Issues related to Economic growth

Jul, 31, 2019

[op-ed snap] Flee Market

CONTEXT

The wheels of India’s multi-year stock market rally are slowly beginning to come off. Since the Union Budget was presented this month, there has been a palpable change in mood among investors, who in June led a mini-rally in the market as signs emerged one after another that the government led by Prime Minister Narendra Modi would be returning to power at the Centre.

Background

  • The Nifty and the Sensex are down roughly by about 5% since the Budget was presented.
  • Foreign portfolio investors have pulled out over ₹2,500 crore in July, in contrast to June when FPIs made a net investment of close to ₹10,400 crore. 
  • Investors who were quite enthusiastic about the prospects of structural reforms that could boost India’s economic growth under the second Modi government, have been quite disappointed by the Budget proposals.
  • Among other things, Finance Minister Nirmala Sitharaman imposed new taxes on the “super rich” and on companies that buy back their own shares, and raised the mandatory minimum public shareholding in listed companies (a move that is seen to be against the interests of promoters).
  • Not surprisingly, investors have been taken aback by these measures, which are seen as increasing the burden on businesses.

Falling stock market

  • Even more worrying is the signal that is sent across by the falling stock market.
  • As stock prices discount the future, lacklustre market performance could well be a prelude to the further worsening of general economic conditions in the near term.
  • There is already a significant downturn in sectors such as automobile with major companies reporting falling sales and earnings, and automobile dealers closing down showrooms and slashing jobs.

Slowing growth

  • The overall gross domestic product growth, which slipped below 6% to hit 5.8% in the fourth quarter, has also been slowly catching up with the bleak picture painted by high-frequency economic indicators for quite some time.
  • The underlying turmoil in Indian markets becomes evident when one looks beyond the Sensex and the Nifty at the mid-cap and small-cap space that has witnessed significant value erosion since the start of 2018.
  • The small-cap index has lost almost a third of its value since January 2018 while the mid-cap index has lost about a fifth of its value.

Conclusion

Interestingly, many industrialists who were previously enthusiastic cheerleaders for the Narendra Modi government have turned vocal about their disappointment at the government not being bold enough in pushing through structural reforms needed to boost economic growth despite the majority it enjoys in Parliament. This suggests the deep sell-off in stocks over the last 18 months may well be a sign of disappointed investors voting with their feet.

May, 01, 2019

[op-ed snap] An employment-oriented economic policy

CONTEXT

In the heated debate on jobs, the crucial link between macroeconomic policy and unemployment has not been flagged.

Tasks associated with economic Policy

  • The first is to review the conduct of macroeconomic policy.
  • Though it must come across as arcane, this is an element of public policy that makes a difference to whether we enjoy economic security or not.
  • This brings up the second task for the winner, namely employment generation.

Impact of poor Macroeconomic Policy

1. Fiscal consolidation

  • The government has continued with fiscal consolidation, or shrinking the deficit, while mandating the Reserve Bank of India (RBI) to exclusively target inflation leaving aside all other considerations.
  • This has contracted demand.
  • That high fiscal deficits and high inflation per se can never be good for an economy does not justify a permanently tight macroeconomic stance.
  • The rationale given for one is that it is conducive to private investment, said to be shy of fiscal deficits and held back by inflation.
  • Both the deficit and inflation have trended downward in the past five years, yet investment as a share of national income has remained frozen.

2.Inflation targeting

  •  Arguably though, India has seen a virtual inflation targeting since 2013 when the policies of the RBI became more closely aligned to the practices of central banks in western economies.
  • Thus in 2013-14 the real policy rate saw a positive swing of over four percentage points, and it has more or less remained there.
  • Admittedly, at double digits, inflation had been high in 2012-13 but that could have been due to abnormal hikes in the procurement price and not due to runaway growth.
  • The high interest rate regime in place since 2013 could not but have had a negative impact on growth by raising the cost of capital to industry.

Reviewing RBI’s role

1.Reasons for review

  • A regime of high-interest rates can be bad not only for investment — and thus for growth and employment — but also for financial stability.
  • Sharp increases in interest rates can trigger distress.
  •  There has been a growth of non-performing assets of banks even after a change in the method of classification first resulted in their surging in 2015. This feature along with the spectacular collapse of the giant Infrastructure Leasing and Financial Services Ltd (IL&FS) recently point to the need to review the role of the RBI.

2.Changes in Responsibility

  • Experience suggests that it must be tasked with far greater responsibility for maintaining financial stability while being granted wider powers.
  • Finance Ministry and its nominees on the RBI Board should desist from insisting upon actions that could jeopardise financial stability in trying to quicken the economy.
  • It also suggests that the movements in the financial markets are to be treated as the bellwether in economic policy-making.
  • Actually, over the past 30 years, from Mexico to southeast Asia, financial markets can be seen to have been fickle, self-serving and capable of causing great harm as they switch base globally in search of profits through speculation.

 

Job creation

1.Strengthening Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)

We can assist the unemployed by strengthening the employment programme we already have, namely the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

Timely Payment

First, there have been reports that though the budgetary allocation for the scheme may have increased, workers face delay in payment.

Extending the MGNREGS to urban India

Second, as has been suggested, there is a case for extending the MGNREGS to urban India for there is unemployment there.

Review of MGNREGS

  • However, as with macroeconomic policies, a thorough review of how the MGNREGS works on the ground is necessary.
  • The MGNREGS should target the waste dotting our countryside, and when extended to urban India should aid municipal waste-management efforts.
  • We would then have a cleaner environment and have at the same time created jobs.
  • That would a fitting tribute to the man after whom the programme is named, one who had worked for a clean India much of his life.
Apr, 08, 2019

[op-ed snap] The governance dashboard

CONTEXT

The current regime has failed to deliver on its promises of development and clean government.

Disappointment with previous regime

  • Towards the end of the second term of the United Progressive Alliance government (UPA-II), from 2009 to 2014, the corporate sector (captains of industry) had become thoroughly disappointed with the slow rate of “progress” being made.
  • The reputation of UPA-II had been tarnished by several high-profile corruption scandals.
  • Significant sections of the Indian elite, both urban and rural, were also upset about the government’s modest welfare schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) and also rights and entitlements such as the Right to Information, Right to Education and the Land Acquisition Act, 2013.

Lack of data to evaluate the Current progress

  • it is very difficult to imagine how a reasoned debate can occur without adequate evidence.
  • Since Independence, India has carefully built an enviable reputation in terms of the integrity of its statistical organisations and the quality of its economic data.
  • Currently Government destroyed this reputation by meddling in the work of statistical organisations, changing the methodology of computation of key figures (such as GDP), and by suppressing important data.

Parameters For Evaluation

  • Two issues that are important in evaluating any regime are economic growth and distribution. India, of course, has been celebrated along with China as the growth engine of the world in recent decades.
  • Recent changes in methodology by the Central Statistics Office have rendered such comparisons very difficult.

Inequal Growth

  • In terms of distribution, researches (for the period 1991-2011) indicates that the Indian economy, after economic liberalisation, was largely driven by inequality-heightening rapid urban growth.
  • Farmers and informal workers in the urban areas have faced acute distress and witnessed losses in their income shares.
  • Given this, the volume draws upon other sources of data such as income taxes and the Credit Suisse Global Wealth Database to make a persuasive case that Indian inequality has continued to rise.

Rise in inequality

  • The share of the top 10% of income-tax payers has increased at the expense of the bottom half. The wealthiest group (top 1%) owns more than half the nation’s wealth today and has consolidated itself during 2014-2018.
  • Crimes against Scheduled Castes have increased during the period 2014-16. What is noteworthy is that both overall crimes and crimes registered under the Scheduled Castes and Scheduled Tribes (Prevention of Atrocities) Act have increased.

Impact of signature Policies

  • The two major signature policies that the government undertook — demonetisation (ostensibly to root out corruption) and the goods and services tax (GST) — have proved to be colossal disasters for the economy and the vast majority of Indians
  • Comparing the periods before and after demonetisation, while the world economy witnessed improved growth (2.6% to 3.1%), the Indian economy suffered a growth decline from 7.8% to 6.8%

Conclusion

As Rabindranath Tagore reflected, if the choice is between a nation that is fundamentally exclusionary, and a society that stands for basic human values and espouses tolerance among a multiplicity of cultures and identities, the path forward is clear.

Mar, 21, 2019

India ranks 140th in global happiness list

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: World Happiness Report

Mains level: Need for introspecting various governance factors affecting happiness levels in India


News

  • The World Happiness Report- 2019 was recently released by the UN.

India’s slips down

  • Indians are not as happy in 2019 as they were in 2018 and the country figures at 140th place, seven spots down from last year, a/c to the UN World Happiness Report- 2019.
  • The overall world happiness has fallen over the past few years, which has mostly been fuelled by a sustained drop in India, which came in 140th place this year compared with 133rd place a year ago.
  • Pakistan is ranked 67th, Bangladesh 125th and China is placed at 93rd position, according to the report.
  • The list is topped by Finland for the second year in a row.
  • The US ranks at 19th place despite being one of the richest countries in the world.

Who are most unhappy?

  • People in war-torn South Sudan are the most unhappy with their lives.
  • It is followed by Central African Republic (155), Afghanistan (154), Tanzania (153) and Rwanda (152).

About World Happiness Report

  • The World Happiness Report is a landmark survey of the state of global happiness that ranks 156 countries by how happy their citizens perceive themselves to be.
  • It is released by the Sustainable Development Solutions Network for the United Nations by the UN General Assembly.
  • It ranks the countries of the world on the basis of questions primarily from the Gallup World Poll.
  • The Gallup World Poll questionnaire measures 14 areas within its core questions: (1) business & economic, (2) citizen engagement, (3) communications & technology, (4) diversity (social issues), (5) education & families, (6) emotions (well-being), (7) environment & energy, (8) food & shelter, (9) government and politics, (10) law & order (safety), (11) health, (12) religion and ethics, (13) transportation, and (14) work.
  • The results are then correlated with other factors, including GDP and social security.
Mar, 06, 2019

[op-ed snap]The mounting challenges of a two-speed Indian economy

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: Nothing as such.

Mains level: The news-card analyses how managing relative price of food in terms of industrial goods will be one of the biggest policy challenges for the govt, in a brief manner.


NEWS

CONTEXT

The dualism of income stagnation in the farm sector and the rapid growth in rest of the private sector is our next big hurdle.

Economic Growth

  • The latest estimates of Indian economic growth released by the government’s statistics office in the last week of February highlight the uncomfortable fact that India now has a two-speed economy.
  • Agriculture is in the slow lane while the rest of the economy is moving ahead at a much quicker pace.
  • The Indian economy lost substantial momentum in the third quarter of the ongoing fiscal year. It grew at 6.6% in those three months.
  • Economic growth in the fourth quarter is likely to be 1.7 percentage points lower than the expansion rate in the first quarter.

Two speed Economy

  • Indian private sector is growing at two speeds right now—one for agriculture and one for the other parts.
  • One important reason why the overall economic momentum has slowed is because of an indifferent rabi season this winter in farms across the country.
  • Farm incomes are now growing at perhaps the slowest pace in the past 15 years.
  • Manufacturing growth has bounced back this year. The Purchasing Managers’ Index for February 2019 shows that factories continue to hum thanks to a combination of strong production and new orders, though business optimism has begun to wane.
  • It is much the same with services in the private sector such as construction, hotels, transport, finance, and communications.
  • The rest of the private sector economy grew nearly six times faster than agriculture in nominal terms in the third quarter.

Effects Of two speed Economy on rural economy

  • new rural occupations continue to have deep links with agriculture and nearly half the Indian labour force continues to be primarily dependent on farming for its income. The poor rabi crop as well as the decline in food prices is bound to hurt.

Global Economic Situation

  • The global economy is weakening, international trade volumes have declined sharply because of the US-China trade war, and there are financial stability concerns in China.
  • Two major consequences of this—lower commodity prices and a slower pace of US monetary policy normalisation—will act like buffers.

Future prospects of Indian Economy

  • The Reserve Bank of India has already cut its policy interest rate while switching its monetary policy stance from calibrated tightening to neutral.
  • India will have three consecutive quarters of lower economic growth this fiscal year. The extent of the cyclical downturn—or growth recession—will depend on a host of factors such as the state of the global economy, the response to domestic policy easing, and the strength of the next monsoon.

Challenges

  • The dualism of income stagnation in the farm sector combined with much more rapid growth in the rest of the Indian economy.
  • The terms of trade between the two continue to be one of the central challenges in Indian political economy. The two-speed economy has implications for Indian politics, as well as economics, in the months ahead.

 

 

 

Feb, 09, 2019

[op-ed snap] Technology, globalization and the good jobs challenge

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: Nothing as such.

Mains level: The news-card analyses the issue that governments must realize that failure to generate good, middle-class jobs has very high social and political costs, in a brief manner.


Context

  • Around the world today, the central challenge for achieving inclusive economic prosperity is the creation of sufficient numbers of “good jobs”.
  • Without productive and dependable employment for the vast majority of a country’s workforce, economic growth either remains elusive, or its benefits end up concentrated among a tiny minority.
  • The scarcity of good jobs also undermines trust in political elites, adding fuel to the authoritarian, nativist backlash affecting many countries today.

Definition of a good job

  • The definition of a good job depends on a country’s level of economic development.
  • It is typically a stable formal-sector position that comes with core labour protections such as safe working conditions, collective bargaining rights, and regulations against arbitrary dismissal.
  • It enables at least a middle-class lifestyle, by that country’s standards, with enough income for housing, food, transportation, education and other family expenses, as well as some saving.

Need to improve employment conditions

  • There is much that individual enterprises all over the world can do to improve employment conditions.
  • Large firms that treat their employees better—by providing them with higher pay, more autonomy and greater responsibility—often reap benefits in the form of lower turnover, better worker morale and higher productivity.
  • “Good jobs” strategies can be as profitable to firms as they are to workers.

Structural problem: low-skilled labour force

  • But the deeper problem is a structural one that goes beyond what firms can do on their own.
  • Developed and developing countries alike are suffering today from a growing mismatch between the structure of production and the structure of the labour force.
  • Production is becoming increasingly skill-intensive while the bulk of the labour force remains low-skilled.
  • This generates a gap between the types of jobs that are created and the types of workers the country has.

Manufacturing and services are becoming increasingly automated and digitized

  • Technology and globalization have conspired to widen that gap, with manufacturing and services becoming increasingly automated and digitized.
  • While new technologies could have benefited low-skilled workers in principle, in practice technological progress has been largely labour-replacing.
  • In addition, global trade and investment flows, and global value chains in particular, have homogenized production techniques around the world.
  • This has made it very difficult for poorer countries to compete in world markets without adopting skill- and capital-intensive techniques similar to those of the advanced economies.

Intensification of economic dualism

  • Every economy in the world today is divided between an advanced segment, typically globally integrated, employing a minority of the labour force, and a low-productivity segment that absorbs the bulk of the workforce, often at low wages and under poor conditions.
  • The shares of the two segments may differ: developed countries obviously have a greater preponderance of highly productive firms.
  • But, qualitatively, the picture looks quite similar in rich and poor countries—and produces the same patterns of inequality, exclusion and political polarization.

Strategies to reduce the mismatch

There are three ways to reduce the mismatch between the structure of productive sectors and that of the workforce.

  1. Investment in skills and training
  • The first strategy, and the one that receives the bulk of policy attention, is investment in skills and training.
  • If most workers acquire the skills and capabilities required by advanced technologies, dualism would eventually dissipate as high-productivity sectors expand at the expense of the rest.

Implications

  • Such human capital policies are important but even when they are successful, their effects will be felt in the future.
  • They do little to address labour-market realities at present.
  • It is simply not possible to transform the labour force overnight.
  • Besides, there is always the real risk that technology will advance faster than society’s ability to educate its labour-force entrants.

2. Convince successful firms to employ more unskilled workers

  • In countries where the skill gaps are not enormous, governments can nudge their successful firms to increase employment—either directly or through their local suppliers.
  • Governments in developed countries also have a role to play in affecting the nature of technological innovation.
  • Too often, they subsidize labour-replacing, capital-intensive technologies, rather than pushing innovation in socially more beneficial directions, to augment rather than replace less skilled workers.

Implications

  • Such policies are unlikely to make much difference to developing countries.
  • For them, the main obstacle will remain that existing technologies allow insufficient room for factor substitution: using less-skilled labour instead of skilled professionals or physical capital.
  • The demanding quality standards needed to supply global value chains cannot be easily met by replacing machines with manual labour.
  • This is why globally integrated production in even the most labour-abundant countries, such as India or Ethiopia, relies on relatively capital-intensive methods.
  • This leaves a broad range of developing economies—from middle-income countries such as Mexico and South Africa to low-income countries such as Ethiopia—in a conundrum.
  • The standard remedy of improving educational institutions does not yield near-term benefits, while the economy’s most advanced sectors are unable to absorb the excess supply of low-skilled workers.

3. Boosting an intermediate range of labour-intensive, low-skilled economic activities

  • Tourism and non-traditional agriculture are the prime examples of such labour-absorbing sectors.
  • Public employment (in construction and service delivery), long scorned by development experts, is another area that may require attention.
  • But government efforts can go much further.

Implications

  • Such intermediate activities, chiefly non-tradable services carried out by small and medium-size enterprises, will not be among the most productive, which is why they are rarely the focus of industrial or innovation policies.
  • But they may still provide significantly better jobs than the alternatives in the informal sector.

Way Forward

  • Government policy in developed and developing countries alike is too often preoccupied with boosting the most advanced technologies and promoting the most productive firms.
  • But failure to generate good, middle-class jobs has very high social and political costs.
  • Reducing those costs requires a different focus, geared specifically toward the kind of jobs that are aligned with an economy’s prevailing skill composition.
Feb, 09, 2019

[op-ed snap] Surveying India’s unemployment numbers

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: Basic knowledge of India’s demographic dividend.

Mains level: The news-card analyses the India’s low labour participation rate and why it fell sharply after demonetisation, in a brief manner.


Context

  • India’s labour participation rate which is very low by world standards, fell sharply after demonetisation.
  • The women were largely at the receiving end and bore the brunt

Background

  • Monthly measurement of the unemployment rate is one of the requirements of the Special Data Dissemination Standard (SDDS) of the International Monetary Fund (IMF).
  • The SDDS was established in 1996 to help countries access the international capital markets by providing adequate economic and financial information publicly.
  • India was one of the early signatories of the SDDS.
  • India complies with many requirements of the SDDS, but it has taken an exception with respect to the measurement of unemployment.

Exception: Govt does not produce any measure of monthly unemployment rate

  • The Government of India does not produce any measure of monthly unemployment rate, nor does it have any plans to do so.
  • Official plans to measure unemployment at an annual and quarterly frequency is in a shambles.
  • This does not befit India’s claims to be the fastest growing economy and as the biggest beneficiary of a famed demographic dividend.

Centre for Monitoring India Economy (CMIE) Survey

  • The Centre for Monitoring India Economy (CMIE), a private enterprise, has demonstrated over the past three years that fast frequency measures of unemployment can be made and that seeking an exception on SDDS compliance is unnecessary.
  • The CMIE decided to fill India’s gap in generating fast frequency measures of household well-being in 2014.
  • In its household survey, called the Consumer Pyramids Household Survey (CPHS), the sample size was 172,365 as compared to that of the official National Sample Survey Organisation (NSSO), which was 101,724.
  • In both surveys, the sample selection method has been broadly the same.

Advantage of CMIE survey over NSSO survey

  • The CPHS is comprehensive, surveying its entire sample every four months where each survey is a wave.
  • The CPHS is also a continuous survey, and so, for example, three waves are completed in a year.
  • The CMIE’s CPHS thus has a much larger sample and is conducted at a much higher frequency than the NSSO’s.
  • Further, the CPHS is conducted as face-to-face interviews necessarily using GPS-enabled smartphones or tablets.
  • Intense validation systems ensure high fidelity of data capture.
  • All validations are conducted in real-time while the teams are in the field.
  • The data capture machinery ensures delivery of high quality data in real time obviating the need for any further “cleaning”, post field operations.
  • Once the data is collected and validated in real-time, it is automatically deployed for estimations without any human intervention.
  • In 2016, the CMIE added questions regarding employment/unemployment to the CPHS.

Difference between the CPHS and the NSSO surveys

  • A difference between the CPHS and the NSSO surveys is the reference period of the employment status of a respondent.
  • While the NSSO tries to capture the status for an entire year and for a week, the CPHS captures the status as on the day of the survey.
  • This could be as one of four factors: employed; unemployed willing to work and actively looking for a job; unemployed willing to work but not actively looking for a job, and unemployed but neither willing nor looking for a job.
  • Since the recall period in the CPHS is of the day of the survey and the classification is elementary, the CPHS has been able to capture the status fairly accurately with no challenges of the respondent’s ability to recall or interpret the status.
  • In contrast, the NSSO’s system is quite complex.

Key findings

  • India’s labour participation rate is very low by world standards and even this low participation rate fell very sharply after demonetisation.
  • The average labour participation rate was 47% during January-October 2016.
  • The world average is about 66%.
  1. Labour participation rate fell after demonetisation
  • Immediately after demonetisation in November 2016, India’s labour participation rate fell to 45%;
  • 2% of the working age population, i.e. about 13 million, moved out of labour markets.
  • That is a lot of people who were willing to work who decided that they did not want to work anymore.

2. Unemployed gave up looking for jobs any further, unemployment rate fell

  • The data show that it was not the employed who lost jobs and decided to stop working.
  • The employed mostly retained their jobs.
  • But it was largely the unemployed who decided that the labour markets had been so badly vitiated after demonetisation that they gave up looking for jobs any further.
  • In short, they lost hope of finding jobs in the aftermath of demonetisation.
  • As more and more unemployed left the labour market, the unemployment rate fell.
  • This is because the unemployment rate is the ratio of the unemployed to the total labour force.
  • This fall gave misleading signals implying that the unemployment rate was falling in a positive sense.
  • In reality it was a reflection of an exodus of the unemployed from the labour markets — a fall in the labour participation rate.

3. India’s female labour participation rate is very low

  • Official statistics have always shown that India’s female labour participation rate is low and falling.
  • The CPHS shows that the situation with respect to women’s participation in the labour force is extremely poor.
  • The entire brunt of demonetisation was borne by women.
  • Their labour participation fell sharply while that of men did not.

Reason for the decline

  • Researchers have shown that this fall is because of rising household incomes that reduce the need for women to join the labour force;
  • increased enrolment in higher education by women which delays their entry into the labour force, and
  • cultural and security factors that keep women away from the labour market in India.
  • Further, it is evident that employers are also biased against hiring women.

4. The Goods and Services Tax shock

  • After the demonetisation jolt came the Goods and Services Tax shock of July 2017 that drove away small enterprises which could not compete in a tax-compliant environment out of business.
  • This caused a substantial loss of jobs.
  • Preliminary estimates suggest that employment shrunk by 11 million in 2018.
  • The brunt of this was again borne largely by women.
  • But men too were also impacted.

Labour participation rate declined

  • Male labour participation rate was 74.5% in 2016.
  • This dropped to 72.4% in 2017 and then to 71.7% in 2018.
  • In contrast, female labour participation was as low as 15.5% in 2016 which dropped to 11.9% in 2017 and then 11% in 2018.
  • Urban female labour participation rates fell faster than rural female participation.
  • In urban India it dropped from 15.2% in 2016 to 10.5% in 2018.
  • The corresponding values for rural women were 15.6% and 11.3%, respectively.
  • Although female labour participation is substantially much lower than male participation, the few women who venture to get employment find it much more difficult to find jobs than men.
  • The unemployment rate for men was 4.9% in 2018 and that for women in the same year was much higher — 14.9%.

Conclusion

  • This higher unemployment rate faced by women in spite of a very low participation rate indicates a bias against employing women.
  • Drawing women into the labour force by removing the impediments they face to at least bring their participation levels close to global standards is critically important for India to gain from the demographic dividend opportunity it has.
  • This window of opportunity is open only till 2030.
  • By not using a good data monitoring machinery, the Indian government is keeping both itself and the citizenry in the dark.
Feb, 06, 2019

[op-ed snap] Risks to global growth

Note4students

Mains Paper 2: Economic Development| Inclusive growth and issues arising from it.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the newly released World Economic Situation and Prospects for 2019.

Mains level: The news-card analyses the issues and challenges w.r.t global economic growth, in a brief manner.


Context

  • The newly released World Economic Situation and Prospects for 2019 illustrates how rising economic, social and environmental challenges hamper progress towards the United Nations Sustainable Development Goals.

Headlines do not tell the whole story

  • On the surface, the world economy remains on a steady trajectory.
  • Many developed economies are operating close to their full potential with unemployment rates at historical lows.
  • However, beneath the surface, a worrisome picture of the world economy emerges.
  • There are many risk factors that could inflict significant damage on longer-term development prospects.

Issue

  • Over the past year, trade policy disputes have escalated, and financial vulnerabilities have increased as global liquidity tightens.
  • Global private and public debt is at a record high, well above the level seen in the run-up to the global financial crisis.
  • Interest rates remain very low in most developed economies, while central bank balance sheets are still bloated.
  • With limited monetary and fiscal space, policymakers around the globe will struggle to react effectively to an economic downturn.
  • Given waning support for multilateral approaches, concerted actions like those implemented in response to the 2008-09 crisis, may be difficult to arrange.

Challenges

  1. Seeds of growth not reaching the intended
  • Even if global growth remains robust, its benefits do not reach the places they are needed most.
  • Incomes will stagnate or grow only marginally this year in parts of Africa, Western Asia, Latin America and the Caribbean.
  • Many commodity exporters are still grappling with the effects of the commodity price collapse of 2014-16.
  • The challenges are most acute in Africa, where per capita growth has averaged only 0.3% over the past five years.
  • Given rapid population growth, the fight against poverty will require faster economic growth and dramatic reductions in income inequality.

2. Effects of Climate change

  • Most importantly, the transition towards environmental sustainability is not happening fast enough.
  • The nature of growth is not compatible with holding the increase in the global average temperature to well below 2°C above pre-industrial levels.
  • In fact, the impacts of climate change are becoming more widespread and severe.
  • The frequency and intensity of extreme weather events are increasing, damaging vital infrastructure and causing large-scale displacement.
  • The human and economic costs of such disasters fall overwhelmingly on low-income countries.

Way Forward

  • Many of the challenges are global in nature and require collective and cooperative policy action.
  • Withdrawal into nationalism and unilateral action will only pose further setbacks for the global community, especially for those already in danger of being left behind.
  • Instead, policymakers need to work together to address the weaknesses of the current system and strengthen the multilateral framework.
Feb, 02, 2019

[op-ed snap] Distributing the rewards of reform

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the reform rewards proposed in Budget 2019.

Mains level: The news-card analyses several rewards of reforms as proposed in the Budget 2019, in a brief manner.


Context

  • The expansive Budget 2019 reflects the fruits of fiscal consolidation, tax reform and streamlined delivery of subsidies.

Background

  • Since Budget 2019 is the last before the general election this year, it was widely expected to be an assessment of the government’s performance.
  • There was a debate on whether the Budget should have announced any substantive measures since they would bind the next government, post-election.
  • Painstaking fiscal consolidation, tax reform, more efficient delivery of subsidies, and a rise in the share of capital expenditure, have created the space to reward tax-payers as well as announce a relief measure for farmers in distress without substantially compromising fiscal consolidation.
  • It is fair that the present government, which imposed the painful reforms and undertook difficult action, should also distribute some rewards of that reform.

Rewards of higher growth

  • It may be asked how payment of ₹20,000-₹75,000 crore can be made to farmers and the tax benefits given with only a marginal impact on the fiscal deficit.
  • But a larger size economy can afford to spend larger absolute amounts with only a small rise in deficit ratios and borrowing requirements.
  • The fact that India is the sixth largest and fastest growing economy in the world has some advantages as well as responsibilities to equitably share the rewards of growth.

Those who bore the cost of reforms, should now benefit from its success

  • Demonetisation, the goods and services tax (GST) and other steps towards formalisation increased the tax base, and it follows that tax rates can themselves be cut.
  • Again it is fair that the aam aadmi, who bore some of the costs of reform, should now benefit from the success of these.
  • It makes good economic sense to move towards a system of a wider base and lower rates.
  • Tax receipts have grown from 10% of GDP — a level at which they had stagnated since the tax cuts after the global financial crisis — to 12%.
  • Although the GST has not yet resulted in a rise in indirect tax ratios above 5.5%, it is likely to do so in the future as it stabilises.
  • The transfers to farmers and tax cuts amount to only 0.4% of GDP this year and are partially funded by a 0.3% rise in tax ratios.
  • The JAM (or Jan Dhan-Aadhaar-Mobile) complex is the other major set of reforms that enable a smaller expenditure to have a larger impact on social welfare.
  • Jan Dhan bank accounts opened through the country and the Aadhaar data base make a cost-effective Direct Benefit Transfer (DBT) possible for farmers.

Rewards of lower inflation

  • A slight rise in fiscal deficits to fund transfers to farmers does not threaten macroeconomic stability when inflation is low and food prices are crashing.
  • In fact they are likely to help stabilise prices so that farmers do not cut production in the next crop cycle.

Deficits has been maintained

  • Moreover, this year, the revenue deficit has been maintained, the primary deficit been reduced, and expenditure on capital account been increased.
  • Better quality of government expenditure as well as the GST tax cuts, reductions in obstacles to inter-State trade, and soft commodity prices will keep inflation low.

Other factors

  • The Budget points out that highways are being built at the rate of 27 km per day, which makes India the fastest builder in the world.
  • Railway safety has improved.
  • Better implementation and reduction in waste brings down costs across the board.
  • The shift in the Budget date to earlier in the year and the focus on spending in the first half have resulted in a better achievement of sectoral spending targets this year.

Government borrowing

  • The size of government borrowing is larger than what the market anticipated, and this has raised G-Sec rates.
  • The rise in gross borrowing is because of higher redemptions but net borrowing is similar to that last year.
  • There was a sharp rise in G-Sec yields that year.
  • As a result, interest payments as a ratio to GDP rose to 3.2 against the budgeted 3.
  • But 3.4% of GDP is not a large fiscal deficit, and market conditions are likely to be more supportive of government borrowing this year.

Effects of global economic conditions

  • The international rate rise has peaked, with the U.S. Fed turning dovish and indicating that there will be no more rise; it is likely to maintain its balance sheet.
  • Emerging market inflows are set to rise, creating demand for G-Secs up to the current cap of 6% of the domestic market.
  • Soft oil prices will encourage foreign investors to return to Indian markets.
  • But since global growth is slowing, inflows are unlikely to be as large as they were in 2017.
  • Therefore, there will be more room for open market operations (OMO) from the Reserve Bank of India that support the debt market.
  • Softening interest rates will also make banks more willing to hold G-Secs.
  • When international demand is slowing, it is important to maintain domestic demand.
  • Therefore, tax cuts, more income to farmers and various schemes to improve demand for housing, which has been under stress, are all appropriate.

Way Forward

  • It is necessary that sharing of growth benefits is done in ways that sustain growth, reduce distortions, and improve capabilities to participate in growth.
  • Well-targeted transfers can be made without destroying fiscal consolidation and creating macroeconomic vulnerabilities.
  • The Budget continues the effort to reduce transaction costs and improve compliance incentives.
  • Stamp duty amendments that seek to tax just one transaction, which will be shared across State governments, on the basis of the domicile of the buying client, will reduce a major market irritant, increase transactions and take the country further toward becoming one effective market.
  • As income tax returns rise, a less than 0.05% will be selected for scrutiny in non-discretionary, machine-based ways without any interface between the tax-payer and the examining officers, thus reducing potential tax-payer harassment.
Jan, 31, 2019

[op-ed snap] Why government must spend more

Note4students

Mains Paper 2: 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: Basic knowledge of the Indian economy in contemporary context.

Mains level: The news-card analyses the measures to boost the Indian economy in present context, in a brief manner.


Context

  • As the Union budget is set to be announced tomorrow, several economists believe that private consumption, investment demands must rise to boost the Indian economy.

Precarious situation of the Indian economy

  • When the current government took over in 2014, the declared fiscal deficit was at 4.5 per cent while the actual was estimated to be in the range of 5.5 per cent.
  • The gap between these two figures was because the previous government incurred off balance-sheet expenses like oil bonds (issued to the tune of Rs 1,42,202 crore and not reflected in government accounts),
  • It withheld income tax refunds and rolled over to the next year payments which would have ideally come in towards the end of financial year 2013-14.

India was part of the “fragile five”

  • Coupled with weakness on the external account, India was part of a group that was informally referred to as the “fragile five” — countries being the weakest links in the global economy.

Govt managed its financial affairs in a very prudent manner

  • Falling global oil prices were leveraged to generate better revenue for the government.
  • Measures like demonetisation and the Goods and Services Tax (GST) were launched,
  • Establishing audit trail and ownership of money and simplification in indirect tax structure.
  • Macroeconomic parameters like inflation and fiscal deficit have been contained,
  • the current account deficit is manageable and foreign exchange reserves and GDP growth rates are inching higher.
  • In doing so, the government has not sacrificed any essential expenditure.

Indian economy during 2014-15 to 2018-19

  • As per the publicly available data, the 2014-15 to 2018-19 period has seen the best combination of GDP growth rate (high) and inflation (low).
  • Success on the macro-economic management front has been one of the biggest achievements of the government.
  • India is not only one of the fastest-growing economy, but also the sixth-largest economy in the world.
  • PwC’s annual Global Economy Watch report projects India’s real GDP growth in 2019-20 at 7.6 per cent.
  • Accordingly, India is likely to surpass UK in 2019 rankings of world’s largest economies and occupy the fifth position.

Achieving a higher and participative level of GDP growth

  • At the centre of all initiatives is the ordinary citizen of India and the goal is to ameliorate her condition of living.
  • The target is to achieve a higher level of GDP growth and to make it as wide and participative as possible.
  • In the roadmap for doing so, macroeconomic parameters are self-imposed road signs.
  • The government should consider ground realities while making its economic policies.

Challenges

  • Currently, agriculture and allied sectors are facing some challenges due to lack of sufficient demand for their output.
  • The Micro, Small and Medium Enterprises (MSMEs) sector is another segment that is facing headwinds due to lack of liquidity in the financial system and lack of demand.
  • Increased demand brings in private investment and if there is resource constraint with the government, fiscal expansion is the way out.

Need to create demand

  • The economy will grow only when there is sufficient demand.
  • Government expenditure has increased tremendously in the last five years and sectors like steel and cement have benefited immensely.
  • However, private consumption and investment demands need to increase further.
  • For this there is scope for expansionary fiscal policies, particularly when inflation is low.

Way Forward

  • Fiscal discipline during the last five years has been one of the best and has given the government the elbow room to boost expenditure.
  • The government might consider measures like interest subvention on agricultural loans,
  • direct cash transfer to farmers based on their landholdings,
  • relaxation in income tax slabs for the lower-middle and the middle class and
  • injection of liquidity in the financial sector to boost credit availability.
  • These measures might put some upward pressure on inflation which might not be such a bad thing.
  • Cash transfers to farmers are constrained by the lack of updated land records with the state governments and a way around it must be found.
  • Such a transfer will boost demand for agricultural and non-agricultural products in the rural areas and help the agriculture and MSME sectors.
Jan, 30, 2019

[op-ed snap] Think universal basic capital

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 Universal Basic Capital.

Mains level: The news-card analyses the issue that a simplistic universal basic income will not solve the fundamental problems of the Indian economy, in a brief manner.


Context

  • India’s GDP is growing quite well. However, India needs to do much better to improve overall human development, in which it continues to be compared with countries in Sub-Saharan Africa.

Growth must trickle down

  • Even India’s poorer sub-continental neighbours are improving health and education faster.
  • Benefits of India’s economic growth must trickle down much faster to people at the bottom of the pyramid: to poorer farmers, landless rural labour, and hundreds of millions of workers living on the edge in low-paying, ‘flexible’ forms of employment with no social security.
  • Economists seem to be offering three solutions to the economy’s structural problems:

(a) that there is no problem.

(b) more privatisation.

(c) a universal basic income (UBI) to be provided by the state.

Ground still to be covered

  • Many economists are juggling with statistics to prove that the Indian economy is doing quite well.
  • According to them, it is providing enough jobs and statistically, poverty has reduced a lot.
  • However, a lot more must be done to improve education and health care.
  • And to address the persistent informality and small scale of enterprises that are providing most of the employment in the country.
  • An ideological solution that the government is unable to provide them is more privatisation of public services.
  • However, the private sector is structurally not designed to provide affordable public services equitably.
  • Businesses run with a profit motive. They cannot take on the burden of subsidising citizens who cannot pay for their services.

Increasing economic inequalities and basic income

  • Structural forces within the global economy have been driving down wages and creating insecure employment while increasing the mobility of capital and increasing incomes from ownership of capital.
  • ‘Industry 4.0’, which has not yet spread too far, is expected to worsen these problems.
  • An economic consequence of declining growth of wage incomes will be reduction of consumption.
  • Which will create problems for owners of capital and automated Industry 4.0 production systems.
  • For, no one will buy all the material and services that these systems will produce.
  • Therefore, the UBI has appeared as a silver bullet solution.
  • It will be an income provided to everybody by the very state that the capitalists say should get out of their way, and to whom they are unwilling to pay more taxes.

Proponents for basic income

  • The beauty of a ‘universal’ basic income is that it avoids messy political questions about who deserves assistance.
  • It also side-steps the challenge of actually providing the services required: education, health, food, etc.
  • Just give the people cash and let them buy what they need.
  • However, if the cash will not provide citizens with good quality and affordable education and health, because neither the government nor the private sector is able or willing to, this will not solve the basic human development problems that must be solved.

Quasi-universal basic rural income

  • Some economists who were proponents of UBI have now begun to dilute their simplistic concept of UBI to make it financially and politically feasible.
  • They propose a QUBRI (quasi-universal basic rural income), targeted only at poorer people in the rural areas.

Limitations of QUBRI

  • The scheme is no longer universal.
  • It will exclude the not-so-poor in rural areas as morally it should.
  • Political questions about who should be included will have to be addressed.
  • It will not cover the masses of urban poor working for low and uncertain wages.
  • Therefore, some other schemes will have to be drawn up for the urban sector, and entitlement and measurement issues will have to be addressed for these schemes too.
  • All the schemes (rural and urban) could be cash transfer schemes, which Aadhar and the digitisation of financial services will facilitate.
  • However, this still begs the question about how to provide good quality public services for people to buy.

Strengthening of institutions of the state

  • A simplistic UBI will not solve the fundamental problems of the economy
  • An unavoidable solution to fix India’s fundamental problems is the strengthening of institutions of the state to deliver the services the state must (public safety, justice, and basic education and health), which should be available to all citizens regardless of their ability to pay for them.
  • The institutions of the state must be strengthened also to regulate delivery of services by the private sector and ensure fair competition in the market.
  • The building of state institutions, to deliver and to regulate, will require stronger management, administrative, and political capabilities.

An alternative approach: Universal Basic Capital

  • A better solution to structural inequality than UBI is universal basic capital (UBC) which has begun to pop up in international policy circles.
  • In this alternative approach, people own the wealth they generate as shareholders of their collective enterprises.
  • Amul, SEWA, Grameen, and others have shown a way.
  • Some economists go further and also propose a ‘dividend’ for all citizens, by providing them a share of initial public offerings on the stock market, especially from companies that use ‘public assets’, such as publicly funded research, or environmental resources.

Way Forward

  • Three better solutions to create more equitable growth than the ones on offer are:

(a) Focus on building state capacity beginning with implementation of the recommendations of the Second Administrative Reforms Commission.

(b) Strengthen the missing middle-level institutions for aggregation of tiny enterprises and representation of workers.

(c) The creativity of economists could be better applied to developing ideas for UBC than UBI.

Jan, 24, 2019

[op-ed snap] India now faces its own version of Soviet Union’s scissors crisis

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: Nothing as such.

Mains level: The news-card analyses how managing relative price of food in terms of industrial goods will be one of the biggest policy challenges for the govt, in a brief manner.


Context

  • Recently, Inflation numbers released by the government earlier this month shows that the prices that consumers pay for food have been falling for three months in a row.
  • Wholesale food prices have fallen for six months in a row.

Background

  • Experts have pointed out that this is the first time since 1990 that the prices farmers get for their produce at the farm gate have fallen for six consecutive months.
  • Farmer incomes have taken a hit even if one assumes some amount of productivity gains in Indian agriculture.
  • The trend in food price inflation since the new consumer price index was introduced deserves closer attention because it throws light on one of the most important challenges in the Indian political economy.

Why Food price inflation has been volatile but overall trend has been down?

  • Food price inflation has been expectedly volatile since January 2012, but the overall trend has been down.
  • According to the experts, Indian agriculture has entered a new era of structural surpluses in many crops through the use of better seeds, as well as new technology.
  • This is far from the old belief that Indian economic growth was held back by a food constraint.
  • It is also a very different situation from the belief among many policymakers at the beginning of this decade that Indian inflation was being driven by rising protein prices.
  • Higher incomes were driving up protein prices since there was no adequate supply response.
  • The production of pulses—an important source of protein in Indian diets—has soared since then.

Trade between agriculture and the rest of the economy: A struggle for govts

  • Successive governments have struggled to deal with the terms of trade between agriculture and the rest of the economy.
  • The previous government had tried to engineer a structural change in favour of the rural economy through higher minimum support prices as well as the rural jobs programme.
  • It did spark off a rural boom. However, food inflation began to climb.
  • It stayed in the double digits for 19 months in a row from June 2012 till December 2013 and soon spilled over into generalized inflation.

India battled inflation crisis when the world faced deflation

  • India battled an inflation crisis in the early years of this decade even as the rest of the world was facing deflationary pressures.
  • The decision of the present govt to temper the annual increases in minimum support prices helped bring down food inflation.
  • Critics of inflation targeting have also argued that farmers have had to bear the brunt of the sharp disinflation over the past four years.

Politics of food prices: Not a distributional issue alone

  • Higher food prices benefit those who are net sellers of food.
  • Lower food prices benefit those who are net buyers of food, including rural labourers.
  • Managing the distributional politics of food prices has foxed successive governments.
  • However, it is not a distributional issue alone.

Indian production has faltered in recent years

  • Low nominal income growth in rural India also hurts demand for various industrial goods.
  • The fragile home market for industrial products plus the weak foreign demand for them is one reason why Indian production has faltered in recent years.

Soviet Union’s scissors crisis

  • There is a parallel between what is happening in India right now with what happened in Soviet Union around 100 years ago soon after the civil war that the communists eventually won.
  • Political stability as well as the withdrawal of draconian controls over Russian agriculture led to a huge rise in food production.
  • The weather also cooperated and Russia saw bumper harvests.
  • Food prices fell. However, the prices of industrial goods continued to rise.
  • A graph of these two price trends resembled the two blades of a pair of scissors.
  • Soviet commissars began to call it the scissors crisis.
  • Farmers who were not getting enough for their output did not have money to buy what the factories were producing.
  • Some farmers chose not to sell the crop at all.
  • Soviet planners tried to deal with this internal terms of trade problem with price controls on industrial goods.

India facing its own variant of the scissors crisis

  • India could now be facing its own variant of the scissors crisis—core inflation and food inflation are moving in different directions.
  • Managing the relative price of food in terms of industrial goods will be one of the biggest policy challenges for the new government that will take charge of the country later this year.

Way Forward

  • One important response to the Indian scissors crisis will be to remove controls on Indian farmers—be it their ability to sell directly to consumers or the freedom to export.
  • Modern rural supply chains could also help undermine the stranglehold of middlemen.
  • Forward markets will reduce at least some of the price risk that farmers face.
  • However, the most potent solution to rural distress continues to be outside of agriculture.
  • India needs to create jobs in productive enterprises so as to create opportunities for millions who seek to escape farming, where they are condemned to deal with the vagaries of the weather as well as wild fluctuations in prices.
Dec, 10, 2018

[op-ed snap] China and India: Struggling to rebalance

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From the UPSC perspective, the following things are important:

Prelims level: IMF, WTO

Mains level: Comaprison between India-China growth levels and various factors affecting growth


Context

Economic challenges for India-China

  1. China and India make up for two contrasting—but fascinating—case studies of economic management in emerging economies
  2. Policymakers in both countries are struggling to rapidly rebalance their economies
  3. China, which is demand-constrained, is trying to cushion its structural deceleration, whereas India, which is supply-constrained, is struggling to unlock its potential for higher trend growth

The wide gap between India and China

  1. Economic reforms took off in China in 1978, while India was a late bloomer, with major structural reforms seeing the light of day following the balance of payments crisis in 1991
  2. The International Monetary Fund (IMF) pegs India’s per capita gross domestic product (GDP) this year at $2,135. This is around a fifth of China’s per-capita GDP of around $10,000
  3. The gap in per capita GDP in the two economies was less than $40 in 1990
  4. China was at India’s current per-capita GDP back in 2006, a gap of 12 years that is similar to the 13-year head start China had compared to India in initiating economic reforms
  5. China’s per capita GDP surged slightly less than five times between 2006 and 2018, while India’s increased two-and-a-half times

Factors for China’s unprecedented growth

  1. China benefited immensely from its entry into the World Trade Organization (WTO) in 2001
  2. China adopted and adapted to the export-driven model of development, with a strong emphasis on keeping its exchange rate undervalued
  3. The disinflationary impact of its stepped-up supply-side and the ballooning of its current account surplus also facilitated a sustained downshift in the structure of local interest rates
  4. This in turn also boosted growth
  5. China’s early focus on education, skills and infrastructure is an important reason that it can make everything, from a simple but good-quality and reasonably-priced toy to cars; specialized and fancy electrical and electronic gadgets to high-speed railways

What are areas in which India lags behind?

  1. Frequent worries about the size of its chronic current account deficit and about its stable financing sometimes cause dislocations that undermine growth
  2. An often overlooked feature of India’s half-baked economic model is that policymakers have reformed end product markets before addressing the entrenched problems in factor markets: high cost of capital, inadequate and insufficiently skilled labour force, and recurring palpitations with land acquisition
  3. All these factors compromise the pace, magnitude and nature of the unlocking of India’s economic potential
  4. Manufacturing, which is critical for absorbing the growing pool of labour, remains a suboptimal link in India’s economic evolution
  5. Also, India is still lost about reforms in agriculture and education
  6. India wants more investment-driven growth, especially focused on upgrading its creaky infrastructure, but is still struggling to jump-start the upturn in investment

The challenge for China

  1. China took up a multi-year investment surge that also contributed to its undisputed status as the factory to the world
  2. The debt-fuelled investment binge that cushioned the hit from the global financial crisis in 2008 has now become the proverbial albatross around China’s neck
  3. The challenge for China is cushioning its deceleration in growth to avoid any social upheaval from a hard landing and/or rising unemployment

Common problems for India & China

  1. The pace of economic rebalancing in both economies is substantially held to ransom by their banking sectors, including the shadow-banking channels
  2. The underlying problem in both cases is home-grown, with politics distorting the more efficient allocation of savings
  3. Both rely substantially on their clunky banking systems for intermediation of domestic savings, though India’s financial sector can justifiably claim to be relatively better regulated and more transparent than China’s

Way forward

  1. The pace of rebalancing in both countries will continue to be slower than what investors expect
  2. Financial markets suffer from tunnel vision and look for quick outcomes, while adjustments in the real economy take time
  3. India’s challenges to unlock its growth potential aren’t unprecedented; several other emerging economies have had to cross several similar hurdles
Sep, 27, 2018

[op-ed snap] Why economic freedom is important in India

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Economic Freedom of the World (EFW) report

Mains level: India’s strides in the liberalization of the economy and areas where the focus needs to be made


Context

EFW report 2018

  1. Cato Institute and Fraser Institute’s annual Economic Freedom of the World (EFW) report was released this week
  2. The EFW report notes that support for free markets has been dipping across the world from well before the financial crisis
  3. There is a strong correlation between economic freedom and well-being

Findings of the report

  1. The EFW report finds that “Nations in the top quartile of economic freedom had an average per capita GDP of $40,376 in 2016, compared to $5,649 for bottom quartile nations” in terms of purchasing power parity in constant 2011 US dollar terms
  2. In the top quartile, the average income of the poorest 10% was almost seven times the average income of the poorest 10% in the bottom quartile
  3. There is a gulf of almost two decades in life expectancy of the nations in the top and bottom quartiles
  4. Political and civil liberties and gender equality levels show similar divergence

India’s place in rankings dipping

  1. India’s overall ranking has dropped from 83 in 1990, when it stood on the cusp of liberalization, to 96 in 2016
  2. This is due to expansion in the number of countries the index looks at, as well as the progress made by them
  3. Judicial and law and order capacity continues to lag in India
  4. Labour market regulations also need to be reshaped
  5. India’s score has barely budged between 1990 and 2016 in index’s transfer and subsidies category
  6. On property rights, likewise—the backbone of a market economy—the scores indicate insufficient progress

Steps being taken to improve on these lacunae

  1. There is a trend towards direct benefits transfers which is making subsidy regimes more efficient
  2. National Land Records Modernization Programme, now part of the Digital India push, is a move in the right direction
  3. State governments are also doing considerable work, for example, Karnataka’s Bhoomi Project to Rajasthan’s Urban Land (Certification of Titles) Act, 2016
  4. Andhra Pradesh government’s push to use blockchain technology for preventing property fraud has perhaps the most potential of the lot

Progress made by India

  1. India has made appreciable progress on some fronts—from the government vacating space for the private sector in various industries to monetary policy with the Reserve Bank of India adopting an inflation-targeting regime in 2015
  2. By 2022, the number of Indians living in extreme poverty is expected to drop to 20 million

Way Forward

  1. India has underestimated the importance of free markets and the economic freedoms they underwrite
  2. A hard-nosed approach can be reductive, particularly in the context of a country like India
  3. An efficient government—one that draws down its intervention where it is distortionary and goes big where it needs to—is a better goal
Sep, 26, 2018

[op-ed snap] Need for an employment policy to solve jobless growth

‘Need for an employment policy to solve jobless growth’

Note4students

Mains Paper 3: Economy | Development & employment

From UPSC perspective, the following things are important:

Prelims level: State of Working India 2018 report

Mains level: The paradox of high GDP vs low job growth and need of a national employment policy


News

Job growth not in sync with GDP growth

  1. A new study released by Azim Premji University’s Centre for Sustainable Employment named the ‘State of Working India 2018’ confirms the spectre of jobless growth
  2. The study contends that the divergence between growth and jobs had increased over time
  3. In the 1970s and 80s, when GDP growth was around 3-4%, employment growth was about 2%
  4. Currently, the ratio of GDP growth to employment growth is less than 0.1 i.e. a 10% increase in GDP results in a less than 1% increase in employment

Findings of the study

  1. The study uses government data to show that total employment actually shrank by seven million between 2013 and 2015
  2. It cites private data to posit that an absolute decline has continued in the years since
  3. Unemployment has risen to more than 5% overall
  4. In geographic terms, north Indian States are the most severely affected, while in demographic terms, young people with higher education levels suffer an unemployment rate as high as 16%
  5. Rural wage growth collapsed in 2014 and has not risen since
  6. In the organised manufacturing sector, though the number of jobs has grown, there has also been an increase in the share of contract work, which offers lower wages and less job security

Divergence in productivity and wages

  1. There is a divergence of productivity and wages in the organised manufacturing sector
  2. Labour productivity in the sector is six times higher than it was 30 years ago but managerial and supervisory salaries have only tripled in the same period
  3. The production workers’ wages have grown a measly 1.5 times

Caste gap in jobs

  1. With regard to earnings, the caste gap is actually larger
  2. Dalits and Adivasis are over-represented in low-paying occupations and severely under-represented in higher-paying ones
  3. They earn only 55-56% of upper caste workers’ earnings

Recommendation

  1. The government ought to formulate a National Employment Policy that takes these trends into account
Aug, 20, 2018

[op-ed snap] Suddenly, another emerging market currency crisis

Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Slide in the value of rupee & the reasons behind it


Context

Sliding value of currencies across the world

  1. In January 2017, when Donald Trump was sworn in as president, the Turkish lira was trading at 3.5 to $1
  2. In the roughly 18 months since, the TRY has lost half its value, hitting a level of 7 TRY to $1 last week
  3. This old emerging markets-style crisis, which has been brewing for the last few months, took down with it the Chinese yuan by nearly 10% from the highs of the year, the Brazilian real by 18% year to date (YTD), the Russian ruble by nearly 20% YTD, the Indian rupee by nearly 10% YTD, and the Pakistan rupee by nearly 17% YTD

Reasons for this crisis

  1. The weakest currencies have been the ones with the most external hard currency borrowing (Turkey), political turmoil (Brazil and Turkey) and/or the highest current account deficits (Pakistan, 5.7% of gross domestic product)
  2. A stubbornly high oil price has added pressure on currencies like the Indian rupee and the yuan
  3. Good economic growth in the US has necessitated a normalization of the low-interest rates that have been the norm since the global financial crisis
  4.  In proximate terms, this steady increase in dollar interest rates has led to a “currency tantrum” in the emerging markets
  5. Also, Trump has openly quarrelled on trade with other countries—particularly those that maintain a trade surplus with the US—and has noisily slapped tariffs on a host of products
  6. Almost all those countries have retaliated with counter-tariffs and this has escalated into an all-out trade war

How is the case of Turkey different?

  1. Turkey has a low savings rate and an extraordinary appetite for hard currency borrowing by companies
  2. This resulted in a high current account deficit and a tendency towards inflation
  3. An “independent” central bank should have raised rates many quarters ago but it was bullied by a populist authoritarian president into not doing so
  4. Companies in Turkey behaved as if they were members of the European Union and North Atlantic Treaty Organization at the same time
  5. That fundamental dichotomy snapped global investor confidence last week and manifested in the lira’s rout

Steps by strong economies

  1. China and, to a lesser extent, India and Indonesia, have competent institutions that have prudently raised rates and have adequate firepower in terms of foreign exchange reserves to bring stability to their economic systems
  2. The Reserve Bank of India can take some credit for seeing this coming and raising interest rates twice

Lessons for India

  1. For the longer term, the lesson from the Turkish crisis is to promote domestic savings—both post-tax savings and pensions
  2. This is one more reminder that India must nurture pension-related savings in the government, corporate and individual sectors
  3. These savings can, and should, substitute for the disproportionate role that foreign capital still plays on our stock market and in foreign direct investment
  4. For the government, it should explicitly set a zero revenue-deficit goal in the next administration

Way Forward

  1. The first panacea for a mismanaged nation is inflation of the currency; the second is war
  2. Both bring a temporary prosperity; both bring a permanent ruin
  3. India needs to be cautious in allowing the inflation of rupee
Jul, 24, 2018

[op-ed snap] Two engines of the economy need to fire

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Sluggsh investments in economy especially from private sectors and ways to revive them


Context

Investments picking up slowly

  1. The recovery in investments will continue in fiscal 2019, led by government efforts to build roads and houses
  2. Capacity utilization, which is a pre-condition to the revival in private sector investments, should also keep improving
  3. The crowding-in impact of public investments is expected to kick in later
  4. Yet a broad-based and decisive pick-up in the investment cycle will take time

Investment rate in India

  1. The share of gross fixed capital formation—fresh investments in the form of plant and machinery, dwellings and other buildings—in the gross domestic product (GDP), is called the investment rate
  2. India’s investment rate averaged 31% in fiscals 2015-2018, compared with 33.6% in fiscals 2010-2014
  3. It touched a decadal low of 30.3% in fiscal 2016

The decline in private investment

Data suggests weakness on two fronts as the reason for the decline in investments

One, the sticky share of private corporate sector investments in GDP

  • CSO data shows private non-financial corporate investments have remained subdued
  • Data from the Reserve Bank of India (RBI) also suggests that capital expenditure by the private sector declined for the sixth straight year in fiscal 2017

Two, a secular decline in household investments

  • The household sector was the biggest contributor to investments in fiscal 2012 (share of about 45%), but its share has declined consistently since then and was about 31% in fiscal 2017
  • Purchase of houses is generally the largest part (more than three-fourths) of household investments, so a slowdown on that score becomes a key reason for the decline

Reasons behind the decline

A broad-based pickup in private corporate investments was elusive for three reasons:

First is the capacity overhang

  • Data from the RBI suggests overall capacity utilization declined to 74% at the end of December 2017 from 81% at the end of March 2011
  • CRISIL Research analysis corroborates this trend

Second is the focus of corporates on improving their capital structure

  • High leverage has also been haunting the corporate sector and has been a deterrent for fresh investments in the economy
  • Companies are, therefore, focused on improving capital structure than investments
  • Consequently, debt/equity and interest coverage ratios have improved, not so much investments

Third was that the transitory shocks from demonetization and implementation glitches in the roll out of the goods and services tax (GST)

  • It added to the uncertainty, which further delayed investment decisions

Productivity of investment

  1. The productivity of investments is measured by the incremental capital-output ratio (ICOR)
  2. Lower the ICOR, higher is the productivity of capital because ICOR measures the capital required to produce an additional unit of output

Expectations on the pickup in investments

  1. A broad-based pickup in investments is unlikely this fiscal as capacity overhang persists and corporates continue to focus on reviving their capital structure
  2. Pre-election year uncertainty, too, discourages private sector investments
  3. This fiscal is expected to see a mild improvement in investments, given the government’s sharp focus on affordable housing, rural infrastructure and roads
  4. Beyond the current fiscal year, there is more optimism on a broad-based pick-up in investments
  5. The government has initiated a number of steps to ease the business environment:
  • big moves such as the GST and Insolvency and Bankruptcy Code (IBC)
  • introducing an online single-window model for providing clearances and filing compliances
  • fast-tracking foreign investments
  • surpassing the Foreign Investment Promotion Board

Way Forward

  1. Both investment and its productivity should pick up as the deleveraging phase gets over, crowding-in benefits of public investment kick in and efficiency-enhancing reforms start bearing fruit
  2. That will lead to faster economic growth
Feb, 23, 2018

India’s top 10% own 63% of country’s wealth, bottom 50% own 5.3%: Oxfam report

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Oxfam, World Inequality Report, World Bank

Mains level: Income inequality in India


News

Income inequality rising

  1. India’s top 10% already held over half the country’s wealth (52%) in 1991
  2. The situation worsened further by 2012 with their share in total wealth rising to 63%
  3. In the same period, the share of wealth held by the bottom 50%, which was already low at 9% in 1991, fell to 5.3%
  4. This was revealed in a report by Oxfam India

India among the three worst nations

  1. The report used national sample survey data sets and other sources and concluded that the level of inequality prevalent in India is among the three worst in the world
  2. Only Indonesia and the United States are doing more worse than India
  3. These findings closely mirror the broad findings of the World Inequality Report released last month

Wealth inequality

  1. The wealth of India’s billionaire club has increased by 10 times in the last decade
  2. In the same period, the national per capita income only grew by two times

Solutions to address the problem of inequality

  1. Progressive taxation policies
  2. Creation of more salaried, formal sector jobs (World Bank too made a similar recommendation in a recent draft report)

Back2Basics

World Inequality Report

  1. It is a report by the World Inequality Lab at the Paris School of Economics
  2. It provides estimates of global income and wealth inequality based on the most recent findings compiled by the World Wealth and Income Database (WID)
  3. WID, also referred to as WID.world, is an open source database, that is part of an international collaborative effort of over a hundred researchers in five continents
  4. It provides data on both distribution of income and wealth
  5. The first report, entitled World Inequality Report 2018 was released on December 14, 2017 at the Paris School of Economics during the first WID.world Conference
Jan, 17, 2018

[op-ed snap] The circular economy

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Circular economy, Smart Cities Mission, Indian Resource Panel

Mains level: Unique ideas that can be implemented to make economy more efficient and sustainable


Context

Challenges of the disposable economy

  1. Products today are designed to have a shelf life
  2. It is a period of time during which they can be used and after which we are constrained to replace them
  3. This is either because a newer, more feature-rich model has presented itself or because the latest apps and software run too slowly on these old machines

What does this lead to?

  1. This economic construct requires a resource-intensive industrial infrastructure
  2. This infrastructure focuses exclusively on the extraction and consumption of natural resources without paying heed to the need for replenishment or conservation

Concept of circular economy

  1. It is a model that is regenerative by design and aimed at ensuring that products are maintained at their highest utility at all times
  2. It describes a continuous cycle aimed at preserving capital and minimizing system risk by efficiently tracking and managing finite stocks
  3. The circular economy requires that value creation be decoupled from consumption of finite resources

How does circular economy work?

  1. It draws its inspiration from the biological world where the nutrients that are metabolized by life processes are generated from other living systems after their death and ensures that the earth remains a stable, self-contained ecosystem
  2. The circular economy attempts to mimic this circle of life
  3. It tries to achieve the same results through technical cycles that recover and restore products and components through strategies like reuse, repair, refurbishment, re-manufacture and recycling
  4. It depends on sustainable practices, but more than that looks to encourage a change in the way in which people think about their business
  5. It asks them to focus on keeping products alive for as long as possible rather than requiring them to be constantly replaced

Indian society and circular economy

  1. Indian society has always had circular ideals
  2. As a people, it is ingrained in us to reuse and recycle as much as possible
  3. On average we reuse up to 60% of our discarded plastics—10 times as much as the US
  4. For the most part, this recycling happens at the end of the value chain by the poorest sections of society
  5. This results in value loss and also health risks for those who extract value from waste

Appplication of circular economy principle in present scenario

  1. While the Smart Cities Mission will help bring feedback-driven efficiencies to our cities, we could do with more constructive action in the areas of urban sanitation, water management and local community development
  2. In the agricultural sector, we should look to develop digital food supply chains that transmit accurate market information to food producers, connecting them more closely with customers
  3. We could also look to borrow from nature, developing self-sustaining cultivation habits like rice-fish farming, which improves rice yields without the use of fertilizers and pesticides
  4. The other area of the economy that shows considerable promise is urban mobility- India could ensure that, unlike the West, vehicle ownership never rises above its current 5% levels

Way Forward

  1. In 2015, the ministry of environment and forests established the Indian Resource Panel with the specific purpose of facilitating the use of recycled materials and promoting resource efficiency
  2. This initiative is facilitating efficient flows of materials from the product design stage to collection after use, repair, reuse, refurbishment, and recycling
  3. We need to tap our cultural instincts and we will have no problem adapting circular practices directly into our national economic model
Oct, 14, 2017

[op-ed snap] Six steps to job creation

Image source

Note4students

Mains Paper 3: Economy | Development & employment

From UPSC perspective, the following things are important:

Prelims level: AMRUT Scheme, inverted duty structures

Mains level: National health policy, National manufacturing policy and other initiatives related to industrial growth


Context

  1. India is indeed the fastest growing large economy in the world
  2. Yet with investment low, credit offtake low, capacity utilisation in industry low, agricultural growth low, plant load factor low, it is hardly surprising that job growth is low as well

Groups in need of jobs

  1. In India’s highly segmented labour market, there are at least three demographic groups that are in urgent need of jobs
  2. These are: A growing number of better-educated youth; uneducated agricultural workers who wish to leave agricultural distress behind; and young women, who too are better educated than ever before

Reason(s) for low job growth

  1. Among many dimensions of this problem is the fact that in the quarter-century since economic reforms began, it is not manufacturing that has been the leading sector driving growth
  2. Manufacturing should drive productivity in the whole economy
  3. Services cannot, as services by definition ‘service’ the distribution of produced goods

What can policy-makers do to revive job growth?

  1. Industrial, trade policy
  • An industrial and trade policy is needed
  • For 20 years after economic reforms began in 1991 there was no National Manufacturing Policy, and the Policy, when it came in 2011, was not even implemented
  • The Department of Industrial Policy and Promotion (DIPP) is finally preparing an industrial policy
  • It is essential that trade policy is consistent with such an industrial policy
  • Otherwise, the two may work at cross purposes and undermine each other’s objectives
  • Manufacturing has been badly affected by inverted duty structures

    2. Special packages needed for labour-intensive industries

  • There are a number of labour intensive manufacturing sectors in India such as food processing, leather and footwear, wood manufacturers and furniture, textiles and apparel and garments
  • The nature of the package will need to be individually designed for each sector defined as quickly as possible

   3. Cluster development

  • There should be cluster development to support job creation in micro, small and medium enterprises (MSMEs)
  • Most of the unorganized sector employment is in MSMEs, which tend to be concentrated in specific geographic locations
  • There is a cluster development programme of the Ministry of MSMEs, which is poorly funded and could be better designed as well

   4. Align urban development with manufacturing clusters

  • Infrastructure investment by the government always creates many jobs
  • The Ministry of Urban Development (MoUD) has a programme called AMRUT (Atal Mission for Rejuvenation and Urban Transformation) aimed at improving infrastructure for small towns
  • An engagement between the Urban Development and MSME Ministries is necessary to ensure that the infrastructure investment under it is taking place in towns which have clusters of unorganised sector economic activities
  • It will attract more investment to industrial clusters, which is where most non-agricultural jobs are

   5. Focus on women

  • Girls are losing out in jobs, or those with increasing education can’t find them, despite having gotten higher levels of education in the last 10 years
  • The problem with skilling programmes has been low placement after skilling is complete
  • Skilling close to clusters (rather than standalone vocational training providers), which is where the jobs are, is likely to be more successful
  • The availability of jobs close to where the skilling is conducted will also enhance the demand for skilling

   6. Public investments in health, education, police, and judiciary 

This can create many government jobs

Health

  • Public investment in the health sector has remained even in the last three years at 1.15% of GDP, despite the creation of the National health policy at the beginning of 2017
  • Given the state of health and nutrition of the population, it is critical that public expenditure on health is increased faster
  • More government expenditure in health means more jobs in government and better health outcomes
  • Preventive and public health has always been in all countries the responsibility of government

Education

  • Government schools have poor quality and parents are voting with their feet by spending money on private schools, whether or not the poor parents can afford it
  • The number of teachers required, at secondary and higher secondary levels, is very high, particularly in science and mathematics
  • Many new government jobs can be provided if more young people could be trained specially to become teachers for science and mathematics at the secondary and higher secondary levels

Police and Judiciary

  • While the number of paramilitary personnel continues to grow, State governments are not filling even sanctioned posts in the policy and in the judiciary (at all levels there are vacancies)
  • More police and a larger judiciary can both reduce crime as well as speed up the process of justice for the ordinary citizen

Back2Basics

Inverted duty structures

  1. An inverted duty structure has the following features: higher duty on intermediate goods compared to final finished goods, with the latter often enjoying concessional customs duty
  2. As a result, domestic manufacturers face high tariffs, leading to higher raw material cost at home
  3. This has prevented many manufacturing sectors from growing since economic reforms began
Oct, 13, 2017

[op-ed snap] Why the economic slowdown, and how to fix it?

Note4students

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

From UPSC perspective, the following things are important:

Prelims level: Fiscal stimulus, expansionary policy

Mains level: How to revive the economy

 


News

Context-

  1. The article puts forward a case for increased spending by the government and lowering of interest rates by the RBI. The author argues that fiscal stimulus is the only logical way to pull the economy out of slowdown.

 

Current state of the economy-

  1. Data from 107 companies from the organised sector (excluding IT & financial services) indicate that number of persons employed by them has decreased by 2% between Mar-2016 and Mar-2017.
  2. The latest RBI Consumer Confidence Survey concludes that there is significant dip in the consumer confidence and business sentiment in manufacturing.

 

Background of the slowdown-

  1. The period 2003/04-2007/08 witnessed the most rapid sustained GDP growth in India at 8% per annum, riding on the boom in the world economy.
  2. Then came the bust, as growth dropped to 3.9% in 2008-09.
  3. Surprisingly, GDP growth rose to 5% per annum during 2009/10-2010/11. This recovery was attributable to counter-cyclical macroeconomic policies among other things.
  4. But the resilience did not last long. Growth slowed to 4% per annum during 2011/12-2013/14, as fiscal imbalances mounted, inflation quickened, and the current account deficit in the balance of payments widened.
  5. In 2015-16 and 2016-17 the GDP growth rate averaged 7.5% owing to one thing only- sharp drop in world oil prices, from more than $110 per barrel to less than $50 per barrel. This led to decrease in current account deficit and fall in inflation.

 

Reasons for slowdown-

Demonetisation and introduction of GST have led to decrease in output in mainly unorganised sectors. But these are not the real reasons for the current slowdown in the economy.

The real reasons for slowdown are structural-

  1. Rural distress: GDP per capita in the agricultural sector has been less than one-tenth GDP per capita in the non-agricultural sector for 25 years. Employment creation is negligible. The outcome is rural distress.
  2. Low share of manufacturing: The share of manufacturing in GDP and employment is lower than it was 25 years ago. India’s share in industrial production and manufactured exports in the world economy has declined steadily.
  3. Thus, GDP growth is supported largely by the services sector, while employment growth in the economy has been sustained essentially by construction activities and the informal services sector both of which have been hurt by demonetization.
  4. RBI’s reluctance to cut interest rates: Between 2013-14 and 2015-16, the RBI repo rate, which sets interest rates in the economy, was reduced by a mere 1.25 percentage points although inflation came down by almost 5 percentage points in terms of the consumer price index. The opportunity to stimulate investment by dropping interest rates sharply was missed out altogether
  5. Appreciation of rupee leading to erosion of export competitiveness: Between January 2014 and June 2017, the rupee appreciated by 10% in nominal terms and 15% in real terms.

 

Solution-

  1. Government should undertake fiscal stimulus by increasing spending and reviving demand. The government need to break free from the 3.5% fiscal deficit target and increase it to 4.0%. It is to be noted that borrowing is bad for the economy only when it is used for paying debts. But if it is used for creation of infrastructure and investment then it is actually god for the economy.
  2. RBI should lower the interest rates by 2 percentage points: It has to be noted that the inflation in economy was controlled not due to lowering of interest rates but because of the fall in global crude oil prices.

 


 Back2basics

  1. Fiscal Deficit: A Fiscal Deficit occurs when government’s total expenditures exceed its total revenues (excluding borrowings).
  2. Fiscal Stimulus: Increasing government spending on infrastructure etc in order to lift investor sentiment, increase money supply in the market and increase demand in the economy.
  3. Expansionary monetary policy: This refers to  a monetary policy by a central bank in which interest rates are cut in order to ease money supply in the economy.
Oct, 09, 2017

Mr PM: It’s time for bold economic thinking

Note4Students

Mains Paper 3 | Indian Economy

 

Prelims: GDP, Real Interest Rate

Mains level:  This article highlights the reasons for the paradoxical situation of the Indian economy and also gives a five step action plan to bring the economy back to high growth path.


News

Context

Present State of Indian Economy

The Indian economy is currently in a paradoxical situation

Reasons for high Economic growth

  1. The rapid economic growth, inflation is down, forex reserves are more than $400 billion, fiscal deficit is on target and current account deficit until recently has been less than 1% of GDP and comfortably financed by capital inflows.
  2. India’s oil imports in FY13 was $164 billion and by FY17 it was only $83 billion, thereby lowering the current account deficit as a percentage of GDP.
  3. The stock market is at an all-time high in anticipation of a surge in earnings which is yet to materialise.
  4. However, the state of the economy has been called to be ‘sinking’.

 

But economy is facing challenges like lack of investment and unemployment.

The RBI, in its latest monetary policy report, lowered the projected growth rate for FY18 from 7.3% to 6.7% .

 

Reasons for slow economic growth

  • The demonitisation and the introduction of GST.
  1. But on a positive note,  the culture as well as the regime for direct and indirect tax compliance in India is undergoing a fundamental shift for the better in a way that has not happened before.
  2. This will expand production in the near future. However, there is uncertainity how fast this is going to happen.
  3. For reforms to yield results necessary follow up policy actions by the government is needed.
  • The lack of speedy resolution of the stress in PSU banks and corporate balance sheets.
  1. This has eroded business confidence leading to lower investment and poor job creation.
  2. The announcement of stimulus package by the government may deal with the problem cosmetically rather than address its root.
  3. Mission Indra-Dhanush has also failed to resolve this problem.
  4. The recent RBI move to refer large stressed accounts to the National Company Law Tribunal so that they could be dealt with under the Insolvency and Bankruptcy Code but it will take a long time to resolve and recoveries will be much lower than what would have been possible by way of one-time payments negotiated with delinquent borrowers for full and final settlement of dues.
  5. The aim to question boards and executive of PSU banks from probes by the three Cs, CBI, CVC and CAG, will delay resolution of distressed loans and causing more losses to PSU banks.
  6. Due to this the high savings in India are currently not directed to productive, long-term investments as corporates have still not been able to repair their balance sheets.
  • The intangible thing called “confidence”, be it consumer or business, has been faltering.
  • The real interest rate which is calculated as the difference between the yield on the 90-day Treasury Bill and consumer price inflation is hovering around 4% therefore the investment might not pick up fast.

Five step plan to bring India back on the high growth track

  1. To counter the effects of demonetiation was politically successful but an economic failure.
  • Introduce an amnesty scheme, a laIndonesia, to allow tax payers to voluntarily disclose hitherto undisclosed income kept domestically and abroad.
  • Indonesia — a nation of 250 million people, with 32 million registered tax payers but only 8.9 million actual tax payers — had close to 1 million people disclose approximately 40% of GDP of undisclosed income this year, the bulk of which was held domestically and a portion abroad, notably in Singapore.
  1. The Indian government should announce a one-time programme valid till December 31, by when anyone can disclose previously undisclosed income held within the country and abroad, for which they will pay a small, one-time fine of 4%, while 50% of the domestic holdings will need to be invested in two large government funds — one for infrastructure and the other for bank recapitalization.
  • The amounts thus invested will be locked for seven years with a compound interest of 4% per annum. Post redemption, the amounts and the interest thereon can be used freely for any lawful purposes in India.
  • From January 1, criminal prosecution should be instituted against Indian residents holding large sums of undisclosed income.
  • By highlighting the automatic exchange of financial account data with nations such as Singapore and Switzerland, it can ensure that the scheme is taken seriously.
  • The work done so far by the SIT on money stashed abroad and the information obtained through Panama leaks can be used as a input to test and start the scheme.
  1. To ensure that the full extent of the NPA problem is recognised latest by December 31 and that banks make necessary provisions in this regard. The consequent shortfall in equity capital adequacy for PSU banks should be met through recapitalisation by March 31.
  • The boards of PSU banks should be recast by bringing in persons with demonstrated professional experience and achievement.
  • The selection of CEOs of PSU banks and determination of their tenure and compensation package should henceforth be the exclusive domain of their boards.
  • Boards should be fully empowered decide on loan resolution by way of real restructuring, with or without haircut, and one-time payment.
  • All cases of suspected wrongdoing involving collusion between borrowers and banks in loan resolution should be screened and vetted first by a high-level committee of former bankers drawn from public and private sectors before being taken up by the 3 Cs.
  • Clear guidelines should be established for such screening and vetting.
  1. Accelerate infrastructure investments, especially in agricultural storage/ support infrastructure, in post-harvest processing, water efficiency technologies, extension services etc. to make agriculture more productive.
  2. Facilitate new export engines — ‘Make in India’ and ‘Serve in India’ — with emphasis on defense exports and medical tourism.
  • An ambitious target of $100 billion over the next 10 years can be set for these two segments as the world is becoming an increasingly dangerous place and global population less healthy with chronic diseases for which India can offer holistic cures.
  1. The PM must take a leaf from the book of former Prime Minister, Narasimha Rao who brought a technocrat to lead the economic reforms that time.

 

 

 

 

 

 

 

 

Oct, 05, 2017

Inflation set to pick up in H2FY18: RBI

Note4Students:

Mains Paper 3| Indian Economy

Prelims: Inflation- WPI and CPI, GST

Mains level: Not much


News

Context

  1. Consumer price inflation is likely to pick up in the second half of 2017-18 with food prices set to rise.
  2. There has been a broad-based increase in CPI inflation excluding food and fuel.
  3. The RBI has kept the repo rate unchanged at 6 per cent in the bi-monthly monetary policy
  4. Inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year, including the house rent allowance by the Centre.

Why RBI feels that inflation will pick up?

  1. Early indicators show that prices of pulses which had declined significantly to undershoot trend levels in recent months, have now begun to stabilise.
  2. Some price revisions pending the goods and services tax (GST) implementation have been taking place.
  3. International crude prices, which had started rising from early July, have firmed up further in September.
  4. Implementation of farm loan waivers by states and salary and allowances

Back2basics

  • Consumer Price Index:CPI is used to monitor changes in the cost of living over time, it reflects the price of goods and services bought by the final consumers. The CPI compares the price of a fixed basket of goods and services to the price of the basket in the base year that is 2011-12. India has adopted CPI to measure inflation. CPI is calculated by Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation (MOSPI).
  • Whole sale Price Index: WPI is used to monitor the cost of goods and services bought by producer and firms rather than final consumers. WPI basket does not cover services. In IndiaOffice of Economic Advisor (OEA), Department of Industrial Policy and Promotion, Ministry of Commerce and Industry calculates the WPI. The new base year for WPI is 2011-12

 

 

 

Oct, 04, 2017

[Op-ed snap] In need of a psycho-economic boost

Note4students:

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

From UPSC perspective, the following things are important:

Prelims level: Concepts: Fiscal and monetary stimulus, economic cycle
Schemes: SEIS & MEIS

Mains level: Steps to revive the economy


News

Context

  1. The article talks about how fiscal and monetary stimulus can help in reviving the economy
  2. The central idea of the article is follows: in a slumping economy, in addition to fiscal and monetary stimulus, a psychological boost is also required in to boost the “animal spirits”

 Current scenario in the economy-
 Investor enthusiasm from the private sector is lacking. Added to their lack of demand is the reluctance of supply of investible funds.

  1. GDP growth is continuously declining six quarters in a row (from 9.2% to 5.7%)
  2. Investment share of GDP is falling for last 5 years
  3. The value of stalled projects is record high at ₹13.2 lakh crore
  4. Newly announced projects are at 4 years low at ₹84,000 crores
  5. Cautious banks: In spite of healthy deposits, the banks are reluctant to extend new credit because the ratio of NPAs have been growing for 5 years in row now.
  6. The new Insolvency and Bankruptcy code could be good but has yet not been tested.

 

Way forward-

On the spending side government should focus on four areas-

  • Provide fresh capital either to existing banks or the new ‘bad bank’.
  • Provide wage subsidy as incentive to labour intensive sectors like textiles etc.
  • Provide big boost to affordable housing by funding land acquisition for the builder and interest rate subvention for the home buyer
  • Promote export oriented labour intensive sectors by enabling weaker exchange rate, quicker refund of GST credit and expanding the scope of the Merchandise Export from India Scheme and Service Exports from India Scheme.

Conclusion-
These short-term measures will try to lift the psychological atmosphere in the economy and hence boost private investment.

For Prelims:

Merchandise Export from India Scheme (MEIS)

  • Under the Ministry of Commerce and Industry
  • Launched under Foreign Trade Policy of India (FTP) 2015-20.
  • Aim: To offset infrastructural inefficiencies and associated costs involved in export of goods and products, which are produced and manufactured in India
  • It seeks to enhance India’s export competitiveness of these goods and products having high export intensity, employment potential

Service Export from India Scheme (SEIS)

  • Under the Ministry of Commerce and Industry
  • Launched under Foreign Trade Policy of India (FTP) 2015-20.
  • It provides for incentives to all service providers of notified services who are providing services from India

Back2basics

  1. Meaning of Investment Share of GDP: This is the quantum of investment which is responsible for creation of new capital in terms of factories and other infrastructure which will give returns in the future.
  2. Keynesianism: M. Keynes was a British economist who suggested (during the Great Depression of 1930s) that in order to pull an economy out of a slump (recession/depression) increased government expenditure and cutting taxes is the way out. This is in short called as Keynesianism.
  3. Fiscal Stimulus: Increasing government spending on infrastructure etc in order to lift investor sentiment and increase money supply in the market.
  4. Monetary Stimulus: Cutting interest rates by the central bank of an economy in order to enable availability of cheaper credit in the market, consequently encouraging more people to spend and increase money supply.
  5. Bad Bank: There is a suggestion to collect all the bad loans from the various banks and move them to a freshly capitalised bank, the so-called “bad bank”. The bad bank would focus solely on liquidating the collateral, bringing in fresh owners and managers to run distressed companies. Once freed from NPAs, the existing banks can resume lending to the healthy sectors.
  6. NPA: When loan payment has not been done for the past 90 days then such an asset is termed as a Non- Performing Asset.
  7. The Insolvency and Bankruptcy Code, 2016: Read in detail here.

 

 

Sep, 30, 2017

[op-ed snap] Pause before you leap

Image result for economic slowdown

Image source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Fiscal stimulus, Current account deficit (CAD)

Mains level: Reasons behind the economic slowdown in India and what needs to be done in order to re-stoke growth


News

Context

  1. The slowing of GDP growth to below 6 per cent has created anxiety and concern.
  2. One suggestion is to go for a fiscal stimulus to re-stoke growth
  3. To assess the efficacy of any intervention, it’s crucial to first correctly diagnose the problem

What are reasons behind the slowdown? 

  1. Growth has now been slowing for five quarters. The slowdown has been accentuated in 2017, because of demonetisation and GST 
  2. Despite this slowdown, manufacturing imports have accelerated sharply, widening the current account deficit (CAD)
    • CAD has quadrupled from 0.6 per cent to 2.4 per cent of GDP
    • Seventy per cent of this is on account of increased manufacturing imports
  3. The growth slowdown before demonetisation was a natural consequence of
    • The oil windfall rolling off
    • Economy embarking on de-leveraging.
  4. This has been compounded by a negative supply shock after demonetisation, as supply chains have been disrupted inducing more imports.
    • Since demonetisation, imports have been growing at 13 per cent.
  5. Domestic supply chains have been disrupted in the manufacturing sector post-demonetisation — likely involving SMEs and that activity has been replaced by imports

Possible implications of a fiscal stimulus?

  1. Expansionary fiscal is unlikely to rehabilitate disrupted supply chains.
  2. Instead, a fiscal stimulus — in the wake of an adverse supply shock — will stoke more imports and result in a larger current account deficit. 

Way forward?

  1. Supply-side shocks need supply-side solutions.
  2. Improve the regulatory and business environment for SMEs
    • Improve their access to credit
    • Resolve teething GST problems and
    • Simplify the burdens of firms competing in the formal sector.
  3. Keep pushing hard on the stressed-asset resolution, so that the twin-balance sheet problem does not remain a binding constraint for larger firms.

Back2basics

Sep, 19, 2017

[op-ed snap] India’s economy: Dark clouds and Silver linings

Note4Students:

Mains Paper 3: Indian Economy growth and development; Investment Models

The following things are important from UPSC perspective:

Prelims: GDP, Current Account deficit, Capital Account Deficit, Functions of RBI

Mains level: What are the structural and cyclical reasons for declining growth rate and its impact on the economy. Also give solutions to reverse declining economic growth.


News:

Context

  1. Economic growth has declined for six quarters in a row.
  2. Inflation has more than doubled in the three months since June.
  3. The current account deficit (CAD) in the first quarter of the current fiscal year was at its highest level in four years as a proportion of gross domestic product (GDP).
  4. Is it time to hit the panic button?

 

Some of the worries are overdone because-

  1. Inflation was expected jump back from an absurdly low level in June.
  2. The current account deficit is still being comfortably financed by strong capital flows.

 

  1. The increased CAD may be because of dominance of debt investments and spurt in electronics and gold imports.
  2. Decline in economic growth in the three months to June can be explained by inventory destocking by companies ahead of the launch of the goods and services tax (GST), so a cyclical bounce back is quite likely over the next two quarters.
  3. The government was facing a comfortable growth trajectory till now because-
  4. The collapse of global crude oil prices and it used it prudently to strengthen its finances rather than immediately pass the benefits to the consumers.
  5. Monetary tightening by the Reserve Bank of India also helped secure macroeconomic stability after nearly five years.
  6. That hard-earned stability does not seem to be at risk—despite the latest numbers on inflation and the current account deficit.

 

 So,  What is the more serious problem-

  • It is the Declining Economic Growth.
  • It may be due to two reasons- Structural or Cyclical.
  • But, at this point of time it is difficult to figure out how much of the decline can be attributed to structural reasons or the cyclical ones.
  • It is also because of the two consecutive exogenous shocks given to the economy—first demonetization and then the transition to GST.
  • Economic growth is expected to claw back once the effects of the above mentioned shocks abate, especially if there is no hysteresis.
  • An important structural element to the economic slowdown is that the Indian economy began started losing momentum well before the demonetization decision was announced in November.
  • In other words, we may expect pleasant surprises in the next two GDP’s.

What can be done to arrest this economic decline ?

  • The key to a sustainable recovery is the investment cycle.
  • The private sector is still struggling with excess leverage and the banks are struggling with bad debts
  • So, the macroeconomic strategy will thus have to delicately balance between the need to push public investment on the one hand and keep the fiscal deficit under check on the other.

Money for investment can come from

  • The extra taxes that the GST is expected to send into the treasury should hopefully create fiscal space for higher public investment.
  • The government should push ahead with a privatization programme that should be used as a way to switch assets—from airplanes to roads, for example.

Conclusion

India may see a small cyclical recovery in the months ahead. However, a sustainable recovery will depend on investment activity. Public investment will have to hold the fort till the private sector deleverages, banks are cleaned up and excess capacity is worked out of the system.

 

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