Tuesday, August 31, 2021

BRICS co-operation in Digital economy

 Q&A with DD (Mark Lyn)

 1. The focus in these meetings has been on digital technologies. The trade ministers believe new technologies are an important tool for modernization and transformation of industry and will promote inclusive economic growth... Do you see digital technologies as the norm or still as a disruptive technology?

A1: Digital technologies are here to stay. Impact will depend on countries' population/ labor force trajectory.  In countries with declining population & scarce human resources it will result in substitution of scarce labor by machines (robotics, ML).  In India, one of our comparative advantages is the high share of global working age population. We can use digital technologies (AI, expert systems) to enhance quality of our labor force and enhance the productivity of skilled professionals.

 2. They talk of assessing implications, and encourage progressive, safe, equitable, and sustainable use of disruptive technologies for advancing growth. This is the new paradigm post-covid world... meeting are also virtual. Comment. (Everything in the digital economy is relatively new and still disruptive).

A2: India was lagging in use of e-services. Covid has changed that with fast adoption of remote marketing, sales, purchase of goods & services. Post-covid we are likely to close the gap with the leaders, much faster. Caution: Safety security: Spying, hacking and information warfare. Free, open, Democracies more susceptible. IBSA vs BRICs

 3. Importance of investment in human resources in line with the changing requirements caused by emerging technologies... How crucial is collaboration in this field?

A3: Different levels, different mix of cooperation & competition:  Basic, moderate; Need to expand rapidly and become supplier to the World. Standardization & certification in needed to make it possible Co-operation in pedagogy very important for & unified market which Indian talent can supply!  Advanced (AI, ML) Indian resources 3rd behind USA & China. Both Cooperation & competition will happen, so both aspects must be kept in mind. R&D cooperation has to be selective & bilateral.

 4. Besides workshops, seminars, and exchange programs... what more can be done to create a digital business ecosystem to promote like-minded projects and investments/

A4: BRICS can set up study groups on specialized topics like Hacking and securing domestic digital systems from international threats.

 5. Will new technologies on their own foster open, fair, and nondiscriminatory trade environment, and ensure greater participation in global value chains? BRICS is committed to making efforts to do create such a trade environment?

A5: Digital technologies can help introduce greater transparency in trade & supply chains and thus promote competition.  However, unregulated, they can also lead to digital monopolies, which will harm user interests and stifle innovation.  Social media (SM) can also be used to propagate misinformation that harms the interests of the target. Modern, professional regulation is needed to ensure competitive environment, which promotes innovation & safeguards interests if consumers/users.

 6. Role of New Development Bank. India wants NDB resources be utilized for strengthening social infrastructure(education, health, community housing etc.) besides promotion of Industrial sector. Importance of increasing scope of the Bank.

A6: Big gaps in funding of Public goods infrastructures remain – original purpose of NDB (WB, ADB unable to fill). NDB should continue to focus physical infrastructure, including hard infrastructure for connectivity, broad band networks, carbon fiber, satellite receiving stations, satellites.  But it could also finance the complementary soft infrastructure needed for the digital economy.

 7. BRICS Industry Ministers agreed to complement each other's strengths and share best practices and learn from weaknesses... How important is kind of working relationship in achieving the SDGs together?

A7: Industrial best practices sharing will help improve the average productivity and competitiveness of the BRICs economies. It is the foundation of BRICS co-operation! The BRICS can benefit from China’s experience and must insist that China share its learning.

8. India as chair has global credible examples. World’s largest bio metric system AADHAR, Success of payment system UPI, Aarogya Setu & CoWin Apps in covid management. India's digital footprint... is important as a trend setter?

A8: India is a pioneer in developing digital public goods infrastructure/soft infra. India must use this to raise the visibility of Indian private digital companies in the BRICs and around the World. This can be done by making hem an essential partner in propagating India's digital foo print. Else we will end up getting praised for one or two times, while foreign companies run away with the sales and the profits; and use these to develop more customer friendly & business friendly applications

 9. “Technical Report on Social Infrastructure: Financing and Use of Digital Technologies” endorsed by Finance Ministers. Report is a collaborative exercise on how BRICS governments have leveraged digital technologies to improve health and education sectors. This is a good way to collaborate judging from common lessons learnt from the pandemic.

A9:  There has been a flowering of social entrepreneurship in India during the last five years.      When Covid hit, we were behind the global leaders in the field of tele-medicine and tele-education. Because of COVID we are closing the gap quickly, with a focus on the needs of the Indian population. Indian Govt should help these entrepreneurs expand internationally and use their expertise to provide education & health services worldwide!

 10. Negotiations on Cooperation and Mutual Administrative Assistance in Customs matters has been completed. Will that help in greater trust... and easier movement of goods?

A10: Yes, that should help transparency and help improve India's exports, which suffer from non-tariff barriers (e.g. Agriculture, drugs & pharma).

 11. Central Bankers discussed Financial Inclusion, Contingent Reserve Arrangement (CRA) and Information Security Cooperation. Importance of economic stability in times of global financial shocks.

A11: such regional co-operation is useful for dealing with regional shocks, but for global shocks one needs international co-operation. Can develop payments system for intra-BRICS trade. It can also help Deal with Non-UN sanctions.


Thursday, August 5, 2021

India macro-economic review: Pre-monetary policy


Covid economy: Lockdown, Transition to Normalization & setback

More than a year ago, EGROW research paper discussed the economics of lockdown[1] and the transition to normalcy. The transition played out as we had envisaged and normalisation had occurred by March 2021 as anticipated.

Second Covid wave started in April and we were back into another transition period, characterised by regional, better targeted restrictions in terms of services and selected district lockdowns. In the last meeting we had pointed that public forecasts were following the covid waves, but our analysis of the second wave allowed us to see through it.

The available forecasts were much too affected by short term developments resulting in a high correlation between covid cycle and GDP forecasting cycle. Our analysis of the delta variant, in EGROW foundation research paper, clearly showed that the new variant is not part of the old wave which is more or less over. Based on our dual S curve model, we predicted that the covid variant would spread very rapidly and then decline just as rapidly as it grew. This is what happened by end of July.

The key point to note is that people were focussing on the wrong issue. It was not the incompetence of the government or the carelessness of the public which was critical in the second wave, but the high transmissibility and severity of the new variant(s). This has been proved by the spread of the Delta variant in the UK, Indonesia, other SE Asian countries, US and China.

Based on the second wave model, published in May 2021[2], we had concluded that FY22, Q1 GDP would be much worse than predicted by anyone and Q2 GDP would bounce back much faster that anyone was expecting. Consequently, Q2 GDP would make-up most, but not all of the losses during Q1. With H2 growth recovery still on track, the full year growth would remain within our six month earlier forecast of 10% +/- 1 percent, with a downside risk. That is how the economic recovery has played out so far.

In our 2020 paper on fiscal policy during the transition[3] emphasis was on logistics disruptions, and supply chain disruptions during the transition period. Logistics problems were much severe in other parts of the world than India. There were problems of sudden stops and sudden starts. The logistic costs of Indian exports went up by only 20 percent, compared to the logistic cost of exports from China to the US, which went up by 100 percent or more.

In the USA this was aggravated by a shift in demand, from services to goods. Demand for manufactured products and imports of the same shot up. This resulted in unexpected pressure on logistic chain.  The logistics of delivering commodities are completely different from services and there was a shortage of ships and containers, and those costs went up. As covid wave dies down, we will see a reverse shift, the demand will shift back to services. Disruptions in the supply chain are an important factor to keep in mind. E.g. semiconductor disruptions, the natural resource commodity disruptions, etc.

As our analysis indicated, inflationary pressures from logistics and supply chain disruptions would have a large temporary component in India, USA and worldwide, because of its origin in the supply chain disruptions. However in the case of India inflation is also strongly affected by global petroleum oil and edible oil prices, both of which have increased substantially during the last six months.

Macroeconomics of Indian economy: Exports, Investment and private consumption

There has been a surge in exports from India especially in the Q1 and till July. The macroeconomic issue is to determine how much of this is temporary and permanent. There have been many indications in the data and personal observations that supply chain shifts are occurring. Most of the surge seems to be due to the shift in supply chains. This has two elements- incremental demand and diversification and risk reduction. There is increasing willingness to pay 10-20 percent higher cost of imports from India, to reduce China risk. This willingness is increasing with the unpredictable behaviour of Chinese authorities, ranging from random actions with respect to capital markets and tech companies and severe lockdowns in many cities purportedly based on a few Covid Delta cases numbering in the tens.

The government must make sure, with the help of industry associations, that any new bottlenecks are identified and solved expeditiously, to ensure that this great opportunity is translated into permanent increase in World export shares.

The government’s provision for Capital expenditure was increased by 30-34 percent in the budget. This will finance construction intensive infrastructure in FY22. The momentum was somewhat disrupted by the second wave but will pick up in Q2 FY22 and stimulate complementary private investment. We expect the Digital economy to lead private investment during FY22. However, much of this investment comes under intangibles and will not be visible in the usual indicators of fixed investment. 

Doubts remain about the speed of recovery of private investments because of the depletion of private saving/increase in indebtedness of those affected by Covid infections and those with employment/income losses during lockdowns. EGROW’s research paper in 2020 had pointed to the importance of distinguishing between Contact Services, goods and their related services, and non-contact services. The key new element is the dynamics of the shift in relative demand for goods and services. The shift from savings to goods consumption took place during the lockdown and transition period was when fears of contagion were high. As vaccination drives proceed and fears of Covid contagion subside, there will be a gradual shift back to services and a reduction in the pressure on the demand for goods. This will translate into reduced pressure on logistics chain, logistics costs and inflationary pressure on commodities.

In India, a nationwide third wave is highly unlikely unless there is a new mutation similar to the delta variant. But, regional variations in the number of cases will be observed.

The overall GDP is expected to be 10% -/+ 1 percent, with downside risk higher because of the second wave. Though the second wave is over on a nation-wide level, we may continue to see regional flare ups as have happened in Kerala, Maharashtra and the Northeast. However, given the learnings from the first two waves (Govt, business, public), the increase in Sero-positivity (2/3rd of population) and the higher vaccination levels (1/3 of adults), a nationwide third wave can only happen if there is new Covid variant comparable in transmissibility and severity as the delta variant. Nobody can predict this, but the medical community can ensure that any such variant is detected quickly and contained before it becomes another wave!

The interest rate should, and is likely to, remain unchanged. So too the future guidance on monetary policy.

Capital depletion, capacity destruction!

The government and RBI must be alert to any, “Capacity destruction” and “capital depletion in informal enterprises” that has taken place under the radar of regular data collection. The formal sector, particularly the corporate sector is flush with cash and have reduced their demand for credit. The medium-large firms in the MSME sector will also have sufficient access to credit once their demand revives. My concern is for the self-employed and the micro & small enterprises which have exhausted their personal and family sources of working capital and may have difficulty obtaining the capital needed to restart their enterprises. The government and RBI must be on the look-out out for sectors/industries/services where capital depletion has happened and ensure that help is provided for restarting their business.

Wednesday, June 9, 2021

State of recovery from covid second wave by State

 In the research paper titled , India's COVID 19 second wave (https://egrowfoundation.org/research/indias-second-covid-wave/ ) we estimated a dual S-curve model based on data up to May 9, 2021. In this note we take stock of the recovery from second COVID wave, by different states. This is based on data up to June 3, 2021. Consequently anticipated recovery after June 3, 2021 is based on the forecasts of the dual S-curve model. Recovery is defined in terms of rate of growth of cases. When the rate of growth of total confirmed cases, declines to the lowest rate seen at the end of the first wave, before the second wave began. The date on which this happens is defined as the recovery date for the State.

Table shows the recovery dates as defined above, and the rates of  growth of active cases (all negative)and of confirmed total cases (all positive). These are also plotted in figure with States' recovery date, with earliest on the left and later ones on right, Delhi, Chhatisgarh, Gujarat and Maharashtra are expected to be the first to recover from the second wave (during June), as per our definition.  Assam, West Bengal, Uttarakhand and Andhra Pradesh will be among the last to recover in July  2021(table, figure).Kerala is a an anomalous state in which the first wave hadn't really ended before the second wave started. So the second wave will not really have ended on 18th June as projected.

 Table : Projected recovery dates & actual growth rates of total & active casses on 3rd June 2021


 Figure 1: States ordered by recovery date