Thursday, March 28, 2024

Measuring progress: Factors that can accelerate GDP growth: Financial Express 28th march 2024

 India, with a per capita income of $2,411, would be classified as a low middle-income country (LMIC). Interestingly, World Bank data shows that the per capita income for Bangladesh was $2,688. Sri Lanka, which is a very fragile economy and was on the verge of bankruptcy a couple of years ago, has a per capita income of $3,354. Something looks out of place, considering that in the past three years India has been the best performing economy in the world with growth rates upwards of 7%, while the rest of the economies had to face sharp challenges in terms of growth. Yet, there is s sharp difference once the GDP numbers are normalised by population.

The simple reason why India does very well when it comes to headline growth, which also results in high GDP numbers, is that there has been overall development across sectors. Services and manufacturing have grown at consistently steady rates, with greater formalisation leading to good overall performance. But the country scores low in terms of per capita indicators due to a very high population of 1.4 billion. This is the reason why even smaller countries like Bangladesh and Sri Lanka score better in relative terms.

Per capita income, in a way, is a measure of average productivity in the economy, which has tended to be low. While population growth has come down well below 1% per annum, there is also a need for accelerated growth of GDP while controlling the population. This is why China, which has around the same population, does much better regarding per capita. However, this has been done over a period of over three decades, with a big push being given by the government on capex. Similar is the case with countries like Argentina and Turkey, where a lower size of population allows the benefit of higher per capita income.

It is against this backdrop that one must look at the targets for a GDP of $5 trillion, $7 trillion, or $10 trillion being relevant. The size of the cake must increase so that with modest growth in population, the per capita income can also increase to higher levels. This is also why having an objective of reaching the status of an upper middle-income country is relevant. There are two issues here—increasing the size of the cake, and improving the quality or productivity of the population so that the former is achieved at an accelerated pace.

India has demonstrated that a nominal growth rate of more than 10% is achievable with real growth of 7% per annum. Assuming that India clocks 11% growth in the next few years, and population growth remains where it is today, we can reach the threshold of $4,095 per capita in the next five years (including FY24). At a conservative level, it can be six years, assuming that there can be slips along the way due to an unfavourable monsoon. If this momentum is maintained for the next 15 years, India can hit the magic number of $12,965 as per capita income, which will make us reach the league of high-income nations. Again, an allowance of another year can be made for any slippages, and the fact that the World Bank’s definition will also adjust to the inflation developments during this period.

Therefore, in the next two decades, which will be up to roughly 2045, with the present momentum being maintained, India can reach the status of a high-income nation. This leads to the second question on the quality of population. While we do talk a lot about demographic dividend, the present matrix does not ensure that the youth are well-educated and are in a position to get jobs which require an acceptable level of skillsets. While there has been a jump in employment in the last few years, it has tended to be concentrated in the construction, retail and delivery industries, which require limited skillsets. There is clearly a need to move over to higher skilled jobs, which will evolve as this pace of growth is maintained.

It must also be remembered that with the widespread use of technology in most industries, there is also a case of labour being replaced. CMIE data shows that for the age group of 15 years and above, there are around 439 million people, of which only 14% are graduates. A graduate degree is not sufficient to get a well-paying job in the private sector. Further, the labour participation rate is around 61% for graduates and 40% for all education groups. Clearly, education is the main challenge for the nation going forward.  

Therefore, there are a few elements that have to fall in place. First, the average product of the population has to increase, and this is where education and skills matter. Second, jobs have to be created at an accelerated pace in sectors which require these skills. These two factors will also help to bring in accelerated GDP growth. The comforting factor is that with the present standard and quality of labour force, the country has done well enough to clock such high GDP growth rates on a sustainable basis. The fulfillment of these two objectives will help add a delta to the growth rate.

Sunday, March 24, 2024

The myth of a powerful finance ministry: Financial Express 24th March 2024

 India’s Finance Ministers: Stumbling into Reforms (1977-1998)

AK Bhattacharya

There is often debate on whether economics drives politics or politics trumps economics. The second volume on Indian finance ministers by AKB, as the author is well known as, helps one decide to some extent. While economics drives politics to an extent, the reverse relation is stronger.

A common observation that pervades both the volumes is that the FM is not an independent person or entity. Often, we tend to say that certain FMs did a better job when presenting budgets relative to others. But what AKB reveals in this book, which is as interesting as the first, is that all decisions are centralised with the prime minister. Any major move that is announced by the FM in the Budget is motivated by the PM. And the FM does not really have a choice even if there is a large amount of discomfort with the decision. Not surprisingly, H.M. Patel could do nothing on demonetisation, which then prime minister Morarji Desai was keen on.

We also get to know that RBI governor KR Puri had to quit in 1977 because he was part of the Indira Gandhi establishment and did not find favour with the new government of Morarji Desai. Hence politics had influence on the appointment and tenure of the RBI governor as far back as the Seventies. Much later in the day, governor RN Malhotra resigned in 1990 ahead of his term, as his advice against high government expenditure to the Yashwant Sinha-led finance ministry was not received favourably.

Another well-known ideological conflict was the one between deputy governor YV Reddy of RBI and FM P Chidambaram. The two differed on the pace of rupee ‘depreciation’ that was invoked by RBI, much to the chagrin of the FM during the Asian crisis in 1997. The FM had said in a peeved manner to the RBI deputy governor: “You will never be forgiven for what you have done!”

We also get to know the interference of Indira Gandhi’s sons in issues pertaining to the FM in this period. R Venkataraman did not get along with Sanjay Gandhi, while Pranab Mukherjee had a hard time with Rajiv Gandhi when they were finance ministers. Therefore, we get the message that being an FM is not easy, even though it is the most powerful ministry as this is where all revenue of the government flows in and decisions are taken on how to spend it.

Interestingly, while a lot of appreciation has gone in for the GST, which was introduced more recently, the germination was from an idea sown three decades earlier. The concept of a value-added tax had its origins in the mid-Eighties when VP Singh was FM. It came in the form of MODVAT or modified value added tax. Further, the fiscal responsibility and budget management that we talk of today had its origins in the Eighties in the form of a long term fiscal policy (LTFP), which though different in scope, had a vision for budgeting. While that could be the high point of VP Singh’s tenure, the low point was when the FM went after the industry for tax evasion. It seemed the FM was after Reliance Industries, which did not go down well with the Rajiv Gandhi government.

These anecdotes make the rather voluminous book an interesting read. There are a lot of facts placed on the table and one can get to know about all the reforms that were brought in under different regimes. Given that the period was quite tumultuous, the book also reveals the undercurrents that drove these reforms, which may not be well known to the reader.

While the normal narrative on economic reforms starts with Manmohan Singh under the leadership of Narasimha Rao, the author points out that most ideas on reforms actually prevailed in the office of Yashwant Sinha, who was the FM for a short tenure when Chandrashekhar was PM. More importantly, the reforms agenda was a fallout of the state of the economy. The near insolvency of the country drove the government to the IMF for help, and reforms were a condition placed that had to be implemented to draw the loan.

While Manmohan Singh takes credit for economic reforms, his tenure was also turbulent with the stock market scam involving Harshad Mehta. The author elaborates more on the rather infamous statement made by the FM on ‘not losing sleep’ when the stock market went down. Another clue one picks up is that once reforms were in, there was really no going back. Even while minority bubble governments came and went, the FMs concerned drove the reforms agenda, albeit at different speeds.

Hence, one can say that a series of reforms were brought in from the mid-Eighties. To begin with, they were gradual because moving from a fully regulated set up to a more liberal architecture could only be done in steps. Subsequently, the push came from what one can interpret as the IMF nudging for big bang reforms in the Nineties. Interestingly, while the author does bring out the different political ideologies in this period of almost 15 years ending 1997, alignment with progressive policies was always there. It also shows that progressive fiscal regimes can have loan waivers and cash handouts, which is due to the political economy in action.

The second volume of India’s FMs is based on a time period closer to a larger part of the population today and would be of great interest to the layman as well as researchers. The natural line of interest would be to wait for the author’s third volume, which hopefully will cover the FMs till 2023-24. The questions that would be of utmost interest would be whether FMs are more independent than their predecessors, considering that there have been several reforms undertaken like demonetisation or the Covid policies that were routed more through the monetary and not fiscal prisms. The reader would be eager to read more about these contemporary times.

Wednesday, March 20, 2024

Podcast on Business lIne with Srivats.

 https://www.thehindubusinessline.com/multimedia/audio/nda10-where-does-india-stand-on-the-economic-front-in-2024/article67967902.ece


Monday, March 18, 2024

Survey results should be taken with a pinch of caution: Mint 18th March 2024


 

Resistance to reforms: Book Review in Financial Express 17th March 2024

 Here is an omnibus on financial sector reforms that takes us through the entire process of reforms in the past three decades. Written with the finesse of an economist and expressed with the panache of a journalist, the views are frank. However, a balanced approach is taken, with extensive references and quotes by those involved in the reforms process over the years. More importantly, it hits hard.

The idea that reforms have largely been driven by the political economy after 1991 plays out through the book. In 1991, we probably did not have an option, but since then we have been vulnerable to such compulsions. The author interestingly points out that there are five stakeholders who exercise uneven power in this process of financial reforms. These are the government, financial institutions, regulators, industrial consumers and the retail segment. He refers to the financial system as one of ‘campaign finance’ where the industrial consumers with disproportionate bargaining power distort the matrix by wielding significant clout in every possible way. This is in contrast to the retail customers who hardly have any power. But once there is a crisis that can be in the banking system or capital markets, there is a major problem posed to the administration. This, in turn, leads to rapid reforms, after which it slides back to a cozy static equilibrium. Hence, the response has tended to be more reactive.

He rightly points out that the reforms that happened in 1991 were wrapped around macroeconomic adjustment and fiscal stabilisation but did not move the needle in the public sector (read government), leaving the patronage network untouched. That’s why there is constant hesitancy in bringing about reforms, which continues even after 2014 (there is a chapter on this aspect).

Four things stand out here. First is the resolution process of NPAs where Singhal is quite blunt in saying that all measures taken so far have yielded sub-optimal results because of poor design and implementation. Any new regulatory scheme that is launched with fanfare gets finessed by Indian corporates. One cannot argue with the author here as he is spot on. Second, he points out that the incentive structures in banks and NBFCs are so designed to encourage higher lending and excess risk taking. Further, as there are no incentives for early disclosures and resolution when things go awry, the repercussions are deep. Third, there is a lot of regulatory arbitrage in the system as only banks and NBFCs are subject to RBI’s regulation, while players like mutual funds, PE funds, etc, reside outside the purview of regulation. There is a need for alignment across regulators. Last, shortages in funding have forced financial players to pivot to foreign capital where PE funds invest in unlisted companies and are routed through funds in tax shelters.

The book is a breeze as Singhal takes us through different segments of the market in various chapters. The chapters make sense individually too, and hence can be read in any order. The chapter on equity markets takes us through the early days when BSE was the only exchange, to the setting up of SEBI, which became a formal regulator post reforms. The pages on the infamous scams in the market is pure déjà vu as those who lived through those years can now see the difference in not just the market but also the regulatory set-up. The stories behind the Harshad Mehta and Ketan Parikh scams are described in some detail. However, he does point out that financial scams were not really new and India has a history of such impropriety, such as the stories of Nagarwala, Mundhra, etc.

When it comes to reforms, the author points out that it can never be clear as to what is the best way out. Post 1991, there were always two views—one where critics felt that they were too gradual and should be faster. The other view is at the other end, where the policy makers felt that anything faster would lead to difficulties in absorption by the players creating disruptions. There is clearly no answer here. But often the policies or reforms turn out to be reactive as they respond to a crisis, meaning thereby that the regulator had not really thought of the same earlier. This is where there is scope for being more nimble.

The author also treads on the delicate territory of the conflicts between the government and the RBI, which are quite historical and not new. Often the government may have other motivations, as seen from the case of abandoning the ad hoc treasury bills to finance the deficit. The RBI had to fight hard to ensure that budgets were financed by borrowings in the market and the ways and means advances were used only for temporary liquidity relief. The author shows that things may not have changed significantly even today.

There is a separate chapter titled ‘Indian reforms: Event-driven, even after 2014’. Hence, longstanding reforms on privatisation of public sector banks have been held up despite several reports recommending it. This period had its share of spats between the RBI and the government, leading to the resignation of a governor. Further, demonetisation affected smaller enterprises, leading to high growth in NPAs. This was also the period of busts with IL&FS, DHFL, Yes Bank and PMC Bank. He raises some pertinent questions here on the Yes Bank issue. Was the RBI stopped from acting by politically powerful interests or was the regulator slow in reacting only when the bank had reached the edge?

The book keeps the reader engaged all through with easily understood examples to demystify some concepts. The title of ‘slip, stich and stumble’ just about summarises the author’s view of how financial reforms have evolved—we fall, stich but stumble again. Can there be a better way out from this pattern? The reader can decide on this one. This book is truly a pleasure and should be on the bookshelf.

Book: Slip, Stitch & Stumble: The Untold Story of India’s Financial Sector Reforms

Author: Rajrishi Singhal

Publisher: Penguin Random House

Friday, March 15, 2024

Analysis: EFTA Can Help Boost India’s Global Relevance: Free press Journal 16th March 2024

 

Signing of these free trade agreements can be considered as work in progress towards making India a strong global economic power

Free trade agreements (FTAs) bring a lot of value to all countries concerned as they provide mutual benefits. That is the basis of drawing up any such agreement which is supposed to be a win-win situation for everyone. The World Trade Organization (WTO) was to be the largest effective such agreement where all countries agreed to the terms of engagement. But this did not work out as there can never be common grounds for over 150 countries which want to further their interests. The reducing importance of the WTO has been accompanied by more free trade agreements being signed by nations with common interests. FTAs are more manageable as there are fewer players involved. India’s recent trade agreement with four European countries in the European Free Trade Association can be looked at against this background.

Countries like Switzerland, Iceland, Norway and Liechtenstein do not really matter much if one looks at the total trade involved with India which is between $ 20-30 bn a year with wide fluctuations. Switzerland is probably the most important one in terms of trade relations. Hence, while it is possible to say that India will gain more from imports coming in as duties would be lowered over time, there may be limited advantage when it comes to our exports given the quantity involved and the size of these economies.

The agreement however has an interesting take on foreign investment which is being targeted at $ 100 bn over 15 years. This is a goal and not commitment, as investment decisions are taken by private parties and not governments. Therefore this would be more of an aspiration number rather than a certainty. Hence there can be an upside to the overall flow of FDI to the country though the amount may not be really large to begin with. Switzerland is the biggest investor among the four nations.

If the immediate gains are minimal and the medium term flows of investment would be based on interest of private investors, how should this agreement be interpreted? This agreement along with other discussions being held on other issues with other countries should be seen as the major effort being put by the government to internationalise the country. This is a medium-term goal which has seen several steps being taken.

To begin with there was the use of rupees to settle payments for oil with Russia. This may not have taken off fully given the complexities involved when it comes to international payments system. But the first step is essential to make a start. As the economy grows in strength and becomes a vital part of global supply chains, it may be expected that there will be more acceptance of the rupee for settlement of transactions. Once accepted by a set of countries for payment of exports, these countries could use the rupee to settle other payments amongst themselves just like how the dollar and euro are used.

Second, there have been agreements signed for use of UPI in foreign countries. Countries that have embraced different forms of Indian payment systems include France, UAE, Saudi Arabia, Bahrain, Singapore, Maldives, Bhutan, and Oman. This implies that Indians will now be able to make payments through UPI, etc. in these countries. At one level it may be argued that this is no different from using debit cards that are already accepted worldwide. But the fact that an indigenously designed effective payments system is being welcomed in other countries is a major victory for our financial system. In fact, this can be one of the more positive outcomes of the various Summits like the G-20 which bring such issues to the table.

Third, the RBI has also been working towards popularising the Central Bank Digital Currency (CBDC) within the country which over a period of time can be considered for settling international transactions too. The thought is still in its infancy but the future direction is clear.

Therefore, signing of these free trade agreements can be considered as work in progress towards making India a strong global economic power. India has vindicated the inherent strengths of the economy repeatedly post covid and remains the fastest growing economy presenting a plethora of opportunity for investors. The FDI rules have been relaxed to a large extent in almost all sectors and foreign investors can take a significant (49%) if not majority stake in most industries. Hence, these free trade agreements are more effective in furthering trade and investment as it involves a closed user groups with similar interests.

Specifically the EFTA would push up exports of textiles, pharmaceuticals, chemicals, and machinery. At the micro level the companies especially in the SME segment could leverage such opportunities. In terms of imports there would be a push to luxury items from Switzerland and Norway in particular which will have good demand as tariffs are lowered and rationalised. Indian will also have more access to processed foods and beverages. The quantum of trade may not be too significant to either propel exports or increase imports to the level of concern. But this will be a good signal to other countries to also explore options of having similar arrangements with India.

Hence the EFTA has to be viewed against a broader framework of making India globally more relevant. Trade and investment is a good starting point from where there can also be exploration of acceptance of the rupee for such transactions as economic relations. Post Russia-Ukraine war there is a growing debate on the use of alternative currencies as the dollar has become politically a risky currency for some countries, which includes China. Making the rupee international will help to widen the global currency basket which is dominated by the dollar, euro, pound and yen (which cover over 90% of trade transactions and forex reserves).

It may also be expected that further deepening of such trade relations can now be established with other members of the EU as well as other Asian nations so that there are enhanced global relations.