The fallout of the Covid-19 second wave

Two articles came into my space this morning. One was written by Makarand Paranjape in ‘Hindustan Times’ and another one was based on an interaction of Anupam Kher with NDTV. Both were not known critics of Modi. Quite the contrary. Yet, they have done some much needed plain-speaking. Worth reading both.

Then, I came across a long FT article that was posted few hours ago online and that, in turn, led me to an earlier article of theirs from April 27th. The link ‘promised’ to reveal scientific warnings of the second wave that the Government ignored. In truth, there is no credible, actionable and remotely precise scientific warning of the magnitude, speed of spread and infectivity of the virus (or its variant) on India from any scientist.

This long article in Bloomberg is another case of long on rhetoric and words and short on substance.

So, what is making everyone train their ‘guns’ on one man? I have several hypotheses. I have aired some of them in my Mint columns. He has that air of everything under control and that he is invincible. That makes him vulnerable when things go wrong. In general, the vast majority of us consider ourselves to be underdogs. Therefore, we usually view with envy/awe those who exude supreme self-confidence. We secretly wish that they would fail so that they would be ‘like us’. Not invincible. Not infallible. So, when they fail, it sends us into paroxysms of glee and schadenfreude and we pile on them.

That could be happening:

When there is substance behind confidence, it is tolerated. If not, we are sitting ducks for scorn when we stumble. [Link]

The other reasons were India’s premature triumphalism and his own statements that reflected such triumphalism. One was his remarks at the virtual World Economic Forum on India’s way of beating the virus and helping the world. Second was the resolution passed by the BJP on the 21st February that called his government victorious in the war against virus.

In general, most humans resent others’ successes. So, very successful people, at least once in a while, must share the credit for success with others and make them co-owners so that when they fail, there would be some sympathy and not everything would have their daggers out.

The high-decibel election campaign in West Bengal also made some wonder if it could really be so much ‘all clear’ on the corona front. Watching the cricket matches in Ahmedabad being telecast with very few sitting with masks on also made some of us entertain a fleeting thought or prayer that it should not turn out to be misplaced optimism. But, that was that. It was fleeting. Given that winter had passed, India was coming into warmer months and with vaccine availability, India, we thought, was justified in opening up fully.

Just two days ago, a friend had shared a video (barely 30 seconds) of massively crowded shopping in narrow streets, with nary a face mask, for Ramadan. This is in the middle of a vicious second wave with so much of death and struggle to grapple with. I am not sharing it here because I don’t have a URL. At one level, one has to call it irresponsible. But, at another level, is it latent stoicism that is also a harbinger of India’s revival, once this phase gets over? People are simply tired of being held down by the virus. That possibly explained why the collective urge to believe and act as though it was all over was so strong.

Sample this tweet by Sridhar Vembu of Zoho on the 26th April 2021:

Most of us, myself included, thought Covid was over in India, particularly after the second wave didn’t happen in Nov/December, unlike in the West. Covid fatigue meant that most of us were happy to forget the whole thing. [Link]

So, it is tempting to hold one man responsible for all of these. Did he influence all of these people or did they influence him? It is not that easy. I reiterate: we should not be seduced by the simplicity of binaries.

All that being said, there is a need to show visible leadership. There is nothing wrong in admitting to errors in vaccine production estimates. One reason is the fire and the other reason is that there are genuine export restrictions from the United States. That is a pity. The Health Policy Editor for ‘The Economist’ has a useful tweet thread on it. She confirms that Novavax production has been held back by U.S. export restrictions on inputs.

Novavax lines in India and the UK have been affected by shortages of items needed from the US. Start with the UK which has been manufacturing this vaccine for a while (not yet approved). Novavax is struggling with 3 key things: biobags, media, and filters. @halhod

Firms also say things are worse under the current administration, not better. Oh, and I have also heard of an un-named firm that had active substance in Europe, shipped to the US, and then were unable to get it out again. They had to improvise and find a new supply chain…

The US needs to become part of the solution, and stop being part of the problem. When it moves to donate vaccine or support the global supply chains, other countries will follow and lives will be saved as a result.

Quite what the Quad statement on helping India with vaccine production capacity for the world means, I am not sure.

Quad partners are working collaboratively to achieve expanded manufacturing of safe and effective COVID-19 vaccines at facilities in India, prioritizing increased capacity for vaccines authorized by Stringent Regulatory Authorities (SRA). Quad partners will address financing and logistical demands for production, procurement, and delivery of safe and effective vaccines. Quad partners will work to use our shared tools and expertise, through mechanisms at institutions including the United States Development Finance Corporation (DFC), Japan International Cooperation Agency (JICA), and, as appropriate, Japan Bank of International Cooperation (JBIC), as well as others. [Link]

A friend of mine assures me that, by July, there will be enough vaccines to go around. But, the next several weeks are important for confidence, sentiment and psychology.

It is true that strong personalities go into their shell/cocoon when confronted with failures. Their advisors might also be influencing them in this regard. But, some thrive on connect with people and communication. Hence, PM Modi must trust his instincts, come out and communicate with people. He must share their angst, their fears and uncertainty and keep communication lines open. This is as good a time as any to break the mould and trust his instincts rather than the usual risk-averse advice offered by advisors. That might be the right thing to follow in normal times. Now, times are not normal.

I was reminded of a very thoughtful note that the investment manager Tim Price wrote in April. I catch up with his writings even if I don’t read him every week. His posts are available at

In this post dated 13th April 2021, ‘Keep Calm and Carry on’, he recounts the tale of James Stockdale, American War Veteran and Prisoner Of War in Vietnam. He survived 7 long years in prison and four of them in utter darkness. Apparently, James Stockdale’s story is recounted in Jim Collins’ ‘Good to Great’.

“I never lost faith in the end of the story,” replied Stockdale, “I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining moment of my life, which in retrospect, I would not trade.”
Collins was silent for a few minutes. As they walked together, Stockdale was limping and swinging his stiff leg that had never properly recovered from repeated torture. Finally, Collins plucked up the courage to ask another question.
“Who didn’t make it out ?”
“Oh, that’s easy,” replied Stockdale. “The optimists.”
Collins was confused.
“The optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving. And then it would be Christmas again. And they died of a broken heart.”
As the two men walked slowly onward, Stockdale turned to Collins:

“This is a very important lesson. You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they might be.” [Link]

The lesson is that the leader should not lose faith and yet he has to convey that he has the discipline and the courage to accept and confront the most brutal facts of the current reality.

If he is unable to rediscover his Mojo, it will begin to affect Indian policymaking in the remaining three years of this government. India cannot afford to lose time now. Already, growth forecasts for 2021-22 are being lowered. Moody’s has cut India’s growth forecast to 9.3%. That does not look that drastic. I did some high-level spread-sheet manipulation without going into individual components. 10% is still achievable but a lot depends on speed of vaccination and the dissipation of fear. Else, consumption will be hit. Inventories will pile up. Production will be cut back and so will capex be.

India’s future, stature and a seat at the high table depend on India being able to generate prosperity and employment for Indians. The latter is not only a pre-requisite but an important end in itself. The former will follow automatically if the latter is achieved.

It is also time to embrace true federalism and usher in an era of cooperation with states. The Union Government can and should showcase successes of other states in managing and controlling Covid even if they are not BJP-ruled. The Prime Minister must share and revel in their success. Big hearts are needed now more than ever.

The website of the Inter-State Council Secretariat sports pictures from five to six years ago in its landing page. ‘What’s new?’ results in a blank page. Quite.

Postscript: If arrogance and hubris were supposed to lead to disasters eventually, I wonder where all of these would lead China to. I just read the recent ‘China Up Close’ column (ht Sanjay Anandaram) by Katsuji Nakasawa. It is a highly perceptive column.

He wrote:

After the Group of Seven foreign ministers issued a joint statement criticizing many of China’s recent actions last week, a computer-generated graphic depicting an event from 120 years ago was widely shared on the Chinese internet.

The aim of the young Chinese CG artist, who goes by the name Wuheqilin, was to brand the G-7 as an invader and to recall the Boxer Rebellion.

The 1900 uprising attempted to expel all foreigners from China and was supported by the Empress Dowager Cixi. That prompted forces from the Eight-Nation Alliance (the U.K., the U.S., France, Germany, Russia, Japan, Italy and Austria-Hungary) to enter Beijing and liberate the besieged foreigners.

As a result, the Qing dynasty was forced to sign the humiliating Boxer Protocol in 1901, which imposed backbreaking compensation obligations.

The satirical image took the commemorative photo of the G-7 foreign ministers standing on the steps of Lancaster House in London and replaced the figures with people dressed in old-style military uniforms from the Eight-Nation Alliance, similarly posing for a commemorative photo at the same place.

The “G7 — United Kingdom 2021” sign behind the ministers had been rewritten “G7 — Invaders United Kingdom 1900.”

One more provocative though less visible element in the image is a soldier from India — a guest participant at the G-7 — wearing a white face mask and connected to an IV drip. The caricature ridicules India as it battles a tsunami of COVID infections. [Link]

This is the image:

Business Correspondents and financial inclusion in India

Since the beginning of this year, I have been working as an advisor cum consultant to the Indicus Foundation on their Financial Inclusion Round Table and Workshops initiative for 2021. The first such round-table on Business Correspondents was held in January on the topic of Business Correspondents – the agents of banks in remote locations. They help act as a bridge between banks and many Indians living in remote parts. They provide minimum services like cash withdrawal, etc. But, they can do more and better. In fact, if more women are employed as Business Correspondents by banks, it not only boosts women employment but more women would use these BCs more frequently and effectively. There will be collateral benefits too. The women BCs – being likely slightly more educated, experienced and qualified than some of their customers would be – can also advise them on other matters. The social and economic multipliers will be quite high.

In fact, that is what seems to be happening on the ground. Women’s World Banking is working closely with a Public Sector Bank (think it is Bank of Baroda) on women BCs. The head of Women’s World Banking in India happens to be the former Citbanker Sriraman Jagannathan – a close relative of my wife and hence, of mine too!

He and his colleague Swati Chowdhary wrote a piece for ‘BusinessLine’ and they mention the on-the-ground transformation:

Women customers find women agents easier to approach, trustworthy, and great at maintaining confidentiality. This is corroborated by another research where women customers transacted more with women agents and they felt more comfortable with them especially when disclosing financial information….

…. In another recent project with a large public sector bank, women agents completed 19 per cent more transactions and had 45 pre cent higher conversions on a newly-launched small savings scheme than their male counterparts. …

… Results of a significant payback were seen in a recent pilot project undertaken with a public sector bank, where the portfolio managed by successful women BCs was three times more profitable than male BCs. Progressive steps like Uttar Pradesh State Rural Livelihoods Mission adding 58,000 women BCs and supporting them for a year, is a shining example of culmination of positive government policy, adequate support and financial service provider interest. [Link]

So, based on the deliberations at the Round-Table, Dr. Sumita Kale at the Indicus Foundation and I wrote a joint piece for Mint on Tuesday. It also happened to coincide with the International Women’s Day celebrated on 8th March. Our main thrust in this piece was to call for more gender disaggregated data at the macro level. We have also mentioned the need for more women BCs in the article, something that Sriram and his colleague write about in greater detail in their BL article, linked above.

I see it as a no-brainer for banks to invest in women BCs. It is commercially likely to be very rewarding – as Sriram and Swati Chowdhary write – and also socially very advantageous. So, maybe, the regulator – the Reserve Bank of India – can incentivise banks to undertake this. One idea is to have banks’ upfront expenditure/investment on hiring, appointing and training women BCs count towards priority sector lending commitments with a higher multiplier.

Comments welcome!

Premature de-formalisation

Mark Mobius and Saurabh Mukherjea have an article in BloombergQuint on the all-important question of the rise of Artificial Intelligence and employment. They admit to presenting us anecdotal evidence and, second, most of their data are from emerging economies in which the impact of Artificial Intelligent is still nascent, at best, and non-existent, at worst. Formal sector employment in these countries is quite low. The question is whether AI and technology will cap the formalisation of these economies at current low levels.

Arvind Subramanian, former Chief Economic Advisor to the Government of India, wrote about premature de-industrialisation of India. Well, what he meant was that some states did not even get to industrialise and the share of Gross Value Added of industry had started declining even before it reached peak levels seen in the West or in today’s advanced nations.

Now, we have to worry about premature de-formalisation.

The article by the two fund managers does not do much to allay this concern. If anything, it declares premature victory.

I might have blogged in the past about Andrew Haldane’s two speeches: Labour’s share (Nov. 2015) and ‘Ideas and Institutions’ (May 2018). Both these speeches provide a realistic perspective on the impact of new technologies on labour.

Readers interested in this issue should read the two speeches. They may appear long. They are not. Key highlights:

(1) From ‘Labour’s Share’:

In sum, the third industrial evolution appears to have resulted in an intensification of trends already fledgling in the first two: a hollowing-out of employment, a widening distribution of wages and a fall in labour’s income share. The key question is what happens next? A re-run of the 19th century, with productivity gains eventually boosting wages and the labour share? Or, different than in the past, a permanent re-shaping of the labour landscape?

(2) From ‘Ideas and Institutions’

The three Industrial Revolutions provide a useful set of case studies. Each caused technological disruption and significant job displacement. Each had, as a result, a wrenching and lasting impact on the job and income prospects of large swathes of society. Each caused a significant and sustained period of hardship for many.25 And each caused a stretching of the social fabric, often to close to breaking point.

It is now well-established that each industrial revolution caused a significant loss of livelihood for workers whose set of tasks was most susceptible to automation….And these losses were often made worse because they were concentrated occupationally and geographically…. A second, accompanying adverse side-effect of technological disruption has often been rising levels of income inequality….

A third adverse side-effect was that workers did not always benefit, fully or immediately, from
technologically-induced gains in companies’ productivity and profitability. In the early stages of each industrial revolution, wages tended not to rise in line with productivity, causing labour’s share of the national income pie to fall.29 This, too, tended to add to popular discontent and damage social cohesion…..

A final side-effect is that periods of technological transition were often lengthy as well as painful. In the first Industrial Revolution, many displaced workers had still to find alternative work by the middle of the
19th century, with income inequality running high and labour’s share falling.

Public policy and the law of unintended consequences

Because social protection programs generate displacement of private transfers, policymakers need to factor in the magnitude of this behavioral response. The robust evidence of crowding-out we find across a diverse array identification strategies demonstrates that, in developing countries, many private transfers are underpinned by altruism. In particular, we review studies that employ difference-in-differences, triple difference, two-stage, and three-stage least squares experimental designs. All of these identification approaches have produced estimates that point to a non-negligible presence of a crowd-out effect…..

…..We document consistently large crowd-out effects in response to all social protection types. Furthermore, gender and the income level of safety-net recipients can interact in important ways with the willingness of family networks to provide transfers. In sum, the relative merit of introducing various safety net benefits and the potential leakage, disincentive costs to the program recipients, and displacement effects among inter vivos transfers should be compared in choosing an appropriate program.” [Link]

Effectively, what the paper is saying is that public welfare programmes – which are the standard answers for all development ills – are not unalloyed blessing. On balance, they may even be harmful.

In this regard, what is happening in California with Proposition 22 (ht: Gulzar) is very interesting and worth following for many reasons. If it failed, it might be the harbinger of the return of labour power.

If it went through, it would exempt firms like Uber, Lyft from certain labour welfare requirements. If it gets rejected, these firms have to comply. In principle, there is a moral case for voting against Proposition 22 since there has been enough evidence of firms treating these workers like full-time workers and yet, not extending them the statutory protection due to them as full-time workers. 

However, as an observer, it will be interesting for me to see if the law of unintended consequences plays out here. Suppose the Proposition got rejected and if these firms scaled back their operations and laid off thousands of drivers or, in the extreme, shut down operations in California, then what happens to the drivers and to the commuters too? What is the welfare loss?

Are there clear choices in public policy? These are wicked problems and societies make decisions based on the zeitgeist not because they are the right answers.

Lost credibility restored

I enjoyed writing my Mint column on Tuesday:

The silver lining around India’s GDP cloud and what to do now

4 min read . Updated: 07 Sep 2020, 08:50 PM IST

V. Anantha Nageswaran

The Q1 setback may have redeemed our data in critics’ eyes and rallied opinion for another stimulus

As per popular interpretations, the Indian data on gross domestic product (GDP) released on 31 August was full of dark clouds. Real GDP, as measured at constant 2011-12 prices, shrank 23.9% from a year ago. Nominal GDP had shrunk 22.6%. I was searching for a silver lining to the data. Some commentators saw agriculture and rural consumption as bright spots. Sure, they are. However, analysts have cast doubts on their sustainability by pointing to rising covid infections in rural India. There must be something else to cheer about. And I’ve found it.

It is that the steep GDP contraction has restored the credibility of India’s macroeconomic statistics. Detractors of the government, critical commentators and opposition politicians seem to trust the latest GDP figure because it has delivered them ammunition. They seem almost pleased that the Central Statistics Office (CSO) has given them a number that the chief economist of the International Monetary Fund has certified as the worst among the G-20 nations for the April-June quarter. As long as it showed brisk GDP growth, the CSO was suspect in their eyes, but by presenting one of the world’s steepest contractions, it has redeemed itself.

It reminded me of how participants in financial markets tend to view central bank transparency and predictability. As long as central banks surprise them with rate cuts and abundant liquidity, surprises and non-transparency are welcome. However, surprise rate increases or monetary tightening are unwelcome and taken as reflective of their opacity and bad behaviour. The response to GDP data is similar.

By now, it should be clear that the estimated real GDP growth rate of around 8.2% in 2016-17 was not political but methodological. As former chief statistician Pronab Sen pointed out, using the growth rate of the formal sector, which benefited from demonetization, to estimate informal and rural sector growth yielded a strange result for that year. Demonetization had affected only the informal sector adversely. Since the shock was idiosyncratic and not general, gauging its impact required a different method. That was not on offer. So, policymakers of all hues—fiscal and monetary—were blindsided. That they should have applied their own methods and set monetary policy and fiscal policy accordingly is a matter that does not get as much critical attention as the note-replacement exercise itself.

When the history of India’s economic growth since 2014 is written, more than demonetization, the left field’s statistical self-goal of accepting 8.2% GDP growth for 2016-17 will figure rather prominently. That is history. The CSO numbers are trustworthy now. The office was already on its way to redeeming itself in the eyes of the critics when it estimated GDP growth in the fourth quarter of 2019-20 at 3.1% and the full-year growth rate at 4.2%. All that remains for it to regain full credibility is to explain better its downward revisions of growth between 2005 and 2011.

Now that the full effects of the extensive and stringent lockdown imposed in March are evident, the government and Reserve Bank of India (RBI) have to concede that whatever they have done to help stabilize the economy since then may not be enough. Yes, the latter has done a lot. But, it can do more. Without it, we risk hysteresis in the economy, as Rahul Bajoria and I wrote in these pages (‘A risk-management approach could guide our next stimulus’, 27 July 2020).

It is a fact that nine major emerging economies have seen a sharp growth contraction between 2010 and 2019, though they did not do demonetization, nor introduce a goods and services tax and bankruptcy code. But that does not and should not mean that we wash our hands of the growth problem. Such explanations do not satisfy critics. Also, economic growth is a strategic imperative for India, given the changed border dynamics. India needs fiscal resources that only growth can provide. For that, it has to be prepared to spend first.

The government has already announced additional market borrowings for the year and also enhanced debt limits for states. Further market borrowing might bring additional costs rather than benefits. Therefore, RBI should not be squeamish about monetizing new government debt, as Srinivas Thiruvadanthai and I wrote some time ago (‘India should give up the fear of inflation and monetize its deficit’, 20 July 2020). It should commit to monetizing 2% of GDP (2019-20) right-away.

RBI has been doing an admirable job of supporting the government’s fiscal operations through several methods. However, announcing a clear one-time purchase of treasury securities would provide the Centre certainty on resource availability, which slow and steady open market operations, yield curve management and re-classification of bonds held by banks won’t achieve. This is critical in these times of strategic uncertainty. India needs flood irrigation now, and not drip irrigation.

If this “act of God” or “leak from the lab” resulting in a 23.9% GDP contraction is not sufficient ground for deficit monetization, then the exceptional clause in the Reserve Bank of India Act for monetising fiscal deficit is pointless. It can be scrapped. [Link]

Ruminations on the inflation targeting framework for India

I had fun researching for the piece on India’s inflation targeting framework now that the first monetary policy committee has concluded its four-year term.

In a note that he recently wrote, Dr. Soumya Kanti-Ghosh, Chief Economist of the State Bank of India notes that the recent CPI inflation rates to be higher than official ones because expenditure on travel, transportation, recreation, restaurants are much lower now. The weights on other components are correspondingly higher then.

So, if the weight of the food were officially at 30% instead of the present 45.86%, it would perhaps validate the official CPI inflation rate? But, is it possible that, for the recent post-Covid consumption pattern, 45.86% weight is appropriate? Of course, it would be by accident and not design.

He makes the case for chain-weighted approach to calculate the CPI instead of the fixed base weights that only get periodically revised. The last weights were chosen in 2014 or in 2015 with the base year to be 2012. Quite old.

I went through the Minutes of the Meeting of the Monetary Policy Committee of the Reserve Bank of India. They had a three-day meeting in the first week of August.

Several members have pointed to how higher duties on petrol and diesel and supply disruptions have caused the short-term price pressure.
Of course, Governor Das alludes to it too:
“In the recent months, the major drivers of inflation have been supply-chain disruptions resulting from localised lockdown; increase in excise duty and VAT on petroleum products; price pressures in protein rich items and vegetables; and impact of statistical imputations.” (paragraph 71).
It is interesting that the Governor calls for re-balancing of the duties levied on petroleum products. Code word for lowering them.
The word, ‘imputation’ has appeared six times in the MPC Minutes. Their focus seems to be on the imputed CPI calculations for April-May.
What it does not really address are these:
(a) The question of weight of food and food-related items in the CPI basket, even if we stay with a fixed base-weight approach
(b) The need to update the base year, if we stick to the fixed base-weight method, and along with that, the weights
(c) The question of switching to the chain-weighted method
(d) The mandate of the MPC itself and the inflation targeting regime
Of course, (d) is not the remit of the MPC.
I think the problems with the measurement of inflation – both short-term issues of data collection and long-term structural issues of finding a representative basket of goods and services for India, chain-weighted vs. fixed weight methods, etc., – actually make the case for a re-think on the Flexible Inflation Targeting (FIT) mandate for the central bank.

In this situation, what should the central bank be doing? I think the more they cut interest rates, the less the mileage for it. In any case, investment decisions are not being held back by a 25-bp. reduction in interest rate from the current level or even 50-bp. It is an over-hyped medicine, beyond certain useful dosage, that is. That is the case, the world over.

In this regard, do read this letter that Daniel Thornton wrote to the Financial Times recently on an article that one of their journalists wrote. The original article by one Robin Harding re-hashed old shibboleths about how central banks were merely following a natural rate of interest and that if their interest rate policy kept rates excessively low, it would have showed up in the inflation rate, etc. Oh, boy! They never give up. Do they?

It will reduce incomes for savers, if we drag the rate lower and the costs would exceed the benefits esp. if the cost of capital is not the one that is holding back capital formation and if other interest rates in the system are not responsive to the policy rate and are ruling higher for various other reasons – risk premium considerations due to lack of information on asset quality and solvency, etc.

In the Indian context, Soumya is right to call for fiscal action right now. Rahul and I wrote too as have others and Srini and I wrote too. The Sales Managers’ Index for India is making slower recovery than is the case with other countries I saw recently (China, USA). But, the government is between a rock and a hard place.

Come to think of it, India’s issues with its macro statistics – first, with economic growth in the context of demonetisation and now, with inflation measurement – have emerged as serious hurdles to policymaking.

The story of India’s growth and growth statistics according to Pramit

Pramit Bhattacharya and Nikita Kwatra have commenced a series of four articles on India’s economic growth situation which, at this moment of writing, looks rather uncertain. In general, Pramit’s columns ought not to be missed. Agree with him or not, it is hard to ignore the points he makes. I will put it differently as well. It is hard to disagree with him because, to disagree with him, you have to be as thorough as he usually is.

His analyses and arguments are data based. There is plenty of it in his writings. This series is no exception. The first of the four articles dealt with India’s growth experience of India since 1979, the last time the economy contracted around 5% in real terms.

Coincidentally, I am in the middle of writing a 5000-7000 word article for the Vivekananda International Foundation on the global economy, post-Covid, and the impact on India. I used the Conference Board data on PPP-adjusted (2019 dollars) per capita GDP for India and China. Unlike the World Bank data that Pramit uses, the Conference Board data shows that China’s per capita GDP (PPP-adjusted 2019 dollars) overtook India’s in 1978 rather than in 1990. Of course, Pramit compares aggregate GDP whereas I used the Conference Board data on per capita GDP.

Of course, I just checked the Conference Board data on aggregate GDP. In the methodology that they have used, China’s PPP-adjusted aggregate GDP has been higher than India’s since 1950, the first data point in their series.

The second article in the four-part series has dealt with the issues in India’s macro-economic statistics. I had written on it for Athena Infonomics in 2016 and Pramit had written extensively in the past on it. If I have to summarise his second article, it would be as follows:

(1) The application of ASI data (formal sector) to estimate the output of informal sector. Of course, ASI means ‘Annual Survey of Industries’ and not the ‘Archaeological Survey of India’.

(2) Misclassification of firms and missing firms in the MCA-21 database

(3) Switch from volume to value and hence, the absence of price indices like PPI, leading to the use of WPI as deflator proxies for different sectors

(4) Allied to (2) and (3) is the issue of misclassification of firms leading to the use of wrong deflators – manufacturing related deflators for service firms and vice-versa.

Initially, this issue was not political. It could have been and should have been fixed by statisticians before it became politicised. It became politicised after the growth rates of the period up to 2011-12 from 2005-06 onwards were revised down, few months before the 2019 National Elections happened. It might have been a genuinely statistical revision but the timing and the government in office then and the government that was making the change in 2018 or 2019 being different made the revisions controversial.

But, all told, the sooner we restore credibility to our macroeconomic statistics, even if it means some downward revisions to the growth data of recent years, the better it is for India’s reputation. The contrast with China would be to India’s advantage.

Look forward to the remaining two articles in the series by Pramit.

Do States, Markets, Institutions and Literacy matter as much as we think or does stuff happen?

The title of the blog post is indicative of the usual debates in economics. One is the false choice between the State and markets. The second is the oft-repeated role of institutions and education in fostering economic growth , prosperity, etc.

In my previous blog post, I had concluded on this note:

Now, talking of the role of institutions, it is hard for me to resist leaving fascinating conclusions on their (over-hyped?) roles in shaping economic outcomes and in sustaining them. In fact, the causality may well be from economic growth to evolution of sound institutions than the other way around. But, the topic is big enough to warrant a separate post and not mix them up here. [Link]

When someone mentions ‘institutions’, they appear scholarly. ‘Institutions’ and ‘Literacy’ are normative phrases like ‘innovation’ and ‘transparency’ in Finance. Abused and deliberately misused to put critics on the defensive from the word, ‘go’.

Here are some important push-backs to consider. This post should be deemed a sequel to this post on the drivers of economic growth acceleration. But, not very directly; somewhat tangentially.

To be fair, the observations that I am citing below were not made in the context of economic growth but in larger and longer contexts:

From Sir John Glubb (in his classic, ‘The Fate of Empires’:

It is, …. interesting to note that the life-expectation of a great nation does not appear to be in any way affected by the nature of its institutions. Past empires show almost every possible variation of political system, but all go through the same procedure from the Age of Pioneers through Conquest, Commerce, Affluence to decline and collapse. [Link]

On intellectual attainment, rather than education, this is what he wrote:

The spread of knowledge seems to be the most beneficial of human activities, and yet every period of decline is characterised by this expansion of intellectual activity…..

…. Less than fifty years after the amazing scientific discoveries under Mamun, the Arab Empire collapsed. Wonderful and beneficent as was the progress of science, it did not save the empire from chaos.

Men are interminably different, and intellectual arguments rarely lead to agreement. Thus public affairs drift from bad to worse, amid an unceasing cacophony of argument. But this constant dedication to discussion seems to destroy the power of action….

….. Thus we see that the cultivation of the human intellect seems to be a magnificent ideal, but only on condition that it does not weaken unselfishness and human dedication to service. Yet this, judging by historical precedent, seems to be exactly what it does do. Perhaps it is not the intellectualism which destroys the spirit of self-sacrifice—the least we can say is that the two, intellectualism and the loss of a sense of duty, appear simultaneously in the life-story of the nation.

Although this is about economic ideologies, these extracts from ‘The Fourth Turning’ also underscore the fallacy of the non-seasonality or the enduring value and virtue of ‘institutions (of public life, of public order, of public policy) or that of ‘higher learning’ from the point of view of economic prosperity, economic development and economic growth:

Just as no single style of leadership or hero worship is suitable for every turning, neither do any of today’s familiar political philosophies offer the right answer for every turning.

People who are for or against a particular policy seldom allow for changes in the saeculum. Whether they want big government or lower taxes, more regulation or less, they tend to hold that view regardless of the era, as though the correct prescription lies outside of time. The political and media elites abet this view. From liberalism and conservatism to socialism and libertarianism, all the popular ideologies are nonseasonal. To the extent their paradigms evolve, they do so linearly, carved around notions of American exceptionalism. Yet the appeal of these ideologies is very cyclical. Nearly all political philosophies wax and wane with the saeculum….

….. Interest-group pluralism and free-market libertarianism follow yet a different pattern. Since both of these -isms exalt rights over duties, they crested in the last Unraveling (1920s), fell out of favor in the last Crisis (1930s), reemerged in the High (1950s), rose in the Awakening (1970s), and are cresting again in the current Unraveling (1990s)….

…. In the current Unraveling, pluralism and free markets are both very popular. …. Today, however, preseasonal thinking suggests preparing for less of both—since, come the Fourth Turning, America will no longer be as hospitable to we-first lobbies and me-first free agents. As the saeculum turns, their day will ultimately come again, albeit not until the middle of the twenty-first century.

Seasonal blindness afflicts proponents of countless well-known causes. Whether feminists or right-to-lifers, the ACLU or NRA, supply-siders or the civil rights establishment, single-issue champions persistently demand uni-linear progress toward a fixed programmatic goal. In a seasonal world, such efforts lead to inevitable self-deception and frustration. In some eras these causes take credit for progress that was mostly due to come anyway. In other eras they despair over backsliding which really isn’t their fault, either.

In other words, stuff happens. We take credit for perceived successes and bemoan failures (usually of others’) to rectify situations. Both might be wrong. Both suffer from the common malady of over-estimating our roles, of our abilities and of our expertise.

It is possible but probable that this video can cure ourselves of this malady (hubris, arrogance and ignorance, rolled into one). Since the video is from 2007, the verdict is already in. We have not learnt because we cannot and because we do not know how to assess ourselves honestly.

Is there a formula for economic growth acceleration?

My long-time friend Srinivas Thiruvadanthai, Director and Head of Research at Levy Forecasting Institute in New York, shared a very interesting paper titled, ‘Growth Acceleration Strategies’ by Michele Peruzzi and Alessio Terzi.  One of them is a Research Fellow and the other is a doctoral student. You can find the paper here.

The work seems eager, thorough and refreshing. Sample these lines in the intro pages:

Over the past three decades, starting with Barro (1991), the economic literature has been characterised by quantitative cross-country analyses that looked for correlates of growth or GDP per capita, and issued blanket policy advice calling for trade liberalisation (Sachs and Warner 1995), domestic financial liberalisation (Levine 1997), opening the capital account (Quinn 1997), improving institutions (Acemoglu et al. 2001), and the likes.

Around the same period, some authors were taking the contrarian view that there is little to be learned from cross-country regressions, because (i) long-term averages hide the fact that growth is highly unstable over time (Easterly et al. 1993; Pritchett 2000); and (ii) growth determinants are highly dependent on specific country circumstances (Rodrik 1995). Addressing (i), Hausmann et al (2005) moved on to analysing structural breaks in growth. Turning to (ii), Hausmann et al (2007) crafted a “diagnostics” framework to identify the binding constraints that hold back a country’s growth.

Twenty years later, the research approach of multilateral organisation can be characterised as a tendency to acknowledge the findings of the latter school of thought, only to then engage in (more modern/sophisticated versions of) the old-school cross-country approach (see for example IMF 2015).  – Emphasis mine

Amusing (and also understandable) to note the tendency of multilateral institutions to somehow proclaim that there is a holy grail of economic growth that applies in all situations.

What I have done below is to capture their key conclusions. I have arranged them in my own orders, copying, pasting and grafting. The words are theirs.

(1) Looking at the effectiveness of individual determinants, or their combinations, we find no strictly dominant strategy to ignite a growth acceleration. Likewise, no one specific growth theory seems to prevail on the others in determining acceleration strength.

Despite standard growth determinants doing a fairly good job at characterising successful accelerations within our framework, we note how take-offs remain extremely hard to engineer with a high degree of certainty.

While the growth levers of standard theories seem relevant in contributing to spark accelerations, in roughly 9 out of 10 instances pulling them failed to ignite a take-off. These findings and figures resonate with another highly sought-after seismic growth event: successful start-ups.

The management literature and business angel community are well aware of the characteristics that successful start-ups share, including access to seed funding, human and technical capital, access to professional networks, and so on. However, even among start-ups that were scrutinised for these characteristics and received venture capital, three out of four fail.

[My comments: This is very interesting and the authors provide a link to an article in Wall Street Journal from 2012. The WSJ article features research by one Shikhar Ghosh, Senior Lecturer at Harvard Business School. It is not surprising and yet amusing to read this:

Venture capitalists “bury their dead very quietly,” Mr. Ghosh says. “They emphasize the successes but they don’t talk about the failures at all.” [Link]

Classic survivorship bias: survivors tend to bias the discourse of venture capitalists, naturally driven by self-interest, to attract more limited partners to their funds.

(2) A key principle of growth diagnostics is that it is better to focus on few key binding constraints (Rodrik 2009). Interactions between constraints in the economy imply that relaxing multiple constraints at the same time might actually produce sub-optimal results.

(3) The third and final class of finding relates to the role of income level. Reading this finding through the eyes of the literature, a way to rationalise this result relates to the fact that income per capita is proxying for the quality of institutions.

In principle, a second way to interpret this finding relates to the dynamics illustrated by our case studies in Section II: Finland. In that instance, country-specific experts underlined how the country’s high education levels allowed it to capitalise on the leap forward in ICT, which was at the heart of Finland’s structural growth change. Generalising this principle, we could suppose that income per capita is proxying for education levels, which in turn, once a growth acceleration was sparked, determines whether a country is capable of capitalising on it and making it sustainable. However, this hypothesis does not stand confirmed once we control for human capital in our OLS regression.

Now, talking of the role of institutions, it is hard for me to resist leaving fascinating conclusions on their (over-hyped?) roles in shaping economic outcomes and in sustaining them. In fact, the causality may well be from economic growth to evolution of sound institutions than the other way around. But, the topic is big enough to warrant a separate post and not mix them up here.

So, this post has to end with a conclusion on growth drivers. The answer is that we are not sure of either necessary or sufficient conditions for economic growth. That is par for the course. Primitive societies did not grow because someone told them how to do it or that they had figured out the sequence of interventions themselves. Most growth theories are deductive by nature.

What we are somewhat surer of is what does not work. No law and order, dysfunctional corruption and lack of trust including no sanctity of contracts and far too many onerous laws, rules and regulations.

As to what works, it is a shot in the dark. Keep trying, keep changing and keep praying.

A postscript to ‘The Frenzy in the stock market’

12. Household survey: How many more workers should have been classified as unemployed on temporary layoff in May?

Other than those who were themselves ill, under quarantine, or self-isolating due to health concerns, people who did not work during the survey reference week (May 10–16) due to efforts to contain the spread of the coronavirus should have been classified as “unemployed on temporary layoff.” However, as happened in April and March, some people who were not at work during the entire reference week for reasons related to the coronavirus were not included in this category. Instead, they were misclassified as employed but not at work.

Of the 8.4 million employed people not at work during the survey reference week in May 2020, 5.4 million people were included in the “other reasons” category, much higher than the average of 549,000 for May 2016–2019 (not seasonally adjusted). BLS analysis of the underlying data suggests that this group included workers affected by the pandemic response who should have been classified as unemployed on temporary layoff. Such a misclassification is an example of nonsampling error and can occur when respondents misunderstand questions or interviewers record answers incorrectly. BLS and the Census Bureau are investigating why this misclassification error continues to occur and are making changes for the June collection. (See item 14 below.)

According to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reassign survey responses.

13. Household survey: What would the unemployment rate be if these misclassified workers were included among the unemployed?
If the workers who were recorded as employed but not at work for the entire survey reference week had been classified as “unemployed on temporary layoff,” the overall unemployment rate would have been higher than reported. This kind of exercise requires some assumptions. For example, first one needs to determine how many workers might be misclassified. There were 5.4 million workers with a job but not at work who were included in the “other reasons” category in May 2020, about 4.9 million higher than the average for May 2016–2019. (While this category contains misclassified workers, not every person in this category was necessarily misclassified. The average for recent May estimates was 549,000 employed people with a job not at work for “other reasons.”)

One assumption might be that these additional 4.9 million workers who were included in the “other reasons” category should have been classified as unemployed on temporary layoff. If these workers were instead considered unemployed on temporary layoff, the number of unemployed people in May (on a not seasonally adjusted basis) would increase by 4.9 million from 20.5 million to 25.4 million. The number of people in the labor force would remain at 158.0 million in May (not seasonally adjusted) as people move from employed to unemployed but stay in the labor force. The resulting unemployment rate for May would be 16.1 percent (not seasonally adjusted), compared with the official estimate of 13.0 percent (not seasonally adjusted). Estimates of people with a job but not at work are not available on a seasonally adjusted basis, so seasonally adjusted data, such as the unemployment rate mentioned in The Employment Situation news release, are not used in this exercise. (Repeating this exercise, but combining the not seasonally adjusted data on additional people with a job but not at work in the “other reasons” category with the seasonally adjusted estimates reported in The Employment Situation news release yields a similar 3.1 percentage point increase in the unemployment rate for May—or 16.4 percent, compared with the official seasonally adjusted rate of 13.3 percent.)

(Comparable calculations were previously published for March and April.)

14. Household survey: What are BLS and the Census Bureau doing about the misclassification error?

BLS and our partners at the Census Bureau take the misclassification error very seriously, and we’re taking additional steps to address the problem. Prior to the March data collection, instructions were provided to survey interviewers on how to answer the temporarily absent question if a person said that they had a job but did not work due to the coronavirus pandemic. (See item 8 above.) Prior to April data collection, an email was sent to all interviewers that included instructions with more detailed examples and a reference table to aid in coding responses. Prior to May data collection, every field supervisor had a conference call with the household survey interviewers they manage. In these conference calls, the supervisors went over the detailed instructions and examples and were available to answer interviewers’ questions.

We will continue to investigate the reasons why the misclassification error persists. In addition, we are making further changes prior to the June collection. The Census Bureau will conduct additional training to review the guidance. Also, we are embedding instructions into the data collection instrument to make them more accessible during survey interviews. [Link]