Budgeting for jobs, skilling and economic revival

Ram Singh
The forthcoming Union Budget will determine whether India’s economic engine gets the steam needed for a rebound, or the current economic situation becomes even worse. Not just the future of the economy, the future of the country’s youth depends on the Budget.

The unemployment rate at 6.1% (Financial Year 2017-2018) is the highest in 45 years. The rate for urban youth in the 15-29 years category is alarmingly high at 22.5%. These figures, however, are just one of the many problems, as pointed out by the Periodic Labour Force Survey. The Labour Force Participation Rate has come down to 46.5% for the ‘15 years and above’ age category. It is down to 37.7% for the urban youth. Even among those employed, a large fraction get low wages and are stuck with ‘employment poverty’.

Structural factors
The prolonged, and ongoing, slowdown, is the main reason behind the depressing employment scenario, though several structural factors have also contributed to the situation. The GDP growth for the second quarter of Financial Year 2019-2020 is 4.5%, the lowest in the last six years, for which a decline in private consumption and investment are the factors primarily responsible. The aggregate investment stands at less than 30% of the GDP, a rate much lower than the 15-year average of 35%. The capacity utilisation in the private sector is down to 70%-75%.

While the structural factors need addressing, in the interim, the Budget should also focus on reviving demand to promote growth and employment. Schemes like PM-KISAN and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) are good instruments to boost rural demand. It is really unfortunate that in the current fiscal year, a significant proportion of the budgetary allocation for PM-KISAN will go unutilised. Farmers and landless labourers spend most of their income. This means that income transfers to such groups will immediately increase demand. Further, rural India consumes a wide range of goods and services; so, if allocation and disbursement is raised significantly, most sectors of the economy will benefit. And, the payoff will be immediate.

Besides, rural unemployment can be reduced by raising budgetary allocation for irrigation projects and rural infrastructure like roads, cold storage and logistical chains. These facilities, along with a comprehensive crop insurance scheme, can drastically increase agricultural productivity and farmers’ income. Moreover, by integrating farms with mandis, such investments will reduce wastage of fruits and vegetables, thereby leading to a decrease in the frequency of inflationary shocks and their impact.

Boosting urban employment
In urban areas, construction and related activities are a source of employment for more than five crore people; across the country, the sector’s employment figures are second only to those of the agriculture sector. These projects, along with infrastructure, support 200-odd sectors, including core sectors like cement and steel.

However, due to the crisis in the real-estate and infrastructure sectors, construction activities have come to a grinding halt. At present, many real-estate projects are caught up in legal disputes — between home-buyers and developers; between lenders and developers; and between developers and law enforcement agencies like the Enforcement Directorate. The sector has an unsold inventory of homes, worth several lakh crores.

Even worse, multiple authorities — the Real Estate Regulatory Authority (RERA); the National Company Law Tribunal (NCLT); and the many consumer courts — have jurisdiction over disputes. Consequently, restructuring and liquidation of bad projects is very difficult, and in turn, is a main source of the problem of Non-Performing Assets faced by the Non-Banking Financial Companies.

To revive demand for housing, the Budget can raise the limit for availing tax exemption on home loans. The ₹25,000-crore fund set up by the centre to bailout 1,600 housing projects should be put to use immediately. The funds should be used to salvage all projects that are 80% complete and not under liquidation process under the NCLT. Several additional measures can also help. For example, there should be a single adjudication authority.

The multiplier effects of spending on infrastructure and housing in terms of higher growth and employment are large and extensive. Therefore, the ₹102-lakh-crore National Infrastructure Pipeline (NIP) programme is a welcome step. If implemented successfully, it will boost the infrastructure investment over the next five years by 2%-2.5% of the GDP annually.

Private sector’s risk appetite
Here, the problem is that more than 60% of the planned investment is expected from the private sector and the States. The government does not seem to realise that for private investment, regulatory certainty is as important as the cost of capital. Many infrastructure projects are languishing due to regulatory hurdles and contractual disputes between construction companies and government departments. As a result, infrastructure investment has come to be perceived as very risky. This is the major reason behind non-availability of private capital for infrastructure.

In this scenario, where the private sector has very little appetite for risky investments and State finances are shaky due to low GST collection, the onus is on the Centre to ensure that the programme does not come a cropper. The budgetary support to infrastructure will have to be much more than the NIP projection at 1.11% of the GDP.

Bidding and contracting for new roads, highways, railway tracks and urban development projects is a lengthy process. This is also the reason why several infrastructure-linked Ministries like those for civil aviation and roads have not been able to spend money allocated to them in the current fiscal year. Therefore, rather than earmarking budgetary support for new projects, the focus should be on projects that are currently under implementation so as to complete them as soon as possible. That is, funding should be front-loaded. In addition to creating employment, a timely completion of infrastructure projects will help increase competitiveness of the economy.

The distress among Small and Medium Enterprises (SMEs) is another area of concern. For many products produced by these enterprises, the GST rates are higher for inputs than the final goods. Due to this anomaly, around ₹20,000 crore gets stuck with the government annually in the form of input tax credits. This has increased cost of doing business for SMEs, which employ over 11 crore people.

Next, according to some estimates, there are more than 22 lakh vacancies in various government departments. Such dereliction is baffling when the unemployment among youth is very high.

Job openings that arise in the private sector put a premium on practical skills and work experience. Here, popular perception is that a good job requires a college or university degree. This misperception is the result of failure of the governments to provide affordable and good quality vocational training programmes.

To stop the demographic dividend from becoming a national burden, there is a need to invest heavily in skilling of the youth. Besides, the Budget should give tax incentives to companies and industrial units to encourage them to provide internships and on-site vocational training opportunities. This work experience can be supplemented with teaching of relevant theories. at educational centres set up at district levels. Distance education mode can also used for the purpose.

Ram Singh is a Professor at the Delhi School of Economics

Only way is up for interest rates after inflation hits 6-year high

By Paran Balakrishnan

Goodbye interest rate cuts. The leap in headline consumer price inflation to its highest level in nearly six years means the interest-rate cutting cycle is over and that the next interest rate move will be up, say analysts.

While good news for savers, this is the latest piece of bad news for Prime Minister Narendra Modi’s government under whose watch the economy’s been tanking. For finance minister Nirmala Sitharaman, the adverse inflation climate only makes her job of preparing her “pro-people, pro-growth” budget, due to be presented February 1, even tougher.

The government has been pushing for rates to come down further, even though the monetary easing medicine hasn’t had an effect. Financial institutions have been slow to pass on the rate cuts and in any event, businesses are more inclined to hang on to their money and repair balance sheets than make investments when demand’s sluggish. (The extent of how sluggish demand is was highlighted when India’s flagship auto industry reported car sales dropped a record 19 per cent year-on-year in 2019).
Despite a string of cuts in this rate-cutting cycle which began in February last year, economic growth has kept falling with second-quarter growth hitting 4.5 per cent, its lowest in six years. The government now projects Indian economy will expand in the full-fiscal year by 5 per cent, down from 6.8 per cent which would be the lowest pace in 11 years. But privately economists say the growth figure could well be lower with Fitch Ratings, for instance, pegging it at 4.6 per cent, citing “weakening business and consumer confidence.”

Now, throwing a further spanner into the works is accelerating inflation. India looks to be in the embrace of that toxic mix known as stagflation -- defined as slow economic growth, increasing unemployment and rising prices. Traditionally, when an economy is in the doldrums, the remedy is cutting rates. Now, though, it’s virtually certain that the Reserve Bank of India will keep its benchmark policy rates unchanged when it meets next in early February. And inflation could also mean that rate hikes will come earlier than expected.

“The jump in headline CPI (consumer price inflation) to its highest since 2014 almost guarantees that the RBI will leave policy rates on hold at its next meeting in early February. And with core inflation likely to rise over the coming quarters... policy rates will be hiked much sooner than most are expecting,” say Mark Williams, Capital Economics chief Asia economist.

Williams said that the available data for January show that food inflation has yet to ease and, “If we are right in forecasting a rise in global oil prices this year, fuel inflation looks set to rise further as well.” Heading the list of vegetable-inflation drivers are onions (which traditionally make Indian governments weep) Shutterstock

So why does the interest rate-easing party seem to be over? Let’s remember first of all that the central bank’s target for headline inflation is 4 per cent and inflation has only been heading northward of that figure. CPI inflation jumped from 5.5 per cent year-on-year in November to 7.4 per cent year-on-year in December -- a staggering 181 basis-point jump. That is the biggest rise since July 2014.

The rise was broad based but mainly driven by food inflation -- specifically vegetables which are up a staggering 60.5 per cent year-on year. And heading the list of vegetable-inflation drivers are onions (which traditionally make Indian governments weep). The headline figure is the highest it’s been since July 2014. By the way, this upward move was far bigger than expected by the financial markets which expected the December rate to be around 6.7 per cent. There’s also been shocks from the rise in oil prices.

Core inflation, which excludes the volatile movements of food and fuel, is looking more stable, edging up to 3.75 per cent even after mobile phone companies substantially raised subscriber costs and railway fares rose. But economists believe core inflation will also creep higher to around 4 per cent.

“We expect the central bank to switch to tightening mode much sooner than is generally expected. We are forecasting modest rate hikes in 2021 with the first move possible before,” says Capital Markets’ Williams.

Economists figure it’s already a given that the financially strapped government will have to burst its fiscal deficit target in the budget. Adding to the government’s woes on this score are the lower-than-forecast revenue collections. It all means that the government will likely have to leave out any feel-good, economy-boosting income tax cuts.

“The upcoming budget in February would be closely watched for fiscal stance and sector-specific actions. Even so, our estimates suggest inflation will likely remain above 6.5 per cent in the fourth quarter of 2020 and could constrain a rate cut in February,” financial services firm Edelweiss says.

HDFC Bank Chief Economist Abheek Barua says the government needs to put more attention on the agricultural sector as higher food prices have a big driver of the higher inflation via better food stock management to avoid shortages. But there’s a big unknown with the rabi crop. Economists also say that the 45 per cent weightage of food prices in the consumer consumption basket may be unrealistic and needs to be reassessed.

What’s ahead for prices? Well, economists expect inflation to stay high in January as well but say it could retreat in the second and third quarters to 4.7 per cent or a little lower, and then head sharply south to possibly 2-2.5 per cent in the fourth quarter.

And if all this bad economic news wasn’t enough, the slow growth is now having a “visible impact” on job creation, notes the State Bank of India. In fiscal year 2019, India created 89.7 lakh new jobs. “In fiscal 20, as per currently projected, this number could be at least 15.8 lakh lower, the SBI said on January 13.

The Confederation of Indian Industry in its pre-budget recommendations to the government says, “All engines of growth are showing sluggishness – consumption, investments and exports, placing the burden of kickstarting the economy on government expenditure.” The CII adds that, “a flexible, yet prudent fiscal policy is the need of the hour.” That’s a tall order under the circumstances, especially as the government has its plate full on the political front, struggling to control the after-effects of passage of the Citizenship Act.

Impression that government prioritises non-economic agenda over development must be addressed

Written by Amartya Lahiri India is now well and truly in the middle of a socio-economic upheaval. The economy has been weakening for a couple of years now. The social upheaval is new but its seeds have been fermenting for a while. The danger here is that the social and economic sides of an economy are not divorced from each other. Each influences the other and the current quagmire threatens to unleash the worst type of feedback between the two.

The most dangerous smoldering ember that could erupt due to the interaction between the social and economic sides is unemployment. The rising unemployment in the country has been commented upon widely. Less noted is the fact that rising unemployment disproportionately affects the young. Misfiring European economies like Spain, Greece, and others routinely report youth unemployment rates above 25 per cent. This is a social tinder box for a country like India whose median citizen is in the 30s and which is thrusting 10 million new young people to the job market every year. This dynamic, popularly hailed as India’s demographic dividend, can rapidly turn into a demographic curse if the employment situation doesn’t improve. A massive pool of unemployed youth makes for a huge collection of unhappy people, running high on testosterone and anger, looking to vent.

Along with this volatile pre-existing cocktail, we now have the addition of the state strong-arming youth protesters across the country. Each violent police action begets more resentment, protests, and additions to the ranks of protesters. Unemployed youth are fodder in these situations for all sides. The young can provide volume, sound, and muscle with relatively little concern for self in normal times. Lack of attractive opportunities makes this risk-taking trait more acute. Self-preservation is a predilection that affects the middle-aged more since they have more to protect.

So where will the jobs come from? The job creators are entrepreneurs, conglomerates, and multinationals. It is in their nature to take investment risks as long as the returns are high enough. Investment rates in India fell well below 30 per cent a while back. Clearly, the returns were not compensating entrepreneurs for the risk. The recent social upheaval is only adding to the perceived risk. It can only be dissuading more fence-sitters from investing in the economy until the uncertainty ebbs and the situation calms down. But the more investors adopt a “wait-and-see” approach, the worse the job situation will become. The worse the job situation becomes, the greater will be the ranks of the angry youth. This has all the makings of a devastating feedback loop. For the sceptical, the examples of Brazil (28 per cent youth unemployment) and South Africa (58 per cent youth unemployment) should be salutary examples of emerging economies descending into crime, violence, and crisis due to failing to productively (and respectfully) engage their youth.

The government’s focus on the economy is unclear. Through its personnel decisions in the past few years, the central government has signaled its low priority on economic management. The position of Deputy Governor (Monetary Policy) of the RBI lay vacant since July 2019 when Viral Acharya resigned. Despite the fact that he announced his decision to resign back in May 2019, the government only filled the vacancy this week. In the interim, the Monetary Policy Committee was operating without a key technical specialist for seven months. A previous vacancy for Deputy Governor of the RBI also remained unfilled for 11 months before MK Jain was appointed in June 2018.

This is particularly debilitating for the RBI because the government replaced Governor Urjit Patel with someone whose domain competence does not lie in either banking or finance or markets or macroeconomics or monetary economics. To compound matters, the government has chosen as economic advisors two people whose domain specialisation is in markets, banking and finance. They would be far better used in the RBI rather than the ministry of finance, which requires trained macroeconomists.

The choice of personnel in key ministries has been equally confusing. In the latest garnish to this soup of confusion, the prime minister was accompanied by the home minister during pre-budget consultations about the state of the economy with industrialists and economists. Strangely, the finance minister was not included in these deliberations.

The overarching impression all of this has given is that the government has prioritised its non-economic agenda over the development agenda. This has become more glaring over the last 18 months when the government started running out of the low oil price largesse that financed its welfare spending till 2017. Without the fiscal room for more spending and the political will to enact labour and land reforms, the government seems out of ideas. Its only proactive moves appear to be retrograde ones such as raising import duties. More damagingly, it is seen as trying to control the message by refusing to release data. This just makes things worse because people assume the worst.

A few changes are needed immediately. The government needs to announce a clear plan and timeline for structural reforms. Alongside, it has to start staffing technical positions by prioritising domain competence and empowering these hires with policy relevance. Importantly, it needs to pledge its commitment to the integrity of institutions tasked with the regulation of corporations and banks, monetary policy management, data collection/dissemination and law enforcement.

The government also needs to desist from trying to drown out protesting voices with state muscle power. Protests serve as a pressure cooker valve. They preserve order by allowing people to vent. Hope goes a long way, especially for the young. A climbdown from the arrogance of power would be a good way of generating hope.

This article first appeared in the print edition on January 16, 2020 under the title ‘Reset and refocus’. The writer is Royal Bank Research Professor of Economics, University of British Columbia

A rough patch

Editorial Indian Express
Latest inflation data seems to corroborate fears articulated by the Monetary Policy Committee (MPC) in its December meeting when it refrained from cutting the benchmark repo rate. Retail inflation, as measured by the consumer price index (CPI), has surged to 7.35 per cent in December 2019, up from 5.54 per cent in November, according to data from the National Statistical Office. With headline inflation well above the RBI’s upper bound target of 6 per cent — it is expected to remain elevated in the coming months, may well surpass the RBI’s estimate for the second half of this fiscal year — it reduces the space for further easing of policy rates, even after clarity over the extent of the Centre’s fiscal slippage emerges. The 10-year G-sec yields have reacted sharply to these developments, rising to 6.67 on Tuesday, partially offsetting the impact of the RBI’s recent open market operations. This combination of weak economic activity and higher than expected supply-side inflationary pressures has put the inflation-targeting regime under test.

Much of the rise in the headline inflation number can be traced to higher food prices. Food inflation has risen to a near six-year high of 14.12 per cent in December 2019, up from 10.01 per cent in the previous month. Much of this spurt is due to vegetable prices, which have surged to 60.5 per cent in December, contributing nearly 3.7 percentage points to the headline numbers. Prior to this data, there was an argument for overlooking this spurt in food prices, and easing rates further, as this spike in inflation is likely to be transitory. But the price rise has been much more pronounced. And while vegetable crop cycles tend to be short, and supply-side pressures may ease in the coming months, the stickiness in prices of protein items is likely to provide a floor for food inflation. Put differently, food inflation is unlikely to revert to previous levels in the short term. And as household inflation expectations, a key metric in the MPC’s assessment, are more responsive to food inflation, this uptick will further exert upward pressure on them. Add to that the uncertainty over oil prices on account of hostilities in the Middle East, and the outlook for inflation looks muddled.

It was expected that the MPC would lower rates further once clarity over the Centre’s fiscal position emerges after the Union budget. But the current trends in inflation suggest that those expectations are likely to be belied. Space for further easing may now open up only towards the second half of the next fiscal year. Soon, attention will turn to the Union budget. With limited fiscal space for a meaningful stimulus, the finance minister should spell out how the government intends to support the economy during this rough patch, and return growth to a higher trajectory.

റിസർവ് ബാങ്ക് എന്ന ഗോമാതാവ്

ജോർജ്‌ ജോസഫ്‌

സാമ്പത്തികപ്രതിസന്ധി അതിരൂക്ഷമായ സാഹചര്യത്തിൽ റിസർവ് ബാങ്കിന്റെ കരുതൽ ശേഖരത്തിൽ വീണ്ടും കൈയിട്ടുവാരുകയാണ് കേന്ദ്ര സർക്കാർ. ഇടക്കാല ലാഭവിഹിതമായി 40,000 കോടി രൂപ അനുവദിക്കണമെന്നാണ് റിസർവ് ബാങ്കിനോട് കേന്ദ്രം ആവശ്യപ്പെട്ടിരിക്കുന്നത്. രാജ്യത്തിന്റെ സാമ്പത്തികവളർച്ച താഴോട്ടായ സാഹചര്യത്തിൽ ,‘അസാധാരണമായ' ഒരു വർഷം എന്ന സ്ഥിതി പരിഗണിച്ച്, പണം അനുവദിക്കണമെന്നാണ് ആവശ്യം.

സാധാരണഗതിയിൽ ആർബിഐ ഇടക്കാല ലാഭവിഹിതം അനുവദിക്കുന്ന പതിവില്ല. എന്നാൽ, കഴിഞ്ഞ മൂന്ന് സാമ്പത്തിക വർഷങ്ങളിൽ തുടർച്ചയായി ഇടക്കാല ഡിവിഡന്റ് നൽകുന്നതിന് സർക്കാർ നിർബന്ധിക്കുകയും റിസർവ് ബാങ്ക് അത് അനുവദിക്കുകയും ചെയ്തു. ഏതാനും മാസങ്ങൾക്ക് മുമ്പാണ് 1 .76 ലക്ഷം കോടി രൂപ ഈ ഇനത്തിൽ സർക്കാരിന് കൈമാറിയത്. ഇതിൽ 1.48 ലക്ഷം കോടിയും നടപ്പ് സാമ്പത്തികവർഷത്തിൽ മുൻകൂറായി നൽകിയതാണ്. ഇതിനു പുറമെയാണ് 40,000 കോടി കൂടി നൽകണമെന്ന് ആവശ്യപ്പെട്ടിരിക്കുന്നത്.
നികുതിവരുമാനം ഉൾപ്പെടെയുള്ള ധനാഗമ മാർഗങ്ങളിൽ വലിയ തോതിൽ ഇടിവുണ്ടായിരിക്കുന്ന സാഹചര്യത്തിലാണ് സർക്കാർ റിസർവ് ബാങ്കിനെ പിഴിയുന്നത്. പരോക്ഷനികുതിയിൽ, പ്രത്യേകിച്ച് ജി എസ്ടിയിൽ നിന്നുള്ള വരുമാനത്തിലെ ഗണ്യമായ ചോർച്ച ധനകമ്മി രൂക്ഷമാക്കി. ധനകമ്മി പ്രതീക്ഷിച്ചിരുന്നതിനേക്കാൾ 115 ശതമാനം അധികമാകുമെന്നാണ് ഇപ്പോൾ കണക്കാക്കപ്പെട്ടിരിക്കുന്നത്. ഫെബ്രുവരി ഒന്നിന് നിർമല സീതാരാമൻ അവതരിപ്പിക്കുന്ന ബജറ്റിൽ ആദായനികുതി ഇളവ് ഉൾപ്പെടെയുള്ള ചില ജനപ്രിയപ്രഖ്യാപനങ്ങൾ പ്രതീക്ഷിക്കുന്നുണ്ട്. ഇത് ചെലവുകൾ കുത്തനെ ഉയർത്തും. ഇത്തരത്തിൽ സാമ്പത്തികപ്രതിസന്ധി അതിസങ്കീർണമാകുകയും അത് പരിഹരിക്കുന്നതിന് സർക്കാരിന് മുന്നിൽ പോംവഴികൾ കുറഞ്ഞതുമാണ് വീണ്ടും റിസർവ് ബാങ്കിനെ സമീപിക്കുന്നതിന് കാരണം. ക്യാപിറ്റൽ റിസർവ് എന്ന രീതിയിൽ ഇത്ര വലിയ ശേഖരം ആവശ്യമില്ല എന്ന നിലപാടാണ് കേന്ദ്ര സർക്കാരിനുള്ളത്. അതുകൊണ്ട് മൂന്ന് ലക്ഷം കോടി രൂപയെങ്കിലും സർക്കാർ ഖജനാവിലേക്ക് കൈമാറണമെന്ന് ഒന്നാം മോഡി സർക്കാർ റിസർവ് ബാങ്കിന് മുന്നിൽ നിർദേശം സമർപ്പിച്ചിരുന്നു. രാജ്യത്തിന്റെ സമ്പദ്‌വ്യവസ്ഥയെ അസ്ഥിരപ്പെടുത്തുന്നതും ആർബിഐയുടെ സ്വയംഭരണ അവകാശങ്ങളിലേക്ക് നേരിട്ടുള്ള കടന്നുകയറ്റവുമായ ഇതിനെ അന്നത്തെ ഗവർണർ ഉർജിത് പട്ടേൽ ഉൾപ്പെടെയുള്ളവർ എതിർത്തു. എന്നാൽ, തങ്ങളുടെ ഇംഗിതം ഒരു വിദഗ്ധസമിതിയുടെ റിപ്പോർട്ടായി കൊണ്ടുവന്ന്, അത് റിസർവ് ബാങ്കിന്റെ ഡയറക്ടർ ബോർഡിനെ കൊണ്ട് അംഗീകരിപ്പിച്ചാണ് കേന്ദ്രസർക്കാർ തീരുമാനം നടപ്പാക്കിയത്. തുടർന്ന് റിസർവ് ബാങ്കിന്റെ ചരിത്രത്തിൽ രാജിവയ്‌ക്കേണ്ടിവരുന്ന അഞ്ചാമത്തെ ഗവർണറായി ഉർജിത് പട്ടേലിന് മാറേണ്ടി വന്നു. പകരം ഒരു പാവ ഗവർണറെ അവരോധിക്കുകയും അദ്ദേഹവും ഡയറക്ടർ ബോർഡും മോഡി–-അമിത് ഷാ കൂട്ടുകെട്ടിന്റെ താളത്തിന് തുള്ളുന്നതുമാണ് ഇപ്പോൾ ആർബിഐയിൽ നടക്കുന്നത്. വിയോജിപ്പ് തുറന്ന് പ്രകടമാക്കിയ ഡെപ്യൂട്ടി ഗവർണർ വിരൽ ആചാര്യയും കേന്ദ്ര ബാങ്കിന്റെ പടിയിറങ്ങി.

ലാഭവിഹിതം അവകാശമല്ല
കേന്ദ്രസർക്കാരിന് ഇങ്ങനെ ലാഭവീതം ആവശ്യപ്പെടാൻ അധികാരമോ, അവകാശമോ ഇല്ല എന്നതാണ് നിയമവും കീഴ്‌വഴക്കങ്ങളും ഇതഃപര്യന്തമുള്ള പ്രവർത്തനരീതിയും വ്യക്തമാക്കുന്നത്. കമ്പനി നിയമങ്ങൾ പ്രകാരം ഡിവിഡന്റ് നൽകുക സാധാരണമാണ്. എന്നാൽ, അത് ഒരിക്കലും ഓഹരി ഉടമയുടെ അല്ലെങ്കിൽ ഉടമകളുടെ അവകാശമല്ല. ഒരു കമ്പനിയുടെ ഓഹരികൾ കൈവശമുള്ള ഒരു വ്യക്തിക്ക് എനിക്ക് ലാഭവിഹിതം തരണം എന്ന് ആവശ്യപ്പെട്ട് കോടതിയെ സമീപിക്കാൻ കഴിയില്ല. അത് നിയമപരമായ ഒരു അവകാശമല്ല. കമ്പനി മെച്ചപ്പെട്ട അറ്റാദായം നേടുമ്പോൾ ഓഹരി ഉടമകൾക്ക് അവരുടെ നിക്ഷേപത്തിനുള്ള പ്രതിഫലം എന്ന നിലയിലാണ് ഡിവിഡന്റ് അനുവദിക്കുക. സാധാരണരീതിയിൽ ഇത് കമ്പനിയുടെ ഡയറക്ടർ ബോർഡ് ശുപാർശചെയ്യുകയും ഓഹരി ഉടമകളുടെ വാർഷിക പൊതുയോഗം അതിന് അംഗീകാരം നൽകുകയും ചെയ്യുന്നതോടെയാണ് ഇതിനുള്ള നടപടിക്രമം പൂർത്തിയാകുന്നത്. അത് എത്ര ശതമാനം വേണം, എപ്പോൾ നൽകണം തുടങ്ങിയ കാര്യങ്ങൾ കമ്പനിയുടെമാത്രം അധികാരത്തിൽ വരുന്ന വിഷയങ്ങളാണ്. സാമ്പത്തികവർഷത്തെ ത്രൈമാസഫലങ്ങൾ വിലയിരുത്തി മികച്ച പ്രവർത്തനം കാഴ്ചവയ്ക്കുന്നു എന്ന് വ്യക്തമായാൽ ഇടക്കാല ലാഭവിഹിതവും നൽകാറുണ്ട്. ഇത് മൂലധന നിക്ഷേപ രംഗത്തെ പ്രവർത്തനരീതിയാണ്. എന്നാൽ, ഇത് ഒരിക്കലും ഓഹരി ഉടമകളുടെ നിയമപരമായ അവകാശമായി മാറുന്നില്ല. ഒരു കമ്പനിക്ക് അവരുടെ ലാഭം പല രീതിയിൽ സൂക്ഷിക്കുന്നതിനുള്ള അവകാശ - അധികാരങ്ങളുണ്ട്.

അതുകൊണ്ടാണ് റിസർവ് ബാങ്കിനോട് ലാഭവിഹിതം ചോദിക്കുന്നത് അതിന്റെ സ്വയംഭരണ അവകാശങ്ങളിലുള്ള പ്രത്യക്ഷ ഇടപെടലായി മാറുന്നത്. അത് സ്വാഭാവികമായി കൈമാറുന്ന ഒരു കാര്യമാണ്. റിസർവ് ബാങ്കിനെ സംബന്ധിച്ചിടത്തോളം സാധാരണ കമ്പനികളെ പോലെ ലാഭ നഷ്ട അടിസ്ഥാനത്തിൽ മാത്രമല്ല പ്രവർത്തനം. അതിന്റെ പ്രവർത്തനങ്ങളിൽനിന്ന് ലഭിക്കുന്നസാമ്പത്തികനേട്ടത്തെ ലാഭം എന്ന് പോലും വിശേഷിപ്പിക്കാറില്ല. സർപ്ലസ് അഥവാ മിച്ചം എന്ന വാക്കാണ് ഇവിടെ പൊതുവെ ഉപയോഗിക്കാറ്. ആർബിഐയുടെ പ്രവർത്തനത്തിനും അടിയന്തര സാഹചര്യങ്ങൾക്കാവശ്യമായ ഫണ്ടുകളും നീക്കിവയ്ക്കുന്നത് ഈ മിച്ചത്തിൽനിന്നാണ്. റിസർവ് ബാങ്കിന്റെ ഓഹരി ഉടമകൾ കേന്ദ്ര സർക്കാരാണ്. സ്വാഭാവികമായും കേന്ദ്രത്തിന് ലാഭവിഹിതം നൽകേണ്ടത് അവരുടെ ബാധ്യതയുമാണ്. എന്നാൽ, തങ്ങൾക്ക് ഇത്ര തുക ഈ ഇനത്തിൽ നൽകണം, ക്യാപ്പിറ്റൽ റിസർവുകളായി ഇത്ര തുക സൂക്ഷിക്കുന്നതെന്തിനാണ്, ഞങ്ങൾ ആവശ്യപ്പെടുമ്പോഴെല്ലാം പറയുന്ന തുക ഇടക്കാല ലാഭവിഹിതമായി നൽകണം എന്നെല്ലാം നിർദേശിക്കുന്നത് അതിന്റെ സ്വയംഭരണ അവകാശത്തെ ഹനിക്കലാണ്, പ്രവർത്തനത്തിൽ നേരിട്ട് ഇടപെടുന്നതിന് തുല്യവുമാണ്. മാത്രവുമല്ല, ഇത് റെഗുലേറ്റർക്കുമേൽ അസാധാരണമായ സമ്മർദം ഉണ്ടാക്കുകയും ചെയ്യുന്നു. ഉർജിത് പട്ടേൽ രാജിവയ്ക്കാൻ ഇത്തരം സമ്മർദം ഒരു കാരണമായിരുന്നു.

വിത്തെടുത്ത്‌ കുത്തുന്നു
സ്വയംഭരണസ്ഥാപനങ്ങളിൽ ഏറെ പ്രത്യേകതയുള്ള ഒന്നാണ് റിസർവ് ബാങ്ക്. രാജ്യത്തിന്റെ സാമ്പത്തികഘടനയുടെ അസ്‌തിവാരം എന്ന് പറയുന്നത് കേന്ദ്ര ബാങ്കും അത് സൂക്ഷിക്കുന്ന റിസർവുകളുമാണ്. സമ്പദ്ഘടനയുടെ നിലവാരവും കറൻസിയുടെ മൂല്യവുംമറ്റും ഇതിനെ ആധാരപ്പെടുത്തിയാണിരിക്കുന്നത് . കേന്ദ്ര സർക്കാരിന്റെ ആജ്ഞ അനുസരിക്കുന്ന ഒരു സംവിധാനമല്ല കേന്ദ്ര ബാങ്ക്. രാജഭരണം നിലവിലുള്ളതുൾപ്പെടെ ഒരു രാജ്യത്തും അത് അങ്ങനെയല്ല. ഇന്നത്തെ രീതിയിലല്ലെങ്കിലും ഇന്ത്യയിൽ നാട്ടുരാജാക്കന്മാർ ഭരിച്ചിരുന്ന കാലത്തും ഇത്തരത്തിൽ സമ്പത്ത് സൂക്ഷിക്കുന്നതിന് കാണിച്ചിരുന്ന വ്യഗ്രതയുടെ ഒരു ഉത്തമദൃഷ്ടാന്തമാണ് ശ്രീപത്മനാഭസ്വാമി ക്ഷേത്രത്തിൽ സൂക്ഷിച്ചിരുന്ന നിധിശേഖരം. ആ വിത്തെടുത്ത് കുത്താൻ രാജഭരണംപോലും ശ്രമിച്ചിരുന്നില്ല. അതുകൊണ്ട് റിസർവ് ബാങ്കിന്റെ അധികാരത്തിന്മേൽ കടന്നുകയറുന്നത് വിപൽക്കരമായ നീക്കമാണ്‌. സർക്കാരിന്റെ സാമ്പത്തികപ്രതിസന്ധി പരിഹരിക്കലല്ല റിസർവ് ബാങ്കിന്റെ കടമ. അത് രാജ്യത്തെ പണവ്യവസ്ഥയുടെ സൂക്ഷിപ്പുകാരനാണ്. വിപണിയിലേക്കുള്ള പണത്തിന്റെ ഒഴുക്ക് ക്രമീകരിച്ച് സാമ്പത്തികവ്യവസ്ഥയുടെ സുസ്ഥിരത സൂക്ഷിക്കേണ്ട സ്ഥാപനമാണ് . അല്ലാതെ സ്വയം കുഴിച്ച കുഴിയിൽ വീണ് കൈകാലിട്ടടിക്കുന്ന മോഡിയെയും അമിത്‌ ‌ഷായെയും സാമ്പത്തികമെന്നാൽ ആട്ടിൻകാഷ്‌ഠമാണോ, കൂർക്കക്കിഴങ്ങാണോ എന്നുപോലും തിരിച്ചറിയാൻ കഴിയാത്ത നിർമല സീതാരാമൻ ഉൾപ്പെടെയുള്ളവരെയും രക്ഷിച്ചെടുക്കലല്ല ആർബിഐയുടെ ജോലി. ഇവിടെ ഒരു കറവപ്പശുവിനെ എന്ന പോലെ റിസർവ് ബാങ്കിനെ ഉപയോഗിക്കുകയാണ് കേന്ദ്രഭരണത്തിലുള്ളവർ. കറന്ന് കറന്ന് അകിടിൽനിന്ന് ചോരവരെ പിഴിഞ്ഞെടുക്കുന്നത് സാമ്പത്തിക മേഖലയിൽ വൻ പ്രത്യാഘാതം സൃഷ്ടിക്കും. ഈ ഓർമകൾ ഉണ്ടായിരിക്കേണ്ടവർ രാജ്യത്തെ എല്ലാ സ്വത്തിന്റെയും ആത്യന്തിക ഉടമകളായ ജനങ്ങളാണ്.

Government must choose between tax reductions and increasing rural spending

Written by Suvodeep Rakshit
The first advance estimate pegs India’s economic growth at 5 per cent in 2019-20 — the slowest since the global financial crisis of 2008. While one may quibble over whether the actual print may be lower or higher, the cause of the slowdown can be attributed to subdued private consumption and investment activity. And given the current trend of high frequency indicators, not much upside to growth is expected.

The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical factors. Despite largely stagnant incomes, private consumption, which is the largest driver of growth, has been financed over the past few years through progressively lower savings, easy credit, and certain one-offs such as the Seventh Pay Commission led payouts. The household savings rate has dipped to 17.2 per cent of GDP in FY18, from 22.5 per cent in FY13. And after the recent NBFC crisis, overall credit in the system has dried up as incremental resources from NBFCs to commercial sector were at (-) Rs1.3 trillion in the first half of FY20 compared to Rs 0.9 tn in first half of last year.

The rural economy has been reeling from low wage growth and largely stagnant farmers’ incomes. Rural wage growth has averaged around 4.5 per cent over the past five years, but adjusting for inflation it has been only 0.6 per cent. The rural population, which was dependent on urban real estate/construction has faced headwinds in the recent past with lower private sector investments and a weak real estate sector.

Looking at the key drivers of growth in the short term, there is limited scope for a sharp recovery. The slowdown in private consumption is a structural issue linked to low household income growth. That in turn is linked to the basic problems of low job creation, and stagnant farm incomes. None of these factors are likely to change immediately. Investment is unlikely to rebound sharply given the challenges on both income and balance sheet of the government, private sector, and households. And government consumption, which has been supporting growth over the past few years, remains under stress. The combined Centre and states’ fiscal deficit is close to 6.5 per cent of GDP. Along with an additional 2.0-2.5 per cent of GDP of central PSE borrowings, the public sector is already weighing on the limited domestic financial resources, ruling out space for an aggressive fiscal stimulus.

The government to its credit has shown a clear preference to rely on supply-side measures to support growth. Yet, expectations will be high that the upcoming Union budget addresses the demand side concerns as well. To this end, the government will possibly need to choose between income tax rate reductions, and substantially increasing allocation to the rural sector. Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people. Based on filings for the assessment year 2019, out of around 58 million tax filers, only 15 million tax filers had a return income above Rs 0.5 million. Further, the impact on consumption would vary widely depending on the relative gains across income brackets. On the other hand, spending on rural infrastructure and employment (MGNREGA, PM-KISAN, PMGSY) can help alleviate some of the pain in rural areas.

The recovery will depend on the utilisation of the fiscal space, and also the health of the financial sector, especially that of NBFCs. The PSU banks are being nursed back to health, but credit flow from NBFCs to certain segments such as MSMEs needs to pick up.

Addressing India’s long term growth concerns and to push the country into the middle-income group of economies requires a broad-basing of the income and consumption profile. Economic reforms in the past have worked to enhance the capacity of the top few hundred million consumers. The next set of reforms should enhance the capacity of those in the middle and the bottom of the income pyramid.

Further, given the huge infrastructure gap in the country, it is essential that the private sector’s role in infrastructure creation is much more inclusive.

In four key areas of infrastructure — electricity (generation, transmission, and distribution), transport (airports, roads, railways, metros), telecom, and water (irrigation, sanitation, sewage, water supply) — the private sector’s involvement is largely restricted to generation in electricity, inter-city roads, airports in transport, and telecom. The rest are largely in the hands of the Centre, state, and local governments. Policies need to focus on ownership (which is largely government dominated) and pricing (which provides the private sector with a remunerable internal rate of return). It is important to note that creating an enabling environment is to a large extent in the purview of the state and local governments.

Given the degree and nature of the growth slowdown, policymakers should continue to focus on measures that raise the potential growth of the economy. Reforms which increase the productivity of the factors of production, provide an enabling environment for competitive production of goods and services, and ensure steady and substantial growth in purchasing power for a larger section of the population should be the focus. After all, why let a crisis go waste.


(This article first appeared in the print edition on January 10, 2020 under the title ‘Limited scope for sharp recovery’. The writer is Vice-President and Senior Economist in Kotak Institutional Equities.)

How are the fundamentals of the Indian economy?

Udit Misra
On Thursday, after a two-hour-long meeting with a whole host of economists, sectoral experts and entrepreneurs, Prime Minister Narendra Modi sounded sanguine about the Indian economy recovering from hitting a 42-year low in terms of nominal gross domestic product growth rate.

“The strong absorbent capacity of the Indian economy shows the strength of basic fundamentals of the Indian economy and its capacity to bounce back,” he said adding sectors like tourism, urban development, infrastructure, and agri-based industry have a great potential to take forward the economy and for employment generation.

The PM’s meeting and his statement on Thursday were significant not only because they happen in the run-up to the Union Budget, which will be presented on February 1, but also because, once again, the Indian economy is being seen to be faltering.

The first advance estimates of national income for the current financial year, released earlier in the week, found that nominal GDP was expected to grow at just 7.5% in 2019-20. This is the lowest since 1978. Real GDP is calculated after deducting the rate of inflation from the nominal GDP growth rate. So, if for argument sake, the inflation for this financial year is 4%, then the real GDP growth would be just 3.5%.

Just for perspective, the Union Budget presented in July 2019 expected a real GDP growth of 8% to 8.5% and a nominal GDP growth of 12% to 12.5%, with a 4% inflation level.

What is the significance of the phrase ‘fundamentals of the economy are strong’?

The PM has reiterated a phrase of reassurance — underscoring the strong fundamentals of the Indian economy — that has been often used by policymakers in the past when the economy is seen to be faltering.

For instance, in October 2017, then Finance Minister Arun Jaitley brushed aside queries of the strains on economic growth by repeating this phrase. Earlier, during the sharp dip in GDP growth rate in 2013, both Prime Minister Manmohan Singh and Finance Minister P Chidambaram reiterated that the same phrase.

Globally, too, this phrase is a boilerplate.

One of the most infamous use of this phrase happened when on the morning of September 15, 2008 — the day Lehman Brothers (one of the most well-respected Wall Street brokerage firms) collapsed and unequivocally declared the Great Financial Crisis — then Republican Presidential candidate, Late John McCain reportedly stated that the fundamentals of the US economy are strong.

Roughly a year before that, in December 2007, then US President George W Bush told Reuters that “the country’s economic fundamentals were strong despite ‘headwinds’ from a weaker housing market, and he voiced confidence in a plan to ease the subprime mortgage crisis”.

So, what are the ‘fundamentals of an economy’?

When one talks about the fundamentals of an economy, one wants to look at economy-wide variables such as the overall GDP growth (real and or nominal), the overall unemployment rate, the level of fiscal deficit, the valuation of a country’s currency against the US dollar, the savings and investment rates in an economy, the rate of inflation, the current account balance, the trade balance etc.

There is intuitive wisdom in looking at these “fundamentals” of an economy when it goes through a tough phase. Such an analysis, when done honestly, can give a sense of how deep the strain in an economy run. It can answer the question whether the current crisis just an exaggerated response to a sectoral problem or is there something more “fundamentally” wrong with the economy that needs urgent attention and “structural” reform.

A spike in a 30-stock index, such as the BSE Sensex, could be misleading if it is out of tune with the GDP rate. Looking at a broader stock index, say a BSE500, may add to the picture. Similarly, comparing the growth of high-end cars to the slump in demand for cheap biscuit packets is also of limited analytical value. That’s because these high and lows may largely be due to some sector-specific factor, not an economy-wide factor.

To be sure about the broader health of the economy, one must look at the broader variables. That way, one reduces the chances of getting the diagnosis wrong.

So, what is the current state of the fundamentals of the Indian economy?

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

Growth rate — both nominal and real — has decelerated sharply; now trending at multi-decade lows. Gross Value Added, which maps economic growth by looking at the incomes-generated is even lower; and its weakness in across most of the sectors that traditionally generated high levels of employment.

Inflation is up but the consolation is that the spike is largely due to transient factors. However, a US-Iran type of conflagration could result is a sharp hike in oil prices and, as such, domestic inflation may rise in the medium term.

Unemployment is also at the highest in several decades. According to some calculations, between 2012 and 2018, India witnessed a decline in the absolute number of employed people — the first instance in India’s history.

Fiscal deficit, which is proxy for the health of government finances, is on paper within reasonable bounds but over the years, the credibility of this number has come into question. Many, including the CAG, has opined that the actual fiscal deficit is much higher than what is officially accepted.

Bucking the trend, the current account deficit, is in a much better state but trade weakness continues as do the weakness of the rupee against the dollar; although on the rupee-dollar issue, a case can be made that the rupee is still overvalued and thus hurting India’s exports.

Similarly, while the benchmark stock indices have run up, and grabbed all attention, the broader stock indices like the BSE500 have struggled.

GDP fall smooth as waterfall

Ashok V. Desai
The graph is smooth like a waterfall: in the quarters beginning with April 2018, the year-on-year growth in gross domestic product at constant prices has been 8.1, 8.0, 7.0, 6.6, 5.8, 5.0 and 4.5 per cent. The Central Statistics Office has not released details of GDP composition. But in the April-September half-year, GDP growth fell from 7.3 per cent in 2018 to 4.6 per cent in 2019. Manufacturing, which in the previous half year had grown by 9.4 per cent, shrank this year by 0.2 per cent. Growth of construction fell from 9.1 to 4.6 per cent. Agricultural growth declined from 5 to 2.1 per cent. The only sector that boomed was — no prize for guessing — government, whose growth rose from 8.1 to 10.1 per cent.

The government dismissed the governor of the Reserve Bank of India, and sent its obedient servant from Delhi to Mumbai to take his place. The new governor transferred a good deal of RBI’s capital funds, carefully accumulated over decades, to finance the Central government. This is old news; but the figures underlying it are shocking. In the budget it presented in February, the government had planned to borrow Rs 4.48 trillion during the year ending next March. By September, it had borrowed Rs 4.78 trillion — Rs 300 billion more than it had planned to borrow in the year. It sold Rs 612 billion of its loans to the National Small Savings Fund and, as if that was not enough, it raided small savings and took away another half a trillion. That was what it did till September; we can only wait and see what further havoc it would wreak in the current half year.

Why is the government so desperate? Why has it destroyed the independence of the central bank? Why is the government of a once fairly well-run state following in the footsteps of reckless Latin American governments? Argentina is the country of gold — in name. Living with a few hundred per cent a year of inflation and without any gold or foreign exchange reserves is normal for Argentina and other Latin American states. India is one of the world’s largest hoarder and importer of gold. Does India want to move from drinking chai to dancing cha cha cha?

Why should it not? It has only to look at its own history to see why. From 1947 till 1991, it had at least one balance of payments crisis every decade. Everyone clapped if the government brought down inflation below 8 per cent. Finance ministers believed that profligacy was patriotic, and spent without caring a hoot about the economy. Finally, the humiliation of running abroad repeatedly with a begging bowl made P.V. Narasimha Rao change the government’s ways. But that is all history. Today, with foreign exchange reserves touching $450 billion, who cares? The finance minister is playing her maiden innings; does she understand the importance of macroeconomic policy? Let us dance duffmuttu, and let the treasury take care of itself — though taking care of the economy is not its priority. A Man peeps through the gates of a closed Shalimar Paints factory in Howrah. Telegraph file picture

But some economists just cannot help worrying about the economy. Arvind Subramanian and Josh Felman have collected reams of statistics and investigated what led to India’s great slowdown. As they show, industrial growth in India has been modest for years; but in the last year, output index of consumer goods industries hardly grew, whilst investment index fell. Direct tax collections show no growth this financial year; non-oil exports are stagnant, whilst imports have fallen. Growth of power generation is close to zero — the lowest in three decades. The world’s fastest growing economy has suddenly given up on growth. The government has drastically reduced corporate tax, and the RBI has cut its interest rate, but the economy has refused to perk up.

Subralman trace back its travails to the global financial crisis of 2008. To save the Indian economy from the global slowdown, the government spent madly on infrastructure — mainly power — projects. State governments buy votes with electric power; they give it to their voters free or below cost. So the private companies that were foolish enough to invest went bankrupt. That led to the Twin Balance Sheet Problem — the insolvency of companies that had borrowed to invest in infrastructure loaded up banks’ balance sheets with bad debts, which we prefer to call non-productive assets. Export growth too sputtered.

The government ran deficits. Many new lenders came up, and their loans started a home building boom. By 2017, the housing boom, too, sputtered: there were no buyers for flats, builders went bankrupt, and so did the lenders — whom we prefer to call non-bank finance companies. The balance sheets of builders and their lenders got loaded with bad debts; the Twin Balance Sheet problem turned into a Quadruple Balance Sheet problem.

How to sort out this mess? Subralman opt for five Rs. First, recognition. Raghuram Rajan had organized an Asset Quality Review to establish the real quality of bank loans — which were good, bad and doubtful, and what could be recovered from no-good loans. There should be another AQR, covering banks as well as NBFCs. Second, resolution. Urjit Patel and Viral Acharya had spelt out the resolution procedure in February 2018; detail was added to it in June 2019. Subralman essentially argue for a law that would strengthen creditors’ hands and limit the courts’ and tribunals’ power to hold up and delay resolution. They also propose two specialized resolution drivers — ‘bad banks’ — which would take over banks’ bad loans to power and real estate sectors respectively and accelerate resolution.

Next, regulation: Subralman want greater powers for the RBI. It should strengthen its prompt corrective action framework, and extend its supervision to NBFCs. Fourth, the government must give its banks more capital on the condition that they recognize NPAs correctly and clean up their balance sheets. Fifth, reform. The government should sell stakes in its banks to the private sector and let it run them; if it cannot, it should at least transfer its investments in banks to a holding corporation with an independent management. There is also a comprehensive programme to improve figures — a fiscal commission to look at the budget, an AQR, to be done by Raghuram Rajan, and a statistical commission, to be chaired by Abhijit Banerjee. Then, there is agriculture: replace fertilizer and power subsidies with direct transfers, create a single market for agricultural products, have a stable policy on agricultural exports and imports as well as on livestock, incentivize water conservation, and give permission to genetically modified crops.

Subralman are so concerned about economic policy even though they get nothing material out of India — no power, no function, no profit — because there is so much to be done, and the case for doing it is so strong. But it is difficult to see a government that abolished the planning commission and dismissed first-class economists understanding the need for good policy. The people have handed the present government the power to rule them; unless they change their minds, it is difficult to see a change in governance; expect a crisis and economic decline every few years. But whatever his idea of governance, the prime minister certainly makes a spectacular show of it.

State of the economy: Beyond hiccups

Dipankar Dasgupta
An eminent economist observed recently in a national daily’s blog that in spite of the Indian economy’s periodic hiccups, there is no serious threat to the system. “[H]istory,” he asserts, “should give us some pause as we assess the prospects of (the) Indian economy in the medium to long run. There is no denying that the economy is going through a rough patch. But let us not forget that we have been here before. There is absolutely no reason for the panic …

“At the heart of the current slowdown is the process of cleaning up non-performing assets... As the cleanup process progresses... growth is bound to pick up. In the meantime, the government should remain focused on its long-term reform agenda.”

The advice to the government to concentrate on the long run even as the economy appears to be gasping in the immediate present is reminiscent of the following, much quoted, remark by John Maynard Keynes in his A Tract on Monetary Reform. “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” The Tract was published in December, 1923, well before the onset of the Great Depression that produced Keynes’s all-time classic, The General Theory of Employment, Interest and Money (1936), a work that was concerned primarily with treatments of short-run problems afflicting free market economies.
The remedy Keynes suggested to resurrect ailing economies firmly emphasized the need for demand generation, primarily through public expenditure. In fact, he had explicitly questioned the effectiveness of monetary policy, such as interest rate reductions, to induce borrower-driven private spending to restore economic health. A lower cost of investment, he pointed out, was unlikely to stir up investment sentiments in a gloom surrounded economy.

The ineffectiveness of interest rate reduction has been amply demonstrated in the Indian case, since a series of repo rate cuts by the central bank has failed lately to prop up the growth rate. At the risk of missing out on the government’s fiscal deficit target therefore, many have suggested an urgent increase in government expenditure to boost production and flag off economic growth.

Direct government expenditure accrues as income to the private sector engaged in producing government demanded goods and services, assuming, of course, that demand is not met from unsold inventories of past production. These incomes, in turn, induce further private consumption expenditure, additional production and income and, hence, more consumption expenditure and so on. Keynes, as is well-known, termed this the multiplier, since the initial government spending creates a multiplied increase in expenditure and income. Most importantly, it increases production and short- term growth of the gross domestic product. Such increments in short- term growth rates, if sustained, average out into healthy medium-term progress.

The power of the multiplier process depends, though, on the strength of the propensity to spend out of income. If the propensity is weak, then the government expenditure may not have any significant impact. It is in this context that Michal Kalecki, a Polish economist, had an important message to deliver. Kalecki was several years younger to Keynes and a relatively unknown figure in the dominant English- speaking world of academic economics. However, he had anticipated the Keynesian theory described above, a fact that he himself pointed out in his Selected Essays on the Dynamics of the Capitalist Economy 1933-1970, an English translation of his works published by the Cambridge University Press in 1971. In the Introduction to the book, he writes that it includes “… three papers published in 1933, 1934 and 1935 in Polish before Keynes’s General Theory appeared and containing... its essentials”.

Kalecki, given his neo-Marxian background, had a version of the multiplier theory that was more illuminating than the one proposed by Keynes. He pointed out that in a capitalist economy, production generated two primary income forms — profits and wages. Profit earners typically represent richer sections of the economy, while wage earners constitute the poor. The poor tend to spend most of their incomes on consumption and save little, thereby adding strength to the multiplier. In contrast, consumption expenditure by the rich has a dubious connection at best with current incomes. These are largely independent of the inflow of extant profits or other incomes, most of which they save. For the expenditure income stream to have a powerful impact then, production technologies should be labour intensive.

Paradoxically enough, this implies that a blind reliance on bouts of government expenditure may not solve our problems either. What with the incredible pace of technological advancement, production processes are guided increasingly by artificial intelligence. Not that the latter is totally divorced from labour, but the quality of labour it depends on is fundamentally different from the labour that Kalecki or Keynes may have had in mind in connection with the multiplier process. India’s labour force is large (exceeding 400 crore, according to some estimates) and a vast majority of it is trapped in the informal sector. They are often referred to as unskilled labourers, not because they lack training per se, but on account of the fact that they are unexposed to the might of modern technology. The situation is ironic, since institutions such as the IIMs, the IITs and others produce graduates who are skill wise the envy of many developed nations in the world. Such highly educated workers do not lack employment opportunities. Besides, they belong to the affluent classes and resemble, expenditure propensity wise, the capitalists far more than Kalecki’s workers.

Even if short-run growth were to pick up therefore, through whatever means this goal may be achieved, it is likely to be characterized by joblessness. The job losers will mostly be unskilled workers or people whose families lack the wherewithal to purchase the super expensive education of our times. Under the circumstances, the West Bengal chief minister’s latest call for investment by micro, small and medium enterprises could well address a part of the unemployment problem, given that these industries are still dependent to an extent on low- skilled, labour-intensive technologies. However, it is not clear if those same MSMEs will have any major impact on the GDP growth rate.

The blog we started off with assured that history didn’t support a pessimistic view of the current state of the economy. Let us end up too with a historical digression. During the 1920s, the US stock market expanded rapidly, reaching its peak in 1929. Simultaneously, production declined and unemployment rose. The eventual market collapse was accompanied by struggling agriculture and large bank defaults. Economic subsidence in many other parts of the world shared similar features.

It is absurd surely to locate signs of a recession in India’s slowdown, leave alone the Great Depression. Yet, the situation is worrisome. The banking sector’s stressed loans have exceeded 12 per cent of total lending, the output of 8 crore industries has contracted, food inflation has spiked and consumer expenditure is limping. Lastly, the stock market dances joyfully as the GDP growth rate continues to decline.

Merrier events hopefully hide in the womb of the future. Till then quo vadis?

The author is former Professor of Economics, Indian Statistical Institute, Calcutta

The results of the NSO survey 2017-18 are truly bizarre

Surjit S Bhalla
Some results of the National Statistical Office’s consumer expenditure survey (CES) for 2017-18 have been leaked. It is hoped that the official release (not endorsement for the reasons enunciated below) of the unit-level data will follow soon, so that researchers, analysts, politicians and even former prime ministers can evaluate for themselves how bad the NSO data really are.

The previous NSO survey on employment (PLFS) estimated the population in 2017-18 to be 1,074 million, when even mathematically challenged individuals estimated it to be upwards of 1,300 million (actually 1,339 million). That error of a 265 million under-estimation is a national record for the highest under-estimation of such a basic number — most NSO surveys have under-estimated population by around 5-10 per cent. The underestimation in 2017-18 at 20 per cent is a record.

This under-estimation has consequences for a major policy variable of interest — jobs and job growth. The unemployment rate is not affected by the estimate of aggregate population; but the number of jobs is affected. Most scholars have estimated employment generated by the PLFS data to decline by around 18 million in the number of jobs in 2017-18 relative to 2011-12. This is according to the usual status of employment, a measure which counts both half-time work (employed for 30-182 days) and full-time work (employed for more than 182 days) as full-time employment. In a detailed (forthcoming) paper on employment, Tirtha Das and I find that the desired full-time jobs (defined as principal status) increased by eight million between 2011-12 and 2017-18 — an increase not that different from what was obtained in the high growth years of 2004-5 to 2011-12 (a 14 million increase, but over seven years).

It is much easier to count people as employed or not employed, than to ask about their monthly per capita expenditure. This is where the world record is on the way to being established. The CES survey for 2017-18 shows that the per person real monthly expenditure (mpce in NSO parlance and not income as mistakenly assumed by some) declined from Rs 1,573 in 2011-12 to Rs 1,514 in 2017-18 (data converted from 2009-10 prices to 2011-12 prices to make it consistent with other data)

In my book, Imagine There’s No Country, I had documented how there was a declining trend in the amount captured by the surveys over time. Household surveys (S) were capturing less and less of consumption as revealed by an alternative calculation — the national accounts (NA). While the two definitions (survey and national accounts) are not identical, they are broadly comparable.

The average S/NA ratio, around the world, was in the mid 80s in the 1980s, that is, if the NA estimate of per-capita consumption was 100, then the household survey would estimate it to be 85. It is worth remembering that the S/NA ratio in India in the 1950’s and 1960’s was upwards of 95 per cent. Too high to be true? In a manner of speaking, yes. For then, the household survey provided the estimate of consumption for national accounts.

But, with time, economies became complicated, and the national accounts data moved with the times, became more sophisticated and captured the trends in the economy much better than the surveys. Survey organisations like the NSO refused to move. In 1983, the S/NA ratio in India collapsed to 63 per cent from the high 70s level just a decade earlier. It was to be 30 years later (in 2012) when the world reached the low 60’s average.

That year (2011-12), India recorded a 55 per cent ratio for S/NA. Just six years later (2017-18), the S/NA ratio in India has collapsed to just 33 per cent — the second lowest ever recorded around the world for economies without hyper-inflation (when S/NA ratio really gets distorted) and with populations above 10 million. The worst ever was Nigeria in 2009 with a S/NA ratio of 27.2 per cent.

There is yet another comparison one can make. The two most recent consumption surveys in India, just six years apart, yield a decline of 22 percentage points. This is the second worst sequential decline in the world. The worst was Pakistan in 2001 when the S/NA ratio was 46.9 per cent, down 26.9 percentage points from the 73.8 per cent estimate recorded in 1998.

The secular decline in NSO has now persisted for some 50 years and marks a sad occasion for an institution that was a trend setting statistical institution in not only the emerging economies, but in the world as well. In the early 1950s, the world famous statistician P C Mahalanobis was its head.

I was privileged to be a member of the first National Statistical Commission of India headed by an internationally renowned economist Suresh Tendulkar. I was sent to Calcutta by Tendulkar to interact with the NSSO and to find out why the Indian S/NA ratio had sharply declined and what could be done to improve survey response. I met with little success and came back frustrated with the ancient techniques being followed by them.

The most recent statistical commission chairman, P C Mohanan, was a colleague. He has been quoted as not being surprised with the decision of the government to not accept the findings of the latest record-low NSO survey. His view is that the government is suppressing reports that are not “favourable”.

If I thought that the NSO consumption surveys were misleading and not acceptable in 2002 and 2006, I can be forgiven for thinking that the surveys are even less acceptable today. The results of the NSO survey 2017-18 are truly bizarre — a decline in average real consumption of 0.6 percentage per year between 2011-12 and 2017-18, when the NA consumption estimate is of a positive 5.8 per cent annual growth. As discussed above, the NSO estimate for 2017-18 is so out of the box that it is actually out of any (reasonable) ball-park. If the government does not accept the findings of the survey (as has been suggested by a recent press release) then a genuine reform of the NSO can actually begin. Even if it does not return to its previous glory, a reformed NSO can become a respectable institution. That will not be easy, but it is a path worth embarking upon.

I have been surprised by how many respected analysts have pointed to the “findings” of the NSO 2017-18 and are relating it to the slowdown in the economy in 2019-20. Some of these very same “analysts” were cheering the RBI/MPC a year ago when it raised the repo rate to 6.5 per cent in June 2018, the very last month of the 2017-18 survey. Their reason for cheering the MPC — growth was too high, so high that it was leading to high and accelerating inflation. Both views cannot be right, and it is worse than disingenuous to hold both views simultaneously. The so-called experts have to make up their mind — if growth was disturbingly high in June 2018, then it cannot under any stretch of the imagination be argued that the CES 2017-18 survey is even close to being right.

Not every government report should be accepted. Just like individuals fail exams, and editors reject papers (and columns), sometimes, institutions fail to produce a credible report. But, I do believe that the unit-level data should be released. Let the world, and experts, find out for themselves how truly informative and credible the NSO CES data really are.

This article first appeared in the print edition on November 27, 2019 under the title ‘Rebuilding credibility’. The writer is executive director IMF, representing India, Sri Lanka, Bangladesh and Bhutan.

Five years of Make in India

Christophe Jaffrelot, Vihang Jumle |

Prime Minister Narendra Modi launched the Make in India campaign on September 25, 2014 with these words: “I tell the world, ‘Make in Inda’. Sell anywhere but manufacture here.” Modi aspired to emulate China — a country he had visited many times as Gujarat chief minister — in attracting foreign investment to industrialise India. The objective was, officially, to increase the manufacturing sector’s growth rate to 12-14 per cent per annum in order to increase this sector’s share in the economy from 16 to 25 per cent of the GDP by 2022 — and to create 100 million additional jobs by then.

Five years later, this policy has produced contrasting results. Foreign direct investment (FDI) has increased from $16 billion in 2013-14 to $36 billion in 2015-16. But this remarkable achievement needs to be qualified from two standpoints. First, FDIs have plateaued since 2016 and second, they are not contributing to India’s industrialisation. FDIs in the manufacturing sector, in fact, are on the wane. In 2017-18, they were just above $7 billion , as against $9.6 billion in 2014-15. Services cornered most of the FDIs — $23.5 billion, more than three times that of the manufacturing sector. This is a clear reflection of the the Indian economy’s traditional strong points, where computer services, for instance, are remarkably developed. But can a country rely on services without developing an industrial base? The response is clearly no and this is why “Make in India” was initiated.

The idea, then, was to promote export-led growth: Foreign investors were invited to make in India, not necessarily for India. But few investors have been attracted by this prospect, and India’s share in the global exports of manufactured products remains around 2 per cent — China’s is around 18 per cent.

Why has Make in India failed to deliver? First, a large fraction of the Indian FDI is neither foreign nor direct but comes from Mauritius-based shell companies. Indian tax authorities suspected that most of these investments were “black money” from India, which was routed via Mauritius. Second, the productivity of Indian factories is low. According to a McKinsey report, “workers in India’s manufacturing sector are almost four and five times less productive, on average, than their counterparts in Thailand and China”. This is not just because of insufficient skills, but also because the size of the industrial units is too small for attaining economies of scale, investing in modern equipment and developing supply chains. Why are companies small? Partly by choice, because labour regulations are more complicated for plants with more than 100 employees. Government approval is required under the Industrial Disputes Act of 1947 before laying off any employee and the Contract Labour Act of 1970 requires government and employee approval for simple changes in an employee’s job description or duties.

Infrastructure is also a problem area. Although electricity costs are about the same in India and China, power outages are much higher in India. Moreover, transportation takes much more time in India. According to Google Maps, it takes about 12.5 hours to travel the 1,213 km distance between Beijing to Shanghai. A Delhi to Mumbai trip of 1,414 km, via National Highway 48, in contrast, takes about 22 hours. Average speeds in the China are about 100 km per hour, while in India, they are about 60 km per hour. Railways in India have saturated while Indian ports have constantly been outperformed by many Asian countries. The 2016 World Bank’s Global Performance Index ranked India 35th among 160 countries. Singapore was ranked fifth, China 25th and Malaysia 32nd. The average ship turnaround time in Singapore was less than a day; in India, it was 2.04 days.
 

Bureaucratic procedures and corruption continue to make India less attractive for investors. It has made progress in the World Bank’s Ease of Doing Business index, but even then, is ranked 77 among 190 countries. India ranks 78 out of 180 countries in Transparency International’s Corruption Perception Index. To acquire land to build a plant, for instance, remains difficult. India has slipped 10 places in the latest annual Global Competitiveness Index compiled by Geneva-based World Economic Forum (WEF).

There was clearly a contradiction in the attempt to attract foreign investors to Make in India before completing the reforms of labour and land acquisition laws. Liberalisation is not the panacea for all that ails the economy, but it is a prerequisite if India intends to follow an export-oriented growth pattern.

A significant move in this direction was made last month with the reduction of the company tax from about 35 to about 25 per cent (at least on paper), a rate comparable with most of India’s neighbours. This reform is also consistent with the government’s effort to compete with South East Asian countries, in particular, to attract FDIs. This competition has acquired a new dimension in the context of the US-China trade dispute. After the Trump administration increases tariffs on Chinese exports to the US, several companies will shift their plants from China to other Asian countries. Some of them have already done so. According to the Japanese financial firm Nomura, only three of the 56 companies that decided to relocate from China moved to India. Of them, Foxconn is a major player which will be now assembling its top-end iPhones in India. Whether other big multinationals will begin to show interest at manufacturing in India remains to be seen.

But India will have to face another external challenge too as it sees capital fleeing the country. The net outflow of capital has jumped as the rupee has dropped from 54 a dollar in 2013 to more than 70 to a dollar in 2019, at a time when oil is becoming more expensive.

Jaffrelot is senior research fellow at CERI-Sciences Po/CNRS, Paris, and Professor of Indian Politics and Sociology at King’s India Institute, London. Jumle is an associate at Ikigai Law, New Delhi

Higher government spending, not tax cuts, is the way to boost growth

Abhyankar
Within three months of the budget session, unprecedented tax breaks have been announced outside Parliament, almost rewriting the tax regime. The government coffers will be lighter by Rs 1.45 lakh crore, and the nation will have to wait for the private corporate sector to rescue us from the slowdown. Surprisingly, there is a deafening silence on the issue of fiscal deficit despite the fact that the revenue forgone is more than 1 per cent of GDP.

Will this extraordinary measure pull the Indian economy out of the slowdown? The slowdown is essentially sluggish aggregate demand in the economy leading to a fall in production, investment, employment and income. To decipher it, we have to decode the components of aggregate demand. It should be noted that the slowdown has been years in the making with the market shrinking due to adverse terms of exchange faced by majority of the population and also due to rising structural unemployment.

With low and falling employment elasticity, the multiplier effect of GDP growth will not lead to healthy growth in private consumption demand. Employment elasticity, which indicates the percentage growth in employment for each 1 per cent change in growth, has come down from 0.4 per cent in the 1990s to 0.2 per cent for the five years preceding 2014, reaching a low of barely 0.1 per cent in recent years. Also, it has been observed that capital expenditure (capex) in the private sector has been falling for seven years.

Expenditure by the central government, as a percentage of GDP, has also been falling for the last four years. It declined from 13.3 per cent in 2013-14 to 12.2 per cent in 2018-19. Of this, capex has come down to 2.4 per cent from 3 per cent over the same period. Also, capex plans of public sector enterprises are at the lowest levels in the last 14 years.

Around 44 per cent of the labour force works in agriculture. Their share in the GDP is merely 15 per cent and is declining faster than the fall in their proportion of the labour force employed in the sector. The exit of labour from agriculture could have been a positive step towards industrialisation. But, unfortunately, it is not so. They are dropping out due to deep economic distress, and not for gainful alternative employment. This has led to two disturbing consequences: First, there is a substantial rise in the rate of open unemployment; and second, a large segment of the population, particularly women, are dropping out from the labour force.

That is the reason why the labour force participation rate of women in India has declined to 23 per cent in 2018 from 42 per cent in 2011. The overall figure (male and female) has dropped to about 50 per cent in 2018 from 63 per cent in 2011 (all figures are for the age group 15-63 from PLFS report).

The bargaining power of the working class in industries and services except in the top layer in the IT and finance sectors, has been falling over the past two decades due lax enforcement of labour laws, leading to the informalisation and contractualisation of almost 80 per cent of employment in the formal sector. The share of the labour in value-added in the formal sector has dropped from 33 per cent in 1990-91 to 23 per cent in 2012-13.

Thus, it is unrealistic to expect that the private corporate sector or even foreign investment would invest in an economy with a shrinking market. Would they risk their capital in new ventures or expansion just because the rate of taxation is low? The Keynesian equation that rising inequality essentially leads to a shrinking market size at the macro level is being vindicated in India.

What is needed is enhanced government spending and investment, to enlarge the scope of employment guarantee to urban areas. This could save the economy from falling into a recession. The tax breaks are counterproductive, as they would almost paralyse the already weak financial muscle of the government.

This article first appeared in the print edition on October 8, 2019 under the title ‘The wrong way out’. The writer is member, CPM Maharashtra state committee and a CITU activist.