The article examines the various aspects of the recently announced Atmanirbhar Bharat Abhiyaan (ANBA). But before digging deeper into the ANBA the author ruminates over India’s growth (GDP) story. Reasons for India’s failure to deliver on the economic empowerment are also examined. In the end, the relation between the free economies and the welfare states is examined.

The good and the bad of India’s GDP story

• India crossed the UK two years ago, France last year, and will cross Germany and Japan in the next five years. (In terms of nominal GDP)
• That will leave only America and China ahead of us.
• But India’s per capita GDP story is on a different track.
• We once equalled Korea (1960) and China (1997) but today there are 138 countries ahead of us.
• The COVID-19 lockdown and the stories of pain inflicted on migrant workers exposes how per capita GDP is more important for our citizens than total GDP.

A take on Economic empowerment

• Ramchandra Guha, in his book- Gandhi: The Years that Changed India, suggests that while other patriots had used Swaraj to signify national independence, Gandhiji made India aware of its true or original meaning, Swa-Raj, or self rule- both political and economic.
• Our collective political Swaraj hasn’t always translated into individual economic Swa-Raj because of inadequate formalisation, industrialisation, urbanisation, financialisation, and skilling.

Atmanirbhar Bharat Abhiyaan(ANBA) – A step towards Swaraj

• The Atmanirbhar Bharat Abhiyaan (ANBA) policy announcements are important moves in meeting Gandhiji’s vision of individual self-reliance and recognising poverty as the worst form of violence.
• ANBA targets avoiding unemployment becoming hunger and illiquidity becoming insolvency.
• The agriculture package of Rs 1.63 lakh crore included farm-gate and aggregation point infrastructure, fisheries, animal husbandries, and others like animal vaccination, micro food enterprises.
• The non-bank liquidity package of Rs 5.94 lakh crore included MSMEs, NBFCs, MFIs, housing finance companies, power discoms, and others (PF, tax relief).
• The migrant and farmer package of Rs 3.16 lakh crore included concessional credit via kisan credit card, farmer working capital, affordable housing, and others (food, street vendors, microloans).
• The welfare and health package of Rs 1.85 lakh crore included women and pensioner benefits, MNREGA, emergency health response, and others like food, financial security.
• RBI’s liquidity measures of Rs 5.24 lakh crore included two phases of targeted long-term repo operations, CRR cut, marginal standing facility limit increase, refinancing facilities, and mutual fund special liquidity facility.
• The reform to the Essential Commodities Act, APMCs and contract farming directly impact prosperity as 45 per cent of our agricultural labour force generates only 14 per cent of GDP.

How ANBA maintained fiscal health?

• ANBA is also important for what it is not. It’s not fiscal profligacy-i.e. the government is spending with due care for fiscal deficit figures.
• Total spending may be higher if the loans for which government has stated to stand as a guarantor turns NPAs (for ex. MSMEs loans).
• But for now, it marginally raises our already difficult fiscal deficit.
• It’s not an institutional assault — RBI’s role in ANBA keeps it away from the political minefield that the US Federal Reserve has entered.
• The US Fed is buying the bonds sold by corporations (i.e. Fed is spending itself) while the RBI has only lent the money to banks.
• There is a recognition that RBI has lending powers, not spending powers.
• It’s not a mindless public sector expansion: The end of monopolies (public sector monopoly) and new public-private partnership opportunities signal pragmatism and efficiency targeting.
• It’s not waiting for potential COVID upsides: it makes us worthy if risky global just-in-time supply chains get replaced by resilient just-in-case diversification.
• It’s not shutting off India from the world i.e. Atmanirbhar is not isolationist policy.
• It creates new openness to ideas, investment, and trade.

What is on agenda for ANBA 2.0?

• The unfinished agenda for ANBA 2.0 includes following-
• Civil service reform-the steel frame has become a steel cage.
• Government reform-Delhi doesn’t need 57 ministries and 250 people with Secretary rank.
• Financial reform-sustainably raising credit to GDP ratio from 50 per cent to 100 per cent.
• Urban reform-having 100 cities with more than a million people rather than 52.
• Education reform-our current regulator confuses university buildings with building universities.
• Skill reform-our apprentice regulations are holding back employers and universities.
• Labour reform-our capital is handicapped without labour and labour is handicapped without capital.

Welfare state and free economies

• A modern state is a welfare state with formal private jobs.
• The idealisation of Scandinavian social democracies forgets that their dense social security nets are underwritten by remarkably free economies.
• The World Bank Ease of Doing Business scale ranks Denmark third, Norway seventh, and Sweden 12th of 190 countries.
• Despite — or thanks to — America’s capitalism, its central government spends 37 per cent of GDP while India’s spends 14 per cent.
• And its ferocious fiscal pandemic response involves $3 trillion government borrowing in the next three months.
• People suggest the US can sustain its welfare state because it has the world’s reserve currency.
• But America can afford its welfare state because of the productivity of its cities, companies and citizens. Consider the following-
• New York’s GDP equals Russia with 6 per cent of the people and 0.00005 per cent of the land.
• The $4.5 trillion revenue of its 25 largest companies is more than Germany’s GDP.
• Its per capita income is $55,000.
• India’s welfare state does not lack intentions but lacks resources.
• No amount of CSR, philanthropy, or government borrowing can provide the resources for the care of our weak, vulnerable, and unlucky that will flow from more productive cities, firms, and citizens.
• This is what ANBA hopes to achieve.

Consider the question “Far from being an isolationist, Atmanirbhar Bharat Abhiyan seeks to make India a welfare state with more productive cities, firms and citizens. Comment.”

Conclusion

India missed the manufacturing export train that China boarded but another may be coming.  Policy reform is not the solving of a sum but the painting of a picture — 90 days after the lockdown ends, we need ANBA 2.0 to finish the job.

Back2Basics: Just in time inventory

• The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.
• Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs.
• This method requires producers to forecast demand accurately.

Just in case inventory

• Just in case (JIC) is an inventory strategy in which companies keep large inventories on hand.
• This type of inventory management strategy aims to minimize the probability that a product will sell out of stock.
• The company that utilizes this strategy likely has a hard time predicting consumer demand or experiences large surges in demand at unpredictable times.
• A company practicing this strategy essentially incurs higher inventory holding costs in return for a reduction in the number of sales lost due to sold-out inventory.

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Not all financial crises are the same. And this is more so about the two crises that we have been witness to – the 2008 Global Financial Crisis (GFC) and the current Corona Financial Crisis (CFC). The author points out the four key difference in the two crises. These four difference also mean that the solution for 2008 GFC may not be the solution for the present CFC. But why is it so? Read to know more…

1. Origin of the two crises

• The GFC originated in the financial sector.
• In GFC, banks and financial intermediaries got carried away by irrational exuberance and recklessly piled on risk.
•  CDS, CDO, MBS, ABS and various other became the villains in the GFC drama as it unfolded in the rich countries.
• As people lost their wealth and savings in the financial meltdown, demand collapsed and growth slumped.
• The contagion, which originated in the financial sector, spread to the real economy.
• In contrast, the CFC came from outside the economic system.
• The first impact came by way of a supply shock as China-centred supply chains broke down.
• And then as countries ordered lockdowns and economies shut down, demand slumped.
• The ensuing distress in the real economy led to distress in the financial system.

So, how origin of the crisis matter for its resolution?

• Restoring the faith in the financial system was key to the resolution of GFC.
• Which meant rescue and rehabilitation of banks and other financial institutions.
• Once that task in the financial sector was accomplished, repair of the real economy fell in place.
• The demand came back, supply resumed and growth picked up.
• In contrast, the central challenge in the resolution of the CFC is to beat the pandemic, and that solution has to come from science.
• Only when there is public confidence that the incidence of the pandemic has been brought down to a low-level equilibrium, will there be a resolution in both the real and financial economies.
• We are seeing that even during this crisis, just like in 2008, governments are coming out with fiscal stimulus packages and central banks with monetary stimulus packages.
• But these are not solutions to the pandemic; they are just holding operations till the central problem is resolved.

2. No one country hold key to solution

• The second difference between the two crises arises from the asymmetry of the solutions.
• The GFC originated in the subprime mortgage sector of the US and then, rapidly engulfed the world.
• The CFC originated in the Hubei province of China and rapidly engulfed the world.
• But the similarity ends there.
• For the resolution of the GFC, restoring financial stability in the US was necessary, and a sufficient condition for restoration of financial stability everywhere.
• But the situation with the CFC is different.
• Every country needs to control the pandemic within its borders.
• But that is not sufficient because the virus can hit back from across the border.
• No country is safe until every country is safe.

3. Policy interventions involve a dilemma

• How the policy interventions interact with one another makes for the third difference between the two crises.
• During the resolution of the GFC, solutions in the financial sector and in the real economy reinforced each other.
• For example, to mitigate the crisis, the RBI cut rates and intervened in the forex market, the government extended special concessions for housing and real estate sectors to provide stimulus in the real economy.
• There was synergy in these actions.
• In contrast, in managing the challenge of the CFC, what we are seeing is tension between the various sets of policy actions.
• The effort to contain the pandemic is exacerbating the challenges in both the real economy and the financial sector.
• The more stringent the lockdown to save lives, the more extensive the loss of livelihoods.
• Managing this tension is by far the biggest dilemma for governments battling the crisis.

4. No single large economy to keep the world afloat

• The global financial crisis, although it was called “global” did not affect all countries equally.
• China was less affected even as all rich countries were in a financial meltdown.
• In fact, one of the less acknowledged facts of the 2008 crisis is that it was the stimulus provided by China that kept the global economy afloat.
• In contrast, now all rich and big economies are weighed down by the virus, and there is not a single large economy to keep the rest of the world afloat.

Consider the question “Analyse the key differences in the Global Financial Crisis of 2008 and the financial crisis caused by the Covid-19.”

Conclusion

If pandemics are going to be more frequent, as is now suspected, it is all the more important that there is a more enforceable global protocol on early warning and information sharing. For all their differences, the GFC and CFC are similar in one respect — they both teach us life-enhancing lessons. The GFC forcefully reminded us that greed and avarice will only bring tears in the end. The CFC is teaching us that the force of nature is bigger than the combined force of our science and technology.

Back2Basics: Credit Default Swap (CDS)

• A credit default swap (CDS) is a type of credit derivative that provides the buyer with protection against default and other risks.
• The buyer of a CDS makes periodic payments to the seller until the credit maturity date.
• In the agreement, the seller commits that, if the debt issuer defaults, the seller will pay the buyer all premiums and interest that would’ve been paid up to the date of maturity.

Collateralised Debt Obligations (CDO), MBS and ABS

• To create a CDO, investment banks gather cash flow-generating assets—such as mortgages, bonds, and other types of debt.
• These assets are then repackaged into discrete classes or tranches based on the level of credit risk assumed by the investor.
• These tranches of securities become the final investment products: bonds, whose names can reflect their specific underlying assets.
• For example, mortgage-backed securities (MBS) are comprised of mortgage loans.
• And asset-backed securities (ABS) contain corporate debt, auto loans, or credit card debt.
• CDOs are called “collateralized” because the promised repayments of the underlying assets are the collateral that gives the CDOs their value.
• Mortgage-backed securities played a central role in the financial crisis that began in 2007 and went on to wipe out trillions of dollars in wealth, bring down Lehman Brothers, and roil the world financial markets.
• In retrospect, it seems inevitable that the rapid increase in home prices and the growing demand for MBS would encourage banks to lower their lending standards and drive consumers to jump into the market at any cost.

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Various projections of growth paint a grim picture of the Indian economy as well as the global economy. This article analyses the sector-wise impact and comes with the GVA projections for 2020-21. The government has to deal with serious challenges like financing huge fiscal deficits. So, what will be the growth rate for 2020-21 and what will be the size of GVA? Read to know!

Projections of growth and uncertainty

• Various institutions have assessed India’s growth prospects for 2020-21 ranging from 0.8% (Fitch)to 4.0% (Asian Development Bank).
• This wide range indicates the extent of uncertainty and tentative nature of these forecasts.
• The International Monetary Fund (IMF) has projected India’s growth at 1.9%, China’s at 1.2%, and the global growth at (-) 3.0%.
• The actual growth outcome for India would depend on: 1) the speed at which the economy is opened up 2) the time it takes to contain the spread of virus, and, 3) the government’s policy support.

Health of India economy before the crisis

• India slid into the novel coronavirus crisis on the back of a persistent economic downslide.
• There was a sustained fall in the saving and investment rates with unutilised capacity in the industrial sector.
• In 2019-20, there was a contraction in the Centre’s gross tax revenues in the first 11 months during April 2019 to February 2020, at (-) 0.8%.
• These trends continue to beset the Indian economy in this crisis.

Growth prospects for 20-21 from the output side

• In 2019-20, which would serve as the base year, India may show GVA growth of about 4.4%,
• This is well below the Central Statistics Office’s second advance estimate of 9%.
• The IMF’s GDP growth estimate for 2019-20 is at 2%.
• GVA is divided into eight broad sectors. Although all sectors have been disrupted, some may be affected less than the others. We divide the output sectors in four groups.
• Group A- This group is likely to suffer minimum disruption.
• Agriculture and allied sectors, and public administration, defence.
• Despite some labour shortage issues, agriculture sector may show near-normal performance.
• The public and defence services have been nearly fully active, with the health services at the forefront of the the COVID-19 fight.
• For the group A sectors, it may be possible to achieve 90% of the 2019-20 growth performance.
• Group D- This group is likely to suffer maximum disruption.
• This includes, trade, hotels, restaurants, travel and tourism under the broad group of “Trade, Hotels, Transport, Storage and Communications”.
• This sector may be able to show 30% of 2019-20 growth performance.
• Group B
• This comprises sectors which may suffer average disruption showing 50% of 2019-20 growth performance.
• These sectors are mining and quarrying, electricity, gas, water supply and other utility services, construction, and financial, real estate and professional services.
• Group C
• In this group come manufacturing which has suffered significant growth erosion in 2019-20.
• It is feasible to stimulate this sector by supporting demand.
• In this case a 40% performance factor on the average growth of the preceding three years is applied.

So, what are the estimates for 2020-21 GVA?

• Considering these four groups together, a GVA growth of 2.9% is estimated for 2020-21.
• Realising this requires strong policy support, particularly for the manufacturing sector which has a weight of 17.4%.
• It is also based on the assumption that the Indian economy may move on to positive growth after the first quarter.
• In the first quarter, GVA growth will be negative.

Policy support for the growth

• Monetary policy initiatives undertaken so far include a reduction in the repo rate to 4.4%, the reverse repo rate to 3.75%, and cash reserve ratio to 3%.
• The Reserve Bank of India has also opened several special financing facilities.
• These measures need to be supplemented by an appropriate fiscal stimulus.
• Cash-constrained central and State governments have taken expenditure reducing measures by announcing freezing of enhancements of dearness allowance and dearness relief.
• This may result in savings of ₹37,000 crore for the Centre and about ₹82,000 crore for the States, together amounting to 6% of GDP.
• There is also talk of substantially reducing non-salary defence expenditure.
• With lower petroleum prices, fertilizer and petroleum subsidies may be reduced.
• These expenditure cuts are contemplated to keep the fiscal deficit under some control.

Fiscal stimulus and fiscal deficit

• Fiscal stimulus can be of three types:
• 1) Relief expenditure for protecting the poor and the marginalised.
• 2) Demand-supporting expenditure for increasing personal disposable incomes or government’s purchases of goods and services, including expanded health-care expenditure imposed by the novel coronavirus, and,
• 3) Bailouts for industry and financial institutions.
• The Centre had earlier announced a relief package of ₹1.7-lakh crore.
• The Centre’s budgeted fiscal deficit of 3.5% of GDP may have to be enhanced substantially to 1) make up for the shortfall in budgeted revenues; 2) account for a lower than projected nominal GDP for 2020-21, 3) provide for a stimulus.
• Thus, the Centre’s fiscal deficit may increase to 6.0% of GDP.
• Expenditure on the construction of hospitals, roads and other infrastructure and purchase of health-related equipment and medicines require prioritisation.
• These expenditures will have high multiplier effects.
• Similar initiatives may be undertaken by the State governments which may also enhance their combined fiscal deficit to about 0% of GDP to account for 3.0% of GDP under their respective Fiscal Responsibility Legislation/Law and to provide for the shortfall in their revenues and some stimulus.

Challenges

• Financing of the fiscal deficit poses a major challenge this year.
• On the demand side, the Central (6.0%) and State governments (4.0%) and Central and State public sector undertakings (3.5%).
• These together present a total public sector borrowing requirement (PSBR) of 13.5% of GDP.
• Against this, the total available resources may at best be 9.5% of GDP.
• The gap of 4.0% points of GDP may result in increased cost of borrowing for the Central and State governments.

Consider the question, “Examine the sector-wise damage caused to the economy due to Covid-19 pandemic. What were the fiscal and monetary measures taken to mitigate the damage and challenges faced by the government in meeting the required revenue demands.”

Conclusion

The gap in requirement of resources and availability may be bridged by enhancing net capital inflows including borrowing from abroad and by monetising some part of the Centre’s deficit. The monetisation of debt can at best be a one-time effort. This cannot become a general practice. 

Back2Basics: What is GVA?

• GVA it is a measure of total output and income in the economy.
• It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
• It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.
• While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective.
• Both measures need not match because of the difference in treatment of net taxes.
• GDP = GVA + taxes on products – subsidies on products

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