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 3^rd 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.

 

Indian Economy: 2nd wave & after

 

 It is useful to compare India's second wave with the first wave, in analyzing its effect on the Indian economy. However, this analysis is incomplete, unless there is a better understanding of the speed and severity of the 2nd wave relative to the first (see previous blogs). It also requires an understanding of Pandemic and lock-down economics (see research & policy papers at foundation for economic growth and welfare (EGROW) website).

 This note contains a preliminary analysis based on available data. Among the elements of this analysis is the comparison of Lockdowns/restrictions, the differential impact  of  pandemic on the three aggregates, essential goods, manufacturing, mining & construction & contact services, the unemployment comparisons, Income and wealth effects and their effect on private consumption, effect of skilled labor shortage and supply chain disruptions on inflation. The note concludes with implications for monetary and fiscal policy.

1.       2020 Lockdown started on 20th March and shut down 60% of Indian economy, in 2021, lockdowns were narrower, State/District specific, starting in April. The lockdown arithmetic therefor suggests smaller effect of lock down on economy.

2.       Essential goods were exempted from both lockdowns, so there is little reason to expect agriculture to be affected very differently, except for two exogenous. One global and Indian agricultural prices are much higher than a year ago, so this will have a positive effect on agriculture sector despite some increase in input prices as terms of trade are clearly better. The second is the rise real wages following, years of falling or stationary real wages. Both are a positive for rural economy in FY22. I think too much weight is being given to Covid wave effect on rural economy relative to urban economy. The fact that second wave has 4 times the cases of first wave, means that direct effects on health will be 4x what they were last time. Overall, the latter effect is short term while the former two are medium term, so agriculture will do better that in 1st wave, after an initial hiccup.

3.       Conventional wisdom is that the Covid 2nd wave will follow the same pattern as the first wave. Our analysis shows that the second wave was faster and much more virulent in terms of numbers of cases and deaths and will therefore subside much more sharply and quickly than the first wave. There will therefore be an upside surprise to the economy.

4.        In first wave, unemployment rose to 8.8% in March, 23.5% in April & May and improving to 11.6% June as lockdown was eased. In 2nd wave, Unemployment rate rose from 6.5% in March to 8% in April and further to 11.8%. This is half of first wave peak, so direct effect of lockdown on production is about half of first wave! The ratio of the urban to rural unemployment rate in the second wave is 1.4 compared to 1.1 in the first wave. Urban areas have been hit harder than rural areas contrary to the assumption of most analysts. This is to be expected from our research on the State wise spread of the mutated virus causing the second wave, which showed that states with higher urbanization have been worse affected than less urbanized states.

5.       Income effect: Post lockdown the Manufacturing-Mining-Construction sectors recovered rapidly after supply chains disruptions were addressed, as our research had predicted. Given the geographically and sector-ally more limited nature of the current restrictions/lockdown, supply chain disruptions are more limited in India, and there is recent experience of dealing with them, the recovery will be as, if not more, rapid. Supply chain disruptions are more widespread across the world and the consequent rise in oil prices will have a negative effect on national income & growth, but as usual this  will be partly offset by higher exports and remittances.

6.       Contact services (hospitality, entertainment, tourism) would take much longer to recover, because of the reality and the fears of infection, particularly in indoor venues and badly ventilated locations. Govts need to incentivize improved ventilation in outdoor venues as well as indoor public spaces & factories & offices, installation of high-quality air filters in air-conditioned halls & buildings and Ultra-Violet (UV) ceiling lights in crowded, small rooms (pubs, bathrooms, kitchens, restraints).

7.       Wealth effect(negative): Saving, Consumption: The first wave eliminated the meagre accumulated savings of the poor. The second wave has done the same for many lower middle-income households as well as the middle-income families affected by disease and death. The precautionary savings are therefore expected by many analysts to increase, post second wave, and thus delay the recovery of private consumption. There are however three other factors one negative and two positive that need to be considered to derive the net effect on consumption.

8.       Consumer Expectations: The consumer confidence incidence (RBI survey) fell from 86 in March 2020 to a low of 50 in September 2020 and had recovered to 55.5 by Jan 2021 & declined to 53.1 in March 2021. This will be a negative factor in the speed of recovery of private consumption after lockdown. Interestingly, the gap between the current and future expectations index has more than doubled since pre-covid days and may result in a fast reversion in current expectations, once it starts. Institutions providing consumer credit (e.g. NBFCs) are in a much healthier position than they were 18 months ago, while credit demand from corporations for bank credit is low, given higher internal savings. So, consumer credit will aid recovery. There was no vaccination in sight through much of the first wave. There are now several approved vaccines, including two produced in India, with several more on the way.  The planning & management problems which have slowed vaccination are manageable and will be solved. So, the medium-term income growth trend is much more positive than during the first wave. Both these factors will offset the desire for more precautionary savings.

9.       Skilled labor effect: In the second wave, Severe Covid cases and deaths are four times that in the first, and the urban middle class has been more heavily impacted. It is therefore possible that preexisting shortages of skilled labor will be accentuated, negatively affecting the speed of recovery of industry & services for which demand recovery is quick. Govt should quickly implement the changes in the Apprentice ship act announced in budget, and to improve training of semi-skilled workers in cooperation with industry.

10.   Across the World (including India) supply chain disruptions and short-term adjustments in demand (e.g. diversion of demand from contact services to goods, because of contagion fears) have led to inflationary pressures in particular goods or sets of goods. These pressures are temporary and will subside as Covid contagion fears decline and demand patterns normalize in 2021. The long-term increase in Govt infrastructure investment in USA is a different aspect, whose effect on inflation needs to be assessed separately.

11.   Overall, GDP growth in Q1 of FY22 will be lower than projected in March 2021, and investment revival delayed by one quarter. As consumption depends on expected income, which is clearly on an upward trajectory in H1 of FY22 as against the downward trajectory in H1 of FY21, this factor will offset the impulse to increased precautionary savings, from Q2 of FY22. Recovery will be much faster in Q2 than anticipated by forecasters. FY 2022 GDP growth will remain within the range of 10% +/- 1.5%, even though the downside risk appears much higher at this point, than it was in February 2021.

12.   Fiscal deficits are being driven by GDP linked revenue fluctuations, which act as automatic stabilizers. The best fiscal stimulus that Govt can provide is revenue neutral or revenue negative tax reform, by accelerating simplification of GST towards a single rate (15%) for 75% of G&S, introducing a new direct code. Speedy revival of construction intensive infrastructure projects will help normalization of total employment. Incentives for air filters & UV lights and investment/production/distribution of Covid vaccines, will help reduce the chances of a third wave, reduce fears of contagion and restore consumer confidence.  Govt can speed the recovery, by implementing the apprenticeship act reform announced in budget and completing Ease of compliance of Labor, tax & financial laws & rules, which it has previously promised. Central govt should also review the laws, rules and regulations affecting start-ups and tech companies to make them competitive with other locations like Singapore. State governments must do their part in simplifying the jungle of controls and regulations imposed by them, and speeding up the vaccination process.

13.    Monetary policy is and has been on the right trajectory since the start of the pandemic and should continue the same path.  Only fine tuning of credit policy or govt security markets may be needed.

Socio-Spatial Distancing: Alternative to Lockdown

   Estimates made by Karan Bhasin and I suggest that the current lock-down (till April 15),  will cost 2.8% of GDP, over and above what it would be, given the effects of the Pandemic on Contact Sectors, particularly Hospitality, Airlines, Travel & Tourism.  If the lock-down is extended to end of April the cost goes up to 5% of GDP and if its extended to end May, the additional cost will be 9% of GDP.  This doesn’t include the bankruptcy cost of all the MSMEs, Tiny enterprises, Restaurants, Shops(retail & wholesale), which will go bankrupt because of inability to (a) lower wages or fire workers, (b) pay rent on premises and get evicted, and inability to repay loans.

    The mean Infection Rate from COVID19/Corona Virus 2 is estimated by author to be 0.2% of population and the mean Death rate is 2.2% of Infected cases, as of March 29^th, 2020. The maximum Infection rate in any country in World today is 0.33% of population (0.6mi) in tiny Luxembourg. That is 1/3 of 1%. The next highest rate is 0.26% of population (0.4 mi) in even tinier Iceland. The maximum death rates per infected cases is 11% in Italy where an overwhelming majority were over 60 years of age with other medical conditions. The death rate in Italy for infected people under 50 years is ~2% and this reduces towards 1% if they don’t have another medical problem. Non peer-reviewed research suggests that overall rate in Italy could be lower.[1]

    It is therefore essential to explore intermediate possibilities between complete National lock-down and normal activity.   One such proposal is outlined below for consideration. It has the following elements:

1. Nationwide Ban on assembly of more than 5 people in any Public place, including religious gatherings, should continue till end June. Family of 5 should be allowed on roads, parks & open air public spaces, as long as they are all wearing masks and keep 1-3 m distance from others.
2. International Travel Ban (till 31/6/31): No international travel allowed by air, sea or road, except for those stranded away from home. Those allowed to travel for compassionate reasons, must be properly tested before being allowed to travel in or out of country.
3. Severely affected Districts may have to continue with lock-down or quarantines till the infected cases have clearly peaked (with exemption for Essential Goods and services).
4. Wearing of Masks must be made compulsory for all workers (including household workers) and all individuals outside the home. There are three broad Quality of Masks; N95 masks are needed only by doctors & those handling SARS Corona Virus 2 (COVID) cases. Surgical masks are necessary only for Health workers. Lowest quality masks are acceptable for the general public and can easily be manufactured in rural areas, villages and even at home.
5. Factories, Mines, & Agriculture & allied production & trade and Non-contact Services can resume with compulsory Mask wearing. SocioSpatial distancing must be maintained to the extent possible in all Work Places. Establishment owners and workers would be liable to fines if masks are not worn.  Services which require Ques (eg Govt/Public Services, NGO Distribution of free food), must make arrangements for SocioSpatial distancing in such Ques. 
6. Public Transport is essential for going to work. One seat must be empty between people, testing with thermal sensor before entry (<100.4 deg) of terminal/transport, compulsory wearing of masks. All those over 60 years old can be allowed to travel on compassionate grounds if they don't have any other medical condition, have tested negative on formal test and need to travel to work. Work related travel must be opened first, while Domestic Tourist travel may be restricted for some time and resumed gradually to ensure lower density on Airlines, Trains and Buses and at Tourist spots, to a level at which SocioSpatial distancing is a realistic possibility.
7. Hotels, Restaurants: All govt restrictions on, and fees for, home delivery from these establishments, must be suspended for the duration of these restrictions. Restaurants with attached gardens or terraces could be allowed to serve customers, with min 3 m distance between tables and strict social distancing among patrons. Internal service could be limited to 1/4th of licensed capacity to enforce 3 m spacing between tables, provided air-conditioned premises use higher quality filters to minimize re-circulation of bacteria/virus for duration. Compulsory temp check of both workers & customers before entry into premises (+ other simple checks). Patrons must wear masks when not seated and eating/drinking at table.
8. Malls & Large Retail Markets, Cinemas, House of Worship, Conference/Seminar Venues etc.: May have to be kept closed for several months and then opened gradually with appropriate safeguards and for younger, healthier folks with no other medical conditions. Small local markets, repair shops and shops selling consumables & non-durable could be allowed to open first.
9. Urban slums & clusters of one room tenements need special measures; Even with best of intentions, it's very difficult to maintain clean hands, clean bathrooms and SocioSpatial distancing in Urban Slum clusters. One possibility is to shift those with rural/village home base, back to these villages for 3 months, after testing & ensuring they have masks.
10. Infected persons: Mild cases must be home quarantined, modest cases in special facilities (including identified hotels) and serious cases sent to hospital. To ensure irresponsible people do not break Home quarantine they can either be Monitored through (a) a mobile app, with random physical checking to ensure they don't go out, leaving mobile home; or (b) An electronic anklet/ wrist band which sends warning if person moves out of range of locator inside house. If house has older people (>55yrs), infected person must either stay away from them or wear a mask in their vicinity.
11. Older people above 50/55/60 years of age with other medical conditions, are most vulnerable to Corona Virus infection and mortality. They must be advised to stay at home and insist that anyone coming from outside wear a mask. They must also shun Hotels, Restaurants, Malls, retail markets and Public transport. Whether they should be compulsorily excluded from these places, is a difficult decision.
12. Anyone caught violating the mask wearing regulations (listed above), should be quarantined at home for 1 week (say); The quarantine period should increase progressively for subsequent violations.

      Early announcement of these measures is essential for all concerned to start Planning for these measures immediately (Production & distribution of Masks, thermal scanners, test kits, protective clothing for health workers, ventilators).

      During a Lockdown it’s impossible to aid the poor through public works and production related subsidies. Even when Lock down is lifted it is difficult given stringent Socio-spatial distancing requirements. A mobile based Direct Cash transfer (DCT) system is ideal for getting transfers and subsidies to the vulnerable sections of the population. It is best for rural areas (70% of population) because people are dispersed and distance to Bank Branches and ATMs is large. It is also the best mechanism for migrants from rural to Urban areas. Women with minor children should get transfers separate from their spouses. This requires a mobile loaded with a Payment App, Aadhar & Voter ID numbers and few work/residence & family details. Rural/slum Women who don't have mobiles, should be given free preloaded ones.

     There are no easy solutions given the uncertainty surrounding the Pandemic, but policy must be based on data-based analysis. All feasible alternatives must be carefully considered, keeping in mind administrative weakness and limitations, variations across States/Districts, Rural/Urban dimensions and Sections of society.

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Source:  http://dravirmani.blogspot.com/2020/04/socio-spatial-distancing-alternative-to.html

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[1] ( https://www.medrxiv.org/content/10.1101/2020.03.28.20046243v1 .