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The Hindu Editorial Analysis | PDF Download

Date: 15 October 2019
  • Economics Nobel for Abhijit, two othersThey were awarded “for their experimental approach to alleviating global poverty”
  • The Royal Swedish Academy of Sciences has decided to award the 2019 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, popularly called the Nobel Prize in Economics, to Abhijit Banerjee, Esther Duflo, and Michael Kremer “for their experimental approach to alleviating global poverty”.
  • While Dr. Banerjee and Dr. Duflo are both affiliated with the Massachusetts Institute of Technology, Dr. Kremer is with Harvard University. The three will equally share the prize money of 9 million Swedish krona (about $916,798/₹6.53 crore).
  • “The research conducted by this year’s laureates has considerably improved our ability to fight global poverty,” the Royal Swedish Academy of Sciences said in a release. “In just two decades, their new experiment-based approach has transformed development economics, which is now a flourishing field of research.”

Reliable answers

  • The laureates have, since the mid-1990s, sought to introduce a new approach to obtaining reliable answers about the most effective ways to combat global poverty. Rather than focussing on big-picture questions, they divided the issue into smaller, more manageable and measurable questions.
  • They then showed that these smaller questions could be best answered through carefully designed experiments among the people who are the most affected. This thought process has resulted in what are called randomised control trials, previously used in the pure sciences and in clinical drug trials, to be deployed in the social sciences.
  • “As a result, we now have a large number of concrete results on specific mechanisms behind poverty and specific interventions to alleviate it,” said the technical paper, accompanying the announcement. “For example, on schooling, strong evidence now shows that the employment of contract teachers is generally a costeffective way to improve student learning, while the impact of reduced class size is mixed, at best.”
  • “On health, poor people’s investment in preventive care has been shown to be very sensitive to the prices of health products or services, giving a strong argument for generous subsidies to such investments,” the paper added. “On credit, growing evidence indicates that micro-finance programmes do not have the development effects that many had thought [they would have] when these programmes were introduced on a large scale.”
  • One of the major findings of Dr. Banerjee and Dr. Duflo was that in developing countries, there is often a stark difference between the technology and practices used by companies in the same economy and sector. That is, in developing economies, some companies use the latest technology and practices, while others use outdated production methods.
  • Dr. Banerjee and Dr. Duflo, who are married to each other, have had a long history of conducting research together, often collaborating with Dr. Kremer as well.

Economics of poverty

  • The Nobel laureates made development economics more relevant to policy making
  • Development economics just got a boost with the award of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to three economists who have worked, and are still working, to understand and alleviate poverty — Abhijit Banerjee and Esther Duflo of Massachusetts Institute of Technology, and Michael Kremer of Harvard University. This is only the second time a woman has bagged the prestigious award, popularly called the Economics Nobel, and it is a first for a husband-wife duo to win in this discipline — Mr. Banerjee is married to Ms. Duflo. In the words of the Royal Swedish Academy of Sciences, the experiment-based approach of the three laureates has transformed development economics and turned it into a “flourishing field of research”. One of their studies resulted in benefiting 5 million children in India through programmes of remedial tutoring in schools. The three adopted an evidencebased approach to apply theory to real-life situations using randomized trials and assessing the outcomes. The effort was to understand the impact of interventions to achieve desirable outcomes. The approach is derived from the concept of clinical trials in the pharmaceuticals industry.
  • If this sounds like gobbledygook, the experiment that Mr. Banerjee and Ms. Duflo carried out in Rajasthan some years ago would explain the concept better. Despite immunization being free, women were not bringing in their children for the vaccination shot. The two MIT economists decided to give a bag of pulses free to women who brought their babies for vaccination. Word soon spread and the rate of immunization shot up in the region. Another experiment they did was in Mumbai and Vadodara to understand learning outcomes in the field of education. Was it lack of access to textbooks or hunger that caused poor learning outcomes?
  • Through field studies, Mr. Banerjee and Ms. Duflo established that the problem is that teaching is not adapted to the needs of the students. Learning outcomes improved in schools that were provided with teaching assistants to support students with special needs. The importance of the work being done by the three laureates cannot be overemphasized. Governments across the world, including in India, spend big money on social schemes without the vaguest of ideas on whether their objectives have been met. The field-work based approach that these economists have perfected has revolutionized the field of development economics and made it more relevant in policy making. The government would do well to borrow from the research of these laureates to understand the impact of its several schemes, and where necessary, tweak them to derive maximum benefit for the thousands of crores of rupees that it spends.

 ‘FASTags will work as Aadhaar, track vehicles’

  •  A FASTag uses Radio Frequency Identification technology to make cashless payments through a prepaid account linked to it.
  • The tag is fixed to the windscreen of a vehicle and an RFID antenna in the canopy of the toll gate scans the QR code and the tag identification number, following which the boom barrier lifts to allow a vehicle to pass through it without the need for a vehicle to stop.
  • The Minister mentioned that cameras will capture the images of vehicles, but officials involved with the initiative explained that it is the FASTag that will help track vehicles.
  • “A FASTag is linked to a bank account. When a vehicle passes through a toll, an SMS with date, time and place of transaction will be sent to the owner of the vehicle.
  • The master data of all transactions will be with the concessionaire of the toll booth concerned, along with the bank with which the owner has registered the FASTag and the National Payments Corporation of India,” officials said.
  • The Minister was quoted in a press statement saying that FASTags are “likely to reduce the nation’s GDP loss by bringing down loss of fuel while waiting at toll plazas.”
  • The National Investigation Agency (NIA) has said “high quality” fake currency notes have “resurfaced”, with Pakistan being the “main source”.
  • One of the reasons cited by the Government in 2016, when it scrapped the ₹500 and ₹1,000 currency notes, was to wipe out fake currency notes in circulation.
  • On Monday, at the national conference of chiefs of anti-terror squads of State police, NIA Inspector General Alok Mittal shared a presentation where he said Pakistan was the main source of printing of high quality fake Indian currency notes (FICN). He made the presentation in presence of National Security Adviser Ajit Doval.

Major challenge

  • The circulation of high quality FICN was one of the six major emerging challenges cited by the NIA at the meeting. The others listed by the agency are increase in Khalistani activities, collection of evidence from cyber space and capacity enhancement of cyber forensic labs.
  • The NIA is the nodal agency for FICN related cases and has so far investigated 48 such cases, of which 13 ended in conviction.
  • Mr. Mittal added that the high quality notes were being pushed through the “western border and Nepal.” Bangladesh had emerged as the source of low quality FICNs, the IG said.
  • On November 8, 2016, Prime Minister Narendra Modi announced that the old notes were being scrapped and new notes were being introduced to weed out black money and eventually eradicate corruption.
  • Over ₹50 crore in fake currency notes have been seized in the past three years, the government had informed the Lok Sabha in June.
  • The Reserve Bank of India (RBI) recently carried out its mandatory bi-monthly announcement on the future course of monetary policy.
  • These announcements ostensibly offer ‘forward guidance’ to economic participants, so that they may plan their future.
  • Arguably, though, the public would have perhaps been more interested in knowing how the RBI intends to respond to the unusually large number of instances of fraud that have surfaced in the financial sector of late. The RBI’s reputation as a regulator has been affected by these. What led the bank to this place needs understanding.
  • Role of a central bank
  • Central banks command an important position in the market economies of the West today. How in a democracy so much power could be ceded to an unelected body must itself come as a surprise. It reflects two things: the political power of financial interests in the U.S. economy and the global intellectual influence of the American economic model. This model revolves around the goal of maximum creation of wealth by private individuals unimpeded by societal objectives. Leave alone the distribution of income, not even the objective of ensuring stability of the economy is allowed to come in the way of private individuals pursuing wealth enhancement.
  • Public regulation, which sets limits to private activity, is rejected as an unnecessary interference in beneficial activity that maximises social gain, and is therefore to be avoided.
  • When applied to finance, this model requires of the government only one action, namely, the control of inflation. Now, it is difficult to see why anticipated inflation, being an increase in all prices at the same rate, is harmful to production, the basis of an increase in wealth. After all, when prices rise together, no one individual is worse off if the inflation has been perfectly anticipated. It is unanticipated inflation that is the problem for producers, as it has the potential to derail their profit calculations. However, inflation, even when fully anticipated, can harm holders of financial assets yielding fixed incomes by eroding their wealth.
  • Borrowers on the other hand are better off with inflation as the real value of their outstanding loans are now less. While the problem of inflation can in principle be tackled through inflation-indexation, the practice is not widespread. This leaves owners of financial wealth averse to inflation.

Inflation control

  • As the volume of financial wealth in an economy increases so does the power of its owners over government. Now inflation control tends to take centrestage in economic policy formulation.
  • When inflation control is implemented via monetary policy it results in higher interest rates. Managers of financial wealth lobby for such a policy on behalf of their clients. This lobbying is the origin of the policy of inflation targeting. Inflation targeting by the central bank involves use of the interest rate to keep inflation under control. As it targets inflation it must let go of the employment objective. Though ‘flexible inflation-targeting’ is meant to take care of this objection, inflation is retained as the target and the central bank is not accountable for unemployment. In fact, in situations where growth, employment and inflation are jointly determined, and mostly they are, inflation-targeting via the interest rate can lower inflation only by suppressing growth. This is the mechanism by which inflation-targeting inevitably lowers growth.
  • Is this an argument for leaving inflation unchecked? No, it isn’t. On the other hand it points to other means of keeping inflation low, which, as has been demonstrated for India, would take the form of checking food-price inflation.
  • If inflation-targeting is essentially a response to the concerns of the financial sector, it tends to go with the view that the sector needs no particular regulation. This view was ascendant in the United States and the United Kingdom before the ‘North Atlantic Financial Crisis’ of 2008, so dubbed by Rakesh Mohan and Partha Ray to convey that its provenance is related to the policies pursued in that geography. Following this crisis, however, there has been substantial re-thinking on inflation-targeting and the role of central banks. Essentially it was recognised that lulled into complacence by low inflation, the U.S. central bank had ignored the possibility of financial instability. Instability had progressed due to the complete violation of the norms of prudence by U.S. investment banks and housing societies in a climate of relatively lax regulation. Alan Greenspan, the chairman of the U.S. Federal Reserve for 19 years, an arrangement seriously questionable in a democracy, was to acknowledge to a congressional committee that everything he had believed in regarding the functioning of the economy turned out to be false.

India’s hawkish stand

  • In a monumental failure of the imagination, India’s policymakers adopted inflation-targeting as the defining function of its central bank, even as the rest of the world was reassessing its credibility. Though the switch was effected by legislation only in 2015, a hawkish inflation stance had emerged at the RBI some two years prior to that. The real interest rate swung upward by over 5 percentage points. Inflation did come down, but that it continued to decline even as the real interest did not do so commensurately belies the possibility that inflationtargeting alone is responsible for it. Commodity prices, both of oil and domestic agricultural goods, have grown slower since. Oil prices have actually been declining in certain phases, and would surely have had a direct impact on inflation. But the slowing of the economy after 2016, which we are still experiencing, suggests that inflationtargeting may have had an impact on growth. This would not be surprising at all.
  • After the adoption of inflation-targeting in India, besides the slowing growth, we see the repetition of a pattern observed in the U.S. We have seen the appearance of stress in the financial sector.
  • Following the rising non-performing assets, or NPAs, of public sector banks, we now see the emergence of instability in the private segment of the financial sector. The most prominent case is that of non-banking financial company, ILFS. While some part of the burden this company faced before it was rescued by the government of India may have been due to a slowing economy, there was evidence of malfeasance, which went undetected also in the cases of Punjab National Bank and the Punjab and Maharashtra Co-operative Bank (PMC Bank). Improper conduct was also evident in the cases of Yes Bank and ICICI Bank.
  • Scenes of agitated depositors outside the PMC Bank’s office in Mumbai must have sent shivers down the backs of millions of Indians who have trustingly entrusted their hard-earned money to India’s banks, only to find their trust violated with impunity in pursuit of private gain. The latter would be unacceptable even if the act is not risky, which in the case of PMC Bank was extraordinarily so.

 Financial instability

  • The emergence of financial instability in India following the institution of inflation-targeting is in line with what we have seen in the Anglo-American economic area.
  • In India, the virtual redefinition of the central bank’s functions appears to have encouraged the RBI to consider its work done once inflation is within target. Televised monetary policy statements every two months would be no more than a charade, if inflation slows for extraneous reasons, and a smokescreen, if financial stability has been compromised due to lax regulation of the financial sector.
  • Even as the TV screens gurgle with news of some microscopic cut in the repo rate I see hapless vendors at Delhi’s swanky new airport scrambling for change. In the new India, the buck, it seems, stops nowhere.
  • Indigenous option
  • Unfortunately, air power is an expensive business, and in a scenario where manpower and running costs consume the lion’s share of the budget, the principal impediment to a comprehensive renewal of the IAF is a financial one. As such, lower capital costs and lower sustainment costs have to go hand in hand — it is simply not enough to argue that expensive western aircraft make up for their high upfront costs over lifetime sustainment.
  • Enter the indigenous option — HAL’s Tejas Light Combat Aircraft. Domestically produced and paid for mostly in rupees, it is not only fiscally attractive but also certainly good enough to replace the IAF’s ageing MiG-21 and MiG-27 fleet as it stands. However, non-compliance with a 1980s Air Staff Requirement and low production rates continue to raise questions about the type’s future. Notwithstanding these concerns, the IAF has committed to a large number of an upgraded evolution of the type incorporating a range of modern improvements such as an active array radar as well as fixes to problems identified early on, such as lack of a self-protection jammer. If this variant can be delivered cheaply and quickly, it will arrest the dramatic hollowing out of the IAF that is anticipated to take place around 2024-25, by which time some 100 aircraft could be withdrawn from service.

Budgetary support

  • In the middle of the French import and the domestic LCA sits a fledgling tender for a third type of fighter — a foreign design to be made in India under the controversial Chapter 7 of the 2016 Defence Procurement Procedure (DPP). Where the budgetary support for a programme of 114 modern fighters, and indeed the ability of the country to establish and sustain two fighter manufacturers, will come from is not clear.
  • Defence budgets have remained effectively flat for a long time, and with the economy flagging, an increase in capital outlay is not likely. Procurement funding will also necessarily have to compete with funding for research and development for upcoming domestic projects such as the redesigned LCA Mk.2 and fifth-generation Advanced Medium Combat Aircraft (AMCA).
  • Finally, even if all near-term procurements proceed to plan, there is still a ‘ramp up’ period to contend with — the training of air and ground crew, building of infrastructure and actually operationalising new types will pose their own challenges that will slow the effective rate of force accretion.