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Type: Op-ed

  • A tale of two bugs

    Context

    India needs to take TB at the same level of seriousness at which it is dealing with the Covid-19.

    Contrast and between the response

    • Tuberculosis in India: Indians will still have to contend with other deadly respiratory tract infections which spread via airborne transmission. We will still have to contend with one particular bug which kills millions of us and which has been around for millennia. Tuberculosis.
      • But all comparisons between COVID-19 and TB end with the superficial observation that they are both deadly respiratory tract infections.
    • Speedy tackling of COVID-19: COVID-19 began its march through humankind barely half a year ago and, in record time, scientists have identified the virus and hundreds of millions of dollars have been allocated to controlling its spread, developing vaccines (at last count, more than a dozen candidates) and testing medication regimens for those infected.
    • Waning of the epidemic: While the virus has spread to over 100 countries, the epidemic already shows signs of waning in the Asian countries where it hit first and hardest.

    Response to the TB

    • How long has the TB infected us? On the other hand, TB is as old as humanity itself, infecting us for at least 5,000 years.
      • The infecting agent, a bacterium, was identified way back in 1882, by Robert Koch, signalling one of the landmark discoveries which laid the foundation of modern medicine.
    • How was the response to TB? The subsequent response to this disease, which was infamously called the White Plague and was a leading cause of death globally at the start of the 20th century, is similar to what we see today for COVID-19, but played out over decades rather than months.
      • Measures taken: TB was made a notifiable disease, campaigns were launched to prohibit spitting and containment policies, including sequestering infected persons, were implemented.
    • The first vaccine was produced over a hundred years ago, and the first curative treatments available by the 1950s.
    • Divide between rich and poor in TB infections: TB was largely beaten in the rich world, not only because of these medical miracles but also thanks to the dramatic reduction in poverty and improvement in living standards.
      • There is compelling evidence that addressing these social determinants was even more impactful than medical interventions in the war against TB.
    • The disease of squalor: TB has always been, and this is even more true now than ever before, a disease of poverty and squalor. And no country is more affected than India.
    • Every TB statistic is grim:
      • We are home to 1 in 4 of the world’s TB patients.
      • Over 2.5 million Indians are infected.
      • In 2018, over 4,00,000 Indians died of the disease.
      • To put this in stark perspective, more people died of TB in India last week than the entire global death toll of COVID-19 to date.
      • Contrast with the response to COVID-19: Given our urgent, energetic and multifaceted response to the latter Covid-19, one is left wondering why we have failed so miserably for another bug, particularly one which has been around for so long, which has been exquisitely studied and characterised, which is preventable and treatable, and which most of the world has conquered.

    Why TB has not been given such attention?

    • It is because those who suffer from TB are not likely to be boarding international flights or passing through swanky airports to attend conferences.
    • It is because TB infects people in slower tides, slow enough for industries to replace the sick with healthier recruits without endangering the bottom line.
    • It is because TB does not threaten the turbines that keep the global economy throbbing.
    • It is because TB no longer poses a threat to rich and powerful countries.
    • It is because those who have TB live on the margins and have little political influence.
    • It is because TB control requires society to address the squalid environments, which shroud the daily lives of hundreds of millions of Indians.
    • It is because TB is a medieval scourge that reminds us of our shameful failure to realise a just, humane and dignified life for all our people.

    Conclusion

    If there is one lesson from COVID-19, it is that India, and the global community, has the political will, technical capacity and financial resources to act in a committed and concerted way to control infectious diseases. It needs to marshal these assets to eradicate TB, the most pernicious and pervasive infection of all, both through addressing its social determinants and scaling up effective biomedical interventions. But, for this to happen, we will have to be as concerned about the health needs of those who travel by foot and bicycle as we do for those who board cruise ships and international flights.

     

     

  • The real reform

    Context

    The IBC has started emerging stronger as it delivered on its promise, passed the constitutional muster, earned global recognition and became the preferred option for stakeholders in case of default.

    Demystifying the myths surrounding IBC

    Myths about recovery:

    Most of the myths surround recovery. Consider the following example for quick appreciation.

    • M/s. Synergies Dooray was the first company to be resolved under the IBC. It was with the Board of Industrial and Financial Reconstruction (BIFR) for over a decade.
    • The realisable value of its assets was Rs 9 crore when it entered the IBC process. It, however, owed Rs 900 crore to the creditors.
    • How much did IBC recover? The resolution plan yielded Rs 54 crore for them.
    • Some condemned IBC because the resolution plan yielded a meagre 6 per cent of the claims of the creditors, disregarding the fact that they recovered 600 per cent of the realisable value of the company, which had been in the sick bed for over a decade.
    • If the company was liquidated, assuming no transaction costs, the creditors would have got at best Rs 9 crore — 1 per cent of their claims.

    The myth that recovery under IBC is dismal

    • Let’s examine the myth that the recovery through resolution plans is dismal.
      • Two hundred companies had been rescued till December 2019 through resolution plans.
      • They owed Rs 4 lakh crore to creditors. However, the realisable value of the assets available with them, when they entered the IBC process, was only Rs 0.8 lakh crore.
      • The IBC maximises the value of the existing assets, not of the assets which do not exist. Under the IBC, the creditors recovered Rs 1.6 lakh crore, about 200 per cent of the realisable value of these companies.
      • Why creditors had to take a haircut? Despite the recovery of 200 per cent of the realisable value, the financial creditors had to take a haircut of 57 per cent as compared to their claims. This only reflects the extent of value erosion that had taken place when the companies entered the IBC process.
      • What is the conclusion? As compared to other options, banks are recovering much better through IBC, as per RBI data.

    The myth that IBC is sending companies for liquidation:

      • What is the primary objective of IBC: Recovery is incidental under the IBC. Its primary objective is rescuing companies in distress.
      • More number of companies sent for liquidation: There is a myth that although the IBC process has rescued 200 companies, it has sent 800 companies for liquidation. The number of companies getting into liquidation is thus four times that of the companies being rescued.
      • The context for the numbers: Numbers, however, to be seen in context. The companies rescued had assets valued at Rs 0.8 lakh crore, while the companies referred for liquidation had assets valued at Rs 0.2 lakh crore when they entered the IBC process.
      • Looking from the value term angle: In value terms, assets that have been rescued are four times those sent for liquidation. It is important to note that of the companies rescued, one-third were either defunct or under BIFR, and of the companies sent for liquidation, three-fourths were either defunct or under BIFR.

    The myth that IBC is resulting in huge job losses

    • The next myth is that the IBC is resulting in huge job losses through liquidation. It is misconstrued that 600 companies — for which data are available and which have proceeded for liquidation — have assets (and consequently employment) at least equal to the aggregate claim of the creditors — Rs 4.6 lakh crore.
    • Unfortunately, they have assets on the ground valued only at Rs 0.2 lakh crore.
      • Take the examples of Minerals Limited and Orchid Healthcare Private Limited, which have been completely liquidated. They owed Rs 8,163 crore, while they had absolutely no assets and employment.
      • What matters in this context is the assets a company has or the employment it provides — not how much it owes to creditors.
    • The IBC process would release the idle or under-utilised assets valued at Rs 0.2 lakh crore, which would have dissipated with time, for business and employment.
    • One also needs to consider the jobs saved through the rescue of 80 per cent of the distressed assets, and the job being created by these companies, post-rescue.

    What changes IBC has brought?

    • Changed the behaviour of debtors: A distressed asset has a life cycle. Its value declines with time if the distress is not addressed.
      • The credible threat of the IBC process, that a company may change hands, has changed the behaviour of debtors.
    • Debtors are settling debt at an early stage: Thousands of debtors are settling defaults at the early stages of the life cycle of a distressed asset.
      • They are settling when the default is imminent, on receipt of a notice for repayment but before filing an application, after filing the application but before its admission, and even after admission of the application.
      • These stages are akin to preventive care, primary care, secondary care, and tertiary care with respect to sickness. Only a few companies, who fail to address the distress in any of these stages, reach the liquidation stage.
    • Value erosion at the liquidation stage: The value of the company is substantially eroded, and hence some of them would be rescued, while others are liquidated.
      • The recovery may be low at this stage, but in the early stages of distress, it is much higher — primarily because of the IBC.
      • The percentage of companies or distressed assets getting into liquidation is insignificant.
      • Stakeholders should increasingly address the distress in the early stages and the best use of the IBC would be not using it all.

    Conclusion

    Stakeholders who understand business and have the backing of sophisticated professionals are using IBC with open eyes after evaluating all options. There is no reason to doubt their commercial wisdom. The 25,000 applications filed so far under IBC indicate the value and trust that stakeholders place on the law — the ultimate test of its efficacy.

     

  • Is the worst really over for the country’s agricultural sector?

    Context

    Estimates of gross domestic product (GDP) released on 28 February confirmed that India’s economy is decelerating. The silver lining was growth in agriculture, which accelerated for the third quarter in a row to 3.5%.

    How agriculture sector has performed in the last few years?

    • Robust growth in the last 5 years: A look at the national accounts for a longer period shows robust agricultural growth during the first five years.
      • With agriculture growing at 3.17% per annum between 2013-14 and 2019-20.
      • This is remarkable, given that the broader economy is witnessing a slowdown.
    • Rural economy seen from the other indicators: A variety of other indicators show that the rural economy has been going through possibly its worst phase, with declining wage growth and farmer incomes causing serious distress.

    Crop sector growth rate at lowest

    • A clue to this disconnect between the national accounts and other indicators lies in a breakdown of the national accounts.
    • Crop sector growing at lowest in two decades: The GDP data for the agricultural sector shows that the crop sector, which accounts for 56% of total agricultural output and employs a majority of the farmers, has been growing at only 0.3%, the lowest in two decades.
      • By comparison, the sector grew 3.3% per annum during the 10 years under United Progressive Alliance governments.
    • Which sector of agri. is growing at a high rate? The agricultural sub-sectors that showed high growth between 2013-14 and 2018-19 were livestock (8.1%), forestry (3.1%) and fisheries (10.9%).
      • It is a puzzle what drove the high growth of livestock at a time when the crop sector was experiencing negligible growth.
      • The trend defies the logic: This defies past trends and is also difficult to believe, given contrasting trends in other indicators of livestock
    • The declining income of farmers and a decline in wages: The poor performance of the crop sector confirms the declining income of farmers, the majority of whom depend on crops for subsistence. Not surprisingly, even real rural wages are declining.
    • Inflationary pressure and hopes of growth in income of farmers: Hopes were kindled in the last three months as agricultural commodities showed signs of inflationary pressures, with food inflation hitting double-digit rates.
      • Increase in rural demand not the cause of inflation: A careful analysis of the data rules out rising rural demand as the cause of that inflationary trend.
      • Many price pressures were due to the mismanagement of cereal supplies by the government and supply shocks in vegetables.
      • In such circumstances, farmer income could not have risen. Some of this was also a result of food prices rising internationally.

    Trend pointing to the fall in agri. prices

    • Softening of food prices: Recent trends in international markets suggest a softening of food prices led by an overproduction of cereals and easing edible oil inflation. Following 3 factors may contribute to its fall.
    • Impact of fall in crude oil price: This trend will gain strength in the wake of the recent slide in crude oil prices.
      • With the global economy displaying signs of a slowdown, prices of agricultural commodities are likely to fall sharply.
      • Relation of food prices with oil prices: They tend to follow movements in crude oil prices, as was seen during the latter’s collapse in August 2014. In all likelihood, a similar decline in agricultural prices is upon us.
    • Food-grain stock with FCI: A second factor that may exacerbate the income troubles in agriculture is the presence of massive food-grain stocks with the Food Corporation of India.
      • This may slow the procurement of farm produce and lower price realizations, particularly cereals but also other crops.
    • The coronavirus outbreak: Lastly, the global slowdown due to the coronavirus outbreak is likely to dampen demand in the economy, and in turn hurt the agricultural sector.

    Conclusion

    • Limited room to improve the situation: These factors are likely to worsen agricultural incomes, and domestic policy has limited room to manoeuvre.
    • Opportunity to revive the demand: This situation is also an opportune time to revive rural demand The government could pass on some of the windfalls from the drop in oil prices to rural consumers. This could help lift rural incomes.
      • The government could also increase spending in rural areas to help boost demand and prevent a collapse in agricultural prices.
    • Worst for agriculture is not yet over: Whether the government uses the opportunity or fritters it away again will be known in the coming months. What appears certain for now, though, is that the worst of the rural slowdown is far from over.

  • Fighting COVID-19 together for a shared future

    Context

    The Chinese government has mobilised the whole nation with confidence, unity, a science-based approach and targeted response.

    Aspects that were focused by China to deal with COVID-19

    • Formulated timely strategies for epidemic prevention and control.
    • Strengthened a unified command and response in Wuhan and Hubei.
    • Coordinated the prevention and control work in other regions.
    • Strengthened scientific research, emergency medical and daily necessity supplies.
    • Effectively maintained social stability.
    • Strengthened public education.
    • Actively engaged in international cooperation.

    Mutual support between India and China

    • China and India have maintained close communication and cooperation on epidemic prevention and control. In a letter to President Xi, India’s Prime Minister has expressed support for China.
    • China appreciates the medical supplies provided by India and have helped facilitate the safe return of Indian nationals in Hubei.
    • The global footprint of COVID-19: China has been closely following the global footprint of COVID-19.

    Cooperation on a global level for disease control:

    • Chines govt. will stay in close communication with WHO.
    • Share its epidemic control experience with other countries.
    • Seek closer international cooperation on medicine and vaccine development.
    • Provide assistance to the best of its capabilities to countries and regions that are affected by the spread of the virus in keeping with its role as a responsible major
    • The Chinese reach-out: China has provided various kinds of assistance including testing reagents, remote assistance and medical supplies to countries with a severe outbreak.
    • Sharing of experience and protocol for treatment: China have shared diagnosis and treatment experience and protocols with many countries including India.
      • China is ready to maintain communication with India, share experience in a timely manner, render assistance and make joint efforts to overcome the epidemic.

    Impact and recovery of China

    • Robust economy: The impact on the Chinese economy will be short-lived and generally manageable. China has a resilient economy with robust domestic demand and a strong industrial base. We will definitely sustain the good momentum of economic and social development and meet the goal of achieving moderate prosperity in our society and eradicating extreme poverty in China.
    • Strengthen coordination and communication: China will also strengthen coordination and communication with economic and trading partners and give priority to the resumption of production and supply of leading enterprises and key sectors that have a major impact on the stability of global supply chains.
      • The fundamentals of China’s economy will remain strong in the long run, and China will remain an important engine for global economic growth.

    Conclusion

    The history of civilisation is also one of a history of fighting diseases and a great journey of ceaseless global integration. To prevail over a disease that threatens all, unity and cooperation is the most powerful weapon.

     

     

     

  • Fail-safe exit for America, but a worry for India

    Context

    The recently negotiated peace deal between the United States and the Taliban is unlikely to bring peace to Afghanistan, is geopolitically disadvantageous for India, and has serious implications for our national security.

    Power dynamics of the US-Taliban deal

    • An honourable exit for India: The terms of the deal, the manner in which it was negotiated as well as the geopolitical context in which it was stitched up indicate that it was more about providing an honourable exit route for the U.S.
    • Violence after concluding the deal: Within 24 hours of the much-publicised deal, violence and major disagreements about the deal began erupting in Afghanistan.
    • Why there are the prospects of instability in Afghanistan: Given that the Taliban negotiated from a position of strength, the Trump administration from weakness and little political will, and that the Ashraf Ghani administration in Afghanistan was by and large a clueless bystander in all of this, means that the country is perhaps on the verge of yet another long-drawn-out and internecine battle.

    The changed Taliban

    • Taliban of the 1990s: When the Taliban came to power in the mid-1990s in Kabul, it had few backers in the world.
      • Nor was it seen as a useful commodity by the great powers or the states in the region, except for Pakistan, Saudi Arabia, and the United Arab Emirates.
    • United pushback from the rest of the world: The international community was almost united in offering a normative pushback against the violent outfit.
      • As a result, the Taliban was at best reluctantly tolerated until it messed up towards the end of its regime in Kabul.
    • The pressure of Northern Alliance: The Northern Alliance, supported by countries such as Russia and India, kept up its military pressure against the Taliban while it was in power.
    • How today’s Taliban is different from the past: The situation today, at least for the moment, is perhaps the exact opposite of what was the case then.
      • Lessons learned to deal with the international system: The Taliban today is also more worldly-wise and might have learned, during its exile, to deal with the international system and play the game of balance of power.
      • Not necessarily the puppet: More so, it may not necessarily be a puppet of the Pakistani deep state once it returns to power.

    International acceptance of the Taliban

    • Lending the legitimacy to Taliban: Given the war fatigue and the geopolitical stakes in Afghanistan, most of the key players in the region and otherwise have been in negotiations with the Taliban one way or another, and for one reason or another, lending the terror group certain legitimacy in the process.
    • Why countries want good relations with the Taliban: Anyone desirous of a stake in Afghanistan or does not want its domestic turmoil to spill over into their country would want to keep the Taliban in good humour.
      • Suitable withdrawal of the US: There is another reason why the Taliban has many suitors — because of the U.S. withdrawal by and large suits everyone, be it China, Pakistan, Iran, or Russia.
      • The US bigger challenge: Suddenly, the Taliban appears to have been forgiven for its sordid past and unforgivable sins because for most of these countries, the U.S. is the bigger challenge than the Taliban.

    Why India’s strategy is diplomatically flawed?

    • Only state at losing end: The only state that seems to be on the losing end, unfortunately, of this unfolding game of chess and patience in Afghanistan is India.
      • Why the earlier Taliban was anti-India? The earlier Taliban regime was anti-India, it was also because India had militarily supported the Northern Alliance that kept up the military pressure against the Taliban.
      • Today’s Taliban does not share the same animus for India.
    • Need for Change in India’s approach: India, could have rejigged its approach to the Taliban this time around. However, it put all its eggs in the Ashraf Ghani basket, even on the eve of the signing of the peace deal in Doha.
    • Not a diplomatic strategy by India: India also, for most intents and objectives, adopted a puritanical approach to the Taliban.
      • There are 2 reason India is neither reaching out to the Taliban nor exploiting the fissures within it-
      • Because it did not want to irk the elected government in Kabul and-
      • It adopts a moralistic approach to dealing with extremist groups in general — not a smart diplomatic strategy.
    • Self-defeating position: This moralistic attitude, also a diplomatically lazy one, I would say, that be it Pakistan or Afghanistan, India would only talk to the legitimate government in that country, is a self-defeating position.
      • The world is not that perfect, nor state all that uniform, created in the shape and image of the Westphalian forefather.
      • Smart statecraft, therefore, is dealing with what you have and making the best of it.

    What would be the result of India’s strategy?

    • Impact on relations with Afghanistan: India’s relations with Afghanistan will take a hit in the immediate aftermath of the deal.
      • Limited ability to influence the outcomes: With China, India’s strategic adversary, deeply involved in the geopolitics and geo-economics of the region, including in Afghanistan, India’s traditional ability to influence the region’s political and security outcomes will be severely limited.
      • This will be further exacerbated by the withdrawal of the U.S., India’s closest friend, from the region.
      • India’s relation with the other players in the region: Other regional actors in Afghanistan are also less friendly towards India than ever before: Iran feels let down by India given how the latter has behaved towards it at the behest of the Americans.
      • Relation with Russia: For Russia, India is only one of the many friends in the region — the exclusivity of Russia-India relations is a thing of the past — and Pakistan would consider targeting India a fair game.
    • Counter Strategy: Unless New Delhi carefully envisages a counter-strategy, these factors will increasingly push India into a geopolitical tough spot in the region.
      • Need to focus on the region: India should worry us that our political class is focused on domestic politics while the region is becoming ever more uncertain and evidently unfavourable to us.

    Taliban and Kashmir Angle of the deal

    • Negligible physical impact but the possibility of psychological impact: While the direct physical impact of the Taliban’s return to power in Afghanistan on Kashmir will be negligible, this will not be without serious implications for the unfolding situation in Kashmir’s restive regions.
      • Psychological impact: The most important impact is going to be psychological.
      • Interpretation of the event: Disenchanted Kashmiri youngsters, and there are a lot of them, will interpret the events in Afghanistan as follows: “If the mighty superpower USA could be defeated by the Taliban in Afghanistan with help from the Pakistan army, defeating Indian forces in Kashmir won’t be impossible after all.”
      • This enthusiasm is completely misplaced, but that is not the point.
      • That the Kashmiri youth might pick up guns drawing inspiration from the situation in Afghanistan is indeed the point.
    • Increase in Pakistan’s utility: The U.S.-Taliban deal cannot survive without Pakistan’s assistance towards ensuring its success, and the U.S. and its allies recognise that. Such recognition of Pakistan’s utility provides the country with ability, as and when it wishes to, to up the ante in Kashmir.
    • The geopolitical significance of Pok and Aksai Chin claim: India’s official statement which describes Afghanistan as a “contiguous neighbour” — meaning that India considers Pakistan-occupied Kashmir (PoK) a part of its sovereign territory — will make Pakistan and China sit up and take notice.
      • Claim making reconciliation more difficult: India also made a similar claim about Aksai Chin in the wake of its August decision on Kashmir. Erstwhile rhetorical claims on PoK and Aksai Chin have suddenly assumed a lot more geopolitical significance today making conciliatory approaches to conflict resolution ever more difficult.

    Conclusion

    Given that a new Taliban-led dispensation in Afghanistan will be far more accepted by the international community than the last time around also means increased acceptability for such regimes in general, either out of necessity or as a function of geopolitical calculations. That the Taliban mass-murdered its opponents into statehood in the 21st century and that this might provide potential inspiration to other outfits in the region and outside should indeed worry us.

     

     

     

  • Corona, crude and credit

    Context

    Amid the gathering global crisis, its time India minds its own house.

    Panic and dislocation in Global markets

    • Panic at the level of the 2008 crisis: Global markets haven’t witnessed such panic and dislocation since the global financial crisis of 2008.
      • Global equity markets have collapsed, the US’s 10-year bond is at its lowest level ever, and crude prices underwent their largest single-day fall in 30 years.
    • Interaction of three global shocks: The market mayhem is the upshot of three global shocks interacting with each other.

    What are the three global shocks?

    • Negative demand shock due to Coronavirus: A negative demand shock around the world. As the coronavirus proliferates globally, households and businesses are understandably becoming risk-averse, and the consequent “social distancing” is expected to exert significant demand destruction around the world.
    • Negative supply shock emanating from China: The widespread industrial closures in China on the back of the COVID-19 outbreak will impact imports and supply chains in other countries, and thereby constitute an adverse supply shock for the rest of the world.
      • The magnitude of the shock: The 20-point drop in manufacturing output in the February PMI and the 17 per cent contraction in Chinese exports across January and February, suggests that the shock was large and immediate.
      • Supply shock likely to fade: That said, with the virus, gradually being contained in China, this supply shock is likely to fade even as the demand shock in the rest of the world widens and deepens.
    • Positive oil supply shock: The failure of oil producers to agree on production cuts has led to a price war with production increases on the anvil.
      • Cumulatively, crude pieces are down almost 50 per cent — about $30/barrel — since January.
      • A positive supply shock, which even adjusting for the concentrated stress in the oil sector, is growth-additive for the world and particularly for India.
    • India specific shock: There is a fourth India-specific force at play. The resolution and reconstruction of YES Bank was inevitable, but, at least temporarily, it is likely to result in a “flight to quality” in India’s financial sector, with resources moving from the financial periphery to the core.
      • Banks and NBFC may face difficulty in mobilising resources: To the extent that the periphery — smaller private banks and non-bank financial companies — will find it harder to mobilise resources, financial sector risk aversion could rise again.

    Implications for India’s macroeconomic stability

    • Significant negative impact due to export: India is a much more open economy than is widely believed with exports constituting almost 20 per cent of GDP. Therefore, the impact of the demand destruction around the world will not be trivial.
      • 40 bps decrease in the growth: If global growth is marked down by 100 basis points in 2020, which increasingly appears to be the case, we estimate that this would shave off about 40 bps from India’s growth through the export channel alone.
      • The cumulative drag to growth from exports and tourism would be a meaningful 60-70 bps.
    • Positive impact due to oil price shock: The near $30/barrel decline since January constitutes a large positive terms of trade shock for India — equivalent to about 1.3 per cent of GDP even accounting for reduced remittances from the Middle East.
      • Meaningful mitigant: If oil prices remain at this level for long, it would constitute a meaningful mitigant to India’s macro headwinds, boosting activity, dampening prices, creating fiscal space and reducing external imbalances.
    • Offsetting the negative impact of trade and tourism: Every $10 reduction in crude prices, boosts growths by about 20-25 bps.
      • Therefore, the $30 decline in crude, if it holds, should boost growth by about 60-70 bps, thereby largely offsetting the negative hit to growth from external trade and tourism.
    • Space for monetary easing: Furthermore, crude at $35-40, along with the global demand destruction is expected to generate large disinflationary forces, opening up space for monetary easing.
    • CAD would disappear: Finally, India’s current account deficit would virtually disappear, for the first time since 2003-04.

    The growth offset conditioned on coronavirus spread

    • The assumption in the offset: The above-mentioned growth offset, however, assumes that the coronavirus does not spread within India.
      • If India witnessed a rapid domestic proliferation, heightened risk aversion by economic agents could meaningfully hurt domestic demand.
    • A thought experiment on the impact on the economy: Discretionary services constitute about 35 per cent of GDP and have been growing at 8 per cent a year.
      • If that growth rate were to halve, that alone would deduct 140 bps from growth, and swamp any growth tailwinds from lower oil prices.
      • Furthermore, a “sudden stop” of demand to certain sectors may necessitate fiscal/liquidity support to ensure these don’t magnify into more disruptive credit events for the financial sector.
    • The best antidote to prolonged growth hit: The best antidote would be to aggressively contain the virus domestically, as authorities appear to be doing.
      • The experience from other countries suggests aggressive containment early in the process (isolation, quarantines, contract tracings, cancelled gatherings) reduces the growth rate of the virus from exponential to linear.
    • Macroeconomic outlook: The key to India’s macro outlook is whether the crude price decline can sustain and whether India can avoid a sharp domestic proliferation of COVID-19.

    Way forward

    • Pass the oil windfall to the public: Given current fiscal pressures, it’s tempting to advocate that the public sector appropriate much of the windfall. But with consumption under such pressure, there’s a strong case to pass this on to households.
      • A sharp cut in domestic fuel prices will boost household purchasing power and aggregate demand thereby creating contemporaneous counter-cyclical pressures.
    • Stick to the asset sale plan: While the turbulence in equity markets could understandably delay the government’s asset sale programme, it should not be allowed to derail it, given the criticality of asset sales to this year’s fiscal math.
      • Absorbing all the oil windfall through higher taxes as a substitute for asset sales would be a suboptimal mix.
    • Continue with the reforms: The salutary effects of falling crude prices — which would boost India’s macros relative to other emerging markets — should not mask the imperative to continue with reforms, particularly recognising and resolving any further financial sector stress proactively.

    Conclusion

    Global markets are witnessing their most acute volatility since 2008. All we can do is mind our own house amidst the gathering global storm.

     

  • A prescription for revival

    Context

    The root cause of the present malaise in our economy is the “death of demand”.

    How demand matters for growth?

    • The relation between demand and growth: Growth in any economy depends on the growth in demand, both for investment as well as consumer goods.
    • How slackened demand leads to a vicious cycle: If demand slackens, then the installed capacity will not be fully utilised, the fresh investment will not take place, employment will slacken and the economy will get caught in a vicious cycle, as we are experiencing today.

    What needs to be done to break the vicious cycle?

    • What sequence to follow in reviving demand? The basic challenge, therefore, is to revive demand in the economy in a sequence where the revival takes place first in the investment goods sector, automatically followed by a boost in demand for consumer goods through enhanced employment opportunities.
    • Past precedents: This is the prescription we had followed in the Atal Bihari Vajpayee government when we were faced with the East Asian crisis and the post-Pokhran global economic sanctions soon after the government assumed office in March 1998.

    Demand in India

    • No dearth of demand in India: In a developing country like India, there is no dearth of “good” demand.
      • We still have to provide so many goods and services to our people in order to improve their “quality of life”.
    • Need to create new infrastructure: Simultaneously, we have to create new infrastructure and improve the existing ones to reduce the transaction cost in our economy and make it more competitive.
    • How infrastructure creation lead to the creation of demand: The emphasis on the construction of roads of all kinds — rural, state and national highways, the new telecom policy, the investment in railways, the emphasis on housing construction and development of the real estate, the improvement in rural infrastructure and reform in the agricultural sector were all meant to lead to the creation of demand in the economy.
    • Creation of the virtuous cycle: The creation of demand should be in such a way that the demand for investment goods picks up first and faster, which creates the virtuous cycle of full capacity utilisation.
      • Demand for consumer goods: Demand for investment goods is followed by fresh investment for new capacity creation, larger employment opportunities of various kinds — unskilled, skilled and highly skilled — which reached money into the pockets of people leading to a surge in demand for consumer goods.

    How the government should deal with the situation

    • Deal with the demand side instead of supply-side: All commentators are agreed now that instead of tackling the demand side government is dealing with the supply side.
      • Tax relief to corporates: For instance, if, instead of wasting a precious amount of Rs 1,45,000 crore on tax relief to a limited number of corporates the government had spent that money on rural infrastructure and agriculture and a part of it on railways and highways, it would have led to the creation of demand both for investment goods as well as consumer goods.
    • Issue of sticking to the fiscal deficit target: There is also the issue of resources. The government claims that it has stuck to the fiscal deficit targets.
      • But the provisions of Fiscal Responsibility and Budget Management (FRBM) Act have been treated in a cavalier manner by all subsequent governments.
      • What was the basic purpose of the act? The basic purpose of the act was to eliminate the revenue deficit completely within a short period of time and live with a limited fiscal deficit.
      • The original FRBM Act, therefore, mandated that revenue deficit should be eliminated completely and the rest of the fiscal deficit should be limited to one per cent of GDP.
      • In special circumstances like today, the fiscal deficit should be allowed to go up to even two per cent of the GDP, which will mean an amount of Rs four lakh crore.

    Figures of the latest budget and need for the reforms

    • Fiscal deficit figures: The government has taken credit in the Budget for the fact that it has successfully restricted total fiscal deficit for this fiscal to 3.8 per cent and for next fiscal at 3.5 per cent of the GDP.
    • The issue involved in fiscal deficit figures: The revenue deficit for the current fiscal is 2.4 per cent of the GDP and for the next fiscal it is 2.7 per cent. In other words, minus the revenue deficit the fiscal deficit is only 1.4 per cent of GDP for this year and for the next year, it is 1.7 per se.
    • Need for managing the expenditure: So, the real villain of the piece is revenue deficit and not fiscal deficit per se.
      • Need for the reforms: It is clearly the government’s responsibility to manage its expenditure and carry out reforms in it, including austerity in expenditure.
      • How will the reforms help? Controlled fiscal deficit will make more money available in the market for private sector investment and help RBI in reducing interest rates — things which will have an overall benign influence on the economy.

    Conclusion

    A lot of other things apart from austerity majors will have to be done, no doubt, like preventing companies, especially banks from failing, to further strengthen the growth impulses but in the present situation, the key is government spending and in the desired sequence.

  • Medicine and frontiers

    Context

    Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.

    Implications of the coronavirus disruption in China

    • Global dependence on China in focus: As the coronavirus spreads far and wide, the global dependence on China for drugs and medical supplies has come into sharp focus.
    • The argument for domestic production of medicine: In both the US and Europe, the shortage of essential drugs to treat the victims of the virus is strengthening the arguments for restoring some domestic production of pharmaceuticals.
    • National security implications: Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.

    China’s dominance in pharmaceutical production

    • Two factors that contributed to China rise:
      • Active state support from Beijing and-
      • Western drug companies eager to shift production to cheaper destinations has facilitated China’s emergence as the most important global source for pharmaceutical products and medical devices.
    • Global dependence on China for drugs: America and Europe are said to import nearly 80 per cent of their antibiotics from China.
      • India’s dependence for API: India is also an important supplier of generic drugs to the Western world, but it is itself dependent on massive imports of active pharmaceutical ingredients (APIs) from China.
      • Impact on India: The reduction in supplies from China after the virus breakout has been accentuated by the recent decision of Government of India to limit the export of common drugs like paracetamol.
    • How the US is responding to dominance? Well before the current crisis, there had been warnings in the US about the national security risks from the massive reliance on external sources for basic medicines.
      • Weaponising the dominance: Late last year, the US-China Security Review Commission, established by the US Congress, pointed to the prospects of China weaponising its dominance over pharmaceutical production and its massive consequences for healthcare in the US.
      • Government support in China: The report also pointed out that the Chinese government promotes and protects the nation’s pharmaceutical companies to the disadvantage of foreign competitors and that leaves other nations little leverage with China.
    • Need to limit the exposure to China in other sectors: While the current international focus is on the supply chains in the pharmaceutical sector, there has been growing recognition of the need to limit the expansive exposure to China in many different sectors.

    National security argument of the dominance

    • National security dimension of trade war: Trump’s case for bringing manufacturing back to America — by challenging the traditional framework of international trade — was not just economic.
      • It also had a strong national security argument — that the US cannot rely on China for servicing its national security needs in a range of sectors from digital components and drugs.
    • What supporters of the globalisation said? Supporters of economic globalisation had countered these arguments by saying that tight interdependence will reduce the incentives for taking unilateral advantage by nations.
    • China using trade dominance into leverage: The critics have pointed to the fact that China was turning its role as the “world’s factory” into powerful leverage.
      • Why did the West start regarding China as a challenge? The Chinese decision to stop rare earth exports to Japan during 2010 in relation to a minor political dispute had led many to put up red flags.
      • Since then, China’s greater political assertiveness and challenge to Western dominance in critical areas have strengthened the case in the West to regard China as a challenge if not an outright threat.
    • De-coupling gaining traction: As the bipartisan political consensus in the US and Europe in favour of a strong economic partnership with China began to break down in recent years, the case for de-coupling has gained much traction.

    How using economic leverage for strategic gains undergone changes?

    • Use of economic leverage and stockpiling: The history of statecraft suggests that it was quite common for states to use economic leverage for strategic gains.
      • Use of strategy during the cold war: Through the Cold War, both America and Russia sought to corner strategic resources around the world. They also adopted policies for stockpiling special materials for use during conflicts. Sustaining a strategic petroleum reserve, for example, was a major priority for the US during the Cold War.
    • Changes due to globalisation: The importance of hoarding resources at home and denying it to one’s adversaries seemed to diminish amidst great power harmony and economic globalisation that flourished after the Soviet Union collapsed.
      • Recent challenges due to weakening of globalisation: The erosion of that moment in the last few years has set up new tensions between the competing imperatives on Western governments.
    • Capital vs. Security issue: While the logic of security compels the state to limit strategic economic exposure, the logic of capital demands policies that reduce costs of production and increase the margins of profit.
      • This tension has been at the heart of the recent Western debates on the China question.

    Conclusion

    While the world finds ways to deal with the Chinese dominance in the other sector, meanwhile, in the health sector, large continental entities like the US, Europe and India are likely to insure against over-reliance on a single source for life-saving drugs. They are likely to find ways to shorten the supply chains, expand domestic production and explore coordination among like-minded nations.

  • No green shoots of a revival in sight as yet

    Context

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

    What closer examination of data reveal?

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

    Competing views of the performance

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

    Why the GDP estimates undergo revisions?

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

    Quarterly GDP estimates and issues with it

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

    Way forward

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

  • Don’t blame it on NSO

    Context

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

    The GDP data revision and its criticism

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

    Examining the criticism purely on the data

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

    What was the problem?

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

    Why such unconditional biases arise?

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

    India lagging in the use of data analysis

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

    Way forward

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

    Conclusion

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