Indian Express Editorial Analysis
28 May 2020

1) The missing data-


CONTEXT:

  • For a country already short of recent large sample survey-based data — nobody knows whether and how much poverty has fallen in the last decade or if consumption of vegetables and protein-rich foods is growing at the same rate as before.

The COVID crisis makes matters worse.

 

HOUSEHOLD CONSUMER EXPENDITURE (HCE) SURVEY:

  • The National Statistical Office (NSO) was to undertake its household consumer expenditure (HCE) survey for 2020-21 from July, which is now practically ruled out.
  • The houselisting phase of the Census, crucial for carving out and assigning “blocks” to field enumerators tasked with collecting household/individual-level information, was scheduled during April-September.
  • Its postponing could have a bearing on the main census slated for February-March 2020.
  • Since the houselisting and enumeration blocks are also used for the rural development ministry’s Socio-Economic and Caste Census (SECC), it points to serious data challenges ahead.

 

 

LACKING JUSTIFICATION:

  • The novel coronavirus has, no doubt, created a war-like situation.
  • The census and other surveys being put off by even a year shouldn’t, to that extent, be held against the government.
  • This argument, however, lacks justification when there has been no officially-released HCE survey, normally conducted every five years, after 2011-12.
  • Nor is there a single field survey-based government study capturing the impact of demonetisation, goods and services tax or even programmes such as Mudra and Jan Dhan Yojana on household incomes, consumption and poverty.
  • Contrast this to the 2011-12 period, when there was a surfeit(excess) of information from the census, SECC and the NSO’s HCE and employment-and-unemployment surveys.
  • The NSO carried out an HCE survey for 2017-18, but its report was withheld, apparently for showing a decline in real rural consumption on the back of rising farm distress.
  • Any survey now or even in 2021-22 may throw up similar, if not worse, results. Will that, then, act as a deterrent(thing that discourages) to not release them as well?

 

 

DOING LARGE SAMPLE SURVEYS:

  • The time has come for the government to move to a continuous mode (annually and quarterly, as opposed to five-yearly) of doing large sample surveys.
  • Technology (use of handheld GPS-enabled devices) and rotational panel sampling design can easily enable this.
  • If a private data analytics company like the Centre for Monitoring Indian Economy can, through its Consumer Pyramids Household Surveys, cover over 1.74 lakh households annually, there’s no reason why the NSO cannot.
  • It has, in fact, made a beginning through its periodic labour force surveys from 2017-18.

 

 

CONCLUSION:

  • Informed policymaking requires continuous data generation, for which one shouldn’t wait for a “normal” year that also suits the government.

 

 

 

2) What is the problem that monetisation is trying to solve?


CONTEXT:

  • In her interview to this newspaper last week, the finance minister said that she is keeping her options open on monetisation(action or process of earning revenue from an asset, business) of the deficit by the Reserve Bank of India (RBI).
  • How the government and the RBI decide on this will have significant implications for India’s economic prospects in the short-term, and indeed in the long-term.

 

 

CLARIFICATIONS:

FIRST:

  • Monetisation of the deficit does not mean the government is getting free money from the RBI.
  • If one works through the combined balance sheet of the government and the RBI, it will turn out that the government does not get a free lunch, but it does get a heavily subsidised lunch.
  • That subsidy is forced out of the banks. And, as in the case of all invisible subsidies, they don’t even know.

 

SECOND:

  • Second, it is not as if the RBI is not monetising the deficit now; it is doing so, but indirectly by buying government bonds in the secondary market through what are called open market operations (OMO).
  • Note that both monetisation and OMOs involve printing of money by the RBI. But there are important differences between the two options that make shifting over to monetisation a non-trivial(important) decision.

 

HISTORICAL CONTEXT:

  • To understand the issue, some historical context will help. In the pre-reform era, the RBI used to directly monetise the government’s deficit almost automatically.
  • That practice ended in 1997 with a landmark agreement between the government and the RBI.
  • It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO route.
  • The implied understanding also was that the RBI would use the OMO route not so much to support government borrowing but as a liquidity instrument to manage the balance between the policy objectives of supporting growth, checking inflation and preserving financial stability.

 

HISTORIC OUTCOMES:

  • In hindsight, the outcomes of that agreement were historic. Since the government started borrowing in the open market, interest rates went up which incentivised saving and thereby spurred investment and growth.
  • Also, the interest rate that the government commanded in the open market acted as a critical market signal of fiscal sustainability.
  • Importantly, the agreement shifted control over money supply, and hence over inflation, from the government’s fiscal policy to the RBI’s monetary policy.
  • The India growth story that unfolded in the years before the global financial crisis in 2008 when the economy clocked growth rates in the range of 9 per cent was at least in part a consequence of the high savings rate and low inflation which in turn were a consequence of this agreement.

 

 

ESCAPE CLAUSE:

  • The Fiscal Responsibility and Budget Management Act as amended in 2017 contains an escape clause which permits monetisation of the deficit under special circumstances.
  • What is the case for invoking this escape clause now even if it means potentially jeopardising(risking) the hard won gains of the government-RBI agreement?
  • The case is made on the grounds that there just aren’t enough savings in the economy to finance government borrowing of such a large size.
  • Bond yields would spike so high that financial stability will be threatened.
  • The RBI must therefore step in and finance the government directly to prevent this from happening.

 

BOND YIELDS:

  • But there is no reason to believe that we are anywhere close to that situation. Through its OMOs, the RBI has injected such an extraordinary amount of systemic liquidity that bond yields are still relatively soft.
  • In fact the yield on the benchmark 10 year bond which was ruling at 8 per cent in September last year has since dropped to just around 6 per cent.
  • Even on the day the government announced its additional borrowing to the extent of 2.1 per cent of GDP, the yield settled at 6.17 per cent.
  • That should, if anything, be evidence that the market feels quite comfortable about financing the enhanced government borrowing.

 

 

MONETISATION AND OMOs:

  • Both monetisation and OMOs involve expansion of money supply which can potentially stoke inflation. If so, why should we be so wary of monetisation?
  • Because although they are both potentially inflationary, the inflation risk they carry is different.
  • OMOs are a monetary policy tool with the RBI in the driver’s seat, deciding on how much liquidity to inject and when.
  • In contrast, monetisation is, and is seen, as a way of financing the fiscal deficit with the quantum and timing of money supply determined by the government’s borrowing rather than the RBI’s monetary policy.
  • If RBI is seen as losing control over monetary policy, it will raise concerns about inflation. That can be a more serious problem than it seems.

 

 

INFLATION PRONE:

  • India is inflation prone. Note that after the global financial crisis when inflation “died” everywhere, we were hit with a high and stubborn bout of inflation.
  • In hindsight, it is clear that the RBI, on my watch, failed to tighten policy in good time.
  • Since then we have embraced a monetary policy framework and the RBI has earned credibility for delivering on inflation within the target. Forsaking that credibility can be costly.
  • If, in spite of all this, the government decides to cross the Rubicon, markets will fear that the constraints on fiscal policy are being abandoned and that the government is planning to solve its fiscal problems by inflating away its debt.
  • If that occurs, yields on government bonds will shoot up, the opposite of what is sought to be achieved.

 

Finally, the biggest question is this:

WHAT IS THE PROBLEM THAT MONETISATION IS TRYING TO SOLVE?

  • There are cases when monetisation — despite its costs — is inevitable. If the government cannot finance its deficit at reasonable rates, then it really doesn’t have much choice.
  • But right now, it is able to borrow at around the same rate as inflation, implying a real rate (at current inflation) of 0 per cent.
  • If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure. We are not there yet.

 

 

 

3) India’s Covid trajectory should be measured against that of its neighbours-

 


CONTEXT:

  • A comparison of India’s situation with its neighbours is much more meaningful than the comparisons where India is almost always compared to countries in North America or Europe.
  • It is well known that the progression of the COVID-19 pandemic has varied enormously across countries.
  • While there are no conclusive explanations for this variation yet, age-structure, genetic make-up, universal BCG vaccination, and climate might play important roles.
  • In all these respects, India is similar to its neighbours in South Asia.
  • Hence, a meaningful comparison of India with its largest neighbours — Bangladesh, Pakistan and Sri Lanka — is a much better way to understand the spread of the pandemic and assess the effectiveness of responses to contain it.

 

 

DIFFERENT TIMES:

  • The pandemic came to south Asian countries at very different times.
  • Sri Lanka was the first to report a COVID-19 case, on January 27.
  • The first case was reported within three days in India, on January 30.
  • Pakistan reported its first case on February 26, and Bangladesh on March 8.
  • The progression of COVID-19 has varied across these four nation-states.
  • Hence, from today’s vantage point, the duration of the pandemic varies in these countries.
  • To assess the pandemic at the same stage of its life cycle, we will identify its beginning in a country on the date total number of cases crossed 50 for the first time.
  • Using this method, we see that, on May 24, Bangladesh, India, Pakistan and Sri Lanka were 54, 75, 69 and 66 days into the pandemic.
  • To make our data comparable, we will, therefore, take the 54th day of the pandemic in the four countries as the point of comparison.

 

 

REPORTED CASES:

  • A first indicator to understand the spread of the pandemic is the total number of reported cases.
  • On the day 54 of the pandemic, the total number of reported cases were 39,980 in India, 32,078 in Bangladesh, 27,474 in Pakistan and 869 in Sri Lanka.
  • These countries are very different in terms of population size. If we look at the total number of reported cases per million population on the 54th day of the pandemic, we get quite a different picture.
  • Bangladesh has 195, Pakistan has 124, Sri Lanka has 41 and India has 29 cases per million population.

 

 

FATALITY RATE:

  • One of the most direct impacts of the pandemic can be measured in terms of lives lost.
  • Dividing the total number of reported deaths by the total number of reported cases, we get what epidemiologists call the case fatality(death) rate.
  • On the 54th day, the case fatality rate was highest in India, at 3.25 per cent, and lowest in Sri Lanka at 1.04 per cent.
  • Pakistan and Bangladesh fell in between, with 2.25 per cent and 1.41 per cent respectively.
  • In terms of total cases per million population, India has done better than most of its neighbouring countries — especially during the early phase of the COVID-19 pandemic.
  • When we look at the impact of the pandemic in terms of direct deaths, the picture is completely reversed.
  • India has lagged behind its neighbours in reducing the fatal impact of the pandemic on the lives of its citizens.

 

 

RAMPING TESTING:

  • India, and more so Sri Lanka, have ramped up COVID-19 testing to adequate levels.
  • This is suggested by the fact that the test-positive rate, that is, the number of positive cases per 100 persons tested, has been low and stable over the past several weeks — at around 2 per cent for Sri Lanka and 4 per cent for India.
  • The situation in Bangladesh and Pakistan vis-a-vis COVID-19 testing is very different.
  • Not only do these countries have much higher test positive rates, at over 10 per cent, but it has been increasing over the past weeks.
  • Thus, Bangladesh and Pakistan have yet to reach adequate testing levels.

 

 

RELATIVE MAGNITUDES OF FATALITY RATES:

  • This has an important implication regarding the relative magnitudes of case fatality rates across these countries.
  • Since Bangladesh and Pakistan are not testing at adequate levels, many positive cases are not being reported in these two countries.
  • If they had been reported, the case fatality rates would have been even lower than what we now see.
  • Hence, the “true” gap of Bangladesh and Pakistan vis-a-vis India, concerning the case fatality rate, is higher than currently reported.

 

CONCLUSION:

  • The daily press briefings of the health ministry paint rosy pictures of the situation in India only because of the largely meaningless comparisons with European and North American countries.
  • Looking at our neighbours will have a much-needed sobering(calming) effect.