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Saturday, February 27, 2016

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 .


[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

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