Resources and Utilization, Bihar...

Inclusion of Seemandhra in the already existing Special Category States has turned into a rise in voices of special category status to other states like Uttar-Pradesh, Odisha, Rajasthan, Jharkhand, and Chattisgarh, and, is resulting in major issue for Planning Commission and policy-makers. It has stimulated big responses in the political scene of Bihar. Bihar’s Chief-Minister Nitish Kumar organized many rallies in Bihar and Delhi demanding special category status for the region which played an important role in the recent elections. On this issue Nitish Kumar also had support of the Bihar BJP wing. In 1969 Gadgil formula with its liberal view, created on the factors like hilly-region, population base and pivotal international borders proposed to include three north-eastern states – Jammu& Kashmir, Nagaland and Assam and slowly the list expanded to include eleven states. Special category status increases the availability of resources by changing Center-State responsibility in Central programmes.  Bihar with a per-capita-income of Rs 13, 632 against the national average of Rs 35, 993 is not in the special category list. However, other states with higher per-capita-capita like Sikkim (Rs 48, ooo), Himachal Pradesh (Rs 48, ooo), Mizoram (Rs 37, ooo) and Tripura (Rs 37, 000) are also included in the list, but the Center tries to maintain that Bihar is not included in the list. According to the Planning Commission deputy chairman “Bihar does not meet the criteria of special category state, but some parts of it have special problems and it does qualify for BRGF (Backward Regions Grant Fund).”  the Union Finance Commission’s criteria for the Tax Revenue Devolution indexed to population, land-area and backwardness have already benefited the state. The central government had formed a Committee under Raghuram Rajan last year to come-up with indicators of backwardness to decide for equitable allocation of the Center’s funds to states. The committee has acknowledged Odisha as the least developed state, followed by Bihar and Madhya Pradesh.

However, it is not only important to acquire funds but it is equally important to decide for major issues on which money should be spent for growth and development. However, Bihar’s record on effective usage of funds has been negative.

According to Asian Development Research Institute the migration of poor-household to other states for work had been a trend but now the migrants comprise of all sections of the society which shows that unemployment is not only a problem for poor but also for others. Bihar is basically an agrarian society where 81% of the population is dependent on agriculture for livelihood. Inspite of the high-growth rate achieved by Bihar, it is as much rural as ten-years ago and labour-force participation has been 10% less than the Indian average. In Bihar agriculture has been the major sector which has occupied the major part of the labor force. With so large workforce in agriculture Bihar’s economy needs to divert it to industry and manufacturing to avoid stagnant per capita income. Agriculture has depressed income and demand within the economy. Bihar needs to add value to the skills of its labor-force so that it can improve their productivity and income.

The situation of power availability in Bihar is also not very good, and, the separation of Jharkhand from Bihar made many power generating units fall in the new-region. The division also made Bihar less privileged as far as mines and natural resources are concerned which further reduced the region’s ability to generate its own electricity by coal. At present Bihar is supported by National Thermal Power Corporation (NTPC) and Jharkhand electricity board for supply of power but there is still a wide gap between demand and supply of power in the region. Only 15% of the population has power-supply and 85% of the population is still without electricity. Power shortage is major reason for the state’s low manufacturing

base. Power generation and electricity has a positive correlation with growth and development and if Bihar has to develop meaningfully it should invest more in power generation. 

Electricity and unemployment are among the major issues during Nitish Kumar’s second term which deserved special attention but the government efforts fall short of the expectations of the people and received criticism…

Troublesome fiscal path for the new government…

A government contrary to an individual first decides its expenditure and then the sources of revenue and income, whereas an individual decides his expenditure according to his income. This is, probably, true for almost all the government in all the countries of the world except the United States which can print platinum coins worth $ 1 trillion and deposit them at the Federal Reserve (US’ Central Bank) and can get $ 1 trillion in the normal currency, to cover deficit and debt. This makes the US’ debt safer than other countries. Public debt in own currency reduces the risk of default. The central or reserve banks act as the bank of the government and fix the percentage of deposits of banks to be invested in the government bonds and securities. In INDIA it is called Selective-Liquidity-Ratio (SLR) and is held at 23 %. However, due to high fiscal-deficit and inflation the reserve bank is considering lowering SLR which will also keep control on the finances of the new government. The government also regularly issues, sell, government bonds and securities to bridge the gap between revenue and expenditure with the help of the reserve bank.                                                       

Even though, the previous government in INDIA succeeded in keeping the economy afloat during recession in the US in 2008 through fiscal and monetary stimuli but it bloated government finances and built demand pressure in the economy and resulted in high inflation as high as 20%. However, later our Finance Minister exuded that the stimuli provided to ward-off recession during 2008 has not been rolled-back till 2013 which created demand-pressures in the economy and pushed inflation higher. Looking at the high fiscal deficit, he said that given high inflation we need to curb fiscal spending, and, prepared a complete road-map to bring inflation and fiscal-deficit down, and proposed to create a reserve or spare capacity in the years to come. The high fiscal deficit following the recession and the government commitment to bring it down will constrain the finances of the new government at the center and will leave less room for fiscal-spending to give the economy a boost in the face of falling growth-rate.

The gross fiscal deficit of the Central Government in budget estimates (BE) 2013-14 (FY14) was placed at 4.8 per cent of GDP as against 5.2 per cent of GDP in the revised estimates (RE) for 2012-13. The gross and net market borrowing requirements of the Government in FY14BE were placed at `5,79,000 crore and `4,84,000 crore, respectively, which were reduced in revised estimates (RE), as per interim Budget for 2014-15, to `5,63,911 crore and `4,53,902 crore in view of the gains made in fiscal consolidation by the Government. The key deficit indicators of the Central Government as percentage of budget estimate (BE) showed pressure in fiscal outcome for the new government vis-a-vis their position during the same period of the previous fiscal year. Lower tax collections coupled with a rise in expenditure accounted for the increase in deficit indicators during the period under review. Gross tax collections during the period, shows a growth of 9.2 per cent against a budgeted growth of 19.1 per cent. Collections from corporation tax, projected to grow at 16.9 per cent showing a growth of 9.6 per cent over the previous fiscal year. Personal income tax collections showed a growth rate of 19.8 per cent against 20.2 per cent projected in BE for FY14. Among the major indirect taxes, collections from customs duties showed a moderate growth of 4.3 per cent during April-December 2013 (BE 13.6 per cent), while growth in excise duties was negative at (-)6.9 per cent (BE 14.9 per cent). Service tax collections increased by 19.8 per cent during the period under discussion against 35.8 per cent in the BE. Total expenditure during April-December 2013 at 69.9 per cent of BE was higher than 66.5 per cent during the same period of previous year. As a result of lower tax collections and increased expenditure, revenue deficit and fiscal deficit during April-December 2013 at 97.7 per cent and 95.2 per cent of BE were higher than 85.1 per cent and 78.8 per cent, respectively, during the same period a year ago. Primary deficit at 155.9 per cent of BE was also higher than 104.6 per cent during the corresponding period of the previous fiscal year.

Therefore as long as fiscal position of the Indian economy is in question, the new government will find the fiscal-path troublesome. Falling growth rate too has contributed to lower tax collections since less income and demand is created in the economy. Economy’s taxes have a positive correlation with its growth rate and higher growth generates more income and taxes. Higher growth rate and taxes can only bring us out of this difficult fiscal position. Only if the economy grows at a higher rate the problem of negative gap between revenue and expenditure could be dissolved.

Moreover, we hope and expect from our new government at center that it will make the Treasury of the Government of INDIA as strong and credible as the United States of America…

Challenges before the new government…

Even-though the macro economic environment of the Indian economy has improved in the last six months and the present government has managed to avoid a ratings downgrade for the economy, but the next government after general elections 2014 will still find it difficult to steer the economy on the high growth trajectory, 8% growth rate… A good rating improves foreign investment in the economy therefore these days every country tries to maintain it in order to keep its status good as an investment destination. It is true that fiscal-deficit and current account deficit has come down but inflation and high interest rates are still impediments to growth.

Moreover, reduction in diesel and fertilizers subsidy will reduce pressure on the government but will put further pressure on inflation, few basis points… Subsidies keep the expenditure divided between the government and the public but in case of government subsidies means more tax on the public and less demand for the Industry therefore the task before the next government is to target expenditure better… For a better rating fiscal deficit targets are to be achieved, but inflation is also an important determinant of policy… Policies that create inflation are not warranted… but the problem is every rupee spent by the government creates inflation, it is an income to some body and with the supply side constraints it is supposed to stoke inflation further…

Supply side constraints are supposed to be the major roadblock in following the course of 8% growth-rate, especially supply of food-stock of which the government has enough stock, even for exports, we need to curb exports a little and increase supply to the domestic market, food has a high percentage in our CPI index and reduction in the prices of food-stock would give the central bank more room for monetary easing, lower interest rates for the Industry. Inflation should be the major point of focus of all policy decisions.

Although the government has succeeded in containing current-account-deficit by curbing gold imports but the demand for reducing import-tariff on gold has increased as we have succeeded in bringing CAD to sustainable levels. Moreover, smuggling of gold since the government has increased import-duty points that the country would again move to gold imports as tariff comes down. Gold is an important investment asset and works well when the stock-market losses its attraction… People invest in gold during slowdown… And, same as other investment assets high-inflation can reduce the real value, purchasing power of gold and can make it unattractive compared to government bonds, especially inflation indexed bonds… Inflation can make investment assets unattractive because of negative real returns but it reduces the value of debt which is good for the borrower, he has to pay less in real-terms, inflation adjusted terms. Therefore, the current situation in INDIA indicates a good condition for investment, but I do not think that many people in the Industry know about real rates…

Moreover, the economy should be prepared to weather the end of quantitative easing in the US which will negatively affect the economy, foreign exchange inflows to the economy will be low which will also make the Indian currency tumble, depreciate to an extent, but good for the domestic economy because it will create demand for exports, reserves would improve, employment will go up. But, too much depreciation will make imports expensive and will increase inflation, especially oil...

The investment cycle in INDIA is at its bottom and the investment we are seeing in the stock-market is mainly foreign capital, and, the biggest challenge for the upcoming government will be to revive that cycle. An investment cycle depends on the monetary policy by the central bank. When interest rates go down investment cycle goes up and when interest rates go up investment cycle goes down. We in INDIA are going through a down-cycle because the RBI is tightening interest rates due to high inflation CPI. The central bank in INDIA is trying to bring inflation close to its target 2-6%, it has increased the key rates three times since our new Governor took charge and given the recent inflation level the RBI is expected to increase the key rates by at least 200 basis points under Taylor-Rule perspective. INDIA is still far away from reviving the investment-cycle, atleast 6-8 months if we discard the Urjit Patel Committee suggestion to bring inflation down at 8% by January, 2015 and to 6% by January 2016 and try to bring inflation down as soon as possible. Even if a new government comes to power the Indian economy will atleast take a full-year to bottom-out the investment cycle and revive the economy. We should bring prices down as soon as possible to kick the investment-cycle. Inflation in INDIA is a supply-side problem and only a determined government can implement reforms that can bring inflation and interest rates down...

Nevertheless, corruption has been the all time issue for Indian Politics and hope that the new government at the center would work to keep that stigma away…

Although INDIA overtook Japan...

Despite the slowdown in the past few years, the Indian-Economy overtook the Japanese economy, in both, GDP terms and GDP in terms of Purchasing-Power-parity (PPP) in 2011. While calculating total economic output and real differences in income, it is important to include relative costs and inflation in different countries than just include exchange rates. Although, the difference was not very large, INDIA’s GDP in PPP terms was 4.46 trillion and the Japanese figure was 4.44 trillion. According to the method, a dollar should buy same amount of goods and services in different countries, and, it tries to reduce alterations due to financial and political factors that increase volatility, but changes in income are slow and adversely affect the living-standard in poor countries. There are two ways to calculate PPP; one, the Real-Effective-Exchange-Rate (REER) and the other is the Big Mac Index. Under REER the exchange rate is adjusted for inflation and the Big Mac Index considers the difference in price of its burgers in different countries. The REER for the Indian-Currency against the US dollar is around Rs 58-60 which says that the Indian currency is rightly valued, but the latter says it is undervalued by 62%. PPP helps us adjust income and inflation in different countries for a meaningful assessment of standard of living in different countries.  In International Comparison program in 2011 in which the World Bank evaluate PPP in different economies for assessing real living costs. The results in the recent study are quite different from its previous review. China supersedes INDIA, but is at number two after the US. The difference between the US and China is not that huge as the difference between INDIA and China. However, per capita GDP in PPP terms in Japan is far higher than INDIA.

The per capita GDP in PPP terms is calculated by dividing the total value of goods and services produced within an economy in a year with the average population in the same year. Japan’s pre capita GDP in PPP terms is 36, 618 $ is far greater than that of INDIA at 3, 870 $  Per capita GDP in PPP terms which is a more exact measure of increase in welfare and standard of living, INDIA has still to catch a lot to overtake the Japanese figures.  Nevertheless, the difference in the Japanese and Indian per capita GDP in PPP terms is less than the difference in nominal per capita GDP in dollar terms.  Most economists use per capita GDP in PPP terms to compare and contrast the difference in the standard of living. However, we should not forget that there is a large difference in population of INDIA and Japan which requires that given the large difference in the per capita GDP the Indian economy, with its so large population base, should grow much more to outpace Japan in per capita GDP in PPP terms. The high growth rate after the stimuli provided in 2008 recession made it possible for INDIA to outdo Japan and if INDIA is to achieve a higher per capita GDP in PPP terms it will have to grow at its fastest for a decades to match Japanese per capita GDP in PPP terms. Expenditure on health services is also an important indicator of welfare within an economy because it adds to the quality of human-capital and, here too, INDIA is far behind Japan. INDIA spends only $ 86 as per capita public and private health expenditure in PPP terms while Japan’s expenditure is around $ 2, 500, much higher than INDIA.    

Moreover, others indicators also show that the Indian Economy is still a long way to go to catch-up Japan’s consumption levels in terms of oil and electricity, health indicators like infant mortality rate, and unemployment levels all of which has a considerable effect on the quality of life and standard of living. Japan uses 1.5849 gallons of oil per day per capita while INDIA consumes only 0.0956 gallons. The per capita consumption of electricity in Japan is 7, 299 kWh while INDIA consumes only 484 k Wh, much below Japan. The life expectancy at birth in Japan is 82.17 while in India it is 66.46. The number of deaths of infants under one year old in a given year per 1,000 live births in Japan is 2.79 while in India it is 49.13. The annual number of births per 1,000 people in Japan is 7.41 while in India it is 21.34. Japan has an unemployment rate of 5.60% while India has 10.70%. The number of adults living with HIV/AIDS in Japan is 0.10% while in India it is 0.30%. The degree of inequality is also higher in INDIA as compared to Japan…

More or less, income will increase...

Article;
Hang-ups of the heterodox vaguely wonkish.

Comment;

Why Krugman forgets that economies like Japan, Europe, and the US are trying to ward-off deflation, they are not fighting with falling wages, directly, although, indirectly, they are trying to push income and wages which will infuse demand in the economy to consume the inventories, sales are down consumer-spending is low, employment has gone down, interest rates, the price of capital, are zero but wages, the price of labor, has become stagnant, low interest rate means we can now buy more labor, labor is in plenty and capital is cheap… but demand is low due to debt-hangover… To bring the economy out of this stagnant position we need to increase wages and income so that debt-repayment does not affect consumer-spending. There could be two possible paths of recovery as far as growth rate of the economy is in focus; either we increase real wages and income or increase nominal income… Since the economy is going through an over-debt period, it is a major concern. We need to weigh down the trade-offs required for the above two paths… I think the monetary policy is potent to achieve these two… because by manipulating interest rate up monetary-policy affect real income and wages by reducing the price-level, they go up… nominal income is affected by lower interest rates, demand goes-up, incomes and wages go up… By going for rise in real-income by lowering prices, Krugman says, is bad for debt, but when income is increasing how it can be bad for debt, I think this fear is baseless. If income is increasing, either, nominal or real, where is the difference ( ?) income is increasing after all, income will go up and it will be easy to pay for debt. At a material level there is no difference, demand will go up… with only difference regarding the value of debt… but not everybody is an economist and no one cares for real interest rate, people not even know the difference between real and nominal interest rates. INDIA is a good example how real interest rates increase investment, real interest rates in INDIA are negative and growth-rate is slowing. However, in both ways income increase and when income will go up debt will go down, too, when interest rates are already zero… General Public does not bother about real interest rates…Apart from this, inflation-targeting is used to reduce real interest rates and to bring the economy out of liquidity trap. We need to reinforce the expectation of a price rise by the same (inflation targeting). Without monetary policy the public is expecting prices to go down because of liquidity-trap, people accumulate reserves, fewer loans will be created, and less demand will be created, prices will go down. Any ways, liquidity-trap is normally attributed to ultra-low interest rates…  Lower prices I think are good for debt repayment…