Why India’s GDP numbers may be right; but so are its doubters.

Why Arvind Subramaniam is right; but Government is not wrong.

Link to the article in Businessline: https://www.thehindubusinessline.com/opinion/gdp-both-subramanian-govt-may-be-right/article28657586.ece

The ex-CEA has argued that the figures of GDP growth are exaggerated. He may be right but equally right may be the government. The tension will ease if one recognizes that it is possible to grow for some period of time without the total amount of goods and services consumed by community not increasing at all. The reverse is also equally feasible. This can happen with increase and decrease in % terms in the domestic content in value addition, or better productivity (or fall) of natural resources, etc. The crucial bridge between the two sides may be the efficiency gains and shifts in the structure of economy in the last few years.

Let’s examine the impact from efficiency gains. Business line published a few weeks ago (GST on the Highway dtd June 4, 2019) the story of a reporter’s journey with a truck driver from Chennai to Bhiwadi. He reported reaching the destination in 42.35 hrs instead of the 4 days it used to take not so long ago. The driver saved 2 days for his owner and as a bonus pocketed the petrol he managed to save from the 400 litres allowance he was allowed for the trip.

This was confirmed to the writer by an official of a leading transport company who claimed it takes 44 hours to reach Madurai from Dharuhera (Haryana) these days instead of the 4 days previously carrying cars. Only 15% of potential savings have come from GST so far; balance has come from better roads and better driver crews who operate as a team. Let’s construct (with some lenience in calculations) the effect of such savings on GDP in different scenarios.

 

Impact on GDP from Logistics savings (of the reported case)
 

 

 

Scenario —>

Before After
1 2 3 4
Customers final bill remains same; Transport company’s profits go up. Customer takes the savings (other than Drivers bonus) Customer takes away all the savings
Petrol (assumed for illustration) Ltr 400 300 300 300
Lorry Hire (day) Days 4 2 2 2
Driver gets paid for (Days) Days 4 2 2 2
Drivers Bonus NIL Petrol savings of 100 litres (assumed) NIL
Petrol price Rs/Ltr 70 70 70 70
Driver’s wage rate Rs/day 1200 1200 1200 1200
Lorry Hire rate Rs/Day 5000 5000 5000 5000
Composition of GDP
Petrol Rs 28000 21000 21000 21000
Wages to Drivers Rs 4800 2400 2400 2400
Bonus to driver from Savings Rs 7000 7000
Lorry Hire Rs 20000 10000 10000 10000
Profits to Transport Company (say) Rs 20000 32400 20000 20000
GDP (Price Paid by Customer) Rs 72800 72800 60400 53400
Fall in GDP 0 (12400) (19400)
Fall in GDP in % 0% -17% -27%

 

The volume of final services (real GDP) has not gone down but the nominal GDP has fallen sharply. If the final price remains due to market demand and supply, both real and nominal GDP will remain same. If the consumer pays less, GDP will fall due to the efficiency gains, unless there is 50% increase in other economic activities to absorb the truck and driver’s time (unlikely) or we start measuring value of driver’s leisure as equivalent to value of wages.  Here the quantum of services enjoyed has not gone down and so the real GDP should not go down. But the real GDP this is usually measured by using deflators, even real GDP will show a decline.

Paradoxical but that’s the exact reason (but contrarian effect) why big earthquakes and natural disasters are big boosters for GDP growth.

How Arvind Subramaniam and Government may both be right

India’s new normal growth looks 7%. But there have been drop in the exports in the last 5 years of some commodities like rice, raw cotton, meat and oil cakes;  construction activities have been hit, GST and demonetization have hit some cash dependent or tax evading activities, China dumping has clipped the growth in steel and tyre industry. But these may have been made good by growth in insurance services in rural areas, banking services through Jan Dhan, massive spread of LED bulbs, construction of toilets on a massive scale, etc. These may well have compensated for the decline in other areas and the Government’s stance of 7% growth may well be true.

Revisions in the GDP calculation approach takes years and they lag changes in the structure of the economy by a considerable time. Hence it is quite likely that many new sources of growth are not captured properly. Without these services in the estimate samples, the ex-CEA’s estimates may well be true.

But the real joker in the pack may be the efficiency gains in the economy. The last few years have seen significant gains in several areas. LED bulbs have grown rapidly saving huge amounts of electricity. Industries have also invested significantly in energy and utility savings. Banking has gone largely digital  cutting down long queues and wasted time; so are airline and railway tickets. Solar energy has replaced capex with opex and led to vastly reduced levels of consumption of fossil fuel. Digital books vastly reduce the consumption of paper; Netflix reduces trips to the theatre.

As illustrated in the table, such efficiency gains have a dampening effect on the GDP. The greater the gains accrue to the final consumer lower will be the GDP and growth.

And the impact from reduction in corruption. DBT reach the beneficiaries without leakage alright. But they have also taken away the jobs of several intermediaries and fixers. This has contributed to loss of several layers of jobs, even as it resulted in convenience, reduced costs, and saved loads of time for beneficiaries.

With the impact from the above factors, the GDP may have fallen as contended by of ex-CEA.

But GDP calculation is not a perfect maths.  The entire GDP calculation of Zambia is done by a single individual. A minister in Robert Mugabe’s cabinet likened measuring GDP to “trying to use a tape measure to figure out how much Coke is in this glass.” GDP is not measured by double entry book keeping; it is based on sampling with all the deficiencies that come with it. The Ex CEA’s approach is even more remote. The rapid changes that have been observed in the last few years especially since 2008, the urbanization and formalization since GST cannot be captured or compared with static sampling approach, size or methodology.

One wishes that the ex-CEA had not adopted an alarmist approach and present India’s GDP as some kind of methodological fudge. Without an examination of reasons, chains of causation, Working Paper no 354 looks more like the statistical appendix in the Economic Survey. If he had examined the reason behind fall in electricity consumption ratio (for example) from pre 2011 period, he could perhaps have come up with appropriate suggestions for perfecting the system.

Nevertheless, assuming his figures are correct, if the 4.5% has come about due to efficiency gains, better ICORs, reduced project implementation times, cost savings, and lesser inconvenience to consumers why should we be ashamed of it. These would only improve the competitiveness of Indian industry and services.

Time to shed excessive fixation over inflationary expectation in Monetary Policy Making

The Last 3-4 years inflation control has become the dominant theme of our monetary policy making with just a lip service to growth and even lesser concern for what is needed most by the democracy – employment. Inflationary expectations have become the mascot of inflation and taming it has become a near exclusive fixation. the current approach fails to incorprate lessons from the recent advances in behavioural economics
Inflationary expectations have stayed stubborn and unrelenting at 8-10% even while CPI inflation has been has been drifting downwards to around 3-4% for several months.
There are some fundamental issues with expectations of individuals.
Firstly, do retail consumers (unlike equity investors) from whom data is gathered for consumer inflationary expectations have sufficient information and expertise to predict inflation even if they are the ones who are affected? People dislike risks and as Daniel Kahneman theorises people dislike losses twice as much as they like profits. There is hence a tendency to overestimate risks and the losses especially the non insurable ones. Even RBI itself has been consistently overestimating inflation.
Secondly, mind comprehends or estimates prices more based on purchase cycle. For example, a vegetable or fruit purchaser might think or worry about what will it be in the next two weeks. But it will be futile to ask him for an estimate of prices 26 or 48 weeks hence. RBI data gathering does not reckon the purchase cycle.
Thirdly, the nature of human mathematical comprehension itself and translation thereof into annual numbers. Even if they knew rightly that the weekly inflation of two different items are 0.2% and 0.5%, they will most likely come up with annual numbers in the region of 6-10% (instead of 11-30%). RBI’s data on various class wise inflation expectation figures reveal how the expectations are in a significantly narrower band than the experience of the preceding few weeks or months which should have had a significant influence on their expectations. Vegetables prices vary by as much as 40% between March and September (RBI’s Mint Street memo 19), yet this is never captured in the expectations reported which stays flat at 8-10% for most of the times.
How much do expectations drive actual behaviour.
This is the most crucial question that would govern the success or failure of the current approach. Unless it can be demonstrated that people’s behaviour (in direction as well as quantum) is consistent with their inflationary expectation using it will be as perilous as a trap shooter shooting before the bell and hoping that somehow the clay pigeon will show up where the shotshell goes.
How much inflationary expectations will affect consumers buying behaviour depends on several factors like the life cycle of the product itself, per transaction costs, costs of advancing or postponing buying decision and the alternative (even if short term) investment avenues and cost of funds (borrowing costs).
A 15% annual inflationary expectation in real estate might make many to advance their purchase of house sooner than later more so if the financing costs are lower and perhaps even reallocate from other items to beat the market. But the same inflation expectations for petrol and diesel prices (roughly 1.12% on monthly cycle basis) may not make a car or 2 wheeler owner to tank up on empty cans to cover his next purchase. The same rate (0.264% on weekly cumulation basis) would not make anyone to stock up on vegetables especially given the cost of preservation and possible deterioration.
The House owner will most definitely compare his cost of borrowing with his expected price increase in house prices to make his purchase decision. But for articles of daily consumption or even white goods the household consumers are unlikely to be swayed by inflations of the range one is talking of in India. This can be gauged by the discount quantum announced during festive seasons or season end sales in India – upwards of 15-20% of sale and in some items 40% or one free for every one purchased and so on. One does not hear of 1-2% off on discount sales open only for 1-2 days (a 2% discount ending in 2 days translates to a cumulative 3500% p.a.) even for ‘definite to be purchased’ articles of consumption like clothing, household supplies etc. It does not have any impact. Even the pensioners may not be influenced to stock up even when their savings may be earning just 6-8% annual interest rates.
Unless inflationary expectations translate to rational choices by consumers, the current approach will on most occasions result on excessive action. And as RBI’s data clearly proves that as far as India is concerned, inflationary expectations are not necessarily rational expectations.
Only when inflation becomes high (say 20-25% for India) and the interest rates are way lower in comparison or in a hyper inflation (like in Venezuela now), would people be driven to rush their purchases fuelling the price increase further. The current approach at inflation levels of 4-6% seems like having a foot firmly on the brake pedal as a precautionary measure while driving at 1 kmph. Actually many end products in agri and manufacturing sector are crying for a better inflation to neutralise their cost increases.
A case for differentiated approach
There is good case for junking our inflation control focus of monetary policy making. If our economists have faith in their own icon, Philips (after whom the curve linking inflation and unemployment is named), even in short run they would be forced to conceed that a low inflation is a leading likely cause of the current unemployment crisis. We can just use the last 2 months or quarters inflation to decide what to do and should it be necessary convene the review meetings at closer intervals whenever necessary.
Rather than a single objective whatever the inflation, we should move a into differentiated approach depending on levels of inflation. Upto 4-6% inflation we should focus on job creation, between 5-8% may be on growth and employment and thereafter inflation control can take primacy.
Our industrial capacity utilisation is stuck at about 75% for a long time now. The lowest hanging fruit to be harvested for employment and growth is to put the unutilised 25% to use. It would take a bold approach to identify the more viable ones amongst these and provide them with 4-6% working capital, which could make them chugging again. A growth of an additional 2% will deliver more goods and services to the consumers and tame inflation and create employment far better. But such a sensible approach would be blasphemous to our orthodox theorists.

Contrarian Ways to tackle Agrarian Crisis

https://www.thehindubusinessline.com/opinion/tackling-the-agrarian-crisis-differently/article26501142.ece

Article link in Businessline 11 March 2019

Agrarian crisis is staring on our face and as usual a flood of familiar suggestions have resurfaced. The political responses have been on expected lines.

Fixing MSPs at 50% over costs is as disastrous as it can get. There is no inherent incentive for cutting down the bill on Government or the rest of society. It may be possible in Western societies where 2-10% farmers depend upon the rest 90% but not in India where 50% are in agriculture. The sinking water table without a care, due to free electricity even in the land of five rivers (Punjab) is an example of such a sink hole. On the contrary, when West Bengal used to charge farm electricity same as residential, it held its water table since the farmers used the expensive resource judiciously.

The basic problem is that our agri sector is producing more than the demand, even when its productivity is way below world standards. The Kcal value of just the top 8 food items produced is approx. 2250 just about what an average Indian requires. And we have compromised the soil health massively in the last 4 decades, so the costs are increasing way beyond productivity gains.

The main impediment in tackling the crisis is the wrong formulation of the problem. Instead of seeking to double the farmers ‘gross’ income, we should seek to raise his “net, net income” – net of costs but more importantly net of soil health loss and depreciation. Let’s see how this cab ne achieved.

First the wastes in our cultivation. Our flood irrigation system which has evolved to cut off oxygen to weeds and thus control their sprouting, has had adverse consequences on plant health also. The excess water washes nutrients, costly chemicals and fertilizers along with it, more than half of these never coming in contact with the plant or root aura. These unutilized chemicals have long term consequences on soil quality.

SRI (System of Rice Intensification) farmers who have consistently reported higher yields, have direct- planted or planted single seedlings with gaps of 20-25 cm (instead of clumps) and shunned flood irrigation for just retaining enough moisture and reported 80% savings in seeds besides saving 50% water.

Next the soil health. Excessive chemical application has killed the earthworms so necessary for aeration and microbes and fungus which break down vegetable matter and carbon into essential inputs for plant growth. These chemicals solidify soil causing easy run-offs. Stronger osmotic pressure of the chemical solution outside the root systems promote reverse osmosis causing the water to flow from roots to soil rather than the other way around causing withering and dryness in some crops.

We need to get a lot more humus into our soil to boost its water retention (without run offs) to achieve the above and enable stronger roots that can to go deeper and wider and sponge more nutrients besides being naturally more disease resistant.

We need to rotate the crops judiciously with nitrogen fixing legumes/plants, so that the artificial life support of chemicals get replaced with natural manures and supplements in a far more balanced way.

Sir Howard the author of the Indore experiment, had demonstrated that with just the organic material available within the village – the foliage, crop residues, and animal residues,  it is possible to generate all the humus and compost and within it all the chemical required in a more balanced manner at much lesser costs. It might require some reinventing the natural and traditional methods and some re-training.

Trapping more incomes within village ecosystem: The Indore experiment cited above reported that a pair of oxen can help generate 1350 cft of compost i.e approximately 27 tons of manure containing a balanced mixture of essential chemical ingredients. The market price of equivalent weight of Urea is about Rs 1.45 lac. Even if one were to offset the cost of animal keep and downscale the value, it would still leave a net Rs 30-40,000 of commercial value in the hands of the farmer and village community. Instead, villagers are driving away these to graze unyoked and spending a fortune in ‘importing’ costly fertilizers. A better balance should be attempted.

Rice production is reported to be contributing nearly 15% of world’s methane emission annually. Long term research should focus on harvesting this thinly spread greenhouse gas like we have done with Sunlight. It is also possible to sequester carbon by traditional methods as modern agriculture is one of the biggest contributory to carbon emission.

If these incomes are trapped within the village ecosystem it could lead to better secondary cycle of incomes and enable our villages to make more investments in housing, electricity, healthcare and education, the other social necessities.

Employment potential: Adoption of natural or semi traditional methods of farming like manual composting and weed control, controlled water charge, focused pest control, recharge of crop residues are reported by Joel Bourne in his book The End of Plenty to absorb 27% higher labour. That may be a huge boon by itself for India which desperately needs to create employment.

‘Open sourcing’ research: The current system of research excessively serves only certain sections or links to the compromise of overall health. It is focused on maximizing chemical or insecticide sales far beyond optimal levels. So much so that insecticide companies do not even train the applicators on optimal volumes or safe methods of application. Today, more people may be dying out of their harmful effects besides those who consume it as poison, than out of farm loan distress.

There is a compelling case for ‘open sourcing’ all agricultural and allied research even if necessary by Government setting up more facilities under its control as well as opening up trade at least in commodities where we have surplus.

In conclusion, it is possible to more than double the net farm incomes just with better seeds and package of farm practices, cutting down heavily on the artificial ‘boosters’ even while preserving or promoting soil health.

RCEP can spell RIP for domestic manufacturing jobs

https://www.financialexpress.com/opinion/opening-up-manufacturing-without-proper-employment-impact-assessment-might-prove-disastrous/1486932/

No one can deny that overall there are net gains from free trade (FT). If the most efficient producers are provided access without artificial restrictions (political or geographical boundaries) obviously it would optimize the costs for a given level of consumption.

But how those gains are distributed is an unsettled question. We can have examples of countries losing out due to FT and others gaining at their expense. It is not even difficult to construct examples of just one country garnering all the gains and all the others losing.

Its also possible that the gainer(s) gain far more than the gains from free trade efficiencies at the expense of others (kind of loss imposition on losers). Unless one is careful about what to negotiate/avoid and does homework properly, one may be a heavy loser. Lets see an illustration.

Illustration

The illustration seeks to break up the supply curve in the standard demand supply analysis of micro economics. The supplying units are arranged from the most efficient to least efficient from left to right. Efficiency is measured by how low the total variable cost is. The thick ridge line running over the top of various bars representing individual units comprises the supply curve. Those to the left of where the Demand curve meets the Supply curve gets to supply the market.  Those to the right will incur a cash loss since the market price is less than their variable cost.

The illustration studies the impact of removal of import duties after FTAs. After removal of import duties, the supply curve accommodates more overseas players to the left and push out some domestic suppliers to the right of equilibrium pricing and hence face closure.

The net impact (difference between before and after scenarios) in the illustration is as follows:

  • The Government has lost whatever Import duties it was getting from the Korean (for example) suppliers who were already competitive suppliers in the market. The entire amount would have accrued to the Korean suppliers,
  • The domestic consumers have benefitted from a price reduction of less than 1%. This is most likely from better efficiencies of the overseas suppliers.
  • There is a net loss in domestic employment (loss of 9% down from 139 to 127 in the illustration).This would have either resulted in better employment overseas or better capacity utilization for them.

This kind of relatively flat demand or supply curves prevail in commodity industries where consumers don’t pay much premiums for brand and supply efficiencies come from factor cost differences, scale economies, cheap labour, patents, etc.

Net loss in employment.

Larger and concentration of capacities enabled by FT does facilitate mechanization and result in net loss of employment as empirically observed. These net losses in employment have also to be distributed and one can end up with a disproportionate share of this unemployment as in the above case where the host country ends up with all the employment loss.

Ineffectiveness of Revealed Comparative Advantage

One of the methods oft-used by trade economists to identify industries with export or import competitiveness is the Revealed Comparative Advantage (RCA) and its variants. Essentially this method calculates the ratio of (i) % of a particular commodity in a country’s exports to (ii) the % of global exports of the commodity in world exports. If the ratio is more than 1, then the country is supposedly export competitive. Instead of global %, one may use specific country %s, regional %s, or host country’s %s, to identify export competitiveness or import vulnerabilities.

But it is terribly reliant on the past like using KL Rahul’s yesteryears averages to play him in todays matches. What is important is the current competitiveness in an ever dynamic world, where the steep price fluctuations in some key inputs like oil, metals, interest rates, etc. can vastly change the fates of several industry players’ competitiveness.

As can be seen from the illustration the units around the equilibrium price – may be 20-30% on either side would largely decide the gains or losses from trade. Units which are highly competitive (leftmost) or least competitive (rightmost ones) will hardly matter. For example, ASEAN units despite a duty reduction do not enter domestic market. There may not be much point in negotiating access in such a commodity if we are in a similar situation.

Likely effects of Regional Comprehensive Economic Partnership (RCEP)     

This kind of analysis should be done for both commodities where we have some basic strengths and where we would like to invite competition. Using elasticities alone may not suffice as so much depends on capacities of individual players around the equilibrium price. ASEAN FTA has not resulted in much gain or loss over the last 5 years it has been in full operation. But China is a different player altogether.

Many Chinese commodity players have huge capacities – in select cases a single unit or player have enough capacities to supply the entire Indian market. If an import facilitating measure or cut in duties make them competitive in domestic industry, then the whole domestic manufacturing can get wiped out resulting in loss of domestic employment.

India’s strength in its low cost labour, but largely untrained and low skilled. In most manufacturing units the wages account for 8-12% and dwindling by the day. Even a 30-40% cheaper labour translates to only a 3-5% overall advantage which is not even sufficient to counter our unreasonably high real interest rates. But where wages constitutes 40-50% like in many services, IT, research, design, etc. a 30-40% cheaper labour can give 10-20% overall advantage. These are also less capital and machine intensive and interest rates are less impactful.

India’s homework so far in negotiating trade agreements has not been stellar. Opening up our manufacturing without proper employment impact assessment might prove disastrous with RCEP. Even if services are negotiated well, it will open up opportunities for higher skilled but the low skilled and labour which are newly transferred from agriculture and rural areas may be left in the lurch.

Illustration:  Before and After FTA – impact of duty reduction

RCEP jpeg

In case the picture is not clear, you may kindly open XL file from the link below

RCEP

Turning useless wastes to useful wastes

In Beverly Hills… they don’t throw their garbage away. They make it into television shows.” —Woody Allen.

Indian wastes are ‘useless wastes’. Our consumption habits may have leapfrogged, but our disposal habits are primitive. We mix up useful wastes with useless wastes, destroying the value in the former—you can’t compost paper and vegetable remains mixed with broken glass and plastic pet bottles, nor can you recycle paper mixed with food wastes and electronic remains.
If India has to successfully deal with its wastes, two paradigmatic changes are required in our thinking.
Unfortunately, it is the rag-pickers and the municipal authorities who are made to grapple with the messy problem, without either adequate incentives or resources. The problem has to be back-loaded on consumer product companies who created the non-destructive, non-biodegradable or unconsumed packaging or products and also benefited from it; and instead of trying to segregate mixed wastes, we should prevent it from getting mixed in the first place by appropriate incentives or punishments for compliant or errant behaviour, respectively, at the stage of the mix-up.
If this principle is accepted, (1) all packaging material should also go back to the packager—just like the truck goes back to the truck owner after the delivery of cargo—and they should be made to pay for the costs of such ‘back trace’, (2) what comes into the city and urban centres should go back from where it came, and (3) electronic hardware (which are potential future debris) and packaged food (which comes with non-biodegradable packaging) should be handled at the time of the original sale itself. Outlined below is a system of incentivising segregation at source and the benefits therefrom.

The suggested scheme
1. Every consumer and industrial manufacturer/marketer should be mandated to file their recycling plan or reclamation plan annually, or on a one-time basis. This can be enforced through fines or suspension of licence, till complied with.

2. They should be made to declare on the packaging (where it is multi-layered, on each of them) what value the marketers are prepared to give back to the consumer if he/she hands over the empty containers, cartons, plastics, corrugators, etc, to the point of sale. For example, water bottles may say: “Collect 40 paise against this bottle”. This would help create a ‘waste currency’.

3. Marketing companies should be mandated to collect at least 50% initially, and by the third year if at least 90% are not collected, their manufacturing licence should stand suspended (a similar procedure of disposal to source supplier exists in the Atomic Energy Regulatory Board regulations). The actual collection must be audited by independent entities.

4. To ensure compliance that marketers make efforts to collect back, few things can be done:
–   An upfront deposit with the government can be collected, say, at 3-4% (to be varied based on the biodegradability of leftovers) at the time of manufacture or entry into state or import into India, which can be refunded back based on the percentage collection.
–   Fines on the shortfall at twice the rate will enforce recollection of wastes.
–   Over a period of time, proper price discovery will happen if the enforcement is tight. If competing consumer marketing companies start offering different rates for recollection, it will be a signal to tighten enforcement on manufacturers who offer poorer rates.

5. Marketers may not deal with the wastes themselves. They will locate third-parties to reclaim, recycle, sell to re-users, or incinerators, energy companies, etc. Positive values will be reclaimed by recycling. Reusable material will be sold at commercial values. The rest may be sold to energy or incinerating companies.

6. The end-consumer may not find it worthwhile to go to a shop and exchange the waste currency. Rag-pickers may pick up wastes at the doorstep, and claim the waste currency at a discount and hand it over at sales counters. This will incentivise source-segregation. Rag-pickers should be trained to pick up all wastes and exchange the value of wastes, and dispose of the rest in designated ways.

7. Special shops will emerge that only concentrate on the collection of all wastes for a margin in every shopping mall, street corners, etc.

8. Heavy fines should be levied on selling companies for litters found in the open, which will induce some policing by them directly.
In addition, litter disposal should be made part of the Swachh Bharat Abhiyan.
Forward distribution is highly working capital intensive, requires expensive shelf space, advertising and product promotion, besides hefty retail margins. Wastes being reclaimed do not suffer from any of these. In fact, the total cost (net of recoveries, if any) involved may not be more than 1-2% of the selling price of base material, excluding the manpower involved.

Estimates of employment and benefits
The Indian retail market for FMCG and pharmaceuticals was estimated at $630 billion in 2015. In FMCG, packaging costs typically account for 3-4% of sales value—the costs incurred on packaging on sales of $630 billion (`42 lakh crore) is likely to be about `1.4 lakh crore.
If the fines for non-collection are kept at, say, 4% of the sales value, hopefully companies could be expected to spend at least 2% on recollection (including on wages, transportation, storage and dealing with wastes), i.e. Rs 84,000 crore.
If roughly one-third of this accrues to labour as wages, it is about Rs 28,000 crore. At minimum wage rates of around `300 on 240 working days, it comes out to be 35 lakh man-years, i.e. 0.3% of our population. This is not wayward compared to the reported 0.7% currently employed in South Africa in similar activities, compared to 0.1% in India currently.

Going forward, probably the government’s role would be minimal. It should create the enabling legislation and set-up a ‘waste police’ whose job will be to catch and fine sellers who are not marking waste currency value, people littering, recyclers not completing their jobs, supervisory audit of audits, ensuring manufacturers file their plans, certifying refunds, etc. This ‘waste police’ should be additional trained staff, and not as an adjunct to the existing police duties.
The government can use a portion of ‘funds in custody’ (through upfront deposits) or fines for training and certifying the people involved. It can train people as part of skill development programmes or get originating companies to train them (for automobiles, e-wastes, hazardous chemicals, etc).
Even if compliance starts with multinational corporations and organised sector companies, it could quickly reach 40-50%. It will have a demo effect and lead to others falling in line.

For the Poor Interest Rates are more a function of Culture; not arithmatics

https://www.financialexpress.com/opinion/a-poor-understanding-of-monetary-policy/1234554/

For much of poor – rural or urban – in many parts of the world, interest rates are not a monolithic price point balancing demand and supply of credit with variations mainly (if not solely) for credit risks and time duration.

Poor people have been observed to keep currencies for safe custody without any compensation with the same wealthy lender from whom they have borrowed money at  usuary rates of interest. This seems irrational but is compelling to the poor to ensure cashflows for upcoming events like marriage, funeral, school admission, or sowing. This perhaps addresses their ‘fear’ against an irresponsible husband or ‘lack of self control’ over competing short term spending itches.

Nothing can explain so many irrational practices (as formal system sees them) in South Africa surrounding funeral finances. A decent funeral is a matter of prestige and social standing (ranks perhaps number 1 in their Maslows hierarchy) and consumes about half/full years income. Years of zero interest (or even paying safe keeping fees), deposits with funeral societies defeats arithmatic rationality but addresses anxieties on maintaning social prestige.

As the book Portfolios of the Poor reports, moneylenders to the poor almost always collect interest rates in advance and don’t refund proportionate portion for unutilized period on any prepayment. Yet just to feel relieved from the burden/shame of indebtedness the poor pay up most loans ahead of time thus increasing the ex post interest rates by several % points – irrational arithmatic wise but rational mental relief wise. The book also observes practices where people borrow expensive monies leaving savings accounts intact due to a silo (usewise) mentality.

Just no commentator or official have understood the ‘Rs 10.50 in the evening for Rs 10 in the morning’ small trade finances. Simple arithmatic tells us it is more than 1800% per annum even without compounding. But the money lender apart from running counter party risks also knows the purpose and can get into such business himself or set up someone else who can. So why should he not get to share the spoils with the trader. In that sense it is more a share in the joint venture profits not interest. Its just dividends with a Cap in treasury managers parlance.

Surely in the ladder of social shame, borrowing ranks somewhere sub-ordinate to other social compulsions (gifts and donations in marriages, funerals, festivals, religious functions, etc), medical emergencies etc. Otherwise they wont be borrowing. Borrowing for economic purposes like for sowing, cattle buying, houses etc. may be justified on rational grounds. If Governments want the poor to become rational, they may have to invest a lot in social education and training to move up indebtedness and make other non economic needs less shameful than borrowing.

In fact this sense of indebtedness and shame from failures to meet obligations and social policing have induced repayment discipline amongst the poor. This is a great social collateral which the formal systems refuse to recognise or promote.

Most poor cannot count; even if they can, most don’t

Many studies indicate that in their decision on when to borrow, from whom (for some loans from next door neighbour is preferred, for some relatives but some other purposes it is considered shameful to borrow from them), and when to repay or prepay, the arithmatic of interest rates weighs far lower as compared to a rational person. Culture, social customs, peer pressure, shame and fear, family pressures decisively overshadow the arithmatic.

Thus when the RBI’s appointed committee put caps on the interest rates charged by MFIs as the main weapon to deal with some events in the erstwhile combined Andhra Pradesh, it only betrayed its lack of understanding of the financial culture of the poor. The arithmatics of interest rate may work better for formal systems, between banks and financial markets, in cities and amongst the rich and heavily banked but not amongst the poor.

The poor levels of financial integration and inclusion in india is the result of this lack or refusal to understand the culture. RBI (or its equivalent monetary authorities) should stop their colonising mindset: they should not  supplant the financial culture by dictating the price, acceptable instruments and institutions. Formal form over substance KYC’s can never match the KYC of the local moneylender whose self interest is locked in with his customers fortunes.

Establish the role of money first before seeking policy effectiveness

Before trying to establish the suzerinity of its policies over the rural and poor India, RBI should first establish the hold of our currency (Rupee) on the poor. For some of more important functions of money the poor trust its surrogates more. Gold (cows in Swaziland or cattle in many parts of Africa) has much more dominance in store of value function of money and to a limited extent even in liquidity and transaction demand. Policies and schemes about Gold over the years have been rather unimaginative. The high levels of informal economy does not help either.

Some aspects of the financial culture of the poor described above also come out of fear and anxieties, cashflow uncertainties, ill timed arrival of cultural exigencies, etc. These can be overcome to a large degree by appropriate insurance whose penetration is very poor now. Proper insurances on various cashflow risks that the poor face, will release a lot of gold and make the poor adopt a more ‘rational’ and self-optimal practices.

Indian authorities should subsume the existing system into its network by refinancing money lenders and accepting social collaterals, finance Nidhis and Chit funds, etc.; instead they erect barriers against such practices on institutions which seek to use the available conducive social infrastructure.

We should of course continue to educate the poor communities about the arithmatics so that wherever possible the poor could act rationally, including proper search of alternatives in their own ‘irrational’ markets.

A regulator who fails to have a grip of the market culture, market practices or interact with its participants continuously to gather market intelligence and spot any significant trends and shifts, is bound to falter. East Asian societies like Indonesia (as spread out), Malaysia, Vietnam (as dense as India) have not tried to supplant the local systems but have sensibly allowed them to co-exist and serve their societies.

 

The Art and Need for Creating Employment

Link to FE 29/5/2018:  https://www.financialexpress.com/opinion/the-art-of-and-need-for-creating-jobs/1184633/

If there is one thing that is common to every government since reforms they all had a growth consciousness but equally they all lacked an employment creation strategy. Employment it needs to be realised is like the insulin that delivers the sweet benefits of growth to the individual citizens. Otherwise growth accumulates like sugar in the blood as inequalities in society with their own adverse consequences.

The chart shows the employment in formal sector versus the economic growth over the last 40 years. Unfortunately, reforms have preferred cost cuts over ensuring adequate levels of government services and preferred efficiencies over employment in private sector. If only post reforms had created employment at half the rate as before, it would have taken care of the army of currently unemployed, a ticking time bomb. An employed and hence an engaged mind would tackle several of our social ills far better than investments in tightening surveillance or even infrastructure. Even the 1.3% uptick in the last few years may be more due to informal employment turning formal.

Presentation1

Unsatisfied needs – the basis of all markets and economic activity

Demand or an unsatisfied need is the basis on which any business is created. Meeting an existing demand with an established market and pricing mechanism is a safer approach to success. But, ingenious minds come up with IPL which fulfilled a latent demand (which perhaps even the customer didn’t know existed) for after day entertainment. Our telecom sector saw explosive growth by satisfying India’s motor mouth urges, never previously anticipated. But this requires foresight, some daring, financiers willing to take the bet, besides creative minds to come up with the relevant package of practices.

Demand for Government services arises out of public goods, constitutional rights like justice, safety, protection of property, ensuring equality of opportunity besides some commercial activities. It sometimes is required to serve needs where users may not be willing or able to pay commensurate prices.

Art of creating jobs – an example

Huge negative value is being imposed on the citizens by our unclean surroundings, waste and litter, sewage drains masquerading as rivers, un-cleared urban wastes spilling over to drive ways etc. There is sure a demand for neatness, cleanliness and hygiene, even if all those desirous of the service may not have the ability to pay for it.

India’s employment from rag picking and waste collection is abysmally low at 0.1% of population whereas similar activities employ 0.7% in South Africa, 0.5% in Brazil, 0.6% in Lima (Peru) as per ILO. The GDP from these activities in advanced countries vary from 2.5% to 3.8%. Employing the people required (say 50 lacs at even 0.4% of population) won’t affect other sectors since these skill sets are low and there is an excess supply in the labour market in any case.

The main missing link is who will pay for the services. At the macro level given the direct and indirect benefits it may be worthwhile re-distributing 1-2% of GDP through taxes and expending it in tackling wastes. But there are other ways. Elsewhere, nearly 30% of value of wastes generated are recovered and reused. There are people in various income classes whose desire for ‘cleaner surrounds, safe drinking water, litter free zones’ are more intense and more can be recovered from them for cross subsidizing the lower income strata. Hopefully the net unrecovered portion can be contained to 0.6-0.7% in the initial periods. People taking employment under these schemes could be made to give up all other subsidies.

The direct and indirect benefits of cleaner surroundings should also be taught to the citizens creating over a period of time greater ‘demand’ for them and higher willingness to pay for them. Or higher willingness to move into areas where such services are recovered at higher charges. The capital required for creation of each job in this sector is way lower than industrial or service sector jobs, private or public sector. The skill sets can be developed a lot easier with minimal training.

The open sewages in our cities, unclean rivers, garbage, etc.  are all a huge source of opportunity for employment creation. Of the various links in the supply chain the only missing link in this case is the poor ability or unwillingness to pay arising out of poor sensitisation of benefits and income. In the case of IPL virtually all the links were missing or invisible and it required some genius still to spot the opportunity and put all the links in place to create the ‘market’.  Similar opportunities exist where just one or two links may be missing and some creative thinking can add substantially to GDP, welfare and employment.

The disproportionate fatal accidents per vehicle is an opportunity to set right the systems by employing people (may be a lac or two) and adding positive welfare value. Our ill-disciplined roads, haphazard parking in crowded areas, rampant littering, usage of killer plastics are all potential opportunities of employment at low incremental capital investments. Our collapsed criminal policing and investigation (in deficit by at least 5 lacs); delayed judiciary can easily create new jobs for twice the existing number. Our deficient healthcare as Dr Shetty points out has a 50 lac employment potential at ‘fit for purpose’ doctors, nurses and service levels.

Government at both central and state level should identify ‘demand’ and need for its various services and ways to fulfil them rather than just run after roads, ports or infrastructure: our governance infrastructure for policing, justice, safety, protection of property, education and primary healthcare are in far greater levels of deficit.

Hiding behind our awful deficit of government services and under-development, chaos and disorder is a latent demand which could create 3 crore new jobs at comparatively low capital investment. This level of additional employment would have most certainly returned the incumbent government in 2014 despite all other troubles and could make a difference in 2019 as well.

This level of employment can be created at 1.8% of our GDP at Rs 100,000 p.a. wage levels. It requires some ingenious minds in the government to identify and fit the missing links in each case. The government should perhaps leave the return based (ICOR, IRRs and Paybacks) growth to private sector and chase newer indices like Incremental Employment per Capital Invested (IECI) for itself –a compromise of efficiency for employment.