Where is Indian Economy Headed?(as of 25/8/14)

Q & A with Kartik Goyal of Bloomberg

Q1: How do you assess India's current economic situation? With CPI inflation still holding uncomfortably high and growth still near a decade low?

A1: The recovery is firming up and we are on track for a 1% point step up in the GDP growth rate, that I predicted on New Years eve. Inflation is also on a clear but gradual downtrend, though some upticks can arise from the poor monsoon.

Q2: What's your outlook on the U.S. Federal Reserve raising interest rates and its impact on India? How well prepared India is to face that and What can it do more to shield itself from the impact of higher US rates?

A2: As I expect US recovery to be a gradual one, my expectation of the Feds monetary policy is a gradual winding down of QE and a corresponding rise in interest rates. There will be some negative effect on capital inflows into India, but I expect this to be temporary and short lived.

Q3: Do you think the RBI's current stance, of maintaining high interest rates even as inflation has come down a bit and the rupee is stable, is aimed at protecting the rupee when the US Federal Reserve starts raising interest rates?

A3: No. The RBIs stance is clearly directed at inflation expectations. In my personal view the inflation expectations as measured by the available survey are a very poor substitute for the inflation expectation expectations that would be reflected in a well functioning market for inflation indexed bonds. In my view the former are way out of line. Any RBI action to reduce rupee volatility will occour at the time of instability.

Q4: How do you see the current monsoon deficit and its impact on inflation? And, how will monsoon, high CPI inflation will impact the RBI's monetary policy and the currency policy?

A4: Any impact of weak monsoon on cereals can easily be managed by the massive stocks with FCI. However, there is a possibility of some regional crop losses and a spike in thier prices. This will merely slow the decline in inflation without breaching the 8% CPI inflation target.

Q5: Do you think that the RBI is done with the rate tightening cycle? and the future moves will be towards easing the rates? What do you think will guide the RBI's monetary policy stance?

A5: Depends on inflation expectations and actual inflation projections.

Q6: What's your outlook for the economic growth? Do you have growth estimate for Fy15 and Fy16? How do you think the recent election mandate will impact the economic growth in the coming years?

A6: In my comments on Mr Jaitlely's first budget, I had reiterated that GDP growth in 2014-15 would accelerate by 1 per cent from last year (i.e 5.6-5.7%) and could go up another per cent point in 2015-16(ie 6.5 - 6.7%) if the policy actions hinted at in the budget fructify

Q7: What's your outlook for the rupee? Where do you see the rupee by the end of December? Do you see it touching 70 against the dollar? Or it gaining or remaining stable and why?

Q8: What do you think are the biggest risks to the rupee? Do you think the Indian rupee is overvalued given inflation differentials with other rnations? What are the risks to the rupee if the US Fed starts raising rates?

Q9: What's your view on the RBI's currency policy? And what it can do more to shield the rupee?

A7-9: The rupee is currently fairly valued at around R60/$. I expect the rupee to remain within a band of +/- Rs 2/$  of this.

 

Q10: Dr Rajan in his speeches talked about how the world is heading towards another crisis as the different central banks move in different directions to protect their economies. What's your view on that? And, what can India do to protect itself from the global monetary policy breakdown?

A10:  I am not sure I agree with the timing of his remarks, so I don't think there is an immediate danger to India. But in several speeches in the IMF board in 2011-2012 I had warned about a Japanese style "lost decade for the Euro Area/EU" and a slow recovery for the US given the policy mistakes they made in 2009-2010 (to which I had been drawing attention since 2010 during their article IV discusssions).

"Neo-liberals,” "Neo-leftists" and Intelectual vested interests

Introduction

       In an article in this paper (Indian Express, August 22, 2014) Prof Ashutosh Varshney of Brown University asserts:  “It is Amartya Sen, the nemesis of neo-liberals, who would emphasize toilets as much as growth.”  This is perhaps a true perception in the exalted World of Western Academia and among the many academic followers of Prof Sen in India. However what happens in the trenches of Yojna Bhavan, North and South block where many of these and related issues were decided is starkly different. It is the followers (neo-communist/neo left?) of Prof Sen who emphasized increased “private health spending” on middle class diseases over “public health” spending on sewers and sanitation. It is the “neo-leftists” who emphasized “right to food” as a means of eliminating malnutrition as against, sewers sanitation and toilets, that “market liberal” like me showed was the main cause of child malnutrition.[i] It is these neo-leftists who emphasized doubling and tripling the money allocated (inputs) on standard inefficient, corrupt, leaking food, education and health programs (mostly States subjects), ignoring or downplaying arguments on the vital need to achieve better outcomes/results by first improving their effectiveness by addressing governance issues(including that of corruption).

Market Liberal Analysis

  A Planning Commission paper Virmani (2006)[ii] analysed poverty, hunger, education and health indicators (in a comparative framework) and their linkage to government policy and programs and argued that, “The broad theme that emerges is that the failures on this front, apart from the indirect effects of growth, are linked directly to the failure of governance.   This failure has many dimensions; the misallocation of government resources, the failure to follow norms of social benefit-cost analysis that were the reason-de-tar for the introduction of national planning, the neglect of public and quasi-public goods that are the most fundamental justification for the existence of government and a gradual (over decades) but progressive deterioration in the quality of governance. This conclusion differs radically from the conventional wisdom (national and international) about India’s poverty, social indicators and income distribution.  Even if treated as a hypothesis it merits debate and further analysis.” 

The paper concluded that, “It can be argued that the ideal (most efficient) social welfare policy is a direct transfer of income to the poor through a negative income tax.  In a developed country this would be very easy.  How can we transfer these amounts directly to the poor, the needy and the disadvantaged in a poor country?  The answer, by setting up an Indian version using a modern smart card system that delivers cash and/or subsidies to the poor based on their entitlements as per specified parameters and norms.  Such a smart card could be programmed with identity (photo & biometric fingerprint), and have information on social (SC/ST) and personal/household characteristics.  Each person/ households’ entitlements could be in the form of specified subsidies for the purchase of each of a set of items.  The set of items could include food/cereals, kerosene, midday meals, nutrition supplements, drinking water, toilet/ sanitation services, basic drugs, schooling (primary/secondary), internet access, electricity and a host of other items reflecting the dozens of subsidies and programs currently in existence.  The entitlement could be varied with and dependent on various economic and social handicaps such as SC-ST, age (infant or aged), mental handicap, physical disability, female head of household, lactating mother, chronic illness.   In this way all the current stakeholders, special interest groups and social policies could be accommodated within a single integrated system.”

“Figure .. shows clearly that the access of our population to sanitation services is much worse than is to be expected at our level of per capita GDP.  Further 89% of the countries for which data is available perform better on this indicator than India.  This is rank is worse than our rank on the mortality indicators and life expectancy indicators”

 

“Where we have failed as a nation is in improving our basic social indicators like literacy and mortality rates.  Much of the failure is a legacy of the three decades of Indian socialism (till 1979-80).  The rate of improvement of most indicators has accelerated during the market period (starting 1980-81).  The gap between our level and that of global benchmarks is still wide and our global ranking on most of these social parameters remains very poor.  This is the result of government failure. Government overstretch, misplaced priorities and deteriorating quality (corruption) has resulted in a failure to fulfil the traditional, accepted functions of government like public safety & security, universal literacy and primary education, public health education (superstition & quackery), provision of drinkable water, sanitation drains & sewage facilities, public health (infectious & epidemic diseases), building roads and creating & disseminating  agricultural technology.  Consequently the improvement in social indicators has not kept pace with economic growth and poverty decline and has led to increasing interstate disparities in growth and poverty.”

Neo-leftist Sabotage

    A presentation of this paper to Planning Commission Members and their Advisors was scheduled and cancelled several times because of the unavailability of ‘certain’ Planning commission members and never took place because of their active discouragement. Apparently the neo-leftists thought it was too dangerous to even present the comparative data on hunger, health & education, or discuss the conclusions reached.
The idea of “eliminating” poverty was perhaps too explosive for the “neo-leftists” and “neo-communists” who were comfortable with “alleviating” poverty for another half century. Even the fact that “sanitation” was a more important problem in India than general health, education, hunger and poverty was too dirty a thought for the “Brahmins of  Poverty”.  Not surprisingly, the analysis and recommendations relating to sanitation and malnutrition the next year, were similarly ignored.[iii]

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A version of this article was published in the Indian Express of August 25, 2014, under the banner, “Wrong End of The Right Debate: The Neo-Liberals emphasise Sanitation, Sewers and Toilets, not neo-communists,” http://indianexpress.com/article/opinion/columns/the-wrong-end-of-the-right-debate/

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[i] Arvind Virmani, “The Sudoku of Growth, Poverty and Malnutrition: Lessons For Lagging States,” Working Paper No. 2/2007-PC, Planning Commission, July  2007

 (http://planningcommission.nic.in/reports/wrkpapers/index.php?repts=wrkpap).

[ii] Arvind Virmani, “Poverty And Hunger In India: What is needed To Eliminate Them,” Working Paper No. 1/2006-PC, Planning Commission, February 2006

 ( http://planningcommission.nic.in/reports/wrkpapers/index.php?repts=wrkpap).

[iii] Virmani (2007) op cit,  fn i

BHARATIYA VIKAS NITI SANSTHAN (BVNS): Indian Development Policy Institute (IDPI)

INTRODUCTION

      The honorable Prime Minister announced to the Nation in his independence day address that,  “we will replace the Planning Commission with a new institution having a new design and structure, a new body, a new soul, a new thinking, a new direction, a new faith towards forging a new direction to lead the country based on creative thinking, public-private partnership, optimum utilization of resources, utilization of youth power of the nation, to promote the aspirations of state governments seeking development, to empower the state governments and to empower the federal structure. Very shortly, we are about to move in a direction when this institute would be functioning in place of Planning Commission.”

     The abolition of the Planning Commission means that there will be no National five year plans, no annual plans related to it or flowing from it, and no meetings of Chief Ministers in Delhi to discuss “State Plans.”  Correspondingly there will be no ‘plan allocations’ or financial approvals (by the erstwhile PC or the new institution). The mandate of the National Development Council would have to be modified (perhaps) by replacing “Plan” by “Policies” and “Planning Commission” by BVNS/IDPI). The distinction between Plan and non-plan expenditures will also dis-appear and needs to be replaced by the economic (functional) distinction between “consumption” and “investment” expenditure, with ‘repair and maintenance” of assets, included in the latter.  Its treatment as “revenue” expenditure in government budgets leads to neglect and deterioration of physical assets. By definition, “current” expenditures have a ‘short’ and “investment” a ‘long’ time horizon.

The Finance Commission, set up under the constitution, with a fresh set of members every five years, to recommend the division of tax revenues between Center & States and Grants in Aid from the Center to the States, focusses on economic & social needs during the five years. Though “Grants in Aid” can cover “capital” Grants, these are based on demands put forward by States,  comments by Center (with inputs from the Planning Commission), and any expert who wants to depose before the FC or is requested by the FC to do so.  With the abolition of the PC, inputs based on systematic research and integrated analysis of long term issues and problems would be reduced or eliminated.

     The ministries of government, including the Finance Ministry, are usually consumed by short term issues with a horizon of a few years and are looking for quick answers. They do not have the time or capacity for medium-long thinking or for obtaining an input from a wide variety of relevant sources on a continuing basis.  The new institute is designed to fill this gap in government operation. Its experts can act as a bridge between the routinized political or occasional crisis driven, operation of most government Ministries and Departments, and the new ideas and thinking across the country and World.[i]  Global experience shows that there is little or no transfer of new knowledge from Universities, research institutions and scholars to Government decision makers, unless there are experts within the government who can understand and appreciate new thinking and research and translate it into practical policy advice and programs.

 SCOPE

 The new institute would combine three overlapping elements,

a)      National Think Tank that does ‘policy oriented’ research on important national issues,

b)      Policy Planning: An organization for holistically examining Central Government (CG) objective, goals, policies, institutions and programs, suggesting improvements/changes and doing “operational” planning to achieve Central Government goals,  with respect to the Central list & part of concurrent list, that come under the purview of CG ministries and departments. [ii] The Ministries would be required to give to IDBI, all data required to fulfill this role!

c)       Federal Forum for States to contribute to and gain from analysis of development goals and problems related to the States (State list and part of concurrent list handled by States) and solutions thereof.

        Unlike the Planning commission, which formally approved the detailed allocation of “Plan funds” on an annual basis, the BVNS/IDPI‘s recommendations relating to Central government ‘investment’ and CG “capital grants” to, and debt market borrowing limits for,  States for their ‘investment’, would be advisory.  This would provide to the PM a considered view independent from the parochial views of the Central Ministries and Departments. The formal financial allocation process would be undertaken by the Finance ministry, in the light of Finance Commission recommendations “Grants in Aid” to States for Investment and the directions of the PM.

MANDATE

The national mandate of the BVNS/IDPI could include;

Future Challenges & Opportunities

1.       Analysis of economic, demographic, environmental, social & international trends and forecasting potential problems and opportunities, which will affect the Nation or a group of States (over different time Horizons ranging from 4 to 20 years).  Working out and disseminating potential solutions to problems and ways of exploiting new opportunities through appropriate Policies, institutions. laws or initiatives.

Current goals & problems

2.       Definition of national and States’ goals (development, growth, employment opportunities, poverty elimination, public health, basic education & skills) in operational terms, analyzing current national, regional and States’ problems and searching for approaches/methods that have succeeded in achieving goals most efficiently (in India or in other countries). The analysis would relate to policies, institutions or programs and the most effective mix of government, private and non-profit/non-govt. organizations (including PPPP).  Disseminating “best practices” to States and red flagging methods and approaches that have failed.

Past Review & Learning

3.       Reviewing and analyzing Central and State Government institutions, policies, programs and projects and analyzing the reasons for their successes and failures.  Drawing lessons for the future and devising ways to improve current & future programs and projects.

Resources: Optimal Use

4.       Policies and institutional structure for the optimal use of natural resources (land, minerals, oil, water, energy) and human resources (job skills & education, public health).  Policies and institutional structure to promote efficient and effective use of capital resources (domestic and foreign, government, market & NGOs-NPOs).  The institute on Public Private Partnership, “3P India” proposed in the budget, could be a part of the BVNS/IDPI or an affiliated institute.

State, Federal

5.        Interact with States Governments & experts working on States’ problems, with a view to identifying issues and problems that they are seeking answers for. Searching for solutions among other States and globally. Working with States to adapt, operationalize these solutions. For this purpose it could carry out case studies or pilot projects in States.  Seek the active participation of States to meet national development goals. Devising mechanisms & institutional structures to stimulate and sustain States active participation on a continuing basis.

Advisory Bodies/Mission Groups

     The Institute would set up a number of Advisory Boards on complex issues (e.g. climate change) or issues that required detailed knowledge or expertise (e.g. legal ambiguities in tax laws, PPPs or supply contracts) or which required continuous interaction (creation employment opportunities, “Ease of doing business”). The institute could also appoint task specific advisory committees (e.g. defining the parameters of a “smart city”, propagating specific policy conclusions). 

The new Institute should immediately set up the following groups for translating the PM’s vision, as suggested in the BJP manifesto and the subsequent statements of the Government (Presidents’ address to new Parliament, Budget Speech of FM & Independence day address of PM) into concrete policies, institutional changes and programs.

Digital India Group

      This group would prepare a vision, an integrated Plan and related polices for extending the broadband network to every corner of the country and using it to provide E-gram, e-governance solutions, E-education, E-skilling, E-Public health, E-medicine, E -commerce related to agriculture, etc.

Swach Bharat Group

    This group would prepare national approach to Sewage, Sanitation, Public Toilets, Water pollution and the creation of a solid waste disposal grid and a waste treatment and disposal grid. It would prepare a plan for creating a clean India with the participation of all citizens of India, including issues like public education on health and cleanliness and using the advertising industry and other private groups to promote cleanliness.

Smart Cities, 100 Cities Group

    New Cities/smart cities to create jobs and employment opportunities, efficient use of energy and water, land use planning to minimize transport costs and traffic congestion, integration of public transport, cycling and walking. Cost efficient ways of using technology in a lower middle income country with a population of 1.2 billion. It would also address the issue of why India has slums instead of rental housing for low income people (as in developed countries) and how to change this.

Ease of Doing Business Group

   This group would document the jungle of controls that hamper business and commercial activity and job & employment creation. It would develop comprehensive strategies, legal, regulatory, administrative and political, for cutting oppressive controls and  identify detailed action at every level.

National Water Grid

      This would cover issues  of connectivity of rivers, depletion of underground aquifers, spatial agricultural policies for optimal use and conservation of water, supply of clean drinking water to all citizens. Use of flood plains of monsoon fed and seasonal rivers to store and supply drinking water.  Supply and pricing of water for commercial and industrial use. Use of waterways  for internal transport. Cross border transport and to transit across neighboring countries.

Sagar Mala Project Group

   Use of major and minor ports to promote, international and national trade and commerce, to reduce transport costs and energy used in transport.  Policy and institutional changes needed for achieving objectives(eg in Port Trusts Act and the structure and management of Port Trusts).  Promotion of economic integration of all coastal areas as well as the coast with the hinterland through integrated road-rail-river connectivity.

Public Security Group

   Reexamine all aspects related to public safety security of citizens, particularly that of Women and Children in a changing social context of greater mobility(from ancestoral village to other rural & urban areas) , the move from joint families to nuclear ones, girls studying at distances from home or in other village/city, greater number of women working outside the home, young men disconnected from family and childhood support structures. Work out legal, judicial, police and other reforms. Develop ideas for community social, sports and activities and community structures and institutions to support them.

Institutional Structure

    A radically different structure can be envisaged in which there would not be one, but two separate institutions.

        I.            A Development Policy Institute combining the role of a policy oriented think tank and the role of the Economic Advisory council to PM. Thus the PMEAC could become the Governing Board of the Think Tank and its chairperson the primary economic advisor to PM. This would cover all national issues and problems that the Central Government has to address and decide on.

      II.            An Inter-States Forum which is a re-designed ‘Inter State Council’ with its own research Staff and research departments, dealing with issues on the States list of the Constitution and parts of the Concurrent list that are under States’. This body would have much greater representation from the States, Staff with experience in States and Experts on State level issues.

Appendix: Conventional Structure?

If a conventional approach is adopted, the institutional structure could be as follows: The Institute would be managed by a Deputy Chairman/Managing Director/CEO and overseen by a governing board, with PM as Chairmen and the DC/MD/CEO as ex-officio member-secretary.  Members heading the three to five overarching departments of the BVNS/IDPI(below) would also be ex-officio members of the board of governors.  The governing board would have representation of Chief Ministers/State Ministers and Central ministers (current of former). A dynamic former CM/State minister could head the Department dealing with States’ issues. It could also have a couple of active business persons, familiar with the difficulties of investment, job/employment creation and production as members. The rest would be macro-economic, sector, industry or other experts, who head the departments of the institute. 

    The organization below the board level, managed by the DC/MD/CEO could have either of the following structures:

A.      Three major departments, headed by Board Member/Directors, corresponding to the three broad objectives outlined under the “Scope” section: (a) A department corresponding to a high quality “think tank”, (b) A policy planning department for analyzing & suggesting Central Govt.  policies, institutions and resource allocations and assisting Central Govt Ministries in “operational planning”[iii] (c) A department dealing with Issues of interest to the State, particularly those on the States list and parts of the Concurrent list.  Each of these could have a number of divisions dealing with different subjects/issues/goals (eg Transport, Energy, Sanitation & Cleanliness).  This may require a seven person governing board.

B.      Five departments headed by Board Member-directors corresponding to the five mandates:  (1) Future challenges and opportunities, (2) Present objectives and problems, (3) Evaluation of Past experiences, successes and failures, and lessons thereof. (4) Optimal use of the Nation’s natural and human resources, and (5) Strengthening the Federal Structure and greater participation of States in development.  This may require a nine or ten person governing board.

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A version of this article appeared under the banner, “What the Modi Government’s Mandate for the New Think Tank May Include,” on 23^rd August 2014 at   http://ow.ly/ADChr .

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[i] It is assumed that the Economic Advisory Council to PM (PMEAC) will be folded into the new Institution, while the “Inter State Council” would continue, perhaps in a modified form!

[ii] Arvind Virmani, “Planning for Results: Public Accountability  Information System,” Working Paper No. 1/2007-PC, Planning Commission, March 2007. http://planningcommission.nic.in/reports/wrkpapers/rpwpf.htm

[iii] Virmani (2007) op cit.