शनिवार, १४ ऑक्टोबर, २०१७

Indian states.. life in debt…

Our system - of debt-fueled economic growth, of ineffective democracy, of overloading planet Earth - is eating itself alive - Paul Gilding.

Forget about debt-fueled ECONOMIC GROWTH, few Indian states have only growth in their OUTSTANDING LIABILITIES. We talk too much about outstanding liabilities and Fiscal Deficit of Central government. But we can’t ignore the financial health of Indian states. Andhra Pradesh is continuously borrowing from markets. West Bengal is new competitor for Andhra Pradesh. One might say that revenue deficit or fiscal deficit is under control or government is taking serious steps to control their deficits. But these deficit can't be financed by borrowing. If it is a case then we should start thinking about outstanding liabilities of Indian states.

(Source - Reserve Bank of India - Handbook of Statistics on Indian States. To make it simple, data selection is restricted to 2013 as Telangana state is created in 2014 and Andhra Pradesh is very important state as far as OUTSTANDING LIABILITIES are concerned.)

Every state is showing OUTSTANDING PERFORMANCE in OUTSTANDING LIABILITIES. States are continuously borrowing. Okay, this borrowing can be justified if states have good economic growth. But are these states really growing? 

(Source - Reserve Bank of India - Handbook of Statistics on Indian States)

 

Total outstanding liabilities to GSDP is also increasing. In 2013, debt to GSDP ratio for Andhra Pradesh was around 71% while for West Bengal it was 64%. It's like both states are in competition and they both have forgotten that the in future, these loans have to be paid. If this trend remains same then it will be dangerous for W.B. and A.P. 
The borrowing not only restricts the spending of borrower but also increases the interest rate in market. Although it's not applicable here but if O.L. is high enough then to avoid riskiness, state government might have pay high interest on new loans in future. So it might create a debt trap. 
Again I am not in favor of restricting the government spending. But it should be productive. We must re-think our policies like subsidies. Agriculture is a state subject. And most of the subsidies are given for this sector. But still this sector is not improving. Government should find an alternative for such policies.
In Maharashtra state assembly, former finance minister informed that although the debt of Maharashtra State is huge, state can borrow more because GSDP of Maharashtra is high compare to the other states. So state government should borrow and spend that money on workers and farmers. Now here is a problem. According to 14th finance commission, for additional borrowing, interest payment to revenue receipts ratio should be less than 10% and debt-GSDP ratio must be less than 25%. According to this criteria Maharashtra is not eligible for additional borrowing as debt-GSDP ratio is more than 25%. Now same former finance minister might demand same thing i.e. state government should borrow or center should provide a financial aid. And center can announce announce any dam package for any state for no reason (except elections). Spending of borrowed money must be restricted to few areas. Gujarat state had debt to GSDP ratio of 25 % in 2016 but in same year, interest to revenue receipts ratio was more than 10%. And now packages are being announced by central government for Gujarat state. These announcements must have some criteria. Even though these announcements are the tools for elections, these announcements are not good as far as financial discipline of state is concern and that's why states are not worried about debt. But when borrower lends money to the next borrower then if one commits suicide, other has to commit suicide because first borrower will lose money and second will lose one lender.



शनिवार, १२ ऑगस्ट, २०१७

Maratha Kranti Morcha.. What does it show and what does it mean?

Maratha community is protesting since last few years. One thing we should appreciate that the protests were peaceful. But I disagree with the concept of this protest. My relatives and friends who are part of this silent protest march might not like this opinion but this is what I think. 
In democracy everyone has right to protest. I am not against any protest march. Everyone should express his/her disagreements. People from Maratha community are also suffering from problems like poverty, unemployment etc. These problems come regardless your caste. (But what about social discrimination? In Maharashtra, (so called progressive state) we have seen honor killings. Right now I don’t want to get into this and I won’t talk about caste discrimination). But certain things are difficult to understand.
One thing which I observe is that the name of Chhatrapati Shivaji Maharaj has been used intensively. Protestors were saying that Chhatrapati Shivaji Maharaj was their ancestral. It shows that they are Kshatriya (Upper caste). But still they want reservation! Demanding reservation by showing upper caste status is simply hypocrisy. They should have demanded reservation without their caste status. We have reservation because of existing caste system which is exploitative. Given demand is pushing this exploitative system up. 
Another thing which is the most important and dangerous that is LOVE FOR KING and KINGSHIP. I personally respect Chhatrapati Shivaji Maharaj. Creating new empire is very difficult. His policies, governance were really good. But in democracy, we can just respect KING AND KINGSHIPS but we can’t follow them. Democracy has its own problem but it is the upgraded system. In democracy no one can enjoy a special treatment because of his/her ancestral. If he/she is enjoying then it is the biggest threat to our democracy. Now why this is happening? (I am just focusing on their demand related to reservation) I tried to find the data related to state-wise agricultural population. But I couldn’t find any data on OPEN SOURCES. So I am using some proxies. I am computing agricultural population by using rural population growth rate (majority of agricultural population is still living in Rural area) and households who hold agricultural land.
I found category-wise household (who hold agricultural land) data (2010). Then I used same population growth rate to estimate future trends.

In others categories, we have OBC, Marathas, Kunbis and others. Right now I am using others as a proxy for Marathas and Kunbis. OBC population is high but ignore OBC population wont make big difference as the numbers for SC and ST are comparably low. I know it is harsh assumption. But I don't detailed data. But roughly we can say that Maratha community is still engaged in agriculture sector. 
Then I calculated per capita agricultural GSDP by using same population. 


Here per capita GSDT is very low. Per capita GSDP in 2011 was app. 1300 while in 2013 it was app. 1450. I know these numbers are really weird. We are using proxies for various variables. Okay lets assume that the per capita GSDP is fours time higher than these numbers. Then also per capita GSDP will be low. The growth of agriculture sector in Maharashtra is also not good.

So with given numbers and graphs we can say that the agriculture distress may be the reason. So I think agriculture reform can be one solution. High per capita agricultural income may solve this problem up to certain extend.
So next time I hope this protest will be a protest of farmers, landless farmers and agricultural laborers.

Data sources -
Planning commission, RBI (handbook of statistics on Indian states), Economic Survey of Maharashtra 2011-2012



शनिवार, २२ जुलै, २०१७

Credit flow in agriculture – A puzzle..

Last year, we had a good discussion over agriculture and its future. I always thought that the credit flow in Indian agricultural market is not enough. Agricultural sector in India is continuously facing insufficient credit delivery (Godara, R. L., Singh, P., & Singla, S. (2014).). Authors also point out that the Indian banking system is not willing to give any king of credit to farmers especially small and marginal. Therefore government must encourage the credit delivery as credit is very important. In India, proper agricultural credit supply is badly required for agricultural production (Das, A., Senapati, M., & John, J. (2009)). By using Panel Data Analysis, authors show that there is an immediate, significant and positive impact of direct agricultural credit on agricultural output. Indirect agricultural credit has also positive and significant impact on agricultural output but the effect is not immediate. Credit has also positive impact on use of inputs in agriculture (Narayanan, S. (2016)). But author finds that the GDP is not sensitive to the credit.
But now I am confused. Yesterday I was looking for data related to the agricultural credit and agricultural productivity. I was astonished. Credit flow is increasing continuously. There is no doubt about it. But the total agricultural loan outstanding is also increasing continuously. For a while, suppose we accept the fact that the credit growth is helpful for agricultural growth. Then with given credit supply, agriculture output and productivity must be improved. If these two variables are improved, then the outstanding loan amount must be declined. But this is not happening. 


Then where is this amount going? Capital formation in agriculture sector is also declining, So this amount is not being used for capital formation.

Then it means either cost of production is very high and increasing continuously or there are some leakages in whole system. If it is because of first reason then we should focus more on productivity of given sector. And if it is because of second reason then we have to take some serious steps to maintain the health of financial institutions. It's like either Green revolution or Financial reform!!!

(Continue..) 

References - 
Godara, R. L., Singh, P., & Singla, S. (2014). Agriculture Credit in India: An Analytical Study. International Journal of Latest Trends in Engineering and Technology (ISSN: 2278-621X), 3(3). Das, A., Senapati, M., & John, J. (2009). 
Impact of agricultural credit on agriculture production: an empirical analysis in India. Reserve Bank of India Occasional Papers, 30(2), 75-107. 
Narayanan, S. (2016). The productivity of agricultural credit in India. Agricultural Economics, 47(4), 399-409.

Data sources -
Indiastat, RBI, World bank.

शनिवार, ८ जुलै, २०१७

Too much investment but where is capital?

Long-term unemployment can make any worker progressively less employable even after the economy strengthens - Janet Yellen. 

Economy is growing rapidly, FDI is surging but where is Capital? Where are jobs and how can we create jobs without capital?? With business friendly policies, government is doing everything to have large FDI. Okay, let’s discuss some papers related to FDI and Economic growth. 
As far as capital is concerned, FDI is very important which is connected with job creation (Chowdhury, A., & Mavrotas, G. (2005). FDI and growth: a causal relationship (No. 2005/25). Research Paper, UNU-WIDER, United Nations University (UNU)). With two way link between FDI and GDP, India is becoming a favored destination for FDI. FDI is increasing with increasing GDP. GDP is not increased by FDI but this causality runs more from GDP to FDI (Chakraborty, C., & Basu, P. (2002). Foreign direct investment and growth in India: A cointegration approach. Applied economics, 34(9), 1061-1073). FDI is an important factor for developing countries as far as economic growth is concerned. By stimulating investment, increasing human capital and transferring technology, FDI helps economy to grow (Gola, Kali Ram, Mridul Dharwal, and Ankur Agarwal. "Role of Foreign Direct Investment in the Development of Indian Economy." Gyanpratha-ACCMAN Journal of Management 5.1 (2013).). In the development of India, FDI has played very important role as a source of capital but also for creating competitiveness of economy. FDI also affects political and economic stability, budget discipline, inflation, governance, interest rates, institutional and infrastructural development conducive to attract competitive FDI, policy and regulatory framework (Vishwakarma, R. Foreign Direct Investment and Economic Growth: Evidence from India). 

Okay.. I am in agreement with above views. But is capital really being created by this surging FDI? I have some doubts over it. Given figure shows the trends of capital formation in India. [For household investment, I have simply used house saving (I assumed that the household saving is equal to the house investment. I also assumed that the household investment is used for capital formation). For public capital formation, I have used government’s finance for public capital formation. By subtracting the addition of above two factors from total gross capital formation, private capital formation can be obtained.] 

Figure no. 1

Given figure points out certain points. Government finance for capital formation is continuously increasing. But most important thing is that the private capital formation is not increasing (Although it is decreasing in given figure but assumptions don’t allow me to say that but we can say that it is not increasing definitely for sure). 

Figure no, 2

Figure no. 2 shows the trends in foreign direct investment. FDI is decreasing till 2011 but after that, FDI is raising. But still there is no any improvement in private GCF. It means FDI is not creating new capital. Technology might be transferred but capital is very important as far as employment is concerned. Without capital, jobs can’t be created. Investors don’t care about job creation as they are interested in the returns. And if the main aim behind this increase in FDI is not capital creation then the Make in India campaign is just useless. 
Yes proper econometric analysis is required but definitely there is little room for doubt.

(Data sources - World Bank, RBI and Open Government Data (OGD) Platform India) 

शुक्रवार, ३० जून, २०१७

GST, GST and GST

“Only two things are certain in this life – death and taxes.” – American author Mark Twain

I have written this article before 20-30 days. But for some reason I couldn’t post this.
So what is GST? I think you must hear something about GST. So I am not going to repeat everything. I am explaining some issues. Implementation is not my concern as it is routine now but there are some INBUILT problems. Before that I would like to discussion some historical aspects of TAX REFORM in INDIA. You might know that India is quasi federal state. So there is a division of tax powers between central and state governments.
State taxes are – Agricultural personal income, sales taxes, excise on alcoholic beverages, state transport taxes, some property taxes, electricity taxes etc.
Centre taxes are – Non-agricultural personal income and wealth taxes, corporate profit taxes, customs and excise duties (now manufacturers’ VAT) of manufactured products.
Some tax reforms are –
1)      The Income Tax Act, 1961 – result of recommendations from ‘Income-tax Investigation Commission’ headed by Sir Srinivasa Varadachariar in 1947, ‘Taxation Enquiry Commission’ of 1953-54 constituted under Dr. John Matha, by Nicholas Kaldor and ‘Direct Taxes Administration Enquiry Committee’  (Tyagi Committee, 1958).
2)      Post 1961 –
·         ‘Committee for Rationalisation and Simplification of Tax Structure’ (Under Bhoothalingham) recommended measures for rationalization and simplification of personal income tax and corporation tax.
·         ‘Direct Taxes Enquiry Committee’ i.e.  Wanchoo committee (1971). This Committee is very important as far as tax evasion and black money is concerned. According to this committee high tax rates, controls, licenses and ineffective information system were major problems in Indian direct tax system. Committee also suggested the reduction of effective top marginal rate to 70%. Another Committee under K.N.Raj in 1972 suggested a novel option to bring agricultural income under income tax net through integrated system of agricultural and non-agricultural income. Personal income tax rates in India were quite high in earlier times. At its peak in 1973-74, the maximum marginal rate of tax (with surcharge) was as high as 97.75 per cent. Keeping in view the recommendations of the Wanchoo Committee (1971), marginal tax rates were reduced gradually to 50% in 1985-86.
·         As far as indirect tax reforms are concerned, committees like L.K. Jha, Raja Chelliah (father of Indian Tax reform). L.K. Jha committee (The Indirect Tax Enquiry Report (1977)) suggested the unification of rates and creation of input tax credit, manufacturing stage value added tax (MANVAT). Modified Value Added Tax (MODVAT) was introduced by V.P. Singh government in 1986 which promised rebates on input taxes paid by manufacturer. Chelliah committee gave three reports in 1991, 1992 and 1993. Some suggestions were – reduction in the corporate tax, integration of excise duties with a Value Added Tax system, improvement in administration of taxation, computerization etc.
·         Former P.M. Dr. Manmohan Signh reduced the number of bracket to 10%, 20% and 30%.
·         Tax force on Direct and Indirect taxes (under Vijay Kelkar, 2002) some steps like increasing the income tax exemption limit, rationalization of exemptions, abolishment of long term capital gains tax and wealth tax etc. So finally wealth tax was also abolished. There was also an extension of MODVAT.
·         CENVAT was introduced in 2000-2001 (Central VAT).
·         With 88 amendment, all taxes of services put under central subject in 2003.
Now before moving towards GST, we should under the difference between direct tax and indirect tax. Indirect tax is one which is directly paid by tax payer like income tax while indirect tax is paid indirectly like tax on product. GST is indirect tax.
Now I have read some research papers and articles.  I am going to summarize one paper and one article.
GST in Malaysia: An Ungly Truth or A Beautiful Lie? written by Lim Boon Poh, Teoh Wei Chieh, Yap Wei Wah and Young Kai Han . The main object of this paper is to find the relationship between the inflation rate and the impending implementation of Goods and Services Tax (GST) in Malaysia and the short term and long term impact of GST on inflation in Malaysian context when GST is implemented. Some economists believe that the implementation of GST will significantly increase the inflation rate but this inflation will only have a short term impact on the economy. On the other hand, some economists believe that the GST will only have a small impact on the inflation. But this can be criticized as workers will demand higher wages as cost of living will be increased in next round. So the cost of production for the firm will increase. Therefore price will be increased and there would be higher inflation. Same thing is concluded by given authors. Author found that there will be price hike after GST implementation. They also accepted the second opinion as inflation will be higher in next period because of second round effect. As far as policy implications are concerned authors are in agreement with the concept of GST. Government revenue can be increased because of GST. Deficiencies in the tax collection system can be reduced after GST implication. But authors disapproved the government’s claim about GST and inflation. Inflation will be higher in both short and long run.
I found one interesting article- GST: Some less explored issues written by Arun Kumar. Indirect tax leads to increase in prices and reduce the demand. Author said that if the tax rate remains the same as earlier, the tax collection would fall as value addition is only a fraction of the value of a product. Author also informed that the cascading effect can’t be removed completely as far as some goods and services are concerned. He suggested that GST has no impact on the black money. There is no any evidence. But price of service will definitely rise. And price of some intermediate and final goods will be increased. Finally author concluded that to increase tax-GDP ratio, tax revenue has to be increase but with that prices will rise and demand will fall. And if tax revenue falls then government spending has to be reduced.

What I feel is that GST is just routine step towards new generation taxation system. For example our ancestors used to stay in hut but now we are living in proper house with AC accommodation. But we must understand the cost of staying.. That is we have to examine the cost of GST taxation. I am concerned about the price and uneven of burden of taxation. Above articles and papers pointed out that price might increase because of GST. But with that we can’t ignore the nature of indirect tax. Marginal propensity to consume (MPC) is higher for poor people and lower for richer people. So with increase in income, poor people tend to consume more therefore they might face more pressure of taxation. So without proper redistribution policies, burden of taxation might be shifted to poor people. Another thing which is also important and interesting is interest rate. Men in power want the reduction in interest rate. But if GST creates any kind of hike in price level then RBI will keep interest rate unchanged. So we need proper fiscal and monetary policy to tackle these problems of GST.
But one thing I must say, don’t expect anything because incompletion of these expectations is not good as far as socio-eco-political conditions are concerned.

References -
Income Tax Reforms in India By Anuradha Chavan Patil
GST: Some less explored issues - Arun Kumar
(http://www.tribuneindia.com/news/comment/gst-some-less-explored-issues/123518.html)
Lim, B. P., Teoh, W. C., Yap, W. W., & Yong, K. H. (2014). GST in Malaysia: An ugly truth or a beautiful lie? (Doctoral dissertation, UTAR).

शनिवार, १७ जून, २०१७

Farm loan waiver, why? Another crisis for Maharashtra?

Everywhere, everyone is debating and explaining his/her opinion on Maharashtra farm loan waiver. I am just trying to explain it with some data and evidence. Before discussing the FUTURE OF MAHARASHTRA ECONOMY, I would like to explain an importance of credit in agriculture sector.

Attempts to strengthen Indian agriculture must address not only farm production (farmers) but also processing, marketing, trade, and distribution. We must link farmers to markets. In this endeavor, marketing and rural credit systems are extremely important. (Acharya, S. S. (2006). Agricultural marketing and rural credit for strengthening Indian agriculture.).
The agriculture sector of Pakistan still suffers from low productivity, expensive financial support to the farmers, inefficient market structure and improper research. Thus to develop farming sector and to increase the farming efficiency it was recommended to enhance the accessibility of small and marginal farmer to formal agricultural credit. Loan for the livestock should be enhanced and this would definitely enhance farmer’s income and ultimately would reduce poverty (Ayaz, S., Anwar, S., Sial, M. H., & Hussain, Z. (2011). Role of agricultural credit on production efficiency of farming sector in Pakistan-a data envelopment analysis. Pak. j. life soc. Sci, 9(1), 38-44.)
Adequate availability of credit on time is an important requirement for the rural people, particularly under conditions of scarcity of resources and uncertainty. Convenient and safes-saving facilities are perhaps even more important to smooth out the peaks and troughs in incomes and expenditures in the rural arena. Lack of savings facilities also force families to rely on inefficient, inconvenient and costly alternatives. Agricultural credit can be a solution for this perspective. (Islam, A., Islam, D. R., Siddiqui, M. H., & Karim, L. (2014).

Importance of agricultural credit for rural development of Bangladesh: A descriptive approach. International Journal of Economics, Finance and Management Sciences, 2(1), 68-83.)

How agricultural credit should be provided? The famous agricultural economist Louis Tardy (1938) has laid the following criteria for good system of agricultural credit.
1. Credit should be granted for a sufficiently long period commensuarate with the length of operation, which it is designed to facilitate.
2. It should be granted at a reasonable rate of interest.
3. It should be adequately secured to avoid any abuse of credit facilities, but the security need not necessarily be material.
4. The security should, if necessary, be in the form of a personal credit secured mainly by the borrowers’ socio-moral standing and farming ability.
5. It should be related to the average yield and capacity for repayment of the farms, particularly during period of economic depression.
6. It should be placed in the hands of institutions the directors, which have received special training and had actual banking experience (http://shodhganga.inflibnet.ac.in/bitstream/10603/96016/12/12_chapter%203.pdf)
But if you observe our credit system in rural area, either people are engaged in informal sector where no one cares about these rules or formal sector is not interested to imply these rules. So it is not just about farm loan. It is about our credit system who forces our farmers into life time debt.
One might say that there are so many people who are not farmer but still getting benefit of agriculture scheme. Again it is not a problem of agriculture schemes. This problem is related to the system in which everything is implemented.
Again one might say that this announcement of government will throw our state in financial un-stability. Or government might increase tax rate to pay that amount.. Yes it might happen but there are so many other ways to finance given amount.

First of all I would like to discuss the finance condition of Maharashtra. 





First two diagrams show that the fiscal deficit and debt of Maharashtra state are very large. This might prove above point that it’s not good for our state. But if we see another two diagrams then you will realize that Maharashtra is in good shape. 





Debt as % of GSDP and fiscal deficit as % of GSDP both are not too bad. So we can afford this announcement. But this credit is very important as far as agricultural growth is concerned. If we have good monsoon this year, new credit will definitely help this sector (more than the given cost).. But this is not a permanent solution. We have to take some steps towards market reform. Market failure is not because of production or input it just because of unnecessary regulations which are imposed on farmers which are continuously reducing the realization of price for farmer.

शनिवार, २२ एप्रिल, २०१७

Farm loan waiver - Reasons, rationale, impacts and alternatives

Farm loan waiver.. Why farmers are demanding? Is this demand of farmers beneficial for them? If not then what should be a proper demand?
Let’s discuss. Figure no. 1 shows the percentage share debt of cultivator household. It is increasing continuously. In 2004, there were 50% indebted farmer households in whole India (figure no. 2).


Figure no.1 

Figure no. 2

Current numbers are very bad. About 52 percent of the agricultural households in the country were estimated to be indebted in 2012-13. Andhra Pradesh (92.9 %), Telengana (89.1 %) and Tamil Nadu (82.5 %) are suffering from worst condition. 60% of total loans were institutional which were linked to government (2.1%), co-operative society (14.8%) and banks (42.9%) (situation assessment survey of agricultural households 2012-13). So with this high number, given demand is obvious.



Figure no. 3

Now figure no.3 shows that the cost of cultivation and production of major crops in major states in India is continuously increasing. But the income is not increasing with that trend (situation assessment survey of agricultural households 2012-13). So burden on farmer is increasing.


Figure no. 4

The value added in agriculture sector is declining and the number of employed person per number of agricultural population is very low (figure no. 4). Therefore the anger in agricultural sector is obvious. But is this demand beneficial for them? We know that in 2008, massive Rs 76,000 crore farm debt waiver announced by the government. But it didn’t help to improve the condition in given sector. We saw that the cost is increasing continuously even after 2008 and returns on that commodity is not increasing. It means productivity in given sector is still low. With that the gross capital formation in given sector is declining while public GCF is very low and private GCF is not improving (even after 2008) (figure no. 5).


Figure no, 5

It means that the given policy didn’t help to increase the investment in agriculture. Certain studies have also shown that the credit has ambiguous impact on agriculture growth. The farmers who were able to reply, they also tried to take benefit of that announcement which created more problems in banking system. So then what should be a proper demand? I think in agricultural sector, the main problem is in marketing system. The regulations in given sectors are restricting farmers from taking the benefits of the international markets or simply global agricultural market.


Figure no. 6
Source - department of agriculture and cooperation 

Figure no. 6 shows that the regulated markets are spending more on administration and salaries, not on infrastructure and productivity. So these expenses are not productive. With these markets are not helping to minimize the post-harvest losses (figure no. 7). Figure no. 8 shows that the MSP is very low compare to international prices (I have used import value and export value for international prices). So if farmers are allowed to take part in international market, then they will get more profit.


Figure no. 7
Source - Final Report of Committee of State Ministers


Figure no. 8
Source - World bank and agriculture ministry


In given situation, the charges in APMCs which are paid by farmers are also (fig. no. 9). So the realization of the prices of agricultural commodities for farmer is very low.

                         
Figure no. 9
Source - price policy report on Rabi crops. 

So farmers should demand a reform in marketing system. They are producing enough, they are incurring more cost but they are not getting enough returns on that. That’s why they are facing more trouble. So instead farmer should demand direct money transfers so that they will increase their investment in agriculture and even they can minimize the cost on input. So waiving loans is not beneficial in long run. The charges or cost in marketing should be minimized. But it is true that the farmers are facing some dangerous problems. There are some alternative solutions which government should use.

गुरुवार, २ फेब्रुवारी, २०१७

From Competitive Federalism to Competitive Sub-Federalism: Cities as Dynamos

Competition among ULBs.. 
CEA wants more competitive urban local body to tackle the problems of urban areas and cities. It sounds good. But will it solve the problems? Let’s see. We should focus more on the root of given problem. The stagnated primary sector and low wages in rural area is the main reason. There are several models on migration (Lewis model of migration, Harris-Todaro model etc.). Logic is very simple. People will move from one sector to another (or from rural to urban) until the wages in both sectors (both areas) get equated. But problem is that the rural wages and agricultural (and wages in primary sector) are increasing but as urban formal sector’s (and tertiary and secondary) wages are also increasing. So they are not being equated by any kind of transformation.

We can see the difference between daily wages in agricultural and non-agricultural sector. And that difference is actually expanding informal sector which is responsible for low standard of living. We are spending too much on rural development and infrastructure. In fact government’s main aim is to double the farm income. (With given growth rate of agriculture, it seems to be a dream only. If this aim is achieved then there is no requirement to focus more on urban area.). 
Just have a look on the spending on rural development and agricultural activities. 




Then why still we have same problem? I think our institutional framework is the main problem. Present institutional framework is not successful as far as supply chain in rural area is concerned. It’s crystal clear that there are leakages in NABARD. There is no growth of any other sector in rural area. We failed to make agri-industry, we failed to establish any kind of market mechanism through decentralization. That means our framework must be changed. Let’s take an example of Philippines’s Rural Development Project. The aim of this project is same i.e. increasing rural income and enhancing farm and fishery productivity in targeted areas by supporting smallholder and fishers to increase their marketable surpluses and their access to markets. Important thing is that local government is also responsible for infrastructure. And that thing we don’t have. Local governments are doing nothing for rural infrastructure. 



Figures give the overview of the project. So funds are important but there should be a proper framework like RDP. Local government should be encouraged to build their own infrastructure but our rural local bodies are built for political purpose only. 

Last thing is that under GST, how can we encourage ULB for more competition? If they don’t have direct source of revenue then how can they compete among themselves? We will discuss on it later…

गुरुवार, २६ जानेवारी, २०१७

Political stability… It does matter for economics also..

Now-a-day, we have strong political stability. But past was little bit unstable. India has witnessed POLITICAL DRAMA in 1980s and even in 1990s. We have experienced several wars also. These things are important not only for political and social conditions but also for economical situation. Let’s see. 
I have created a coding for political stability. In India, resignation of prime minister means abolition of council of minister and loksabha. So ideally P.M. should complete full five years. So suppose X person completed his full years as a P.M. then corresponding years would be coded as 1 (it means government was stable in these years.). Now suppose Y person couldn’t be there as P.M. for 5 years. He ruled (let’s say) only for 2 years then code for corresponding years would be 365*2/365*5 (365*5 are ideal days and 2*365 days were practically stable days.). For emergency, I have given -1 code. One might say that the dictatorship is the most stable (with compare to democracy) and that’s why emergency period should be coded as 1. But we are taking in the context of democracy and in the context of democracy, such kind of incidents are simple invalid. Now we have several wars. And wars have also an impact on government stability. We should consider it also. So suppose war is fought for 45 days then 45/365 (45 days are unstable days in given year.) would be subtracted from the corresponding year’s code. 



Fig 1 shows the whole picture of coding.

Fig 2 

Now observe the fig no. 2. The trends of stability and gdp growth rate (gdp growth rate/10 for simplicity) are very similar. Except 2008, graphs are very similar. We know that in 2008, there was a financial crisis therefore the given downfall was because of international fluctuation. Generally we connect political situation with FDI. But there are certain other undetermined factors through which such type of instability affects economy. 

Fig 3 

If we see fig 3, FDI is actually increasing but still there are fluctuations in growth rate. Fall and rise in growth rate during unstable and stable government is not actually because of FDI. It might be because of other factors like government expenditure, trust on government, trust on system and skeptical market. In next article, I will try to find out the reasons behind this relationship.

(Data sources – world bank - http://data.worldbank.org/) 
(Note – I have taken only major wars like Sino-India, Indo-Pak wars, Indian intervention in Sri Lanka. I have ignored the internal conflicts.).

शनिवार, २१ जानेवारी, २०१७

Inequality: run without your legs

कही है रोशनी 
तो कही है बस धुआ 
कही है छत शीशे का 
तो कही है आसमान खुला 



And that's inequality.
Yes, it’s true that the disparity between rich and poor people is continuously increasing.
Recently Oxfam announced the data related to the wealth hold by richest people. According to Oxfam, own 58% of total wealth in India is owned by richest 1%. But why this disparity is increasing continuously? And does it really matter? Let’s have a discussion.



First figure shows that the GDP (current US$) (in billion), per capita GDP, government spending and tax revenue is increasing with similar trend. It means tax revenue and government spending (total) is increasing continuously and it's reflecting in the growth of GDP. As GINI coefficient for each year is not available, I am just using the share of top 1% richest people in GDP. We can draw a rough diagram of inequality.


Second diagram is showing that the income share of top 1% richest people is increasing after 1990. But is it serious? If there is economic growth, then it is obvious. Problems takes very serious and dangerous face when there is no growth in the income of certain people. It the income of certain group of people is stagnated, then the economic growth itself becomes a reason behind the increase in inequality.


Third figure clears all doubts. The value added in service sector is rapidly raising while it's rapidly decreasing in agricultural sector. As service sector is a labor intensive sector, the return on capital is very high. That's means owners (very few) of limited sectors are getting high returns while majority of people are getting very low return as they are highly dependent on agricultural sector. That means the growth which we have seen is not equitable.



Now last diagram is interesting. More complicated analysis of given figure is required. But two things are showing consistency i.e rate of government spending and rate of income share of top 1% people. They have clear opposite nature. When rate of government spending is high, the rate of income share of top 1% is very low and vice versa. Government spending can be a weapon to tackle the problem of inequality. As one sector has high growth and another has low, there must be balance. And it does matter. As there is disparity, we are seeing the outflow of worker from one sector to another. But the sector which has high returns is not able to absorb the excess labor supply. And that's why informal sector with problems related to health, crimes, unemployment are increasing. Market is there for efficient return but for fair and equitable return government should intervene. Rather than encouraging the sector which has already grown up for more economic growth, government has to focus more on the benefit transfer programs like skill, health, credit supply (specially for a sector which has low return)

(data sources - world bank, https://datahub.io/dataset/world-top-incomes-database/resource/1a3b85d0-1076-4dd1-b762-f6e99201fa15