Corona spirituality – a poem

By V Kumaraswamy

It was a call from my daughter, voice sweet as honey as ever, enquiring after my welfare,

I said I was fine and countered her on the inscrutable disease and its surrounding despair,

Precautions we insist on – last time we stopped visitors at our door, and sanitization a must

This time it is upgraded: We don’t let outsiders in or insiders out of our society’s gate.

God! You came in various Avatars – Fish, Wild Boar, Turtle; you came as half lion and half man,

But due to come was the winged one that soars and shows us the way to Heaven,

Bat it is this time: and if your winged creation prefers darkness over light,

You have taken over our lives through a virus which remains out of sight

First you shut the national borders and made us stay within our shores.

Next you locked us within our states and we learnt to live by new mores, 

Then it was national lock down and you made us all stay within our doors

Then you shut our workplace and made office part of household chores

Then you came into my life uninvited, sent shivers down every near one’s spine,

My office knew it and said to stay away from work was fine,

Courtesy and rules made me inform my society, who said the lift is closed for us,

Stay indoors they warned and made us prisoners within our own doors.

Then it was my wife, who shut the door of my room within the house’s larger door,

Sanity she called; I could not figure if it was society’s hygiene or my mental one to preserve,

Not satisfied with your sanctions, You made me voiceless with a mask around my face,

And made every sneeze, cough, and breath of mine an enemy of Mankind.

May be as a prelude to taking my last breath, You took my smell and taste away,

The sight of flowers outside my window became my only cherished company,

You made me discover different aspects of mine and explore the beauty within,

The Blue skies and fresh winds free of Man’s corruption for once felt so genuine.

Oh! Almighty Corona, you shrunk my energy and diminished my zest and zeal for life,

Can You also take away my ego, invisible like you but the scourge of our happiness,   

Can You shut the doors on greed and avarice and fear of future, my biggest demon within?

So I shed the several layers of false cloths I wear and see the true Me and its virtuous origin,

To Deliver this Realization, Oh Corona! hope taking our breath away is not Your only way!     

A case for science that is inclusive

Science that is inclusive

There is a kind of frostiness between science and the unscientific, that takes the shape of snootiness, dismissiveness to superiority or patronisation, with the so-called unscientific being at the receiving end most times. Scientists have the tendency to dismiss everything ‘unscientific’ as preposterous and illogical and hence undependable and unfit for use.

Instead of splitting into two classes – scientific and unscientific – it would be more worthwhile if we saw it as ‘adequately explained’ and ‘not yet adequately explained’. Science is ever evolving as Einstein (is claimed to have. Only Einstein can come back and confirm his having made it since there are so many quotes which are attributed to him without proof or evidence) stated, ‘science is but the existing state of knowledge of nature’ and will sure bring within its fold more and more currently unexplained aspects of nature which may have alternative explanatory routes than what science follows as of now.  

Things like intuition, premonition, astrological predictions, prejudices, tradition, sixth sense, occult sciences, lunacy and planetary influences and even many branches of medicine and traditional cure are currently deemed or dismissed as ‘unscientific’. For all we know they may be in the same state as earth being spherical but dismissed as superstition before Aristotle, Eratosthenes, or Pythagoras (take your pick) reasoned it out. And many such things which are today considered scientific have come after much agony and punishment to the discoverers from the church, orthodoxy and existing beliefs and their champions or those who stood to lose their status.

With a dismissive attitude and binary outlook unwittingly science and scientists may themselves become the new tormentors (like religion, royalty and vested interest were in the past) for faster discovery and assimilation of currently unexplained events or phenomena into the ‘scientific’ fold. A cross fertilisation of ideas between science and current un-science may lead to many beneficial outcomes which may otherwise be lost or postponed. If the church was dismissive of science before, it is increasingly the other way around now. 

Noted mathematician Ramanujan purportedly left behind 147 theorems for which he could not provide proofs or had no time to write before his demise.  If deductive reasoning is a primary weapon of mathematics, it is unbelievable that someone had the time to reason it out and write out the theorems but no time to write out the proofs. If one reads Hardy’s account of his association with Ramanujan clearly, Ramanujan wrote them down as it occurred but skipped many steps in between which he wasn’t himself aware of or in a position to explain. Do we dismiss his theorems as preposterous (until each one is proved) particularly when some 47 of them have been proved in the last 100 years? What status does the unproven set enjoy? – unscientific or scientific? How and who are we to conclude that the unscientific (like intuition, forewarning, sixth senses) will not one day be proven like Ramanujan’s theorems, causality explained, and embraced within the fold of ‘science’.  Or science itself will get redefined and one of its main pillars -cause-effect- loses its primacy.   

Its time science and rationality shed their snootiness, we shed our dismissiveness and arrogance to whatever we consider ‘unscientific’ and replace it with curiosity and respect facilitative of smoother and faster integration.  There is a need for a healthier dialogue between the conflicting bodies to understanding what is and how it occurs and how to use them for our collective benefit.  

Respect need not imply blind acceptance. It can lead to search for solutions by both factions by making use of tools and techniques known to both. It might involve adopting alternative routes to proof and acceptance that somethings may be beyond proof or at least as per existing methods. A worm’s eye view, a bird world view and snakes perceptual aids need not be same as mankind and a shift in definitional scales may break many existing notions and ‘prove’ unaccepted ones. Attempts to prove might also result in proving the opposite and setting at rest false notions. Responsibility for proof and disproof could be equally shared. The faster science and rationality expands, the domain of ‘unscientific’ would only shrink faster. Even if it is vast, the accretion to the bank of unscientific is slow and unlikely to gain momentum. 

Such an approach and attitude towards the currently not adequately explained occurrences or phenomena might hasten the process of unravelling the secret, mystery, enigma or plain ignorance behind them and bring them into usable body of knowledge with or without safeguards and caveats.

Church ‘and’ science can achieve a lot more together than church ‘versus’ science. There is no need for science to become the new church.  

Weird Adventures; Uncommon Lessons – a recapture of motivations behind the book

This is an interview with Gopi Keertinagar which probes into the motivations behind my perilous pursuits and passion for meeting people and sharing the positive side of stories. Enjoy.

https://photos.app.goo.gl/EnJ7auduzfPSCYGK8

Enjoy

Weird adventures; uncommon Lessons

This is my latest book. Based on my travel to over 4 dozen countries and the wit, wisdom and vignettes gathered in various meetings, conversations and experiences with various people from presidents, pushcart vendors, policemen to pole dancers. all written in a positive spirit. It is in #4 rank now… you can make it #1.

Weird Adventures; Unusual Lessons

Dear Friends:
I am happy to announce my new book: ‘Weird Adventures, Unusual Lessons’  is available as Kindle edition now (print will be available soon).  Briefly, 
I write for business dailies on economic and business matters. I also write on novel experiences during my various sorties to several parts of the world. 
my work and own interest in travel has exposed me to over 4 Dozen countries, their culture, their people, social mores, practices, peculiarities, local governance systems, etc. 
It has put me in touch with paupers and fishermen, guards and guides, monks, priests and boatmen, high and low ranking government officials from presidents, ambassadors,  ministers, and others to chiefs of some of the largest companies, tribal dwellers, politicians to pole dancers, lions and cheetahs, researchers to rogues  – poor and rich, cultured or otherwise, etc.  
It has put me in touch with people who still use flint stones, whose savings or investments for tomorrow do not go beyond a solitary piece of cloth on their loins; cultures where cow is still a currency, blind at birth, yet patriotic to their country which they have never seen. These experiences include  a trip to Egypt days before Tahrir Square revolution,  travel  in one of the most heavily land-mined areas in the world – Cambodia; pleasant experiences during innumerable trips to Myanmar; experiences and insights from the animal kingdom in South Africa. taste of Dutch humour, etc. 
This book is about the various unusual and novel (sometimes embarrassing, awkward, sometimes humbling and at other times moving) experiences, conversations with ordinary people yielding extra-ordinary insights on various facets of life, anecdotes, lessons and local humour, information and personal encounters which dispel known and established notions and beliefs and, shall I say, sometimes falsehoods spread by motivated sections about nations, people and systems mostly radiating positive energy. It is not a travelogue of various touristy places and historical monuments or beaches.
I have sent the contents and sample vignettes.
 I would like to have your comments once you have read the book either to me or in comments section in Amazon and Flipkart. 
Many thanks and best regards

Kumaraswamy
The world is too full of beautiful people and positive energy for  Mankind to mess up. You have only to experience it.

ReplyForward

Time to move away from prescriptive macro policy making

Indian economy seems caught between tight fiscal targets prescribed under the FRBM review and a government which treats it as cast in stone despite being faced with the current crisis.

The best example of failure of the prescriptive approach is the Eurozone. The prolonged sluggishness of the Eurozone is caused mostly by the restrictive tight inflation targeting (influenced largely by Germany’s phobia for inflation given its post WWII memories), fiscal deficit targets and debt/GDP ratios which were good for a select few countries but out of context for most of the rest. Those who were already better gained in relative terms but those who were not aligned already have gone into prolonged sluggishness and some into economic coma. But on overall basis, Eurozone has not gained; it has been a massive loser – a sinkhole which the Chinese have expertly filled in to their advantage.

Prescriptive and market distorting intervention in agriculture products has been around in India for a long time along with minimum wages in labour markets. But in the recent years such an approach has been extended to other areas of macro management. Prohibitive pricing under Land Acquisition Act has virtually put it out of reach. Inflation management which was largely situational or contextual has become tightly prescriptive, where the midpoint 4% has operated more like a hard-stop cap. FRBM was loosely operated till 2016. With a rigid fiscal target and glide-path and Debt/GDP ratio, it has started impacting other macro variables like output and employment and government investments, besides putting breaks on response to a 6-sigma kind of event like Covid.

Such a prescriptive approach is born out of a lack of faith in markets’ efficiency and its self-correcting nature. Fixing targets for macro-economic variables like inflation, interest rates, fiscal deficits are as detrimental to the efficiency of free markets and its equilibrium seeking ways as fixing minimum or maximum prices in individual commodity markets or fixing quotas or tariffs, or licensing in micro markets.

A circuit breaker in stock markets at 10% and 20% might make sense, but at 3 and 4% they will affect free functioning of markets and its adjustments to new information or assimilation of the effect of other economic factors. The trouble with tight constraints is that they start affecting other factors and force them to operate at sub-optimal levels. As an example, anyone seeking air tickets or hotel rooms on internet will know that the more the conditions or filters one puts, the lesser the number of options that gets thrown up. The recent prescriptions have operated like ‘binding constraints’ in a linear programming language reducing the value of outcome than act as circuit breakers.

Free of any prescriptions major macro variables like inflation, investments, fiscal deficits, CAD, exchange rates, growth and output interact with each other influencing and being influenced by others so that the markets seek optimal or equilibrium ways. Such interplay also keeps the others in check so that they don’t escape their gravity. The experience of communist countries has proven that market based equilibrium have been far more enduring and self-sustaining with fewer glitches. Prescriptions should be like circuit breakers for extreme 3-sigma events like East Asian meltdown, Dotcom bubble and 2008 and Covid.

Are there risks in letting markets play

Will inflation, for example, run away to 20-30%. Or interest rates go sky high and snuff out all investments. Or Exchange rates break loose and settle at Rs 120/$. In an open economy where most commodities as well as finances can be imported or exported there is little risk in a general inflation shooting through the roof – import parity prices will ensure domestic prices cool down. Sudden swift exchange rate variations are to release pent up pressure. If the exchange rates fall far too steeply, higher exports and greater incentive for overseas Indians to bring back money will soon cool it down. Any spikes in interest rates will increase the investments attractiveness and bring in moneys from savings here and overseas and cool it down.

Unless the government resorts to absurd 30-70% increases in MSPs (as it did in 2008 and 2010) extreme food inflation is unlikely. With our excess stocks and production of food grains there is no need for food inflation fears; surely in contingencies we have enough forex reserves to import food and cool down prices – something markets will do anyway.

Safeguards

Safeguards if any should be limited to extreme events – specified or emerging- something that has a 1% or 2% chance. For some most essential items like food it may be necessary. But even in such areas it may be better to let the market find its level but compensate the vulnerable through cash transfers.

During the 10 years before 2013, we have had some of the best growth years when the inflation range has been 4-10% and fiscal deficits were in the range of 6.4% to 3.3% with an average of around 4.7%. Surely there was a causal connection between these various factors, when they were managed with caution than prescription. To aim 4% and 3% respectively tantamount to ignoring these causalities and give hygiene factors the status of main deity. These then operate as constraints which pull down the potential of others.

When the history of China’s stupendous rise from 1980 to 2020 is examined carefully 2 things might become clear. FED’s Volcker’s constricting inflation control during the 80s diluted US’ investment spurs and helped China to grow green shoots and the self-negating Eurozone policies of the last 2 decades helped consolidate it further. Europe, once the cauldron of new ideas in many facets of science and technology and corporate governance is regrettably having to shield itself from Chinese investment invasion now.

Before we learn about Chinese manufacturing excellence, we might learn some lessons on how they have managed their economy.

India seems fatally infatuated to Eurozone ways and replicating the resultant sluggishness.

India can sustain a fiscal deficit of 6%

A sustained and synchronised recovery path

The three important reason for the currently stagnant economy are (i) a monetary policy which is not synchronised with the fiscal (ii) disconnected with the rest of world in real terms in an increasingly open economy and (iii) mistaking risk aversion for sustainability (of government debt and deficits). Our FRBMs are forcing the government think more like an individual in retirement mode: pay off debts and resist fresh ones as if its sources of income are to dry up soon.

Considering the current strengths, the following can be the action agenda for getting out of the current rut. The aim is to have integrated fiscal and monetary policies. The sustainability of these are demonstrated later.

  1. RBI to maintain real interest rates (RIR) at +/- 0.5% of select competing countries/economies. This will preserve India as an attractive investment destination for inbound investments besides staying competitive for domestic investor. This has become disengaged of late due to nominal anchoring in an open economy, as can be seen in the chart. Since 2013, our Real Interest Rates has gone off into a different orbit.

Slide2

  1. RBI to target a GDP deflator of 6% p.a. for the medium term. This together with RIR will establish the target nominal interest rates. Within this food and essential inflation may be targeted at 3-4% to ‘protect the poor’.
  2. Government to aim at Tax GDP ratios in line with other countries (those chosen for real interest rates) – increase it by 2-3% over next 5 years.
  3. Target real growth rate and spend as if we are growing at 7%. If government continues to spend at 7% when the economy is growing at 10%, lower spends will cool down the economy and when the economy is growing at 4% act as a booster – an automatic stabiliser.
  4. Central Government to increase its debt levels to 52.5% from the present 47.8%. The overall debt limit is to be 60%, with 7.5% being kept as ‘Cushion’ to be tapped only for tackling extreme exigencies like prolonged war, events like oil shocks, extreme natural national calamities, 1997/2008 type of contagious external shocks, etc. Any deviation to be brought back to these levels within 2 years of economy retracting to the anchor assumptions of 7% real growth and GDP deflator of 6%.
  5. Government to switch over to accrual accounting from cash accounting and integrate extra budgetary resource (EBR) within the meaning of fiscal deficit. (One reason why the interest rates for the government has not fallen in line with the steep fall in fiscal and primary deficit numbers is the EBRs and Government compete in the same market for the same investors. And since there are multiple agencies placing essentially the same instrument, the pricing power of the central government gets diluted).
  6. Although Industry and agriculture are State subjects, CG will play the stabilisation and balancing role for business cycles.
  7. Subsidy list and quantum to be agreed between states and centre. Subsidies to be limited to basic necessities of food, clothing, shelter, and creating conditions for equality of economic and social opportunities including education, skills, basic healthcare and hygiene. All other subsidies to be part of state budget for which a limit as % of States GSDP to be applied. No subsidies to be mandated on non-government players.

Sustainable glide path

The above are tested below for sustainability of debt/GDP levels, primary and fiscal deficits. These are demonstrated below using standard equations laid out by IMF, Economic Survey (2016-17) and FRBM review committee report.

The government should increase its debt to 52.5% in 3 years. This would involve much higher primary deficits on which additional interest will have to be paid. The governments revenues grow at nominal rates of growth say 13% year on year. But Primary deficits which add to debt have to be serviced at 7-8% only. So one has to balance and equate the additional taxes with serving costs of PD. This is signified by the FRBM review in its report as pdt = (gt-rt)/(1+gt)*dt  (derived from the equation in page 54 of report). Table 1 captures the sustainability.

A primary deficit level of 2.3% is consistent with 52.5% debt/GDP levels and 8% GOI borrowing rate. Based on the above assumptions it is possible to sustain a fiscal deficit at 6% at the Central Government level alone. If we want to rein-in the states, we can mandate them to maintain NIL primary deficits. The sustainable fiscal deficits are given by FDs = Dt * (g/1+g), where FD is sustainable fiscal deficit and g is nominal growth rate. Table 2 lays out the sustainable debt levels across various growth rates and debt levels.

Slide3Table 3 lays down the glide path based on above recommendations. The switch over from cash to accrual accounting might gobble up 2-3 lac crores, which is accommodated by the higher PD targets in Yr1. Since there are already ‘incurred’ expenditure the inflation effect will be muted. By Yr 2, it can keep ready viable public projects. As can be seen, it is eminently feasible.

 

Government has enough firepower to spend its way out of recession

Government is needlessly self-shackled.

V Kumaraswamy

The Government looks like a batsman wanting to play only copy book orthodox shots in death overs of a T20 cricket match. The wherewithal and the government’s ability to spend are far better than when we faced sub-5% growth last. Yet the government seems morally shackled and too ideologically paralysed and unaware of its fiscal strengths.

The virtuous looking dogmas that is sustaining the present pall of gloom are (i) that the fiscal deficit targets given are inviolable and the present situation does not call for any counter cyclical action due to shortcomings in FRBM Act or the Review Committee, (ii) the Inflation Targets (4 +/- 2%) developed by the RBI are a kind of moral or constitutional obligation, (iii) better prices mean better welfare for the people and (iv) the masochist pride over currency values – an overvalued currency is a sign of strength.

The assumptions behind false prides attached of currency values and welfare effect of cheaper prices needs to be shed. But here we will see how despite the vastly superior financial fire power at its disposal, the economy is unable to take benefit of it – rather such inaction seems to be the root cause of the problem. The assumptions concerning fiscal and inflation bounds need to be revisited by more pragmatic economists.

First the monolithic way Inflation targets have been prescribed. It will be tough to find in economic history how a fledgling economy trying to graduate from lower income to low middle contained its inflation at 3-4% or those who grew at 7-8% with such low inflation consistently. Any growth will expand demand which will mostly increase the prices while interacting with an upward sloping supply curve. Even if the current excess capacities, will require better prices to restart. There are no flat supply curve commodities especially with people’s growing quality and brand consciousness. The more the demand growth fuelled by growth in economy the more the inflation is likely to be. To prescribe a 4% central rate and follow it up with hysterical reaction even when the economy gets close to it is a sure way of supressing demand. It appears that over the last 3-4 years the low target of 4% has pulled down our growth rate to 4-5%.

No doubt the poor need protection. But when the same poor is borrowing at 3.5% per month and in some daily loan cases that much for a day, to target interest rates’ closest economic cousin inflation at 4% to protect them seems absurd and ill conceived.

Second, the fiscal deficit targets. The dissent note of the former CEA points out several lacunae in the approach and final recommendations of the recent FRBM review Committee. The report is not comprehensive nor does it deal with appropriate counter measures for various contingencies. The 3% wait either ways before Government can act is far too wide and as the ex CEA points both magnifies over heating and further depresses an economy in distress.

The government has to be complemented for the way it has built the Balance Sheet strengths of the economy but the costs it is paying is too much in current terms. Chart 1 calculates the revenue receipts, expenditure and subsidies as a % to GDP for the period 2008-09 to 2018-19 and compares how these % measure up if 2008-09 is the base year.  As can be seen, revenue receipts of the central government have fallen by 5% but the expenditure has fallen by 20% and subsidies by 32%. Even if the fall in subsidies is due to plugging of leakages, it still means contraction of government expenditure going into private hands. Moral issues aside, it will still have its economic impact. The Central Government’s capital expenditure have moved but in narrow range (albeit downwards) and have not compensated for it. Government’s fiscal rectitude has of course brought down the CG’s debt as % to GDP from 56.1% to 47.8% and the fiscal deficit from a high of 6.46% to 3.34% today. It has been commendable but it has also taken its toll.

The difference between the nominal growth rate (g) and the (nominal) interest rates that the government (r) borrows is an important measure of how sustainable the deficits can be, and ‘g’ is most likely higher than ‘r’. The government’s ability to raise taxes is a function of nominal GDP but it has to pay only ‘r’ to sustain such deficits. But as Chart 2 shows despite our great fiscal restraints, this gap has been on continuous decline, reflecting an unexplained inability to use its strength to bring down yields on government securities.

One reason may be the ‘black’ fiscal deficits – amounts parked outside through extra budgetary resources or instruments issued by CG allied institutions which compete for the same kitty as CG’s debt on eligibility criteria and hence are having their impact. And if there are multiple agencies placing essentially the same instrument, the pricing power of the central government takes a beating. Even if in the short run, it may be irksome it may be more prudent to consolidate the black and white fiscal deficits and manage them as one.

Given its enormous strengths the Government should be bold enough to cast aside (at least for sometime) the needless and contextually out-of-sync inflation and fiscal targets and spend its way to revive the economy. The government can as a first measure raise upto 1-2% of GDP and firstly clear all its pending bills (to NHAI contractors, Fertiliser subsidies and capital expenditure payments for railways and defence) that every Govt does to manage fiscal numbers. Since these expenditures have already been incurred in the past most likely there won’t be inflation from these. The balance can be for newer capital expenditure or paying off state GST dues.

I hope the government overcomes academic impositions with practical actions.

frbm 1

frbm 2

Misplaced Hopes on MSP

Misplaced hopes on MSPs

V Kumaraswamy

There is some growing frustration over governments procurement of key grains under its Minimum Support Prices (MSPs) not being to lift the open market prices of those commodities and benefit the farmers. What the policy makers and economists forget is that our MSP procurement is not an end in itself but has to be studied with its end use – distribution of such procurement under our PDS programmes and how they work at cross purposes.

Effect of MSP procurement

It is generally assumed or hoped that once the MSPs are increased the open market prices would also rise in sympathy. There is insufficient realization that such procurements hardly create incremental demand. The government has limited flexibility in increasing the quantities procured under MSP which may be a surer way of enhancing prices and how increasing farm productivity from the current levels only harms the farmer interest not help them.

The effect of procurements under MSP is quite often overestimated. It is necessary to visualize the impact of procurement operations to separate reality from hope and wishes. Lets try and understand the impact through graphical exhibits. Picture 1 orders the demand from the buyers at various prices in decreasing order of prices. The thick ridge line at the top forms the demand curve as is depicted on the left side. Any procurement by government agencies at any price leads to a kink (drawing on right side) in the normal demand curve as is shown on the right picture. It shifts the demand curve horizontally in proportion to the quantity bought (dd’ in Picture 1) at the price point equal to the MSP for the crop.

 

demand supplyIn Picture 1 due to the governments initial extra demand the total demand increases but as we will see later once the government supplies the same though PDS, the effect is neutralized.

mspdsinterplay

Picture 2 studies the combined effect of demand and supply of the same commodity as in Picture 1. The normal (without intervention) demand curve DD’ is represented by the solid blue line which shifts to Ddd’d” (partially dotted line) after procurement.

The supply curve is shown as SS’ (in solid Red line). The market price without any government intervention settles at P(free).  When the Government intervenes and procures dd’ from the market at the MSP price indicated it will move the market price of independent sellers or buyers which will not be

equal to the MSP: it will settle at lower levels. Where it will settle depends upon the elasticity of the supply curve; the flatter it is, the lesser will be the price increase. In agricultural markets there are many tiny suppliers whose cost structure hardly differs from one to another since many inputs come heavily subsidized or free to most players. Hence supply curve is often flat and highly elastic. The market price will settle at P(MSP) which is way lower than MSP but higher than the free market price of P(free).

It is a fallacy to think that hiking MSPs from the current levels will result in higher open market prices. Unless the quantities procured are increased from year on year (which will keep pushing the dotted d’d” segment further and further to the right), mere yearly MSP increases will have nil or negligible impact on open market prices.  Where P(MSP) settles will depend more on the width of dd’ than where it is above the P(free) levels. (MSPs below the free market prices are useless anyway). That’s the reason why formulas like 50% over all-in cost of farmers will prove innocuous, except benefitting those fortunate to sell their crops at MSPs directly by the Government.

Given the current levels of buffer stock in FCI go-downs, any significant increase in procurement quantities will be a hazardous exercise.

Effect of PDS distribution on prices

The crops procured under MSP are used in supplying them at cheaper (than free market prices) cost through the public distribution system to end consumers. This has the effect of changing the supply curve from SS’ (without PDS operations) to Sss’s” (partially in red dotted line in Picture 2 right side). This will lower the open market price which may even settle at levels lower than the initial free market price, as is the case in Picture 2. Will the total quantities bought and sold expand as a result of these operations? It will since production will increase due to price support and so will consumption since people more people at lower levels could afford to buy more due to lower PDS prices.  The difference between procurement and PDS supplies will be accretion/depletion to buffer stocks.

Way Out

The production of agri commodities has been surplus to requirements for several years running. The buffer stocks with FCI is far more than norms and the credit to FCI from banking system at uncomfortable levels. One way would be to export the surpluses and not supply the same back in home markets through PDS. Or sell it to private sector for food processing. Alternatively, it can allow food processors and exporters to procure crops at MSPs and reimburse the difference between market price and MSPs to them. At least the handling/storage loss can be reduced. Simultaneously, the govt should reduce the size of PDS physical distribution and reimburse the consumers through Direct Benefit Transfers even if the consumers buy their requirement in open market.

A method to tweak the supply curve by partial rationalization of subsidies on inputs to increase the market prices and thus benefit the farmers was also explored in this paper (How the Agrarian Crisis can Be Eased, June 24, 2019).

It is time we realized the areas where MSPs and PDS can be effective and where they can’t be and not be fooled by misplaced faith and theories.

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.