The Budget Fails India’s Demographic Dividend

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

The Economic Survey released on January 31, points out: “Over the next three decades… India… seems to be in a demographic sweet spot with its working-age population projected to grow by a third.”

Estimates suggest that a million Indians enter the workforce every month.  They are India’s demographic dividend. The hope is that as these Indians work, earn and spend money, India will grow at a faster growth rate than it currently is.

This theory works if and only if India’s demographic dividend can find jobs. And the question is where are the jobs?

As per the Report on Fifth Annual Employment – Unemployment Survey, the unemployment rate in India during 2015-2016 stood at 5 per cent. If a person is employed for 183 or more days during the year, he is considered to be employed.

Further, only 60.6 per cent of those who were available for work for 12 months of the year, found work all through the year. Hence, India’s problem is underemployment and not unemployment. There aren’t enough jobs going around for everyone. And in this scenario, the single most important focus of the Indian government should be to facilitate policies and create an environment in which jobs are created.

This should have been the focus of the annual budget of the central government as well. But the budget failed miserably on this front.

Take the case of public sector banks(PSBs) which are sitting on a huge amount of bad loans. In fact, in 2009-2010, 58.7 per cent of all banks loans went to industry. By 2015-2016, it was down to 13.4 per cent. In the last one year, industrial credit has contracted.

Unless, banks give loans to industry how will industries expand and jobs be created? But banks are in no mood to lend to industry given the huge amount of bad loans they have accumulated over the years by lending to industry. The budget makes no effort to come up with a holistic solution for bad loans of banks. Many piecemeal solutions have been tried and they have failed.

These banks require a large amount of capital to continue to function. In the budget for 2017-2018, the government has allocated just Rs 10,000 crore towards their recapitalisation.

An estimate made by Viral Acharya (now one of the deputy governors of the RBI) and Krishnamurthy Subramanian, suggests that in a prudent scenario PSBs would require around Rs 9,97,400 crore of capital. The government clearly doesn’t have this kind of money. In this scenario, it should be looking at exiting out of the ownership of most of these banks. But nothing of that sort has been suggested either in the budget or otherwise.

Over and above the PSBs, the government also continues to run loss-making companies which include an airline, a couple of telecom companies as well as a company which used to make photo-films. There was no mention in the budget about getting out of these companies.

In 2014-2015, the total losses of loss-making public sector enterprises stood at Rs 27,360 crore. Given the government’s total expenditure that is not a lot of money, but at the same keeping these companies going, does take away the focus and attention from other more important areas like education, health and agriculture.

At the same time, another factor that continues to hold back India are its labour laws. The Economic Survey talks about generating jobs in the apparel sector. The sector should be employing a large number of unskilled Indians entering the workforce. It has the ability to generate close to 24 jobs per one lakh rupees of investment. Rapid export growth can create close to a half a million jobs every year in the apparel as well as the leather goods sector.

But that is not happening primarily because an average Indian apparel and leather firm continues to be small and thus lacks economies of scale to compete globally. As the Economic Survey points out: “Indian apparel and leather firms are smaller compared to firms in say China, Bangladesh and Vietnam.”

This situation can be handled by ensuring that we simplify our labour laws. But no government worth its salt has been able to do anything about it till date. Nevertheless, if the government wants to handle India’s demographic divided well, it needs to simplify the labour laws and in the process help companies grow and create jobs.

If that does not happen, it is worth “remembering that demography provides potential and is not destiny”. And the budget was as good an opportunity as any to set this right.

The column originally appeared in Daily News and Analysis on February 2, 2017


India Budget 2017: Spending to get out of trouble

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

In January 2017, the ministry of statistics and programme implementation of the Indian government, came up with the economic growth prediction for 2016-2017 (i.e. the period between April 1, 2016 and March 31, 2017).

The numbers showed that incremental government expenditure made up for one-third of the increase in the Indian gross domestic product(GDP) in 2016-2017. What did this mean in simple English? This essentially meant that increased spending by the government would be responsible for one-third of the Indian GDP growth in 2016-2017.

In 2015-2016, the contribution of increased government expenditure to Indian economic growth was just a little over 3 per cent. Hence, what it essentially means is that in the current financial year, the Indian government will primarily drive economic growth.

And from the looks of it, this is likely to continue in 2017-2018 as well. The annual budget presented by the finance minister Arun Jaitley on February 1, 2017, seems to suggest so. Let’s look at this in some detail.

The government has allocated Rs 48,000 crore to the Mahatma Gandhi National Rural Employment Guarantee(MGNREGA) programme. The
of MGNREGA is to provide at least 100 days of guaranteed work during the course of a financial year to adult members of every rural household who are willing to do unskilled manual work.

The Rs 48,000 crore allocation to MGNREGA is the highest allocation ever made to the programme. In 2016-2017, the government had allocated Rs 38,500 crore to MGNREGA, though it will end up spending Rs 47,499 crore on it. The increased spending on MGNREGA is to alleviate the negative impact of demonetisation being felt in the rural and the semi-rural areas of India, where major part of transactions happen in cash. And after demonetisation cash has been in short supply.

It is also expected to alleviate the negative impact of demonetisation on the informal manufacturing sector which operates in cash and tends to employ many semi and unskilled people migrating from rural India. From the midnight of November 8 and 9, 2016, the Narendra Modi government demonetised Rs 500 and Rs 1,000 notes, and made them useless.

Interestingly, in 2013-2014, the Indian government had spent Rs 39,778 crore on MGNREGA. Hence, in inflation-adjusted terms, the Rs 48,000 crore allocation is around the same. Given this, the allocation to this cash for work programme is not as much as is being made out to be.

The government has also increased the allocation to the Prime Minister Housing Scheme-Rural by more than 50 per cent to Rs 23,000 crore. This is expected to create some jobs in rural India where disguised unemployment is extremely high. Close to half of India’s population is engaged in agriculture which contributes only around 18 per cent of the GDP.

On the physical infrastructure front, the government has increased the allocation to build highways by 12 per cent to Rs 64,900 crore. Further, the total capital and development expenditure of Railways has been pegged at Rs 1,31,000 crores. This includes Rs 55,000 crores provided by the government.

The allocation to 29 schemes sponsored by the central government has gone up by 21.6 per cent to Rs 3,35,461 crore, in comparison to the allocation made in 2016-2017. The allocation to the infrastructure sector has gone up by 13.5 per cent to Rs 3,96,135 crore. Also, the total resources being transferred to the States and the Union Territories with Legislatures in 2017-2018 is Rs 4.11 lakh crores, against Rs 3.60 lakh crores in this financial year, the finance minister pointed out. This is a jump of 14.2 per cent.

Over and above this, the government has increased the lending target under the Prime Minister’s Mudra Scheme by 100 per cent to Rs 2.44 lakh crore. Under this scheme, the Micro Units Development and Refinance Agency (or Mudra) provides loans at low interest rates to micro-finance institutions and non-banking finance institutions which in turn lend money to micro/small business entities engaged in manufacturing, trading and services activities.

Further, in the budget speech, the finance minister said: “I have stepped up the allocation for Capital expenditure by 25.4% over the previous year”. Also, capital expenditure will form 14.4 per cent of the total expenditure of the government in 2017-2018. This is the highest since 2008-2009. Capital expenditure leads to the creation of assets and hence, is a good thing.

Long story short—the Modi government is trying to spend its way out of trouble. Though at the same time it needs to be said that it is not going overboard with it. A part of this pump-priming became necessary because of the self-goal of demonetisation, which is expected to pull down economic growth in 2016-2017. The Economic Survey for 2016-2017 released on January 31, 2017, expects GDP growth to be between 6.5-6.75 per cent in 2016-2017. India grew by 7.9 per cent in 2015-2016. The question is what would the economic growth have been if the Modi government hadn’t scored the self-goal of demonetisation?

When pushed to a corner, most governments try to spend their way out of trouble. Nevertheless, the government spending is not always as effective as private spending. In the Indian case, a major reason is massive leakage.  A large portion of the government spending does not reach those it meant for and is siphoned off by the bureaucracy expected to distribute it.

One way of tackling this is for the government to concentrate on running a few important schemes on which it can spend a bulk of its money and focus its time and attention on. The Economic Survey points out that “the Budget for 2016-17 indicates that there are about 950 central sector and centrally sponsored sub-schemes in India.”

One negative impact of running so many schemes is that “in many cases, the poorest districts are the ones grappling with inadequate funds – this is evidence of acute misallocation. Many districts in Uttar Pradesh, Bihar, Chhattisgarh, parts of Jharkhand, eastern Maharashtra, Madhya Pradesh and Karnataka, among others, account for a large share of the poor and receive a less-than-equal share of resources”.

A very important part of economic reform in India is to bring down the number of these schemes. But that as they always say is easier said than done. And as always, this budget missed out on this opportunity as well.


The column was originally published on on February 1, 2017


Economic Survey’s Spin on Demonetisation Doesn’t Quite Add Up


The Economic Survey for 2016-2017 was released yesterday. The Survey has a chapter on demonetisation and makes some very interesting points which I want to discuss in today’s piece.

One of the reasons offered for the Modi government carrying out demonetisation is: “Across the globe there is a link between cash and nefarious : the higher the amount of cash in circulation, the greater the amount of corruption, as measured by Transparency International.”

The Survey further points out: “In this sense, attempts to reduce the cash in an economy could have important long-term benefits in terms of reducing levels of corruption. Yet India is “off the line”, meaning that its cash in circulation is relatively high for its level of corruption.”

Is this really true? Is there a link between the total cash in the economy and corruption? Let’s take a look at the currency to gross domestic product(GDP) ratio across countries for 2015.


Source: The Curse of Cash, Kenneth Rogoff,

As can be seen from the above table, India’s currency to GDP ratio is quite high at 12.51 per cent. But Japan’s is even higher at 18.61 per cent. What rank does Japan hold in the Transparency International’s corruption ranking? In 2015, Japan was the 18th least corrupt country in the world. Where did India stand? India was the 76th least corrupt country in the world.

Hence, Japan which has a higher currency to GDP ratio than India is significantly less corrupt than India is. This basically means that cash is a greater part of the Japanese economy than it is of the Indian economy, but still the Japanese are less corrupt than the Indians. This goes totally against the point made in the Economic Survey.

Also, Japan is not an outlying one-off example. Take the case of Brazil. The currency to GDP ratio in this case is 3.44 per cent. This is nearly one-fourth the Indian ratio of 12.51 per cent. This means that Brazil has largely moved away from cash or currency as a form of payment. Nevertheless, does that mean that Brazil is less corrupt? As per Transparency International data Brazil is also the 76th least corrupt country in the world, like India is.

There are other examples as well. At 1.45 per cent, the currency to GDP ratio is the lowest in Norway. At 1.53 per cent Nigeria comes in next. Norway is the fifth least corrupt country in the world. On the other hand, Nigeria is the 136th least corrupt country in the world.

Let me give you more examples. After Norway and Nigeria, come Sweden, Argentina, New Zealand and Denmark, when it comes to low currency to GDP ratio. Sweden is the third least corrupt country in the world. New Zealand is the fourth least and Denmark is the least corrupt country in the world. But Argentina comes in at 107th, much lower than even India, despite having a very low currency to GDP ratio.

Are we done yet? Colombia has a currency to GDP ratio of 6.79 per cent, which is significantly lower than that of India. But it is the 83rd least corrupt country in the world. Or take the case of Singapore, which has a reasonably high currency to GDP ratio of 8.46 per cent, but it is the eight least corrupt country in the world, as per Transparency International.

How about China? China’s currency to GDP ratio at 9.34 per cent is lower than that of India. But it is the 83rd least corrupt country in the world, a little below India at 76th position.

All these examples clearly show that there is no clear link between high cash in the economy and the prevailing corruption in the country. And even if there is a link, it is a very weak one. Given this, what do we say about the Economic Survey’s observation? To put it simply, the Economic Survey is published by the ministry of finance, which is a part of the government. Hence, not surprisingly, it is trying to bat for the government on the demonetisation front.

What else does the Economic Survey have to say on demonetisation? On page 55 it points out: “A cautionary word is in order. India’s demonetisation is unprecedented, representing a structural break from the past. This means that forecasting its impact is hazardous.”

This is a very interesting statement. What the Economic Survey is essentially saying here is that forecasting the impact of demonetisation can be hazardous. Why is that? This, for the simple reason that there is no past example of demonetisation in a country being carried out in a situation, like that of India.

As the Survey points out on Page 54: “India’s demonetisation is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions. All other sudden demonetisations have occurred in the context of hyperinflation, wars, political upheavals, or other extreme circumstances.”

Given this unique context, it is risky and dangerous (other meanings of the world hazardous) to forecast the impact of demonetisation. If this is the case, it is worth asking on what basis did the government make the decision to demonetise high denomination notes, given that forecasting its impact is not easy at all. Or so the Economic Survey published by the Ministry of Finance tells us. Further, after warning the readers that forecasting the impact of demonetisation is hazardous, the Survey goes about making several forecasts (on pages 59-60).

Such silly blemishes that bat for the government, spoil what is otherwise a well-written Survey.