Policymaker’s Journal is an odd book for anyone, especially for those who are in Policymaking Business or economists in general. There are two reasons for it, first, you don’t want to know how the sausage – economic policies– is being made. Second, you are also in the business of policymaking and you are experiencing almost the same things, so why would you want to hear about it from someone else? It is a good book for people who are either going to switch to policymaking or are at a juncture in their lives when they have to make a decision about their future. 

Having established who should read this book. What should one expect from this book? When I bought this book, I made a rookie mistake of judging a book by its author (and its cover), and I think I paid handsomely for that. It sat in my reading pile for almost a  year and then I picked it up in August 2022, to see what it actually had. Since I had read his “An Economist in the Real World: The Art of Policymaking in India”, I thought this would also talk about policy instruments in detail to apply for solving economic problems, but I realized early that such expectations were wrong, so I adjusted them quickly and continued reading. 

The book is a diary where he tells what happened in his day at work. It starts from his appointment as Chief Economic Advisor (CEA) to Manmohan Singh’s UPA government in 2009 and ends in Washington in 2016 when he was the Chief Economist for World Bank. He talks about his travel, food, people he met, and his anecdotes. Ultimately, it became little about the policy instruments (or at least as much as I expected them to be) and more about his life. It became about his days, and truth be told, when you look at life per day it is quite mundane and uneventful, life is only exciting and joyful in parts. 

I felt, that his CEA years are more interesting and more regular than his World Bank years. World Bank years are also not as detailed as the CEA years, I guess since they were written irregularly, often jumping across months, it didn’t give him time to write about them in detail. As expected from such a semi-autobiographical diary, there were days that were very interesting, and then there were days when nothing happened. While reading I was constantly reminded of Lenin’s Quote “There are decades where nothing happens; and there are weeks where decades happen”. 

Basu is also more political and critical of economic policies and institutions while working as CEA, as compared to his World Bank years. He met more political leaders during his World Bank years but he talked little about politics during them, he would only get political or share the history of the region in his diary when he was restricted to making a public comment on a particular visit. 

Although lacking in political anecdotes or criticism or shock of working in policymaking, his world bank years also talked about research and research ideas. So, I loved reading them as well. Future researchers can definitely learn something from them on how to build teams and get talent from across the world. 

Despite all the shortcomings, his writings from both years remove a lot of enigma about the kind of jobs these are supposed to be and what an individual can expect if they are planning to work at them or in those institutions. So, if you are planning to work here, I think you can pick this book and give it a read. 

But now this begs a question what was the takeaway from this book and whether or not should one buy it? Being a first-generation college student, I always felt I had less information than anyone else around me, therefore, every author, book, report, or speech he mentioned in his book was new to me and was taken afresh by my mind. Given that Basu had produced or edited so much work and had a colorful experience, I got a lot of recommendations on books to read, places to visit, food to eat, drinks to have, and even what places to avoid while in a country. Reading diaries (or memoirs), such as this, well the honest ones, gives a glimpse into the lives of individuals which most of us don’t have the privilege of meeting in an informal setting where they could share such vivid anecdotes about their lives or experiences.  

Coming to the latter question of whether you should buy it or not, I honestly feel you can skip buying this and instead download an epub or pdf from free libraries on the internet to read about the kind of days he has had while working on two different jobs in policymaking. You can instead invest your money in any other book that you have been planning to buy for a long time. 

IMF releases its survey of the World Economy for near and medium-term two times a year. In this survey, IMF presents its staff economists’ analyses of global economic developments and along with that presents the estimated growth rate for individual countries and the world economy.

Let’s begin by explaining the first point which is that the negative growth rate in FY21 creates a low base for the growth rate. I explain this using a case, refer to the figure for cases.

Look at Case in the year FY20 economy X was at output level 3 and the estimated output level was 4 in the year FY21, this means an estimated growth of 33.3%. But let’s say an unexpected event occurred in economy X in FY21 which reduced the output level to 2 in the year FY21. This means output reduced or contracted by 33.3%, shown by a negative sign, instead of rising by 33.3%. Now seeing this unexpected event the government responded with an economic package. That might help in bringing the output level to 5 in the year FY22. This will be an increase in output by 150%, the estimated growth rate for FY22 was 100%, as we kept the estimated output level at 4. The increase to the output level 5 may have happened because the government’s effort was supported by private players.

Now here is what has been missing in the celebration of the output growth rate of 150%. It lies in the future and will only be realized if X’s economic policies today are good and achieve their desired goals.

But the estimation is certain, something we expect to reach, as we were going to achieve it before the unforeseen event occurred. Now it will take two years to reach the same estimated output level and in that process, we have lost time. The opportunity cost of which is immeasurable. And as Howard Stark says in Avengers Endgame “No amount of money can buy a second of time.”

I highly rever the time lost by our economy because we stand at an important juncture in our economic progress, where the movement towards high-income levels can only come through sustained and equitable growth.

Similarly, the IMF projects India’s economic growth rate for FY21 to be -8% which will create a low base for growth measurement next year. Therefore, these percentage growth rates do not paint a full picture of what is happening in the economy, we need to look beyond these percentages towards the output levels of our economy to understand the full picture of it.

The Second Point I want to highlight here is about output recovery and this is based on a combination of both previous research and some (adjusted) expectations. This should, therefore, be taken with a pinch of salt. I draw these expectations particularly from the IMF paper Growth dynamics: The Myth of economic recovery, by Valerie Cerra and Sweta Chaman Saxena, where they prove that output after a crisis may not be recovered over the long term. They took into consideration both economic and political crises.

The Indian economy was experiencing sluggish economic growth with occasional spurts of quarterly high growth rates but after successive frauds in the banking and shadow banking sector, this occasional growth too became fragile. This is not to say that the Indian economy has experienced or is experiencing a shadow banking crisis but to highlight the already existing weaknesses and those that have been exacerbated by the pandemic.

Last year’s COVID pandemic and non-pharmaceutical policy interventions to control it combined with already present weaknesses are creating an instant recipe for disaster(read: crisis). And if this is allowed to play out in a similar pattern as previous weaknesses have been it would create output loss that may become irrecoverable, both over the short term and long term.

India has experienced several crises before and has come out stronger from such crises because there were visible constraints present in the economy that just made economic policy bad. Thus removal of these constraints directly became a solution to get out of those crises. This is not the case today, the weakness is not in one sector alone. Apart from this, India today is at an important juncture where the transition to income level above it (or below) is just a matter of time and correct(or incorrect) economic policy. Therefore, any crisis today will create a bigger dent in the output stock of our country and the future growth of the output.

This has been proven by Cerra and Saxena. They also showed that the output loss is more persistent for lower-income countries(LIC)  and lower-middle-income countries(LMIC) in the sample, this happens not just in economic crisis(banking, currency, or twin financial crisis) but also for the political crisis(civil wars, weak institutions, or twin political crisis). It further concludes that in some of the crises, “output loss is persistent with no discernable rebound”.

Cerra and Saxena, in particular, paint a more gloomy picture for LIC and  LMIC which are more susceptible to the crisis(of any kind). They, using the” impulse response function, show that less than 1% of deepest output loss is regained by the end of ten years following a crisis of any kind. A partial rebound only occurs for civil wars. The magnitude for output loss ranges from 4-16% for various shocks.”

This should be enough to generate cautioned optimism, which means that “Yes, the Indian economy has the potential to grow like East-Asian economies but lately it has been off its track”.

The COVID pandemic has affected every sector of the Indian economy differently. The formal sectors’ problems are more visible, thus recognizable, as the data can be collected for it at a faster speed than for the informal sector. It will only be in one and a half to two years when we can fully understand how pandemic affected the informal economy- an entire cash economy- and therefore the correct response needed for a rebound in its growth. The situation to some extent can be preempted using the data on Work Demanded under MGNREGS, a rural employment guarantee scheme.

You might now think that the pandemic-induced crisis (if it occurs) would only be in the informal economy. Yes, there is a high probability of that but one can not absolve the formal sector, particularly banking and finance, of not being the epicenter of the crisis. The weaknesses in the banking sector and shadow banking sector of NPAs predates the pandemic (and even this government) and were waiting to cause havoc because no real solutions have been mandated by both regulators and the government- I here suggest you read Vivek Kaul’s Bad Money for more information (what happens with the creation of a bad bank remains to be seen). Thus we cannot absolve any one sector of not being an epicenter of the crisis. In particular, if we continue to ignore the fact that the pandemic has adversely affected the informal sector and not take accurate measures to correct it, soon we will be experiencing weaknesses in the manufacturing sector.

Also, the widening gap between the fundamentals of the economy and the stock market tells a tale in itself. The previous crises(particularly GFC and dotcom bubble) that originated elsewhere in the world came after a period of easy lending through low market interest rates and new highs in the asset prices. To say that Indian retail investors are any different would be to say that they are not evolved enough to understand what is going on (and I am, in particular, very small to make such an implication).

Therefore, the pandemic and the government’s response to it do not inspire much confidence that a rebound in the growth rate of the sectors affected by the pandemic will be at a faster speed as almost no fiscal impetus has been provided to them. Thus, I believe there is no V-Shaped recovery happening, recovery, if anything, is K-Shaped. This claim is reinforced by poor complementary policy interventions and a lack of eagerness to initiate an early recovery by the government.

The pandemic in India has been under control in most areas for most months in the previous year. But this pandemic has deepened the weaknesses in almost all the sectors of the economy, especially banking and finance, and the informal sector. These deepened weaknesses will create problems for the future growth of the economy. If these weaknesses are allowed to play out it will lead to an irrecoverable output loss.

Now there is no timeline as to when these weaknesses will start creating havoc and cause a crisis, neither there is an economist who can accurately tell such a thing; anyone stating that everything is good with the economy or can make a prediction about when a crisis will occur is an astrologer masquerading as an economist. We can only highlight the weaknesses and sound the bugle of incoming threats and suggest policy interventions to reduce output losses and initiate an early- and equitable-recovery. But this does not mean that without this bugle the can of inaction can be pushed down the road indefinitely.

The aim of governments should be to create new schemes to expand the social safety net and take the help of local governments in it (something something cooperative federalism), diversify its sources of revenue, and make sure these are continual and not a one-time event such as disinvestment.

So while we have aimed to reach a double-digit GDP growth rate for the most part in the previous decade it comes today not because every sector in the economy is contributing towards it or because of real output growth. But because of maths, and that is something that is not being talked about in the news.

Corporations have neither bodies to be punished, nor souls to be condemned, they, therefore, do as they like.

Edward, First Baron Thurlow

Economists are shocked to see the percentage of the GDP growth rate for India, in just a decade it has gone from positive double-digit growth to negative double-digit growth. The answers to this phenomenon are a few, as this does not happen in every developing country. This is something different some people point to the larger global conspiracy that is carried out in collusion with the opposition parties of India, others hint at the political divisiveness and the trust deficit with the government. The latter has widened recently since the three new farm bills have been passed (read: bulldozed) through the parliament.

This trust deficit did not emerge out of the blue but from the past policies or reforms carried out by the government. They have bungled their every reform and response, and these bungled responses, one after the other have exacerbated the fault lines already present in respective sectors. But here I explain the farm bills and why everyone should be worried about them.

The Three Bills that has lead to nationwide protests are The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, Essential Commodities Act, and The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, which were introduced as ordinances in June 2020. These bills complement each other and attempt to “unshackle” or free the agricultural/Primary Sector. But these bills will achieve the opposite of what they are introduced for. Let’s see how.

Key Features:

1. The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 allows
   • Farmers to enter into an agreement with a buyer for its products before the beginning of the season, the maximum period for an agreement is five years.
   • Prices to be agreed upon by both parties before the sowing season.
   • The settlement, in an event of a dispute, to be conducted by a Board, or Sub-Divisional Magistrate, or Appellate authority.
2.  The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 which
   • Allows the agricultural produce to be sold anywhere, even outside regulated areas of State APMCs.
   • Establishes an electronic trading system where anyone with a PAN Card can participate in the purchase and sale of agricultural produce. The infrastructure for the same may be set up by Mandis
   • Prohibits state-run APMCs from charging any tax on sales made outside its premises.
3. The Essential Commodities (Amendment) Act, 2020 allows
   • Central Government to regulate supply and distribution of certain essential commodities in extraordinary circumstances. Essential commodities will be classified by the government.
   • The imposition of stock limits only if there is a price rise by 100% of horticulture produce or 50% of non-perishable commodities.

Why these policies are sinister?

Of the three Acts, only the first two are directly related to the farmers, the third Act has direct consequences for the consumers, through the basket of goods they consume. The third Act is also simple to explain so let’s begin by simplifying it.

Essential Commodities Act, 2020, empowers the Union Government to declare any commodity as essential and regulate its production, supply, distribution, and trade in extraordinary circumstances. Essential commodities may include food items and non-food items. It exempts government orders relating to the Public Distribution System, exporters, and value chain participants from this law. The Value Chain Participant is anyone who adds value to the product and is placed in the production cycle between production and distribution.

The agricultural products that were previously included in the essential commodities will now be free to be stored by any exporters and value chain participant under the garb of value addition which could be packaging cauliflower in a silicone wrap to avoid decay and longer shelf life, a necessity for retail chains. This policy also allows for corruption on part of PDS employers involved in retail, especially in obscure areas, where they may hoard products for local businesses and indulge in Black Marketing.

Other than that, when the private corporations, continue to build infrastructure for storage as value chain participants in unregulated agricultural markets, the fear of artificial shortages only become stronger. These artificial shortages in the market will increase the price of a commodity for the end consumer, especially in urban areas. Will there be government intervention, if prices rise? Duh!

The government intervention in the market will happen if the price rise by 100% for vegetables, fruits, or nuts and 50% for non-perishable commodities against the price of the last twelve months or an average of the past five years, which allows private players to ensure continual profits by introducing price breaks. This will make skirting the system easy for anyone who has resources, ability, and will to use them in the right way.

The creation of this law, in 1955, was to discourage hoarding- and thus artificial price rise- as India was an agricultural nation that was affected by famines and poor cultivation process. This law was to protect the consumers, most importantly the marginal consumers, from artificial price increases and provide food security. The amended law in essence goes against this thinking to discourage hoarding and protect marginal consumers. Therefore, This is an essential regulatory law, not the usual red tape which is hampering growth in this sector.

While the law states, government intervention, I do not have enough confidence that the government’s actions to protect the consumers will be prompt. I draw this from all the instances in the past where the public was hung dry be it in the case of the Real Estate sector, or the PMC Bank fraud and other Cooperative Bank frauds, or even in the case of NBFCs. The sense of urgency was missing then and so is now, will be in the future, even when the matter will come to the plate.

I believe the union government aims to control the supply chains like the Defense Production Act, in the United States, if that is so, it can create a new law that applies equally to both the public sector and the private sector in any extraordinary circumstances and not comes at the cost of public infrastructure and markets. 

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 allows farmers to enter into a contract with anyone from individuals to Limited Liability Groups and Societies (same as LLC, but it does not mention companies, maybe to protect governments feign socialist character) before the sowing season. It states that the agreement must mention a guaranteed price and any premium over and above it, but it does not mention whether this guaranteed price would be above or below MSP. The government does not even names MSP in any of the three laws.

MSP is important and most talked about everywhere because it partially covers the cost of farming, but it does not cover the true cost of production of the crops.

This law explicitly gives power to the invisible hand- whose “benefits” the world is still exploring for three centuries- as it exempts produce under it from existing State Acts regulating agricultural produce and amended Essential Commodities Act. This law also exposes an already vulnerable farmer with a little safety net, to an additional vulnerability that is free markets that aim to reduce costs in an attempt to make itself competitive.

As this law does not mention the variety of crops that can be produced under such contracts any private player who offers a premium on staple food crops and manages to control Supply chains of such crops would not only manage to control the price of these crops but also introduce artificial supply shocks to maintain its profits, which eventually will prove harmful for retail food price inflation. The law also sets up a redressal system in which the highest dispute resolving power is with the Appellate Authority headed by a Collector or an Additional collector, which may solve the issue in 30 days.

Contract farming is not a new concept but something that has been there for quite some time with factories directly. This law only formalizes it and provides dispute resolution, which I believe is a good step for cash crops. Contract farming Act talks only about the contract of agricultural products and nothing about the production of it. As 86% of landholdings in India are small, most farmers contract their land for growing crops to someone else and choose not to grow crops themselves, and take odd jobs in the informal economy to sustain themselves, what would happen to these people? How will this system be allowed to function in this new arrangement?

In an attempt to ‘reform’ agriculture it continues to maintain the inefficient status quo of contract farming that includes payment delays, absconding middlemen(put in place by the corporate), forfeiture of contracts in the event of surplus produce, or price rise in state markets, etc. Testing Failures or Poor Quality have been a quite common excuse to not buy the agricultural produce from the farmers and forfeit the contract.

The dispute resolving apparatus also does little to inspire confidence that the new envisaged agricultural model will be self-sustaining and impartial in deciding a dispute between the companies and the farmers, or even a small farmer and a large farmer.

In an event of a dispute, arising from any party in the contract, who do you think the collector or SDM will side with? A farmer or his post-retirement prospective future employer?

Other than this, the Contract Farming Act can make farmers more vulnerable, especially the marginal ones, and increase their financial anxiety in this sector- and this could translate into an increase in the number of suicides. Due to a lack of information on the prices of the agricultural produce, in free markets, the farmers may be forced to sell crops at throwaway prices that may not even cover their costs.

The third act, The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 begins by defining farmer’s produce, which includes food items and non-food items including meat, cotton and jute, and cattle fodder. It attempts to make agricultural produce tradeable and aims to integrate local markets into a single national market, but comes at the cost of State APMCs and rural government Markets, which also contribute to state revenues. This Act implicitly weakens the APMC Act by making the procurement outside APMC tax-free.

The buying in the APMC market is taxed and taxes on the purchase of the crops are paid by the buyer, which is the government or FCI in most cases, especially in the case of procurement in Punjab and Haryana. These taxes are charged for the services the market offers and are used in the development of infrastructure in these markets, and make payments to labor that works there. This disincentivizing process exposes small and marginal farmers to the risk of price volatility, and thus their livelihood, and culture.

This Act also talks about developing infrastructure for electronic trading of the farm produce, which would further integrate the markets but the charge of this duty is shared among Mandi Boards and private investors. This will only make the dereliction of their duty easier.

It also mentions the dispute settlement mechanism which is the same as mentioned above in The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020.

Therefore, while the aim of these laws, in conjunction, is to increase the number of buyers in the agricultural markets and thus ensure better prices to farmers for their produce through competition, these laws will achieve entirely the opposite. Initially, and immediately, it erodes the power of collective bargaining of the farmers, especially marginal ones, and creates informational asymmetry in the agricultural system- a feature for market failure. Private Players often indulge in collusion in markets they operate in and it comes at the cost of the small farmers and consumers in these markets. These laws can also decay the social structure of the country and exacerbate geographical differences in social indicators.  

These laws also claim to solve many problems that farmers face but ignore the problems faced by the farmers in already unregulated markets, which include informational asymmetries and high transaction costs. Apart from this, there is poor connectivity of already existing government markets, which makes transportation costs for the farmers to get to the markets very high. The standing committee on agriculture in 2018-19 recommended that the central government should create marketing infrastructure in states that do not have such an arrangement. 

Most of the time, small and marginal farmers cannot sell their produce in these unregulated markets because of various issues like lack of marketable produce, lack of transportation facilities, and long distance to the nearest APMC market. The standing committee suggested the creation of small rural markets, the investment fund for which will be provided by NABARD at a concessional rate to the states. The recommendation was also to set up a small rural market in every panchayat.

I do not recommend that every sale should go through the Mandis. It would create an inefficient system filled with corruption, and a government-mandated oligopoly market structure in every local market where large farmers and middlemen are the gatekeepers. These Mandis were a way to ensure social security to small farmers but at the same time became a crutch for the farmers in some areas, which I believe can be corrected if harvest prices are increased, through quality and increase in benchmark prices.

Comparison across States

Manipur, Kerala, and, Bihar, do not have the APMC Act but the development in all the states is different. Refer to the table where I compare Social Indicators from Kerala and Bihar.

The average income of Bihar farmers is the lowest in the nation, which repealed the APMC Act in 2006. The Standing committee on agriculture in 2010 had noted that repealing of APMC act in 2006 did little to inspire confidence among private players and attract investment. Instead, APMC Markets lost their income and no significant investment was made for the upkeep of the agricultural market infrastructure in Bihar. The problems for farmers in such unregulated markets increased, they faced issues such as high transaction costs and lack of information on prices and arrival of produce.

The farmers’ income in Bihar fell while the share of labor dependent on it increased. Further, low agricultural income is also the reason for low agricultural wages in Bihar as compared to other states, such as Punjab and Haryana, where agriculture income is high. This is not to say that before APMC was repealed in 2006 everything was fine with agriculture in Bihar. The connectivity of the markets was low due to which farmers had to sell their-whatever surplus- produce to the vyaapaar mandals which resulted in corruption but Vyaapaar mandals ensured procurement at MSP. These Mandals were replaced by PACS which also ensured procurement at MSP but was riddled with inefficiencies, most important of which payment delays and private contractors operating PACS in some areas.

Payment delays are an important catalyst that changed farming in Bihar as the majority of farmers here are marginal with an average landholding of 0.9 hectares which makes agriculture here a source of livelihood, not entrepreneurship. Thus repealing of APMC in 2006 forced farmers to sell the produce to local businesses at throwaway prices and work elsewhere as agricultural labor to sustain their families and cover for fall in their incomes. The magnitude of this economic migration from the state cannot be comprehended, one can only make guesses of it by looking at pictures of migrant labor walking east from the west during the COVID lockdown in April. 

Both lack of storage, lack of savings, and lack of market infrastructure have added to the woes of the farmers in Bihar.

The other aim of the reforms in Bihar was to increase buyers and thus investment in agriculture but no significant investment has happened to build infrastructure instead it has been dilapidating since the APMC Act was repealed. This was because the income of the market boards was reduced since the repealing of the Act. However, private markets that were created after that, continue to charge such fees even when necessary infrastructure is missing in them.

NCAER found that price volatility increased in Bihar after 2006 and adversely affected the crop choice and decisions of farmers to adopt improved cultivation practices. Price volatility could also be the reason for low growth in the agriculture sector in the state, as compared to the other states. Lack of institutional arrangement left farmers at the mercy of the private traders who deliberately fixed the price of agricultural produce lower, to maximize profits, by playing on the urgent needs of farmers for payment.

What happened in Bihar is a long term impact of these reforms where 70-80% of labor works in the agriculture sector.

In Kerala, there are various social security schemes both for farmers and non-farmers that has kept farmers’ incomes stable. Apart from that crops grown in Kerala are different than that of farmers in Bihar, both because of geographical differences and differences in base income to start with, refer to figure 1 and figure 2. The income of farmers in Kerala is the third highest in India, whereas Bihar is the lowest refer to figure 3.

The low income of farmers in Bihar is also the reason for low personal investment in social sectors and thus poor performance in social indicators, compared to India’s average and Kerala.

Madhya Pradesh after years of strengthening the State APMC Act also implicitly weakened it. The data on business done by Krishi Upaj Mandis shows the same, that reduction in cess does not impede private players to invest in agricultural sectors. These Mandis did little business both before the laws were amended and on Year on Year terms.

Therefore, one can conclude that the removal of barriers alone cannot lead to an increase in private investment in the agricultural sector. The mandi board has to be replaced to fill the institutional void created by these reforms, states could substitute for the absence of the Mandi Board, but that also might fail to represent the needs of the local farmers.

This will reduce the contribution these markets make to state revenues, thus increasing the net contribution states and central government will make in these Mandis. As state revenue sources have become volatile and less diverse since GST, this only increases the burden on the revenues of the central government, which again might fail to represent the needs and issues of the local farmers. This will also make farmers a target audience for populist schemes, which has already adversely affected the sector.

The situation of farmers in every region is different. In Punjab and Haryana farmers get the benefit of MSP but in Orissa and Bihar very small section of farmers get such benefits. The harvest prices, the price at which the general public buys the crops, also paints a different picture with regional disparities, refer to figure 5.

These low harvest prices have not translated into low retail inflation for the consumers, especially in urban areas. The percentage change in CFPI has been highest in recent years, refer to figure 6 and 7.

Let’s look at alternative policies that could help the farmers.

Recommendations

The most gruesome mistake that these laws make is to consider the agricultural market outside of the rural economy- where a single agent may interact in various markets both depending upon his and family’s economic and non-economic power. Sometimes, the Arthiya or middlemen is also the moneylender to the farmer whose crop he is selling to the third party. If the farmer holds a small piece of land and the agricultural produce is not surplus enough to generate income to sustain a family, the same middlemen could also be the employer of the farmer, if he is a large farmer or contracts land from small and marginal farmers.

As these laws explicitly prohibit to include any landholding of the farmers in any contract generated, this might not happen in an informal rural economy, where they interact because of the trust they have in the other agent. This is also where farmers interact immediately due to their urgent needs.

Contract farming law believes that one size fits all regions, all crops, and, all markets and this is another grave mistake that would not be termed erroneous even in hindsight.

Some have suggested that price in APMC markets could act as a benchmark price but for that to happen, the buyers-sellers would have to interact in this market. As buyers are not bound to enter such a market to interact as opposed to sellers who do not have to sell their produce at the earliest, due to lack of storage infrastructure. Therefore, distress sales would become a direct implication of these reforms.

Apart from all of this, the Contract farming Act also includes food crops intending to increase buyers for such crops and increase investment in them. Food Crops could have been exempted as they are essential for consumption and most vulnerable to artificial price shocks, especially at a time when our NFHS data does not inspire much confidence.

Further, These three laws in conjunction make farmers’ a target audience for populist politics which has been happening for many years and in multiple states, with plenty of blame to throw around, on people on both sides of the aisle, which has severely crippled the primary sector, as it makes farming profitable today as the cost of future.

My recommendations are very simple, other than those mentioned here and there:

First, Replacing MSP with a direct payment method to ensure stable agriculture income, should be made to the farmers. This will also reduce the burden on central & state government expenditures. This should also cover the sale of crops outside the Mandis. 

Second, Encouraging investment in the primary sector by providing an implicit guarantee to private investors, instead of deterioration of state markets, which is a safety net for small and marginal farmers. This would reduce the risk & cost of investment & help them in generating a steady profit.

Third, to exclude the food crops, with exception of a few vegetables, from the Contract farming Act, and make it exclusive for cash crops.

Fourth, repeal the Essential Commodities Act, because no way should an influential person be allowed to hoard essential goods and create a monopoly. The agriculture sector is just too important to let loose in the hands of capitalists.

Fifth, to set up a benchmark market infrastructure for the APMC Mandis and State Mandis and allow them to charge a cess based on how close they are to this benchmark.

Conclusion

The agriculture sector cannot function in free markets especially when the other sectors are not ready to accommodate the surplus labor that will be out of work in the agriculture sector due to these laws and low wages.

These laws do not force anyone to enter into contracts, but private individuals, especially corporates, have the resources, will, and ability, to make the contracts a lucrative option and make them a honey trap for the farmers when the entire government market structure is dilapidated and gone.

So in conclusion, these agricultural laws will have ripple effects that would make an already limping economy a paralyzed one.

References

Vivek Kaul has recently published a book Bad Money: Inside the NPA mess and How it threatens the Indian Banking System, where he writes about how Non-Performing Assets have accumulated in our banking system, with a particular focus on last decade, and if left unattended could lead to a bigger problem that could harm the economy in multiple ways.

The book is written in simple English, almost without jargon. If you compare with other books that were simultaneously released on the same Banking problem, you will find no conjoined sentences and no use of heavy words, this helped me in saving time. It also takes into consideration the bureaucratic nomenclature that is slipped by the naked eye.

As it happens in his columns on the web, the book has a lot of references and includes quotes from other books, which to a new reader might feel like a magician pulling a rabbit out of a hat. The book is loosely based on Hyman P. Minsky’s Financial instability hypothesis and its three stages of the hedge, speculate, and Ponzi, with a significant focus on the Ponzi stage, which the Indian financial system was and is possibly still in.

The book has cut off date of March 2019 (the precedented times), and when it comes to solutions he does not offer many but leaves us with a warning to bring back the house in order.

The book also takes multiple digressions in the beginning to explain or rather update the reader, if he has either forgotten something or does not know something. These digressions are both a boon and a bane for the reader, boon for those who either don’t know economics/finance or were not aware enough to nitty-gritty details of what happened in the last decade in the economy, and bane for those who don’t belong these categories.

To summarise, it is an analysis book with a focus on bank and financial system.

Despite this, I have two problems with it.

1/ The Graphical Errors

A key characteristic of visual representation of data is easily readable, which this book is missing. Instead of using distinct colors for lines on graphs or distinct lines for depicting various metrics it only uses shades of grey, which was unappealing and was not easily readable as a graph should be.

2/ The Monkey Balancing

The book goes from being political, to less political, and apolitical. He does not explicitly name politicians, unless absolutely necessary, but towards the end of it, even that enthusiasm seems to be missing. I do not lay importance on politics as for me good research always supersedes politics but it becomes important when you name one and not the other.

For instance, he uses the term Phone Banking, which as you know is a political lexicon used at regular intervals by the current government to attack its predecessors. This hypothesis is political in nature, which should have no space in an economics book, as it cannot be verified by data, or should only be placed if you are making a comparison between the two time periods or governments.

In the end, I have no regrets that my good money was spent on Bad Money, therefore I recommend it to anyone with an interest in this field.

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This post is personal one. It is a painful one. I adapted the reflections that I sent to Janet Yellen, Ben Bernanke, and Peter Rosseau recently. 36 …

Economics is a disgrace

The default on debt, therefore, burns a hole in someone’s pocket, some have bigger holes while some have smaller holes, but everyone has it. Then there is a handful who profit out of a financial meltdown. The Global financial crisis, which was caused by the default on mortgages* created havoc, it was a fire, metaphorically, but in October 1834, London was in literal fire caused by Tradable debt.

In 1834, Westminster decided to demonetize exchequer tallies as currency which was in use for the last six centuries. This system was older than the Bank of England by more than 500 years. Willow’s branches were used as tally sticks for accounting, it was used as a receipt for the amount deposited for the use of the king. On a willow branch, the amount deposited was written on two halves along with the name of the debtor and creditor. The half with the debtor was called foil and a half with creditor was called stock.

So If I, JP, takes a loan from ecolibria of £100, the willow branch with me is foil, and one with ecolibria is a stock. But why only willow branches were used and not a ledger?

Willow Branches have a unique and distinctive grain that could be matched when the repayment was made, which increased willow’s functionality as a currency and also strengthened the contract between two parties. Also, different size willow branches were used for a different amount of debt. The one with £1000 was longer than £100, which was longer than the branch of a penny.

Coming back to the transaction of £100, which I have to repay. Unless ecolibria believes that I would default on the debt, it can use it’s ’stock’ to get goods worth £100. Similarly, if I need to get money from X, I can save my trip of going to ecolibria to make repayment and instead ask that X pay directly to ecolibria. This can happen only when there are very few people in the economy and everyone know each other.

You see how that stick became a currency just because creditors trusted their debtors, that could not possibly happen if instead of exchequer tallies the transactions were recorded in a ledger.

This is not a single case of history where debt became currency, in fact, all currency is debt that is tradable, look at your currency notes, the money in your wallet is a liability of a government and everyone uses or accepts it because everyone trusts the government. If you did not trust the government, you would be at bank demanding goods more valuable than the currency notes.

In Ireland, in May 1970, when a dispute between banks and its employees resulted in an anticipated closure of activities. Irish citizens started writing checks mostly made out to cash. This system had many risks attached to it. People could lose track of how many checks they have written or their finances. People with a motive to cheat would write checks that would eventually bounce. The Irish economy survived because most of the Irish Business was small and local. When the dispute was resolved and banks opened in November, the banks had a backlog of £5 billion of checks to be cleared, which took another 3 months to get cleared.

So can anything can be money? No, to make it very simple. Any commodity that is fixed will run into problems when it comes to divisibility. See again the debt I took, anyone to whom stick passes must take goods worth £100 against it, you cannot get goods worth £80 and get change for £20 unless the seller has an exchequer tally of £20.

Either the seller or ecolibria could come to me and take two exchequer tallies, one with £80 and another with £20, but the question is how many trips the creditor or the seller would be willing to make?

The problems are magnified when commodities become money, that is how many shoes should I exchange for a loaf of bread, and this is just one of the many. The problems are further magnified when there are numerous goods, buyers and sellers do not know each other, and transportation cost is very huge or there is a long queue at the exchequer for the conversion of large willow sticks into smaller willow sticks.

Another problem with my example is I am not a central authority that could be trusted, but the United Kingdom had a central authority- the King.

What caused the London fire?

The exchequer tally system was not used since 1826 and became obsolete so in 1834 it was abolished and subsequently replaced by paper ledgers. The new task of disposition of two cart load exchequer tallies emerged. The Clerk of Works thought that two underground stoves in the House of Lords would be appropriate to carry out the said task.

Senile Clerk of Works locked the premises at 5 PM and went home. The repetitive complaints of floor heating were ignored and eventually, a fire broke out.

The fire broke out at 6 PM on 16 October 1834 and it was assumed to be under control, but at 6.30 PM to the utter disappointment of everyone spectating, a fireball exploded taking the flames to skies. Prime Minister William Lamb called it ’one of the greatest instances of stupidity upon record’.

The fire burned House of Lords, House of Commons, and part of the Palace. It was finally quelled with the help of Volunteers, Change of Wind, and London Fire Engine Establishment’s great, floating, barge-mounted fire engine.

The fire was the most significant blaze between 1666 and the Blitz. The firefighters left five days later after putting out the fire that kept emerging from the debris. The Volunteers were later paid in beers for their efforts.

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*Note: It was caused by the failure of regulatory agencies who failed to take preemptive action when the debt markets were in the red zone.

Backstage, Montek Singh Ahluwalia’s book on India’s high growth years is an introspection-ary tale of our economic policy throughout the years, where economists carefully nitpicked the instruments to use, patiently, to get the growth we had. While he talks about economics at length he does not shy away from sharing his personal journey through the years, which runs parallel in the background.

It is filled with both political anecdotes and opposition he, and everyone else in bureaucracy, faced to carry out basic reforms. Thus was born reforms by gradualism and stealth, and has remained ever since with us.

One thing, that is not said, but is underscored by the ideas put forth by people is the quality of education these (mostly) men got from universities all around the globe which makes hard work and Harvard both necessary.

He also outlines the significant achievements made throughout the years, with the help of gradualism and stealth, but most consequential outcomes were achieved from 2002 till 2013. A series of necessities, like education and food, were made into rights through laws by the Right to Education Act, and the Right to Food Act respectively.

Books on economy normally end with a lot of suggestions about the future while commenting nothing upon what to do with the challenges they, themselves, faced while carrying out reforms. Backstage does not fail you as a reader, or reformer, in that area. It leaves you thinking about the reforms suggested, as they are not detached from reality. It affects you, me, consumers, society, communities, states, and nation.

One inevitable change, which is not taken seriously enough, is Climate Change. And at the cost of climate, we are making our primary activities profitable as it is politically attractive to do so. The problem is not only with a state or a region but throughout the nation and across all political parties, regional included. The noose of inevitability is tightening by the day.

He also points out the problem with our bureaucratic system and how persnickety and inward-looking it has become over the years, with regard to lateral entry and getting technorcats from outsiders. Backstage even mentions the need for judicial reforms and the cost of everlasting, and impeding, investigations.

In the last years of the dubbed high growth years, gains were realized that could be felt in the economy, but no one felt the need to take charge of the baton and instead choose to start with a clean slate with the help of masquerading technocrats. In the PM’s first term, I wrote ’PM should keep economists at his disposal, not accountants pretending to be economists’ my mistake was I assumed ’it could be disastrous for the economy and people’ was implicit. (Pardon my French; Assumptions is the mother of all fuck ups.)

I do not want to even pretend that I will do justice to the book or writing by mentioning what has been achieved, therefore, I recommend you all to read it. Of all the books I have read, so far, this is the one that has been written like an economy’s memoir, not just a personal one. What I most liked about the book was its underlining of the importance of teamwork, and like any other book, this ends on a hopeful note.

And in the end, I would like to say I do not feel no one is a better candidate than Montek Singh Ahluwalia, who has given more than 30 years to the nation, and his book to enter the 70 years development debate.

Ban is like the first appearance of Kramer in an episode of Seinfeld, it gets all the applause but once other characters start talking his importance fades, just like that all we need is a new distraction and the demand for a Blanket Ban will become hollow.

There are multiple ways to discourage economic ties, like either imposing a Tariff barrier or a non-tariff barrier or banning the country from Trade. But in the view of recent clashes, should we be impulsive and jump on this Ban-All bandwagon?

Which Country does the ban hurt?

Let us take the example of a discouragement of trade that leads to the imposition of tariffs.

Any country, the state within a country, and county/district can impose a tariff as and when they like. This instrument is not exclusive to anyone, any country, of any category of income, can impose it. The good on which it chooses to impose tariff depends upon a variety of factors, political and economical included.

Tariff hurts an economy, sometimes both, but there is no ambiguity to the fact that it hurts a country that is relatively poor. If a country J is poor than country S then J will suffer if they impose a tariff because people of country J will not be able to get the goods and also they don’t have means and the ability to increase production, as they are poor, and meet the domestic demand.

It also depends upon the good on which tariff is applied. Again, If a country J applies tariff on the import of bottle gourd, which has no demand in the economy, the country is in the same position as before, and whoever chooses to become a Masterchef overnight with a dish that includes bottle gourd will suffer. Now he has a choice between paying an extra price or not using it at all.

As India is relatively poor, a tariff on any intermediate or final consumption good, will hurt India and Indians more than China and Chinese.

But what about a Non-Tariff Barrier? Can that be an option?

Who does the non-tariff barrier hurt?

There are a variety of non-tariff barriers, each with an aim to discourage imports. This could range from basic quantity restrictions to those of Red Tape.

Quantity restriction is like the rationing of goods, given the total demand in the economy, but also not necessarily so. As opposed to rationing, in quantitative restrictions only people with high reservation prices, that is they value the commodity purchased more than its price, and the low price elasticity of demand will be able to buy the restricted goods.

Low Price Elasticity of Demand means that when Price changes, the demand does not change by a lot.

Quantity Restrictions also increase the prices of the goods and lead to an increase in black marketing and, given how India’s bureaucratic channels function, it would also lead to corruption and hoarding and what not.

Red Tape is a natural non-tariff barrier, used both in countries that are heavily lobbied by corporates and those that want to have a micro-managed economy. Licenses are an important tool for it, another tool is unnecessary checks.

The license raj till the 1990s was a nightmare for this country, going back to it and issue it for getting imports will be equivalent to burning our own house. The businesspersons that had an influence then used it to curtail competition, bribed both politicians and bureaucrats, with favors, to restrict it’s access to very few and chosen individuals. We went away from it in 1991, and now we are moving back to square one. Undoing Progress one reform at a time?

Under unnecessary checks, an importer would have to take the consignment to the dedicated location to get a certificate of quality from the bureaucrat, this could be on Ports of Kerala or Landlocked Madhya Pradesh. These checks increase the time travel of the consignment but the underlying aim is to discourage the imports.

For example, without checks or on site quality checks a ship from China carrying goods get docked at Chennai Port, and is checked on the port and sent to the place of the factory, which has placed the order. But with checks in Madhya Pradesh, it would be sent from Chennai to Madhya Pradesh, get a certificate, and then sent to whichever factory that has placed the order. If the factory is in Andhra Pradesh, Kerala or Telangana this will be time-consuming, increase our production costs and reduces our ability to produce goods, if we imported intermediate goods.

Therefore, a non-tariff barrier will hurt both Businesses and Consumers, businesses will have to expend more time getting a license for import of goods and buying good and the consumers will have to satisfy their demand with a fewer variety of goods and that too at higher prices. End consumers are affected varyingly, depending upon their relative position, income, and state of the economy.

Read Now: A Case for Fiscal Policy.

You, Me and Consumerism

Our economy, like any other developing economy, is very much dependent on the consumer for economic growth. A tariff is like a tax, which causes the prices to rise in the economy. In today’s globalised world, it is a bureaucratic nightmare to decide which good is Indian or Foreign, case in point being the list of commodities banned from Paramilitary Canteen, under AtmaNirbhar Bharat Abhiyan, to be replaced by Swadeshi (local) goods. The list, now redacted, included Ayurveda giant Dabur, which is very much local.

The tariff will affect those that are poor, as Indian goods are not cheap, they find alternatives in cheap Chinese Goods to meet their demand. Apart from it, people that have high incomes and also low price elasticity of demand can buy imported goods.

India does not have a product diversity that would be sufficient to meet every consumer’s demand. Therefore, start with having one good in every segment, increase competition over time and increase it’s market share and then impose restrictions.

Moreover, retail shop owners, and MSMEs, who again are relatively poor than corporates will be worse off. It is a tough time for India right now, instead of focusing on inward-looking policies, without any infrastructure, the focus should be on infrastructure building that smooths our economic activity and thus growth.

There is a threat of The Great Shutdown looming upon us, all businesses are prone to it, this was an exogenous shock but countries have prepared for it, both on paper and on the ground. With a lack of fiscal space and government raising debt to meet its a revenue shortfall, the government only shows a lack of seriousness to deal with the problem.

If at such a time tariff is placed and with no cash reserves at hand businesses stop importing and are forced to shutdown then what is the guarantee that government will not raise income taxes to meet revenue shortfall, and if at all recession transforms into a depression what is the guarantee that government will extend it’s helping hand and take care of those who are severely affected.

A weak economy suffers more in an inward-looking and protectionist policy, certainly more so in a globalized world. Blanket ban or Tariff imposition is a knee jerk reactionary policy, if adopted, will rise up and match Demonetization on the disaster’s list.

Buridan’s Nationalism

India’s nationalism is a case study for every political professor. In the last six years, we have seen a lot of shades of it and once we boast about seeing all hues of it, there would be a volte-face. I call it Buridan’s nationalism, struck between two superpowers, pleasing both at the same time and yet no close associates, and country worse off than before.

We have made ourselves closer to the USA yet no significant gains have been realized from it, we have ousted from GSP and there are other investigations underway. On the other hand, our exports to China have fallen by 14%.

When we did not sign the Regional Comprehensive Economic Partnership (RCEP) agreement we were promised an FTA with other countries, yet these agreements or even talks of it haven’t seen the light of the day. Vietnam has recently signed an FTA with the EU which will give Vietnam greater access to EU markets. Japan and the UK are in talks to sign one. 26 out of 29 firms exiting China went to Vietnam and not India. Indonesia, Myanmar, and Japan are up for grabbing the rest of those that are exiting China.

Bangladesh’s rate of growth in GDP was higher than us and India’s GDP growth rate was the lowest in the decade.

There is growing public sentiment, especially in conservatives, to ban all Chinese and fringe groups flung to action and destroyed shops that sold Chinese goods, our Minister went on a limb and advised to banning Chinese food as well and therefore putting lives of those employed in these restaurants at risk. Never should public sentiment define economic policy, this new found Nationalism will leave us worse off than ever.

Corporates and Businesses, that have capital or are able to raise it, will use this moment to increase their exposure to the US and enter into Joint Ventures with them, there incomes or revenue will not be affected, in the medium term. Similar is the case for the government, and if at all revenues fall, tax cuts will be reversed and then subsequently raised to meet the shortfall. Consumers will be worse off, no one else.

Conclusion

The COVID-19 Pandemic is showing it’s full might in India, with no clear policy to deal with pandemic and untimely full-opening of the economy is proving disastrous, the government is busy in petty politics and trying to meet the demand of those in their coterie.

In the last six years, there has been no sector that has not been affected by one policy or other.

Similarly, there are our own limitations, primarily, infrastructure, which you yourself might have experienced during the strictest Lockdown. Next, is Fiscal, Chinese production is severely subsidized that is why they are sold at very low prices everywhere around the world. India does not have the fiscal space to subsidize production in India. Then, there are numerous laws that govern India’s business atmosphere which are overreaching and hampers business activity, and labor laws are not one of them.

I am not saying that we should sit idle against Chinese Intrusion, and skirmish that followed, but it is not, and should not be, the forte of any patriotic, or nationalist, Indian to advise military action or ask for economic action against China that affects everyone. Let Diplomats and Armed forces do their work, and if your sugar rush nationalism compels you to boycott the Chinese made goods, do not ask for a blanket ban that hurts everyone. We should not let our emotions dictate our economic (or any) policy, instead, stay in reality and work over the long haul to make sure our weakness becomes our strength.

Repair the ratings that are just above junk, find a solution for the shadow banking crisis, find a solution for falling demand and growing unemployment. Try that Foreign investors does not leave India causing a bigger crisis than ever, inflation remains under control and does not end up hurting the consumers. Make sure no one goes hungry and jobs are created not destroyed, and gains from the last four decades are not erased by an imminent recession that we face. There are myriad challenges facing India’s economy and Businesses and any State’s election is not one of them.

Economic Nationalism is a slippery slope, with a higher probability that we fall on our faces.

Transfers are non-binding, that is they do not create a liability on the receiver for the future. They can help to get out of the crisis if there is no demand in the economy provided the supply chains remain unaffected due to lockdown and it leads to no or minimal increase in the virus infections. In normal times, unemployment transfers give people money on their hands when they are in between jobs so that they fill their bellies but being unemployed is more identifiable in a formal economy. So some people saying we should dole out cash as many people have lost jobs are not entirely wrong. But for transfers to work, in an economy, the Banking connectivity should be very high. The transfers will also fail to work if all people in need of money do not have a Bank account or have a bank account and bank connectivity is very low and chances of Virus infections are high.

Even if transfers are made who will bear the cost of it? Should it be a future tax, as was the case during wartime or raise government debt to provide transfers? These questions remain unanswered as no one can say certainly what the future holds, as every day is unprecedented.

Now let us see how debt behaves. Let’s assume the government raises debt today for a promise to repay in the future, let us also assume there is a future ahead, a calmer one.

Every country will raise debt according to its own need and capacity. Similarly, the ability and credibility of Industrial Nations will absorb the capital in the market like a sponge if both Emerging markets and Industrial Nations issue bonds simultaneously.

Raising debt can also be unsustainable if it is short term and is denominated in foreign currency. It should not happen that we get out of this crisis and end up in a situation of East Asian Crisis of 1998. Debt raised in foreign currency induces more risk today when there is no or lack of cooperation between nations, as most are engulfed in protectionism and deglobalization. In such a scenario default risk of a loan denominated in foreign currency is increased.

The raised debt will have to be paid back, there is no question about that, but with political uncertainty and lack of Bipartisanship, the growth could take longer than expected to return and eventually postpone debt repayment. After the Great Recession, it was in 2016, that growth was normalizing and that too with increased income and wealth inequality, which is even more in marginalized communities, of color and gender.

An industrialized nation will raise debt in Trillions whereas an emerging market, like Myanmar or Bangladesh, will prefer more country to country transfers as compared to debt, and might raise debt in Billions. Both could be unsustainable and it solely depends upon how much was the Debt-to-GDP Ratio before COVID. Countries that have a Debt-to-GDP Ratio of more than 100 are more vulnerable and put more pressure on the public for debt repayment, at the same time might be choosing to avoid any future help if the second wave of virus follows with total Lockdown.

Another issue that comes with raising debt is interest payment, as the interest rate worldwide is at historic low levels it poses less of concern. But government revenues, from which it makes these interest payments, in the form of taxes are more uncertain than before and will be reduced in a post lockdown economy. This would somehow make it attractive for countries to raise the income tax rate for individuals and corporates.

The argument being both amounts of debts can be repaid as both are nominal amounts and a Trillion differ a Billion only by 1000 times is completely wrong. If you paid a dollar every second to repay your loan, it would take you over 31 years to repay a Billion dollars and around 31,000 years to repay a Trillion dollars of debt, at no interest rate, this is not just a long run but the longest run anyone can assume and by that time human civilization will not be around.

So being completely dependent on a debt-laden economic package is not advisable and so is the case for completely dependent on Transfers. Countries have to resist the urge of both borrowers, who want more unemployment insurance, and savers, who want more transfers, from the same amount of fiscal policy, and reach a compromise.

Coming to the pertinent question of non-economists of growth recovery. It can happen within a quarter or two quarters and it can even take up to a year for it to return. It all depends on how robust a country’s healthcare system is and how soon a breakthrough happens in terms of vaccines and medication, as this is not a crisis that has its root in economics. Having said that, a correct mix of fiscal policy and monetary policy measures will act as a catalyst for faster growth recovery. The shape of the growth recovery graph will not be from the alphabets if the nation was already struggling with problems before COVID. It could even take a decade for growth to recover if there is a lack of bipartisanship in the country and growing political uncertainty.

We have to flatten the coronavirus curve and a recession curve.

I hope you find this article useful if you have any suggestions in mind feel free to contact us. If you want any particular topic to be written about you can mail us at ecolibria.theblog@gmail.com or you can tweet to us, using #AskECOLiBRiA. For more updates follow us on Instagram and Twitter. 

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1. GDP Growth Rate: With a majority of the workforce remaining out of work due to the COVID-19 pandemic, the Quarterly GDP growth rate of the Indian economy will indeed fall. With factories shut under lockdown, it is the magnitude of the shrinkage that we should worry about. India has witnessed a negative GDP growth rate in the past as well but it was the era of License Permit Raj, and the blame could be thrown at the red tape. This does not mean we don’t have regulations anymore, we still have them but the negative growth rate, if caused, will be partially due to the pandemic and but mostly due to the culmination of various disastrous decisions of the past. Pandemic has exacerbated India’s problem. IMF Economic Outlook paints a grim picture but hopes for faster recovery for India and the world economy. At the cost of sounding sanguine, I would say, it would be a little longer than a year to get back on track.

The official estimate of the GDP growth rate should not be taken at its face value because of the various problems in methodology, prime being the use of GVA as compared to GDP at factor cost in calculating the GDP growth rates and equating the production in, behemoth, informal sector to the formal sector, which I feel is definitely unscientific and an unsubstantiated claim to overstate GDP. Another point of worry is the research of Arvind Subramanian, which proves that the GDP is overstated by 2.5 percentage points. Until corrections are made, it would be imbecile of us to believe in numbers.

As the economy shrinkage becomes more apparent with each passing day, even without the data, the goal of $5trillion economy seems further away. It is definitely not unachievable but it will be arriving in later years and definitely after 2024, and therefore will fail to become an election talking point. Even if we restore back to the normal growth rates of 5% we will miss the target, by more than a mile, as it is definitely not sufficient to reach the said goal. A lot of senior economists have underlined the importance of a continuous and double-digit GDP growth rate of at least 11% to achieve it in the next 4 years.

The goal was ambitious when announced but now it has become over-ambitious. Throw it in the bucket for the time being and don’t spook the goal by repetitively talking about it.

India’s economy shrank by 5.2% in 1979-1980. In 1975-76, GDP grew at 9.0%.

GOVERNMENT OF INDIA, 2014. GDP IS AT FACTOR COST, AT CONSTANT PRICES, WITH 2004-05 AS THE BASE YEAR.

2. Unemployment: Looking at the unemployment data generated weekly by the Bureau of Labor Statistics of the USA it gives us a general picture of what the situation is going to look like in India. I know data of the US cannot be extrapolated to explain India’s unemployment numbers, but the turnaround time of our data is very large. The Unemployment numbers in the US are skyrocketing. With a suspicion that they are overstated, until the course of time further clear things, I believe a similar pattern might be visible in India’s economy. We should take time to improve our data collection methods and streamline it to produce faster results.

The alternative data available, for India, puts the aggregate unemployment in double digits at 23.52% in the month of April 2020 as compared to 8.74% in March 2020.

Unless a labor-intensive scheme is announced and jobs created en masse we will see this unemployment persisting through the second half of this financial year and next financial year too, while new additions are made to the workforce. A centrally sponsored scheme must be created with the flexibility for the states to use the fund in the sectors they like and to absorb the unemployed in their state.

Wages will also take a severe hit in the upcoming year, not just in India but also globally. Wages as a share of GDP have been falling for 40 years now, and with the pandemic, more and more labor will be substituted for automotive technology. This will create unskilled unemployment which is tougher to absorb as more sophisticated the economy becomes.

3. Revenues: In Union Budget 2020, a lot of disinvestment plans were laid out citing a lack of revenues of the government. If the government has to be sustainable then it should not offer any tax holidays, definitely not for this year and another financial year. The government should also be clear on the strategy it wants to adopt for the next four years. It is not hard science to reach a conclusion in a conundrum of Short Run Revenues and Long Run Revenues.

Disinvestment, any in pipeline, should be postponed until the fourth quarter of this Financial year or the early quarter of the next financial year.

This is also not the time to think of the fiscal deficit and abide by the guidelines in the FRBM Act. We should not pay heed to Vultures and Peacocks. We need to put the economy back on the track, and I hope the wheels of doing so are already in the motion.

A wealth tax can be introduced to cover up the shortfall in the revenues. But increasing Excise Duty or Import fees will hamper the consumer and even deteriorate our position.

Increasing import duties will lead consumers to buy only essential goods, and for all the other goods we don’t have quality substitutes if we want to drive consumption back home. Raising excise duty or Value-added Tax (VAT)*, particularly on crude oil, will make our transportation cost high and create inflationary pressures. A logical solution will be to get crude oil now when it practically costs nothing and create emergency reserves and pass on the benefit to the consumers, for a temporary period of this fiscal year. When the activities will resume, to the fullest, the purchasing power of our end consumer will be very low, as he/she has been out of work, and this pass-on benefit could help him.

4. Malnutrition: Kaushik C.Basu in a keynote online said that ’we don’t know how many are dying due to hunger.’ He went on to say ’as happens in famine, the first deaths due to hunger always go unreported’. As the daily wage labor remains out of work, due to lockdown, the state should have a safety net to protect people from death caused due to hunger. The places were such a provision was made, many were excluded due to technical difficulties, prime, and most persistent, being server overload.

States should be proactive, at least, till later July, in making sure that nobody dies due to hunger artificially created by the bureaucracy.

We have maintained our food buffer stock above the limit and we also had a good crop this year. This will be sufficient enough to provide food security in India to the bottom 60%, which is the right of every individual according to the Food Security Act.

So, What can be done?

Taxing the Rich: When I say, tax the rich individuals, you hear a high-income tax but that is not what I mean by it. We need to create a wealth tax that creates enough space for subsidies of the poor, just offsetting the costs of it. Indeed, temporary, because if carried to long term it will lead to underreporting of wealth.

As far as corporates are concerned, they will be hesitant to invest in the upcoming years due to losses they faced due to the Lockdown, all the steps should be taken to generate confidence among the executives to ensure the investment continues. Every step must be taken to prevent this from becoming the Great Shutdown.

But using only Supply-Side measures is as good as burning the money. We need Demand-Side measures, too.

Subsidies for Poor: If there is Socialism, it shouldn’t be only for the rich, and by that I mean corporates, who have turned risk-averse in the last 1.5 years, TLTRO, offered specifically to ensure liquidity in the pandemic, strengthens this claim.

Instead, MSMEs and SMEs should produce export quality goods, with the help of subsidies, and the government should realize the export potential of this sector to its fullest. The government should work to remove impediments that hinder the growth of SMEs or MSMEs to become large scale export units. Write-off their loans as large corporates have a higher probability to (wilfully) default on their loans and acquiescently become NPAs.

Subsidies should be phased out with a wealth tax as tax is offsetting the cost of subsidies.

So far we have covered the relatively poor businesses, but let’s get to the poor individuals. Why the poor? The bottom line of this argument is on humanitarian grounds but let’s ignore it for a minute. Poor with their low incomes always consumes less, a handout for even one year, will increase the demand in the economy as they have the highest marginal propensity to consume.

PM-Kisan which has a budgeted amount of 75,000 Crore, highest budget allocation for any agricultural policy in our history, should be raised from Rs6,000 yearly payments to the farmers to Rs10,000.

In UPA years, 138 million people were lifted out of poverty. Many would have circled back into it due to unemployment in the last 6 years, we should provide handouts and create pro-poor schemes so that we do not undo all the gains that UPA was able to achieve.

Employment Schemes: Employment is the only area that had been rem acu tetigisti and it could be the final nail in government’s coffin. Earlier, unemployment existed mostly in educated individuals but now both skilled and unskilled are rendered unemployed. A scheme like MGNREGA cannot absorb both and this could be a good time to lower down the megalomanic character and reach out to experts and create a scheme that proves fruitful to both the categories of unemployed.

Indian Bureaucracy has its limitations, therefore, experts from outside the government, of immaculate global reputation, should be called and asked for help and this should be done at the earliest.

Healthcare: We as a nation of 1.3 billion-plus population do not spend a requisite amount on our healthcare sector. We haven’t reached the peak, yet and we still believe we can fight the pandemic by our will power and not through medicinal treatment. Let MoHFW spend its budgeted amount and allow it to borrow it as well to prepare for a second wave after we reach the peak now, in the first wave. Fiscal Space can be created for it by postponing new defense purchases and deferring the Central Vista Project until things become normal again.

Procure PPEs, testing kits, and Ventilators and start applying Kerala Model to states like Maharashtra, Telangana, and Delhi.

This is a battle that will not be fought by will power alone, so don’t float such daft ideas.

Economic Cost of Pandemic cannot be covered without government shrieking about the revenues, venerable would dive his hand deep into his pocket and match the effort with providing the money because austerity now will leave us worse off than ever before and at last, Do Not Micromanage the economy.

*This was written on Monday, May 4, and on Tuesday State Government of Delhi increased VAT on Petrol and Diesel from 27% to 30% in the state, citing lack of funds. A detailed version of the solutions to the pandemic shall follow this post. Stay tuned for that.

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