NITI Aayog

The idea that India needs transformation but no longer evolution is captured in the establishment by Prime Minister Narendra Modi of NITI Aayog, the National Institution for Transforming India, on January 01, 2015, as a successor to the Planning Commission which was instituted by India’s first prime minister Jawaharlal Nehru in 1950. Gone are the 5-year plans which have been replaced by a 15-year vision punctuated by milestones at the 3-(Action Agenda) and 7-(National Development Agenda) year marks. The primary purpose of NITI Aayog is the working together of India’s 29 states and 7 union territories toward the realization of one common vision.

If India manages to achieve the ambitious initial 15-year vision of the institution by 2030 – a document currently in its draft stage – farmer incomes are expected to double by 2022 and India’s gross domestic product (GDP) and per capita GDP are seen tripling due to an annual real GDP growth rate exceeding 8% over the next 15 years. India will also then have met all of the sustainable development goals (SDGs) by 2030.

A challenge for India is to limit its imports, in particular as the Indian rupee gets stronger because of solid growth. “Make in India” appears to be one way to limit imports, alleviate the large trade deficit, and to achieve the much belated development of India’s manufacturing sector if not as a factory to the world but at least as a factory for its own vast internal market. The transformation of India would create the millions of jobs that are needed to absorb not only India’s educated youth but also the migrating population from rural to urban areas as agriculture’s contribution to India’s GDP further falls lowering agriculture’s share of employment which currently stands at nearly 50%. Still, agriculture itself would be transformed by becoming more industrialized as small subsistence farms consolidate into large holdings and technology changes seeds and farming methods.

One objective of the 3-year action agenda from 2017-2020 is to assess the funding requirements to implement the NITI Aayog vision. A major initial step in that direction has been the Goods and Services Tax (GST) which is expected to be rolled out on July 1, 2017. Despite the touted revenue neutrality of the GST, the broad-based consumption tax will loop in considerably more tax payers than there are currently and could, in fact, increase government tax revenue.

The higher tax revenues, in both the states and the center, particularly as GDP growth rises, could make available some, but not all, of the needed funds to finance the implementation of the vision of NITI Aayog. One way to finance would be by entering into public-private partnerships for infrastructure (not only roads and rail but also energy and water) and digital transformations.

India’s infrastructure alone would require about USD 2 trillion in investment by 2025 which amounts to more than 90% of the country’s 2016 nominal GDP or an average of about 10-15% of GDP every year between 2016 and 2025. The transformation of India that NITI Aayog has taken upon itself will require at least another USD 2 trillion by 2030. All of this cannot obviously be financed by domestic public-private partnerships alone. India would still need a way to finance its transformation which remains a challenge unless the timelines are less ambitious if monetary policy is not to be coopted by the vision of NITI Aayog.

NITI Aayog is good news for the financial markets. A sustained GDP growth rate above 8% over the next 15 years could see considerable flows of funds into India’s capital markets in the form of Foreign Institutional Investment (FII), Foreign Direct Investment (FDI), and a substantial increase in the market valuation of India’s public companies due to increasing earnings as India’s large domestic market develops together with a rise in exports as the rest of the global economy mends.

Monetary Policy of India and Economic Development

India, since liberalization in 1991, has depended on foreign institutional investment (FII) and foreign direct investment (FDI) to bulk up its foreign exchange reserves, even as it built its services exports sector that depends on outsourcing primarily from the United States and Europe. Unlike China, India paid little attention to the development of domestic infrastructure and manufacturing, remaining as a primarily agricultural economy. The challenges, as a result, India continues to face are hightened poverty, among the highest in the world, and inability to create jobs commensurately to the number of young people, about a million, entering the job market every month.

On the path toward becoming the most populous country in the world by 2050, India, being a democratic polity and a mixed economy founded on Fabian socialist principles, must position itself to reap the demographic dividend in the upcoming three decades. If leveraged well, India, with its large English-speaking population, can create the needed jobs by aiming to become a global center for services similar to but beyond Singapore and by transforming its infrastructure with smart cities, “Make in India” and “Digital India” programs. This would also have a dramatic effect on poverty reduction which has not happened as one would expect after 1991. The government programs are there but the question remains about how they can be funded at the scale that is needed for India’s economic transformation.

Monetary policy of China, says Li Yunqi, a Chinese research scholar associated with the People’s Bank of China (PBOC), has always been about economic development. Industrialization, in particular infrastructure related, has been the focus of PBOC, together with, of course, expanding the exports sector. Both infrastructure and exports, which contributed to significant and sustained increase in real investment have propelled China to be the second largest economy in the world when measured by nominal gross domestic product (GDP) and the largest in purchasing power parity (PPP) terms.

Blessed with fertile land and fresh water perennial rivers both in its north and south, India is an economy waiting to happen on the world stage powered by all three of the economic sectors: agriculture, industry and services. Road, rail, electricity and water are the primary infrastructure areas that are ripe for transformation. With urban areas growing, the government’s smart cities initiative should be able to accommodate the migration from rural to urban areas without over-burdening the existing cities by expanding or building new cities along major highway or railway corridors.

China printed money for investment in the expanding infrastructure and exports sectors of its economy, thus raising the potential growth rate which also thereby managed inflation despite occasional, short bouts with high inflation. This created millions of jobs and dramatically reduced poverty in the three decades since 1978 when China began its market socialist reforms. Though China, as Li Yunqi points out in his 1991 Asian Survey article “Changes in China’s Monetary Policy”, has to deal with the paradoxes of a burgeoning market economy and a socialist state that intervenes in it, and also with finding growth drivers as infrastructure and exports wane, its management of monetary policy holds important lessons for its neighbor to the south, India.

The Reserve Bank of India (RBI) should expand money supply for targeted funding of economic transformation initiatives. Money supply targeted to investment and growth initiatives only raises the potential growth rate but does not cause inflation. India is not yet an economy whose monetary policy can behave as if it is a developed economy.

Sustainability: The Great Race in Asia

Two sleeping giants had been awakened by economic liberalization since the end of the Cold War. Both Asian, China and India, the world’s most and second most populous countries, began liberalizing their economies particularly after the fall of the Berlin Wall in 1989. In the nearly three decades since, China has transformed itself from being a low income country with significant poverty into a middle income country with nearly a billion people lifted out of poverty. It now aspires to the status of a high income market economy. In the same 30 years, India – a democratic country which had its historical Fabian socialist economic structure continue to co-exist with the market – remained a lower middle income country still with considerable poverty. Yet both China and India today, on purchasing power parity terms (PPP), are among the top 3 largest economies of the world.

In terms of infrastructure and industrial development, India is significantly behind China. While China built world class infrastructure and became the factory to the world, India primarily focused on developing its information technology (IT) services industry and continued to remain a principally agricultural economy. Growth, however, for both these very large markets, has not come without costs for themselves or for the rest of the world. The pressure on global natural resources and the environment grows as China and India continue to develop.

Both these countries thus far have argued that they should not disproportionately bear the burden of climate friendly policies when, in fact, such policies were not a constraint during the development of advanced high income countries. They say that economic growth and raising the per capita incomes of their peoples should come first to close the gap with rich countries before they can consider sustainable development. While India is yet to achieve all the MDGs, China may have met all its Millennium Development Goals (MDGs) by 2015 but is far from reaching the new Sustainable Development Goals (SDGs) by 2030. That this is so, for example, can be seen in their smog-filled mega cities where air quality is dangerously poor.

Sustainability presents a unique set of challenges to all countries, not just to China and India, and, therefore, all countries begin on a level playing field. This is what makes the great race in Asia between China and India particularly interesting. Sustainability – besides requiring clean air, clean water, clean energy, efficiency in natural resource use and social inclusion among its 17 SDGs – most importantly requires consumption to be sustainable in all countries as they grow. Consumption, however, is the cornerstone of mainstream economics because it is the majority part of any country’s gross domestic product (GDP) and is indicative of the living standards of countries.

The new economic paradigm the SDGs herald is collaboration and competition among countries to grow sustainably without economic development and, thereby consumption, leading to severe stresses on natural resources and the environment, because for about 2.5 billion people in China and India to enjoy the same standard of living as the high income countries, each country’s nominal GDP needs to be about USD 40 trillion today, much higher than that of the United States or the European Union. That this is not so is the reason why per capita incomes in China and India are far less than those in rich countries despite China and India being relatively very large economies in aggregate.

India’s 15 years from 2015 (or by 2030) when MDG time frame ended and the SDG time frame began – when done with policy consistency, commitment and execution over time – can put the country directly on the path to sustainable development instead of having to redo development sustainably as the rich countries and China are now doing. An example is Norway which is aiming to transition itself and the corporations in which it invests its massive near-trillion dollar sovereign wealth fund based on its profits from oil sales to embrace sustainability. So are Saudi Arabia and the United Arab Emirates diversifying their oil-based economies to become sustainable.

The SDGs – requiring sustainable development – are not merely goals but a whole new way of approaching economic growth and living standards around the world. For example, profit maximization is a core and fundamental concept of neo-classical economics, only that the price of a product fails to account for the cost of all the negative externalities in its production such as social and environmental costs. If it did, products would be far more expensive. Intrinsically, the current economic model is unsustainable and, therefore, using the model to grow is a fool’s errand. India would do well to integrate sustainability into its economic policy and planning to achieve growth, higher standard and quality of life without necessarily consuming more natural resources, and sustainability overall because living standards and sustainability are interdependent and deeply intertwined.

India Importing Cotton is an Example of What is Wrong With World Trade

Cotton has a long history in India. It is the crop which galvanized the independence movement against the British. The movement led by Gandhi to produce domestic cloth woven from domestic cotton and the boycott of cloth imports from Great Britain had undercut the colonial British economy. Economic self-reliance or a form of near-autarky was what was advocated by Gandhi to undermine the British empire which imported cheap natural resources from its colonies and sold finished and semi-finished goods made in the industrial mills in Britain in the territories it occupied. Many argue that this is also the neo-colonial strategy that China is currently pursuing in its trade relations with other countries.

India is usually an exporter of cotton. Lately it has begun importing it, contributing to the country’s trade deficit. Two reasons standout for India’s cotton imports. One, limited domestic supply because of droughts or crop disease and two, a strong rupee which sometimes makes it cheaper to buy cotton in the world market than produce it domestically. While the first reason may, on occasion, make imports necessary and sensible, the second reason is purely the current global paradigm of trade at work: in a regime of free trade, under Ricardian comparative advantage, if it is cheaper to produce a good or a service in another country then countries which incur higher costs of producing the same goods or services domestically will import. The importing countries’ economic structure and labor market will shift away from producing the imported goods and services domestically and focus on others where they have comparative advantage in the ideal world that trades in goods and services freely across borders without any protections for domestic products.

The Ricardian comparative advantage may be attractive at an initial glance because it envisions a world of freely trading countries engaging in only that economic activity in which they are more economically efficient. However, the reality is such a division of labor across countries in the production of goods and services may be unsustainable because the world demand for various goods and services will always be higher than the possible world supply due to fewer producers and a disproportionately large number of consumers. Prices could be higher than in autarky over the long run and oligopolies of suppliers of goods and services will be created around the world.

Moreover, if, for example, selling natural resources cheaply is the comparative advantage of some countries, no domestic industry will be developed in such countries because they would import goods and services with the revenues earned from their natural resource exports. This lack of development of domestic industry has negative feedback effects on the amount of revenues extraction of natural resources can generate for these countries because the technology to extract natural resources does not belong to them but to other countries which specialize in those technologies. Therefore, despite being rich in natural resources, many countries remain poor due to lack of technical know how to exploit their own resources to their maximum benefit and they also enter into lopsided bad deals in their eagerness to earn income.

What we see in reality is some balance between economic specialization in world trade and competitive domestic production of the same or similar goods and services in various countries. What needs to be done in this age of the multinational corporation (MNC) in a largely sovereign and democratic world – which is very different from the age of the colonial multinationals such as the East India Company when the colonial master profited from the assets of the colonies without colonial development – is to institute a global trade regime of quasi-autarky as Gandhi had envisioned. Only natural resources and food that countries are deficient in and management and technical know how cross borders, and most needs of goods and services of countries are met through production within their borders by both the MNCs and domestic companies either in collaboration or in competition with each other.

India, given that it has proven to be self-sufficient in agriculture, must ensure its agriculture sector does not trigger the need for imports as with cotton as an example. This, however, does not mean that India should shoot for a cheaper rupee to make Indian cotton less expensive. It means that whatever the global price of cotton, India should specialize in cotton and cotton-related goods and services while committing to at least self-sufficient domestic cotton production through perhaps better agricultural techniques or better seeds that are drought and disease resistant. India should commit to innovation in agriculture, develop its own agricultural MNCs while welcoming foreign MNCs into its domestic market. This applies not only to agriculture but to all sectors of the Indian economy.

Quasi-autarky is a feasible option for India and in fact, as Gandhi envisaged, for the rest of the world as well.