Economic Survey 2015-16: Some Issues

Growth and Jobs

Q1: The survey pegs GDP growth at 7-7.75 per cent for the coming year, which is broadly in the range of 7.6 per cent expected in the current financial year. Do you think the Survey is conservative this time, after overestimating growth in the past many years?

A1: The mid-term review late in 2015, put the estimate of growth rate for 2015-16 at 7 to 7.5%. This means that the Economic Survey predicts a rise of 0.25% points at the top end. My own forecast of growth is an acceleration of about 0.2% points in 2016-17 over the growth rate that we get for full year 2015-16 (which is projected by CSO at 7.6%).

Q2: Do you agree with the survey observation that -- "India being in the midway through its demographic dividend is providing an economic growth in terms of the working age share of the population. Hence to exploit this dividend and meet the growing aspiration of those entering the labor force, India’s Economy needs to create enough “good jobs”- jobs that are safe and pay well, and encourage firms and workers to improve skills and productivity. It may be noted that of the 10.5 million new jobs creative between 1989 and 2010, only 3.7 million-about 35 percent – were in the formal sector. In this period total establishments were increased by 4.2 million. However jobs informal sector have come down possibly due to increased use of contract labour. Thus, the challenge of creating the good jobs of India could be seen as a challenge of creating more formal sector jobs which also guarantee workers protection." 

A2: We have long known that formal sector jobs are on average of higher quality than informal employment. Many of us have also argued that many labour policies that restrict flexibility of labor in the formal sector, including to reduce workers when there is no product demand actually end up reducing the generation of new formal sector jobs. The survey updates us on this issue.

Fiscal Deficit, Subsidies

Q3:  The survey finds that  meeting fiscal deficit  target of 3.5 per cent would be challenging due to OROP  and VII th pay commission recommendations. It suggests the time is right for a review of medium term fiscal frame work. It adds that there are new developments in, and approaches to, medium term fiscal frameworks around the world from which India can usefully learn. Your take on the issue and on whether the Budget should defer fiscal consolidation plan for another year?

A3: The formal FRBM technically expired in 2008, but has been informally maintained since then. A comprehensive review, updation and legal reiteration of the framework is overdue. In my view the first best policy would be to stick to fiscal targets for 2016-17 and reduce monetary policy (Repo ) rates by 75 BPS. As the latter is unlikely to happen given the the financial markets focus on nominal (instead of real) rates, the second best policy may be to postpone FD targets, while holding on to Revenue Deficit targets

Q4:  The survey says Rs 100,000 crore subsidies are going to the better-off merely on account of 6 commodities like gold, LPG, Kerosene, Electricity, railway fares, aviation and turbine fuel (ATF) plus the Small Savings Scheme. This represents substantial leakage from the Government’s kitty, and an opportunity foregone to help the truly deserving. Do  you agree? What reforms would you suggest?

A4: As I haven't done my own estimate, I have nothing to add to the economic survey's estimate. Some of us have been arguing for decades that subsidies should be targeted on the poor and deserving and channeled in a way that minimizes misdirection to the better off, bureaucratic expenditures & corruption. This was my reason for suggesting a UID based multi application smart card that would bring all subsidies under one roof(so to say).[i] I have also subsequently suggested allowing a mobile based cash payment system, that connects the cell number to the UID. A DBT system using bank accounts is an alternative which has been adopted and also serve the same purpose given spread of bank accounts to rural areas. JAM is an attempt to incorporate Mobiles into the system

 Q5:  The survey emphasizes that the Government budgeted Rs. 73,000 crore- about 0.5 per cent of GDP- on fertilizer subsidies in 2015-16. Nearly 70 per cent of this amount was allocated to urea, the most commonly used fertilizer, making it the largest subsidy after food. Distortions in urea are the result of multiple regulations. These distortions feed upon each other, and together create an environment that leads to a series of adverse outcomes.  Your views?

A5: I have myself served on several committees that recommended reform of the Urea production and  subsidy system. Unfortunately the vested interests are too strong to be easily disrupted. In the past, the share of the subsidy going to producers (vs farmers) has fluctuated between 100% to 0%. The current period when the prices of oil refinery products used in Urea production are low, provides a good opportunity for complete decontrol combined with targeted subsidy through bank accounts, mobiles or a Kisan credit card.

Social Security

Q6:  The survey also says introduction of DBT in LPG and MGNREGS have proved that use of JAM can considerably reduce leakages, reduce idle funds, lower corruption and improve ease of doing business with the government. Despite huge improvements in financial inclusion due to Jan Dhan, JAM Preparedness indicators suggest that there is still long way to go. Your take?

A6: The key common element is the use of the UID/Adhar number and a payment channel that is accessible to beneficiaries. The opening of bank accounts for the poor has definitely facilitated the use of bank accounts for making direct payments. I have long argued that the use of mobile accounts as a way of transferring funds would be a better channel because its reach among the poor is much deeper. However, forcing the administrators to open accounts for the poor before making payment can accelerate the spread of accounts.

Q7:  The survey says providing food security entails making food available at affordable prices at all times, without interruptions. In order to provide food security, in the current agriculture scenario, India has to focus on supplies which are timely and uninterrupted and affordable for the poor. Your views on that?

A7: I first analysed this issue in a 2002 paper & suggested a three tier approach depending on the degree of competitive availability of food supply shops.[ii] In urban areas where there competitive food supply is available, we should switch completely to some form of food credit cards. In remote or hilly areas where there may not be many suppliers we should continue with the full PDS system. In the other in between areas a combination of food stamps/food credit card and competing PDS outlets could be used.

Q8:  There are some new chapters in the Survey such  as Mother and Child. What do you think  of those?

A8: In 2007 paper on Child Nutrition I argued that Sewage, Sanitation and Public toilets were the most important cause of this problem in India.[iii]  I am therefore very happy that this problem is receiving attention.  However, I think more research needs to be done to determine what are the other critical elements of the problems and consequently the most effective solutions

Trade & Tariffs

Q9:  The survey suggests that India should resist calls to seek recourse in the protectionist measures, especially in relation to items that could undermine the competitiveness of downstream firms and industries. It also suggests that India should strengthen procedures that allow WTO-consistent and hence legitimate actions against dumping (anti-dumping), subsidization (countervailing duties), and surges in imports (safeguard measures) to be taken expeditiously and effectively. Your take?

A9: I agree completely with this suggestion with one caveat. China is a non-market economy which is exporting deflation through its State owned and Party sponsered enterprises. So in the short term (say during 2016) other temporary protective measures may be justified.

Q10  It  also  says higher tariff is coming in the way of benefits from FTAs. Do you agree?

A10: What the CEA said was that the imports of India (& its FTA partners) have increased in proportion to the reduction in tariffs resulting from the FTA. So for example India's imports from ASEAN have gone up more that than vice versa, because India with higher tariffs, reduced them more in per cent points.

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A version of this appeared in the Business Standard of Saturday 27th March, under the banner, "Vested Interests too strong to Reform Urea Subsidy" http://www.business-standard.com/budget/article/vested-interests-too-strong-to-reform-urea-subsidy-arvind-virmani-116022700010_1.html .

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[i]  https://sites.google.com/site/chintan1997reg/institutional-reform/uid 

[ii]  Virmani, Arvind and  P. V. Rajeev, “Excess Food Stocks, PDS and Procurement Policy,” Planning Commission Working Paper No. 5/2002PC, December 2001.

[iii]https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxkcmFydmluZHZpcm1hbml8Z3g6NzlkYzBkYzRlNzJlYTQxOA

China: Hard or Soft Landing?

  Pick up any article on China since mid-2015 and it either begins or ends with , "We don't expect a hard landing in China." Same goes for statements of globally feted wise man and prominent China analysts on TV.  One also often hears statements that, "We don't expect China's economy to collapse." As no one asked (whether China's economy would collapse) nor has anyone publicly  said that it would, one wonders about the motivation for this unsolicited remark?  Could be that the speakers business interests in China demand such a statement to remain on the right side of the CCP?

  As none of the writers or speakers define "hard landing", it is a flexible term whose definition has changed over the last year and can continue to be changed without embarrassment to the reputation of this prominent personalities and experts.  With the exception of a few analysts who have been predicting (for 15 years) a growth slowdown during the current decade and a handful who started predicting it after the Global Financial Crisis (GFC) of 2008, most predicted a "soft landing".  "Soft landing" meant a gradual slowdown of China's growth trend from the 10%% that prevailed for about 30 years to a trend growth of about 8% (a decline of 20%).  However, since 2009 a handful of analysts realised that China's credit expansion was fuelling a debt bubble that was a substituting for essential policy/structural reform and disguising the underlying decline in the growth trend.  The longer this process continued, the greater would be the probability of growth falling further and more sharply below 8%. Since then the winding down of US QE, the sharp decline in commodity and oil prices and the China's policy actions in August 2015 have reduced China's trend growth to around 6%.

  A "hard landing" is now underway. Government is politically unable and/or unwilling to make the fundamental structural reforms to reduce controls that may reduce or eliminate the CCPs monopoly of politico-economic power. It appears poised to use debt financed expansion in government expenditure and government guaranteed expansion of debt financed infrastructure investment, to disguise this fall in growth trend from 8% to 6%. As with the previous experiment from 2010 to 2014, this cannot work for more than three years, particularly given the additional problem of capital outflows and the consequent difficulty of managing the trilemma.  The longer macro controls and fiscal-monetary policy are used to suppress the negative effects of unchanged growth model/growth policy, the larger the likely growth deceleration. Thus we predict another sharp drop in China's trend growth rate in about 3 years to below 4.5%.

   What about the global effects of China's growth decline. In my judgment most of the real effects of the growth decline from 10% to 6% are already absorbed into the World economy. What is creating greater turmoil and uncertainly  in the World economy is the unwillingness and/or inability of China analysts and China buffs to understand and accept China's political and economic reality(as outlined above).  New uncertainty will however be created by China's efforts to keep the trend growth rate from falling from 6% to 4%, as it will continue to create excess capacity in tradable undifferentiated manufactures and other tradable goods, export deflation to the World and put pressure on non-Chinese producers of these goods as well as on banks and financial institutions that have lent to them.

Please see following pages for more detailed articles & analysis: http://dravirmani.blogspot.in/p/blog-page_8147.html and https://sites.google.com/site/drarvindvirmani/home/china-pakistan

Asian Infrastructure Investment Bank (AIIB): Q & A

Q1. Do you think India's decision to put in $ 8 billion -- and become the  second largest shareholder after China -- makes sense?

 A1: As with any company the owned equity capital is not the same as paid up  capital. Thus $8bi is the risk capital committed by India. The amount put  into the account of AIIB will be much less. Being the second largest shareholder gives some influence in determining the nature & amount of loans to infrastructure projects of interest to India, both within India and in other countries which have an overlap of interests with us or similarity of  approach to infrastructure lending.

Q2. From a lay person's point of view -- why doesn't India spend the $ 8  billion on infrastructure projects at home? What would be the added benefit of putting this money in and accessing it through the bank's pool?

 A2: As indicated in A1, the actual money spent by us initially will be a fraction of $8bi committed. The nature of multinational banks is such that actual lending depends on borrowed funds, which are related both to the risk capital committed by all shareholders and the credibility of the institution in Global capital markets. Thus the funds available to the AIIB will be a multiple of the outlays. The loans we get will depend on the proportion of viable projects that are put up to the bank, ie potentially much more loans than the amount we put in equity.

 Q3. China is by far the biggest shareholder, with $ 29.7 billion (out of $ 100 billion capital). According to the voting structure, this will give them a strong say in most decisions (although their influence has been a little diluted in the negotiations process, as voting doesn't just reflect your shareholding but also takes into account your founding member status etc.) Is this unavoidable in a financial institution -- that the majority stakeholder dominates? Will this be a problem for India?

 A3: There is no better way to run a global institution than on basis of voting based on equity shares.  Just as the ADB is a Japanese run bank with US having a significant influence, the AIIB will be a Chinese run Bank. However, given the different relationship between US & Japan, our influence in the AIIB cannot match that of US in ADB. However, India's influence will
 depend on getting support for other share holders in pushing rules and procedures for lending that are seen as objective and rational, and enhance the credibility of AIIB on international debt markets where it will have to raise resources.

 Q4. The bank's officials in Beijing say it aims to position itself differently from the World Bank and ADB by focusing on infrastructure projects -- no poverty reduction/social welfare programs etc. Is this a good idea?

 A4: As the name says clearly this is a bank for infrastructure lending, where there is the greatest gap between needs-demand for loans and supply of loans. These are the sectors that require a lot more capital. This is something we had analysed and focussed, on in proposing the New Development Bank in 2012, when I was at the IMF. The World Bank has been unable to
 fulfill the demand for infrastructure loans as it DC shareholders didnt want to increase the authorized capital. Consequently, it has increasingly focussed on the soft sectors requires less capital investment and tried to substitute "knowledge" for even the lower capital needed.

 Q5. The process of putting out its environmental framework has been criticised -- that this was done in six weeks, that the documents were entirely in English, and that diverse views, ncluding of civil society groups in member countries, were not considered. The bank says the time period and framework meet international standards and follow the standards set by other multilateral banks. There is a fear that since China's shadow on this bank is rather large, it will follow China's (poor) standards when it comes to environment and human rights. Do you think this fear is well-founded?

 A5: China is likely to accept the national environmental standard prevalent in the country in which the project is located, rather than imposing any uniform standards.  To these national standards are below ADB or World Bank standards, the fear is justified.

Written (email) interview to Ananth Krishnan of India Today, Beijing on January 16, 2016.