Ideas@IPF2023 series: NCAER’s India Policy Forum – where research meets policy

Every year, the National Council of Applied Economic Research (NCAER) hosts the India Policy Forum (IPF), a platform where economists and policymakers dissect five research ideas for their utility to public policy. To commemorate the 20th anniversary of the conference, Ideas for India launches the Ideas@IPF2023 series, introduced in this anchor by NCAER’s Anupma Mehta. Across this week, from 10-14 July, we will host five articles summarising cutting-edge empirical work at the intersection of economics and policy.

The India Policy Forum, a marquee event hosted annually by the National Council of Applied Economic Research (NCAER) has, over the years, acquired a distinctive character as an interactive platform where research and policy converge to foster meaningful socioeconomic outcomes for the country. The fact that the IPF routinely attracts eminent participants from the policy, research, and academic space is a testament to the mission and objectives of the conference. The intellectual exchange of ideas at platforms such as the IPF also drives NCAER’s mandate of ensuring ‘Quality, Relevance, and Impact’ through its work.

The 2023 edition of the IPF, held on 6 and 7 July, has been especially significant as it marked the 20th anniversary of the conference, which had since the very outset been conceptualised as a veritable meeting place for evaluation of Indian economic and social policies. The papers that found a voice at IPF 2023 represent a wide spectrum of subjects: including the ramifications of rising public debt, implications of widespread electrification, investment in skills for productivity, son preference as a fertility trend, and trajectory of the finance system in India.

In their paper, ‘Is electrification in India fiscally sustainable?’, Prabhat Barnwal and Nicholas Ryan examine the fiscal health of state electricity distribution companies in India, and how this affects the supply of electricity in the country, especially as state discoms continue to record losses in both transmission and revenue.

Another paper, ‘How worker investments can fuel productivity in India’s manufacturing sector’, by the team of Achyuta Adhvaryu, Smit Gade, Anant Nyshadham, Sandhya Srinivas, and Jean-Francois Gauthier, establishes stylised facts and flags the slowdown in aggregate productivity growth in India’s manufacturing sector over the last several years. The authors posit that under-investment in workers by firms could be a major reason for inadequate productivity across companies.

The paper ‘An overview of (elder) son preference in India’, by Seema Jayachandran, mainstreams the issue of persistent gender discrimination, manifested in the preference for male children over their female counterparts in most parts of the country, and how it plays out through both differential investment in sons over daughters and a fertility preference to have male children.

In their paper, ‘India’s debt dilemma’, Barry Eichengreen, Poonam Gupta, and Ayesha Ahmed highlight the prevalence of high fiscal deficit and public debt in India. This necessitates measures like fiscal consolidation by achieving lower primary deficits through greater generation of tax revenue and privatisation. They also assess the sustainability of public finances, with a focus on the next five years.

The final paper presented at the IPF, ‘The past and future of Indian finance’, written by Ruchir Agarwal, locates the financial crisis faced by India during 2018-20 within the context of its growth story. He analyses the fiscal slowdown in the country commencing in 2018, signified by a serious decline in its GDP, and recession in various sectors of the economy. The paper also outlines the various steps taken to strengthen India’s financial system in an effort to safeguard it from future fiscal crises.

These papers thus not only diligently mirror the crucial developments in India’s socioeconomic landscape but also use robust data, analysis, and empirical research to chart the future trajectory of action that would help policymakers navigate the challenges and optimise the opportunities for ensuring sustained economic growth in the country.

Over the course of this week, each of the papers presented at IPF 2023 will be shared on Ideas for India, in collaboration with NCAER. We hope that these will generate greater debate and discussion on pivotal economic issues.

Bank of England exercises aim to better understand market dynamics

An important step on the path to a global macro-financial risk framework.

The Bank of England has raised the bar in managing the UK financial system and launched ‘system-wide exploratory scenario exercises’ to understand market behaviour. A more profound grasp of market dynamics will enhance public confidence, with other central banks likely to follow suit.

Exploratory scenarios – first used by oil companies in the 1970s – analyse uncertainty in planning. The Bank’s proposed system-wide exploratory scenario exercise will study the behaviours of banks and non-bank financial institutions to understand how their actions might amplify stress in the UK financial markets. Financial firms are also able to incorporate systemic issues more informedly into their risk management frameworks. Therefore, not only will this help prepare for various future scenarios but it might also make market agents set aside deeply held assumptions and have an open mind to new dynamics.

The past 50 years have seen shifts in the global financial system’s behaviour. Major market crises, such as the 1997 Asian crisis and the 2008 financial crisis, have resulted in more robust financial policies focused on licensed entities.

However, an integrated system-wide oversight framework focused specifically on macro-financial risks has yet to be implemented. The International Monetary Fund’s Financial Sector Assessment Programs and the Bank for International Settlements annual reports have repeatedly highlighted the shortcoming.

This knowledge gap is a growing source of global financial instability, especially as technology and connectivity, between and within financial systems, advance. Such interplay has witnessed pulls and tugs, leading to market dysfunctions, collapsing firms and crises – often requiring recourse to public money.

Market agents behave differently under stress. Commonly practiced entity-level stress testing does not provide a view of these dynamics. The same applies for macroeconomic and supervisory early warning exercises. Therefore, the Bank exercise – which will be an interagency effort involving the Financial Conduct Authority and the Pensions Regulator – will go beyond standard entity-level-based stress testing to cover all large amplifiers and propagators of contagion. Market participants will share their behavioural patterns under stress and develop action plans to adjust to adverse dynamics.

Why is the UK taking the lead?

The BoE’s latest initiative to understand market behaviour through system-wide exploratory scenario exercises is particularly relevant for the UK. As a global financial centre, the city serves as an international public good, providing financial services to hundreds of sovereigns, central banks and finance and corporate firms. Several developing countries depend on London for financing, debt, risk and asset management. With its 300-year-old history, the system often comes across as labyrinthine so the more insights one can get, the fewer surprises there will be.

In its last post-Brexit FSAP assessment of the UK in 2021, the IMF saw a deepening of financial system interconnectedness. It suggested that the UK must further build on its systemic risk management practices to cover risks from market-based finance, private markets and cross-border channels in an integrated manner.

This will be an exacting exercise – to grasp risks in an ever-evolving world of money and finance. While the Bank can build on its experience with exploratory scenarios on climate risks, the exercise will be challenging for many reasons.

Relevance

Determining the core part of the financial system will require agreement from all agencies and market participants. Legal challenges may arise, especially for firms hosted in the UK. Academic approaches, such as using an interbank lending market or transactions in the payments system, could help establish a method. However, connectivity matrices often yield degenerate systemic importance scores. This is because not all market agents are identical from a systemic viewpoint.

Metrics and materiality

Developing monitorable metrics for this exercise will require drawing up the system’s critical nodes first. One particularly challenging metric to measure is the system-wide leverage in the core and its impact on the overall system. Sifting between relevant behavioural connections will be complex and the critical question is what fraction of economic value could be lost in distress and feed back into the real economy.

Limitations

Exploratory scenario exercises have inherent limitations, such as modeling behaviour risks while keeping market characteristics. Assumptions must capture portfolio shifts, risk tolerance and incentive problems that impact market behaviour.

Data gaps

Available time series and data gaps may impede a definitive assessment of market behaviour from models fit for policy purposes (such as agent-based modeling or those based on game theory or behavioural economics).

Policy toolkit

The exercise will be valuable when tools exist to preempt adverse market behaviour on time. The existing macroprudential toolkit must be completed and a clear set of systemic mitigation policies and backstops will become necessary over time.

Communications

A final challenge for the Bank will be explaining outcomes. Scenarios may only capture some potential factors influencing market agent behaviour, so stakeholder education must reflect that the exercise is not about definitive predictions of future market behaviour.

The BoE’s efforts to understand market behaviour through system-wide exploratory scenario exercises will be exciting. The benefits stand to be universal and could serve as a public good, but active engagement from cross-border authorities and financial entities is essential. It might also take some time before the exercises becomes policy-relevant. But the days of odd, self-serving market behaviour and compounding moral hazard must end. We must collectively focus on building an inclusive social order, which should be in the interests of all.

Udaibir Das is the former Assistant Director and Adviser of the Monetary and Capital Markets Department at the International Monetary Fund. He is a Non-Resident Fellow at the National Council of Applied Economic Research, a Senior Non-Resident Adviser at the Bank of England, a Distinguished Fellow at the Observer Research Foundation America and a Distinguished Visiting Faculty at Kautilya School for Public Policy.

Monthly Review of the Economy: June 2023

In the Review, we summarise the economic and policy developments in India; monitor global developments of relevance to India; and showcase the pulse of the economy through an analysis of high-frequency indicators and the heat map.

Click here for previous issues

The need for high-quality environment data in India: The case of riverine pollution

Controlling water pollution and protecting water resources in India requires comprehensive collection and monitoring of data. In this article, Pohit and Mehta describe a project undertaken by NCAER and TCD, which used automated sensors attached to boats to collect data on water quality parameters at key points along the Ganga river in Uttar Pradesh and West Bengal. They emphasise how these findings can help understand the sources of pollution to ensure effective policy interventions and regulatory compliance by polluters. 

The Glasgow Climate Pact, adopted by the 26th United Nations Conference of Parties (COP26) on 21 October 2021, outlines the need to bring together governments and the private sector for catalysing technological innovations to achieve long-term and meaningful decarbonisation in the most polluting sectors. The COP26 Pact also highlights India’s interests and initiatives on climate action to support the country’s transition to a clean and climate-resilient economy. However, the first step towards attaining this goal is to acquire the relevant knowledge and tools for ensuring adequate adaptation actions in line with the agenda for controlling worldwide climate change.

Is India equipped to move in tandem with the goals set forth by the United Nations Framework Convention on Climate Change at Glasgow? It is often suggested that, though India has a highly robust data collection system, it falls woefully short where environmental statistics are concerned. At a time when taking climate change into account has become imperative for policymaking and economic growth, any deficiencies in official data on various environmental components could seriously hamper the country’s efforts to move towards realising its net zero emissions targets.  In India, the conventional System of National Accounting (SNA) has historically been used to examine economic data for boosting growth and development. The SNA, however, relies almost exclusively on monetary data pertaining to production, employment, consumption, income and financial transactions for economic strategisation and policymaking. These data have been obtained through economic surveys and administrative records since the early 1950s. Although the methodology and components of the SNA were revised in 1993, what emerged was an amalgam of several satellite accounts which largely focus on popular developmental themes such as tourism, health, and education.

With the issue of climate change gaining primacy over the years, India needs to spruce up its research efforts and produce high-quality, advanced data related to various domains of the environment, especially the supply and use of water, green technologies, and marine economics. A nascent attempt by individual researchers to produce modules of environmental protection accounts through the construction of an environmentally Extended Social Accounting Matrix (ESAM), way back in 2006-07, marks one of the first significant steps in this direction (Pal et al. 2012).

While stressing the need for obtaining better data on all aspects of environmental conservation, in this article we specifically focus on data imperatives for curbing riverine pollution, which has a serious deleterious impact on climate dynamics.

Need for data on water quality and pollution

Water covers 71% of the earth – in oceans, rivers, lakes, and glaciers; in the soil as moisture; and in the air as water vapour. And this crucial resource is under constant threat in terms of both quality and quantity. The latest United Nations World Water Development Report finds that 26% and 46% of people globally lack access to safe drinking water and basic sanitation respectively (UNESCO, 2023). Around 80% of the people living under persistent water stress and subject to the effects of water pollution reside in Asia, particularly India, Pakistan, and north-east China.

Other research has found that, annually, 37.7 million Indians are affected by waterborne diseases; 1.5 million children die of diarrhoea; and 73 million working days are lost due to the direct and indirect impact of water pollution, resulting in an economic burden of Rs. 900 million. Poor wastewater management, improper irrigation practices such as the unchecked use of pesticides and fertilisers, oil pollution, discharge of anthropogenic waste into water bodies, unregulated shipping and industrial activity, as well as religious rituals leading to submergence of toxic materials in rivers, all contribute routinely to the widespread water contamination that is increasingly encompassing India with each passing year (Pohit and Mehta 2022, UNESCO, 2023).

A NITI Aayog report also reveals that India accounts for 18% of the world’s population, but holds only 4% of its water resources, making it one of the most water-deficient regions in the world. Further, as per this report, 70% of the freshwater sources in the country were found to be contaminated, and India ranks 120 out of 122 countries in terms of the quality of its water resources (NITI Aayog, 2019, Mehta and Pohit 2023).

Using advanced techniques for monitoring water data

Monitoring water quality on land, and in rivers and other water sources, is thus an international necessity. Within the European Union, the European Green Deal sets out goals for restoring biological biodiversity, reducing water pollution, and ensuring standards of water quality. In the United States, the Environmental Protection Agency enforces regulations to address water pollution in each state. Across the world, countries are increasingly understanding the importance of effective water quality monitoring parameters and methods.

In India too, the Government has initiated several flagship programmes for pollution control and protection of water resources, such as the Namami Gange National Mission for Clean Ganga launched by Prime Minister Modi in 2015. Seeking to rejuvenate the holy river’s waters by curbing pollution at major sites of public convergence along the river, this project underscores the need for regularly collecting and monitoring data on the river’s water quality. In this context, it is pertinent to analyse the data collection methodology and assessments in a recent comprehensive study on riverine pollution, conducted by the National Council of Applied Economic Research (NCAER). Undertaken in collaboration with the University of Chicago’s Tata Centre for Development (TCD), the study examines the quality of the Ganga’s water at selected stretches notorious for high levels of pollution ((NCAER, 2020). While laying the roadmap for carrying out state-of-the-art research on environmental issues in the country, this project could also coalesce with other green programmes to meet the national goals of controlling carbon footprints and combating climate change.

The NCAER-TCD study explores the social and economic engagement of the riverine communities on the Ganga river, at locations in Uttar Pradesh and West Bengal, which are characterised by a high degree of human engagement in terms of both fishing and spiritual rituals. Traditionally, the monitoring of river water has largely been done through conventional means, by collecting water samples at periodical distances on the river, usually on a monthly basis, and analysing the samples in a laboratory. This resource-intensive and time-consuming process is often prone to human error due to possible mishandling of samples and faulty laboratory protocols. Additionally, rivers are dynamic systems whose character and course could change frequently. Such sparse data may, therefore, be unable to either accurately capture the health of the water body or adequately shape policy discussions.

Stepping in to bridge this gap, the NCAER-TCD team carried out continuous, in-situ data collection for a real-time analysis of the Ganga river water across four upstream and downstream locations in Uttar Pradesh and West Bengal. The project team mapped water quality using multiple, submersible, automated sensors attached to a boat that would sail in a zigzag pattern from bank to bank, at different times of the day on a predefined route, to gather high-resolution, spatially and temporally varying, water data. Figures 1 and 2 show the routes followed by the boats along the river in two towns of Uttar Pradesh, Unnao and Narora, respectively.

Figure 1. Boat ride route along the Unnao site in Uttar Pradesh, with sample collection points


Source: NCAER (2020).

Figure 2. Boat ride route along the Narora site in Uttar Pradesh, with sample collection points
 Source: NCAER (2020).

In order to map a particular region of the river, the sensor heads were immersed into the water at a depth of 12 inches below the water surface, with the sensor platform(s) simultaneously measuring GPS location and 10-12 water quality parameters, including pH, dissolved oxygen, electrical conductivity, turbidity, temperature, Chlorophyll-a, tryptophan, and coloured dissolved organic matter, among others (see Figure 3). The boat speeds of 1-2 metres/second allowed for accurate turbidity measurements, while also capturing sensor measurements at a distance of every 15-20 metres at intervals of 10 seconds. For heatmaps, the sensor-measured data was linearly interpolated between the data points. The measurements were repeated at different locations during different seasons and times.

Figure 3. Various laboratory and sensor-based parameters measured

Source: NCAER (2020).

As a pioneering Water-to-Cloud study, the NCAER-TCD project also facilitated sharing on the cloud of time-stamped and geotagged data from the Ganga river for carrying out further mathematical analysis of the spread and sources of pollution, and for interpolating the available data. Such dynamic mapping of river water quality through heatmaps and other forms of visualisation can go a long way towards understanding the overall and location-specific transformation in river water quality due to the impact of weather, pollution, fishing, and general use. It can also help pinpoint the exact sources and points of pollution, thereby ensuring both effective sanitary interventions and regulatory compliance by the polluters. Further, the study assessed the implications of pollution in the river for the riverine communities that depend on it for livelihood, as well as the economic costs of river water pollution for the country.

Conclusion

The NCAER-TCD project is an apt example of how environmental data can be obtained and utilised for not only achieving climate goals, but also fructifying the charter laid down by the System of Environmental-Economic Accounts for Water (SEEA-Water) worldwide. SEEA-Water integrates a wide range of hydrological statistics across sectors into a single coherent information system, combining it with economic data to provide a policy direction to environmental objectives. The importance of water as a key component of ecosystem accounting is also reflected in the UN’s Sustainable Development Goal 6, which focuses specifically on improving water quality by reducing pollution, eliminating dumping and the release of hazardous materials, reducing the proportion of untreated wastewater, and increasing recycling and safe reuse of water. Innovative methodologies such as those proposed in SEEA-Water and used in the NCAER-TCD project can play a significant role in meeting these targets by providing a framework for the development and measurement of environmental indicators.

India can attain these goals only if it lays down a panoptic policy to fulfil its data needs for safeguarding its environmental and natural resources from climate change and other contingencies.

Views expressed by the authors are personal.

India’s Social and Economic Transformation in the 21st Century

This book provides a comprehensive analysis of India’s social and economic transformation in the decades leading up to the COVID-19 pandemic and explores both resilience and vulnerabilities in Indian society.

It provides an in-depth look into diverse aspects of how Indians live, earn a living and care for their children by examining vital indicators such as poverty, malnutrition, health and marriage and family relationships, among others. Analysing the data from the India Human Development Surveys, it presents a complex picture of India’s transformation and large economic and educational gains, while exploring the reasons why these have not translated into social transformation of a similar magnitude. The volume also describes the backdrop against which the COVID-19 pandemic crippled the Indian economy. In effect, it foreshadows the challenges that need to be addressed on the road to recovery. It argues that in order to reduce the scarring and ensure recovery for all, it will be important to focus on the underlying conditions faced by the most vulnerable sections of the Indian society as policymakers seek to effectively tend to issues of socio-economic inequality and marginalisation in the long run.

Rich in data and analysis, this book will be useful for scholars and researchers of economics, political economy, sociology and development studies.

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