Category Archives: Market Reforms

Is Education Economically Productive?

It depends.  In many low-income countries, learning assessments show that many young children and youth lack the most basic literacy and numeracy skills even after attending school.  And employers in many countries complain that workers lack technical and soft skills.  Therefore, for education to contribute to growth, other policies must be conducive to making education economically productive.

Progress and Pitfalls

India has shown extraordinary progress (Johnson, 2010). The economy grew at an average annual rate of 7.26 percent over the past five years. Between 2014 and 2015, the manufacturing sector grew by 8.4 percent, up from 4.4 percent a year ago. Between 2014 and 2015, the Indian manufacturing sector grew by a substantial 8.4 percent, up from 4.4 percent a year ago. India has also firmly established itself as a lucrative foreign investment destination, with foreign capital inflows of over US$ 31 billion in 2015 – surpassing the US and China. India’s dynamic services sector, second only to China in terms of growth rate, clocked an impressive double-digit growth rate of 10.6 percent in 2015, up from 9.1 percent in 2014 (UNDP, 2015).

However, a half-century after independence India still remains one of the world’s most inegalitarian societies (Weiner, 2001).  Even as the world’s largest democracy remained resilient in face of the global economic crisis, the country faces a critical challenge similar to several other BRICS counterparts – high growth has been accompanied by persistent inequality, reflected in the low human development attainments of the country’s most marginalized groups including scheduled castes, tribal and rural populations, women, transgenders, people living with HIV and migrants.  Gender inequality in India persists despite high rates of economic growth, and is particularly apparent among marginalized groups. Women participate in employment and decision making much less, than men (UNDP, 2015).

Indeed, the country’s Human Development Index value when adjusted for inequality loses 28 percent of its value (UNDP, 2015).

What India can do about this?

Before turning to the question of the distribution of public goods, it is first necessary to note that the persistence of poverty in India and elsewhere, is in large part a consequence of other issues.  Yes, poor economic performance, but also health outcomes, human security, environmental sustainability, and perceptions of well-being.  Indeed,  though rising per capita income is no guarantee that poverty will be eliminated or, for that matter, significantly reduced, a low per capita income assuredly means massive poverty and the persistence of other problems (Weiner, 2001).

The World Bank’s Chief Economist, Kaushik Basu this week announced plans to address one aspect of this wide debate.  According to Basu, the World Development Report (WDR) 2018— Realizing the Promise of Education for Development, will  take stock of what the development community has learned, and how it can strengthen the many economic challenges and expand education systems to drive significantly more development and growth.  India, along with most countries, is concerned with the future of the labor market and employability.  However, WDR will for the first time examine these issues at all levels of education, from early childhood to higher education, and will explore the roles of public, private, and civil society actors.

The report will focus on what countries can do and present evidence on how to improve learning with lessons on effective interventions—in areas like pedagogy, teacher training, and accountability, as well as the many benefits to early childhood development (ECD), and on the promise of new technologies.

Going to Scale

Significant changes have occurred over the past fifty years, and educational achievement has risen enormously, particularly over the past twenty-five years.  However, improving economic productivity  will require attention to many things, including emphasizing skill development in order to make school education more practically relevant.

Primary school enrollment in India has been a success story, largely due to various programs and drives to increase enrollment even in remote areas.  With enrollment reaching at least 96 percent since 2009, and girls making up 56 percent of new students between 2007 and 2013, it is clear that many problems of access to schooling have been addressed.  Improvements to infrastructure have been a priority to achieve this and India now has 1.4 million schools and 7.7 million teachers so that 98 percent of habitations have a primary schools within one kilometer, and 92 percent have an upper primary school within a three-kilometer walking distance (Brookings, 2015).

Despite these improvements, the quality of learning is a major issue and reports show that children are not achieving class-appropriate learning levels (Brookings, 2015).  According to Pratham’s Annual Status of Education 2013 report, close to 78 percent of children in Standard III and about 50 percent of children in Standard V cannot yet read Standard II texts.  Arithmetic is also a cause for concern as only 26 percent students in Standard V can do a division problem. Without immediate and urgent help, these children cannot effectively progress in the education system, and so improving the quality of learning in schools is the next big challenge for both the state and central governments.

India faces many economic challenges that could be tackled through the education system.  However, experience shows that going to scale is not as simple as taking a pilot intervention and implementing it widely.  The WDR will address part of the economic productivity issue in diagnosing the hurdles to implementation and the political economy forces that block system-wide improvements.  It will not highlight how to overcome all challenges, nor how to align all key stakeholders and institutions in the system toward work and employment, and economic productivity.  One of the most radical changes must be in the manner in which government seeks policy inputs –  from ensuring that the system innovates and draws lessons from experience to taking account of the social and political roles that education plays – rather than just the economic and technocratic roles in formulation and implementation.

Is India Open For Business?

WTO logoThe Sixth Review of the Trade Policies and Practices of India offered an excellent opportunity to learn about the development of the trade, economic, and investment policies of India since its previous WTO Review in 2011, and its overall readiness for business.

WTO members commended India’s accelerating economic growth during the review period, particularly in the services sector, and the milder inflation in recent years.   However, members also recognized India’s need and willingness to overcome its structural bottlenecks, including fiscal deficit, shortfalls in infrastructure such as education, health care, transportation, and power supply, delays in project approval, difficulties in land acquisition, low manufacturing base and agricultural productivity, and cumbersome labor market regulations. In this respect, WTO urged India to pursue further tax reforms, which may increase government revenues, as well as to increase investment in infrastructure.

In terms of trade policy challenges, India’s share of world trade continues to be small, with only a slight increase from 1.3 percent in 2009 to 1.7 percent of global merchandise exports in 2013.  Further, given uncertainties in the international economic environment in general and within India’s major trading partners in particular, the country may experience future challenges in its trade sector. Moreover, domestic factors like weak infrastructure, rising wages and scarcity of skilled labor in the case of services are inhibiting growth of trade and related activities (WTO, 2015)

Finally, the rising incidence of non-tariff barriers, in the form of sanitary and phytosanitary (SPS) measures and technical barriers to trade (TBT), remain a major trade concern.  While tariffs have been going down globally (also as a concomitant to rising number of FTAs), the use of technical regulations/mandatory standards as barriers has grown, along with the growth of a variety of conformity assessment procedures.  The resultant increased transaction costs arising from complying with such regulatory requirements adds to the costs of India’s exports and erodes price competitiveness (WTO, 2015).

Emerging Markets Need to Prepare in Advance to Deal with Uncertainty

Managing Director of the International Monetary Fund Christine Lagarde speaks as Governor of Reserve Bank of India Raghuram Rajan looks on during an event at the RBI headquarters in Mumbai March 17 2015.Unconventional monetary policies, which include large purchases of government debt, has been used to provide policy accommodation in advanced economies since the 2007 global financial crisis.  However, these policies have had both positive and negative spillovers.

During a recent visit to India, International Monetary Fund (IMF) Chief Christine Lagarde, cautioned that “the unconventional monetary policies have had strong positive spillovers for the global economy, and by implication for India and other emerging markets.”  However, “it is also true that these policies led to a build-up of risks.” 

Between 2009 and the end of 2012, emerging markets received about US$ 4½ trillion of gross capital inflows, representing roughly one half of global capital flows.  Such inflows were concentrated in a group of large countries, including India, which received about US$ 470 billion (IMF, 2015).  As a consequence, bond and equity prices rallied, currencies strengthened, and spillovers to asset prices and capital flows were even greater than from earlier conventional policies (IMF, 2015).  “The danger is that vulnerabilities that build up during a period of very accommodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility,” she told Raghuram Rajan, Governor of Reserve Bank of India (RBI) and audience at the headquarters in Mumbai, March 17.

I agree the next move for emerging markets is to prepare in advance to deal with this uncertainty.  The reality is that as economic conditions improve in at least some advanced economies, portfolio rebalancing out of emerging market economies can be expected, and some volatility cannot be ruled out.  Remember the surprise indiscriminate capital outflows from India mid-2013?  With all eyes on US Federal Reserve change in posture, the timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets.

Photo source: voanews.com

Budget Proposes Game-Changing and Revenue Significant Reforms

There are several specific proposals in the Budget 2015-16 to recalibrate India’s tax effort so that fiscal consolidation may be achieved in the short and medium term.  The game-changing and revenue significant proposals include:  Goods and Service Tax (GST) and Jan Dhan, Aadhar and Mobile (JAM) – to implement direct benefit transfer.   “GST will put in place a state-of-the-art indirect tax system by April 1, 2016.  The JAM Trinity will allow us to transfer benefits in a leakage-proof, well-targeted and cashless manner,” said Finance Minister Arun Jaitley during the budget speech on February 28.

In preparation for the introduction of the GST, the Government has been taking consistent policy steps to expand the scope and reach of service tax.  The shift is monumental in terms of changes in the mode of implementation and will undoubtedly require a transition phase.

BRICS to Discuss Creating it’s Own Rating Agency

BRICSBRICS experts will meet in March to discuss the idea of establishing an independent credit rating agency announced Brazilian Ambassador to Russia Jose Vallim Antonio Guerreiro.  The agency would become an alternative to the ‘big three’ firms: Standard and Poor’s (S&P), Moody’s, and Fitch Group.

The BRIC [Brazil, Russia, India and China] idea was first conceived in 2001 by Goldman Sachs as part of an economic modeling exercise to forecast global economic trends over the next half century; the acronym BRIC was first used in 2001 by Goldman Sachs in their Global Economics Paper No. 66, “The World Needs Better Economic BRICs”.

Today, their collective contribution (which includes South Africa) to global economic growth over the last decade has reached 50%, which makes this group of states the leading power in global economic development.   In addition, BRICS accounted for approximately 11% of global annual foreign direct investment (FDI) flows in 2012 (US$465 billion); and 17% of world trade with combined foreign reserves estimated at US$4 trillion.

“We may need to look for alternative indicators and broad approaches to assess the ‘health’ of economies,” said Ambassador Guerreiro. “I do not believe that the new agency will be something to resist the existing institutions.  They do their job, and certainly, there is a demand for their services.  But it is possible that the BRICS countries will elaborate a different approach”  (Office Group, SCO BRICS, Ufa 2015).

The challenge of course, is how the procedures of existing rating agencies can be applied more fairly to all economies.  The credit rating firm Standard & Poor’s will pay $1.5 billion to resolve a collection of lawsuits over its ratings on mortgage securities that soured in the run-up to the 2008 financial crisis, concluding one of the U.S. government’s most ambitious cases tied to the housing collapse.  The settlement comes after more than two years of litigation as S&P tried to beat back allegations that it issued overly positive ratings in order to win more business (Reuters, 2015).

Incentivizing Trade and Investment

The U.S.-India Business Council (USIBC) hosted President Barack Obama and Prime Minister Narendra Modi for a first-ever joint address to the U.S. and Indian business communities on Monday, January 26 in New Delhi along with the Government of India’s Department of Industrial Policy & Promotion (DIPP), the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce & Industry (FICCI).

The New Delhi Deal

U.S. President Obama and India's PM Modi wave towards the media during a photo opportunity ahead of their meeting at Hyderabad House in New DelhiThe New Delhi Deal initiated by U. S. President Barack Obama and Indian Prime Minister Narendra Modi last week has emboldened India’s economic reform agenda and deepen U.S. – India bilateral relations.  The two countries reached agreement on a series of measures designed to reinvigorate commercial trade, restore the confidence of investors in India’s vast market, and resolve differences over the liability of suppliers to India in the event of a nuclear accident and U.S. demands on tracking the whereabouts of material supplied to the country.

  “Chalein saath saath; forward together we go.”

 – India-U.S. Delhi Declaration of Friendship

Trade and Investment

Under President Obama, trade between the two countries has increased by about 60 percent to nearly $100 billion a year (White House, 2015).  Speaking at a U.S.-India Business Council Summit in New Delhi,  President Obama announced a series of steps that will generate more than $4 billion in trade and investment with India while supporting thousands of jobs in both countries:

  • The Export-Import Bank will commit up to $1 billion in financing to support “Made-in-America” exports to India.
  • OPIC will support lending to small and medium businesses across India that will result in more than $1 billion in loans in underserved rural and urban markets.
  • The U.S. Trade and Development Agency will aim to leverage nearly $2 billion in investments in renewable energy in India.

Climate Change

The President and Prime Minister Modi pledged to enhance U.S.-Indian cooperation on our mutual climate and clean energy goals. The new deal ranged from financing initiatives aimed at helping India use renewable energy to lower carbon intensity.  The progress made on combating climate change, include the U.S.-India Partnership to Advance Clean Energy (PACE) umbrella program and technical work on emerging technologies.

The agreements include:

  • Enhancing bilateral climate change cooperation to achieve a successful and ambition agreement in Paris this year.
  •  Cooperating on Hydro-flurocarbons to make concrete progress in the Montreal Protocol in 2015.
  • Expanding PACE-R, the U.S.-India Joint Clean Energy Research and Development Center, to extend funding for research on solar energy, energy efficiency, and advanced bio-fuels.
  • Launching air quality cooperation to help urban residents reduce their exposure to harmful levels of air pollution.

More than 80% of electricity generation in India comes from fossil fuels and the power sector consumed nearly 70% of the coal the country produced in 2011, according to the International Energy Agency (IEA, 2014).

Human Rights

President Obama addressed an audience of 1,500 at Siri Fort Auditorium in New Delhi on the final day of his trip.  In a pointed message, the President pressed India on the need to address wider social challenges, including human trafficking and slavery, the status of girls and women in society, religious and racial tolerance and the need for programs to empower young people (Baker/Barry, New York Times: 2015)

Rising Incomes, Increasing Happiness

20141101_gdc115A Pew Research Center survey finds that people in emerging nations now rival those in advanced economies in their self-reported well-being (2014). The Pew poll asks respondents to measure, on a scale from zero to ten, how good their lives are.  In 2007, 57% of respondents in rich countries were counted as happy; in emerging markets the share was 33%; in poor countries only 16%.   But in 2014, 54% of rich-country respondents counted themselves as happy, whereas in emerging markets the percentage increased to 51%.

Wealth also has a significant effect on who is happy after market reforms.  Individuals with higher incomes, more education, more key household goods and paid employment are more satisfied with their lives than people who are less well-off.  Other characteristics also matter, however.  Women tend to be happier than men.  And there is a life-cycle effect: married people are more satisfied than unmarried individuals and middle-aged people tend to report lower well-being than both younger and older people (Pew, 2014).

In India, the highest rated aspect is their social life (69%) followed closely by their health, family and religion (68% each).  In nearly every country surveyed in Asia the lowest ratings go to either their present job (regional median of 60%) or their standard of living (58%).

The survey was conducted in 43 countries among 47,643 respondents from March 17 to June 5, 2014.  The overall relationship between life satisfaction and GDP per capita noted in the survey is consistent with what other research has found.  However, the exact curve of the logarithmic regression line and magnitude of the coefficients depends on what countries are included in the analysis.

India Credit Growth: Minorities Community Lending Totaled Rs. 240838 Crores

Top 5 Banks in terms of percentage share of minorities community lending 9. 18. 2014

Indian banks stepped up lending in the first Quarter, contributing to the growth of the Priority Sector by extending credit on favorable terms in Minorities Community Lending (MCL).

Punjab-And-Sind-Bank-LogoThe growth in the percentage share of MCL, in total Priority Sector Lending (PSL)  show banks have been working in accordance with the reform policies of the Government of India (Ministry of Finance, 18 September 2014).    The top 5 Indian banks (PSUs) having the largest percentage share of MCL Outstanding in total PSL are Punjab & Sind Bank, State Bank of Travancore, State Bank of India, State Bank of Patiala and Canara Bank.  Though State Bank of India is on the third position in Percentage terms, it is the top most bank as per MCL Outstanding in terms of absolute amount i.e. Rs. 53671 crores out of the total PSL of Rs.278590 Crores as on Quarter ending March 31, 2014.

All the 27 Indian PSU banks including IDBI and Bhartiya Mahila Bank, put together, have MCL Outstanding of Rs. 240838 crores out of the total PSL of Rs.1497055 crores as on the Quarter ending March.

Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of special exemptions.  Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections of the economy (Reserve Bank of India, 2014).   The central bank revised guidelines on lending to steady credit growth and avoid the big fluctuations that unnerved the market, October 2013.

New Data: Top 5 States for Rural Employment

October 1, 2014 Employment generated under Mahatma Gandhi National RuralIn spite of all its shortcomings, the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) of 2005 has had some major achievements.  All these achievements, however, are conditional on work being available on the ground (Ministry of Statistics and Programme Implementation, 1 October, 2014).

The total number of households which were provided employment was 49494518, which was 96.82% of households who had demanded employment (i.e. 51120857 households), during the Financial Year 2012-13.  The top 5 States where the maximum number of households which were provided employment during the Financial Year 2012-13 are: Tamil Nadu (7060722), West Bengal (5801138), Andhra Pradesh (5786315), Uttar Pradesh (4931708) and Rajasthan (4217157).

The data illustrates a number of interesting points that are also corroborated in other studies (See Dreze, 2010).  First, MNREGA is reaching the poorest of the poor, and is of particular significance for marginalized communities such as the Scheduled Caste (SCs) and Scheduled Tribes (STs).  Second, MNREGA is of special significance for women who have very limited opportunities for remunerated employment.  Third, MNREGA workers have a productive value -creating useful assets in the village.  Fourth, the transition to a right-based framework appears to be leading to a major decline in the exploitation of labor at public works.  Fifth, MNREGA has shown its potential as an organizational tool for rural workers (Dreze, 2010).

The MNREGA is a significant step towards the realization of the right to work.  The Act, which aims to guarantee hundred days of wage-employment in a financial year to a rural household whose adult members volunteer to do unskilled manual work, came into force February 2006  in 200 districts , and was extended to the entire country April 2008.    However, there is still a long way to go in protecting basic entitlements of rural workers under MNREGA – work on demand, minimum wages, payment of wages within fifteen days of work, basic worksite facilities, and unemployment allowance, among others (Dreze, 2010).