Bangladesh learns a public policy lesson

In a WhatsApp group, I shared the following ‘golden rules’ or principles of public policymaking:

(1) With economic policy prescriptions, be aware of the law of unintended consequences
(2) A corollary of that and independently too, the road to hell is paved with good intentions.
(3) To a degree, both (1) and (2) above are because relationships between economic variables and between policy action and outcomes are non-linear and/or asymmetric.
(4) An example of the asymmetry is that it is far easier to hurt with government interventions than to help the economy.

In view of the above four, economists-experts, non-economics experts and policy advisors have much to be careful about and humble about.

Here is an example from Bangladesh.

Negative yields

Dreihaus Capital has tweeted that excluding America, nearly 45% of the global bond market is trading in negative yields.

Michael Lebowitz has a wonderful piece in ‘realinvestmentadvice.com’ and unfortunately or mysteriously or both, it is not available there. It is available via Zerohedge.

This explanation of negative yields, in particular, is brilliant:

It implies that the future is more certain than the present – that the unknown is more certain than the known!

Enjoy reading it as much as I did.

In the meantime, President Trump tweeted exactly the opposite of what Michael Lebowitz is trying to convey:

The Economy is doing really well. The Federal Reserve can easily make it Record Setting! The question is being asked, why are we paying much more in interest than Germany and certain other countries? Be early (for a change), not late. Let America win big, rather than just win! [Link]

and this:

Germany sells 30 year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home! [Link]

Desperate for re-election, he is forgetting all that he said before getting elected for the first time in 2016. Negative interest rates all along the German bund yield curve is a sign of sickness and not health. European banks are hurting from negative yields.

The European Central Bank, originally modelled after the German Bundesbank, had become absolutely reckless and it believes that it has saved the single currency. Perhaps, it did, temporarily only to make the problem re-appear much later. It is inevitable.

The fact that the German economy is contracting in less than a year after enjoying a weak Euro for years and ultra-low interest rates says a lot about the non-efficacy of ultra-low and negative interest rates.

Through his constant haranguing of the Federal Reserve, he is staking a lot more than his re-election. More on that on another occasion.

Finally, it is impossible not to feel disappointed with the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) for its kid-glove treatment of the Fund on its advice during the post-crisis years with unconventional monetary policy. It was not even a rap on the knuckles. The costs of UMP have far exceeded the short-term benefits and the costs continue to mount. The Fund cheer-led it. IEO has nothing to say on the consequences – political, social and economic – of UMP. Egregious pricing of junk bonds (negative yields!) and tech. unicorns and some of them being able to get away with accounting and other practices weirder than the ones that prevailed in the dotcom mania years of 1996-2000 are also traceable to ultra-cheap money.

IMF warns today about the consequences of real estate bubbles and leveraged loans. But, UMP is directly responsible for both. IMF endorsed and encouraged. It discouraged the Federal Reserve from raising rates even gingerly in 2015 and in 2016. IEO has neither done evaluation nor is it independent.

For a true independent evaluation, read ‘The Rise of Finance’. Available here.

Who provides traction for populism?

Daron Acemoglu and James Robinson have an interesting piece in ‘Project Syndicate’ on the forces that contribute to the victory of populists.

They cite Jean-Claude Juncker and that is rather dangerous elitist thinking, totally self-absorbed:

In Europe, Jean-Claude Juncker, while serving as prime minister of Luxembourg, once described the European Council’s decision-making as follows: “We decree something, then float it and wait some time to see what happens. If no clamor occurs … because most people do not grasp what had been decided, we continue – step by step, until the point of no return is reached.” Such elitist logic is intrinsically vulnerable to populism.

Their conclusions appear very reasonable:

To defeat populism, then, one must address all the factors that make it a viable strategy. That starts with recognizing that populism can emerge only when there are real social and economic problems to give it electoral traction. It also means being honest about the fact that there are competing and contested visions of citizenship, which should be debated, not ignored.

Somewhat connected to this but not very directly is the blog post by Chris Dillow on the adverse impact of neo-liberalism on productivity. It might take a few days to go through all the links in that post!

Any case, fat chance that elites will heed their (Acemoglu and Robinson’s) message. Check out my previous post on the so-called open letter of China experts in America.

Ninan’s missed opportunity

Last weekend (June 29, 2019), T.N. Ninan wrote an article on the departure of Viral Acharya from RBI. He is the Deputy Governor. His first term ends in January. He is leaving six months ahead in July.

Viral Acharya has been personally courteous to me. In fact, when I pointed out that RBI surveys (quarterly surveys) should be captured in Excel for download and analysis, he quickly set the ball in motion and it became a reality. Now, we can download the survey results and do analytical stuff with it.

That is not the point. His departure is neither the end-of-the-road for RBI independence nor is it an embarrassment for the Indian government.

Ninan writes:

Similarly, those within the Indian government system do not speak out publicly against the government they serve. When you are the governor or deputy governor, you do not have the freedom of speech that an ordinary citizen enjoys. Differences are aired only internally. On the occasions when someone feels the need to start a public debate, it is not done in apocalyptic terms. Naturally, when Dr Rajan and Dr Acharya spoke out bluntly (in the case of the former, on issues with which he was not officially concerned), it did not go down well.

No employer will allow their employees to speak out against them publicly when you are still working for them. No private sector enterprise would allow that. Nor, for that matter, do foreign governments – even those in developed countries – allow that.

Independence of the central bank does not mean that they cannot be questioned. It does not mean that they are not accountable to anyone. If they are forced to overturn a decision taken in public interest by the sheer weight and force of authority without logic, that is an assault on institutional independence.

Indeed, those who brandish independence as the first line of defence against and all criticisms are the ones who are shutting out debate.

I was happy to see the header in a MINT report on RBI’s revised circular on the recognition of non-performing assets after the Supreme Court struck it down. The report said that the new circular was an exercise in humility. Well said. I found the new circular pragmatic and it did not sacrifice credit discipline.

Mr. Ninan concludes his article thus:

Today, with growth having slowed and macroeconomic challenges in every direction, would the government have benefited from the advice of “Harvard” economists? Perhaps, but judging by past record it probably would not have paid much heed.

Is that so? But, Andres Velasco provides a counter perspective. India, probably, does not miss much or would not miss much.

Mr. Ninan has missed an opportunity to write a more useful piece. That is a pity because he is one of the more perceptive, experienced and balanced commentators in the country.

GST and India’s truck drivers

I did not realise that it is more than twelve days since I last blogged here. Once I returned to Sri City to resume my physical presence here as the Dean of the IFMR Graduate School of Business, the time available to blog came down drastically.

I had read this article on how India’s Goods and Services Tax (GST) has transformed the transshipment of goods across India. It is an interesting and informative article. GST has saved time for sure. I am sure the highways are helping too. But, what stood out for me was the wretched conditions under which the truckers survive while on the road:

Ram, being a part-time driver (he tends to his family’s fields during the monsoon period between May and October), is not paid a salary. His income comes from savings in fuel, incentives and whatever he saves from the ₹3,000 his employer pays for food and bribes. “I am given 400 litres for each way. How much of diesel I save at the end of the return trip is paid to me in cash,” he said. This time he had managed to save 50 litres (both ways). That got him ₹3,500. “I end up making, in all, ₹12,000 comfortably for every return trip,” he added. But his ability to realise more income is hampered by the fact that he gets to make just two or three round trips in a month. ….

…. Most drivers end up sleeping under their truck. “No one cares to offer us decent facilities,” rued Ram. That is a valid statement. Companies invest hundreds of crores to build manufacturing facilities but they do not create decent facilities for truck drivers to rest and freshen up inside the factory. After all, they entrust the drivers with goods worth many crores. Salaries are low, cabin conditions are bad and most importantly, there is no value for their time. They need to push themselves very hard to make money.

“The irony is that the demand-supply equation does not work here,” said Ram adding “when there is a shortage of drivers, the condition of the existing lot should ideally improve but that is not the case.” Ram, being a part-time driver (he tends to his family’s fields during the monsoon period between May and October), is not paid a salary. His income comes from savings in fuel, incentives and whatever he saves from the ₹3,000 his employer pays for food and bribes. “I am given 400 litres for each way. How much of diesel I save at the end of the return trip is paid to me in cash,” he said. This time he had managed to save 50 litres (both ways). That got him ₹3,500. “I end up making, in all, ₹12,000 comfortably for every return trip,” he added. But his ability to realise more income is hampered by the fact that he gets to make just two or three round trips in a month. …. [Link]

That is a shame and a pity. It reminded me of how some employers treat their household help and housekeepers in developed Asian countries. They trust their entire household, their valuables and their small children with these live-in maids but won’t feed them well. Some even abuse them physically.

The article has focused on this conclusion and that, indeed, is a big positive:

It took Ram just 42.35 hours to cover 1,288 km. In the days before GST and before India’s highways were the four-lane beauties they are today, it would have taken about four days to cover the distance. Though some issues remain, the flow of goods along Indian highways has definitely become smoother and faster.

Arvind’s work smells right

There are two people whose timing has been questioned recently. No, this is not about timing of cricket strokes by the batsmen – the timing of the impact of ball on bat. If it is perfect, there is no need to apply force. The ball speeds to the boundary. But, this is about the timing of their announcements.

Yuvraj Singh announced his retirement from cricket even as a World Cup cricket campaign was on. Sharda Ugra who had helped him write his story gently hinted that legitimate questions could be asked of his timing. One can say that he wanted a fraction of the attention on himself. Let us leave it there.

Our interest in this blog post is on someone else.

The other person whose timing has been questioned is that of the former Chief Economic Advisor, Arvind Subramanian. Earlier this week, he wrote an article in Indian Express summarising his findings on the econometric work he had done on India’s GDP growth estimates. His results suggest that, on average, India’s GDP could have been overstated by a magnitude of about 2.5% points every year since 2011 amounting to a cumulative 19-21% during the whole period: 2011-18. However, for estimation, he excludes data for 2017-18 and 2018-19.

He has been criticised by commentators on both sides of the political divide in India. Those who are opposed to BJP and Modi criticise him because he did not publicise this before the election. It might have strengthened their hands. Or, so they think. Unlikely. But, that is their grievance.

The pro-BJP and pro-Modi commentators are upset that this paper has spoilt the ‘feel-good’ air that they are basking in, post-election victory. There is also the unstated anger that AS’ results suggest that the over-estimation of GDP growth, if broken down on an annual basis, is more in the post-2014 years than in the pre-2014 years (up to 2011) because official growth estimates between 2011 and 2014 are lower than the annual growth estimates post-2014.

Since both camps are unhappy, he must have done something right.

In fact, one must applaud his timing. By releasing his study after the elections were over in India, he had shown himself to be apolitical. The only politically somewhat loaded statement he has made in the paper is this: “that also requires us to reject the more recent estimates for the post-2011 period because they may not simply reflect the technical changes.

The statement put out by the Prime Minister’s Council of Economic Advisors does not indicate an awareness of the spirit and the discussion that are needed. In the interests of the credibility of the government and that of the Indian Statistical System, the data and the methodology need to be put in the public domain, instead of hiding behind technical arguments.

The other charge that is laid at AS’ door is that he didn’t he do this when he was in CEA. Now, we don’t know, honestly, if he did not do this exercise inside the government. He might have given the output to them and it might have been rejected. That could be one reason why he left six months earlier than he needed to. Who knows?

But, let us accept his statement that he did not have the time and space to do so when he was the CEA. I assume that by ‘space’ he means ‘mental space’ and nothing else.

To a large extent, I can vouch for that, even in my limited experience of being the Dean of a Business School. One simply does not have the energy at the end of a long day to write serious blog posts. It is hard to catch up even with one’s reading let alone writing. My blog posts came down drastically since October 2018 – when I took up my assignment – for no other reason but that I did not have the time and energy to be as productive as before.

If some were to attribute it to political correctness, I can point out that even my private emails to my mailing lists came down dramatically let alone public blog posts.

So, I am prepared to take him at his face value that he did not have the time and space to engage in a serious data analysis and investigation. It is one thing to write casual op.-eds., and it is another thing to undertake a serious investigation of data and do some statistical analysis on them. After all, the Chief Economic Advisor was engaged in multiple other projects – planning for the introduction of the Goods and Services Tax, annual Economic Surveys, etc.

I have gone through Arvind’s paper carefully more than once. His conclusions appear reasonable. He has merely invoked the spirit of ‘difference in difference’ approach. The estimation method is simple statistical regression. Did the difference in methodology adopted since 2011 make a difference only to India? That is ‘two differences’ there.

His first two pictures – Figures 1 and 2 – are specific to India. They do no invoke cross-country analysis. In other words, he has not just engaged in an ‘unusual exercise’ of cross-country regressions. He has also analysed India independently.

I had done a similar exercise in 2016 itself. See here and here. These two papers show that the GDP growth figures do not accord with growth in many other indicators of the real economy. The analysis was done using several indicators and the conclusions were clear. I did not undertake an econometric investigation. So, my result was not quantifiable. It was descriptive in nature. I concluded – without any statistical estimation – that India’s real GDP growth rate – might be overstated by 1.0% to 1.5%. In other words, the new GDP growth data did not pass the smell test. They still do not.

Arvind’s points about import and export growth and GDP growth in the post-2011 period and the import elasticity of demand are as important as his point about growth in manufacturing not being correlated with growth in manufacturing exports.

One could ignore his cross-country and panel regressions and undertake a ‘India-only’ exercise but there is not simply enough data, if one used annual data and tried to estimate a structural break in the data either by splitting samples or by introducing dummy variables. But, the evidence is clear in his Figures 1 and 2 and in my works cited above. There is no point in being in denial about it.

Pre-2008, India experienced an economic growth boom due to massive capital inflows, credit growth, capital investment boom and export growth. Many other nations did so too. Post-2008, global trade volumes have slumped. Countries – developing and developed – briefly recaptured their growth rates of pre-2008 years due to stimulus. Some of the stimulus was unsustainable as India found out in 2013.

That is why most of the countries have struggled with economic growth since then. In fact, post-2014, leading emerging economies have suffered lower growth than pre-2014. Only India has been an exception in spite of the introduction of many potentially growth-unfriendly and demand-unfriendly structural but long-term positive and essential structural reforms. Does not pass the smell test.

Harsh Gupta has written an interesting and thoughtful op.-ed., in Indian Express drawing attention to the fact that India’s tax collections have grown robustly since 2014 and if Arvind’s growth estimates (mid-point of 4.5% between the range of 3.5% to 5.5%) were accepted, the tax/GDP ratio would be much higher. He is right unless the tax data were fudged too. Rather unlikely. Tax collections are realised in cash and the government has to transfer a portion of it to States too.

My responses to Harsh Gupta’s article are as follows and not just to his argument on Tax/GDP ratio:

(1) The tax collection could well be the problem. That the tax collection mechanism became so active and coercive might be one of the contributors to the private sector uncertainty and investment funk. Indeed, even many sympathisers of the BJP and the Modi-led government were of the view that ‘tax terrorism’ was pursued with greater vigour post-2014 than it was in the pre-2014 years.

(2) For example, between 2014 and 2016, when the price of crude oil slumped, the Government did not pass on the decline in the price of crude oil to the Indian public. Instead, it loaded up additional taxes on the crude oil and ensured that the final retail price of petroleum products was only marginally lower, if at all.

(3) Productivity improvements would show up in profitability data. They have not. Second, export growth would be better if there is a renaissance of productivity. That is why despite the slump in global trade volumes, countries like Bangladesh and Vietnam have done better than India with export growth.

Some friends have pointed to articles such as this and have asked rhetorically if these improvements are captured in GDP data. Two responses are in order:

(1) They should be captured in profitability data, eventually.

(2) Ceteris is not paribus:

(i) Even as GST related improvements are happening to the movement of goods in India, the power sector (Independent Power Producers) has gotten into trouble due to lack of raw materials availability and at the expected prices and due to low price realisation from buyers or non-evacuation of power at agreed prices.

(ii) Then, the non-banking financial sector has gotten into trouble and has stopped lending.

(iii) What has grown rapidly even amidst overall tepid bank credit growth is growth in credit to households including credit card or revolving credit. That is for consumption purposes. That is not the stuff of productivity improvement.

Only if other things remained equal and then GST-triggered productivity gains occurred at the margin, one can speculate on their positive impact on growth.

In the final analysis, it is important to note two things from Arvind’s analysis (and mine):

(i) Post-2008, emerging economies are not the same. It is futile to keep talking about the 2008 crisis as the North-American or the Atlantic crisis. Emerging economies – including India – are as, if not more, worse off as developed nations are. It is not just about India and about economic growth in the UPA or NDA years.

There is a need to rethink the facile conclusions about the momentum of economic activity and the balance of economic power shifting inexorably towards the East and prepare accordingly to negotiate and deal with the West.

Such realism is also necessary to tackle the impact of Artificial Intelligence and Robotics on employment, the challenges of climate change and the looming water scarcity. All of these threaten both economic growth and economic and social stability.

(ii) This cannot be viewed as a partisan political battle. There is much at stake. Instead of arguing about it, it is far easier and more effective (lasting effect) to make available the CSO data and methodology to independent statisticians for verification. Only then will the controversy end.

(iii) It is quite possible that some concerns were raised in the government by some about growth numbers. But, that they were not either heeded or smothered. That should not be the case. The lone dissenting or a different voice deserves all the respect, if not more, as the conforming voices.

The government could have easily asked the CEA or the Department of Economic Affairs to come out with such an exercise as soon as the controversy about GDP growth estimates erupted in 2015. That would have made both monetary and fiscal policies more responsive and reasonable in the last four years. The failure to accept a lower growth rate has actually prolonged the growth stagnation and even resulted in the previous government taking a chance with demonetisation, perhaps at the wrong time.

In short, Arvind Subramanian has done a rather useful service to the discourse on India’s official economic data. It is better to pay heed to the message even if its specifics are open to challenge. It is wrong, self-destructive and counterproductive to shoot the messenger.

Ira Dugal – the arbiter?

Ira Dugal has a piece in Bloomberg Quint titled, ‘Why Few Are Celebrating Low Inflation In India.’

It is a good piece. A nice arbiter between Neelkanth Mishra and Sajjid Chinoy 🙂

Her pertinent paragraphs are these:

The last time India saw a step-change in the inflation scenario was perhaps in the 1990s. Back then, the inflation rate declined from an average of 11 percent during 1990-95, to about 5.3 percent from 1995-96 till the end of the decade. In response to the falling inflation, the bank rate, which at the time was one of the benchmark policy rates, fell from a peak of 12 percent in 1997 to 6 percent  by 2003. In the current period, the extent of fall in inflation has been similar. CPI has fallen from a peak of 11 percent in 2013 to under 3 percent now. Even if one expects that the current bout of low inflation will not last, the MPC will likely ensure that it remains within its flexible target band of 4 (+/-2) percent. Still, the fall in inflation has been substantial. 

In response to this fall in inflation, the benchmark policy rate has fallen from 8.5 percent at the end of 2012 to 6 percent now. To be sure, broader economic conditions then and now are not comparable and neither is the framework that governs monetary policy. Still, the change in the 10-year bond yield then and now drives home the point. 

Between 1999 and 2003, the 10-year yield dropped from 12 percent to 5 percent. Since 2013, the 10-year yield has dropped from 8 percent to 7.2 percent now. No surprise then that few in India are cheering low inflation in India.

One clue might be that between 2013 and 2019, the borrowings of the central government (and central PSUs) have gone up by 60% – about 8.15% CAGR. This does not include State governments’ market borrowings.


If we compare the figures for the period 1995-2003, we might get a clue. I do not have those figures. In an environment of falling household savings and low deposit ratio, the borrowing of the goverment sector kept bond yields from falling. Of course, the conservative central bank monetary policy stance is also a contributing factor.

RBI raised rates in 2018 and cut rates in 2019 by 50 basis points. Effectively, no change in policy in the last eighteen months.

Simply put ,we do have an unwieldy and unproductive Government sector. Therein lies the rub. There is no shor-term fix for that problem.