Universal Basic Income (UBI) Scheme an alternative to plethora of State subsidies for poverty alleviation;

Economic Survey: Universal Basic Income (UBI) Scheme an alternative to plethora of State subsidies for poverty alleviation;

JAM and Center State cost sharing prerequisite for a successful UBI

The Economic Survey 2016-17 tabled in Parliament today by the Union Finance Minister Shri Arun Jaitley has advocated the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes in an effort to reduce poverty. The survey juxtaposes the benefits and costs of the UBI scheme in the context of the philosophy of the Father of the Nation, Mahatma Gandhi. The Survey states that the Mahatma as astute political observer, would have anxieties about UBI as being just another add-on Government programme, but on balance, he may have given the go-ahead to the UBI.
The Survey says the UBI, based on the principles of universality, unconditionality and agency, is a conceptually appealing idea but with a number of implementation challenges lying ahead especially the risk that it would become an add-on to, rather than a replacement of, current anti-poverty and social programmes, which would make it fiscally unaffordable.
Based on a survey on misallocation of resources for the six largest Central Sector and Centrally Sponsored Sub-Schemes (except PDS and fertilizer subsidy) across districts, the Economic Survey points out that the districts where the needs are greatest are precisely the ones where State capacity is the weakest. This suggests that a more efficient way to help the poor would be to provide them resources directly, through a UBI.
Exploring the principles and prerequisites for successful implementation of UBI, the Survey points out that the two prerequisites for a successful UBI are: (a) functional JAM (Jan Dhan, Aadhar and Mobile) system as it ensures that the cash transfer goes directly into the account of a beneficiary and (b) Centre-State negotiations on cost sharing for the programme.
The Survey says that a UBI that reduces poverty to 0.5 percent would cost between 4-5 percent of GDP, assuming that those in the top 25 percent income bracket do not participate. On the other hand, the existing middle class subsidies and food, petroleum and fertilizer subsidies cost about 3 percent of GDP.
The Survey concludes that the UBI is a powerful idea whose time even if not ripe for implementation, is ripe for serious discussion.

setting up of a centralised Public Sector Asset Rehabilition Agency

Economic Survey 2016-17 suggests setting up of a centralised Public Sector Asset Rehabilition Agency

The Agency will look after the largest, most difficult Cases, and make Politically Tough Decisions to reduce Debt

      The Union Finance Minister Shri Arun Jaitley presented the Economic Survey 2016-17 in the Parliament today. The Survey shows that our  country has been trying to solve its ‘Twin Balance Sheet’(TBS) problem – overleveraged companies and bad-loan-encumbered banks, a legacy of the boom years around the Global Financial Crisis. So far, there has been limited success. The problem has consequently continued to fester: Non-Performing Assets (NPAs) of the banking system (and especially public sector banks) keep increasing, while credit and investment keep falling. Now it is time to consider a different approach – a centralised Public Sector Asset Rehabilitation Agency (PARA) that could take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.

       As per the Survey, gross NPAs has climbed to almost 12 per cent of gross advances for public sector banks at end-September 2016. At this level, India’s NPA ratio is higher than any other major emerging market, with the exception of Russia. The consequent squeeze of banks has led them to slow credit growth to crucial sectors-especially to industry and medium and small scale enterprises (MSMEs)-to levels unseen over the past two decades. As this has occurred, growth in private and overall investment has turned negative . A decisive resolution is urgently needed before the TBS problem becomes a serious drag on growth.

The Survey reaches to the conclusion that a PARA may be necessary because

·         Public discussion of the bad loan problem has focused on bank capital. But far more problematic is finding a way to resolve the bad debts in the first place.

·          Some debt repayment problems have been caused by diversion of funds. But the vast majority has been caused by unexpected changes in the economic environment after the Global Financial Crisis, which caused timetables, exchange rates, and growth rate assumptions to go seriously wrong.

·          This concentration creates a challenge since large cases are difficult to resolve, but also an opportunity since TBS could be overcome by solving a relatively small number of cases.

·          Restoring them to financial health will require large write-downs.

·          Among other issues, they face severe coordination problems, since large debtors have many creditors, with different interests. And they find it hard –financially and politically—to grant them sizeable debt reductions, or to take them over and sell them.

·          It increases the costs to the government since bad debts of the state banks keep rising, and increases the costs to the economy, by hindering credit, investment, and therefore growth.

·         Since, private run Asset Reconstruction Companies (ARCs) have not been successful either in resolving bad debts, though international experience (especially that of East Asian economies) shows that a professionally run central agency with the government backing could overcome the coordination and political issues that have impeded progress over the past eight years.

Economic Survey advocates reforms to unleash economic dynamism and social justice

Economic Survey advocates reforms to unleash economic dynamism and social justice

India needs an evolution in the underlying economic vision across the political spectrum and further reforms are not just a matter of overcoming vested interests that obstruct them. This was stated in the Economic Survey 2016-17 presented in the Parliament today by the Union Finance Minister Shri Arun Jaitley.
The Survey lists the some of the challenges that might impede India’s progress. These challenges are classified by the Survey as follows: ambivalence about property rights and the private sector, deficiencies in State capacity, especially in delivering essential services and inefficient redistribution.
The Survey highlights difficulties in privatizing public enterprises, even for firms where economists have made strong arguments that they belong in the private sector. In this context, the Survey points towards the need to further privatize the Civil Aviation, Banking and Fertilizer sectors.
The Survey points out that the capacity of the State in delivering essential services such as health and education is weak due to low capacity, with high levels of corruption, clientelism, rules and red tape. At the level of the states, competitive populism is more in evidence than competitive service delivery, the Survey adds. Constraints to policy making due to strict adherence to rules and abundant caution in bureaucratic decision-making favours status quo, the Survey cautions.
According to the Survey, redistribution by the government is far from efficient in targeting the poor. This is intrinsic to current programs because spending is likely to be greatest in states with better institutions and which will therefore have fewer poor.
The Survey notes that over the past two years, the government has made considerable progress toward reducing subsidies, especially related to petroleum products. Technology has been the main instrument for addressing the leakage problem and the pilots for direct benefit transfer in fertilizer represent a very important new direction in this regard, the Survey adds.
Noting that India has come a lo¬¬ng way in terms of economic performance and reforms, Economic Survey 2016-17 says that there is still a journey ahead to achieve dynamism and social justice. Completing this journey will require broader societal shifts in the underlying vision, the Survey adds.

Fiscal activism embraced by advanced economies not relevant for India: Economic Survey 2016-17

India’s economic experience underscores fundamental validity of fiscal policy principles in FRBM Act 2003: Economic Survey 2016-17

India’s economic experience shows that the fiscal activism embraced by advanced economies- giving a greater role to counter-cyclical policies and attaching less weight to curbing debt- is not relevant for India. This observation was made in the Economic Survey 2016-17 presented by the Finance Minister Shri Arun Jaitley in the Parliament today. The Economic Survey has also stated that India’s fiscal experience has underscored the fundamental validity of the fiscal policy principles enshrined in the Fiscal Responsibility and Budget Management Act (FRBM) Act 2003.
Since the 2008-09 Global Financial Crisis (GFC), internationally fiscal policy has seen a paradigm shift from the emphasis on debts to deficits, arguing for greater activism in flows (deficits) and minimizing concerns about sustainability of the stocks (debt). But India’s experience has reaffirmed the need for rules to contain fiscal deficits, because of the proclivity to spend during booms and undertake stimulus during downturns. India’s experience has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the “heavy lifting” on debt reduction. In, short it has underscored the fundamental validity of the fiscal policy principles set out in the FRBM.
Even as the basic tenets of the FRBM remain valid, the operational framework designed in 2003 will need to be modified for the fiscal policy direction of India of today, and even more importantly the India of tomorrow. This setting out a new vision through an FRBM for the 21st century will be the task of the FRBM Review 

Redistributive Resource Transfers (RRT) should be significantly linked to fiscal and governance efforts on the part of the states

Redistributive Resource Transfers (RRT) should be significantly linked to fiscal and governance efforts on the part of the states: Economic Survey 2016-17

Annual per capita RRT flows for all North-Eastern States (except Assam) and Jammu & Kashmir have exceeded the annual per-capita consumption expenditure that defines the all-India poverty lines, especially the rural line.

The Economic Survey 2016-17, which was presented today in parliament by the Finance Minister Shri.Arun Jaitly, examines whether the effects associated with the “aid curse” and the “natural resources curse” internationally are discernible in the context of the Indian States. It calculates Redistributive Resource Transfers’ (RRT) from the Centre (between 1994 and 2015) and value of natural resources for Indian States (over 1980 and 2014) and correlates these with several economic outcomes and an index of governance

Redistributive Resource Transfer or RRT to a state (from the Centre) is defined as gross devolution to the state adjusted for the respective state’s share in aggregate Gross Domestic Product(GDP). The top 10 recipients are: Sikkim, Arunachal Pradesh, Mizoram, Nagaland, Manipur, Meghalaya, Tripura, Jammu and Kashmir, Himachal Pradesh and Assam.

Figure 1 shows the ranking of States, in 2015, in the descending order of RRT received in per capita terms and also per-capita gross devolution. The yellow and green dotted lines in figure 1 show the all-India rural and urban annualised per-capita poverty lines for 2015 respectively. Annual per capita RRT flows for all north-eastern states (except Assam) and Jammu & Kashmir have exceeded the annual per-capita consumption expenditure that defines the all-India poverty lines, especially the rural line.

The Economic Survey 2016-17 points out that there is no evidence of a positive relationship between these transfers and various economic outcomes, including per capita consumption, GSDP growth, development of manufacturing, own tax revenue effort, and institutional quality.

Instead, there is a suggestive evidence of a negative relationship. For example, larger RRT flows seem to negatively affect fiscal effort (defined as the share of own tax revenue to GSDP). These trends are robust to alternative definitions of RRT.

 Also, whether mineral rich states like Jharkhand, Chhattisgarh, Odisha, Rajasthan and Gujarat ,are doing well on the metrics of economic outcomes and governance is considered in the context of redistributive transfers. However, this does not reveal conclusive results and there is no evidence of a negative relationship between fiscal effort and reliance on revenue from natural resources over the period 2001-14.

Thus, the existence of a ‘RRT curse’ and the lack thereof of a ‘natural resource curse’ in the context of Indian States implies that both the Centre and States need to act to mitigate the effects of the former and guard against the emergence, in future, of the latter.  In this context, the question is whether RRT, in future, can be linked more saliently to fiscal and governance efforts on the part of the States.

The Economic Survey 2016-2017, also suggests providing a part of the RRTs or to redistribute the gains from resource use as a Universal Basic Income (UBI) directly to households in relevant states which  receive large RRT flows and are more reliant on natural resource revenues.

Finally, recognizing and responding creatively to possible pathologies created by large bounties-either in the form of redistributive resources or natural resources, will be important to avoid making the errors of history.

Labour migration in India increasing at an accelerating rate, reveals new study: Economic Survey 2016-17

Labour migration in India increasing at an accelerating rate, reveals new study: Economic Survey 2016-17

New estimates of labour migration in India have revealed that inter-state labor mobility is significantly higher than previous estimates. This was stated in the Economic Survey 2016-17 presented by the Finance Minister Shri Arun Jaitley in the Parliament today.  The study based on the analyses of new data sources and new methodologies also shows that the migration is accelerating and was particularly pronounced for females. The data sources used for the study are the 2011 Census and railway passenger traffic flows of the Ministry of Railways and new methodologies including the Cohort-based Migration Metric (CMM) .

The new Cohort-based Migration Metric(CMM) shows that inter-state labor mobility averaged 5-6.5 million people between 2001 and 2011, yielding an inter-state migrant population of about 60 million and an inter-district migration as high as 80 million. The first-ever estimates of internal work-related migration using railways data for the period 2011-2016 indicate an annual average flow of close to 9 million migrant people between the states. Both these estimates are significantly greater than the annual average flow of about 4 million suggested by successive Censuses and higher than previously estimated by any study.

Figure 1. Estimates of annual migrant flows based on railway traffic data

The second finding from this new study is that migration for work and education  is accelerating. In the period 2001-2011 the rate of growth of labour migrants nearly doubled relative to the previous decade, rising to 4.5 per cent per annum. Interestingly, the acceleration of migration was particularly pronounced for females and increased at nearly twice the rate of male migration in the 2000s. There is also a doubling of the stock of inter-state out migrants to nearly 12 million in the 20-29year old cohort alone. One plausible hypothesis for this acceleration in migration is that the rewards (in the form of prospective income and employment opportunities) have become greater than the costs and risks that migration entails. Higher growth and a multitude of economic opportunities could therefore have been the catalyst for such an acceleration of migration.

Third, and a potentially exciting finding, for which there is tentative but no conclusive evidence, is that while political borders impede the flow of people, language does not seem to be a demonstrable barrier to the flow of people. For example, a gravity model indicates that political borders depress the flows of people, reflected in the fact that migrant people flows within states are 4 times than migrant people flows across states. However, not sharing Hindi as a common language appears not to create comparable frictions to the movement of goods and people across states.

Fourth, the patterns of flows of migrants found in this study are broadly consistent with what is expected - less affluent states see more out migration migrating out while the most affluent states are the largest recipients of migrants. Figure 2 shows the strong positive relationship between the CMM scores and per capita incomes at the state level. Relatively poorer states such as Bihar and Uttar Pradesh have high net out-migration. Seven states take positive CMM values reflecting net in-migration: Goa, Delhi, Maharashtra, Gujarat, Tamil Nadu, Kerala and Karnataka. Fifth, the costs of moving for migrants are about twice as much as they are for goods – another confirmation of popular conception.

Figure 2. Cohort-based Migration Metric vs. Real Incomes across States

Policy actions to sustain and maximize the benefits of migration include: ensuring portability of food security benefits, providing healthcare and a basic social security framework for migrants – potentially through an inter-state self-registration process. While there do currently exist multiple schemes that have to do with migrant welfare, they are implemented at the state level, and hence require greater inter-state coordination.

Good fiscal performance by States should be incentivized to keep the overall fiscal performance

Good fiscal performance by States should be incentivized to keep the overall fiscal performance on track: Economic Survey 2016-17

Centre should take the lead in sound fiscal management suggests Economic Survey

The Economic Survey 2016-17 presented in the Parliament today has highlighted the need for fiscal prudence both by the Centre as well as the States in order to maintain overall fiscal health of the economy. The Economic Survey states that the Centre’s Fiscal Responsibility and Budget Management (FRBM) Act, was mirrored by Fiscal Responsibility Legislations (FRL) adopted in the States.

As per the Economic Survey, there has been an improvement in the financial position of the States over the last few years. The average revenue deficit has been eliminated, while the average fiscal deficit was curbed to less than 3 percent of GSDP. The average debt to GSDP ratio has also fallen.

However, just because fiscal progress followed the introduction of the FRL, it doesn’t mean that the progress can be attributed entirely to FRLs. The following points are important with respect to the improvement in fiscal variables:

       I.            The deficit reduction owes much to favorable exogenous factors (see Figure 1):

·         An acceleration of nominal GDP growth (of 6 percentage points on average after 2005) helped boost States’ revenues by about 1 percent of GSDP;

·         Increased transfers from the centre of about 1 percent of GSDP both because of the 13^th Finance Commission recommendations and the surge in central government revenues;

·         Reduced interest payments of about 0.9 percent of GSDP on account of the debt restructuring package offered by the Centre; and

·         Reduced need for spending by the States—estimated at about 1.2 percent of GDP--as the Centre took on a number of major social sector expenditures under the Centrally Sponsored Schemes (CSS). 

Figure 1: Decomposition of Reduction in Fiscal, Primary and Revenue Deficit before and after States’ FRL

I.            Desisting from splurging rather than belt-tightening was probably the real contribution of the States. Despite the revenue surge, non interest revenue expenditure rose by only 0.4 percent of GSDP.

II.            Off-budget expenditures fell, as measured by the flow of explicit guarantees and loans to public utilities fell.

III.            There was a sharp drop in the magnitude of forecast errors suggesting an improvement in the process of budget formation. The shortfalls between budgeted and actual own tax revenue went from an average of 5.9 percent of actuals (optimistic forecasts) before the FRL to -0.6 percent of actuals after.

IV.            All of these positive indicators show signs of decay in later years; fiscal deficits for example are close the limit of 3 percent on average 10 years after the FRL (see Figure 2). 

Figure 2: Average Fiscal Deficit of States in Years Relative to Adoption of FRL (as percent of GSDP)

 

Economic Survey 2016-17 elaborates that as the fiscal challenges mount for the states because of the Pay Commission recommendations, and mounting payments from the UDAY bonds, there is a need to review how fiscal performance can be kept on track. Greater reliance will need to be placed on incentivizing good fiscal performance, not least because states are gradually repaying their obligations to the Centre, removing its ability to impose a hard budget constraint on them says the Economic Survey. Above all, however, incentivizing good performance by the States will require the Centre to be an exemplar of sound fiscal management itself.

GDP growth in 2017-18 is projected at 6 ¾ to 7 ½ percent Post-demonetisation

GDP growth in 2017-18 is projected at 6 ¾ to 7 ½ percent Post-demonetisation

Middle class to get affordable housing due to fall in Real Estate prices

Remonetisation to eliminate cash squeeze by April 2017.

The Government says that the adverse impact of demonetisation on GDP growth will be transitional. The Economic Survey 2017 presented in Parliament today by
 the union Finance Minister,  Shri Arun Jaitley states that once the cash supply is replenished, which is likely to be achieved by end March 2017, the economy would revert to the normal.  Therefore the real GDP growth in 2017-18 is projected to be in the range of 6¾-7½ percent.

The Economic Survey points out that demonetisation will have both short-term costs and long-term benefits as detailed in the attached table. Briefly, the costs include a contraction in cash money supply and subsequent, albeit temporary, slowdown in GDP growth; and benefits include increased digitalization, greater tax compliance and a reduction in real estate prices, which could increase long-run tax revenue collections and GDP growth.

On the benefits side, early evidence suggests that digitalization has increased since demonetisation. On the cost side, effective cash in circulation fell sharply although by much less than commonly believed – a peak of 35 percent in December, rather than 62 percent in November since many of the old high denomination notes continued to be used for transactions in the weeks after 8^th November  Additionally, remonetisation will ensure that the cash squeeze is eliminated by April 2017. The cash squeeze in the meantime will have significant implications for GDP, reducing 2016-17 growth by ¼ to ½ percentage points compared to the baseline of 7 percent. Recorded GDP will understate impact on informal sector because, for example, informal manufacturing is estimated using formal sector indicators (Index of Industrial Production). These contractionary effects will dissipate by year-end when currency in circulation should once again be in line with estimated demand, which would also allow growth to converge to a trend by FY 2017-18.

The Economic Survey states that the weighted average price of real estate in eight major cities which was already on a declining trend fell further after November 8, 2016 with the announcement of demonetization. It goes on to add that an equilibrium reduction in real estate prices is desirable as it will lead to affordable housing for the middle class and facilitate labour mobility across India currently impeded by high and unaffordable rents.

The Survey suggests a few measures to maximize long-term benefits and minimize short-term costs. One, fast remonetisation and especially, free convertibility of cash to deposits including through early elimination of withdrawal limits. This would reduce the GDP growth deceleration and cash hoarding. Two, continued impetus to digitalization while ensuring that this transition is gradual, inclusive, based on incentives rather than controls and appropriately balancing the costs and benefits of cash versus digitalization. Three, following up demonetisation by bringing land and real estate into the GST. Four, reducing tax rates and stamp duties. And finally, an improved tax system could promote greater income declaration and dispel fears of over-zealous tax administration.

Impact of Demonetisation

Sector	Impact
	Effect through end-December	Likely longer-term effect
Money/interest rates	Cash declined sharply	Cash will recover but settle at a lower level
	Bank deposits increased sharply	Deposits will decline, but probably settle at a slightly higher level
	RBI's balance sheet largely unchanged: return of currency reduced the central bank’s cash liabilities but increased its deposit liabilities to commercial banks	RBI's balance sheet will shrink, after the deadline for redeeming outstanding notes
	Interest rates on deposits, loans, and government securities declined; implicit rate on cash increased	Loan rates could fall further, if much of the deposit increase proves durable
Financial System Savings	Increased	Increase, to the extent that the cash-deposit ratio falls permanently
Corruption (underlying illicit activities)		Could decline, if incentives for compliance improve
Unaccounted income/black money (underlying activity may or may not be illicit)	Stock of black money fell, as some holders came into the tax net	Formalization should reduce the flow of unaccounted income
Private Wealth	Private sector wealth declined, since some high denomination notes were not returned and real estate prices fell	Wealth could fall further, if real estate prices continue to decline
Public Sector Wealth	No effect.	Government/RBI's wealth will increase when unreturned cash is extinguished, reducing liabilities
Formalization/ digitilisation	Digital transactions amongst new users (RuPay/ AEPS) increased sharply; existing users’ transactions increased in line with historical trend	Some return to cash as supply normalises, but the now-launched digital revolution will continue
Real estate	Prices declined, as wealth fell while cash shortages impeded transactions	Prices could fall further as investing undeclared income in real estate becomes more difficult;  but tax component could rise, especially if GST imposed on real estate
Broader economy	Job losses, decline in farm incomes, social disruption, especially in cash-intensive sectors	Should gradually stabilize as the economy is remonetized
GDP	Growth slowed, as demonetisation reduced demand (cash, private wealth), supply (reduced liquidity and working capital, and disrupted supply chains), and increased uncertainty	Could be beneficial in the long run if formalization increases and corruption falls
	Cash-intensive sectors (agriculture, real estate, jewellery) were affected more. Recorded GDP will understate impact on informal sector because informal manufacturing is estimated using formal sector indicators (Index of Industrial Production). But over time as the economy becomes more formalized the underestimation will decline. Recorded GDP will also be overstated because banking sector value added is based (inter alia) on deposits which have surged temporarily	Informal output could decline but recorded GDP would increase as the economy becomes more formalized
Tax collection	Income taxes rose because of increased disclosure Payments to local bodies and discoms increased because demonetised notes remained legal tender for tax payments/clearances of arrears	Indirect and corporate taxes could decline, to the extent growth slows Over long run, taxes should increase as formalization expands and compliance improves
Uncertainty/ Credibility	Uncertainty increased, as firms and households were unsure of the economic impact and implications for future policy Investment decisions and durable goods purchases postponed	Credibility will be strengthened if demonetisation is accompanied by complementary measures. Early and full remonetisation essential. Tax arbitrariness and harassment could attenuate credibility