Archives: Publication

Fall in income and depreciating exchange rate would have a dampening impact on imports demand while rising domestic inflation should have reverse impact.

Is a merchandise trade surplus of around USD 0.8 billion in June 2020 a first in 18 years since January 2002 a turning point in India’s trade history?  The NCAER Quarterly Review of the Economy June 2020 has documented the weakness in India’s international trade position pre-coronavirus and its collapse during the first three months of the current fiscal.  However the June numbers throw an element of surprise.

Placing it in context merchandise exports and imports’ growth rates have fallen for five consecutive quarters since Q1: 2019-20. The pace of deceleration gathered speed in Q4: 2019-20 and Q1: 2020-21 due to the lockdown associated with the novel coronavirus.  Merchandise exports grew at [(-) 12.8%] in Q4: 2019-20 and [(-) 36.6%] in Q1: 2020-21 on a year-on-year (y-o-y) basis.    Merchandise imports grew at [(-) 9.8%] in Q4: 2019-20 and [(-) 52.4%] in Q1: 2020-21 on a y-o-y basis.    The monthly data shows us that while y-o-y growth of exports and imports decelerated in June 2020 compared to April and May 2020 imports fell at a faster rate than exports.  Exports and imports for June 2020 declined by (-) 12.4% and (-) 47.6% respectively on a y-o-y basis resulting in a merchandise trade surplus in June 2020.  Overall there was a trade deficit of USD 9.1 billion in Q1: 2020-21 exhibiting a huge fall by 80.2% on a y-o-y-basis.

We examine the dynamics of exports and imports empirically to see whether there are particular changes in the composition of commodities and direction of trade geographically.  From theory we know that exports demand is a function of foreign income export prices foreign prices and exchange rate. Imports demand is a function of domestic income price of imports domestic inflation and exchange rate.  

Commodities

Non-petroleum and non-gem & jewellery exports grew at (-) 3.5% on a y-o-y basis in June 2020 and non-oil and non-gold at (-) 41.4%.  As Figure 1 shows that negative growth rates were almost similar in April 2020 and then there is a large divergence since May.  

The major components of India’s exports in June 2020 (DGCIS website) included engineering goods drugs and pharmaceuticals organic & inorganic chemicals petroleum products gems & jewellery. 

The positive y-o-y growth of organic & inorganic chemicals exports (19.06%) and drugs & pharmaceuticals (9.89%) arrested the slide in overall exports in June 2020.  Negative drivers of exports were RMG of all textiles (-34.84%) and engineering goods (-7.5%).    The role played by drugs and pharmaceuticals in arresting the slide of exports in times of pandemic was a positive signal.  

In contrast in the case of imports all the key components of imports – gold; petroleum crude & products; electronic goods and; machinery electrical & non-electrical saw double-digit fall in June 2020 on a y-o-y basis.

Role of China

The reduced imports of machinery and electronic goods can be attributed to a disruption of the global supply chain dominated by China. Imports from China accounted for 13.8% of India’s total imports in FY 2019-20 making its share the largest. India’s import basket of Chinese goods is dominated by electrical machinery and electronic goods constituting about 29.3% of total Chinese imports to India. However with the pandemic hitting the Chinese economy in November 2019 overall Chinese imports shrunk by 7.2% (y-o-y basis) during FY 2019-20 becoming the worst hit amongst India’s top 5 importers. This trend is also mirrored in the electrical machinery imports declining by 7.4% in FY 2019-20 on a y-o-y basis. 

Though the figures for India’s imports from China for April 2020 have shown improvement over the March 2020 figures it is still quite low in comparison to last year’s value. This slight improvement is also reflected in recently released figures for China’s overall trade wherein China’s exports and imports showed positive y-o-y growth – exports surged by 0.5% and imports rose by 2.7%. However as China’s exports pick up slowly compared to its imports (largely driven by pharmaceutical goods) the return to normal with regard to India’s imports from China may take longer and hence paints a favourable trade balance picture.

Overall we find that growth of exports to North-east Asia and ASEAN countries was higher in June 2020 on a y-o-y basis versus June 2019 (DGCIS website).  Trade with remaining regions is lower but there is no major change in the order of importance of regions. In the case of imports trade with all regions is lower in June 2020 versus June 2019 (DGCIS website).

Macro variables

The NCAER QRE June 20 Update simulated that the combination of aggregate demand and supply would in all likelihood result in negative output with elevated inflation.  Indian consumer inflation was 6.1% in June 2020. The rupee has depreciated against the dollar. The RBI’s Consumer Confidence Index has fallen from 115.2 in March 2020 to 97.9 in May 2020 showing muted sentiments.  The IMF World Economic Outlook June 2020 had forecasted 0.3% retail inflation for Advanced Economies 4.4% for Emerging Market and Developing Economies and (-) 4.9% growth for world output.  The rupee has depreciated against the dollar.

Fall in income and depreciating exchange rate would have a dampening impact on imports demand while rising domestic inflation should have reverse impact. The deep fall in imports reflects the impact of the former variables.  

Fall in income and relative lower inflation abroad should have a dampening impact on exports demand. We see the reverse because of a particular reason i.e. demand for Indian pharmaceuticals organics and chemicals and other food products has resulted in upward demand for Indian exports. This is inelastic demand with India playing to its comparative advantage in a world afflicted by the pandemic. While these effects may help India sustain its exports momentum and therefore trade surplus for a while but whether it translates to an overall growth engine for the Indian economy remains to be seen.

Authors are Prerna Prabhakar Associate Fellow NCAER and Bornali Bhandari Senior Fellow NCAER Views are personal.

Given this uncertainty over the reach of PM-KISAN and its targeting the relevance of the scheme needs to be carefully evaluated during this period.

The Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) is the first universal basic income-type of scheme targeted towards landed farmers. It was introduced in December 2018 to manage agricultural stress. Initially the scheme was targeted at small and medium landed farmers but with the declining growth in gross value added of the agricultural sector it was extended to all farmers in May 2019. The Union budget had allocated Rs 75000 crore to this scheme in 2020-21.

PM-KISAN is a useful vehicle to provide support to farmers during the lockdown and it was included in the Pradhan Mantri Garib Kalyan Package and on March 28 it was announced Rs 2000 (out of Rs 6000) would be front-loaded to 8.7 crore farmers between April-June. But was this a useful way of relieving distress during the lockdown? Data from the Delhi-NCR Coronavirus Telephone Survey Round 3 (DCVTS-3) conducted by the NCAER National Data Innovation Centre in mid-June provides some useful insights. 

The target geographical area for DCVTS is the Delhi-NCR. The DCVTS-3 included 52 per cent rural and 48 per cent urban households from Haryana Delhi Rajasthan and Uttar Pradesh. The survey offers a holistic perspective to understand the extent of income loss of farm households their experience of hardship and the role of PM-KISAN in alleviating their suffering during April-June. Out of the 3466 households in the sample 18 per cent reported cultivation as the primary source of household income. 

The survey records a somewhat lower level of economic distress among farmers than among other groups. While farmers faced some logistical challenges in transporting and selling their produce 97 per cent of them continued to harvest rabi crops and prepared for the kharif season. Nearly 75 per cent of the cultivators who usually hire labourers for agricultural activities continued to do so. 

As a result farmers were relatively immune to the economic impact of the lockdown. About 32 per cent of them experienced large income losses in the month of May which is much lower compared to the proportion among casual wage workers (73 per cent) and business households (70 per cent). About 20 per cent of farm households reported no reduction in their income in May. 

The proportion of households that had to borrow to meet their day-to-day consumption needs during the lockdown was relatively low for the farmers (34 per cent) compared to casual wage workers and business households. While 7 per cent of farm households suffered from occasional unavailability of food during the lockdown this figure was much higher for casual workers (24 per cent) and business households (14 per cent). 

In the months of April and May 21 per cent of 632 farm households received cash transfers through PM-KISAN. Among the recipients around two-thirds reported receiving Rs 2000 and about a fourth received Rs 4000 in April and May combined possibly because family members engaged in agricultural activities may be co-residing within a household.

On the whole when compared to non-recipients of PM-KISAN (including both farm and non-farm households) these households exhibited lower signs of economic distress. About 35 per cent of rural PM-KISAN recipients suffered income losses to a large extent in comparison to more than half of the non-recipients. A little more than a third of PM-KISAN recipients borrowed money during this period as against 48 per cent of non-recipients. However these households were somewhat better off than the general rural population even before receiving PM-KISAN benefits. Thus their relative immunity to the income shock may not be solely due to PM-KISAN. 

Two aspects of this scheme present particular challenges. First PM-KISAN is not reaching all farmer households as intended. Most of the farmers in UP Haryana and Rajasthan own land and should be receiving benefits. But only 21 per cent of the cultivators interviewed reported receiving the benefit. The exclusion is greater in UP than in Haryana and Rajasthan. Second this scheme is not pro-poor since recipients of PM-KISAN seemed to be better off than the general rural population even before the lockdown. Given this uncertainty over the reach of PM-KISAN and its targeting the relevance of the scheme needs to be carefully evaluated during this period

Bhandari and Pramanik are senior fellows at NCAER Desai is a joint professor at NCAER and University of Maryland. Views are personal

The economies of India and China were roughly at par back in 1962 but we have been left far behind

China’s recent intrusions at multiple points along the Line of Actual Control (LAC) in Ladakh are unquestionably the most serious incidents at the India-China border since 1962. The main events are well known. From around 19 April Chinese forces began to push the LAC further inside territory claimed by India and towards the Chinese claim line at multiple points: the Bottleneck in Depsang near Daulat Beg Oldi (DBO) Patrol Point (PP) 14 on the Galwan river PP 15-17 at Hot Springs near Gogra and further south at the so-called Fingers 4 to 8 on the north-east bank of the Pangong Tso lake. When Indian forces realized that these were not routine post-winter manoeuvres and attempted to push the Chinese back it led to aggressive confrontations including the 15 June clash at PP 14 that resulted in the unfortunate death of 20 soldiers and many more injuries for the Indian forces and also casualties on the other side.

In the disengagement negotiations that have followed China has successfully implemented its usual tactic of two steps forward one step back. Both sides are pulling back a kilometre or two on either side of each confrontation point to create a buffer zone. But since the Chinese army had first moved forward before partially moving back after negotiations the effective LAC has been shifted further west of the Indian claim line and closer to the Chinese claim line. This is not the first time that China has made such intrusions. But it is the first time since 1962 that China has simultaneously intruded at multiple points all along the LAC in Ladakh in the process reportedly occupying a vast expanse of land claimed by India. Two questions arise. Why has China made such a move at this time? And why does India tolerate these repeated incremental moves through which China is gradually shifting the effective LAC towards its claim line?

One explanation for the Chinese move is the Darbuk-Shyok-DBO road which is nearing completion. This 255-km all-weather road reduces travel time from Leh to DBO from two days to six hours and aims to secure India’s supply lines to the military base at DBO as well as the Karakoram Pass just above it. This pass India’s gateway to the Xinjiang province of China is of enormous strategic importance. On the east it gives India direct access to China’s strategic highway G219 which links the restive provinces of Xinjiang and Tibet. On the west this pass gives India access to Pakistan-occupied Gilgit-Baltistan and the China Pakistan Economic Corridor (CPEC) that passes through it. The CPEC highway is China’s main supply line for transporting oil and other strategic goods from the Pakistani port of Gwader port on the Arabian Sea to Kashgar in Xinjiang. Occupying vantage points close to the Darbuk-Shyok-DBO road and gaining the ability to cut this critical supply line to DBO and the Karakoram Pass should the need arise are thus of vital strategic importance to China.

Another explanation is that China now wants to enforce its 1960 claim line which it had actually secured in 1962 before a partial withdrawal. Seen along with China’s aggressive moves in the East and South China seas to impose its will on littoral neighbours like Japan Philippines Vietnam Malaysia and Indonesia it reflects Beijing’s switch from Deng Xiaoping’s doctrine of China’s “peaceful rise” to the more hegemonic doctrine of Chinese President Xi Jinping. In my view these explanations are not mutually exclusive. One folds into the other.

The other question is why India accepts repeated intrusions that incrementally shift the effective LAC further into territory claimed by it. The short answer is that India may not have much choice. The narrative of India-China relations has been dominated by India’s defeat in the 1962 border war between the two neighbours but China’s real victory was its dramatic and unprecedented economic growth over four decades which has left India trailing far behind.

Back in 1962 both economies were of comparable size. In fact they were broadly comparable even as recently as in 1980. But today China’s economy is nearly five times the size of India’s. This difference in economic power is directly reflected in the defence capabilities of the two countries with China’s capability far exceeding that of India. This is a sobering reality that has to be factored into any Indian response.

Rich country strong army” was Japan’s driving slogan that led its great modernization following the Meiji Restoration of 1868 and its emergence as Asia’s pre-eminent economic and military power in the early 20th century. It was the same principle that led China’s emergence as Asia’s leading economic and military power in the late 20th century. It is also the goal that India must pursue diligently if it is to protect its interests in a period of emerging Chinese hegemony. This is a long-term goal requiring a radical transformation from a sclerotic dirigiste and unequal economy to one that is nimble and dynamic but also inclusive like most of the successful countries of East Asia.

Meanwhile China’s premature assertiveness under Xi Jinping might actually have helped India by setting alarm bells ringing across capitals in Asia and beyond. The collective resistance of these countries to Chinese power may hopefully persuade its current leader to walk back to Deng’s shrewd path of China’s “peaceful rise” without posing a threat to others.

Sudipto Mundle is a distinguished fellow at the National Council of Applied Economic Research. These are the author’s personal views.

Until a viable vaccine is found finding new ways to cope with the unexpected seems to be our only recourse to brace against the unexpected challenges thrown by the virus

When the famous US family therapist Virginia Satir talked about coping with life’s adversities she was unlikely to have had images of a pandemic like COVID-19 in mind. But her words have a grim relevance today as we learn to live with the unforeseen and unprecedented situation caused by the Coronavirus. A recent telephone survey conducted by the National Council of Applied Economic Research (NCAER) through its Data Innovation Centre documents several insightful findings about public behaviour and the health and economic outcomes of both the virus and the lockdown imposed by the Government to curb its transmission.

The findings explain the surge as most respondents while adhering to safety protocols admit that they took advantage of the “unlock” phase to step out of the house when there was no pressing need. At the same time the economic trough has been gloomy even after opening up with a high percentage of the workforce losing jobs or facing salary cuts. This despite a majority going back to work in the “unlock” phase.

The survey titled The Delhi Coronavirus Telephone Survey (DCVTS) was undertaken in Delhi and the National Capital Region (NCR) in three rounds between April 3 and 6; April 23 and 26; and June 15 and 23 respectively. The most notable finding during the first round of the survey was the successful communication by the Government of the dangers associated with the virus and the consequent need for a stringent lockdown — nearly 87 per cent of the respondents asserted their support for the lockdown to be extended for two more weeks beyond its original end date of April 14 notwithstanding the hardships caused by it.

The study also throws light on other aspects of dealing with COVID-19 including the level of awareness among the people about the risks and symptoms of the disease; their threat perceptions in terms of the chances of contracting the virus and their attitudes relating to mandated safety protocols such as hand hygiene social distancing and the use of masks. In addition it highlights the impact of the lockdown on the incomes and livelihoods of all sections of society.

Pandemic makes inroads: With the virus making nascent inroads into the country during late March and early April it was important to explore awareness levels about the disease and the possible prevention measures among the general public. A strange paradox that emerged in the first round was the dissonance between people’s perceptions about the dangers posed by the virus and the possibility they envisaged of getting infected themselves.

While almost 95 per cent of them averred that the virus was highly dangerous as many as 65 per cent of them did not expect themselves or any of their household members to get infected. This sense of confidence in the ability to sidestep the infection was obviously put to the test after the easing of the lockdown in June which has been followed by a massive surge in positive cases in Delhi and the adjoining areas.

Immediate impact of the lockdown: With a complete shutdown of all activities and commercial establishments starting March 25 the first phase of the NCAER survey  indicated that 25 per cent of the rural and 33 per cent of the urban residents suffered shortages of essential items including food supplies cooking fuel and even medicines. Subsequently however while shortages of essential supplies somewhat eased when the respondents were interviewed during the second round of the survey in the third week of April people’s worries had now squarely shifted to the economic impact of the lockdown. The predominant concern during this period was the decline in incomes and loss of livelihoods due to the closure of offices and businesses.

During DCVTS-2 an overwhelming majority of the respondents — 82 per cent —reported loss of income or wages especially daily wage workers and employees in small businesses. Further among these 72 per cent of casual workers complained that their incomes and wages had suffered “very much” indicating that the brunt of the economic distress was borne by workers from the informal sector. Even among the salaried class 38 per cent of the workers either received truncated salaries or were relieved of their jobs.

Interestingly and perhaps as a saving grace farmers did not seem to be overly affected. Only 34 per cent reported a drop in incomes during the lockdown.  This because most of them were busy harvesting the Rabi crop and doing preparations for the Kharif crop during this period.

Focus on safety measures during “unlock” Phase I: The most conspicuous results of the NCAER’s DCVTS were observed in the third round which virtually stood at the cusp between the lockdown and phased “unlocking.” Characterised by the opening up of a range of commercial activities and establishments this period in early June was critical to determine how far people were adhering to safety measures against the disease. Some level of complacency was witnessed after the “unlocking” as 73 per cent of the respondents reported going out for some reason during the period of one week prior to the survey.

More worryingly as high as 61 per cent of the respondents above the age of 60 years had ventured out of their homes despite the advisory to elderly people to remain indoors as they fall in the high-risk category. Overall there was a general adherence to the precautionary measures specified by the Government and health authorities with 95 per cent of the surveyed people affirming that they were wearing masks or face coverings while going out; 66 per cent reported frequent use of hand sanitisers; and only 0.8 per cent of the respondents claimed that they did not follow any precaution at all.

Economic repercussions of COVID-19: In what could signify a gradual economic revival post the lockdown 78 per cent of the households reported that their members had resumed going to the workplace in the second and third weeks of June. But the trajectory of loss of livelihoods and incomes for daily wage workers and small businesses reported in the second round of the survey continued in the third round too.

Thus DCVTS-III showed that more than 70 per cent of the households relying on wage work and business as the main source of income suffered extensive loss of earnings. A large section of these households was also compelled to borrow money to counter financial distress. In fact medium and small businesses have literally withered under the onslaught of the economic earthquake unleashed by the virus with 52 per cent of them reporting suspension of activities during the lockdown in May and June and 12 per cent shutting down completely.

Have welfare measures mitigated financial suffering?  Apart from documenting the adverse impact on incomes and wages the third round of DCVTS also focussed on the role of Government programmes and measures to ameliorate the suffering of the marginalised sections. It was found that a large number of households — 58 per cent of the total surveyed and 61 per cent in Delhi alone — were given extra rations through the use of Aadhaar cards and e-coupons. About 35 per cent received cash transfers from the Government in May and June taken together. While most of the fund transfers were achieved through Jan Dhan accounts the Government also used other schemes like the Ujjwala Yojana and PM Kisan programme to offer financial relief to the affected households.

So what does the future portend? The results of three rounds of the NCAER survey could offer some insights to policy makers for negotiating the rough road ahead as we brace to meet the persistent challenges of a virus that refuses to go away. Until a viable vaccine is found possibly by next year turning to Virginia Satir’s practical advice to find new ways of coping with the unexpected seems to be our only recourse.

(The writer is Consultant Editor at NCAER. Views expressed are personal)