In creating one Economic India, Technology, Economics and Politics are Surging Ahead

In creating one Economic India, Technology, Economics and Politics are Surging Ahead

Survey suggests that it is Time for the Laws to catch up and facilitate this Internal Integration

Finance Minister Shri Arun Jaitley today presented the Economic Survey 2016-17 in the Parliament today. The Survey suggest that on the question of creating one economic India, technology, economics and politics have been surging ahead. Perhaps, it is time for the laws to catch up to further facilitate this surging internal integration.
It finds high levels of internal trade between states: India’s internal trade-GDP ratio at about 54 percent is comparable to that in other large countries. The extent to which the Constitutional provisions facilitate the creation of one economic India is discussed in a final section.
The first-ever estimates for inter-state trade flows indicate that cross-border exchanges between firms amount to at least 54 per cent of GDP, implying that domestic trade is significant. Both figures compare favourably with other jurisdictions: de facto at least, India seems well integrated internally. A more technical analysis confirms this, finding that trade costs reduce trade by roughly the same extent in India as in other countries.
The Survey shows that :-
• Smaller states Uttarakhand, Himachal Pradesh and Goa trade more; the net exporters are the manufacturing powerhouses of Tamil Nadu, Gujarat, and Maharashtra
• Otherwise agricultural Haryana and Uttar Pradesh are also trading powerhouses because Gurugram and NOIDA, respectively, have become part of the great Delhi urban agglomeration.
• Intra-firm trade across States is surprisingly large (about 68 per cent of inter-firm inter-state trade), and is affected by trade costs to a greater extent than inter-firm trade.
However, there is a potential dampener on the finding that trade in goods is high within India. The high level may be a consequence of the current system of indirect taxes which in some important cases perversely favours inter-state trade over intra-state trade. If true, the GST by ironing out these oddities will normalise inter-state trade in the country. This may reduce trade in some cases, and yet have a positive impact on tax revenue because of improvements in compliance, competitive enhancements and other channels.
It may be noted the Indian Constitution provides the Centre and States considerable freedom to restrict trade and commerce; the needs of creating one economic India were actually subordinated to the imperatives of preserving sovereignty for the states. In practice, courts’ interpretation of these constitutional provisions have also been in favour of protecting the sovereignty of states over economic integration.

Real per capita GSDP between 1983 and 2014, shows across-the-board improvement

Real per capita GSDP between 1983 and 2014, shows across-the-board improvement: Economic Survey 2016-17

Improved health indicators in life expectancy

Striking over performance of Indian States in fertility decline

Shri Arun Jaitley presents the Economic Survey 2016-17

The Union Finance Minister Shri Arun Jaitley presented the Economic Survey 2016-17 in the Parliament today. The Economic Survey states that while economic performance has been remarkable in the aggregate, India’s success as a federation depends on the progress of each of its individual states. What is a reasonable standard for assessing how well the states are doing? One intuitive metric is to see how well individual states have done over time on two sets of indicators: economic indicators, such as income and consumption, and health/demographic indicators such as infant mortality rate, life expectancy, and total fertility rate. Our analysis of these indicators begins in the 1980s, when the structural break from the previous era of the “Hindu Growth Rate” occurred.
The Economic Survey states that seeing only the shift in the levels of these indicators does not give us the full picture because there is no benchmark for relative assessment. Here, economic theory provides us a useful metric: convergence (or unconditional convergence). Convergence means that a state that starts off at low performance levels on an outcome of importance, say the level of income or consumption, should grow relatively faster over time, improving its performance so that it catches up with states which had better starting points.
The Economic Survey mentions that when studying real per capita GSDP over time between 1983 and 2014 ,there has been a clear increase in levels indicating an across-the-board improvement. For example, between 1984 and 2014, the poorest state (Tripura, with a per capita income of INR 11,537 in 1984 to INR 64,712 in 2014) increased its per capita GDP 5.6 fold; the median state (Himachal Pradesh) increased its income level 4.3 fold.
The Economic Survey mentions that, when convergence in real per capita GDP is studied for the latest decade (2004-2014), it is found that while incomes converge for provinces in China and for countries in the world, in India, they diverge. When convergence in real per capita consumption for states in India is studied, the same trend of divergence is observed. Despite growing rapidly on average, there is sign of growing regional inequality among the Indian states. This is puzzling because the underlying forces in favor of equalization within India—namely strong and rising movements of goods and people—are strongly evident. This is not found to be the case in the previous decade (1994-2004), when we see that incomes in China, India and the world were all diverging/weakly converging.
The Economic Survey elaborates that to observe convergence, we should see a downward sloping line – this means that the countries/provinces/states that start off poorer subsequently grew faster, closing the gap with more developed countries/states. The opposite is happening in India.
The Economic Survey states that a similar trend of consumption divergence is observed within India for the three time periods of 1983-1993, 1993-2004 and 2004-2011. All this suggests that over time, regional income/consumption inequality in India is not narrowing despite such gaps narrowing across countries in the world and within China. The Indian paradox is doubly confounding: thicker international borders that are more impervious to the equalizing flows of factors if production lead to convergence but the supposedly porous borders within India perpetuate spatial inequality.
The Economic Survey further states that one possible hypothesis for seeing a regional dispersion in income and consumption is that there might be governance traps that impede the catch-up process. And if there are such traps, labor and capital mobility might even aggravate underlying inequalities. But why such traps persist if competitive federalism is forcing change upon the lagging states remains an open question.
The Economic Survey remarks that in contrast, on health, there is strong evidence of convergence amongst the states in the 2000s. But here it is the international contrast that is striking. With regards to life expectancy, the Indian states are close to where they should be given their level of income. But that is not true of IMR (Infant Mortality Rate), suggesting that the “mother and child” (discussed also in last year’s Survey) bear the brunt of weaker delivery of health services.
The Economic Survey states that but what really stands out in the international comparison is fertility (measured using Total Fertility Rate), where we find that for their levels of development, the Indian states have much lower levels of fertility than countries internationally. These unusually large declines in fertility have strong—and potentially positive—implications for India’s demographic dividend going forward.

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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.