Archives: Event

NCAER and the International Monetary Fund released a seminal, new IMF book Digital Revolutions in Public Finance, on the reshaping of public finance by digitalization, at the Imperial Hotel, New Delhi on April 4, 2018.

The Government of India taxes and spends through its fiscal policy. The design and implementation of its fiscal policy is fundamentally shaped by the information available to it about its citizens and the economy. This includes taxpayers’ incomes and assets, the identity and circumstances of programme beneficiaries, and the magnitude and timing of all government transactions. By transforming the way in which governments collect, process, and act on information, digitalization is reshaping the design and implementation of fiscal policy globally and in India. The book thus comes at a time when the Government’s Digital India programme is pushing ahead with its vision to transform India into a digitally empowered society and a knowledge economy.

In introducing the book, Shekhar Shah, Director General of NCAER, said, “This book cannot have come at a more timely moment in the evolution of fiscal policy in India. Digitalization is gathering pace all around us. For example, following demonetization, the Indian Government announced several measures to increase the pace of digitalization in India. Similarly, the introduction of GST in 2017 crucially depends on efficient digitalization, as does the Government’s ambitious Direct Benefits Transfer (DBT) scheme. Aadhaar, the world’s largest digital identity program, has enrolled some 1.2 billion Indian residents.”

In his presentation on the key themes in the book, the lead editor, Sanjeev Gupta, Visiting Senior Fellow, Center for Global Development and former Deputy Director, IMF’s Fiscal Affairs Department, pointed out, “Digitalization can allow us to do what we do now, but better. And, perhaps before too long, even design fiscal policy in new ways. Digitalization may facilitate more efficient tax design and dramatically improve the targeting of subsidies.  It can improve the government’s revenues and the impact of what it spends on.”

India’s sheer size means that it represents one of the world’s largest potential digital markets. Prices of mobile services have been falling sharply. TRAI data show that by January 31, 2018, some 1.17 billion Indians had subscribed to mobile services. By that time, India also had 378.1 million broadband subscribers, up from 261 million just a year back and from 1.4 million in March 2006.

Yet despite a widespread perception of India as a leader in digitalization, it has a lot of catch up to do. On the World Economic Forum’s Networked Readiness Index, India ranked 91st among 139 countries in 2016. China ranked 59th, Brazil 72nd, and South Africa 65th. India ranked well on political and regulatory environment (78th), and affordability of digital services (8th), but poorly on other parameters, particularly digital infrastructure and content (114th) (see annex table).

The book contains salient contributions from academic researchers, former government officials and technologists, providing perspectives on how digitalization can revolutionize the design and implementation of fiscal policy—and on the risks and challenges that need to be faced. The book explores the institutional challenges and capacity constraints faced by countries seeking to benefit from the digital revolution. It highlights data privacy, surveillance, and cybersecurity concerns, particularly important in the context of recent high profile episodes of digital identity theft and the exposure of private information, which call for stronger domestic digital infrastructure and greater international cooperation and regulation as information increasingly travels across borders.

The book has a number of informative country studies, including a seminal article by Rathin Roy and Suyash Rai on “Fiscal Policy Consequences of Digitalization and Demonetization in India,” perhaps the only authoritative review to date of the demonetization goal of increasing digitalization in India.

The launch of the book was followed by a panel discussion moderated by Shekhar Shah on the fundamental questions raised in the book as they apply to India. The panelists included Arbind Modi, Member, Central Board of Direct Taxes & Chair of the Arbind Modi Task Force on a new Direct Tax Code; C N Raghupathi, Head, India Business, Infosys; Renuka Sane, Associate Professor, NIPFP; and Sanjeev Gupta.

The Panel Discussion was followed by a keynote address by Shri Amitabh Kant, CEO, NITI Aayog, who spoke about the work being done at NITI on digitalization and improving the functioning of government. He noted that this book would be required reading for those at NITI working on digitalization.

Bringing the evening to a close, Andreas Bauer, the IMF’s Senior Resident Representative in India, said, “Clearly today’s discussion shows that digitalization of public finance holds great promise in India. It can not only help raise more revenues at lower cost but also assist the government in reaching the poor through better targeted programs. This is an area that is deservedly receiving much attention from the authorities.”

Shah added that “NCAER’s work, for example, on the Government of India’s DBT schemes, is showing us the strong and weak links in the chain of digitalization, both at the Centre and in the states. As Nandan Nilekani has said, India will become data rich before it becomes economically rich, the reverse of what most other countries at India’s scale have seen. Managing this reverse sequence to the advantage of each Indian citizen is the challenge.”

 The book can be downloaded free from: http://www.elibrary.imf.org/drpf 

NCAER invited a talk on “Trends in India’s Income Distribution” by Dr Surjit S. Bhalla on February 15, 2018. Dr Bhalla is Senior India Analyst for the Observatory Group, Chairman of Oxus Research & Investments and a member of the Prime Minister’s Economic Advisory Council and of NCAER’s Governing Body. Dr Pronab Sen, Country Director for the International Growth Centre was the discussant.

While much is known about how the distribution of consumption in India has changed over time, the evolution of income distribution in India is still a relative unknown. Household surveys at the national level with data both on consumption and income have been conducted in India, primarily by NCAER. The known limitations of consumption and income surveys (not able to capture the consumption/income of the top 1 to 5% of the income distribution) have led Thomas Piketty and colleagues to develop a data base for evaluating trends in income distribution for many countries. Dr Bhalla discussed his paper which evaluates the Piketty methodology, and the resulting data for India. In particular, the paper examines trends in consumption and income distribution using several different methods and sources. The paper’s estimation approach stays as close as possible to the Piketty methodology of integrating and matching three sources of data—consumption, income, and tax returns. Bhalla does not obtain the Piketty results for any consistent set of assumptions about consumption, income, or tax payments.

Surjit S. Bhalla is the Senior India Analyst for the Observatory Group, a New York-based macroeconomic policy advisory firm, Chairman of Oxus Research & Investments in New Delhi, a member of the Prime Minister’s Economic Advisory Council and a member of NCAER’s Governing Body. Bhalla has taught at the Delhi School of Economics and was the Executive Director of the Delhi-based Policy Group. He has worked as a research economist at the Rand Corporation, the Brookings Institution, in the research and treasury departments of the World Bank, and as a consultant to Warburg Pincus. He worked on Wall Street at Deutsche Bank and at Goldman Sachs. He is the author of several academic articles as well as of Imagine There’s no Country (2002), Devaluing to Prosperity (2012), and The New Wealth of Nations (2017). His first book, Between the Wickets: The Who and Why of the Best in Cricket (1987), developed a model for evaluating performance in sports. Bhalla is a regular contributor to Indian newspapers, magazines, and television on financial markets, economics, politics and cricket. He is a contributing editor for the Indian Express. Bhalla has a PhD in Economics from Princeton University, a Master’s in Public and International Affairs from the Woodrow Wilson School at Princeton, and a Bachelor’s degree in Electrical Engineering from Purdue University.

Pronab Sen is the Country Director for the India Growth Centre’s India Central Programme. Most recently he was the Chairman of India’s National Statistical Commission, Secretary in the Ministry of Statistics and Programme Implementation, and Principal Adviser, Power and Energy, at the Planning Commission. He received his PhD in Economics from Johns Hopkins University.

NCAER invited Dr Poonam Gupta, Lead Economist, the World Bank for an exclusive presentation of the 2018 India Development Update—India’s Growth Story. The India Development Update is a biannual flagship publication of the World Bank which takes stock of the Indian economy. Dr Gupta discussed the current, March 2018 issue, titled “India’s Growth Story” which describes the state of the Indian economy, shares India’s growth experience and trajectory over the past several decades and provides a long-term perspective on India’s growth outlook.

In her talk attended by NCAER research faculty, Dr Gupta spoke on the key findings of the Update. Over the last 50 years, the Update notes that India’s average growth has accelerated slowly but steadily across sectors – agriculture, industry and services – and become more stable. This is reflected in increasing labor productivity and total factor productivity. After growing far more rapidly before the global financial crisis, the economy has grown at an average rate of about 7 percent since 2008–09.  The Update centers around an assessment of what it will take for India to return to growth rates of 8 percent and higher on a sustained basis. India will need to keep a close eye on several factors to make the country more resilient to shocks: the changing landscape of open trade, reforms in the banking sector, strengthening financial institutions, and regulatory supervision of the financial sector to sustain its growth path. Deepening its structural reforms in the areas of health, education and service delivery will be critical for development of human capital required to sustain growth, says the report.

A brief excerpt from the report is as follows:

Outlook

India’s GDP growth saw a temporary dip in the last two quarters of 2016-17 and the first quarter of 2017-18 due to demonetization and disruptions surrounding the initial implementation of GST. Economic activity has begun to stabilize since August 2017. India’s GDP growth is projected to reach 6.7 percent in 2017-18 and accelerate to 7.3 percent and 7.5 percent in 2018-19 and 2019-20 respectively. While services will continue to remain the main driver of economic growth; industrial activity is poised to grow, with manufacturing expected to accelerate following the implementation of the GST, and agriculture will likely grow at its long-term average growth rate.

India’s growth in recent years has been supported by prudent macroeconomic policy: a new inflation targeting framework, energy subsidy reforms, fiscal consolidation, higher quality of public expenditure and a stable balance of payment situation. In addition, recent policy reforms have helped India improve the business environment, ease inflows of foreign direct investment (FDI) and improve credit behavior.

The Update points to the positive impulse expected from India’s novel GST system which, while remaining more complex than comparable systems in other countries, is likely to improve the domestic flow of goods and services, contribute to the formalization of the economy and sustainably enhance growth.

Higher growth requires reforms

Despite the recent momentum, attaining a growth rate of 8 percent and higher on a sustained basis will require addressing several structural challenges. India needs to durably recover its two lagging engines of growth – private investments and exports – while maintaining its hard-won macroeconomic stability. Crucial steps in this process include cleaning up banks’ balance sheets, realizing the expected growth and fiscal dividend from the GST, and continuing the integration into the global economy.

“Durable revival in private investments and exports would be crucial for India achieving a sustained high growth of 8 percent and above,” said Dr Gupta,. “This will require continued impetus for structural reforms. Resorting to countercyclical policies will not help spur sustained growth and India should not compromise its hard-earned fiscal discipline in order to accelerate growth,” she added.

Priority areas for reform

Investments: The rate of investment needs to accelerate. Private investment in India is constrained by several factors including issues related to past leverages, credit availability, market demand, and policy uncertainty. Understanding and relieving the generic, spatial, or sector-specific constraints to investment growth is important. Further policy measures should aim at assuring an efficient mix of public and private resources to effectively use scarce public funds and crowd-in private investment. Private sector investment in particular needs to be enhanced, through measures that assure a favorable investment climate while reducing policy uncertainty.

Bank Credit: Reviving bank credit to support growth is important. The banking sector is experiencing high balance sheet stress. The genesis of the problem can be traced to the period of exuberant bank credit growth during 2004–08, and to the response to the global financial crisis, which entailed evergreening of loans. Decisive reforms will be needed to enable the Indian banking sector to help finance India’s growth aspirations. The implementation of the new Insolvency and Bankruptcy Code is an important step towards improving the credit behavior; and the recent efforts towards recapitalization have the potential to ease stress on the banking sector and reinvigorate bank credit. However, they need to be followed by wider reforms. Additional measures could include a consolidation of public-sector banks, revising their incentive structure to align more closely with their commercial performance, ensuring a level playing field for private banks, and opening the space for greater competition.

Exports: Export growth rate remains well below the levels registered during the boom years of 2004-2008. The Update points out that India’s export growth has lagged global growth in recent years. Among the many preconditions for India to reverse this pattern are an infrastructural boost to bring it on par with the world’s current manufacturing hubs. In addition, reforms to land, labor and financial markets would be needed to assure the continued competitive supply and use of key production inputs. Finally, building on recent improvements to its doing business ranking, India can benefit from further strengthening its competitive business environment.

Leverage external conditions: As India has increased the level of integration with the rest of the world in recent years, it could benefit from the revival in the global economy and trade volumes, both of which are poised to grow at healthy rates in the near-term. Leveraging the global recovery will be key for India to elevate its growth rates. While oil prices pose less of a risk for the Indian economy, the expected normalization of monetary policy by the US and other advanced economies are likely to tighten financing conditions.

The complete report is available at the World Bank’s website.

A seminar on “New Approaches to the Financial Inclusion of Small Farmers in India: Some Experimental Results,” with Dr Dilip Mookherjee, Boston University was held at NCAER. Dr Renuka Sane, an Associate Professor at the National Institute of Public Finance and Policy (NIPFP) was the discussant.

In many parts of India, such as West Bengal, formal credit does not reach small farmers owing to lack of collateral, low banking penetration and the absence of credible targeting of productive farmers. This limits the effectiveness of directed lending programmes in stimulating agricultural growth or reducing rural poverty. Microcredit (e.g., via Self-Help Groups) does not help finance agriculture either, owing to high-frequency repayment requirements, joint liability loans and intensive monitoring.

The paper reports on randomised controlled trials with a new approach in which an agent from within each local community is appointed and asked to recommend high productivity farmers for low interest loans. Agents are incentivized by commissions linked to loan repayments. In the first experiment labelled TRAIL, a private trader/lender with extensive trading experience within the village is appointed. The second approach, GRAIL, asks the local Gram Panchayat to appoint an agent. The performance of these two approaches is compared with the conventional approach to providing microcredit (GBL). TRAIL turns out to be highly successful in raising the output of potatoes, the leading cash crop in West Bengal, and in raising annual farm incomes, both by about 20 to 30 percent. GBL does not have a significant positive impact on either, and GRAIL performs between TRAIL and GBL. All three achieve loan repayment rates of around 95 percent. TRAIL also achieves higher take up and incurs lower administrative costs compared to GBL.

The reasons for TRAIL’s superior performance include better targeting of productive farmers, and motivating them more strongly to improve farm performance. These results suggest that the appointment of private commission agents by formal lending institutions is a promising strategy for increasing financial inclusion.

Dilip Mookherjee is Professor of Economics at Boston University, where he is also the Director of the Institute for Economic Development. He is a member of the Research Panel for NCAER’s India Policy Forum and is also currently the Lead Academic of the India Central Program of the International Growth Centre. He has previously taught at Stanford University and the Indian Statistical Institute, New Delhi. His research focuses on food marketing, land and forest rights, governance, microfinance and financial regulation in South Asia. His books include Market Institutions, Governance and Development (2006) and Incentives and Institutional Reform in Tax Enforcement (1998). He studied economics at Presidency College, Kolkata, and at the Delhi School of Economics, and received his PhD from the London School of Economics.