Contemporary Economics in DNA

I had written a weekly column in the Daily News and Analysis before joining the service on certain contemporary economic issues of that time. I think that some of them are still relevant today while others throw light on interesting perspectives through the lens of economic analysis.

Take, for instance, how wisdom of the crowd need not always be the correct one and in some cases can turn into a madness of the masses. To a large extent, stock markets can display irrational exuberance in the short run mainly because some of the experts conform to their biases which get magnified and exacerbated with time.

On the one hand, I have written about how why robust institutions are crucial for the economic upliftment of any country, while on the other hand, I have kindled my interest in behavioural economics through a short article on Nudge.

I am jotting down the links to my articles below. To the one with the economic bent of mind, these articles might re-kindle your lost interest in the subject after years of monotonous readings from textbooks. To the uninitiated, these might open up an opportunity to explore the rather mundane subject with a fresh set of perspectives. So, here it goes!

1. Getting Corporates to Cough up Tax Money
2. Solving India’s Twin Balance Sheet problem
3. RBI’s unhealthy obsession with inflation
4. Organ donation movement remains a failure
5. Development not at the cost of nature
6. Nudging economists in right direction
7. Why robust institutions are crucial
8. The mistaken belief in market experts
9. When inequality pulls a nation down
10. India can become a knowledge economy
11. Impact of GST on formal sector
12. Nobel for sustainable economic growth
13. Solving India’s Twin Balance Sheet problem
14. Job growth depends on increasing exports
15. Rising population: Why we need to worry
16. The Amazon effects and monopsony

Doubling farmers’ income: Can it be a reality?

There is much agreement among economists and policymakers alike that India’s agriculture is in distress. The newspaper reports of farmer suicides and distress sales of vegetables point to a gloomy picture and warn about the impending obstacles to the government’s target of doubling farmers’ income by 2022. Addressing the challenges to agriculture gets even more important when the sector that employs about 49 per cent of the workforce contributes only 14 per cent to the country’s GDP.

The challenges arise primarily because agricultural is an inherently risky sector. There are five basic risks in agriculture: input, market, price, credit and weather-related risks. Input risks arise from soil quality, the effectiveness of fertilisers and pesticides and possibility of pest attacks. Thanks to the over-regulated APMC markets in states, stock limits through the Essential Commodities Act, 1955, and unpredictable export policies, farmers face various market risks. Price volatility is a common risk. During times of underproduction, prices shoot up but farmers do not have enough harvest to sell. During a glut, prices crash. Access to credit is another source of risk. Although priority sector lending (PSL) norms of commercial banks in India mandate a certain fraction of loans to be disbursed to agriculture, in reality, these loans go to large farmers as banks find them less risky borrowers. The small and marginal farmers that make up more than 70 per cent of the total pool of farmers are forced to borrow from the usurious money-lenders at extremely high rates of interest. As they get trapped in debt, many of them are left with no option but to end their lives. Finally, the weather is the dominant risk faced by farmers. With just about 44 per cent of the Net Sown Area under irrigation, a majority of the peasants in India are overwhelmingly dependent on the monsoon. The risk is getting exacerbated due to climate change, as the recent Economic Survey has highlighted.

Post Green Revolution, Indian agricultural policy has followed a two-pronged approach. First, farmer incomes are protected through the Minimum Support Prices (MSPs) announced for a variety of crops every year. Second, research, extension and introduction of high-yielding variety seeds, better fertilisers and focus on mechanization. This has been accompanied by falling public investments in agriculture. The MSPs have been effective for mainly paddy and wheat as the government has proper procurement mechanisms for these two crops. At the same time, excessive focus on MSPs has resulted in a ballooning subsidy bill coupled with rising costs of production, without any concurrent improvement in farmer remuneration. Governments have also resorted to loan waivers from time to time, putting extra pressure on the fiscal deficit.

Given the policy complexities enumerated above, there has been a change in thinking in policymaking from ensuring stable prices to ensuring stable incomes for farmers. This shift in policymaking has resulted in the introduction of various schemes, such as a nationwide electronic National Agriculture Market (e-NAM), a model law on Contract Farming, tax incentives to Farmer Producer Companies, an agricultural insurance scheme, promotion of organic farming, diversification to horticulture and so on. The recent announcement of a hike in the MSP should be a short-term step to provide immediate relief to farmers in distress. The long-term success of agricultural policy will depend on how the above schemes are implemented.

India can become a knowledge economy

The reforms of 1991 unleashed India’s services sector, which began to clock growth rates of over 8-9 per cent per year. More importantly, it was the Information Technology and Business Process Management (IT-BPM) sub sector, which had an accelerated take-off. Today, India is an important player in the global IT-BPM industry, which is hinged around the availability of a talented pool of cheap but skilled labour and the growing requirements of firms in Western markets to off-shore their services.

However, in the last few years, this IT-BPM model in India has taken a hit for a number of reasons. First, there is a growing backlash in the West against off-shoring, as it is perceived as a way of denying jobs to the locals.

Second, the rise of Artificial Intelligence (AI) and its various offshoots — Machine Learning, Deep Neural Networks, etc — are rapidly changing the landscape in which the skilled jobs operate. As a result, while the IT-BPM industry continues to be the dominant player in the Indian economy, its foundation is beginning to get shaky.

While AI and Information Communication Technology (ICT) rapidly transform economies and usher in the Fourth Industrial Revolution, it becomes imperative for India to carve its own niche around these technologies. This requires India to transform into a Knowledge Economy (KE). There are three pillars around KE: institutions, research and development (R&D), and human capital. By institutions, I refer to the legal and regulatory frameworks, universities and business ecosystem conducive to developments in ICT and AI. This would require bringing in new sets of legislations, providing greater autonomy and resources to our universities to conduct R&D, increase industry-academia interface and promote start-ups and other firms that innovate in frontier areas like AI.

Coming to the second pillar, R&D must focus on frontier areas. It would also require international collaboration. Equally importantly, some mission-mode projects on genomics, AI, quantum computing or deep neural networks can be initiated by the government. Raising public expenditure on R&D to about 1.5 per cent of GDP is another hurdle to be overcome.

Finally, I come to human capital. In India, this is where the investments must be directed towards the most. Human capital augmentation must start from improving our health and schooling systems. In the higher education sector, focus should be on honing the skills in Science, Technology, Engineering and Mathematics (STEM). This is not to deny the due space to the humanities and social sciences, which will enable scientists to provide holistic development.

Thus, while initiating a Knowledge Economy appears to be simple, we must keep in mind that the US and China are already the leaders in exploiting the benefits of frontier technology. These two countries provide divergent lessons for India to learn from. There has been a modest start with NITI Aayog’s policy to make India ‘the AI garage of the world’. It remains to be seen how the implementation takes place.

Why robust institutions are crucial

One of the highlights of the post-war era has been the wave of decolonisation that swept through Asia and Africa. Countries, which were under centuries of European colonial rule, now emerged independent — free to chart their own course of development. It was felt that centuries of subjugation had resulted in extreme poverty and underdevelopment in these countries. Independence, it was felt, would enable them to bring in the much-needed changes to their government policies which would propel them to a high-growth phase. Yet, one of the hallmarks of the decolonisation era has been the heterogeneity in the development trajectories of these countries even though many of them started with similar initial conditions.

One can take the example of India and Pakistan, or India and Sri Lanka, or the East Asian Tigers (Taiwan, Korea, Singapore and Hong Kong) and Indo-china (Vietnam, Cambodia and Laos). Similar examples abound in Africa too. Most of these nations started out together — many of them had the same levels of human capital (literacy levels and health conditions) or the same types of physical resources (water, minerals or oil). Yet, while some of the nations prospered, others stagnated. Traditional theories of development are based on either natural resources or human capital. Theories based on natural resources argue that countries that are relatively more abundant in certain natural resources like coal, oil, gold or iron specialise in their production, increase employment, obtain foreign exchange through exports and embark on a high-growth path. Theories based on human capital, on the other hand, focus on the role of investments in health and education which makes the population more productive.

However, as pointed out earlier, many of these countries had similar resources or human capital. Thus, the traditional theories cannot explain their heterogeneity. In fact, there appears to be a ‘resource curse’ — some of the mineral-rich countries of Africa are the poorest in the world. As a result, in the last few decades, economists have turned their attention to the role of institutions in shaping the development trajectories of nations.

Institutions refer to the sum total of all the laws, rules, regulations, and various organs of the state like the judiciary, executive and legislature. They together shape the way in which people interact with each other and with the state. It has been seen that countries that perform poorly in development are also the countries that have weak institutions. In these countries, either elections are not free and fair or the judiciary is not independent. The laws on corruption are poorly enforced or the constitution is frequently amended.  In all these cases, the rule of law is undermined. Private property is not adequately protected, while common resources are overused by the rich or powerful. Corruption crowds out honest entrepreneurship while crony capitalism flourishes. Inequality rises while human capital erodes. This is one of the distinguishing features of the developing economies that separates them from their developed counterparts.

In the last few years, development economists have modelled this role of institutions in shaping the development trajectories of countries. Policymakers have also taken note of this emerging area and are trying to build strong institutions that not only ensure the rule of law but also the ease of doing business.

(This article appeared in the Daily News and Analysis (DNA) on 6th May, 2018)

Link: http://www.dnaindia.com/analysis/column-why-robust-institutions-are-crucial-2612022

Development not at the cost of nature

Does development conflict with the environment? There is a widespread belief that it is so. This explains why there is a constant refrain from some economists and policymakers about the rigid environmental laws of the country stalling ‘development’ projects like industrial corridors, highways and other infrastructure projects. However, the problem actually stems from the way we continue to define development — as an increase in per capita Gross Domestic Product (GDP). Although our conception of what constitutes development has clearly undergone changes in the last few decades, yet the GDP measure continues to be the most popular among policymakers, primarily because it is easy to quantify GDP.

The problem with the GDP is that it is a measure of the production of only those goods and services for which a market exists and a ‘price’ can be attributed. But the environment provides a lot of goods and services, like the air we breathe and ecosystem services, for which there is no market. So, a degradation of these goods and services, say because of deforestation or pollution, is actually a loss to the society but is never captured by the GDP. In fact, activities that directly contribute to environmental degradation, like construction, also directly add up in the GDP. This is not to say that industrial corridors and construction projects are necessarily bad — they generate gainful employment. But there are certain costs to the environment which are never adequately accounted for. In economics, we say that there is a negative externality. As a consequence, the economy ends up producing ‘too much’ of industrial corridors and construction projects — the gains from employment in the short run are outweighed by the losses from environmental degradation in the long run.

Development, on the other hand, moves away from the singular focus on the GDP. Rather, development needs to be understood as a general improvement in the wellbeing of people, of which incomes or per capita GDP are an important but not the exclusive component. As Amartya Sen and Jean Dreze point out in their book An Uncertain Glory, development also includes the right to a clean and green environment, and that too from an intergenerational equity perspective. A clean and green environment is also important for a healthy workforce. As soon as we introduce this perspective to development, it readily becomes evident that development and environment can never be at loggerheads with each other. Rather, the two must work together. Any project that seeks to bring in economic benefits, say job creation or value addition, needs to weigh in the associated costs to the environment. Only when the benefits outweigh all the costs (including the environmental costs) should the project go through.

This new approach, therefore, calls for three important steps. First, development planning by policymakers need to internalise the environmental concerns. Second, existing tools for quantifying environmental costs, such as Environmental Impact Assessment (EIA) and green accounting standards, need to be developed further and made more user-friendly. Third, a renewed focus on interdisciplinary courses on environment, economics, accounting and development is urgently needed.

(This article in the Daily News and Analysis (DNA) on 8th April 2018. Link: http://www.dnaindia.com/analysis/column-development-not-at-the-cost-of-nature-2602135)