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

INDIA and WTO: Distinguishing GeoPolitics From Economics

Introduction

    At the start of the Doha Round of WTO negotiations, I warned against confusing the Economics and GeoPolitics of WTO negotiations [Virmani(2003)]. I quote extensively from this note (below) because it remains relevant today, in the context of the decision of the Indian Government to make approval of the agreement of “Trade Facilitation” contingent on a commitment to revise the agreement on Food subsidies.  I conclude with an economic analysis of protection and subsidies that clarifies the economic issues and puts them in proper perspective

Geo-Politics Of Negotiations

 “Economic theory and empirical analysis as understood and accepted by academics in the USA, Europe and the emerging market economies, says that removal of controls, restrictions and obstacles to Imports will by and large lead to an increase in the welfare of both the importing and the exporting countries.  Then why is it that each country ignores what its own academics tell it with respect to policy reforms and focuses mostly on the import restrictions imposed by other countries on its export items (whether these are goods, services or factors)?  The answer is politics.  In every country, politics imposes a cost on the nation as a whole while benefiting some sub-set of individuals.  The geopolitics of negotiations is motivated by a desire to transfer some of the national costs of policy distortions onto other countries, while retaining as much of the benefits for sub-groups within the country.  A good example of this from the rich countries is the multi-fibre agreement (MFA).

One implication of this strategic approach to multilateral economic rules is that there can be an apparent dichotomy between our domestic reform intentions and actions and our public posture and negotiating stance at WTO.  Economic analysis must drive our (autonomous) reforms in the external sector irrespective of what happens (or does not happen) at WTO.  That is, liberalisation is beneficial to the country and must continue independent of the WTO and at a pace and timing of our choice.  Economic analysis also provides us with the true costs and benefits to our citizens, of specific policy changes.  This forms the basis of our evaluation of what rules we should be willing to accept in the negotiations- those resulting in policy change that have a higher benefit to us in any case.  Conversely it also determines which changes we should resist conceding (those that have higher cost).  The public position that we take at the negotiation need not however lay all this out publicly for other countries. In the tactics and strategy of negotiations, politics/geo-politics will inevitably play a substantial role.” Virmani(2003)

Trade Facilitation

“Trade facilitation is the global equivalent of the Indian mantra,  ‘red tape and bureaucracy’ in international trade (import-export) system.  Trade facilitation would directly address this problem on which there is a national consensus (with the exception of the customs bureaucracy).”

“From the perspective of politics/geo-politics therefore, it is quite rational for India to concede to others on any of the Singapore issues if and only if we gain concessions and benefits in other areas. In other words we must use these as counters to bargain for what would not be available to us otherwise.  It should be remembered however that these bargains are sometimes informal, on the sidelines of the formal negotiations or a meeting in another capital.” Virmani(2003)

WTO Negotiations on Agriculture

                “Agriculture is an area where the economic arguments of rich countries are very weak (because of high subsidies) while those of poor countries are relatively strong.  It is quite clear that many countries in the EU and to a lesser extent the USA are hostage to agriculture producers who constitute a small fraction of their population.  On our side a large proportion of the population is dependent on agriculture, lives in rural areas, is very poor and less educated and has little access to up to date and relevant knowledge.  This puts their lively hood and sometimes even their survival at risk from exogenous shocks.  Over the last few years we have also raised the import duties on a number of agricultural products above the peak rate.[1] The inter-ministerial expert group argued that in the interest of economic efficiency, these should be brought down to the peak rate, with an intermediate step of two times the peak rate.  In the meanwhile, we should carry out a thorough de-control and reform of the agriculture, agro-processing and food retail sectors (as detailed in a Planning commission working paper).[2]

As far as the WTO negotiations are concerned, however, offence is the best form of defence.  We should marshal the global NGOs to expose the hypocrisy of the rich countries vis-à-vis free trade and verbal concern for the poor (while giving subsidies to rich farmers that destroy poor agriculturists jobs).  The outcome of this will either be a stalemate (both rich and poor countries retain their preferred distortions) or less likely a trade-off relating to (one or more of) the Singapore issues.  A commitment to reduce rich country agricultural subsidies in return for a reduction in (bound) tariff rates on agricultural goods in poor countries the third but least likely possibility.” Virmani (2003)

Economics Of Food Subsidy

    In several articles during the last year I opposed the Food Security Bill on the grounds that it was barking up the wrong tree. As I showed the real problem is child malnutrition and this requires improved sanitation not more food.[i]  However, we now have the food security Act and the Govt. has to implement it as it stands, until it is amended or redirected.  If the pessimistic calculations of the fiscal critics of the Act come true, implementation will involve huge subsidies. There is a fear in the Indian bureaucracy, that unless the exiting WTO subsidy limits are changed, India could be constantly in the dock at the WTO, having to answer to Global agricultural exporters for domestic subsidies.  To put this fear in perspective, we need to understand the three aspects of Agricultural protection-subsidy:

(1)   Production Subsidies (S_f)

    Subsidies on agricultural inputs given to the farmer, such as fertilizer, electricity and water, that reduce the cost of production. If the subsidy per unit of output is S_{f  =}  s P_d  this will reduce domestic market price from P_d to P_d’ = P_d  - S_{f  =} (1-s) P_d  . The last WTO agreement on Agriculture puts a limit on production subsidies of 10% based on a three year average of prices prevailing at the time the agreement was signed (1986-88). This is clearly outdated and needs to be updated to current/recent price levels. Once this is done a 10% subsidy limit would mean that input subsidies cannot exceed 1.8% of GDP (as GDP from agriculture is about 18% of total GDP).  Current input subsidies are less than 1% of GDP.[ii] To pump even more than this amount into agriculture input subsidies instead of into enhancement of agricultural productivity, would be reflective of very bad agricultural policy.[iii] In the medium term, direct income transfers to poor farmers could eliminate even the need for this level of input subsidy.

(2)   Tariff Protection (t)

      Protection of domestic agricultural/food output through tariffs (and QRs). If the effective tariff rate is t this will mean that with World Price P_w ,  P_d’= (1+t) P_w  or P_d = (1+t) P_w  + S_f  =  [(1+t)/1-s)] P_w  . The effective tariff rates on Wheat and rice have varied between 5% and 10% in the recent past, without exceeding the latter.

     The WTO agreements on tariffs, stipulates that the “actual” tariff rate cannot be higher than the “bound tariff rates”. Even though our peak tariff rate on non-agricultural goods is 10%, the bound rates on agriculture are two to three times the bound rates on non-agriculture imports. Therefore elimination of input subsidies could be offset by raising the import tariffs to t’ = s +  t (1+s), thus keeping the degree of import protection to farmers unchanged.

(3)   Consumer subsidies (S_c)

    Consumer subsidies reduce the price of food paid by the consumer (P_c) below the market price. P_c = P_d’- S_c = (1+t) P_w  - S_c . There are no WTO limits on consumer food subsidies.  However, our consumer subsidies are provided through the FCI which also runs the price support system for farmers. Therefore it is not always clear what part of the subsidy given to FCI is compensation for its inefficiency and corruption and how much is a subsidy to consumers. 

       Further, foreign producers argue that the MSP acts as a subsidy to farmers and must be included in the production subsidy calculation, as the Govt. does not allow foreign agriculture producers to supply FCI imported agricultural produce at the MSP. Though this point is debatable, it could be another issue for putting Government in the dock at the WTO. If food subsidies were provided directly to consumers through a food debit/credit card or a bank account (instead of through FCI), the issue would not arise.

Conclusion

    The Indian Government has stated that it is willing to continue discussion on the Bali issues when the WTO meets again in September after a recess.  It seems to me that a reasonable compromise that meets the domestic political objectives of India as well as of Agricultural exporters such as the USA and Australia is possible before the end of the year given a genuine desire to reach agreement, instead of trying to scapegoat India.

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[1] See references in Planning Commission Working Paper No. 4/2002-PC (April 2002), “Towards a Competitive Economy: VAT and Customs Duty Reform,” by Arvind Virmani, for a list of items (Table 3, p 30) and tariff rates (appendix table).

[2] See Planning Commission Working Paper No. 5/2002-PC (May 2002), “Excess Food Stocks, PDS and Procurement Policy,” by Arvind Virmani and P V Rajeev.

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[i]  See articles & blogs at http://dravirmani.blogspot.in/p/blog-page_25.html and research papers at  https://sites.google.com/site/drarvindvirmani/social-welfare .

[ii] Even if highly questionable items are added from FCIs MSP operation (see below) the total agricultural subsidy is less than 10% of Agricultural GDP.

[iii] For a benchmark of good agricultural policy see,  https://sites.google.com/site/chintan1997reg/economic-policy-and-regulation/agriculture

Malnutrition is Widespread, Hunger is limited & hidden

 Co-authored with Prof Charan Singh, IIMB

Introduction

Malnutrition is a persistent problem in India, though it is often confused with hunger. According to Food and Agriculture Organisation (FAO), about 18 per cent of India’s population was undernourished in 2012. Undernourishment is the main cause of children’s death, and according to UNICEF, India houses one-third of stunted/wasted, termed malnourished, children of the world.

Food and Hunger

According to different rounds of NSSO, the proportion of households in rural areas, getting enough food every day of the year, increased from 94.5 percent in 1993-94 (NSS 50^th round) to 99.0 percent in 2009-10 (66^th round). The proportion of rural households, not getting enough food every day, for some months of the year, declined from 4.2 percent to only 0.9 percent while those not getting for all months of the year, declined from 0.9 percent to 0.2 percent. In the urban areas, where, to begin with, shortage was much less, similar story unfolded. Thus food availability has reached a large segment of the population and the gap between the rural and urban percentages has narrowed appreciably.

In the survey undertaken from July 2009 to June 2010, NSSO reported that percentage of households not perceiving themselves as getting adequate food throughout the year was 2.1 per cent or less in all major states except West Bengal (4.6 percent) and Odisha ((4.0 percent). In urban India, similar percentage was less than 1.3 percent except Madhya Pradesh (1.4 percent). There are a few states in which food inadequacy appears to reach a peak during some months, illustratively, Arunachal (January, February, November and December), Odisha (February), and West Bengal (February). Inadequacy of food is being addressed through the targeted public distribution system (TPDS) and a wide network of fair price shops (Table 1). Therefore, the incidence of food inadequacy has declined in major states like Odisha and West Bengal, as well as across the country from 2004-05 to 2009-10.

Calorie Deficiency

Some organization’s measure hunger in terms of average calorie deficiency relative to a global norm. This Calorie deficit (CD) is an average, which under the assumption that the calorie distribution is normal suggests that people at the lower end of the distribution may be consuming inadequate food. India’s calorie deficit is the highest among the BRICs, but this is not surprising given India’s per capita GDP is the lowest among the BRICs. The primary justification for the Indian PDS system was to ensure that all Indian’s get adequate cereals (calories).  It is widely accepted that the enormous leakages in the PDS need to be plugged and the administrative costs reduced so that higher proportion of the expenditure reaches the intended beneficiaries. 

A sharply focused effort needs to be made to identify the hungry and calorie deficient households, who may be living in remote/hilly areas, or families with dis-functional male heads (drugs, alcoholism), aged or with serious disabilities or female headed households.

Malnutrition: Wasting & Stunting

There is still another persistent but separate issue of ‘malnutrition’ which is the main cause of underweight children. For instance in Rajasthan, in 2004-05, there is no food inadequacy but substantial ‘malnutrition’ as measured by underweight children (Table 2). This could be due to poor sanitation represented by non-existence of sewerage systems, open sewers, toilet facility and access to piped water. A reduction in malnutrition can be achieved by a focused nutritional and public health policy, better drinking water facilities, better drainage and sewerage system, education and public campaign about nutrition, hygiene and disease precaution

Table 1: Government Measures to Address Inadequacy in Food

	No. per 1000 of households getting inadequate food some months of the year 2004-05		No. per 1000 of households getting two square meals everyday only some months of the year 2009-10		Number of Fair price Shops – in ‘000 - As on June 30, 2011	Off take of Rice and Wheat under TPDS  (in lakh Tone) - 2012-2013
State	Rural	Urban	Rural	Urban		BPL	AAY	APL	Total
Andhra Pradesh	6	1	5	1	43.6	10.5	6.4	14.3	31.3
Assam	17	3	12	5	34.0	4.7	2.9	10.6	18.3
Bihar	20	8	11	5	44.4	14.4	10.1	1.8	26.3
Chhattisgarh	26	1	10	0	10.4	4.8	3.0	3.9	11.7
Jharkhand	6	0	2	1	14.3	5.9	3.7	.1	9.7
Karnataka	3	1	1	0	20.5	8.1	4.3	10.5	23.0
Kerala	22	17	5	4	14.5	4.0	2.5	8.2	14.7
Madhya Pradesh	15	4	4	14	20.8	19.6	8.1	7.7	35.5
Odisha	48	4	39	5	28.4	11.7	5.1	4.3	21.2
Punjab	8	2	4	0	0.5	1.0	.5	4.5	6.1
Uttar Pradesh	14	7	6	1	73.4	27.9	16.9	20.7	65.6
West Bengal	106	7	38	8	20.2	15.5	5.8	14.8	36.2
All India			9	3	505.9	179.6	100.1	168.9	448.7

Table 2: Hunger, Poverty and Malnutrition

States	Inadequate food % 2004-05	Poverty % of Population URP 2004-05	Malnutrition under 3 yrs underweight children % 2005-06	Public Health % of Households using piped drinking water 2005-06	Public health% of households access to toilet facility 2005-06
AP	0.5	15.8	36.5	67.8	42.4
Assam	5.0	19.7	40.4	11.6	76.4
Bihar	2.7	41.4	58.4	4.2	25.2
Chhattisgarh	2.2	40.9	52.1	16.8	18.7
Jharkhand	0.6	40.3	59.2	11.3	22.6
Karnataka	0.2	25	41.1	57.4	46.5
Kerala	2.3	15	28.8	24.6	96
MP	1.6	38.3	60.3	25.0	27
Odisha	5.3	46.4	44	10.2	19.3
Punjab	0.7	8.4	27	54.6	70.8
Rajasthan	0.0	22.1	44	45.4	30.8
Uttar Pradesh	1.5	32.8	47.3	10.3	33.1
West Bengal	9	24.7	43.5	27.9	59.5
All-India	1.9	27.5	45.9	42.0	44.5

A version of this article appeared in the 23^rd September, 2013 issue of the Mint (Live Mint) under the banner “Malnutrition not Hunger ails India:  http://www.livemint.com/Opinion/3qMKRqinXT0Dlkl39K5N3M/Malnutrition-not-hunger-ails-India.html