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Investor-friendly India: How are India’s States Faring? A NCAER-PRI Dialogue

Investor-friendly India: How are India’s States Faring? A NCAER-PRI Dialogue

NCAER organized an NCAER-PRI video-dialogue, the third in the series of an on-going dialogue with PRI. The theme of the dialogue was India’s investment climate and focused particularly on India’s states. PRI, the Policy Research Institute in Japan, is affiliated with the Japanese Ministry of Finance. The Dialogue follows two earlier video-dialogues in February and June 2015 and is part of the work envisaged by NCAER and PRI to foster joint work and greater collaboration in enhancing economic relations between Japan and India.

Interest in India as an investment destination has risen sharply in Japan, particularly in the light of Prime Minister Modi’s ‘Make in India’ campaign and reciprocal visits by the two prime ministers, including Mr Modi’s last visit in November 2016 when the two countries also signed a civil nuclear pact. The number of Japanese companies entering India has gone up substantially in the past year. Building on this momentum, India and Japan have set ambitious goals for bilateral trade and investment.  Under the India-Japan Special Strategic and Global Partnership, the two prime ministers have set an ambitious target of 3.5 trillion yen for public and private investment and ODA and a doubling of the number of Japanese companies in India in just five years. Many have heralded this as a special moment in India’s relationship with Japan.

Tuesday’s dialogue featured three presentations on India’s investment climate.  Ms Mythili Bhusnurmath, Senior Consultant, NCAER, spoke on “The NCAER-State Investment Potential Index (N-SIPI)”, Mr Tomofumi Nishizawa, Research Manager, Asia and Oceania Overseas Division, Research Department, JETRO, spoke on “Japanese Companies in India: Expectations, Achievements and Challenges” and Mr Neelkanth Mishra, Managing Director, Equity Research, Credit Suisse Securities India, made a presentation on “Doing Business in India: What has changed and What has not.”

The presentations were followed by a lively open discussion with useful questions from New Delhi led by Dr Shekhar Shah, Director-General of NCAER, and followed by perceptive comments and questions from Tokyo. The Dialogue was attended in New Delhi by NCAER researchers and other invited participants and in Tokyo by a number of Japanese participants eager to know more about investing in India.

The 18th Annual Neemrana Conference

The National Council of Applied Economic Research (NCAER) in collaboration with the Indian Council for Research on International Economic Relations (ICRIER) organises an annual conference at Neemrana Fort Palace. This year’s Conference was held during 16-18 December 2016.

Measuring Money: Using Divisia Monetary Aggregates to avoid Policy Mishaps

The inadequate availability of high-quality monetary and financial data has long been associated with misinformed policy decisions.  Conventional, simple-sum, money-supply measures are not adjusted to account for differences in the degree to which different assets actually serve as money.  Divisia measures, named after the early 20th century French economist, Francois Divisia, make proper adjustments based on rigorous index number theory; they have been shown to offer a more accurate picture of what is really happening to a country’s money supply.  In the US, since monetary assets began paying interest over a half century ago, Divisia measures have given better forewarning of U.S. recessions than conventional, simple-sum, money supply measures.

In his presentation, Dr Soumya Bhadury, Associate Fellow at NCAER explored the potential role of Divisia monetary aggregates in the Indian context, including how better data can assist the new Monetary Policy Committee decision-making process. With financial instruments becoming increasingly complex, the simple-sum monetary aggregation done by almost all major central banks, including the Reserve Bank of India, can lead to misjudgments about liquidity in the economy and prevent systematic assessment of risk and its mitigation, as in the case of dealing with a potential market bubbles. Divisia aggregation has made major inroads in the professional literature on aggregation. Besides explaining these aggregates, Bhadury elucidated the experiences of the European Central Bank and the central banks of Poland, the United Kingdom, and the United States after their adoption of such aggregates. . Dr Partha Chatterjee, Associate Professor, Shiv Nadar University and Dr Kanhaiya Singh, Senior Fellow, NCAER shared their comments.

Soumya Bhadury joined NCAER recently as an Associate Fellow. Prior to this, Bhadury taught at the University of Kansas while working on his PhD there. His dissertation focused on the role of correctly measured monetary aggregates in exchange rate determination for open economies. Bhadury’s research interests lie in macro and international economics with a special focus on the exchange rate, and in monetary theory and policy.

The Northeast Regional Workshop on Direct Benefit Transfer

NCAER in collaboration with the DBT Mission, organized a one day  Northeast Regional Workshop on Direct Benefit Transfer in Imphal, Manipur. Apart from NCAER and the DBT Mission, the other stakeholders that participated in the workshop included the Unique Identification Authority of India, National Payments Corporation of India, Ministry of Finance, Reserve Bank of India, Department of Posts, Ministry of Telecommunications, Common Services Centre, Bill and Melinda Gates Foundation, MicroSave, and Centre for Digital Financial Inclusion, along with senior policy planners from the seven sisters and Sikkim. This workshop is part of NCAER’s ongoing study on “Implement Digital Direct Benefit Transfers: A DBT Readiness Index for the States of India”.

The main objectives of the workshop were: firstly, assess challenges in the implementation of DBT in the North-eastern region and address the respective challenges raised by various stakeholders stemming from their individual perspectives. Secondly, disseminate the concept note of NCAER on the DBT Readiness Index and the information requirements to assess the State/UT DBT Readiness Index measure. Thirdly, provide a facilitating platform to the DBT Mission and state governments in the North-eastern region (including the seven sisters and Sikkim) and other key stakeholders for DBT adoption, and address the challenges likely to arise in its implementation.

Following were the major challenges foreseen in the implementation of DBT in the North-eastern region:

  1. Lack of adequate financial infrastructure: In this context, the Government of Manipur highlighted that it has 27 development blocks with no access to any banking facility. Although have developed an integrated infrastructure to address this issue, it is imperative to ensure mobilisation of banks to augment the existing financial infrastructure. Furthermore, many states discussed the difficulties faced by them in the implementation of the Banking/Business Correspondent Model, especially due to the delicate law and order situation in the North-east.
  2. Poor penetration of Aadhaar in some states: This challenge was highlighted by the states of Assam and Manipur. They emphasised the poor penetration of Aadhaar in some of the states. The problem stems from the decision of the Registrar-General of India (RGI) to start the National Population Register (NPR), which is a digital database of residents of the country with their biometric details. However, it is hoped that with the approval of the Supreme Court, Aadhaar penetration would start increasing in the states. UIDAI suggested that schools and hospitals should serve as Aadhaar enrolment centres to enable generation of Aadhaar cards for the local residents in the North-eastern region.
  3. The states also averred that they had access to only limited guidance for proper implementation of DBT. They listed other issues that served as roadblocks in this task such as the absence of a uniform adoption structure for IT infrastructure highlighting, the need for laying down of uniform guidelines (with particular reference to the form in which they have to be stored such as Excel formats) with regard to the different databases that the states are required to hold.
  4. The states also struggle with the transition from a family-based benefit system to an individual (Aadhaar)-based benefit system and its implementation. Nonetheless, the Central Government suggested that these hurdles can be overcome if the states use databases of the NPR and the Socio-economic Caste Census of 2011 for smoothening the transition by facilitating ‘communication’ among the databases.
  5. The key concern of connectivity was also tackled during the workshop. Government officials of the Northeastern states brought to the forefront that the problem of poor connectivity can be traced to the absence of a central authority to manage telecommunications in the area. The states, therefore, requested the Ministry of Telecommunications to take the lead in ensuring better connectivity through programmes such as the one being implemented in Andhra Pradesh, wherein a consolidated package comprising Internet, TV and mobile services is provided at `149 a month.
  6. It was suggested that states are not equipped to map the shadow areas in the region and would thus require help from the Central Government in this task, though some work has been done in this sphere.
  7. Finally, it was decided that all the North-eastern states would use the Public Finance Management System (PFMS) to transfer any funds and that it is crucial to impart quick training in the use of this system as it serves as the building block for DBT.

In order to further facilitate the transfer of knowledge between the Central and state governments, NCAER, jointly with MicroSave and with support from BMGF, is undertaking a survey to assess the DBT Readiness of States. During the workshop, NCAER also outlined the need for such a survey, which would help assess the ability of states to adopt government-to-citizen (G2C) and government-to-bank (G2B) ICT-based solutions, entailing the electronic transfer of cash or delivery of in-kind goods and services based on biometric authentication.

Citing the example of Krishna district in Andhra Pradesh, NCAER emphasised that the implementation of DBT would result in significant savings by doing away with duplication and weeding out of the ghost beneficiaries. In this way, the assessment and ranking of the states, from high achievers to average achievers, through the survey would help the states in identifying the lacunae in the implementation of DBT. It was argued that even if the government enacts good policies and puts the relevant infrastructure in place, limited usage of the facility among citizens would lead to limited success of the scheme. The proposed survey will thus engender a sense of competition among the states, encouraging them to do better in the areas where improvements are needed. MicroSave also recounted some of their experiences on the field.

The workshop helped in promoting an understanding of the myriad problems faced by the North-eastern states in implementing DBT. It also offered the Central and state governments an opportunity to identify the areas in which the Central Government (and its associated bodies) needed to intervene for providing adequate support and infrastructure to the states in effective enforcement of the programme.

Know more about NCAER’s ongoing study on “Implement Digital Direct Benefit Transfers: A DBT Readiness Index for the States of India”.

Malcolm Adiseshiah Mid-Year Review of the Indian Economy, 2016-17

NCAER presented the 2016-17 Mid Year Review (MYR) of Indian Economy at this seminar held in New Delhi.  The MYR presents the most comprehensive, independent assessment of the Indian economy as the Indian Government and its Ministry of Finance begin preparation of the FY 2017-18 Union Budget.

Dr Shekhar Shah opened the seminar delivering his opening remarks, followed by Dr Pronab Sen, Country Director, International Growth Centre’s India Central Programme who was invited to chair the Review. Ms Mythili Bhusnurmath, Senior Consultant, NCAER and Dr Bornali Bhandari, Fellow, NCAER presented the main findings of the Review. The MYR provides an independent stocktaking of the Indian economy’s performance. The Review included two special presentations on ‘New Paradigms for Financial Sector Development in India’ and ‘Healthy Ageing in India: Situation and Challenges’. The first presentation by Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI  assesses the four pillars of the financial sector in India. The second paper by Dr Debasis Barik, Associate Fellow, NCAER examines whether the Indian health delivery system is prepared to tackle the rise in communicable and non-communicable diseases among the elderly as India’s demography changes. During the latter half of the seminar, two invited discussants, Dr Indira Rajaraman, Member, 13th Finance Commission and Dr Shubhashis Gangopadhyay, Research Director, IDF, shared their comments.

Key highlights of the NCAER’s 2016-17 Mid-Year Review of the Indian Economy are as follows:

GDP Growth: NCAER places overall 2016-17 GDP growth (GDP at market prices), in constant 2011–12 prices, at 7.6%. On one hand, the anticipated improvement in the agricultural sector and the associated increase in rural demand will give an upward push to economic growth. The manufacturing sector is also giving positive signals with the Purchasers’ Managers Index and Index of Industrial Production for core sectors and auto sales going up. The domestic aviation sector growth continues to be robust. However, other service index indicators continue to be muted.  Food inflation is also showing signs of dampening in the latter part of the second quarter.  However, fuel inflation may revive. Although urban demand is predicted to remain strong, external demand continues to be volatile.

Agriculture: Unlike the past two years, this year witnessed a normalisation in rainfall at just short of the 100% long period average. The actual rainfall measured as an index on the basis of un-irrigated area under foodgrains as weights was 1.5 per cent above its normal level. Consequently, the area under kharif sowing is about 3.5% more than last year, with the sowing of pulses being about 29.1% more than last year. Thus, our estimates show that the output of kharif foodgrains is expected to reflect an increase of 10 per cent to 11 per cent over last year’s output of 124 million tonnes.

Industry: The Index of Industrial Production (IIP), a measure of industrial performance, shows a negative growth of (–) 0.27% during April-August, 2016–17, as compared with 0.45% growth recorded during the same period of 2015–16. The Gross Fixed Capital Formation (GFCF), a key indicator of investment in the economy, has shown a steady and precipitous fall since the second quarter of 2015–16. In the first quarter of the current fiscal 2016–17, the GFCF touched (–) 3.1%. The core sector showed a year-on-year (y-o-y) growth of 4.6% in 2016–17:H1 versus 2.6 per cent in 2015–16:H1. Six out of eight industries showed higher growth in the 2016–17:H1 as compared to the corresponding period in the last fiscal. The two major components of IIP by economic activities, i.e., Mining and Quarrying (0.6% in 2016 versus 1.4% in 2015) and Manufacturing (-1.2% in 2016 versus 4.5% in 2015) show lower rates of y-o-y growth in April–August 2016–17 as compared to 2015–16. The third major component, Electricity, shows higher growth in 2016–17 (5.1% in 2016-17:H1 versus 4.5% in 2015-16:H1).

Services: The growth of the services sector growth remained more or less stable in Q1 of FY17. But in a break from the past, public administration, defence and other services led the growth in the services sector with a growth of 12.3%, up from 5.9% in the comparable period during the last fiscal. Contrary to this, growth in activity in the services sector declined in September 2016. The Nikkei India Services Business Activity Index fell to 52 in September 2016, down from 54.7 in August (a reading above 50 shows expansion while a number below 50 shows contraction).  Furthermore, construction sector activity, GVA growth in trade, hotels and transport slowed down. However, tourist arrivals increased sharply in July and August 2016, to 17.1% and 11.8%, respectively.

Inflation: After a sequential uptick in inflation in the initial months of FY17 to 6.07% in July 2016, it fell sharply in September 2016 to 4.31%, as measured by the Consumer Price Index (CPI). After declining for 17 consecutive months, the Wholesale Price Index (WPI) inflation turned positive in April 2016, remaining at around 3.5-3.7%. Food inflation was the swing element in both cases, accounting for both the uptick as well as decline.

Monetary Policy: The H1 of FY17 saw a revamping in monetary policy formulation with the appointment of the new RBI governor, Urjit Patel, and the operationalisation of the Monetary Policy Committee (MPC). After the cautious approach adopted by the previous Governor, the MPC unanimously decided to reduce the repo rate by 25 basis points. Furthermore, the Governor, in his post-policy briefing, hinted that the inflation target of 4% would be achieved over five years. The PSU banks continued to be plagued by NPAs and the credit and deposit growth remained sluggish.

External Sector: The first half of the year looked bright on the external front with the current account deficit (CAD) being within manageable limits. India’s merchandise exports turned positive in June 2016, with exports rising at 1.27% y-o-y in June to $22.57 billion, reversing the trend that started in December 2014 due to weak global demand and a fall in commodity prices. Furthermore, after a decline in July and August, exports grew at 4.6% in September, raising hopes that the decline period in Indian imports is coming to an end.

Fiscal Policy: India’s fiscal position remained under stress during H1of FY17. Despite healthy growth in tax revenues, the combination of rising expenditure and lower-than-expected non-tax revenues is likely to test the Government’s resolve to abide by the fiscal deficit target set out in Budget 2016-17. According to the latest numbers released by the Controller General of Accounts, the FD during the period April-September 2016 stood at 84% of the budget estimate for the year. This marks a considerable worsening over the comparable period last year when the FD stood at 68% of the Budget estimate. At 569.3% of the budget estimate, the primary deficit is more than double the deficit during the comparable period last year (182%), indicating that the Government truly has an uphill task on its hands to be able to stick to the targets laid down in Budget 2016-17. Tax collections (net to the Centre) are better at 42.5% of the BE with an improvement in both direct and indirect tax collections.

The Mid-Year Review of the Indian Economy was started at the India International Centre (IIC) in 1976 by Dr Malcolm S. Adiseshiah. Dr Adiseshiah was one of India’s most distinguished economists and educationists, Life Trustee of IIC, recipient of the Padma Bhushan, founder of the Madras Institute of Development Studies, and one of the key architects of UNESCO’s work on education and technical assistance. Now conducted in collaboration with the Malcolm and Elizabeth Adiseshiah Trust, Chennai, the Review has been presented by many distinguished Indian economists since Dr Adiseshiah’s passing away,  MYR remains a tribute, in a long standing partnership with the India International Centre to one of India’s most prominent post-Independence economists, Dr Malcom S. Adiseshiah.

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