Return of protectionism

Prime minister Narendra Modi has applauded India’s latest budget delivered by his finance minister Arun Jaitley, but the parallel chorus is fading out by the day. It was Utrjit Patel, RBI governor last week, this time it’s Modi’s former advisors, Arvind Panagariya, who was also deputy chairman of the Niti Aayog until August 2017.

The RBI's monetary policy committee listed out reasons why inflation could stay well above the RBI target of 4% throughout the next financial year. RBI expects a rise in food and vegetable prices, crude oil prices and cost of health and personal care. Three other factors that will likely fuel inflation emanate from Jaitley’s budget. 

• Proposal to raise minimum support price (MSP) for farm products
• Hike in custom duties for various products including industrial inputs
• Wider-than-expected fiscal deficit

All this assuming that the south-west monsoon will be normal this year. The future of investments is  as bleak as it was before. For Modi government, these  nonchalant jabs from the RBI governor it is yet another sign that its populist budget may not help push the growth pedal. 

Substantial liberalisation under PV Narasimha Rao and Atal Bihari Vajpayee, India became the first democracy to achieve 8% plus growth for nine years beginning in 2003-04. The top industrial tariff rate fell from 355% in 1990-91 to 10% in 2007-08 and imports and as proportion of the GDP expanded to 30% and exports to 24% by 2011-12. Sadly, a new generation of bureaucrats seems to have now replaced its more enlightened predecessor. It is on course to erect the wall of protection all over again. 

Those who cannot remember the past,
are condemned to repeat it ... George Santayana 

Much is said about liberalisation and globalisation which benefited only one half of the world population while leaving other half in distress. What is visible is the constant economic growth that had eradicated extreme poverty and at the same time helped rich to become extreme rich, albeit unjustly. The casualty is environment, over extraction of non replenishable natural resources and workers with stagnant wages in developed nations. Today, US has accumulated trade debt of $20 trillion, up from $1 trillion during 1980's and has no clue or any forward looking plans to repay that debt and trade gap of $100 trillion is likely in next few decades and is saddled with huge industrial work force with stagnated wages. On other hand, China armed with huge trade plus faces deterioration of social values, degradation of landscape & environment and over exploited 150 million labour force with no human rights for over 30 years. Economics are complex and any change usually has unintended consequences. Over dependence on either exports or imports, for prosperity, is detrimental to any nation. The prudence lies in living within means and/or maintaining manageable trade gap at all times. Economic growth is never a true indicator of progress, development and wellness of any nation.

Selling pakodas is not employment

Answering a question on employment during an interview with Zee TV telecast on Jan 20, 2018, Prime Minister Narendra Modi asked, "If someone opens a 'pakoda' shop in front of your office, takes home Rs 200 at the end of the day, does that not count at employment?"

• The fact that the prime minister actually celebrates this kind of ’employment’ as a major success of his Mudra scheme is even more worrisome.
• Earning a meagre Rs 200 a day may come as solace to an unemployed person, the government must acknowledge that it only reflects under-employment and these earnings are just not enough to live life with dignity.
• Niti Aayog noted that “not unemployment, but severe under-employment is the main problem facing the country” and that “what is needed is the creation of high-productivity, high-wage jobs”. Prime Minister himself heads Niti Aayog.
• 90% of the Mudra scheme loans to over 10 crore beneficiaries in last three years were under the ‘Shishu’ category averaging Rs 43,000. With such a low degree of investment provided to nearly nine crore Indians, the employment opportunities can hardly be of high value.
• Banks reported a 47% increase in non-performing education loans between March 2015 and March 2017 and the bad loans have doubled. The defaults in education loans are a direct result of poor availability of good jobs. 
• In equating the success of low-value Mudra loan disbursement with generation of employment, the prime minister has sought to shift the goalpost on employment creation.
• The failure of the flagship programmes i.e. Start Up India, Stand Up India and Make in India schemes has forced the prime minister to yet again shift the goal post. The objective and success of the government is no more in addressing the concerns of an aspiring India, but to provide meagre income enough to earn ‘do waqt ki roti’. For an individual who is unemployed due to any reason, be it demonetisation or global distress or lack of adequate manufacturing and agricultural growth, any income that sustains his daily meals may be a matter of solace. But the prime minister of India cannot and should not take pride in it.

Under-employment is accompanied with the economic costs of social and family distress, health problems, impact on education etc – the head of the government cannot be oblivious to this. His vision has to accommodate the economic costs of under-employment. He does not have the luxury of looking at the economy only from the view point of a common unemployed citizen. That’s why the success of Mudra does not automatically translate into success for India’s economy and is why earning 200 rupees a day by selling pakodas cannot be considered a happy state of affairs.

Read the source article

This is a kind of economic collapse

JNU professor Himanshu says the economic slowdown is not the result of a one-off event like demonetisation, nor a technical problem but the slump began almost two years ago. This is a kind of economic collapse. The first step to tackle it is to acknowledge it.

• The economy is in a trough. GDP growth dipped to 5.7%. The Index of Industrial Production for July came in at 1.2%. Consumer Price Index showed that the inflation rate had risen to a  high of 3.4%.
• While Finance Minister Arun Jaitley acknowledged that the GDP numbers for the April-July quarter were of concern, BJP president Amit Shah told that the slowdown in the economy was due to “technical reasons”.
• These numbers might be an early warning of possible stagflation with low demand, high unemployment, decline in GDP and persistently high prices.
• There are many reasons for the collapse of domestic demand and the economic crisis India is facing and the government has limited room to manoeuvre and bring the economy back on track.
• RBI has confirmed, what all of us knew, demonetisation caused much pain without any gain. But demonetisation was not the trigger for the economic collapse one is witnessing today.
• It is a kind of economic collapse. The data is clear on this. Since 2015-16, growth rates have been going down. These numbers represent a very serious set of problems with the economy that have been neglected for a long period of time, which is why they have come to bite us today.
• Some of these problems started in 2013-2014. Wages had started turning negative in real terms since 2013. The problem of non-performing assets had appeared by then. The global recession was visible. These factors were well-known. The one big trigger was in August 2014, when primary commodity prices collapsed following a fall in oil prices. This hit farmer incomes hard.
• The droughts of 2014 and 2015 were difficult to deal with and agriculture GDP contracted and these factors severely dented agricultural incomes. With wages going down, rural demand collapsed by 2015.
• Jobs were not being created and wages were turning negative in real terms – growing slower than the rate of inflation.
• The government neglected the severe depression in rural demand for a long time that eventually spilled over to other sectors. Exports had been falling and the government ignored the trouble spots. Private investment has slowed down and credit growth is at its lowest.
• Construction has been the bulwark of employment in the non-agricultural sector in the past 10 years. But the government was in denial till chief economic advisor accepted the possibility of demand deflation in the economy. But this admission should have come earlier.
• In a normal monsoon year in 2016 after two consecutive droughts, when the situation was improving, demonetisation broke the back of the informal economy. It acted almost like a drought does on the economy. Demonetisation delayed hopes for the revival of the economy, and demand deflation was extended.
• Surely, GST has impacted the informal sector in terms of taxes and cost of compliance, which basically means hiring consultants. If it hits the unorganised sector, then manufacturing will be in deeper trouble in the coming quarters.
• The current scenario is uncertain about the next two to three quarters with no signs of private economic activity reviving. Worse, agriculture will make a very low contribution to growth with food grain production remaining flat. The livestock sector has been hit by political beef controversy that could contract the livestock sector as well. Excluding cotton, all major kharif crops have shown a decline in acreage.
• This year even though monsoon was good but its distribution is unlikely to contribute much to GDP in the next quarter.
• There are no visible signs of green shoots right now in the economy. The SBI has already pared down the growth rate for the entire year to 6.5%. There is almost a consensus emerging that the mess in the economy is far more serious than what people had assumed earlier.
• Farm loan waivers by nine states have sucked up the resources of state governments – there is a decline in capital formation in the states. That is telling us that state government expenditure towards investment is going down. The spending capacity of states has been squeezed quite dramatically and total fiscal deficit of states has increased. This impact the government’s ability to ramp up expenditure in the coming months to revive demand. By the end of June, the Central government had already reached 92.4% of its fiscal space. So, there is not much manoeuvring room left for either the states or the Centre.
• Government might have to breach the fiscal deficit target to revive demand. The government is hoping to collect more from non-tax revenue sources. It had a lot of hope for one source initially – dividend from the RBI which has been dashed. Two other sources the government is banking on are telecom auctions and disinvestment of PSUs. Both depend a lot on market conditions. Even though it has floated the idea of selling off Air India, it may not materialise soon. Given the market situation and the heavy squeeze on the telecom sector caused by the launch of Reliance Jio these decisions could get delayed.
• This is similar to what happened during the time of the AB Vajpayee government (1998-2004). At that time, too, the government failed to recognise that there were problems. The “India Shining” slogan came out of not recognising the economic situation. Inflation was low, wage rate growth was low, agriculture had almost collapsed. Foodgrain production on per capita basis had turned negative. This is true with this government also. Foodgrain production was 265 million tonnes in 2013-2014 and it has been projected up to 276 million tonnes for this year. So in four years, it has gone up by just 10 million tonnes, the lowest in the last 15-20 years. This is lower than the rate of growth of the population. In terms of per capita, that means foodgrain growth is negative. Incomes are negative in real terms. Agricultural investment is negative. This is similar to the NDA government period 1998-2004.
• But 2008 was different because the problems that hit our shores spiralled out of a global crisis. We had one of the best runs of growth between 2004 and 2008. The government distributed a lot, it earned a lot. The agriculture sector was clocking around 4% growth. Incomes were rising. Global commodity prices were rising, so terms of trade shifted in favour of the agricultural sector and farmers benefitted. Construction and manufacturing were growing at their fastest rates. That gave us the cushion to go in for a fiscal stimulus and revive demand.We were not so directly exposed to the financial crisis in developed economies and domestic demand was the prime driver. Right now, the engine of the economy – domestic demand – has collapsed.
• 2018 will be the last Budget the government will be presenting. In 2019, it would be a vote-on-account. The first thing is to acknowledge the gravity of the problem. The government has played blind for long to what has been happening in the economy. The finance minister has come on record to say that these are of concern. That is the first time the government has acknowledged such concerns. But if they actually have a very good idea of the magnitude of the problem is unclear. Right now the engine of the Indian economy, domestic demand, has collapsed.
• The share of private final consumption expenditure as a share of gross domestic product, it was roughly 62% during the third quarter of 2016-2017 – this is the festive season, so private consumption is usually high. Then, mid-way through this quarter, demonetisation happened and sucked out buying power. Compared to the third quarter of 2016-2017 with severe disruption in its second half, the share of private final consumption expenditure in gross domestic product has come down now. in the last quarter, it was down to 57%. That should be a worrying sign.
• There have been too many disruptions in the economy at the same time. What is needed is somebody who can work hands on with the economy.
• The entire economic policy-making group including the RBI in it. The policy-making is never one individual, it is a collective effort. Unfortunately the government’s ability to tap into a pool of economists and experts is very limited. Niti Aayog is in transition now, RBI is already under fire, the chief economic advisor may change now. There needs to be a point where experts, economists and policy-makers come together.
• Differences are bound to be there. No two economists are going to have the same opinion. This government has far less differences than the previous one and that is its problem. Somehow the government must seize the moment and act fast. If this continues for long, it will take a disproportionately greater effort to recover to what is now considered a normal 7% growth rate.

The Wire: Wide Angle: Episode 10: Demonetisation Anniversary

Arvind Panagariya, vice-chairman of NITI Aayog resigns

Arvind Panagariya, first vice-chairman of the NITI Aayog

• Arvind Panagariya, first vice-chairman of the NITI Aayog, resigns to continue his academia with Columbia University. Nearly a year ago, Raghuram Rajan had decided not to continue as the governor of the RBI.
• Both Rajan’s exit in Sep'2016 and now Panagariya's exit were preceded weeks of sustained attacks on them by the RSS and its outfits. His stated reason that Columbia University declined his further leave extension and, his remark "If I were at 40, then I would have got job anywhere...the kind of job I have at Columbia is almost impossible to get at this age of 64." is so pale and unbelievable.
• It's difficult for a "pure economist" to survive the politically volatile world of economic and monetary planning even if there is a favorable boss. 
• Arvind Panagariya and toothless NITI Aayog did some credible work in education, social sector spending, digitalisation of the economy and agriculture. 
• Panagariya, a pure economist, delighted by economics, disappointed by the landmines of Indian economic policy planning, the motivated criticism, the lack of space to think and deliver was a bit too much to handle. 
• Panagariya's exit proves that bright minds lack the courage to shine in the unlit alleys of governance.

Read Panagariya's brief Q&A with journalists

After predicting that growth in Q4 of 2017-18 will touch 8%, 

Panagariya has wisely resigned before proved wrong ... P. Chidambaram

Modi replacing powerful Planning Commission with teeth less NITI Aayog makes it a redundant body. Advises are being obtained from quacks like Artha Kranthi etc. With top class economists leaving one after another, and replacing them with second grade economists or politicians, where are we heading as a nation? Modi must realize, at least now, that it is easier to demolish than to construct. Next in firing line may be Arvind Subramanian, Chief Economic Adviser?