Tag Archives: Macro-economy

Getting the vaccine to a billion plus people

Getting the vaccine to a billion plus people

10 September 2020

India can learn a lot from its experience in managing cash – getting a billion people what they need can be planned effectively.

A vaccine for Covid-19 is expected to come sometime over the next few months – hopefully in this year. Once a vaccine is available, getting it to India’s billion plus people is a logistical challenge with many moral and ethical questions attached. How should India plan for the vaccination program? 

Before we go there, let us recognize that a few very important questions still remain to be answered. What shape and form the vaccine will be remains to be seen: it is expected that it will be intravenous and hence may require skilled or trained practitioners to administer. It is also not clear whether there will be only one vaccine or many competing ones, and how effective each might be. All of this will feed into the number of doses that might be required – whether a single shot would do or multiple jabs may be required. Hopefully, India will develop its own vaccine; however, if vaccines are available from other countries, how soon can they come to India? 

Given all these imponderables, one may be tempted to push back the planning till there is more clarity. With fast-paced changes taking place in this field, it is possible that many of these questions will be responded to rather quickly. It will be useful, hence, to have the policy framework for the delivery of the vaccine in place. 

Make it flow like cash

A vaccine is a good with significant positive externalities: the more the number of people who take the vaccine, the better it is for everyone in the society. Ideally, if everyone is inoculated, then everyone is safe. There are a few providers (or maybe even one) and everyone is a buyer. All citizens in the country will queue up to get a vaccine, as and when it is available. 

Cash is a similar type of a good. There is only one supplier (the government) and everyone needs it: all are required to have the same type of cash when they transact with each other. All citizens in the country queue up to get the notes as required. 

India has recent experience of ensuring the wide availability of a good like cash to all its citizens. Unlike in the case of demonetization where the announcement was sudden, the expectation of a vaccine has been building up for some time – this allows us the opportunity to draw upon our experiences. The re-monetization process lasted only around 50 days: similarly, we need to think of timeframes in days and not years as we think of our vaccine delivery. 

The three As

Availability and training: There is an implicit Government assurance to all citizens that they will all have the notes in their wallets when they want them – this has been perfected over years of experience. As the RBI annual report of 2017 says, “…during a short span from November 9 to December 31, 2016, the Reserve Bank pumped in 23.8 billion pieces of bank notes into circulation aggregating ₹5,540 billion in value.” Assuming that every transaction meant the final customer picked up 24 pieces from a bank, it meant a billion transactions, similar to the number of vaccine doses that may be required. 

The availability of the new notes was made across all branches of the banks: more than 125,000 centres. A similar size and scale need to be brought to bear to the vaccination program which should be available across all primary and secondary healthcare units with an appropriate training for administration. We note that there are 0.9 mn Accredited Social Health Activist (ASHA) workers and many private medical care professionals in the country. The training for administering intravenous vaccines, if not already done, should be started now – even before the vaccine has been finalized. Similarly, the logistics and cold storage facility plans should be thought-through now. 

Access and prioritization: As we plan to roll-out the vaccines, access to every citizen has to be assured. Unlike in the case of cash, where there were concerns on hoarding, there should be limited concern that a citizen would want to take multiple shots when a single dose would suffice. Anyone who presents himself/herself should be offered a shot without concerning too much on whether the person has received a shot earlier. 

The government should invest its energies in getting the doses, not in administering the system that administers the doses. If an elaborate system of maintaining records is kept, it can lead to undue bureaucratic delays and hold-ups. Anyone who wants to take a vaccination shot should be allowed to without the need to show any documents. The crisis is not the time to create a health registry or a digital health id. 

The issue of who gets the vaccine first remains. The frontline health-workers, other essential workers, and senior citizens have a natural claim to be the initial recipients. The most effective way in which this can be practically and morally be addressed is if the other citizens know that their turn will come soon. This is a key reason why the target for overall vaccination has to be measured in days – not months or years. 

Affordability and pricing: An important component of access is the price at which vaccines will be available. In the case of the vaccine, a low price coupled with the solid expectation of availability-on-demand will remove most of the incentive to hoard. Government can give an assurance of supply (and hence keep prices in check) by contracting capacity for many hundreds of millions of doses. The government should use the powers at its disposal to grant licences to make the vaccines to a large number of players. It should consider and resolve whether India can invoke a process patent instead of a product patent in this case.

There should be a pay-out to ASHA workers or other health professionals who administer a dose. A local, social audit should be powerful enough to determine whether the vaccines were actually administered and not just stored or wasted away. Public announcements of when and what quantities of medicines reach the health centres should be periodically made.

A vaccine shot to heal them all

Once vaccines are ready, we should aim to reach as many of our citizens as quickly as possible. The Indian pharma industry has proven to be a world beater in manufacturing large scale doses. As we saw with the prices of ventilators and PPE kits, a large supply almost inevitably results in low prices – the government should use the scale to keep vaccine prices low. 

Quick dose of vaccination will lead to a quick restart of the lives of the citizens and the economy. 

The author is with Axis Bank. Views are personal.

Originally published in The Financial Express.

Making the frontier sector work

Making the frontier sector work

14 August 2020

Many of the networks of value could start to become ‘utilities’ as they become more embedded in everyday lives.

In the previous article, we introduced the idea of the D-sector. The three traditional sectors have a well-defined, or largely settled, understanding of the many elements that build them: (1) what resources are required, (2) employment and its regulations, (3) the path to skills, (4) how they are priced and valued, (5) taxation policies, and (6) their impact on society. We detail these below.

Defining the D-sector

Resources required: Five elements are required to build a sturdy ‘digital cocoon’: the ability to (1) get on a network, (2) communicate and connect, (3) add value, (4) make and receive payments and (5) access assets and liabilities. We detailed these in the earlier article. There is a role for both the public and the private sector in creating the networks. Many networks that help create value in the fourth sector are largely private today: think of Facebook, Uber, Amazon, AirBnB, MTurk, Fiverr, YouTube or any of the streaming networks, etc. Payment systems like UPI have been developed in the public domain. Over time, many of the networks of value could start to become ‘utilities’ as they start to become more embedded in everyday lives of people as anyone with an MS Teams or Zoom meetings will attest!

Employment: Since the network creates value by linking together buyers and sellers (terms which are used in the widest sense possible), it commands a value. Building credibility on the network, currently billed via “stars” or “like” or “followers” is hence a sine qua non. The employment or income potential on the network gets impacted by the policies of the network. Since this is a new way of earning, it has been hotly contested on whether those who come on the network are employees or partners; or whether the medium carries any responsibility for the messages. Popularly called ‘gig’ work, building long-term incomes, creating the ‘forced savings’ like provident funds, getting advantages of cheaper group insurances, etc. need to be re-imagined. Banks need to develop new models of financing such professionals, especially as the hardware requirements to get on the networks are typically required to be borne by the participant. Transferability or inter-operability of the “credibility” from one network to another will be crucial for participants, especially since networks, like trade routes and fashions, can wax and wane.

Skills and education: The pathways for jobs in the three traditional sectors required building specific skills which were honed via specialized education and on-the-job training. While the importance of the deep skills will continue, the fast-paced nature of change will require learning and relearning new technical skills, if only to remain on the network or to move between them. This will require constant learning interventions which will have to be designed to be easy to consume, understand, assess, and measure. The quality of learning itself will need to be standardized and benchmarked. Carrying the right certifications, which can be verified, as part of the digital profile will become the new CV.

Pricing and valuation: One of the most-quoted phrases of the tech economy is: “if it is free, you are probably the product”. It is amazing how some of the most valuable online activities – from communication to search – are essentially free. Starting positions have a strong anchoring bias: since we have all become accustomed to free, or deeply discounted, services, many industries in the “digital cocoon” have found it difficult to find the right monetization model. There are now moves to create (or redistribute) value: for example, Australia has recently proposed a law which requires dissemination networks to pay for information content. The relative share of value between the network and the participants will take time to reach an equilibrium – and the path will not be linear.

Taxation: If the value distribution is either zero, unknown, or unsettled, this leaves the tax authorities in a quandary. Over the last many years, the idea of Base Erosion and Profit Shifting (BEPS) for multinationals in the traditional sectors has stated to fall in place: companies moving their profits from high to low jurisdictions are now expected to be checked via international cooperation in taxation. Digital taxation continues to remain an unsettled area: the US-French dispute of taxing French wines is response to tax on American digital giants is a case in point; the Apple/Ireland-EU tax case is another. As economic value is created by the D-sector and gains from it accrue to the owners and participants of the networks, finding the right model to tax will be help generate the funds required in creating the pathways for people in the society to enter the D-sector.

Societal impact: Manufacturing and services led the need for urbanization and dense close networks of people working together. The idea of “work from anywhere” will upend the need to be present in dense cities. Many of the largest cities in the world today continue to remain port or riverside cities – they derive their roots from the industrial clustering over the eighteenth and nineteenth centuries on which the services economy of the twentieth century built upon. However, as the information technology reduced the need to be near a port, cities like Bengaluru, Hyderabad and Gurugram in India scaled up. As the fourth sector of work, especially the delivery of services, entertainment or gaming online picks up, it could have a profound reshaping of the geographies, especially in the current tier-2 cities. A specific aspect that banks and monetary authorities should keep an eye out for: as some of these networks become islands of value, they may become systems which require only infrequent conversion of their internal “currencies” with the external world.

The author is with Axis Bank. Views are personal. 

Originally published in The Financial Express.

Defining the frontier sector

Defining the frontier sector

13 August 2020

The new normal after Covid-19 requires a re-imagining of macroeconomics: we need to start defining the contours of, and measuring, the fourth sector. (First of a two-part article)

“There are three estates in Parliament but in the Reporters’ Gallery yonder there sits a Fourth Estate more important far than they all. It is not a figure of speech or witty saying, it is a literal fact, very momentous to us in these times.” Edmund Burke’s quote highlighted the rising of the Fourth Estate as press and media became an important pillar of the society. A similar momentous time is upon us again, courtesy the pandemic, as we recognize what brings income and wealth to the society.

In an earlier article, “Getting India digitally ready: COVID-19 pandemic highlights urgent need to build digital cocoons for the whole population” (May 15, 2020, The Financial Express), we had looked at the importance of and need to build “digital cocoons” for a large segment of India’s population. As the impact of Covid-19 lingers on globally, it is abundantly clear that those who were part of the digital cocoon have done much better than those outside. Indeed, many activities, from office work to schooling, from ordering groceries to entertainment, the trend unmistakably is to move to a digital mode. Anyone who serves within the digital cocoon, or any sector which has evolved to serve within the cocoon, has been spared the worst of the crisis.

Macroeconomics has traditionally looked at the break-up of a country’s income in three buckets: primary (largely agriculture, mining, etc.), secondary (which includes factories and industrialization), and tertiary (all other value-creating services that did not require land and machinery). It is time now to start to think about a sector of the economy as distinct from the “three-sector view”.

The idea of a “quaternary sector” has been around for some time. However, it is not tightly defined – sometimes it is taken to be a sub-sector of the tertiary sector, sometimes as a placeholder for the knowledge-based sectors of the economy. Pre-Covid, there was limited reason (or push) for this concept to become mainstream. Now, with a significant proportion of the value in the “digital cocoon” having been relatively resilient, it is important that we explicitly call the sector out to understand its nuances. This will help deepen the understanding and shape the response that policy makers should have towards this sector.

What counts, needs to get measured 

As the fourth sector is now more deeply and firmly entrenched, it is imperative that tools to measure it are now developed and refined. We need to make it more widely understood so that it can become commonplace and not a walled garden for those who are lucky or can afford to be in the “cocoon”. An important element will be to name the sector which encompasses all the various aspects: digital, connected, and knowledge-oriented. While professional macroeconomists can formally name the sector, for the time being, we will refer to it as the D-sector. This links it both to the digital world and the fourth letter of the alphabet as a placeholder!

There are two ways in which D-sector will grow: (1) many activities of the “traditional” sectors will move into the virtual domain creating a new set of processes and solutions – think Uber-ization of various activities or any of the work-from-anywhere or gig initiatives of various organizations, (2) completely native elements will spring up thereby creating new work and income streams – think e-gaming, for example. As the sector grows, a larger proportion of the value addition will come from the latter heralding many changes in the society and the distribution of incomes and wealth.

Changes will be very long-drawn

As agriculture gave way to the industrial revolution, it led to significant social, political and economic changes: the fall of feudalism, the exploration of the world, and large increases in global incomes and wealth (if very unevenly distributed) were some of the key changes that reverberated across the globe and the centuries. As the services sector began to take shape, newer professions emerged, the education landscape changed, and a middle- and upper-class emerged on the back of sectors that were previously unimagined. The D-sector will also create similar large scale changes. The most promised one currently seems to be “geography will be history” – if this were to even partly come true, it will have massive ramifications.

Note that the D-sector is not just the digital sector – which has now been around for long and is a key component of the services/tertiary sector. The defining aspect of the D-sector is that value is created and consumed in the digital ecosystem itself. There is no need for the participants to step out the ecosystem.

Public policy for the D-sector remains to be shaped. What aspects of the new sector should be governed centrally, what should be left for the markets to decide? Should the government “guarantee” access to the sector by getting high-quality, low-cost digital infrastructure to all? What education and employment policies will facilitate the growth of this sector – and indeed prepare more people to come into these sectors? What geopolitical implications does this have if services can be offered from anywhere across the world without a “visa”?

These will be contested issues and there is no currently obvious equilibrium. Solutions will evolve as we step into the New World that the pandemic has required us to imagine. The impacts will parallel those of the European explorers as they stepped out in search of new worlds.

The author is with Axis Bank. Views are personal.

Originally published in The Financial Express.

Landmark Reforms in Indian Agriculture

Landmark Reforms in Indian Agriculture

25 June 2020

Notes from a Live Webinar co-hosted by Axis Bank and agribazaar

The panel was represented by senior government officials, investors, developmental agencies, agri-industrialists and a banker. The reforms undertaken by the Government were outlined and explained by the four Secretaries to the Government of India. These reforms have been variously called the “watershed moment”, “1991 moment”, and the “unshackling” of Indian agriculture, especially since they converted the Covid-19 crisis into a massive opportunity.

A good start with many reforms

With almost half a billion people associated directly or indirectly with Indian agriculture, any change here impacts incomes, jobs, social status, and prosperity for them. These changes fit in well with the Government’s commitment to double farmers’ incomes.

The three big changes that have taken place are: (1) abolition of the monopoly of local mandi, or agriculture yard, where the farmer was required to sell his produce, (2) doing away of the stocking limits on the private sector, and (3) encouragement to contract farming. Enabling schemes of government of India like promoting 10,000 new farmer producer organizations (FPOs), Digital Agri Stack and Rs 1 trillion (US$13 bn) Agri Infra Fund.

What are the key implications of the changes?

•                     No monopoly of APMC mandis at the local level means that for the farmer, the nation becomes his market – and digital platforms can connect farmers to buyers and processors.

•                     Private entrepreneurs and investors now have many more avenues to invest: no stock limits mean larger holding capacity, leading to bigger warehouses and associated infrastructure for logistics and processing.

•                     Contract farming opens up the possibility of land-pooling allowing small, fragmented farmers to come together to grow high-quality food and cash crops.

With these changes now, scale will be the key determinant of success for Indian agriculture. Scale will require capital, technical know-how and supportive regulations.

An investor-friendly government

A fundamental shift in the thinking of the government was highlighted when it was mentioned that the focus now is not on “managing the shortages” but on “processing the surplus”. This was picked up by industry participants to highlight that the sector is now moving from being “production-centric” to “demand-centric”. The investors highlighted that it is now time to move from a thinking of subsidy to welcoming a wide range of capital (from debt to mezzanine to equity).

The government representatives committed to answering all the questions live and those that remained they promised to respond to the registered participants over email. The role of Invest India in promoting and facilitating foreign investment was highlighted and so was the concept of Empowered Committees. Many segment that are open for 100% foreign direct investment, especially in the food processing sector, were brought to attention.

On a specific ask for a policy and government support on palm oil (one commodity in which India is not self-sufficient), the government reached out to the industry to co-create opportunities.

Opportunities identified

A wide range of opportunities were identified and highlighted including crop advisory, crop marketing, smart irrigation, leasing of equipment, new avenues of financing, aggregation of inputs and/or output chains, etc. Sectors like food processing and fisheries were highlighted as “sunrise sectors”.

The key mantra is that any industry needs to be able to compete in the global export market – only then it can serve the local market efficiently. The world is now moving towards plant-based products and India has a natural advantage in this market. The animal husbandry market was noted for the changing dietary preferences locally and globally. India should set an audacious target of US$100 billion of agri exports – the sector should look at all seven billion people on the planet as its customers and not just the one billion people in India.

Science and technology

The Indian farmer is very tech-savvy. Many of them quickly learnt and came on to the various webinars and other apps that agri-input and agri-finance companies organized during the lockdown. It was noted that the farmers are very flexible and willing to adapt to new ideas and technology.

Technology research in India still lagged many other countries. Many new ideas in ag-tech are cutting-edge technologies like digital agri stack, gene editing, plant-based meat, etc. India, with its fantastic agri research universities, should step up to take advantage.

Climate change is an area of concern and will require significant adaptation. Patterns and intensity of rainfall are changing and that will impact the output of agriculture. Sustainability has to be kept in mind for long-term business models.

Some open areas

The initiative of the Central government was lauded by all. However, some concerns were raised on whether the States will be completely on board? Ideas like creating a GST Council like body or moving agriculture to Concurrent List were highlighted. It was noted that 16 states have already started to issue their notifications in line with the central initiative.

Price is a key economic variable and one of the big reforms is to let price discovery take place easily without any restrictions. However, it was pointed out that certain commodities still operate under price control and the futures market still requires regulatory support for development. It was noted that creating a robust price information system was a key initiative of the government reforms.

Unshackling of more sectors to make them sunrise sectors was highlighted: key among them were palm oil and poultry.

Overall comments

The event was very widely attended. It had received full support of the government and the private sector. A total of 9,543 participants registered for the event and 4,686 attended the event. The event was noted for its smooth flow, equitable time distribution between all participants, live question and answers sourced from the audience, and an interactive panel.

Panelists:

  • Mr. Sanjay Agarwal, IAS, Secretary, Department of Agriculture, Cooperation & Farmers welfare, Ministry of Agriculture and Farmers Welfare
  • Ms. Pushpa Subrahmanyam, IAS, Secretary, Ministry of Food Processing Industries
  • Dr Rajeev Ranjan, IAS, Secretary, Department of Fisheries, Ministry of Fisheries, Animal Husbandry and Dairying
  • Mr. Atul Chaturvedi, IAS, Secretary, Department of Animal Husbandry and Dairying, Ministry of Fisheries, Animal Husbandry and Dairying
  • Mr. S. Sivakumar, Group Head – Agri & IT Businesses, ITC
  • Mr. Balram Yadav, Managing Director, Godrej Agrovet
  • Mr Srini Nagarajan – Managing Director and Head of Asia, CDC
  • Mr. Anuj Maheshwari, Managing Director, Agri business, Temasek International
  • Mr. Akhilesh Tilotia, Head, Strategy and New Initiatives, Axis Bank (Moderator)
  • Mr. Amit Mundawala, MD, agribazaar (Vote of thanks)
Medium-term dynamics for India post Covid-19 lockdown

Medium-term dynamics for India post Covid-19 lockdown

01 June 2020

Shape of economic recovery will determine employment, debt and exchange rates.

The immediate fiscal deficit dynamics and growth outcomes for India post Covid-19 lockdown have been the subject of intense analysis and discussion. The human crisis of lives and livelihood did demand both an immediate and urgent response. With the lockdown now opening and economic activity picking up, it is important to look beyond FY21 to see how India could fare in the first half of the next decade.

Discussions have focussed on whether the economic recovery will be L, U, V, W, or a swoosh, a la the logo of a famous sports brand. These descriptors refer to the shape of the chart when plotting real GDP (on y-axis) over time (on x-axis). The GDP in FY20 is estimated to be Rs 204 trillion (Rs 204 lakh crore) and if it had continued to grow at 8% in real terms, GDP would have reached Rs 300 trillion by FY25. Depending on the inflation trajectory, the nominal number would have been higher. This then is the baseline chart.

An L-shaped recovery means that there is a sharp displacement from the trend line: this displacement is large and possibly growing compared to the baseline GDP over the next few years. A U-shaped recovery means that there is a gap in the output compared to the baseline over the next few years but the catch-up brings the GDP back to trajectory but this takes, say, the next 4-5 years. A V-shaped recovery means that the sharp fall from the trend-line is reversed in the next year or two. A swoosh can be a U or an L such that the recovery is asymptotic to the trend line: it tries to reach the trendline but never does. W is a scare-scenario: this is the virus coming again and causing the economy to go through varying intensities of L, U, V or swoosh again.

No one knows which of these scenarios will play out. The best that can be done is to describe these scenarios in some detail, assign probabilities based on judgment or expertise, and be ready to reassess the scenarios and probabilities as new information comes in. All economic agents can try to be ready to prepare themselves to react to the emergent scenarios. The government can try to trigger an outcome on the back of their fiscal and reform policies.

Moving beyond GDP

Employment and inequality
Employment, from both a stock and a flow perspective, will be determined by the shape of the recovery. In the near few quarters, depending on the severity of the economic shock, there will be a dent in the stock of people who are currently gainfully employed. Some part of this employment, in sectors and units that are most vulnerable, may simply never come back. The pace of job growth was anyways lower than what was required even before the Covid-19 lock-downs and slowdown: if the job growth remains anemic, this will add to the stock of those who are not able to find jobs.

A V-shaped recovery is hence the best outcome if it can be engineered. An L or a long-U or a swoosh can leave many families out of the employment market. Lack of jobs takes away the ladder that many millions used to climb out of poverty. For those who are not able to build their ‘digital cocoons’, this can keep them deprived of a decent life and future for longer.

Fiscal and debt dynamics
There is a circular loop between the shape of the recovery and fiscal dynamics. A large expansion in fiscal spending can create a sharp recovery: this worked during the Great Financial Crisis in India when India ‘de-coupled’ with the rest of the world, continuing on its growth trajectory for longer. It did eventually lead to challenges in inflation and slow growth, and there are some lessons to be learnt there.

The current discussions concentrate on what the fiscal deficit-to-GDP ratio for FY2021 can be—however, it is important to look beyond to see how both the components of the equation behave. If the GDP growth does not pick up (L, long-U, swoosh), the ratio will continue to remain large. Fiscal deficits cumulate into the debt of the country. If the rate of addition to the debt stock of the country is larger than the rate of growth, debt as a proportion of GDP will continue to increase. This will have consequences on (1) growth rates thereafter (research suggests that countries with high debt-to-GDP ratio find it more difficult to grow), (2) credit rating of the country, and (3) the interest rates in the economy.

Exchange rate and $5 trillion GDP target
The world is awash – once again – with more capital being churned out by central banks. Currencies will take time to find their levels: their nature of trade and capital flows, debt on the country, the strength of its reserves, how the inflation dynamics play out, will all play a role in determining where exchange rates finally start to settle. Low prices of oil can help strengthen the rupee but an outflow of capital, on account of change in confidence or credit ratings, can weaken it.

We started this article by reference to a ‘real’ GDP of Rs 300 trillion by FY25 in the base case scenario, without Covid-19. If the rupee appreciated against the dollar, there was a possibility that India could reach the$5 trillion GDP target. Given the shock to the GDP and the uncertain direction of the exchange rate, it is reasonable to expect that the $5 trillion GDP will take longer. The$5 trillion GDP, at a population of 1.4 billion, would have meant a per-capita income of more than $3,500.

There are real consequences to the lives of millions of Indians based on the shape of the recovery. What jobs they find, what lives they lead and where, what they pay to access loans, how their incomes compare to the rest of the world, depends on how quickly we put Covid-19 behind us. A sharp V-shaped recovery can keep the medium-term economic trajectory of India intact—this will require significant investments from the government.

The author is Head, Strategy and New Initiatives, Axis Bank. Views are personal.

Originally published in The Financial Express.

The Ladder of Development and Progress

The Ladder of Development and Progress

20 February 2020

Development and Progress go hand-in-hand; getting on and remaining on the ladders key to economic growth for individuals and nations.

As India changed and economically progressed, it brought hope. There was indeed a pathway out of the poverty that the slow growth of the many decades had foisted upon the society. There was now a way to get out of ration queues to become tax-payers – from being dependent on the State to giving back to the country. A sliver of the population would jump right off the subsistence farms and move to the cities. The pathway was to get into one the burgeoning services sectors: get into IT to bring in the moolah or become an air-hostess to serve the customer flying in and out of the country; sell the young generation a home, or the loan and insurance on it.

One needs to have found the right steps on the Ladder of Development to eventually get on the Ladder of Progress.

The Ladder of Development

The ladder of development is basically a citizen’s access to public goods: (1) personal capital for basic needs: roti, kapda, makaan, (2) physical capital: bijli, sadak, paani, and (3) human capital: shiksha, swasthya, suraksha.

Think of these as steps on the way up a pyramid – the more certain you are about being able to set your foot on one step of the ladder, the more prepared you are to head up to the next one. If you are not suffering from malnutrition, you can try and find some decent shelter. Once the shelter is reasonably assured, one looks for the ability to find and go to work. Electricity is a game changer that reduces physical effort at home and multiplies output at work. Decent hygiene and sanitation – both for social and health reasons – help a family keep away from the cycle of disease and debt. Once basic physical capital is reasonably be assured (load-shedding is eliminated, or at least announced and called out; roads don’t shut down in monsoons; or piped potable water comes home), individuals and society build upon it using education and a higher level of health. Ultimately if there is certainty of incomes, a pool of money for emergencies, financial security and retirement can be built up.

We have not added elements beyond the ‘public goods’ – however, progress eventually requires that people, regions and society enter into networks of value. Such networks may be a social network that helps them find and retain jobs, or a global value chain of production and delivery. These networks can keep people in gainful employment: this is as true in the gig-economy where getting on to a platform is important or in the old-world economy.

The Ladder of Progress

If over time, the chance that a citizen is able to earn more than the per-capita or per-household income increases, not only do they start to become financially more secure, they also pull the per-capita income of the country up. This creates a positive, virtuous cycle of pulling up incomes across the board and takes the citizens into the consuming middle-class that the investors and businessmen find so attractive. Progress, hence, can be defined as the change in this probability for the better.

The inclusivity of India’s growth depends on its ability to create income and social mobility. Income mobility comes when new and different opportunities present themselves to the working-age population: this allows them to make a cleaner break from the shackles of the previous generation. Many a times this involves migration one tries to move to the right sectors at the right places while planning their growth prospects.

Overall economic growth: The most important component of change is the overall rate of growth of the economy. A fast-growing economy is the best way to create new opportunities. Basic calculations will suggest that the current annual per-capita income can increase to 10X if the economy grows at 10% a year for 25 years, or may grow to only 3.5X, if the economy grows at 5% a year.

The right sectors: While the overall growth creates incomes and wealth for the economy as a whole, the distribution of the income streams and wealth will depend on the sectors and regions that create the jobs. Sectors like IT, pharma, banking, telecom, aviation and real-estate created many millions of new jobs in the last quarter century. When new sectors suddenly emerge or see disproportionate growth, they create a vortex of demand which pulls in many youths into the workforce. The digital economy is expected to be one such sector – what remains to be seen is whether it is enough for the many millions who seek employment.

The changes in the probabilities or in the structure of the labour force are dependent on how the economy shapes up. The rate of growth of the overall economy, of the various sub-sectors within it and the regions from where the growth comes shapes the labour force requirement. When the IT revolution came to India, it created a whole new set of opportunities and created a new labour force structure that altered the probability for many in the 2000s and 2010s.

The places of action: Western and Southern Indian states benefitted significantly from this growth. Cities like Delhi, Hyderabad, Bengaluru, among others also saw massive improvement in their economic destinies. This growth across a part of India has been variously described as the divide of the Amritsar-Vijayawada line or the East-West of the Kanpur longitude. Many reasons have been attributed the development across such imaginary lines, including better connections with the global economy, slowing down of the growth-rate of the population as maternal and infant mortalities came down in these areas, better education infrastructure, more skilled labour-force, the usage of English, etc.

Ladders of strength

The ladders of development and progress are self-reinforcing. If there is progress, it creates a tax base to fund development. Better access to development tools can lead many more citizens to join the ladder of progress.

The author is Head, Strategy and New Initiatives, Axis Bank. Views are personal.

Originally published in The Financial Express.

Larger incomes to tax or larger taxes on incomes?

Larger incomes to tax or larger taxes on incomes?

01 February 2020

Budget 2020 cares for people’s economic aspirations, says Axis Bank’s Akhilesh Tilotia.

India’s response to its dilemma will determine whether budgets of the next decade will have larger incomes to tax or larger taxes on incomes.

This Budget Speech of the finance minister was one of the longest in recent history. Her previous Budget speech in July last year was around 11,000 words. This one was more than 13,000.

Part A of the speech went from 8,000 words to 9,000. Part B went from 3,000 to 4,000. This depicts the relative importance attributed to the plans and schemes of the government and changing tax structures. The FM’s pictorial depiction of the bouquet of government schemes held by two caring hands of governance and financial sector reinforces the work required in building and unclogging the plumbing of the BFSI sector.

There are many proposals that build on the agenda of liberalisation and privatisation such as the proposed Initial Public Offering (IPO) of Life Insurance Corporation (LIC), enabling sourcing for foreign direct investment (FDI) in education, corporatisation and listing of a port, involving private sector in the four station redevelopments and many trains, encouraging signals to the foreign portfolio investors (FPIs) for investing in corporate bonds (from 9% to 15% of outstanding bonds), and to sovereign wealth funds (SWF) to invest in infrastructure.

The elevated levels of FDI to $284 billion over FY2014-19 from $190 billion over FY2009-14 was highlighted. Across soft and hard infrastructure, hence, “it would mean yielding more space for the private sector”. It will be interesting to observe how the proportion of financing for such initiatives evolves between local and foreign over the years, especially as the local financial savings have dipped over the last few years even as space for foreign funding has opened up.

On a similar note, there are many proposals that build on the importance of the government and of its expected ability to create transformative changes. Kisan Rail, Krishi UDAN, solar grids on fallow and railway lands, Jal Jeevan Mission, Bharat Net, ODF+, five new smart cities, hundred new airports, among many others, seek to bring in large infrastructure-related changes in the lives of ordinary Indians. A fascinating social change that the government has proposed in the Budget is the deliberation on the age of marriage for women. Interestingly, this Budget is unique in recent times, in its complete omission of the defence sector in the speech. Even as we, the readers of pink papers, focus on the macro and fiscal numbers, it is critical to keep in mind the continuing and permanent importance of government in shaping society and its economy.

Does the last Budget of this decade prepare India and its economy for the challenges of the next decade? Part A of the Budget recognises that “Artificial intelligence, Internet-of-Things (IoT), 3D printing, drones, DNA data storage, quantum computing, among others, are re-writing the world economic order.” In Part B, it says “Undue claims of FTA benefits have posed threat to domestic industry. Such imports require stringent checks.” The world is changing fast: over the next decade, India will be required to decide on how it embraces the changing the world order even as it builds stringent checks.

India’s response to this dilemma will determine whether budgets of the next decade will have larger incomes to tax or larger taxes on incomes.

Views are personal. Originally published in The Financial Express.

Here’s why India may end up choosing capital flows over current account flows

Here’s why India may end up choosing capital flows over current account flows

09 January 2020

India may end up implicitly choosing a stance of preferring capital flows over current account flows, if it sets a GDP target in a foreign currency.

A currency serves two purposes: medium of exchange and store of value. We have explored this idea in these pages in a different context earlier when we looked at the relationship between legacy finance firms and fintech companies. Today, we explore the implication of this definition and purpose of a currency in the context of a country’s financial relationships with other countries.

For a country, its relationship with the world flows through two accounts: capital account and current account. For sake of simplicity, capital account refers to all the monies transferred on account of buying or selling of assets like equity, debt, property, etc, and current account includes all the trade in goods and services including investment incomes and remittances. It can readily be seen that when a country engages with the world on the current account, its currency is being used as a medium of exchange; when it interacts using the capital account, the current is a store of value.

There is a natural tension when any good has to serve two purposes. An investor looks for a more stable store of value: they would want that the value of investment changes largely due to the underlying economic factors, and not because of currency. A buyer or seller of goods and services would want a higher or lower value of the currency depending on which side of the trade s/he is: the lower the value of a currency, the easier for exporter to export and more difficult for an importer to import.

India runs a current account deficit that is made up by capital account surplus—the net result of which is that, the balance of payments tends to be marginally positive in most of the years. This shows up in the rising foreign exchange reserves of the country. Over the few decades, before it changed track in the last couple of years, China used to have large current account surpluses and not-as-large capital account deficits, and hence, they too built up very large foreign exchange reserves. Both countries operate at very different scales in their capital and current accounts, and, hence, the stock of forex reserves is very different across the two.

India’s articulated policy on its exchange rate is that it does not target any particular level, but it also does not like significant volatility. What most economic agents bake in, over medium-term time periods, is a depreciation in the Indian rupee vis-à-vis say, the US dollar. This largely follows from the inflation differential in both the economies. Before the mandate of the Monetary Policy Committee to keep inflation within the 4% +/- 2% range, Indian inflation had seen significant upticks. Over the last few years, inflation has been maintained in the defined range. However, the realised and expected inflation in the US economy has been lower than India’s. Sometimes, economic and financial forces can create sudden sharp movements in currency rates, as happened during the ‘taper-tantrum’.

If the exchange rate between the two currencies do not regularly take the inflation divergence into account, the Indian rupee can start to become uncompetitively strong from an export perspective. However, a strong currency works well from the perspective of foreign portfolio investors (FPIs) and foreign direct investors (FDI). Not articulating an exchange rate level is, therefore, an attempt at balancing these naturally-conflicting interests. It is worth reviewing periodically (every decade?) whether India wants to have a balancing stance or prefers one form of currency flow over the other (capital versus current).

The $5-tn question

A new element in this currency conundrum is the target of India becoming a $5 trillion GDP economy. The recently-released National Infrastructure Plan (NIP) has projections of the Indian economy over the next few years. It forecasts that the GDP of the Indian economy is expected to be Rs 365 trillion by FY25, which implies an ~12% compounded annual growth rate over the FY20 GDP of Rs205 trillion. At current exchange rates of ~Rs71-72 to a dollar, Rs365 trillion GDP in FY25 implies a $5 trillion economy.

The 12% nominal growth is broadly expected to be 7-8% real and 4-5% inflation. Assuming dollar inflation at 1-2%, this will imply a depreciation of 3-4% in rupees every year. Such a change may not take place every year, but the cumulative effect will possibly catch up over a five-year period. This could imply a 15-20% change in the INR-USD rate over this time period. If this happens (that the Rs/$ rate moves to say 90 over this period), then Rs365 trillion will amount to only $4 trillion GDP.

Reaching the $5-trillion-GDP target will be easier if the currency remains stable at current exchange rates. This may be possible if RBI targets and maintains a level of the currency—this will require a change in the current stance. Any such implicit or explicit move will have follow-through implications on the local economy via interest rates, inflation expectations and real-effective exchange rate of Indian rupee vis-à-vis its trade partners.

A large part of the $5 trillion GDP economy is predicated on the increase in net-exports (excess of exports minus imports): a strong rupee may not make this easy. A currency which is stable and strong will, however, be welcomed by FPI and FDI investors. With its growing market and liberal FDI policies, India will become a strong contender for increased capital flows.

India may end up implicitly choosing a stance of preferring capital flows over current account flows, if it sets a GDP target in a foreign currency: India should make this position explicit. If it wants to continue maintaining a balanced stance, reiterating its growth aspirations and GDP targets in its own currency will be useful.

The author is Head, Strategy and New Initiatives, Axis Bank. Views are personal.

Originally published in The Financial Express.

State finances: Finding the monies

State finances: Finding the monies

12 December 2019

As the Centre and States try to find GST compensation cess monies, it is time to look beyond the present, to see how the future could unfold for State finances.

The financial relationship between states and the Centre has been in news recently. The Fifteenth Finance Commission submitted its report to the president; there have been some delays in payment of the GST compensation cess, and there were some discussions on whether the Centre will honour its commitment of assuring a 14% revenue growth in the agreed-upon transition period.

Constitutionally, Centre-State fiscal relations come up for review quinquennially (once every five years). States have ceded significant taxing powers to the Centre via GST. Earlier, the states had their own tax bases and could manage revenues by juggling taxation policies. This led to a large number of state-specific tax rates, a lack of uniformity in the tax structure in the country, and sometimes, a race to very low-tax regimes to attract investments—and hence, a move towards GST. On the other hand, such flexibility allowed the state governments to create their own fiscal policies which could be more suited to their needs: it also made the states, especially the non-special-category ones, less dependent on fund flows from the Centre.

While the states have a say in GST rates, one-third voting power for the Centre means that it has a casting vote to reach a three-fourths majority in case decisions needs to be taken by voting. The GST Council has, till date, taken decisions by consensus. Large sources of direct funds remaining for the states are non-GST goods, property taxes and stamp duties. Over time, non-GST goods like petroleum, natural gas, aviation turbine fuel, alcohol and electricity may also move into the GST framework to complete the input tax credit cycle.

This can leave states dependent on the Centre for a significant portion of their revenue inflows for funding their expenditure. If there is a slowdown of funds at the Centre, or if there is any misalignment between the priorities of the Centre and the states, the fund-flow situation at the states could become challenging. Since chief ministers are expected to deliver on their promises, the states are face a near-continuous requirement of funds. Note that the states have built-up a lot of “committed expenditure”, mostly on account on salaries (including pensions) and a plethora of social services that belong on the state list. The states also have defined fiscal deficit and debt targets that they cannot breach.

Over time, the states will again seek to build buoyancy in taxation. The only way for the states to keep to deficit and debt targets when expenditures are committed and growing is to increase revenues. Once the five-year GST transition period of committed annual 14% growth in revenues is over (in 2022), states may be required to find themselves new sources of revenues. We look at some possible sources that might come up: citizens and businesses should also remain cognizant about such scenarios.

Better efficiency in tax collection: Better implementation of existing taxing powers of the states by promoting greater compliance, making tax collections more user-friendly, and identifying taxes with large potential, say property taxes. The Economic Survey 2017 had identified that the states (and the cities) do not do a thorough job in identifying, assessing and collecting property taxes—it had mentioned that “Bengaluru and Jaipur are currently collecting no more than 5-20 per cent of their respective potentials for property tax.”

Better collection on state services: The states offer various services to its citizens like transport, water, electricity, schooling, primary health care, etc. User charges (in places which, and for citizens who, have the ability to pay), long recommended by economists, could start to become an important revenue source for state budgets. Many services may see refinement in eligibility criteria to sharpen targeting to genuinely-needy. As average incomes increase, the ability of citizenry to pay increases and requirement for subsidised services could reduce. Many areas which are currently completely in the purview of state governments (say transport services) could partially open up for private sector participation.

Finding new sources of tax funds: Necessity could be the mother of innovation: whatever one state does, it could quickly get copied across other states. Such taxes could be levied on products currently out of tax-net, or on goods and services that may be perceived to be luxury or ‘sin goods’, or be based on new ideas (like say congestion pricing). State-backed lotteries or similar new products/services can create a revenue potential for the state. There are very few state PSUs that could be disinvested for meaningful sums of monies—in any case, these ‘receipts’ will be one-time and only available to a few states which may have such PSUs. Possibly, the states could start their own social-security collections?

Land sales or value-capture: Chinese cities created a significant revenue base for themselves by selling land in the city and on its periphery. Whether by issuing TDRs, or by allocating higher FSI near public infrastructure creation (like a metro station), or by charging a well-documented premium for converting agricultural land to non-agricultural (NA), states can come up with new solutions on these.

Debt: Along with all the cash flow initiations/optimisations that we discussed above, states could look at their debt-raising ability and its profile—after all fiscal accounting in India is cash-based and not accrual-based. A recent OpEd in FE highlighted that Telangana is now borrowing more long-term to avoid the short-term roll-over pressures. Over time, many other states could come to similar conclusions: long-dated papers of state government could start to come to the markets.

These trends will emerge not only because of the current news flow on Centre and state fiscal relations but also because as India prospers, its tax-to-GDP ratio could increase to the levels of OECD countries—this will require both the Centre and the states to come up with new ideas, reasons and methods of collecting the monies.

The author is Head, Strategy and New Initiatives, Axis Bank. Views are personal.

Originally published in The Financial Express.

Fiscal architecture for a US$5 trillion economy

Fiscal architecture for a US$5 trillion economy

28 November 2019

The evolution of India’s tax-to-GDP ratio will require significant political and social consensus—a strategic modelling and planning of tax POLICIES is required.

India’s tax-to-GDP ratio at the government level has hovered around 18-19% of GDP over the last few years (between FY17 and FY20E). Coupled with disinvestments, dividends, and other receipts, the central government mops up another 5-6% of GDP, taking the total revenues of the government to about a quarter of GDP. The government is committed to spend, on account of both revenue and capital expenditure, 29-30% of the country’s GDP, leaving it with a fiscal deficit in the 4-6% range. The revenue percentages for the government have remained reasonably sticky, and the expenditure items are also committed.

As India works its way towards a $5 trillion economy, or double its current size, in the next few years, it is worth considering what the fiscal landscape could look like. As Esteban Ortiz-Ospina and Max Roser note in ‘Our World in Data’, “total tax revenues account for more than 80% of total government revenue in about half of the countries in the world”. Also, “developed countries collect a much larger share of their national output in taxes than do developing countries; and they tend to rely more on income taxation to do so. Developing countries, in contrast, rely more heavily on trade taxes, as well as taxes on consumption.”

As India’s economy doubles in size and tax-to-GDP ratio rises, government tax revenues could more than double. India has various forums to opine and act on fiscal policy. India has made—and kept—some long-term promises on reducing the rate of taxation on corporate income. The Direct Tax Code report has proposed some changes in the tax structure. The Finance Commission, when it submits its report, will forecast its expectation of the taxes collected by the governments at various levels over the next five years. A model describing how India’s tax-to-GDP ratio can evolve will offer pointers on what social and political aspects need to be focussed upon to build a fiscal consensus.

Deep-diving into the drivers of tax revenue

The composition of taxes for the central government largely rests on direct and indirect taxes—and so, we will focus our attention on those line items. We note that with the rolling out of GST, the casting vote on deciding on tax rates now is with the Centre. A progressive taxation structure requires that the ratio of direct taxation in total tax collection is more than half.

Direct taxes: According to the information released by the income tax department, Rs 51 lakh crore of income was offered for taxation in AY19. The GDP in FY18 was Rs 170 lakh crore. The income from salaries offered to tax amount to rS 20 lakh crore, business income Rs 24 lakh crore, other sources Rs 6 lakh crore, and house property and capital gains make up the rest. This implies that only 30% of GDP (income) was offered to tax. The total direct taxes collected amounted to Rs 11 lakh crore, implying an average tax-incidence of 22% on the incomes offered to tax.

We know that only around 5% of citizens are registered to pay tax. From the above, we observe that less than a third of the GDP is offered for direct taxation, and where so offered, the average rate of taxation is significantly lower than the marginal rate.

Factors which could impact direct taxes as a percentage of GDP are: (a) proportions of taxpayers-to-citizens rising significantly beyond 5% as the average incomes in India increase, (b) the incomes offered to tax rising beyond 30% of GDP as the rising middle-class citizens breach threshold incomes, and consequently (c) governments being in a position to alter the marginal and average rates of taxation.

Indirect taxes: GST now forms the largest component of indirect taxes, even as customs and excise continue to remain important in international trade and for states, respectively. The total GST collection was Rs 13 lakh crore in FY19. Consumption, at 58% of GDP, amounted to Rs 100 lakh crore—this implies that the average rate of GST on overall consumption is ~13%.

Various factors that could impact indirect taxes as a percentage of GDP are: (a) consumption as a percentage of GDP could rise back to the 60%+ levels, (b) more goods and services could be offered to taxation under GST and/or (c) the rates of taxation could materially change.

Expenditure: The committed revenue expenditure of the central government is Rs 18 lakh crore in FY20. To make it easy to understand and remember, just think of this as 3-4-5-6. The central government is committed to spending Rs 3 lakh crore on subsidies (food subsidy being the largest, followed by fertiliser), Rs 4 lakh crore is spent on social development (agriculture, rural development, health and education), Rs 5 lakh crore goes in pay and pensions (and the latter is increasingly a larger share of the total pie), and Rs 6 lakh crore is the interest paid on the loans outstanding against the government.

How each of these items evolve over time, and what levers the government has on controlling or directing them will determine what is available for capital investment and defence. A concerted overhaul of the composition of expenditure is possible, especially as tax revenues more than double as the economy grows.

In a recent article, Dr Arvind Subramaniam pointed out that “macroeconomic pathologies arise from conflicts over how to divide the economic pie”. While changes to tax architecture, administration, laws, and processes are important, it is critical that underlying factors that drive tax revenues and expenditure for the government are understood, highlighted, detailed, and debated in the wider society. Building a social and political consensus on the tax architecture will help develop effective mechanisms for burden-sharing in our society.

The writer is author of The Making of India. Views are personal.
The first paragraph has been updated – Nov 30, 2019.

Originally published in The Financial Express.