examining the slowdown

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Reasons for the slowdown in the Indian economy, declining household saving, consumption driven growth.

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.

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: Fiscal Marksmanship

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Fiscal Marksmanship

Mains level : Signs of economic slowdown in the country

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.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Where demand has gone

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Role of informal sector in Indian economy, How expansionary fiscal policy can help more than represented in the official data.

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.

 

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

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

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- National accounting and problems in associated with the data collection and methods.

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 bigdata 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.

 

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

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

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Inflation targeting by RBI, and other mandates of RBI.

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.

 

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] A rough patch

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Rising inflation-slowing growth rates and its consequences for Indian economy.

Context

High inflation has reduced the fiscal space available for a rate cut.

RBI target of 6% breached.

  • CPI at 7.35 %: Retail inflation, as measured by the consumer price index (CPI), has surged to 7.35 per cent in December 2019.
  • Latest inflation data seems to corroborate fears articulated by the Monetary Policy Committee (MPC) in its December meeting.
  • In the meeting, MPC refrained from cutting the benchmark repo rate.

Consequences for the economy

  • Reduced scope for fiscal slippage: High inflation reduced the space for further easing of policy rates.
    • Even after clarity over the extent of the Centre’s fiscal slippage emerged.
  • Rise in yield for 10-year securities: The 10-year G-sec yields have reacted sharply to these developments, rising to 6.67 on Tuesday.
    • Offsetting operation twist: Rise in yield resulted in offsetting the impact of the RBI’s recent open market operations.
  • Inflation targeting under stress: The combination of weak economic activity and higher than expected supply-side inflationary pressures has put the inflation-targeting regime under test.

Reasons for the inflation rise and chances of easing

  • Food prices rise: Much of the rise in the headline inflation number can be traced to higher food prices.
    • Food inflation has risen to a near six-year high of 14.12 per cent in December 2019, up from 10.01 per cent in the previous month.
    • Vegetable prices have surged to 60.5 per cent in December, contributing nearly 3.7 percentage points to the headline numbers.
  • Chances of ease in coming months: While vegetable crop cycles tend to be short, and supply-side pressures may ease in the coming months.
    • The stickiness in prices of protein items is likely to provide a floor for food inflation.

Bleak outlook for inflation easing

  • No short-term return to normal level: Food inflation is unlikely to revert to previous levels in the short term.
  • Household inflation expectations, a key metric in the MPC’s assessment, are more responsive to food inflation, this will further exert upward pressure on MPC.
  • A factor of hostilities in the Middle East: The uncertainty over oil prices on account of hostilities in the Middle East, adds to the bleak outlook for inflation.

Conclusion

With limited fiscal space for a meaningful stimulus, the government intends to support the economy during this rough patch, and return growth to a higher trajectory.

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: The fundamentals of the Indian Economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Fundamentals as mentioned in the newscard

Mains level : Fundamentals of Indian Economy

PM Modi highlighted the strong absorbent capacity of the Indian economy while referring to certain fundamentals. He emphasized the strength of these basic fundamentals in absorbing the shocks of ongoing economic slowdown.

What are the ‘fundamentals of an economy’?

  • The PM has reiterated a phrase of reassurance — underscoring the strong fundamentals of the Indian economy — that has been often used by policymakers in the past when the economy is seen to be faltering.
  • When one talks about the fundamentals of an economy, one wants to look at economy-wide variables such as the overall GDP growth, the overall unemployment rate, the level of fiscal deficit, the valuation of a country’s currency against the US dollar, the savings and investment rates in an economy, the rate of inflation, the current account balance, the trade balance etc.
  • There is intuitive wisdom in looking at these “fundamentals” of an economy when it goes through a tough phase.
  • Such an analysis, when done honestly, can give a sense of how deep the strain in an economy run.
  • It can answer the question whether the current crisis just an exaggerated response to a sectoral problem or is there something more “fundamentally” wrong with the economy that needs urgent attention and “structural” reform.
  • To be sure about the broader health of the economy, one looks at the broader variables. That way, one reduces the chances of getting the diagnosis wrong.

Their relevance

  • The first advance estimates of national income for the current financial year, released earlier in the week, found that nominal GDP was expected to grow at just 7.5% in 2019-20.
  • This is the lowest since 1978. Real GDP is calculated after deducting the rate of inflation from the nominal GDP growth rate.
  • So, if for argument sake, the inflation for this financial year is 4%, then the real GDP growth would be just 3.5%.
  • Just for perspective, the Union Budget presented in July 2019 expected a real GDP growth of 8% to 8.5% and a nominal GDP growth of 12% to 12.5%, with a 4% inflation level.

So, what is the current state of the fundamentals?

The data on most variables that one may call as fundamentals of the Indian economy are struggling.

  • Growth rate — both nominal and real — has decelerated sharply; now trending at multi-decade lows. Gross Value Added, which maps economic growth by looking at the incomes-generated is even lower; and its weakness in across most of the sectors that traditionally generated high levels of employment.
  • Inflation is up but the consolation is that the spike is largely due to transient factors.
  • However, a US-Iran type of conflagration could result is a sharp hike in oil prices and, as such, domestic inflation may rise in the medium term.
  • Unemployment is also at the highest in several decades.According to some calculations, between 2012 and 2018, India witnessed a decline in the absolute number of employed people — the first instance in India’s history.
  • Fiscal deficit, which is proxy for the health of government finances, is on paper within reasonable bounds but over the years, the credibility of this number has come into question. Many, including the CAG, has opined that the actual fiscal deficit is much higher than what is officially accepted.
  • Bucking the trend, the current account deficit, is in a much better state but trade weakness continues as do the weakness of the rupee against the dollar; although on the rupee-dollar issue, a case can be made that the rupee is still overvalued and thus hurting India’s exports.
  • Similarly, while the benchmark stock indices have run up, and grabbed all attention, the broader stock indices like the BSE500 have struggled.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: First Advance Estimates (FAE)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GDP, GNP, GVA etc.

Mains level : First Advance Estimates

The First Advance Estimates (FAE) were recently released by the Ministry of Statistics and Programme Implementation (MoSPI).

The First Advance Estimates and their significance

  • The First Advance Estimates (FAE) extrapolate a variety of data, such as the Index of Industrial Production (IIP), the financial performance of listed companies, first advance estimates of crop production etc., for the first 7 to 8 months to arrive at the annual figure.
  • The significance of the FAE is that this is the final bit of official data before the government presents its next Budget.
  • The sector-wise Estimates are obtained by extrapolation of indicators like-
  1. IIP of first 7 months of the financial year,
  2. financial performance of Listed Companies in the Private Corporate sector available upto quarter ending September, 2019
  3. 1st Advance Estimates of Crop production,
  4. accounts of Central & State Governments, information on indicators like Deposits & Credits, Passenger and Freight earnings of Railways, Passengers and Cargo handled by Civil Aviation, Cargo etc., available for first 8 months of the financial year”.

Estimates for 2018-19

  • It estimated India’s GDP will grow by just 5 per cent in the current financial year (2019-20). Last financial year, 2018-19, the Indian economy grew at 6.8 per cent.
  • The gross value added (GVA), which maps the economic activity from the income side as against the GDP which maps it from the expenditure side, is expected to grow by 4.9 per cent in 2019-20 as against 6.6 per cent in 2018-19.

Drivers of the GDP

There are four main drivers of the GDP:

  • One, the private consumption expenditure – that is the expenditure that you and I make in our personal capacity. This category has grown by just 5.7 per cent in 2019-20 while it grew by 8 per cent last financial year.
  • The second driver is the expenditure made by the Government. This grew by 10.5 per cent, which is higher than the rate of growth (9.2 per cent) in the last financial year.
  • But the most disappointing number is the deceleration in business investments in the economy.
  • This driver, which is the key to sustainable long-term growth, grew by less than 1 per cent; last financial year it grew by 10 per cent.
  • This shows that while the private consumption demand is tepid, businesses have completely turned off the tap on new investments despite the government making a once-in-generation cut in corporate taxes.

Performance in terms of GVA

  • The GVA data provides a detailed picture. Given that the overall GVA has decelerated sharply, almost all sectors have witnessed slower growth in economic activity.
  • Only “Public Administration, Defence and Other Services,“ which essentially measures how the government did, grew by 9.1 per cent.
  • All other sectors saw a GVA growth that was slower than the average growth in the last financial year.
  • The worst performing sectors are ‘Agriculture, Forestry and Fishing’, ‘Mining and Quarrying’, ‘Manufacturing’ and ‘Construction’, which are expected to see a GVA growth of 2.8 per cent, 1.5 per cent, 2.0 per cent and 3.2 per cent respectively.

Back2Basics

Real vs. Nominal GDP

  • GDP is the total market value of all goods and services produced in the economy during a particular year, inclusive of all taxes and subsidies on products.
  • The market value taken at current prices is the nominal GDP.
  • The value taken at constant prices — that is prices for all products taken at an unchanged base year (2011) — is the real GDP.
  • In simple terms, real GDP is nominal GDP stripped of inflation.
  • Real GDP growth thus measures how much the production of goods and services in the economy has increased in actual physical terms during a year.
  • Nominal GDP growth, on the other hand, is a measure of the increase in incomes resulting from rise in both production and prices.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[oped of the day] India needs a bottom-up growth model

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Economic growth - approach for India

Context

India’s decision to stay out of the Regional Comprehensive Economic Partnership until the needs of the country’s small enterprises, farmers, and poorest citizens are properly addressed dismayed by many economists. 

Reasons for the decision

  • Indian government feared that the increase in Chinese exports would harm small producers and farmers.

India – China

  • China and India embarked on new journeys around the same time.
  • More than 70 years later, China has progressed much faster. 
  • India is yet to reach the development indicators that China attained back in the early 1990s.
  • A Chinese thought leader said 15 years ago that both countries have the same vision: of prosperity for their citizens.

People-centric policies

  • They need to make their policies people-centric rather than growth-centric. The Communist Party of China demands that local officials address the needs of citizens effectively, as does Singapore’s government. 
  • The Chinese government derives its legitimacy from citizens’ satisfaction with their well-being, not from a vote in an election.
  • In the case of India, its constitutional structure enables its States to adopt different models of development. 
  • There is a ‘Kerala model’, a ‘Gujarat model’, and now a ‘common man’s model’ implemented by the Aam Aadmi Party (AAP) in Delhi.

Kerala

  • Local, participative governance has been a distinction of Kerala’s model
  • The State has been well ahead of the rest of the country, matching China in its Human Development Indicators in education, health, and women’s inclusion.

Delhi

  • Delhi’s AAP government has adopted a people-centric model of government. It has established School Management Committees with parental involvement. Teacher training budgets have increased five-fold. 
  • The performance of Delhi’s government schools is not only higher than the national average, it now exceeds the performance of private schools in Delhi. 
  • Public health expenditures have more than doubled. ‘Mohalla clinics’ have been set up in poor colonies to provide accessible and affordable health care.
  • The share of unauthorized colonies provided with piped water has increased from 55% to 93% in just five years.
  • This reduced the need for poor people to pay for expensive tanker-delivered water. 
  • Despite water subsidies for the poor, the Delhi Jal Board’s income has increased. 
  • Electricity supply has expanded to include 20% more consumers. Amongst Indian metros, Delhi provides the cheapest electricity. 
  • Still, its distribution companies, all in the private sector, have improved their financial performance.

Increase in disposable incomes

  • The government has computed that its programs for improving the ‘ease of living’ of citizens and reducing the costs of a range of public services has increased savings per family by ₹4,000 per month. 
  • The increase in disposable incomes has resulted in additional consumer-buying power, estimated at ₹24,000 crores per annum.
  • This proves that growth must be bottom-up to be equitable and sustainable. 
  • India has climbed many rungs on the World Bank’s ‘Ease of Business’ rankings. Yet, investments to expand production ventures have not increased much because consumer demand, even for basic items like packaged biscuits fell. 
  • Democratically elected governments such as India, who should be focused on citizens’ well-being, have become focused on making it easy for global capital to do business in their countries. 
  • This has made citizens rise up against the globalization paradigm promoted by an ‘establishment’ of policymakers and economists. 
  • Citizens want their governments to put jobs in their countries first, and to implement policies that increase incomes at the bottom of the pyramid rather than facilitating only further growth at the top.

India’s challenges

  • The country must improve on many fronts simultaneously. 
  • India ranks very low in international comparisons of human development (education and health), even below its poorer subcontinental neighbors.
  • It is the most water-stressed large economy in the world; its cities are the most polluted. 
  • India’s economic growth is not generating enough jobs for its burgeoning population of youth: the employment elasticity of India’s growth is amongst the worst in the world. 
  • Unemployment of persons with vocational education has gone up between 2011-12 and 2017-18, from 18.5% to 33%. India now has a larger number of frustrated youth.

More free trade, not the answer

  • The RCEP decision shows that India is now standing up to pressure from a rump of Washington Consensus economists who advocate that more free trade is the solution to India’s economic problems, despite the evidence that India has not benefited from the agreements it has entered into.
  • India’s challenge is to build an Indian ecosystem in which competitive enterprises will grow to create more opportunities for jobs for youth and for increasing citizens’ incomes. 
  • The growth of incomes in India will make India more attractive to investors. A stronger industrial system will give India more headroom in trade negotiations too. 
  • India’s industrial and entrepreneurial ecosystem’s growth must be accompanied by an improvement in the environment. 
  • Policies must be managed with a whole systems view. While ‘Ease of Doing Business’ gauges health from a business perspective, ‘ease of living’ should become the measure of the health of the whole system.

Conclusion

  • Policy decisions require compromises between competing interests.
  • Mahatma Gandhi’s talisman provides a good test. The government should think of the needs of the poorest citizens first.
  • A citizen’s fundamental need is for a good job and source of income to buy imported goods. 
  • India urgently requires an employment and income strategy to guide its industry and trade policies.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: Is India facing stagflation?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various keywords mentioned

Mains level : Signs of economic slowdown in the country

With fast decelerating economic growth and sharply rising inflation, there is a growing rumor about India facing stagflation.

What is Stagflation?

  • Stagflation is a portmanteau of stagnant growth and rising inflation. The term was coined by Iain Macleod, a Conservative Party MP in UK, who while speaking on the UK economy in the House of Commons in November 1965.
  • Typically, inflation rises when the economy is growing fast. That’s because people are earning more and more money and are capable of paying higher prices for the same quantity of goods.
  • When the economy stalls, inflation tends to dip as well – again because there is less money now chasing the same quantity of goods.

When does stagflation occur?

  • Stagflation is said to happen when an economy faces stagnant growth as well as persistently high inflation.
  • That’s because with stalled economic growth, unemployment tends to rise and existing incomes do not rise fast enough and yet, people have to contend with rising inflation.
  • So people find themselves pressurized from both sides as their purchasing power is reduced.

Why is everyone asking about Stagflation in India?

  • Over the past six quarters, economic growth in India has decelerated with every quarter. In the second quarter (July to September), for which the latest data is available, the GDP grew by just 4.5%.
  • In the coming quarter (October to December), too, GDP growth is likely to stay at roughly the same level. For the full financial year, the GDP growth rate is expected to average around 5% – a six-year low.
  • In fact, the October inflation was a 16-month high and the November inflation, at 5.54%, is at a three-year high. Inflation for the rest of the financial year is expected to stay above the RBI’s comfort level of 4%.
  • So, with growth decelerating every quarter and now inflation rising up every month, there are growing murmurs of stagflation.

So, is India facing Stagflation?

Although it appears so at the first glance, India is not yet facing stagflation. There are three broad reasons for it:

GDP hasn’t declined

  • Although it is true that we are not growing as fast as we have in the past or as fast as we could, India is still growing at 5% and is expected to grow faster in the coming years.
  • India’s growth hasn’t yet stalled and declined; in other words, year on year, our GDP has grown in absolute number, not declined.

Food Inflation is predictable

  • It is true that retail inflation has been quite high in the past few months, yet the reason for this spike is temporary because it has been caused by a spurt in agricultural commodities after some unseasonal rains.
  • With better food management, food inflation is expected to come down.

Retail inflation is under control

  • Lastly, retail inflation has been well within the RBI’s target level of 4% for most of the year.
  • The core inflation – that is inflation without taking into account food and fuel – is still benign.
  • A sudden spike of a few months, which is likely to flatten out in the next few months, it is still early days before one claims that India has stagflation.

Back2Basics

Types of Inflation

  • Creeping or mild inflation is when prices rise 3% a year or less.
  • Walking inflation is strong, or pernicious, inflation between 3-10% a year.
  • Galloping inflation occurs when inflation rises to 10% or more.
  • Hyperinflation is when prices skyrocket more than 50% a month.
  • Deflation occurs when there is a general fall in the level of prices
  • Disinflation is the reduction of the rate of inflation
  • Stagflation is a combination of inflation and rising unemployment due to recession

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Twin troubles: On low growth and high inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Stagflation

Mains level : Economic slowdown

Context

Economic data released by the government suggest that India may be stepping even closer to stagflation. 

Indices

  • IIP – The Index of Industrial Production (IIP) contracted 3.8% in October against a rate of 8.4% witnessed during the same month last year. 
  • Inflation – Retail inflation jumped to a 40-month high of 5.5% in November. This is fuelled by a sharp jump in food prices. It might drop as fresh food supplies hit the market. 
  • Stagflation – Low growth combined with high price inflation is sure to cause headaches for policymakers. 
  • Growth – Economic growth has declined for six consecutive quarters now. This is one of the longest downturns in recent history. 

Problem

  • RBI’s limitation – Due to inflation raising its ugly head, the RBI is unlikely to cut rates aggressively in the next few months at least. 
  • More on Fiscal policy – it is entirely up to the government now to find ways to boost growth. The government cannot delay reforms.

Government’s inaction

  • Blaming Monetary policy – The government maintained that the country’s growth rate was held back by the tight monetary policy stance adopted by the RBI. 
  • Repo rate cut – as the benchmark interest rate was cut five times so far this year, the government can no longer shift the blame on to the RBI. 
  • Cyclical slowdown – the government is now blaming that the slowdown in growth is merely a cyclical one that will end sooner than later. 
  • Lack of reforms – the Centre has failed in bringing about major structural reforms to the economy. But for the recent cut in corporate tax rates, the government has not come up with any other significant reform in response to the slowdown. 

The root cause of the slowdown

  • Low growth along with high inflation raises questions about the root cause of the slowdown. 
  • Demand shortfall? It has been attributed to a drastic fall in consumer demand. 
  • Rate cuts didn’t help – Aggressive rate cuts by the RBI cannot stop the continuous slide in growth rate.
  • Supply-side is also in deep trouble. 

Way ahead

  • Economic reforms can lift the potential growth rate of the economy. 
  • Further rate cuts by the RBI will only add to the government’s troubles by stoking inflation in the wider economy.

Back2Basics

Stagflation

Economics | Inflation explained with real life examples

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[pib] National Economic Census

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National Economic Census

Mains level : Economic planning in India

The Seventh Economic Census was launched in the National Capital Territory of Delhi. Delhi is the 26th state where the survey has been launched, while the process is already on in 20 states and 5 UTs.

National Economic Census

  • In 1976, GoI launched a planning scheme called Economic Census and Surveys.
  • It is the census of the Indian economy through counting all entrepreneurial units in the country which involved in any economic activities of either agricultural or non-agricultural sector which are engaged in production and/or distribution of goods and/or services not for the sole purpose of own consumption.
  • It provides detailed information on operational and other characteristics such as number of establishments, number of persons employed, source of finance, type of ownership etc.
  • This information used for micro level/ decentralized planning and to assess contribution of various sectors of the economy in the GDP.

Censuses till date

  • Total Six Economic Censuses (EC) has been conducted till date.
  • In 1977 CSO conducted First economic census in collaboration with the Directorate of Economics & Statistics (DES) in the States/UTs.
  • The Second EC was carried out in 1980 followed by the Third EC in 1990. The fourth edition took place in 1998 while the fifth EC was held in 2005.
  • The Sixth edition of Economic Census was conducted in 2013.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Volcker’s Rule

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Volcker's Rule

Mains level : Inflation control measures

Paul Volcker passed away on December 8. He was the economist who helped shape US economic policy during the period of “The Great Inflation” that lasted for roughly two decades starting in the mid-1960s.

 “The Great Inflation”

  • The Great Inflation of 1965-82 was one of the defining macroeconomic events in the US history.
  • It was marked by the abandonment of the global monetary system used during World War II, multiple economic recessions, and wage and price controls.
  • Inflation in the US rose from below 2 percent in 1962 to above 15 percent by 1979.
  • Paul Volcker was appointed Chairman of the Board of Governors of the United States Federal Reserve System on August 6, 1979, and given a second term in 1983.

Volcker’s Rule

  • The Volcker Rule generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds.
  • In easy terms it prohibits banks from using customer deposits for their own profit.
  • They can’t own, invest in, or sponsor hedge funds, private equity funds, or other trading operations for their use.
  • It aims to protect bank customers by preventing banks from making certain types of speculative investments.
  • The Volcker Rule allows trading in two circumstances. First, banks can trade when it’s necessary to run their business. For example, they can engage in currency trading to offset their foreign currency holdings.
  • Second, banks can trade on behalf of their customers. They can use client funds only with the client’s approval.

The idea unique

  • What Volcker did differently was to emphasis a tighter control on reserves and bring in credit control policies at a time when it was generally accepted that controlling inflation required greater control over the growth rate of reserves and broad money.
  • Even so, despite these measures, the US economy entered a phase of recession in 1981 and unemployment rose to about 11 percent, but inflation was coming down.
  • By the end of 1982, the economy entered “a period of sustained growth and stability”.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: Significance of computing GDP

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GDP, GNP

Mains level : National income accounting

  • With the upsetting news of a secular decline in India’s GDP growth rate, the government has offered several arguments to either say the picture is not as bleak as it is being made out to be.
  • This has questioned the merit of the basic variable, GDP used to map economic growth.

What is GDP?

  • GDP measures the monetary value of all goods and services produced within the domestic boundaries of a country within a timeframe (generally, a year).
  • It is slightly different from the other commonly used statistic for national income — the GNP.
  • The Gross National Product (GNP) measures the monetary value of all goods and services by the people and companies of a country regardless of where this value was created.
  • For example, if Apple manufactures its mobile phone worth $1 million within India, then this $1 million will be counted in India’s GDP and US’ GNP.
  • On the other hand, if the US office of Infosys created software worth $1 million, then it will be counted in US’ GDP and India’s GNP. It is the domestic boundary that distinguishes the GDP.

Its creation

  • The modern-day definitions of GDP and GNP can indeed be traced back to Simon Kuznets, who was entrusted with the task of creating National Accounts in 1933 by then US President Franklin D Roosevelt.
  • Kuznets’ team travelled the length and breadth of the USA asking farmers and factory managers what and how much they had produced and what they had purchased in order to make their final product.
  • The final report, National Income, 1929-32, was presented to the US Congress in January 1934.
  • However, the origins of GDP as a concept date far back. Indeed, the man credited with inventing the concept is William Petty (1623-1687), an Englishman who was a professor of anatomy at Brasenose College.
  • Petty’s quest started when he received an estate in Ireland. To figure out how much did it value, Petty attempted to account for the benefits from the estate and find an appropriate “present value” of the estate.
  • Later on, he applied his approach to the whole of England and Wales to provide the first set of national accounts for the two countries.

Was Kuznets completely satisfied with GDP as a measure?

  • But, again, one has to understand that no measure can accurately summarize the welfare or wellbeing of an entire population.
  • Kuznets was striving for a measure that would reflect welfare rather than what he considered a crude summation of all activities.
  • All measures suffer from some weaknesses. For instance, annual GDP of India is $2.8 trillion but that does not mean that an average Indian is better off than say the average New Zealander ($0.18 trillion).
  • An average Kiwi is 19-times richer than an average Indian even though India’s annual GDP is 15-times than of NZ’s.

So, what is the point of GDP?

  • Yet, GDP is a variable of great merit. That’s because as a measure, it most sums up more information about an economy than any other variable.
  • For instance, countries with higher GDPs have citizens with higher incomes and better standards of living.
  • Of course, one can point out variations and suggest that a country ranked 1 in GDP is ranked 9 in GDP per capita but these divergences would be relatively small when data is seen at a global level.
  • Similarly, countries with higher GDP can be expected to have much better health and education metrics.
  • The so-called richer countries would have better institutions devoted to higher education, research and development etc primarily because they have the money to spare.
  • As such, while it helps not to depend overly on just the GDP of a country to make up one’s mind, it is also not a good idea to disregard it as a measure.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[oped of the day] Why India is staring at a middle-income trap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Middle Income Trap - role of institutions to tackle

Context

For India, there are few things more important than our challenge of becoming a rich country.

GDP

    • From experience, we know that the only way out of mass poverty is to obtain modest rates of growth of per capita GDP sustained for many decades. 
    • If per capita GDP grows at 4% per year, there is a doubling every 18 years. Per capita GDP would then go up by 8 times in 50 years.
    • That graduates us beyond middle income.

Idea of development

    • The early idea about economic development viewed an underdeveloped country as a child. 
    • Growth was inevitable. It was only a matter of putting in a few actions to enable that process. 
    • This leads to the risk of thinking that progress is inevitable.
    • Now we know that there is no inevitability about the rise of a country to be a prosperous democracy. 
    • There are only four countries that were poor in 1945 that are now prosperous democracies: South Korea, Taiwan, Chile, and Israel. 
    • In all those countries, growth came as a result of improvements in state capability.

State capability

    • A prominent measure of state capability is available for the 1996–2012 period. 
    • By this, the state capability in India declined in this period. 
    • Our institutional capacity got worse in a period of strong GDP growth. 
    • It is wrong to equate GDP growth with improvement in the foundations for GDP growth.

Higher GDP growth – reduced state capacity

    • When bigger rupee values are at stake, private persons gain by undermining state institutions.
    • We saw this in India in the period after 2005 when the country was starting to reap remarkable success by private sector firms. 
    • The prospective gains from subverting state institutions were suddenly larger and we got bigger investments into attacks on institutions. 
    • State apparatus that used to work when million-rupee bribes were offered broke down when the offers went to billions of rupees.

Reasons

    • Perhaps India’s growth of 1979–2011 was not adequately grounded in the required institutional capacity to be a prosperous liberal democracy.
    • This has something to do with the difficulties that have been seen after 2011.
    • The growth model of 1991–2011 has not carried forward into the following years. 
    • Private “under implementation” investment projects rose from ₹10 trillion in 2006 to ₹50 trillion in 2011. 
    • After that, there has been a decline in nominal terms to ₹40 trillion in mid-2019. 
    • The share of non-workers in the working-age population stands at 60.43% in April–June 2019.

Middle-income trap

    • In many other countries, the phenomenon of a “middle-income trap” has been observed. 
    • At the early stages of development, the simple mobilization of labour and capital is enough to escape from abject poverty. 
    • But once the minimal market economy is in place, a different level of institutional quality is required. 
    • The maturation of firms and the government creates the need for complex contracts, contract enforcement, economic regulation, and institutions that channel the conflicts between social groups.
    • When a middle-income country wants to rise to a mature market economy, and institutional capacity is weak growth stalls. 

Reasons for underperformance

    • A lot of government intervention and the license-permit-inspector raj remains in place. 
    • The economic freedom promised in 1991 has not evolved into a mature market economy. 
    • Private persons are beset with government intervention. 
    • The instincts of central planning are alive and well among policymakers. 
    • There is a great deal of arbitrary power in the hands of the government. 
    • Extensive interference in the economy by the government still exists.
    • There is a policy risk associated with future interventions. The fear of how arbitrary power will be used has led to a loss of confidence in the private sector.

State capacity deficit

    • When India was a small economy, the GDP was small, and the gains from violating rules were also relatively small. 
    • The tenfold growth in the size of the economy created new opportunities to obtain wealth. 
    • The gains from violating rules went up sharply. Large resources were brought to bear upon subverting state institutions.
    • The foundations of state institutions in terms of the rule of law, and checks and balances were always weak. 
    • The combination of an amplified effort by private persons to subvert institutions, coupled with low state capacity, has resulted in a decline of institutional quality.

Addressing the problems

    • Economic thinkers of the previous decades tended to focus on economics more narrowly, on issues such as the green revolution or heavy industry or trade liberalization.
    • We need to more explicitly locate ourselves in the intersection of politics and the economy. 
    • The founding energy of liberal democracy is the pursuit of freedom, of people being masters of their own fate. 
    • We need to shift away from notions of a developmental state with big initiatives from the government, towards a philosophy of respect for the self-organizing system. 
    • We need to rely far more on private negotiations, private contracts, and civil society solutions, rather than turning to the government to solve problems.
    • APMCs (agricultural produce market committees) were not intended to create entrenched power in the hands of traders. Land ceiling Acts were not intended to create shortages of real estate and high prices for real estate. Bank nationalization was not intended to hamper growth, stability, and inclusion.
    • Single-window systems do not solve the problem of state coercion, and the threat of raids and punishments.
    • In the absence of deeper reform, it is hard to build single-window systems that overcome a maze of restrictions. 

Deeper reforms

    • The reform required in the early 1990s was not a single-window system governing IPO approvals, it was the abolition of the office of the Controller of Capital Issues. The reform required in trade liberalization was not a single-window system for import approvals, it was the removal of trade barriers. 
    • Some of the work of regulation can be pushed down to private firms. To tackle the problem of regulating taxis, one possibility lies in setting up bureaucratic machinery that engages with each taxi driver. Another pathway lies in contracting out this regulation to private taxi companies. 
    • Aggregation business models, such as Airbnb, have an incentive to utilize customer feedback and supervisory staff to improve the quality of their customer experience. 
    • Modern technology makes it possible to remove the market failure. 
    • In allocating spectrum, the state creates bureaucratic machinery which auctions spectrum and polices for violations. There is an alternative methodology where intelligent devices establish a self-organizing system through which the spectrum is shared. The need for government control of spectrum allocation is removed. 
    • Nobel Prize-winning economist Elinor Ostrom reminds us of the remarkable outcomes through some traditional community arrangements. The possibilities for purely decentralized solutions to allocate common goods without requiring a bureaucratic apparatus are high.
    • A complex modern economy only works when it is a self-organizing system. It has to have the creative efforts of a large number of individuals.

Conclusion

It is always possible to obtain GDP growth without solving these deeper problems. We should shift focus from the numbers for GDP growth to focusing on the state of health of state institutions. Sustained improvement in institutional quality is hard, but it is the only way to obtain sustained GDP growth.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[oped of the day] Politics should not meddle with our official statistics

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Government statistics - reliability

Context

The National Statistical Office is making headlines over the non-release of the results of the 75th round (2017-2018) of the National Sample Survey (NSS). 

Reasons

    • It is said that the report revealed a decline in average monthly per capita consumer expenditure (MPCE) in real terms compared to 2011-12.
    • The government indicated that it is examining the feasibility of conducting the next survey in 2020-2021 and 2021-22.

Issues with official statistics

    • T.N. Srinivasan and others refer to these as India’s downfall “from being the world leader in surveys” to a country “with a serious data problem”. 
    • S.L. Shetty pointed out that India’s “official statistical collection machinery has been in decline for more than two decades”. 
    • Our governments have repeatedly interfered with various official statistics.

Statistics – India

    • Poverty reduction has been integral to independent India. The NSSs are the primary means to track household consumer expenditure and poverty. 
    • Led by P.C. Mahalanobis initially, several economists and statisticians contributed to the design and development of the NSS. 
    • American statistician Harold Hotelling has remarked, “No technique of random sample has, so far as I can find, been developed in the United States or elsewhere, which can compare in accuracy with that described by professor Mahalanobis.”

History of distortion

    • Beginning with the 1970s, political interference began to corrode trust in government statistics.
    • In 1973, B.S. Minhas resigned from the Planning Commission over differences on the misuse of data to present a rosy picture of the economy.
    • The 55th round (1999-2000) of the NSS stirred a controversy over the lack of inter-temporal comparability of its MPCE estimates.
    • Angus Deaton and Valerie Kozel pointed out that “the political right had an interest in showing low poverty, and the political left in showing high poverty, and this undoubtedly intensified the debate on survey design and led to the unfortunate compromise design that temporarily undermined the poverty monitoring system”.
    • The 66th round of the NSS (2009-10) showed that employment generation fell significantly short of the target of the 11th Five Year Plan. 
    • The government also delayed the fourth round of the National Family Health Survey, which was eventually held after the 2014 polls. 
    • The government delayed the release of the results of the 2017 Periodic Labour Force Survey that contested its employment claims. Two members of the National Statistical Commission resigned in protest. 
    • Unlike the 27th and 66th round when the results were released but superseded by fresh surveys, the Centre decided not to release the results of the 75th round of NSS.

Impact of politicisation

    • Several surveys and committees have seen their reports either delayed or trashed.
    • Revisions have eroded trust in national accounts. 
    • The government also delayed the release of several tables of the 2011 Census, which should have been made public.

Way ahead

    • Statistical institutions should be insulated from political interference.
    • The government’s contention that the NSSs are unable to capture changing patterns of consumption is not entirely untrue.
    • This calls for a way to shield statistical bodies from politics.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[pib] Household Consumer Expenditure Survey

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Household Consumer Expenditure Survey

Mains level : Signs of economic slowdown in the country


Govt has scrapped this year’s NSOs Consumer expenditure survey over data quality.

Consumer Expenditure Survey

  • The Consumer Expenditure Survey (CES) is usually conducted at quinquennial intervals and the last survey on consumer expenditure was conducted in the 68th round (July 2011 to June 2012).
  • It is conducted by National Statistical Office (NSO), MoSPI.
  • It generates estimates of household Monthly Per Capita Consumer Expenditure (MPCE) and the distribution of households and persons over the MPCE classes.
  • It is designed to collect information regarding expenditure on consumption of goods and services (food and non-food) consumed by households.
  • The results, after release, are also used for rebasing of the GDP and other macro-economic indicators.

Highlights of the 2018-19 survey

  • Consumer spending is falling and the report has been withheld due to its ‘adverse’ findings.
  • There was a significant increase in the divergence in not only the levels in the consumption pattern but also the direction of the change when compared to the other administrative data sources like the actual production of goods and services.

Why is the survey not published?

  • In view of the data quality issues, the Ministry has decided not to release the Consumer Expenditure Survey results of 2017-2018.
  • Concerns were raised about the ability/sensitivity of the survey instrument to capture consumption of social services by households especially on health and education.
  • The Advisory Committee on National Accounts Statistics has also separately recommended that for rebasing of the GDP series, 2017-18 is not an appropriate year to be used as the new base year.
  • The MoSPI is separately examining the feasibility of conducting the next Consumer Expenditure Survey in 2020-2021 and 2021-22 after incorporating all data quality refinements in the survey process.

Data leaked

  • The survey allegedly showed that the average amount spent by an Indian in a month fell 3.7% to Rs 1,446 in 2017-18 from Rs 1,501 in 2011-12.
  • While consumer spending declined 8.8% in 2017-18 in India’s villages, it rose 2% over six years in cities, it said.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Never the twain shall meet: Why gap between WPI and CPI based inflation widening

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Inflation

Mains level : Inflation - CPI, WPI divergence

Context

The retail inflation as measured by the Consumer Price Index touched a 16 month high at 4.62%. The wholesale price inflation measured by the Wholesale Price Index is on the verge of entering the negative territory. The gap between the two is currently the widest in two years.

Data

  • In October, wholesale price inflation dropped to 0.16%. 
  • Most analysts expect WPI inflation to decline further in the coming months, weighed by a base effect.

WPI

  • Wholesale price deflation signals that producers lack pricing power and maybe offering discounts at a time consumer expenditure has dropped to an 18 quarter low in the April-June period. 
  • Automakers offered heavy discounts during the festive season to break the trend of falling sales. 
  • Factory output data for September also showed that the production of both consumer durables and consumer non-durables contracted during the month. Overall output shrank to its lowest level at least in seven years.

Reasons for high CPI

  • CPI and WPI are two different sets of indicators with varied compositions. 
  • Manufactured items have the highest weight of 64.23% in WPI, while fuel and primary articles have 13.15% and 22.62% weight, respectively. 
  • Food and beverages have the highest weight of 54.18% in CPI. Services sectors such as health, education, and amusement have a combined weight of 27.26%. 
  • So the supply shortage of onions and tomatoes due to floods and unseasonal rains has a disproportionate impact on the overall retail inflation than wholesale price inflation. 
  • A spike in crude oil prices or a rise in other commodity prices would drive WPI based inflation up faster than the CPI-based inflation. 

CPI – Food inflation

  • Retail food inflation often mimics wholesale food inflation as the price rises are first reflected in the wholesale market than in the retail market.
  • In October, retail food inflation quickened to 7.89% following similar print in wholesale price inflation in September at 7.47%.

It led to…

  • The WPI based inflation has lost the primacy that it once enjoyed in economic policy debates when RBI signed the monetary framework pact with the Centre in 2015. 
  • Now, the RBI is mandated to only achieve the medium-term target for CPI inflation of 4% within a band of two percentage points.

Back2Basics

Inflation in India: CPI, WPI, GDP Deflator, Inflation Rate

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] A deeper dark

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Moody's downgrade

Context

Data from the National Statistics Office showed that industrial production contracted by 4.3% in September — the lowest in the current series.

IIP movement

    • Over the course of the entire second quarter, the IIP has contracted by 0.4% after growing by 3% in the previous quarter. 
    • Of the 23 sub-sectors within manufacturing, 17 contracted in September.
    • This suggests that the contraction is deeper and more widespread. 
    • The worsening performance of the consumer durables, as well as the non-durables segment, is indicative of subdued household demand.
    • The capital goods segment contracted by 16.8% in the second quarter, indicating that investment activity continues to be depressed.

What it signifies

    • Data from the Controller General of Accounts shows that government spending picked up pace significantly after the Union budget was presented.
    • This wouldn’t have been enough to offset the subdued performance of other sectors. 
    • Various high-frequency indicators suggested that economic activity has slowed down considerably over the past few months. Growth may come in the 5% mark in the quarter. 
    • Even the government spending will not be available due to pressure on its own finances.
    • Transfers from the RBI can only partially offset the shortfall in both direct and indirect tax collections.
    • Even the disinvestment receipts remain well below the budgeted target.
    • Cuts in government spending are likely going forward, thus further accentuating the slowdown. 

Moody’s

    • Reflecting this deteriorating economic situation, Moody’s changed its outlook on India’s rating from stable to negative.
    • They cited increased risks that the country’s economic growth will remain “materially lower than in the past.”

Way ahead

    • Towards the end of this year, the headline growth numbers may pick up once the base effect kicks in. 
    • It would be a mistake to construe this as a sign of a recovery. 
    • The government needs to address multiple issues plaguing the economy. Along with measures to boost long-term potential growth, comprehensive measures are needed to address the stress in specific sectors such as telecom, real estate, and the financial system.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Base Year in GDP Calculations

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Base Year

Mains level : National income accounting

At a time when India is facing an economic slowdown in GDP growth the Ministry of Statistics and Programme Implementation announced that the new base year for the GDP series will be decided in a few months.

What is Base Year?

  • The base year of the national accounts is chosen to enable inter-year comparisons.
  • It gives an idea about changes in purchasing power and allows calculation of inflation-adjusted growth estimates.
  • The last series has changed the base to 2011-12 from 2004-05.
  • The base year is a benchmark with reference to which the national account figures such as gross domestic product (GDP), gross domestic saving, gross capital formation are calculated.

How is a base year calculated?

  • In India, the first estimates of national income were published by the Central Statistical Organisation (CSO) in 1956 taking 1948-49 as the base year.
  • With the gradual improvement in availability of data, the methodology was revised.
  • Earlier, CSO depended on the population figures in the National Census to estimate the workforce in the economy.
  • Therefore, the base year always coincided with the census figures like 1970-71, 1980-81 etc.
  • Subsequently, CSO decided that the National Sample Survey (NSS) figures on the workforce size were more accurate and hence, the base year would change every five years when the NSS conducted such survey.
  • This system was started from 1999 when the base year was revised from 1980-81 to 1993-94.

Why need it?

  • The base year prices are termed as at constant prices. This reduces all the data to a comparable benchmark, base year price.
  • The base year is a representative year which must not experience any abnormal incidents such as droughts, floods, earthquakes etc.
  • It is a which is reasonably proximate to the year for which the national accounts statistics are being calculated.

Why is the base year changed every few years?

  • The base year has to be revised periodically in order to reflect the structural changes taking place within an economy, such as increasing share of services in GDP.
  • The more frequently the base year can be updated, the more accurate the statistics will be.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Global Wealth Report 2019

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Global Wealth Report 2019

Mains level : Income inequality in India


  • The Credit Suisse Group, a Switzerland-based multinational investment bank, has released the 10th edition of its annual Global Wealth Report.

Global Wealth Report 2019

  • The report typically tracks both the growth and distribution of wealth – in terms of the numbers of millionaires and billionaires.
  • It tracks the proportion of wealth that they hold – as well as the status of inequality around the world.

How is wealth defined?

  • Wealth is defined in terms of “net worth” of an individual.
  • This, in turn, is calculated by adding up the value of financial assets (such as money) and real assets (such as houses) and then subtracting any debts an individual may have.

What are the drivers of the wealth of nations?

1) Size of the population

  • Several factors can explain why wealth per adult follows a different path in different countries.
  • For instance, the overall size of the population is one possible factor that drives wealth per adult in the country. For a country with a huge population, in terms of final calculation, this factor reduces the wealth per adult.
  • But there is a flip side as well. A big population also provides a huge domestic market and this creates more opportunities for economic growth and wealth creation.

2) Saving behaviour

  • Another important factor is the country’s saving behaviour. A higher savings rate translates into higher wealth. The two variables share a strong positive relationship.
  • Overall, a percentage point rise in the savings rate raises the growth rate of wealth per adult by 0.13% each year on average.
  • Thus, for example, household wealth in Poland (with an 18% savings rate) would be expected to be 27% higher in mid-2019 if it had matched the savings rate of Sweden (28%),” states the Credit Suisse report.

3) Level of economic activity

  • But by far the most important factor in determining the different trends in household wealth among countries is the general level of economic activity as represented by aggregate income, aggregate consumption or GDP.
  • That’s because the expansion of economic activity increases savings and investment by households and businesses, and raises the value of household-owned assets, both financial and non-financial.
  • But wealth and GDP do not always move in tandem, cautions the report. This is especially so when asset prices fluctuate markedly as they did during the financial crisis.

Key findings of the report

  • A key finding of 2019’s report is that China has overtaken the US this year to become “the country with most people in the top 10% of global wealth distribution.
  • As things stand, just 47 million people – accounting for merely 0.9% of the world’s adult population – owned $158.3 trillion, which is almost 44% of the world’s total wealth.
  • At the other end of the spectrum are 2.88 billion people – accounting for almost 57% of the world’s adult population – who owned just $6.3 trillion or 1.8% of the world’s wealth.
  • The other way to look at this distribution of wealth is from the prism of inequality.
  • The bottom half of wealth holders collectively accounted for less than 1% of total global wealth in mid-2019, while the richest 10% own 82% of global wealth and the top 1% alone own 45%,” states the report.

Indian case

  • Total wealth in India increased fourfold between 2000 and 2019, reaching $12.6 trillion in 2019, making India the fifth globally in terms of the number of ultra-high net-worth individuals, as per the report.
  • India has 8.27 lakh adults in the top 1% of global wealth holders – 1.6% share of the global pool .
  • It is estimated that India has 4,460 adults with wealth of over $50 million and 1,790 that have more than $100 million.
  • However, the study also found that while the number of wealthy people in India has been on the rise, a larger section of the population has still not been part of the growth in overall wealth.

Inequality persists

  • While wealth has been rising in India, not everyone has shared in this growth.
  • There is still considerable wealth poverty, reflected in the fact that 78% of the adult population has wealth below $10,000,” stated the report.
  • While highlighting the fact that a small fraction of the population — 1.8% of adults — has a net worth of more than $100,000.
  • Meanwhile, as per the financial major, India is expected to grow its wealth very rapidly and add $4.4 trillion in just five years, reflecting an increase of 43%.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

World Economic Outlook, 2019

Note4Students

From UPSC perspective, the following things are important :

Prelims level : WEO report

Mains level : Economic slowdown in India


  • In the gloomy global economic picture painted by the IMF, India retains its rank as the world’s fastest-growing major economy, tying with China.

Growth projections for India

  • IMF has projected growth rate of 6.1 per cent for the current fiscal year, despite an almost one per cent cut in the forecast.
  • The report projected India’s economy to pick up and grow by 7 per cent in the 2020 fiscal year.
  • The world economy is projected to grow only 3 per cent this year and 3.4 per cent next year amid a “synchronised slowdown”.
  • IMF’s projected growth rate of 6.1 per cent for 2019-20 is consistent with the Indian Monetary Policy Committee’s forecast.

Mapping the slowdown

  • India’s economy decelerated due to sector-specific weaknesses in the automobile sector and real estate as well as lingering uncertainty about the health of non-bank financial companies.
  • It added that corporate and environmental regulatory uncertainty was other factor that weighed on demand.
  • The global slowdown is due to rising trade barriers, uncertainty surrounding trade and geopolitics, and structural factors, such as low productivity growth and an aging population in developed countries.

Suggestions for India

  • The IMF suggested that India should use monetary policy and broad-based structural reforms to address cyclical weakness and strengthen confidence.
  • A credible fiscal consolidation path is needed to bring down India’s elevated public debt over the medium term.
  • This should be supported by subsidy-spending rationalization and tax-base enhancing measures, said the report.
  • Other measures it suggested included reducing the public sector’s role in the financial system, reforming the hiring and dismissal regulations that would help incentivise job creation and absorb the country’s large demographic dividend”, and land reforms to expedite infrastructure development.

Crisis looming on Auto Sector

  • The auto sector is one of the areas seriously affected globally.
  • Global car sales fell by three per cent last year, while the number of automobile units manufactured declined by 1.7 per cent, in value terms it fell by 2.4 per cent.
  • The number of auto units produced by China fell by four per cent, its first decline in more than two decades, according to the WEO.
  • It said the two main reasons for the decline of the auto sector were the removal of tax breaks in China and the rollout of new carbon emission tests in Europe.
  • The auto industry had a large global footprint and vehicles and related parts are the world’s fifth largest export product, accounting for about 8 percent of global goods exports in 2018.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Global Competitiveness Index 2019

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GCI

Mains level : Ease of doing business in India

  • The annual Global Competitiveness Index (GCI) compiled by Geneva-based World Economic Forum (WEF) is released.
  • Singapore has become the world’s most competitive economy in 2019, pushing the U.S. to the second place. Hong Kong SAR is ranked 3rd, Netherlands is 4th and Switzerland is ranked 5th.

About the GCI

  • The GCI was launched in 1979, maps the competitiveness landscape of 141 economies through 103 indicators organised into 12 pillars.

India ranked second for shareholder governance

  • India is ranked also high at 15th place in terms of corporate governance, while it is ranked second globally for shareholder governance.
  • In terms of the market size, India is ranked third, while it has got the same rank for renewable energy regulation.
  • Besides, India also punches above its development status when it comes to innovation, which is well ahead of most emerging economies and on par with several advanced economies.
  • India ranks high in terms of macroeconomic stability and market size, while its financial sector is relatively deep and stable despite the high delinquency rate, which contributes to weakening the soundness of its banking system.
  • This is largely due to improvements witnessed by several other economies.

India’s declining performance

  • India has moved down 10 places to rank 68th from 58th on an annual global competitiveness index.
  • WEF has flagged limited ICT (information, communications and technology) adoption, poor health conditions and low healthy life expectancy.
  • India is among the worst-performing BRICS nations along with Brazil (ranked even lower than India at 71st this year).
  • In the overall ranking, India is followed by some of its neighbours including Sri Lanka at 84th place, Bangladesh at 105th, Nepal at 108th and Pakistan at 110th place.

Why?

Low healthy life expectancy

  • The WEF said the healthy life expectancy, where India has been ranked 109th out of total the 141 countries surveyed for the index, is one of the shortest outside Africa and significantly below the South Asian average.

Improving skill base

  • Besides, India needs to grow its skills base, while its product market efficiency is undermined by a lack of trade openness.
  • The labour market is characterized by a lack of worker rights’ protections, insufficiently developed active labour market policies and critically low participation of women.
  • With a ratio of female workers to male workers of 0.26, India has been ranked very low at 128th place. India is also ranked low at 118th in terms of meritocracy and incentivisation and at 107th place for skills.

Asia-Pacific is most competitive region

  • The report showed that several economies with strong innovation capability like Korea, Japan and France, or increasing capability, like China, India and Brazil, must improve their talent base and their labour markets.
  • The presence of many competitive countries in Asia-Pacific makes this region the most competitive in the world, followed closely by Europe and North America.
  • China is ranked 28th (the highest ranked among the BRICS) while Vietnam is the most improved country in the region this year at 67th place.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[oped of the day] The quest for inclusive growth to combat inequality

Note4Students

From UPSC perspective, the following things are important :

Prelims level : World Inequality Report

Mains level : Rising Inequalities

Op-ed of the day is the most important editorial of the day. This will cover a key issue that came in the news and for which students must pay attention. This will also take care of certain key issues students have to cover in respective GS papers.

CONTEXT

According to the work of the World Inequality Lab, in the nearly 90 years between the Great Depression of 1929 and the year 2017, inequality in the US and UK first collapsed enormously and then exploded, ending up roughly where it started. 

Extent of Inequalities

  • In 1928, at the end of the Roaring Twenties, 22% of the US national income went to the richest 1%. 
  • Something very similar happened in the UK. The share of the top 1% fell steadily from 1920 to about 1979 and then went up, almost reaching the 1920 levels by 2017.
  • India has followed an even more extreme trajectory than the US since Independence. In the 1950s, the share of the top 1% in income was between 12% and 14%. That number dropped to 6% in the early 1980s and then began to climb, reaching 23% in 2017.

Not the same across all countries

  • The share of the top 1% in France, Germany, Switzerland, Sweden, the Netherlands, and Denmark was not too different from that in the US or UK in 1920. After 1920, inequality went down very sharply in all of these countries. 

What’s causing these differences

  • One view is that inequality is the cost we pay for fast growth. 
  • Countries track themselves in terms of GDP per capita despite radically different experiences with respect to inequality.
  • Across the world, the correlation between inequality and growth at the country level is negative. More unequal countries grow less fast. There is also no evidence that an increase in inequality is followed by increased growth.

Understanding Inequalities

  • There is very little support for the theory that we need to incentivize the rich so that the country grows. 
  • The sharp turnaround in inequality in the US and UK around 1980 coincides with Ronald Reagan in the US and Margaret Thatcher in the UK. They were true believers in the doctrine of incentives and pushed through a policy that combines large tax cuts for the rich with massive deregulation, and hostility towards the rights of workers. 
  • This did not happen in the rest of Western Europe, and it may be one important reason why they never saw the same explosion of inequality. 
  • Tax cuts and other giveaways to the rich do little to change their behavior.

Need for government regulation

  • It is clear that the regulations that we had in India before 1991 or China before 1979 can be debilitating. 
  • Governments do need to get out of the way of private businesses.
  • But there is a lot that can be done with a simple set of instruments
    • sensibly high taxes on high incomes and high wealth
    • vigilance against resource grabs (land, mines, water) by the rich
    • progressive carbon taxes
    • effective defense of workers’ rights by making job losses less painful

Income Inequalities

  • Income inequality is an enormous and complex challenge. 
  • The level of inequality today is the highest it has been in the last 100 years and has increased steadily over the last several decades.
  • The promise of equitable and inclusive economic growth has remained elusive.
  • Solving inequalities is not a matter of economics and policy alone, but also that of attitudes, empathy, and activism, both at the individual and societal level. 

Conclusion

This is not a problem that can be solved in three or five years. We must brace for this long quest with the consistent purpose for decades to come.

 


Back2Basics

World Inequality Report by the World Inequality Lab at the Paris School of Economics provides estimates of global income and wealth inequality based on the most recent findings complied by the World Wealth and Income Database.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] India’s economic mobility and its impact on inequality

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Economic inequality; Inclusive Growth issues

CONTEXT

There has been a phenomenal rise in economic inequality in India. It is important to measure the extent of economic mobility in India, which reflects the number of people moving up and down the economic ladder over time. 

Facts

  1. A 2018 Oxfam study reports a significant increase in the consumption Gini index in both rural and urban areas from 1993-94 to 2011-12.
  2. According to the Global Wealth Report (GWR) 2017 by the Credit Suisse Research Institute, between 2002 and 2012, the share of the bottom 50% of the population in total wealth declined from 8.1% to only 4.2%. In the same period, the share of the top 1% of the total wealth increased from 15.7% to 25.7%.
  3. A recent survey pointed out that the mobility rate for the population is remarkably low. In 7 years, at least 7 in 10 poor households remain poor or remain in an insecure non-poor state.

Economic mobility

In a mobile economy, the households move more freely throughout the income/consumption distribution.

Importance of mobility

  1. Long-term welfare effects of rising inequality depend crucially on the level of economic mobility.
  2. Economic mobility or the lack of it can accentuate the adverse effects of inequality.
  3. An economy with much economic mobility will result in a more equal distribution of incomes and consumption than an economy with low mobility.

Dimensions of mobility

  1. Muslims are more vulnerable to falling below the poverty line over the seven-year period compared to Hindus or other religious groups.
  2. Compared to upper-caste groups and OBCs, SCs and STs are less likely to escape poverty and more likely to move into poverty.
  3. Between upper castes and OBCs, the latter is more likely to move into poverty and less likely to become secure non-poor.
  4. Rural households are more likely to remain in poverty compared to urban households.
  5. Inequality in India can be characterized as chronic since households belonging to the lower rungs of the economic ladder are likely to find themselves caught in a poverty trap.

Way ahead

  1. Poverty reduction efforts should focus on ways to improve the permanent economic status of households through the acquisition of assets and capabilities, rather than dealing with temporary volatility.
  2. There is also doubt on the efficacy of existing affirmative action and social programs to improve the economic status of marginalized groups in the country.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India enters 37-year period of demographic dividend

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Demograhic Dividend

Mains level : Read the attached story


  • Since 2018, India’s working-age population (people between 15 and 64 years of age) has grown larger than the dependant population (defined as children aged 14 or below as well as people above 65 years of age).
  • This bulge in the working-age population is going to last till 2055, or 37 years from its beginning.

Why it matters?

  • In many ways, India’s demographics are the envy of the world.
  • As populations in countries such as China, US, and Japan is getting older, India’s population is getting younger.

What is demographic dividend?

  • Demographic dividend, as defined by the United Nations Population Fund (UNFPA) means the economic growth potential that can result from shifts in a population’s age structure.
  • This happens when the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older).
  • In other words it is a boost in economic productivity that occurs when there are growing numbers of people in the workforce relative to the number of dependents.
  • It indicates that more people have the potential to be productive and contribute to growth of the economy for a longer period of time.

When this happens?

  • This transition happens largely because of a decrease in the total fertility rate (TFR, which is the number of births per woman) after the increase in life expectancy gets stabilized.

Global Examples

Japan

  • Japan was among the first major economies to experience rapid growth because of changing population structure.
  • The country’s demographic-dividend phase lasted from 1964 to 2004.
  • An analysis of the first 10 years since this phase shows how such a shift in the population structure can propel growth.
  • In five of these years, Japan grew in double digits; the growth rate was above 8% in two years, and a little less than 6% in one.

China

  • China entered this stage in 1994 — 16 years after Deng Xiaoping’s economic reforms started in December 1978.
  • Although its growth accelerated immediately after the reforms, the years of demographic dividend helped sustain this rate for a very long period.
  • In the 16 years between 1978 and 1994 (post-reform, pre-dividend) China saw eight years of double-digit growth.
  • In the 18 years since 1994 there have been only two years when China could not cross the 8% growth mark.

Indian Case

  • In near future India will be the largest individual contributor to the global demographic transition.
  • A 2011 IMF Working Paper found that substantial portion of the growth experienced by India since the 1980s is attributable to the country’s age structure and changing demographics.
  • By 2026 India’s average age would be 29 which is least among the global average.
  • The U.S. Census Bureau recently predicted that India will surpass China as the world’s largest country by 2025, with a large proportion of those in the working age category.
  • Over the next two decades the continuing demographic dividend in India could add about two percentage points per annum to India’s per capita GDP growth.

What next?

  • It is however important to note that this change in population structure alone cannot push growth. There are many other factors.
  • According to research by the RBI this will depend on India addressing its declining labour force participation rate.
  • The UNFPA states that countries can only harness the economic potential of the youth bulge if they are able to provide good health, quality education and decent employment to its entire population.

Harnessing a golden opportunity

  • India’s working-age population is now increasing because of rapidly declining birth and death rates.
  • India’s age dependency ratio, the ratio of dependents (children and the elderly) to the working-age population (14- to 65-year-olds), is expected to only start rising in 2040, as per UN estimates.
  • This presents a golden opportunity for economic growth that could be reaped through higher growth.

Way Forward

  • India needs to pay  special  attention  to  skilling  and  reskilling  its  workforce,  keeping  in  view  the  changing  nature  of  today’s  job
  • There are  serious  gaps  between  what  the  skill  development  institutions  currently  do  and what the industry requires.
  • Improving education and health infrastructure, in terms of both quality and access and  timely  action  in  a  co-ordinated  manner  by  the  Government,  private  sector  and  researchers  is  necessary  to  harness  the  window  of  opportunity  provided by a favourable demography.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: Economic Survey 2019 — new ideas to policy prescriptions

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Highlights of the Economic Survey

Mains level : Read the attached story

What is Economic Survey?

  • Each year, a day before the presentation of the full-fledged annual Union Budget, the country Chief Economic Advisor (CEA) releases the Economic Survey.
  • However, notwithstanding the close proximity of its release with the Union Budget, the Economic Survey is not exactly a predictor of the Budget proposals.
  • Still, it is a very important document because it provides an authoritative, detailed and official annual summary of the current state of play in the Indian economy.

What it consists of?

  • Beyond the summary, the ES paints a variety of future scenarios, highlighting likely challenges and pointing to possible solutions.
  • In the past few years, the ES has been presented in two volumes.
  • Volume 1 focussed on research and analysis about the challenges — both contemporary and long-term — facing the Indian economy.
  • Volume 2 provided the more descriptive review of the fiscal year, encompassing all the major sectors of the economy.

Importance of Economic Surveys

  • Apart from providing a comprehensive snapshot of the various sectors of the economy, the ES is also used as a sounding board for introducing new policy ideas and triggering fresh debates.
  • As the years have rolled by, successive CEAs have used every aspect of the Economic Survey to convey some key idea.
  • For instance, the colour of the 2018 Survey’s cover — pink — was chosen “as a symbol of support for the growing movement to end violence against women, which spans continents”.

Key takeaways from Economic Survey 2018-19

Slowest projection of growth

  • The ES has projected that economic growth in the current fiscal year could rise to 7% from the 6.8% in 2018-19 — the slowest rate of growth in five years.

Macroeconomic Indicators

  • The survey has flagged the challenges on the fiscal front following an economic slowdown impacting tax collections amid an expected surge in agri-spending.
  • It has underlined the need for India to shift gears to accelerate and sustain a real GDP growth rate of 8% in order to achieve the target of becoming a $5 trillion economy by 2025.
  • It flags the need for a “virtuous cycle” of savings, investment and exports to be catalyzed and supported by a favorable demographic phase required for sustainable growth.
  • Private investment has been highlighted as a key driver for demand, capacity, labor productivity, new technology, creative destruction and job creation.

Era for behavioral change

  • The Survey lays out an agenda for behavioral change by applying the principles of behavioral economics to several issues.
  • It includes gender equality, a healthy and beautiful India, savings, tax compliance and credit quality.
  • It highlights a transition from ‘Beti Bachao Beti Padhao’ to ‘BADLAV’ (Beti Aapki Dhan Lakshmi Aur Vijay Lakshmi), from ‘Swachh Bharat’ to ‘Sundar Bharat’, from ‘Give it up” for the LPG subsidy to ‘Think about the Subsidy’ and from ‘Tax evasion’ to ‘Tax compliance’.

Policy prescriptions

  • The Survey flags the case for intervention in the case of “dwarfs” (firms with less than 100 workers) despite being more than 10 years old, account for more than 50% of all organized firms in manufacturing by number.
  • In this context, it calls for a sunset clause of less than 10 years, with necessary grand-fathering, for all size-based incentives and deregulating labor law restrictions to create significantly more jobs.
  • It calls for a need to ramp up capacity in the lower judiciary, including a focus on delays in dispute resolution.
  • Contract enforcement biggest constraint to improve EODB ranking; much of the problem is concentrated in the lower courts.
  • It also calls for policy changes to lower overall lifetime ownership costs and make electric vehicles an attractive alternative to conventional vehicles.

Problem areas

  • While the investment rate was expected to pick up following improvement in consumer demand and bank lending, the GST, farm schemes will all pose challenges on the fiscal front.
  • Fiscal deficit has been pegged at 3.4% of GDP for 2018-19.
  • There are apprehensions of slowing growth, which will have implications for revenue collections.
  • Crude oil prices are projected to decline in 2019-20, which could push consumption.
  • Flags need to gear up for ageing population; necessitating more healthcare investment, increasing retirement age in a phased manner.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed of the day] Not by wishful thinking

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : How to make India a 5 trillion Economy

Note- Op-ed of the day is the most important editorial of the day. Aspirants should try to cover at least this editorial on a daily basis to have command over most important issues in news. It will help in enhancing and enriching the content in mains answers. Please do not miss at any cost.

CONTEXT

In early June, at a NITI Aayog meeting, Prime Minister Narendra Modi set a clear and bold economic target — to grow India into a $5 trillion economy by 2024. It is now for ‘Team India’, as the meeting was bannered, to translate this target into a plan and policies and programmes.

How realistic is this dream?

  • It is ₹350,00,000 crore of gross domestic product (GDP) at current prices, at ₹70 to a U.S. dollar exchange rate. India’s (provisional) GDP in 2018-19 at current prices is ₹190,10,164 crore (or $2.7 trillion), which means the annual per capita income is ₹1,42,719, or about ₹11,900 per month.
  • The target implies an output expansion by 84% in five years, or at 13% compound annual growth rate. Assuming an annual price rise of 4%, in line with the Reserve Bank of India’s inflation target, the required growth rate in real, or inflation-adjusted, terms is 9% per year.
  • To get a perspective, India officially grew at 7.1% per year over the last five years, but the annual growth rate never touched 9%. 

Comparison with Asian Countries

China – China, with a historically unprecedented growth record in its best five years, during 2003-07, grew at 11.7%;.

South Korea – South Korea, between 1983 and 1987, grew at 11%.

How to grow at such a fast pace

No country grew at such a pace without mobilising domestic saving and raising fixed investment rates.

1.Savings and investment rates required

  • In the last five years, on average, the domestic saving rate was 30.8% of gross national domestic income (GNDI), and the investment rate (gross capital formation to GDP ratio) was 32.5%.
  • Assuming the underlying technical coefficients remain constant, a 9% annual growth rate calls for 39% of domestic saving rate and 41.2% of investment rate.
  • Correspondingly, shares of private consumption need to shrink to about 50% of GDP from the current level of 59% of GDP at current prices, assuming foreign capital inflow remains at 1.7% of GDP.
  • In other words, India will have to turn into an investment-led economy as it happened during the boom last decade (2003-08) before the financial crisis, or like China since the 1980s.
  • Granting that rapid technical progress or changes in output composition could reduce the required incremental capital-output ratio (ICOR), it nevertheless will call for a nearly 8-9 percentage point boost to saving and investment rates.

The low domestic saving rate

History shows that no country has succeeded in accelerating its growth rate without raising the domestic saving rate to close to 40% of GDP.

FDI is not an alternative – Foreign capital can fill in some vital gaps but is not a substitute for domestic resources.

A decline in savings – The domestic saving rate has declined from 31.4% in 2013-14 to 29.6% in 2016-17; and gross capital formation rate from 33.8% to 30.6% during the same period.

NPA Crisis – The banking sector’s ability to boost credit growth is limited by non-performing assets (NPAs) and the governance crisis in the financial sector.

Baltic Dry Index indications –

  • Export to GDP ratio has declined rapidly, with a looming global trade war on the horizon, as has been indicated by the Baltic Dry Index.
  • The highly regarded leading indicator of global trade, currently trading at 1354 is forecasted to decline to less than 1,000 index points by the year-end (a decline from its historic high of 11,793 points in May 2008, just before the financial crisis set in).

Conclusion

Given the foregoing, the $5 trillion target appears daunting. It may yet be doable, provided policymakers begin with a realistic assessment, by willing to step up domestic saving and investment, and not by the wishful thinking of FDI-led growth accelerations in uncertain economic times.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] The savings dilemma.

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Decline in savings rates should be arrested as sson as possible.

Importance of savings

  • Empirical evidence shows that developing economies have a positive long-term correlation between savings and growth.
  • In a fast-growing economy like India, investments generally outpace domestic savings, and the gap gets funded by foreign savings.
  • This shows up as current account deficit.
  • Maintaining adequate domestic savings, therefore, is essential to sound macroeconomic management — more so in today’s challenging global environment.

Unfortunately, Indians have been saving less.

The decline in savings Rate

  • Worse, our rate of savings has fallen sharply.
  • The overall savings rate (households, public sector and private sector), or the proportion of gross domestic savings in the GDP, plunged to 30.5 per cent in fiscal 2018 from a peak of 36.8 per cent in fiscal 2008, rising marginally in the interim.
  • It has been downhill since fiscal 2012.
  • The external shock of the global financial crisis led to a sharp slowdown in public savings in fiscal 2009, with the government resorting to fiscal stimulus.
  • The savings rate recovered marginally in the next three years, only to lose momentum thereafter. This could compound India’s problem of slowing growth.

1. Decline in household savings

  • The largest savers in the economy, household savings, (the government and the corporate sector being the other two categories) fell from 23.1 per cent as a per cent of the GDP in fiscal 2010 to 17.2 per cent in fiscal 2018.
  • That’s a major source of concern because households have been traditionally net suppliers of funds to the private corporate sector as well as the public sector.
  • This means that excess of household sector savings over their investments is used to fund the saving-investment gap of the other two sectors.
  • A continuation of this trend will shrink the pool of savings available to facilitate private investments.

What explains the decline in household savings?

Increased Consumption –

  • A part of the answer lies in the consumption trend. National accounts data shows that over the past few years, private consumption as a percentage of the GDP has risen — in a reversal of the trend seen till the early 2000s.
  • Given favourable demographics, households are becoming consumption-centric, and their financial liabilities have been rising, as evidenced in retail credit, which, at 17 per cent annually, is the fastest-growing loans segment in the past five years.
  • This fall in household savings rate is also corroborated by a sharp fall in household saving elasticity (the proportional change in savings to a change in income) since the beginning of this decade.

    2.Government savings

On the other hand, savings of government corporations (departmental and non-departmental enterprises) are largely offset by government dis-saving (as it runs a revenue deficit), which keeps the overall public savings rate low.

3.Private sector Savings

  • But the private corporate sector savings bucked this trend, surging to 11.6 per cent of the GDP in fiscal 2018 from 7.4 per cent about a decade ago.
  • So while private corporate savings surged, household savings declined commensurately.
  • Yet, the rise in private corporate savings is in line with evolving global trends in savings after the global financial crisis.

 

Way Forward

  • In India too, rising corporate savings could be channelled for financing private corporate investment when the opportunity arises.
  • Beyond these domestic sources, an increase in private sector investment will need to be financed by foreign savings, which carries its own set of risks beyond a point.
  • With the election-related uncertainty behind us, a softer monetary policy stance, and the government’s resolve to push growth up, investments are likely to increase in the future.
  • Clearly, it’s time to reignite the virtuous cycle of high savings, investment, and growth so that the country returns to the high-growth trajectory of the past.
  • Pushing up household financial savings would require greater efforts towards financial inclusion, and possibly, incentives for saving.
  • These must be complemented by productivity-enhancing reforms that encourage private sector investments.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] The middle income illusion

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Why middle income trap might only be a hypothesis and not a reality.

CONTEXT

The World Bank has a definition of middle income. It is a range of per capita income between $996 and $12,055, with $996 to $3,895 defined as lower-middle income and $3,895 to $12,055 defined as upper-middle income (the thresholds are often changed, these are 2019 levels).

With a per capita income of around $2,000, India is still a lower-middle income country and $12,055 is a long way off.

The issue with the estimation

Numbers are based on nominal exchange rates

  • These numbers are based on official exchange rates, the so-called nominal per capita GDP or Atlas method figures.
  • But a country’s per capita income is in local currency, that is, rupees.
  • Typically, when economists use the trap idea, they at PPP (purchasing power parity) dollars, using PPP exchange rates, not official exchange rates. India’s PPP per capita income is now around $7,000.
  • The grist to the mill is usually provided by empirical research, documenting the development experience of a diverse range of countries.

Reasons for such a trap

  • On the one hand, as countries attained middle-income status, they would be squeezed out of manufacturing and other dynamic sectors by poorer, lower-cost competitors.
  • On the other hand, they would lack the institutional, human, and technological capital to carve out niches higher up the value-added chain. Thus, pushed from below and unable to grasp the top, they would find themselves doomed to, well, middle-income status.

Faults in this assumption

  • Middle-income countries as a group continued to grow as fast or faster than the convergence standard demanded.”
  • First, a trap cannot be defined without referring to a time-frame.
  • The time series on PPP per capita is a bit more difficult to get than the official rate per capita.
  • With that caveat, take a look at the time series of any relatively more advanced country. Until a few decades ago (a cut-off in 1960 or 1970 will suffice), all these countries were stuck in middle-income traps.
  • Second, the middle-income trap is sometimes defined not with respect to an absolute threshold level of per capita income, but with per capita income expressed as a share of US per capita income.
  • Even if one uses this relative notion, the case of a middle-income trap existing has not been proven.

Conclusion

  • Does this mean there are no issues with the Indian economy? Certainly not. After the elections, with a new government in place, plenty of people have come up with agendas for reform. In most instances, these are not short-term quick fixes, but medium-term changes.
  • Therefore, they can rightly be called structural reforms, and the suggestions should be debated, accepted and implemented.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

National Data Warehouse

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National Data Warehouse (proposed)

Mains level : Need for NDW

Setting up National Data Warehouse

  • The statistical reforms are necessary for ensuring responsiveness to the changing needs of society.
  • The statistics ministry said that it proposes to set up a NDW with a view to leveraging big data analytical tools to further improve the quality of macro-economic aggregates.
  • Here technology will be leveraged for using big data analytical tools for further improving the quality of macro-economic aggregates.
  • Efforts are also on to evolve a legislative framework under which the National Statistical Commission (NSC) may function with independence and give holistic guidance for improving the national statistical system.

Why such move?

  • Over a period of time, there have been increasing demands on the statistical system for the production of relevant and quality statistics.
  • MoSPI has been criticised in some sections for the quality of macro-economic data.
  • The Ministry said revision in GDP estimates occur when data coverage from administrative sources improves over time and these improvements get well documented.
  • Consequently, the initial estimates of GDP tend to be conservative.
  • To improve this, it would require concomitant changes in the sectoral data flows and associated regulatory framework in the data source agencies to facilitate the use of more macro modelling techniques.

Recent initiatives

  • The Ministry has been accommodating these demands by optimizing the available resources and use of technology.
  • The recent step for the merger of CSO and NSSO was aimed at leveraging the strengths of the two organisations so that it can meet the increasing demands, MoSPI said.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] The only mantra

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Resolution of underlying economic challenges should be the foremost agenda.

CONTEXT

India’s problem is not unemployment — this has bounced in the low and narrow range of 4-7 per cent for 50 years — but employed poverty. Our traditional labour market shock absorbers — farm employment and self-employment — are dying because kids born after 1991 are unaccepting of self-exploitation and recognise the wage premiums, identity, dignity, soft skills, apprenticeship effect, and financial inclusion of formal jobs.

1.Poor Formalisation –

India’s 6.3 crore enterprises only convert to 12 lakh GST registrants, 10 lakh provident fund payers, and 19,500 companies with a paid up capital of Rs 10 crore or more because of our regulatory cholesterol — 58,000-plus compliances, 3000-plus filing, and 5000-plus changes every year.

2. Facilitating ease of business –

We need massive ease-of-doing business that rationalises (cuts down ministries, compliances, and filings), simplifies (adopts a universal enterprise number and one labour code) and digitises (adopts a paperless, presenceless and cashless process for all employer compliance by shifting from uploads to websites to an API architecture with straight-through-processing).

3. Reverse payroll wedge

  • India’s labour laws have an insane reverse payroll wedge — employers are forced to deduct 40 per cent-plus of gross wages from chithi waali salary (gross wages) for employees with monthly wages up to Rs 25,000.
  • Yet, haath waali salary (net wages) are only 9 per cent lower for employees with monthly wages above Rs 25,000.
  • This wedge murders formalisation and confiscates property from the poor; all wages belong to employees in a cost-to-company world.

Need of competition to fix  Reverse payroll wedge

  • Fixing this wedge needs competition; EPFO is the world’s most expensive government securities mutual fund (300-plus basis points for administration fees) and Employees’ State Insurance (ESI) is the world’s most expensive health insurance programme (less than 50 per cent of contributions are paid out as benefits).
  • The reform agenda is clear — employee contribution must be made optional, employees must choose who handles their employer contributions, and social security programme fees must be capped to their costs.
  • One driver of 20 million new social security payers has been the Pradhan Mantri Rojgar Protsahan Yojna — this partial reimbursement to employers for incremental low-wage employees has incentivised social security enrolment, is easy to verify, and hard to fudge and should be extended for a fixed period of three years.

4.Challenges before skill development

  • Our skill development system faces the difficult trinity of cost, quality and quantity combining with challenging changes to the world of education.
  • In a world where Google knows everything, knowing is not as important as lifelong learning and hard skills become a necessary but not sufficient condition for the wage premium.

Lack of Apprenticeships –

Apprenticeships are the future of learning, yet India only has 5 lakh apprentices instead of 1.5 crore (if we use Germany’s number of 2.7 per cent of the labour force).

Ways to improve Apprenticeship –

  • Changes could include merging the two central government initiatives, Regional Directorates Of Apprenticeship Training (RDAT) and Board of Apprentice Training (BOAT), operate effective online matching platforms and reinforcing the regulatory legitimacy of apprenticeships as classrooms to overcome the trust deficit with employers.
  • Most importantly, we must enable degree-linked apprentices (skill universities await clearance for linking apprentices to degrees via distance and online delivery).
  • There must also be a focus on financialisation reform and sustainable competition.
  • Fairly-priced capital catalyses formalisation, yet India’s credit to GDP ratio is 50 per cent (rich countries are at 100 per cent). Sadly, Arunachal Pradesh is at one per cent and Bihar is 17 per cent.
  • Lowering our cost of money has begun but sustainably targeting a higher credit to GDP ratio needs more bank licences, fixing the governance at nationalised banks, blunting the asset liability mismatch at NBFCs (some irrationally funded 30 per cent of their balance sheet with commercial paper) and restoring the sanctity of the 270-day IBC bankruptcy deadline.
  • More Indian enterprises need formal financial credit — capital investment and working capital availability drive productivity — without replicating the rash lending between 2008 and 2014 that gave us Rs 14 lakh crore worth of bad loans. 

6.Labour as a state subject

We should consider making labour a state subject and must continue the decentralisation of funds, functions and functionaries to states while simultaneously creating accountability, capabilities and resources in city governance.

Conclusion

The 67 per cent-plus turnout in our recent election not only reflect the invisible threads that hold India together but capture an aspiration that breaks with India’s economic past. This dua needs policy to pray to the one god of formal jobs.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] The sum and substance of the jobs data

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Alternate view on unemployment rate

CONTEXT

The report from the Periodic Labour Force Survey (PLFS) is finally out. In particular, the staggering increase in the unemployment rate, from 1.7% in 2011-12 to 5.8% in 2017-18 for rural men and from 3.0% to 7.1% for urban men, has generated wide ranging hand-wringing.

Three-pointers

  • First, while the unemployment rate is a frequently used measure of poor performance of the economy, under conditions of rising school and college enrolment, it paints an inaccurate picture.
  • Second, the reported unemployment rate is dominated by the experience of younger Indians who face higher employment challenges and exhibit greater willingness to wait for the right job than their older peers.
  • Third, the unemployment challenge is greatest for people with secondary or higher education, and rising education levels inflate unemployment challenges.
  • These three conditions, taken together, suggest that part of India’s unemployment challenge lies in its success in expanding education while not expanding formal sector jobs.

Unemployment rate data

  • Change in education enrollment-  India has seen massive changes in proportion of individuals enrolled in an educational institution over the past decade.
  • For 15-19-year-old rural men, the proportion primarily engaged in studying increased from 64% to 72% between 2011-12 and 2017-18. As a result, while the proportion of the population aged 15-19 that is unemployed doubled from 3% to 6.9%, the unemployment rate tripled from 9% to 27%.

Reasons for high unemployment in this age group –

Contribution from family – Much of the increase in male unemployment is located among ages 15-29. It is important to recognise that in a country dominated by informal sector work, remaining unemployed is possible only for individuals whose families can survive without their immediate contributions.

High for people with higher education – Finally, the unemployment rate has been traditionally high for men with secondary or higher level of education and this is the segment in which most of the increase in unemployment is located.

Educational expansion without employment expansion –

  • Educational expansion affects the unemployment debate by skewing the unemployment statistics and by creating greater competition for well-paid jobs among a rising population of educated youth.
  • Rising prosperity allows young graduates to wait for well-paying jobs, creating an army of educated unemployed, before being forced to accept any work, frequently returning to family farms or starting small shops.

Meeting aspirations

  • After decades of economic stagnation, the 21st century has seen massive growth in aspirations.
  • Parents invest their hearts and souls along with their rising incomes in educating their children.
  • Children hope to make rapid economic progress well beyond the modest gains achieved by their parents’ generation.
  • The unemployment statistics based on PLFS data document the challenges these young people are likely to face.

CONCLUSION

Creating jobs for an increasingly educated workforce and ensuring that the new workers are well equipped to enter the labour force are twin challenges that deserve greatest priority. One hopes that leaders of the present government who made their political debut during the student movement in the 1970s will meet this challenge head-on.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Slowdown confirmed: on deepening economic crisis

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Economic slowdown is indicating towards the need of change.

CONTEXT

The first macro data set released under the new Finance Minister, Nirmala Sitharaman’s watch, on Friday, showed an under-performing economy with GDP growth falling to 5.8% in the fourth quarter of 2018-19 and pulling down the overall growth for the fiscal to a five-year low of 6.8%.

Background

  • Growth in gross value added (GVA), which is GDP minus taxes and subsidies, fell to 6.6% in 2018-19, pointing to a serious slowdown.
  • If further confirmation were needed, the growth in core sector output — a set of eight major industrial sectors — fell to 2.6% in April, compared to 4.7% in the same month last year.
  • And finally, unemployment data, controversially suppressed by the Union government so far, showed that joblessness was at a 45-year high of 6.1% in 2017-18.
  • These numbers highlight the challenges ahead for Ms. Sitharaman as she sits down to draft the Budget for 2019-20, to be presented on July 5.

The overall slowdown in the economy

  • The economy is beset by a consumption slowdown as reflected in the falling sales of everything from automobiles to consumer durables, even fast-moving consumer goods.
  • Private investment is not taking off, while government spending, which kept the economy afloat during the last NDA government, was cut back in the last quarter of 2018-19 to meet the fiscal deficit target of 3.4%.
  • The good news is that inflation is undershooting the target and oil prices are on the retreat again.
  • But the rural economy remains in distress, as seen by the 2.9% growth in agriculture last fiscal; the sector needs a good monsoon this year to bounce back.
  • Overall economic growth in the first quarter of this fiscal is likely to remain subdued, and any improvement is unlikely until the late second quarter or the early third.

Way Forward

  • In the near term, she has to boost consumption, which means putting more money in the hands of people.
  • That, in turn, means cutting taxes, which is not easy given the commitment to rein in the fiscal deficit.
  • In the medium term, Ms. Sitharaman has to take measures to boost private investment even as she opens up public spending again.
  • These call for major reforms, starting with land acquisition and labour, corporate taxes by reducing exemptions and dropping rates, and nursing banks back to health.
  • On the table will be options such as further recapitalisation of the ailing banks, and consolidation.

Privatisation

  • The question, though, is where the money will come from.
  • With tax revenues likely to be subdued owing to the slowdown, the Centre will have to look at alternative sources such as disinvestment.
  • There may be little choice but to go big on privatisation. A rate cut by the Reserve Bank of India, widely expected this week, would certainly help boost sentiment.

Conclusion

But it is the Budget that will really set the tone for the economy.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Why the integrity of data matters

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Autonomy of NSC is required to maintain sanctity of data, surveys.

CONTEXT

The announcement that the government has decided to merge the National Sample Survey Office (NSSO) into and under the Central Statistics Office (CSO) has caused both surprise and concern. ecent attempts to question the veracity of National Sample Survey (NSS) data and the way the issue has been handled have given rise to apprehensions within academia, State governments and the media about the prospect of radical changes in the present system for deciding substantive issues of scope, design, scrutiny and validation of the surveys.

The present system

Under the present system, every year various departments of government send a list of subjects that they would like to be investigated by the NSSO.

Request for investigation are sent to NSC –

The requests are sent to the National Statistical Commission (NSC), which has respected economists, subject matter specialists and statisticians from government, including the head of the CSO and senior officials of the NSSO responsible for technical aspects of design and conduct of field work, as well as representatives of State governments.

The investigation by NSC –

  • Subject matter specialists in particular fields are also brought in. The proposals are discussed at length keeping in view the budget allocations, availability of trained field staff and supervisors.
  • In doing so, the conduct of periodic surveys on important issues is also considered. (It should be noted that budget allocations, and personnel of the NSSO have always been under the Department of Statistics.)
  • After providing for periodic repeat surveys (at quinquennial or decennial intervals) of some important aspects (notably consumer expenditure, employment, social consumption, land holdings, rural savings and investments), the subjects to be covered in a particular year and the scope of the inquiry are decided.
  • The tasks of sampling design, the scope and content of information to be collected, design of schedules and protocols of field work are left to be decided by special working groups.
  • The tabulated results are discussed in detail by the NSC and are published after its approval.

Compromising autonomy

  • The NSSO surveys command wide respect among academics, State governments and non-governmental organisations .
  • The existing institutional arrangement in which the NSC, as a professional body independent of government, has not only functioned smoothly but also commands confidence and respect both within the country and abroad must be maintained.
  • Any attempt or even a suggestion that its substantive work, publication and free dissemination of data are subject to the department’s approval will hugely dent the credibility of the Indian statistical system.

Scope for improvement

  • It is widely recognised that there is scope for improvement in the functioning of the institution and the way data are collected.
  • These problems are well known: the NSSO doesn’t have adequate budgetary allocations; there is an acute shortage of trained field staff; the scale of surveys is un-manageably large mainly because the users demand a degree of detail in content and regional disaggregation of estimates.
  • But there are also serious difficulties inherent in trying to get reliable and complete information through the interview method.

Solutions

  • The solutions call for action by the institutions responsible for gathering data by investing in continuing research on improving sampling design, field survey methods and validation of data.
  • Correcting these deficiencies is entirely in the domain of government.

Conclusion

Increasing the role of CSO officials in running the NSSO will not solve these problems, but they can help by providing funds for specialised research on survey design and methodology. The necessity and importance of such research calls for far greater attention and resources than they receive at present.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Government’s key agenda must be to accelerate growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Economic growth should be top agenda of new government.

CONTEXT

Accelerating economic growth must be on top of the agenda of the new government. It is only a fast-growing economy that will generate the surpluses which are necessary to address many of our socio-economic problems and to provide social safety nets.

The decline in the investment rate

  • In current prices, the ratio of Gross Fixed Capital Formation to Gross Domestic Product has stayed low at 28.5% between 2015-16 and 2017-18. In 2018-19 it is estimated at 28.9%. In 2007-08, it was as high as 35.8%. In constant prices, the ratio, has, however, shown a smaller decline from the peak.

Reviving investment

  • The bulk of public investment comes from public sector enterprises, including the Railways.
  • What is needed is for the government to interact with all public sector units and prepare a programme of public investment for 2019-20.

Long term view of Public Sector

Public sector units can take a longer-term view than the private sector. A strong public investment programme can be a catalyst of private investment. In a situation such as the present one, it can crowd in private investment.

Industry government participation

Second, there have to be sector- or industry-wise discussions between the government and industrialists to understand the bottlenecks that each industry faces in making investment and take actions to remove them.

  • Banks are under stress and the ratio of non-performing assets (NPAs) has risen.
  • We need to resolve this issue as early as possible so that banks can get back to lending at a significant pace. In the absence of term lending financial institutions, banks provide both working capital and long-term loans.
  • That is why resolving the issue of NPAs is critically important for larger flow of long-term funds.

Jobs and growth

  • The answer to the problem of jobs is only growth. It is faster growth and faster investment which will generate employment.
  • Sectors such as IT and the financial system, which provided attractive employment to young educated entrants to the labour market in the past, have their own problems.
  • But an improvement in the financial system may trigger some new jobs. Ultimately, it is overall growth which is key to more employment.

Rural Demand –

  • The main concern is the slowdown in rural demand, which can affect the off-take of consumer goods.
  • Agrarian distress, which is the cause of the slowdown in demand, needs to be tackled on a priority.
  • Where distress is due to a fall in prices, the best course of action is to resort to limited procurement so that the excess over normal is procured by the government.

Increase in agricultural output –

  • As far as increase in agricultural output in the short run is concerned, the monsoon is a big question mark.
  • Nothing can be done about it except changing the cropping pattern depending on rainfall.
  • Over the medium term, more attention must be paid to increasing agricultural productivity through consolidation of land holdings and spreading better techniques of cultivation.

Goods and services act

  • The government should get tax authorities, industrialists, traders and, particularly, exporters to sort out the issues together.
  • The Insolvency and Bankruptcy Code was another significant step taken in the last few years.
  • Even here there are some bottlenecks and the government must address them.

Land Reforms –

Compulsory acquisition of land is the antithesis of competition and should be resorted to only in limited cases where the public interest is involved.

Labour Reforms – 

  • Labour reforms should wait until the economy has picked up steam and moved to a higher growth path.
  • Only in these circumstances will there be less resistance.

 

Conclusion

To conclude, besides economic factors, non-economic factors are also critically important to revive what are often described as ‘animal spirits’. Investment today is based on expectations of future earnings. Thus it is an act of faith in the future. For this to happen, there must be social and political tranquillity.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Trade troubles

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Industrial slowdown and it's effects

CONTEXT

Labour intensive exports remain sluggish, non-oil non-gold imports contract, suggesting weak domestic demand. According to the latest trade data, at the aggregate level, exports grew by a mere 0.64 per cent in April. But, strip away the spurt in petroleum exports, and the remaining exports actually contracted by 3 per cent in April.

Background

  • India’s trade deficit surged to a five-month high of $15.3 billion in April with merchandise export growth slumping to 0.64 per cent — the slowest pace since December 2018.
  • These numbers suggest that the high export growth observed in March may indeed have been an aberration.
  • This subdued performance in April comes after recent data showed that industrial production had contracted by 0.1 per cent in March.
  • With both consumer durables as well as capital goods segments contracting sharply — the latter is a proxy for investment demand — it suggests that the underlying drivers of growth are sputtering.
  • According to the latest trade data, at the aggregate level, exports grew by a mere 0.64 per cent in April.
  • But, strip away the spurt in petroleum exports, and the remaining exports actually contracted by 3 per cent in April.
  • The lacklustre performance can be traced largely to the contraction in exports of engineering goods as well as subdued growth of major labour intensive segments.
  • For instance, gems and jewellery contracted by 13.4 per cent, leather products by 15.25 per cent as did man-made and cotton yarn. Growth of the ready-made garments segment also slumped to 4.4 per cent in April, down from 15 per cent in March.
  • This does not bode well for job creation. On the other hand, imports rose by 4.5 per cent in April, on the back of higher crude and gold shipments.
  • But what is worrisome is that imports, excluding oil and gold, which give a better sense of domestic demand, contracted by 2.2 per cent in April, after contracting by 2.67 per cent in the previous month.

Impact of slow down

  • The near-term prospects for exports appear to be muted. For one, the escalation of trade tensions between the US and China is likely to impact global growth and trade.
  • In fact, last month, the World Trade Organisation (WTO) lowered its projection for global trade growth.
  • It now expects merchandise trade volume growth to fall to 2.6 per cent in 2019, from 3 per cent in 2018.

Conclusion

  • Clearly, the next government has its task cut out. It will have to carefully navigate the intensifying trade war between the US and China while putting in place measures to boost competitiveness and revive exports.
  • Perhaps, easing the compliance burden of the goods and service tax (GST) would be a good starting point.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Missing demand: on economic slowdown

Note4Students

From UPSC perspective, the following things are important :

Prelims level : New GDP series

Mains level : Industrial slowdown and it's effects

CONTEXT

A welter of data collectively and individually point to one worrying conclusion: economic momentum across sectors is slowing in the widening absence of that key ingredient, demand.

Slowdown across the economy

The decline in the automobile sector –

  • Domestic sales of cars, commercial vehicles and two wheelers all contracted in April, from a year earlier, the Society of Indian Automobile Manufacturers (SIAM) has reported.
  • The decline of almost 16% in total automobile industry sales is an indication that consumption demand across markets — urban and rural, institutional and individual — is petering out.
  • While sales of commercial vehicles, a fair proxy for overall economic activity, slid 6% last month, a 16.4% drop in demand for two-wheelers extended the segment’s slump into the new financial year, mirroring the rippling rural distress.
  • The data on passenger vehicles, which saw the steepest drop in almost eight years, add to the gloom.
  • Car sales shrank almost 20% amid a protracted slump that shows no signs of a reversal.

Output decline in various sector

The latest industrial output figures from the government serve to underscore the widespread nature of the demand drought.

The decline in IIP – The Index of Industrial Production (IIP) for March shows output fell 0.1% from a year earlier to a 21-month low, with the use-based classification revealing a weakening that spared none of the six segments.

Shrink in capital Goods sector – The capital goods sector shrank by 8.7% on the back of an 8.9% contraction in the preceding month.

Fall in consumer durables – Output of consumer durables fell 5.1% from a year earlier, and growth in consumer non-durables production slid to 0.3% from the 14.1% pace in March 2018.

Drag in manufacturing – Manufacturing, which has a weight of almost 78% in the index, continues to be the biggest drag, with output contracting by 0.4% after shrinking by a similar extent in February.

Overall, the sector’s growth slowed to 3.5% in the last fiscal, from 4.6% in 2017-18.

Conclusion by data

  • Overly optimistic GDP growth Rate – The composite picture that emerges from all these numbers belies the CSO’s implicit fourth-quarter GDP growth assumption of 6.5%, and paints it as overly optimistic.
  • Unstable global conditions – With global headwinds strengthening in the backdrop of an escalating trade war between the two largest economies, the U.S. and China, and rising tensions in West Asia beginning to push up energy costs from the top oil-exporting region, Indian policymakers have to contend with an external sector that would likely only add to the domestic pressures, most certainly in the near term if not in the longer.
  • Need for a normal monsoon – The distress in the farm sector may just ease marginally if the monsoon does turn out to be “near normal” as forecast last month, and could help spur a demand revival in the rural hinterland.

Conclusion

Still, the new government that emerges after May 23 must spare little time in drawing up appropriate policy measures that not only help reinvigorate demand but also ensure that such a revival is robust, across-the-board and enduring.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[pib] 7th Economic Census 2019

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Economic Census

Mains level : Importance of the Economic Census


  • In the run up to upcoming 7th Edition of Economic Census, a national training workshop of the Master Trainers was organized by the Ministry of Statistics and Program Implementation (MoSPI).
  • The census is to begin in June this year.

7th Economic Census -2019

  • The 7th Economic Census -2019 is being conducted by MoSPI to provide disaggregated information on various operational and structural aspects of all establishments in the country.
  • MoSPI has partnered with Common Service Centres, CSC e-Governance Services India Limited, a Special Purpose Vehicle under the MEITY as the implementing agency for 7th
  • An IT based digital platform for data capture, validation, report generation and dissemination will be used in this Economic Census.

About Economic Censuses

  • In 1976, Government of India launched a plan scheme called Economic Census and Surveys.
  • It is the census of the Indian economy through counting all entrepreneurial units in the country which involved in any economic activities of either agricultural or non-agricultural sector which are engaged in production and/or distribution of goods and/or services not for the sole purpose of own consumption.
  • It provides detailed information on operational and other characteristics such as number of establishments, number of persons employed, source of finance, type of ownership etc.
  • This information used for micro level/ decentralized planning and to assess contribution of various sectors of the economy in the gross domestic product (GDP).

Censuses till date

  • Total Six Economic Censuses (EC) have been conducted till date.
  • In 1977 CSO conducted First economic census in collaboration with the Directorate of Economics & Statistics (DES) in the States/UTs.
  • The Second EC was carried out in 1980 followed by the Third EC in 1990. The fourth edition took place in 1998 while the fifth EC was held in 2005.
  • The Sixth edition of Economic Census was conducted in 2013.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Of shells, companies and GDP

Note4Students

From UPSC perspective, the following things are important :

Prelims level : New GDP series

Mains level : NSSO finding of shell companies inclusion in MCA-21 might impact gdp data.

CONTEXT

About a third of non-government non-financial companies in the services sector are not traceable is the finding of a National Sample Survey Office (NSSO) survey for 2016-17 that has just been released. Since such entities could be shell/fake/bogus companies included in the MCA-21 database of “active” companies used for estimating the gross domestic product (GDP), the new finding could imply that private corporate sector GDP is being currently overestimated, denting the official growth narrative.

The background

  • Change in the base year – In 2015, the Central Statistics Office (CSO) issued a new GDP series with 2011-12 as the base year, replacing the earlier series with the 2004-05 base-year as a routine matter.
  • Usually, the revision leads to a slight expansion of the absolute GDP in the base year, but its growth rate does not change, implying that the underlying pace of economic expansion in the two series has remained the same.
  • Change in growth rate – This time was different, however. The absolute GDP size — the sum of the value of all (unduplicated) goods and services produced in a year — got diminished slightly in the base year, and its growth rates went up subsequently.
  • Application of global template – Faced with public scrutiny and scepticism, the CSO defended the revision by claiming that it had followed the latest global template (the System of National Accounts 2008), applying improved methodologies to a newer and larger data set.
  • Inclusion of MCA-21 financial returns – In a first, the new series estimated private corporate sector (PCS) GDP directly using the Ministry of Corporate Affairs’ (MCA) statutory filing of financial returns, MCA-21.
  • Effect on industries  – Accounting for over a third of GDP, as the non-financial PCS now spans widely, the revision has affected the estimates of many industries and services. Hence the GDP debate has mostly centred on the PCS.

Screening and setback

  • To redress the shortcoming, the CSO is committed to launching an annual survey of services (on the lines of the ASI).
  • As a first step, the NSSO carried out a survey of non-government and non-financial companies/establishments in 2016-17.
  • The NSSO report says, “About 45% of MCA units were found to be out-of-survey/causality
  • The inference could be that such companies are likely to be shell/fake/spurious entities that remain legally registered (but merely on paper), without actually producing goods and services.

Impact of estimation

  • The survey findings could bring down the growth estimates.
  • However, those knowledgeable have dismissed such an apprehension on two counts:
    • One, shell companies add value to the economy, hence their deletion would underestimate GDP.
    • Two, as all active companies are said to submit their audited accounts at least once in three years, the contribution of shell companies is well captured in the MCA database.
  • Both arguments seem questionable.
    • Shell companies, by definition, do not produce goods and services; they help the promoter/owner to hide profits or evade taxes/regulation.
    • The argument that all active companies under the MCA have filed statutory returns at least once during the last three years is a bureaucratic fiction.

 

Case for scrutiny

  • In sum, the NSSO’s survey of active companies in the services sector discovered that 45% of them could not be traced or misclassified; hence they could represent or be shell/fake/bogus companies.
  • The finding throws into sharp relief the poor quality of the MCA-21 data set, which has formed the backbone of the new GDP series.
  • The NSSO survey results have added more questions about the beleaguered GDP series.

Way forward

As a first step towards dispelling the growing distrust in the new GDP series, the government should put up the MCA-21 data for public scrutiny and lift the opacity of the methodology used in estimating corporate sector output.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Asian Development Outlook 2019

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Highlights of the report

Mains level : India’s economic growth: prospects and challenges

  • Asian Development Bank has published its flagship report Asian Development Outlook 2019.

Asian Development Outlook 2019

  • ADB, in its report mentioned that recent policy measures by the GoI to improve the investment climate and boost private consumption and investment will help India to lift economic growth in the next two fiscal years.
  • For the entire Asia, the multilateral agency forecasted that growth will soften to 5.7 per cent in 2019 and 5.6 per cent in 2020.
  • India will remain one of the fastest-growing major economies in the world this year given strong household spending and corporate fundamentals said the report.
  • Income support to farmers, hikes in procurement prices for food grains, and tax relief to tax payers earning less than Rs 5 lakh will boost household income.
  • Declining fuel and food prices are also expected to provide an impetus for consumption.
  • An increase in utilization of production capacity by firms, along with falling levels of stressed assets held by banks and easing of credit restrictions on certain banks, is expected to help investment grow at a healthy rate.

About ADB

  • The ADB is a regional development bank established on 19 December 1966 which is headquartered in Philippines.
  • ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty.
  • The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP).
  • The ADB was modeled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with members’ capital subscriptions.
  • The president has a term of office lasting five years, and may be reelected.
  • Traditionally, and because Japan is one of the largest shareholders of the bank, the president has always been Japanese.
  • ADB is an official United Nations Observer.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap]Consumption is the key, not easy to stimulate either govt or private spending

Note4Students

Mains Paper 3: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: GDP.

Mains level: The news-card analyses the recent slowing down of growth and how to revive it.


NEWS

CONTEXT

It won’t be easy to stimulate either govt or private spending.Indeed, even if RBI trims the repo rate by 50 basis points, it won’t have much of an effect since the liquidity in the banking system will probably stay in a deficit with the currency in circulation remaining elevated.

Background

  • As anticipated, much of the slowdown in the economy during Q3FY19—growth came in at just 6.6% year-on-year (y-o-y)—was due to slower government consumption and, to a lesser extent, moderating private consumption.
  • Even this is hard to comprehend given the festive season was one of the dullest ever, resulting in weak sales of durables such as cars.

Distressed Financial Conditions

  • Tighter financial conditions since September 2018, after the crisis in the Non-Banking Financial Companies (NBFC) space, have choked off the flow of credit to consumers.
  • Liquidity will remain tight given the relatively slow growth of deposits, making loans costlier for consumers.
  • Again, much of the consumer credit has been in the form of unsecured loans, and banks will be forced to cut back on these.
  • At least 30% of the sales of consumer durables and staples now emanates from rural India, so these will be impacted by the relatively weak purchasing power in the hinterland.
  • Also, slowing global growth will exacerbate the cyclical slowdown, not just hitting exports but also singeing both manufacturing and investments.
  • That, then, will keep consumption subdued because very few new job opportunities will be created.

Current Efforts to revive Growth

  •  The large amounts of FDI flowing into the e-commerce sector are resulting in jobs—both for the skilled and unskilled.
  •  But that is not enough to keep consumption growth at the current pace. Given much of the local investments are being channeled into buying stressed assets—either via the IBC route or otherwise—no new jobs are being created.
  • Thus, even the limited investments won’t sustain since promoters don’t have unlimited resources, are fairly leveraged and are unlikely to take big bets until the elections are over.
  • Indeed, even if RBI trims the repo rate by 50 basis points, it won’t have much of an effect since the liquidity in the banking system will probably stay in a deficit with the currency in circulation remaining elevated.

Conclusion

  • To be sure, there will some election-related spending on automobiles and other items, but that will taper off in a few months.
  • Unfortunately, government spending which has been holding up consumption in the last couple of years will remain muted since tax revenues have fallen way short of targets.
  • The relatively poor GST collections threaten to crimp government expenditure in 2019-20, too. Also, off-budgetary spends have been uncomfortably high and could be curtailed further, and that will lower spends.

 

 

 

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Centre’s debt-to-GDP falls, States’ rises

Note4students

Mains Paper 3: Economy| Issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the present situation of economy has been tested by UPSC in recent times

Mains level: The news-card analyses Public Debt situation


News

  • While the Centre is moving in the right direction in terms of meeting the N.K. Singh Committee recommendations on public debt, the States are moving in the opposite direction, data released by the government show.

States are lagging

  1. According to the Status Paper on Government Debt for 2017-18, the Centre’s total debt as a percentage of GDP reduced to 46.5% in 2017-18 from 47.5% as of March 31, 2014.
  2. The total debt of the States, however, has been rising over this period, to 24% in 2017-18, and is estimated to be 24.3% in 2018-19.
  3. In absolute terms, the Centre’s total debt from the end of March 2014 to till 2017-18, represents a 45% increase.
  4. The total debt of the States increased up to almost 63%.

Alarming for States

  1. The Central debt has been within control because the government has been trying to stick by-and-large to the fiscal deficit parameters.
  2. The increase in the debt stock at the State level is worrying because they don’t have the other means to service the debt if it goes beyond a certain point.
  3. The report says that the States do have some fiscal space to reduce their borrowing in the coming years due to the large cash surpluses they hold.
  4. State governments as a group have exhibited a tendency to hold large cash surpluses/investments in Cash Balance Investment Account on a consistent basis while at the same time resorting to market borrowings to finance their GFD (Gross Fiscal Deficit).
  5. This indicates scope for reducing the quantum of market borrowings by State governments in case they bring down their cash surpluses (parked as investment in treasury bills of the Central government).

N.K. Singh Recommends

  1. The N.K. Singh-headed FRBM (Fiscal Responsibility and Budget Management) Review Committee report had recommended the ratio to be 40% for the Centre and 20% for the States, respectively, by 2023.
  2. It said that the 60% consolidated Central and State debt limit was consistent with international best practices, and was an essential parameter to attract a better rating from the credit ratings agencies.

Role of UDAY bonds

  1. Outstanding liabilities of States have increased sharply during 2015-16 and 2016-17, following the issuance of UDAY bonds in these two years.
  2. It was reflected in an increase in liability-GDP ratio from 21.7% at end-March 2015 to 23.4% at end-March 2016 and further to 23.8% at end-March 2017.
  3. The total outstanding liabilities as a percentage of GDP stood at 24% as at end-March 2018 and are expected to move upward to 24.3% at end-March 2019.

Implications

  1. The ratings agencies have predicted that the combined fiscal deficit of the States to be 3.2% of GDP in financial year 2020 (higher than the prescribed 3%).
  2. It is unlikely that the States will meet their 20% debt-GDP ratio target by 2023.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] How India’s economy smoothly navigated troubled waters

Note4students

Mains Paper 3: Economy|  Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the present situation of Indian economy.

Mains level: The news-card analyses the challenges of Indian Economy and its present situation w.r.t global economic challenges, in a brief manner.


Context

  • According to several economic experts, Indian economy is on a recovery path. However, for several others, the economic outlook is still gloomy.

Positive side of Indian Economy

  • The advance estimates of national income indicate that real gross domestic product (GDP) will grow at 7.2% in FY 2018, up from 6.7% last year.
  • The advance estimates, based on data for the first six months and up to November for some indicators, are a fair assessment of the likely outcome.
  • The earlier projections of the Reserve Bank of India (RBI), the International Monetary Fund (IMF) and the World Bank are also all higher than the advance estimates.
  • Hence, barring any major shock in the next 10 weeks, it is quite likely that the year will end with at least 7% growth.
  • This robust growth is also fairly diversified with more than 8% growth in manufacturing and 9% growth or more in electricity and other utilities, construction, and public services.
  • It is particularly encouraging that the growth upturn is being led by the recovery of investment instead of debt-financed consumption as in the recent past.
  • After stagnating for several years, quarterly growth of gross fixed capital formation (GFCF) has been recovering since the second quarter of FY 2017.
  • It is now estimated to grow by 12.2% in real terms in FY 2018 compared to 7.6% in FY 2017.
  • The investment rate, which had declined to 31%, is now estimated to be back up to 33%.
  • Further, implementation of the 2016 Insolvency and Bankruptcy Code and progress on resolutions under the National Company Law Tribunal are important reforms.

Low Rate of Inflation: Mixed blessing

  • The consumer price index (CPI) inflation rate is now down to only 2.2% and the wholesale price index (WPI) inflation rate is 3.8%.
  • However, the decline in inflation is mainly on account of the decline in food and fuel prices.
  • Fuel prices are unlikely to harden any time soon, unless events in West Asia deliver a political shock. This has been a great boon for oil importing countries such as India.
  • However, whether the decline in food prices, which implies a shift in the terms of trade against agriculture, is an unmixed blessing in the present context of widespread distress among farmers is a question to be pondered over.
  • Also, core inflation (excluding food and fuel prices) is still close to 6%.
  • This presents a dilemma for monetary policy.
  • RBI’s mandate is to contain the CPI inflation rate at around 4%, but can it ignore the stickiness of core inflation around 6%, especially when central and state government spending is likely to pump-prime demand in the run-up to general elections?

Major deterrent to growth

(a)NPA

  • There is still a long way to go in tackling the problem of stressed assets and high levels of non-performing assets in public sector banks which is a major deterrent to growth.
  • There is also a return to discretionary interventions, demonstrated among other things by the arbitrary raising of tariffs in the last budget.
  • These will adversely impact growth in FY 2019.

(b)Elections

  • In the coming few months, experts are of the view that there’s expected surge in pre-election public spending.
  • Combined with a significant shortfall in tax revenues, especially goods and services tax (GST) revenues, this will lead to several fiscal deficit targets of the central and state governments being breached.
  • On the other hand, the past record of political business cycles suggests that there could be a sharp decline in public spending in the post-election period.
  • These swings in public spending can be destabilizing and adversely affect growth in FY 2019.

 

(c)Challenging External Environment

  • Far more worrying than the above discussed domestic issues is a very challenging external environment.
  • 2018 was the year of great decline. Everything declined: inflation, commodity prices, asset prices, growth.
  • While the decline in inflation is welcome, the decline in growth has now raised fears of deflation in advanced economies.
  • The IMF Data Mapper, which maps growth throughout the world, looks pretty scary.
  • More than half the globe is a dark region shrouded in grey (below 3% growth) or black (negative growth).
  • Soothing shades of green, representing robust growth, are seen only in Asia and a few countries in Africa.
  • Emerging markets and developing countries in Asia grew at 6.5% while sub-Saharan Africa grew at 3.1%.
  • Among major economies, growth declined in 2018 and is expected to decline further in 2019 in the US, European Union, Japan and China.
  • Together, they account for almost two-thirds of the world economy.

Underlying these gloomy numbers is the emergence of multiple risks such as:

  • The trade war between Trump-led US and China;
  • Tensions between US and its European allies, Canada and Mexico;
  • Confrontation in West Asia between the Trump-led coalition of the US, Saudi Arabia, Egypt, and the tacit alliance of Iran, Russia, Turkey, and Syria.
  • The potential spike in oil prices if that confrontation escalates and financial outflows from emerging markets in response to political uncertainties and rising US interest rates are the other major risks.

Effect on Indian Economy

  • India stands out for sailing smoothly through these troubled waters so far.
  • It remains the fastest growing major economy in the world.
  • However, being well integrated with the world economy, India cannot continue to grow rapidly as global growth declines.
  • The trade deficit, up from 1.7% of GDP in 2016-17 to 3.0% in 2017-18, is projected to rise further to 3.5% in 2018-19, thereby completely offsetting the expansionary impact of the fiscal deficit.
  • The net reduction of nearly $30 billion in foreign exchange reserves since 1 April 2018 is also a consequence of the gloomy global economic environment.

Way Forward

  • These adverse external factors, combined with the domestic challenges mentioned earlier, will pull growth down to less than 7% in FY 2019.
  • It could decline further in the event of a major negative shock such as a failed monsoon or a spike in global geopolitical tensions.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Number theory: on lowering UPA-era GDP growth rate

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From the UPSC perspective, the following things are important:

Prelims level: GDP calculation, Base year, CSO, United Nations System of National Accounts

Mains level: Controversy related to GDP revision and why a robust methodology is necessary for calculating growth


Context

Revised GDP data

  1. The release of the new GDP back series data shows that the economy grew at an average of 6.7 per cent between 2005-06 to 2008-09 as well as between 2009-10 to 2013-14
  2. This is lower than the earlier estimates of 8.1 per cent and 7 per cent average growth respectively going by the earlier 2004-05 base
  3. The biggest of learning is that India never really decoupled from the global economy during the years of the financial crisis (2008-10), unlike what was earlier believed

Revisions of figures not new

  1. Backcasting, or reworking past national accounts statistics based on the latest base year, is a regular exercise that governments carry out
  2. Mainly done to enable precise comparison and analysis, it is a difficult exercise prone to contestation as it involves the inclusion of newer data sources, exclusion of outdated ones and making some subjective assumptions in the process

Spat over economic data

  1. In January 2015, when the government switched to a new series with 2011-12 as the base year, and subsequently after the report of the Committee on Real Sector Statistics which was mandated by the National Statistical Commission to work out a robust methodology under the new series a few months ago, there was a controversy, with agencies such as the IMF besides the RBI flagging their concerns
  2. The release of the data under the new series in 2015, and also later, had led to sceptics questioning the validity of growth figures

Reliability of the data

  1. Any criticism of the data has to take into account the fact that it has been generated by a thoroughly professional organisation, the CSO, and the methods have been scrutinised by experts, including past chief statisticians, and the Advisory Committee on National Accounts Statistics
  2. Certainly, the release of the back series by the Niti Aayog goes against convention and is bad in optics
  3. But this should not be the reason to contest its integrity
  4. The method of computation reflects the latest United Nations System of National Accounts
  5. It also captures changes in the economy since 2004-05
  6. Data sources have also been updated. Experts had testified to the robustness of the method when it was introduced in 2015

Way forward

  1. There is little doubt that India needs to invest more in data collection and integration and do informal sector surveys more frequently
  2. Robust, updated data are, in fact, insurance against politicians hijacking what is essentially an economic exercise
  3. Revisions in economic growth data are not uncommon elsewhere but what political parties ought to keep in mind is the potential damage to the credibility and its impact on investors, both global and domestic, who rely on the quality, reliability and consistency of data when they pump in money and on informed policy-making

With inputs from the article: Back and forth

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Nations increasing wealth at the expense of environment, shows Inclusive Wealth Report

Note4students

Mains Paper 3: Economy | Inclusive growth & issues arising from it.

From UPSC perspective, the following things are important:

Prelims level: Inclusive Wealth Report 2018

Mains level: Inclusive growth and GDP as measure of growth


News

  • The Inclusive Wealth Report 2018 shows that while overall global wealth is rising, the increase for many countries comes at the expense of environmental assets, such as water, clean air, forests and biodiversity.

Inclusive Wealth Report 2018

  1. A country’s inclusive wealth is the social value (not dollar price) of all its capital assets, including natural capital, human capital and produced capital.
  2. The IWR 2018 builds on previous versions of the report (IWR2012 and IWR 2014) and advances methods of measuring the base of economy- capital of all types.
  3. It covers the period from 1990 to 2014, which is 25 years, which provides us with a picture of the changes in capital assets over almost a generation.
  4. It is biennially released by UNEP, that seeks to evaluate and report on a country’s wealth and wellbeing.
  5. IWI is a tool assessing a nation’s ability to look after its wealth in a way that is sustainable and safeguards its future generations.

Highlights of the report

  1. The Inclusive wealth (IW) in 135 countries was higher in 2014 compared to the level in 1990 and the global growth rate of IW was 44% over the indicated period.
  2. This implies an average growth rate of 1.8% per year.
  3. However, during the same period the global GDP growth per year was 3.4%, which is close to twofold of the annual growth rate of growth in IW.
  4. The global level growth of each of the three capitals over the study period indicate that produced capital was growing at an average rate of 3.8% per year and health and education induced human capital was growing at 2.1%.
  5. Contrary, natural capital was decreasing at a rate of 0.7% per annum.
  6. The structure of capital at the global scale as of 2014 has composed of produced capital (21%), human capital (59% of which 26% education induced human capital and 33% is health induced human capital), and natural capital (20%).

Inclusive wealth over GDP

  1. By this measure, 44 of the 140 countries – more than a third – ranked in the report’s Inclusive Wealth Index have declined in inclusive wealth per head since 1998, even though GDP has increased in many of them.
  2. The report explores alternatives to using Gross Domestic Product (GDP) as a measure of a country’s wealth.
  3. It says that GDP measures the size of a country’s economy but not its underlying asset base.
  4. Instead, it uses inclusive wealth, which focuses on stocks of manufactured, human and natural capital.

Way Forward

  1. The health of an economy must be drawn from the health of the environment.
  2. To make the right choices that will keep us on a sustainable path, we have to be able to properly measure our progress.
  3. This report will equip policy-makers with the right numbers, so that they can make the right decisions to deliver results for generations to come.

With inputs from: UN Environment

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India, Japan sign $75 billion currency swap agreement

Note4students

Mains Paper 2: IR | Bilateral, regional & global groupings & agreements involving India &/or affecting India’s interests

From UPSC perspective, the following things are important:

Prelims level: Particulars of the BSA

Mains level: India-Japan economic relations


News

Context

  • India and Japan Monday concluded a $75 billion Bilateral Swap Arrangement (BSA), a move that will help in bringing greater stability in foreign exchange and capital markets in the country.

Bilateral Swap Arrangement (BSA)

Why Currency Swap?

  1. RBI’s foreign currency reserves have shrunk from over $426 billion in April
  2. The rupee has depreciated the most among Asian currencies amid emerging market volatility triggered by rising US interest rates, pricier crude, geopolitical concerns and intensifying protectionism and trade wars.
  3. It has fallen over 13% since start of 2018, having recovered from 74.48 to the dollar earlier this month to close at 73.41.
  4. The arrangement will be used only when required, and will help meet short-term liquidity mismatches.
  5. India has taken several steps to contain its current account deficit, which could swell to an estimated 2.8% of GDP, and is seen as the root cause of rupee volatility.
  6. Conversely, Japan can also seek dollars from India in exchange for yen.

Other measures to keep CAD

  1. Some of the measures taken by the government to attract foreign capital include the review of certain restrictions on FPI investment in debt.
  2. It is promoting exports through hike in customs duty to curtail imports of non-essential items, relaxations in the policy for external borrowings and issuance of offshore rupee bonds (Masala Bonds) etc.

What it means for India?

  1. The BSA will allow India to pay for any loans that it borrows from Japan in Indian rupees, rather than borrowing a third-party acceptable currency like the US dollar.
  2. It will also allow the country to make any interest or principal payments in domestic currency.
  3. This, in turn, will increase the demand for the national currency in the forex market, making it more valuable, and stabilizing the rupee-to-dollar ratio.

Benefits of Currency Swap

  1. The BSA will aid in bringing greater stability to foreign exchange and capital markets in India
  2. This facility will enable the agreed amount of foreign capital being available to India for use as and when need arises.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Estimates panel wants GDP norms changed

Note4Students

Mains Paper 3: Economy | Growth

From UPSC perspectives following things are important:

Prelims level: GDP, GVA and factors affecting growth

Mains level: Issues with current GDP measurement in India


News

Context

  1. The current manner in which GDP is measured needs an overhaul as it provides an incomplete estimation of economic activity a/c to a report by the Estimates Committee of Parliament.
  2. The current GDP and Gross Value Added measures have also been questioned by all stakeholders alike.

Why revamp GDP norms?

  1. The report said the current measure of GDP did not incorporate the economic contributions of women in running households and maintaining accounts.
  2. Nor did it have any measure of whether an increase in GDP resulted in an increase in happiness.
  3. Whereas any rise in GDP growth requires utilization of natural resources, their utilization and depletion is not taken into account while measuring GDP.
  4. The Committee strongly recommends evolving indicators/parameters to gauge the environmental resource decay and replenishment.

New avenues for GDP

  1. The report highlighted that the current GDP measure, doesn’t take into account the increase in production due to other factors such as the change in quality of the output due to improvements in technology like artificial intelligence.
  2. It noted that there was no mechanism to measure whether increase in GDP added to happiness, specifically, whether leisure helped in increasing GDP or vice versa.
  3. The Committee strongly recommends the government to have mechanisms by coming up with new measures of GDP estimation and statistical measurement of other socio-economic factors.

Back2Basics

Gross Value Added

  1. GVA it is a measure of total output and income in the economy.
  2. It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
  3. It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.
  4. While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective.
  5. Both measures need not match because of the difference in treatment of net taxes.
  6. GDP = GVA + taxes on products – subsidies on products

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Time for economic policy vigilance

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Issues being faced by Indian economy and what can be done to maintain growth momentum


Context

Growth in economy picking up

  1. The Indian economy is gaining momentum
  2. The annual assessment recently released by the International Monetary Fund (IMF) showed that it expects the Indian economy to grow at 7.3% in the current, and 7.5% in the next, fiscal
  3. India is contributing 15% to global growth
  4. Some of the recent structural reforms, such as the implementation of the goods and services tax (GST) and Insolvency and Bankruptcy Code (IBC), along with liberalization of foreign direct investment and improvement in the ease of doing business, will help improve economic activity

Risks being faced by the economy

1. External Sector

  • On the external front, there are risks such as high crude prices and the tightening of global financial conditions
  • India’s current account deficit widened to 1.9% of the gross domestic product (GDP) in 2017-18 and is expected to go up to 2.6% of GDP in the current year
  • The widening of the current account deficit is getting reflected in the depreciation of the rupee, which has fallen over 7% since the beginning of the year
  • External sector risks are getting amplified by the tightening of financial conditions in global markets

2. Domestic front

  • On the domestic front, there are risks such as the delay in addressing the twin balance sheet issue and possible revenue shortfall owing to GST implementation issues
  • The resolution of the twin balance sheet problem is a real challenge
  • Resolution or liquidation of distressed assets could result in large haircuts for banks
  • This will possibly increase the capital requirement of public sector banks and the government, with fiscal constraints, may find it difficult to spare resources
  • While the collection from GST is improving, it is still running below the desired rate of ₹1 trillion per month
  • Any compression in capital expenditure as a result of revenue shortfall will affect growth

Further measures required

  1. Even as important reforms have been implemented, more will be needed in areas like land and labour
  2. Labour market reforms could complement the GST in terms of promoting the formal economy and creating fiscal space for needed social and infrastructure spending
  3. Factor market reforms and greater formalization of the economy will push growth and generate higher tax revenue
  4. For now, the government should work on smoothening the IBC and GST and not allow electoral compulsions to affect fiscal management

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] The urgent need for states to get fiscally fit

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Deteriorating condition of state finances and need for reforms in economic planning


Context

RBI state finances report

  1. The recent report, “State Finances: A Study of State Budgets 2018” by the Reserve Bank of India (RBI) confirms that the state of state finances is in “deep trouble” territory
  2. Even as the levers of India’s development increasingly shift to states, there has been a sharp and swift reversal of the assiduous fiscal consolidation by states over the previous decade

Rising problems of the states due to increased spending

  1. The share of states in development expenditure rose from about half of all development spending by the Centre and states in FY11 to over two-thirds by FY16
  2. Revenue deficit of states was up by 50%, from ₹40,500 crore in FY17 to ₹61,100 crore in FY18
  3. The 3% GFD/GSDP (gross state domestic product) threshold has been breached for three years in a row, with 19 states crossing the threshold in FY18
  4. Overall liabilities sans guarantees grew to 24% of GDP in FY18, the highest in the last five years, driven by the issuance of Ujwal Discom Assurance Yojana (Uday) bonds in FY16 and FY17, farm loan waivers and pay commission awards

Actions needed

1. Continued efforts to make the goods and services tax (GST) buoyant

  • Corrective actions since the GST was launched seem to be showing results, as reflected in an uptick in revenue recently
  • GST remains a work-in-progress and relentless attention is required to make good the promise of a simple, and distortion-free indirect tax regime for states to reap revenue buoyancy benefits sustainably

2. Unlocking resources for infra-spending through asset monetization

  • Earlier, CRISIL Advisory had pegged India’s infrastructure investment needs during FY18 and FY22 at ₹50 trillion, with states having to account for 35-40% of this
  • Asset monetization in sectors including state highways and power transmission could possibly help recycle capital into newer infrastructure spending without adding incremental debt
  • It will also crowd-in long-term private capital and bring efficiencies in management

3. Empowering city governments and public utilities

  • Municipal bonds have made a comeback with Pune, Hyderabad, and Indore tapping capital markets successfully
  • States should do more to empower cities to translate their economic potential into resource mobilization
  • The vicious cycle of low tariffs, poor services and institutional incapacitation needs to be tackled head-on
  • Differentiated tariffs, directed subsidy and universal services access ought to replace flat tariffs, universal handouts and poor services

4. Engendering a vibrant investment climate

  • While some strides have been made on the “doing business” front over the years, the bar needs to be raised beyond the promise of “single-window” clearance and red carpet to large investors
  • Expediting structural reforms to enable timely clearances, fair and effective land acquisition, and flexible labour markets will help sustainably scale-up sluggish private investment, which is showing early signs of a pick-up
  • A recalibrated public-private partnership programme with judicious risk allocation, contract enforceability, and consistent policy regime can further augment resources for infrastructure creation

5. Redressing agrarian stress durably through wholesome reforms

  • Loan waivers announced by states since 2014 amount to ₹1.69 trillion or roughly 14% of all incremental market borrowings by state governments during this period
  • The RBI attributes 40% of slippage in consolidated revenue expenditure in FY18 vis-à-vis budget to loan waivers
  • Durable transformation in agriculture calls for progressive policies for stable prices and market linkages, farm-level support, including on crop insurance, farm inputs, soil and crop advice, and investments in logistics, irrigation, and food processing

Way Forward

  1. Financially empowered and fiscally sound state governments are a prerequisite to lift India’s growth trajectory sustainably
  2. States will need to tackle the headwinds with speed, resolve and responsibility
  3. The time for states to get their act together on the fiscal front is now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[pib] Invest India

Note4students

From UPSC perspective, the following things are important:

Prelims level: Invest India

Mains level: Not Much


News

Context

  1. Invest India and Business France has signed a MoU to promote investment facilitation and cooperation between startups of India and France.
  2. The goal will be to facilitate direct foreign investment by providing practical investment information to enterprises and support the companies pursuing those opportunities which contribute positively to economic growth of the two countries.

Invest India

  1. Invest India is the National Investment Promotion and Facilitation Agency of India and acts as the first point of reference for investors in India.
  2. It is set up as a nonprofit venture under the Department of Industrial Policy and Promotion, Ministry of Commerce and Industries, Government of India.
  3. Operationalized in early 2010, Invest India is set up as a joint venture company between the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry (35% equity), Federation of Indian Chambers of Commerce and Industry (FICCI) (51% equity), and State Governments of India (0.5% each).
  4. Thus, essentially, Invest India is a private company, unlike India Brand Equity Foundation – another investment promotion agency in India set up by the same Ministry – Ministry of Commerce & Industry.
  5. Invest India’s specialists provide multiple forms of support such as market entry strategies, deep dive industry analysis, partner search and location assessment, and policy advocacy with decision makers.
  6. Functions:
  • The core mandate of Invest India is investment promotion and facilitation.
  • It provides sector-specific and state-specific information to a foreign investor, assists in expediting regulatory approvals, and offers hand-holding services.
  • Its mandate also includes assisting Indian investors to make informed choices about investment opportunities overseas.
  • Its experts, specializing across different countries, Indian states and sectors, handhold investors through their investment lifecycle ⎯ from pre-investment to after-care.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Rescuing the rupee: A peek into the RBI’s arsenal

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Fall of the rupee in recent times and factors affecting its value


Rupee may slump further

  1. With the current-account deficit set to widen, thanks to higher oil prices and outflows from stocks and bonds, the rupee could be in for some more weakness
  2. Increasing the interest rate and burning billions in foreign reserves have done little to reverse the rupee’s standing as Asia’s worst-performing currency this year
  3. India could turn to other weapons in its arsenal if things deteriorate further

Factors affecting rupee

  1. Trade wars
  2. Sanctions on Iran
  3. Oil prices
  4. The US Fed rate decisions

Tools available with RBI

1 Raising rates

  • The Reserve Bank of India (RBI)hiked rates for the first time in four years in June and is likely to follow through in the coming months
  • Part of the reason behind a rate hike is to maintain stability on the rupee front
  • The central bank doesn’t target the exchange rate and attributes any rate moves to its goal of containing rising prices

2 Intervention

  • The RBI is suspected to have intervened regularly in the foreign exchange market
  • India’s foreign exchange reserves fall to $406 billion
  • Of these nearly $100 billion are in short-term debt, assets which the RBI considers are hot money and can leave the country anytime

Higher tariffs

  • The trade war is a new weapon in town
  • India, with its past experience of relying on higher duties to curtail imports, could use it to curb current-account deficit
  • In the aftermath of taper-tantrums in 2013, India hiked import duty on gold bullion and jewellery. That saw inflows shrink, helping narrow the current-account gap

Tap non-residents

  • One of the last resorts will be to turn to wealthy non-resident Indians to replenish precious foreign currency reserves
  • India has that option and also a sovereign bond issuance

Fight panic

  • Verbal intervention is always an option
  • RBI officer had said that India has sufficient “firepower” to deal with the rupee’s decline

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India became third largest economy in 2011: World Bank

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: International Comparison Program (ICP)

Mains level: India’s status in world trade and future prospects


Largest economy tag

  1. In a matter of six years, India emerged as the world’s third-largest economy in 2011 from being the tenth largest in 2005
  2. This data was released by the International Comparison Program (ICP), hosted by the Development Data Group at the World Bank Group

Major findings

  1. According to the ICP, six of the world’s 12 largest economies were in the middle-income category (based on the World Bank’s definition)
  2. The 12 largest economies accounted for two-thirds of the world economy and 59 per cent of the population
  3. The six largest middle-income economies — China, India, Russia, Brazil, Indonesia and Mexico — account for 32.3 per cent of world GDP, whereas the six largest high-income economies — US, Japan, Germany, France, UK and Italy — account for 32.9 per cent

Back2Basics

International Comparison Program (ICP)

  1. ICP is a partnership of various statistical administrations of up to 199 countries guided by the World Bank
  2. The main partners of this program are the World Bank, IMF, UN, ADB, OECD, CISSTAT, Eurostat, AfDB ESCWA, ECLAC, DFID, ABS, IDB, NMoFA who are also all part of the executive board
  3. The Program produces internationally comparable price and volume measures for gross domestic product (GDP)
  4. Its component expenditures are based on purchasing power parities (PPP’s)
  5. The International Comparison Program holds surveys collecting price and expenditure data for the entire range of final goods and services at intervals of some few years (the last two were separated by six years)
  6. The ICP tries to make different countries GDPs comparable by calculating them in PPP both currency converters and spatial price deflators
  7. The ICP has published its PPP results eight times so far – the first time for 1970 (a preliminary study for 1967 was also carried out) and the latest for 2011

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

RBI flags States’ fiscal stress

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: FRBM targets

Mains level: The continuous cycle of Farm loan waivers and its detrimental effect on economy


Risk of higher expenditure

  1. The Reserve Bank of India (RBI) has pointed to the fiscal stress that States are facing due to several factors including farm loan waivers
  2. In a report ‘State Finances: A Study of Budgets of 2017-18 and 2018-19,’ the central bank noted that States’ consolidated gross fiscal deficit (GFD) overshot the budget estimates in 2017-18 due to shortfalls in own tax revenues and higher revenue expenditure

What could this mean?

  1. Since the combined GFP to GDP was at 6.4% as compared with the Fiscal Responsibility and Budget Management Committee’s (FRBM) medium-term target of 5%, there is a risk that private investment gets crowded out of the finite pool of financial resources
  2. Risks are also likely to emanate from possible higher pre-election expenditure in more than 10 States and implementation of the balance pay commission awards
  3. With States continuing announcements and roll-out of farm loan waivers, the budgeted GFD could be at risk, and additional borrowing requirement could produce a concomitant impact on the already elevated borrowing yields

Effect of farm loan waivers

  1. These have a dampening impact on rural credit institutions
  2. Waivers impact credit discipline
  3. They vitiate credit culture and dis-incentivise borrowers to repay loans, thus engendering moral hazard

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[pib] Andhra Pradesh, Telangana and Haryana Top Rankers in Ease of Doing Business

Note4Students

Mains Paper3: Indian Economy | Issues relating growth and development.

The following things are important from UPSC perspective:

Prelims: Ease of Doing Business

Mains level: Read the attached story


News

State Reform Exercise

  1. The State reform exercise under Ease of Doing Business in India is creating a lot of interest in other countries like Brazil, South Africa and Indonesia which proves that such reforms are imperative for improving the business and regulatory environment.
  2. Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, released the final rankings of States in Ease of Doing Business.

Rankings

  1. The top rankers are Andhra Pradesh, Telangana and Haryana.
  2. Jharkhand and Gujarat stood fourth and fifth respectively.

Feedback system to monitor the reach

  1. It is for the first time that DIPP has introduced taking feedback to ensure that the reforms have actually reached ground level.
  2. The feedback was collected through face-to-face interviews of actual users selected from more than 50,000 users of the services provided by the State and UT governments.
  3. DIPP organised numerous outreach programmes including 30 workshops and periodic video conferences with States and UTs.
  4. Another practice introduced in the current reform exercise was handholding support provided by the higher scoring States.

Business Reform Action Plan (BRAP)

  1. DIPP, Ministry of Commerce and Industry in collaboration with the World Bank conducted an annual reform exercise for all States and UTs under the Business Reform Action Plan (BRAP).
  2. The aim of this exercise is to improve delivery of various Central Government regulatory functions and services in an efficient, effective and transparent manner.
  3. States and UTs have conducted reforms to ease their regulations and systems in areas such as labour, environmental clearances, single window system, construction permits, contract enforcement, registering property and inspections.
  4. States and UTs have also enacted the Public Service Delivery Guarantee Act to enforce the timelines on registrations and approvals.
  5. The current assessment under the BRAP 2017 is based on a combined score consisting of Reform evidence score that is based on evidence uploaded by the States and UTs and Feedback score that is based on the feedback garnered from the actual users of the services provided to the businesses.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

IMF suggests India three steps to sustain high growth rate

Note4students

Mains Paper 2: IR | Important International institutions, agencies & fora, their structure, mandate

From UPSC perspective, the following things are important:

Prelims level: International Monetary Fund

Mains level: Steps that need to be taken to sustain high growth momentum in India


Projections for India

  1. The International Monetary Fund suggested India can sustain high growth rate by carrying out banking sector reforms, simplifying and streamline GST, and renewing impetus on reforms
  2. Growth is projected at 7.4% in FY 2018-19 and 7.8 percent in FY 19-20, respectively

Suggested measures

To revive a bank credit and enhance the efficiency of credit provision

  • by accelerating the cleanup of the bank and corporate balance sheets and enhancing the governance of public sector banks

To continue fiscal consolidation and to lower elevated public debt levels

  • This needs to be supported by simplifying and streamlining the goods and services tax (GST) structure

Over the medium-term, renew impetus to reforms of key markets

  • Labor and land, as well as improving the overall business climate would be crucial to improving competitiveness maintaining high level of growth in India

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

RBI steps in as rupee hits record low

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: RBI tools for maintaining the value of rupee, current vs capital account convertibility

Mains level: Impact of global factors on the price of Indian currency & overall economy


Rupee hits a record low

  1. The rupee breached the 69-a-dollar mark for the first time ever in early trade
  2. This prompted the central bank to intervene in the currency market that enabled the domestic unit to cut losses
  3. It is estimated to have sold dollars about $700-800 million through state-owned banks

Reasons for fall of rupee

  1. Rising crude oil prices
  2. Looming trade war fears
  3. Capital outflows from the emerging markets
  4. Markets were partly under pressure due to the derivatives expiry

RBI intervention

  1. India’s $ 413 billion foreign exchange reserves act as a cushion
  2. RBI intervenes to cut volatility in currency prices

Back2Basics

Read more about Capital & Current account convertibility here:

Capital and Current Account Convertibility in India

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Tighter is better

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Current account deficit, Fiscal profligacy

Mains level: Risks associated with India’s CAD and factors affecting it


Context

Sudden reversal of capital flows

  1. Since April, emerging markets (EMs) have been rudely shocked by the sudden reversal of capital flows without any apparent change in economic fundamentals
  2. Financial buffers in EM are much stronger today than they were before the 2013 taper tantrum

Which economies are under pressure?

  1. The ones with large current account deficits and, in turn, high foreign borrowing
  2. Why? There has been a steady decline in policy space because of loose fiscal and, in some cases, monetary policy
  3. Without adequate policy space, the buffers have turned ineffective

Factors influencing Capital inflows

  1. The growth differential with developed markets (DM)
  2. The strength of the US dollar
  • Higher EM-DM growth differential increases inflow, a stronger US dollar lowers it
  • Why? Investing in EM is riskier, higher growth will compensate the risk
  • A stronger dollar raises the cost of funding and therefore investors scale back investment

What happened in April 2018?

  1. Incoming data from the Euro Area and Japan pointed to growth disappointment, but above par growth in the US
  2. The altered dynamics forced the market to reprice US interest rates and the dollar
  3. The consequent tightening of global financial conditions caught investors off guard
  4. Capital outflows from EM ensued and their currencies depreciated

Why are economies struggling even after having buffers?

  1. Along with buffers, Foreign exchange liabilities have also risen and there are limits to the use of reserves
  2. In several, if not all, vulnerable economies, the current account deficit is rising because of growing fiscal and quasi-fiscal deficits
  3. Fiscal profligacy is restraining the space for the economies to grow without increasing foreign borrowing

What needs to be done?

  1. If an EM economy is to maintain or widen the growth differential with DM, it needs to grow faster, requiring more funding
  2. If the government does not reduce its deficit to provide the additional funds, the private sector is forced to borrow more externally, that is, the current account deficit has to widen
  3. The way out is to tighten fiscal policy, even when it might not have been part of the problem so that the private sector has the domestic space to grow

Risks for India

  1. India’s overall fiscal deficit (Centre plus state) has remained virtually constant, around 7 percent of GDP since 2013-14
  2. This year also, both the Centre and state deficits are likely to be under pressure with GST collections running below the budgeted run rate
  3. A continued decline in private investment in last 4 years provided the excess domestic savings needed to keep the current account deficit (foreign borrowing) contained at around 1 percent
  4. With the higher budgeted fiscal deficit, even the hint of a recovery in private investment is raising fears of the current account deficit rising sharply

Way forward

  1. Loose fiscal and monetary policies pushed India to the brink of crisis in 2013
  2. If India doesn’t tighten fiscal and monetary policies early and sufficiently, then it too could be heading down the path of its peers

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Has the Indian economy caught the Dutch disease?

Note4Students

From UPSC perspective, the following things are important :

Prelims level :  “Dutch Disease”, Trends in CAD, Fragile Five

Mains level : Impact of rising crude oil prices on CAD, fiscal deficit, etc.

Note4students

Mains Paper 3: Economy | Indian Economy

From UPSC perspective, the following things are important:

Prelims level: “Dutch Disease”, Trends in CAD, Fragile Five

Mains level: Impact of rising crude oil prices on CAD, fiscal deficit, etc.


Context

Rising crude oil prices

  1. Crude Oil Prices are 50% up over the last nine months.
  2. With India particularly sensitive to oil, the combination of higher oil and global turbulence has inevitably raised questions about India’s preparedness to deal with global stress. This raises following questions:
  • How much more insulated is India?
  • Is there any risk of a 2013 repeat, when India was part of the “Fragile Five”?

Emerging pressures

  1. India’s current account deficit (CAD) is on course to triple to 2% of gross domestic product (GDP) in 2017-18—even though crude prices averaged just $57 per barrel last fiscal—affected by underperforming exports and over-performing imports.
  2. Now, if crude prices were to average $75 per barrel in 2018-19, we estimate the CAD would widen towards 3% of GDP or $80 billion
  3. Over the last five years, even as oil prices collapsed and India’s fiscal reaped a large windfall, the consolidated deficit has not witnessed any meaningful reduction
  4. While the Centre has reduced its deficit, states have increased theirs, such that the consolidated deficit has only inched down from 6.9% to 6.5% over the last five years

Rise in Crude Oil Prices: Implications on India’s CAD

  1. The collapse in oil prices in 2014 served as a large, positive terms-of-trade shock for India.
  2. India witnessed large gains from the collapse in oil prices (3.1% of GDP across two years, of which two-thirds was estimated to have been spent).
  3. So the collapse in oil prices should have put upward pressure on actual and equilibrium real exchange rates.
  4. The only choice policymakers had was whether to accommodate this real appreciation through nominal appreciation or relatively higher inflation.
  5. Operationally, this manifested itself in a collapse of the CAD (because of oil) and therefore a larger balance of payments surplus that was putting upward pressure on the rupee.
  6. This was compounded by foreign direct investment flows almost doubling after this government came to the power. All this exacerbated the rupee appreciation pressures.

What is Dutch Disease?

  1. The 20% real appreciation between 2014 and 2017— reflecting this positive terms-of-trade shock—has impinged on the competitiveness of India’s manufacturing sector (exports and import competitors) and therefore contributed to the deterioration of underlying balances.
  2. India likely caught the “Dutch disease”—a term that describes the Netherlands in the 1960s where a discovery of gas deposits in the North Sea and the income boom that followed, led to a real appreciation of the exchange rate that crowded out manufacturing exports.
  3. In India’s case, the analogy is the collapse in oil prices resulted in a large, positive terms-of-trade shock that was largely spent, drove up the actual and equilibrium real exchange rate which, in turn, has affected the competitiveness of India’s tradable sector.

Policy Implications

  1. Firstly, policymakers should not fight this real depreciation since it’s an equilibrium phenomenon, but simply use reserves to ensure the new equilibrium is reached in a gradual manner, so as to avoid self-fulfilling panic and overshooting.
  2. Second, there are bound to be inflationary consequences of the rupee depreciation. Under the new inflation-targeting framework, this will need to be countered by monetary tightening.
  3. So, external stress will need to be buffered through a weaker currency and higher rates, as is being witnessed all around the world.
  4. Third, it is crucial that fiscal policy (at the Central and states) does not slip again.
  5. The more expansive the fiscal policy, the more it will offset the real depreciation that will occur from the positive terms-of-trade shock reversing, and thereby hurt the competitiveness of the tradable sector.
  6. Fourth, policymakers need to continue working on improving underlying trade competitiveness, apart from exchange rate, by boosting infrastructure, total factor productivity and assimilating into global value chains.

The Way Forward

  1. India is much more fortified than in 2013, but that should not mask the fact that underlying, external imbalances have widened.
  2. The recent rise in crude prices and the real depreciation that it will induce may well be a blessing in disguise, because it may help improve underlying competitiveness.
  3. But the scale of what needs to be done to improve trade competitiveness, more fundamentally, remains daunting and should be underestimated only at our own peril.

Back2Basics

Fragile Five

  1. Fragile Five is a term coined in August 2013 by a financial analyst at Morgan Stanley to represent emerging market economies that have become too dependent on unreliable foreign investment to finance their growth ambitions.
  2. The acronym follows a long line of analyst acronyms that have caught on over the years, including Jim O’Neill’s BRICS and MINTS acronyms.
  3. As capital flows out of emerging markets to developed markets, many of their currencies experienced significant weakness and made it difficult to finance current account deficits.
  4. The lack of new investment also made it impossible to finance many growth projects, which contributed to a slowdown in their respective economies. This created a potential issue for certain vulnerable economies.
  5. The five members of the Fragile Five include:
  • Turkey
  • Brazil
  • India
  • South Africa
  • Indonesia

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Centre to start measuring ‘green GDP’ of States

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Green GDP, Particulars of the Initiative

Mains level : Importance of sustainable development

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspectives, following things are important:

Prelims level: Green GDP, Particulars of the Initiative

Mains level: Importance of sustainable development


News

Green GDP calculation for States

  1. India’s environmental diversity and riches are universally recognised but have never been quantified.
  2. Starting this year, the government will begin a five-year exercise to compute district-level data of the country’s environmental wealth.
  3. The numbers will eventually be used to calculate every State’s ‘green’ Gross Domestic Product (GDP).
  4. The metric will help with a range of policy decisions, such as compensation to be paid during land acquisition, calculation of funds required for climate mitigation, and so on.

What’s so special?

  1. This is the first time such a national environment survey is being undertaken.
  2. A pilot project is set to begin this September in 54 districts.
  3. The land will be demarcated into “grids” with about 15-20 grids per district.
  4. These will capture the diversity in the State’s geography, farmland, wildlife, and emissions pattern, and will be used to compute a value.
  5. For instance, there’s a no-go zone, we need to calculate what its economic impact.
  6. Much of the data required for the inventory would be sourced from datasets that already exist with other government ministries.

Launching “Green Skilling Programme”

  1. The government has also launched a ‘green skilling’ programme under which youth, particularly school dropouts, would be trained in a range of ‘green jobs’— as operators of scientific instruments used to measure environmental quality, as field staff in nature parks, and as tourist guides.
  2. Some of the labour required for the survey would also be sourced from the green-skilled workforce.

Back2Basics

Green GDP

  1. Green GDP is a term used for expressing GDP after adjusting for environment degradations.
  2. Green GDP is an attempt to measure the growth of an economy by subtracting the costs of environmental damages and ecological degradations from the GDP
  3. The concept was first initiated through a System of National Accounts.
  4. The System of National Accounts (SNA) is an accounting framework for measuring the economic activities of production, consumption and accumulation of wealth in an economy during a period of time.
  5. When information on economy’s use of the natural environment is integrated into the system of national accounts, it becomes green national accounts or environmental accounting.
  6. The process of environmental accounting involves three steps viz. Physical accounting; Monetary valuation; and integration with national Income/wealth Accounts:
  • Physical accounting determines the state of the resources, types, and extent (qualitative and quantitative) in spatial and temporal terms.
  • Monetary valuation is done to determine its tangible and intangible components.
  • Thereafter, the net change in natural resources in monetary terms is integrated into the Gross Domestic Product in order to reach the value of Green GDP

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Fitch maintains India sovereign rating with stable outlook

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Sovereign rating

Mains level: India’s fiscal consolidation targets and their impact on sovereign rating and economy


News

No change in rating

  1. Global rating agency Fitch Ratings has not upgraded India’s sovereign rating
  2. Agency maintained its lowest investment grade rating at BBB-, with a stable outlook

Why status quo?

  1. It blamed weak fiscal finances and some lagging structural factors, including governance standards and a still difficult, but improving, business environment for its rating action

What needs to be done for rating upgrade?

  1. India can expect a rating upgrade if it reduces general government debt over the medium term to a level closer to that of rated peers at 41% of GDP and maintains higher sustained investment and growth rates without the creation of macro imbalances

Other ratings

  1. Last year, Moody’s Investors Service raised India’s sovereign rating from the lowest investment grade of Baa3 to Baa2 and changed the outlook to stable from positive
  2. Standard and Poor’s kept its India rating unchanged at the lowest investment grade of BBB-, with a stable outlook

Back2Basics

Sovereign rating

  1. A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting
  2. A sovereign credit rating is the credit rating of a sovereign entity, such as a national government
  3. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions, and also takes into account political risk
  4. Obtaining a good sovereign credit rating is usually essential for developing countries in order to access funding in international bond markets