Food Security and Poverty

My article on the proposed Food Security Act in India is in the Financial Express today. The Government's proposal in principle extends the right to food to all citizens in India but limits the legal binding on it only for the population that lies below the poverty line (BPL) - and here there is a wide range of the estimates of poverty in the country - ranging from 38% according to the Tendulkar committee set up by the Planning Commission recently to 77% set by the 2007 Arjun Sengupta Committee. The NC Saxena Expert Group for the 2009 Census of BPL households in rural areas puts the estimate at 50%, but says that 80% of rural households would be more appropriate if the calorie consumption is to be 2,400 calories in rural areas

Read the Report of the committee on the methodology for estimating the population in India below the poverty line, particularly the dissent note by P. Sainath for a compelling argument on why coverage of the food security act should be universal.

My conclusion in the article:

The reason behind limiting coverage of the Act has to be fiscal, and the Centre should admit that outright. Under the present Public Distribution System (PDS), the higher estimates of BPL population can raise the food subsidy bill by 25% to 140%, depending on which estimate is used. However these estimates assume that the PDS continues in its present form. Instead of looking at the high subsidy costs as a deterrent, the Centre should keep the spirit behind a Food Security Act foremost in mind—systems set up should be decentralised and allow greater flexibility to the states with the idea for organisational cost savings. A simple example is to distribute coarse cereals, pulses, fruits and vegetables suited to the local conditions through a revamped, new PDS, rather than use rice or wheat transported long distances from other states.


In fact, if the primary responsibility of providing food security is to lie with the state governments, as the Act proposes, why not minimise the role of the Centre to being a facilitator, rather than a controller of the whole food stock trade and distribution? There is much to be said for making the right to food a universal right and there is ample evidence to show that targeted systems increase the scope of corruption. Clearly, the Food Security Act is an important step forward, but it should not narrow its focus and result in two steps back in the battle against hunger in this country.

Financial crisis and central banking

Marc Faber in an interview recently praised the RBI for being amongst the best central banks in the world - mainly from the point of view of keeping an eye on financial stability:
The RBI has one of the best monetary policies in the world because they supervise the financial sector very closely. They have maintained relatively tight monetary policies and also they pay attention not only to core inflation which is not representative of the cost of living increases and is not representative of inflation in the system but the RBI also pays attention to rising and falling asset prices. So, I have to give them credit for being actually one of the best Central Banks in the world.


That's the view from the investment world, yet the RBI has often been criticised by economists for being ultra-conservative. Shankar Acharya talks of the good performance of the RBI in his article dealing with policy continuity at the RBI


But the conventional wisdom attributes this to an instinctively conservative and cautious approach of the RBI and its leadership, especially then governor Y V Reddy and deputy governor Rakesh Mohan. At best this is a partial truth and, at worst, it’s quite misleading. Let me explain. Reddy and Mohan should certainly get a lot of credit, but for much more than being instinctively conservative.

To begin with, maintaining a cautious stance in the boom years of 2003/4-2007/8 was itself quite a feat in those exuberant times when the financial community, the media and even the government were pressing for rapid progress on conventional, financial liberalisation. 

But the Reddy-Mohan RBI did much more than just preserve key elements of the policy/regulatory framework. Over the boom years, as the perceived scale and risks of global financial excesses mounted inexorably, the RBI evolved a diverse set of heterodox policy responses to deal with the problem. These included:

• The inclusion of “financial stability” as an explicit objective of monetary policy;
• Active management of surging and volatile capital inflows through partial “sterilisation” by market stabilisation scheme (MSS) security issues, cash reserve ratio (CRR) hikes and liquidity adjustment facility (LAF) operations, thus retaining substantial, discretionary control over monetary and exchange rate policies;
• Moderation of bank exposure to asset bubble-prone sectors such as real estate and equity markets through countercyclical provisioning requirements and differentiated risk weights for bank lending to such “sensitive” sectors;
• Extension of stronger regulation to systemically important non-bank finance companies;
• Enhanced supervision of financial conglomerates;
• Bringing bank exposure to non-banks within the prudential framework;
• Tighter guidelines for securitisation and a sceptical stance towards complex financial products.

After a challenging year of crisis management, Governor Subbarao has explicitly endorsed the key elements of the Reddy-Mohan heterodoxy. It has probably helped that mainstream, international thinking on these issues has been driven much closer to the Reddy-Mohan positions by the global financial crisis. For those, like me, who backed the Reddy-Mohan approaches to monetary and regulatory policies, the continuity shown by Subbarao’s RBI is very heartening. For earlier critics of these approaches there may be some disappointment and discomfort.

So true! For those who are looking for a short roundup of the issues plaguing EMEs today, Subbarao's latest speech on the crisis and EMEs is worth reading. His conclusion:

It needs to be recognized that after a crisis, with the benefit of hindsight, all conservative policies appear justified. But excessive conservatism in order to be prepared to ride out a potential crisis could thwart growth and financial innovation. The question is what price are we willing to pay, in other words, what potential benefits are we willing to give up, in order to prevent a black swan event? Experience shows that managing this challenge, that is to determine how much to tighten and when, is more a question of good judgement rather than analytical skill. This judgement skill is the one that central banks, especially in developing countries such as India, need to hone as they simultaneously pursue the objectives of growth and financial stability.

Borlaug and the Green Revolution

Norman Borlaug passed away on 12^th September. Newspapers have carried eulogies and criticism for his work towards ensuring food self sufficiency in India in the sixties.

From the Hindu

Norman Borlaug’s association with India began in the late 1960s. India was then importing 10 million tonnes of wheat and “we lived a ship-to-mouth” existence. The introduction of the dwarf variety of wheat developed by him in Mexico was a turning point in India’s food production pattern.

And the Hindustan Times carried this piece on ‘The American who helped India conquer hunger’

Borlaug had been criticised by environmentalists for his innovation of genetically modified food (food developed by altering gene structures) and advocating the use of fertilisers, insecticides and pesticides. “It is better to die eating genetically modified food instead of dying of hunger,” he remarked at PAU.

There is a sharp attack in the Business Standard by Sadanand Menon

Within three decades, the pattern was to lead to a new kind of devastation — extreme rural indebtedness on the one hand and high levels of soil salinity on the other. The unprecedented levels of rural migration to urban areas in the 1990s, was only one of the consequences. The other was the rapid decline in the productivity of cereal farming and a wholesale turnaround to cash crops. Cotton, sugarcane, tobacco, bananas, coconuts, etc. replaced rice, wheat and millets in many pockets. This was to lead to further experiments in hybridisation of production and an invasion of Indian agriculture by multinational giants like Monsanto, who could exercise long-distance control over the entire process.

And a defence of Borlaug in the Mint

To be sure, agricultural productivity has declined, but that drop is due to a complex set of reasons: Nothing, not even population, rises at the same rate over a period of time. The drop in the size of a farm due to inheritance leads to a drop in productivity. Politicized subsidies encourage waste of water and power, as well as overuse of fertilizers and pesticides by the well-connected farmers, skewing distribution of resources. Warehouses are poorly managed, and a chunk of what is produced gets wasted in transit, or consumed by rats. Insufficient and inefficient irrigation means Indian agriculture remains a gamble with monsoon. Borlaug wanted poor farmers to be paid remunerative prices; governments avoided that, in order to placate the influential urban constituencies.

There is a lot that needs to be fixed in Indian agriculture. But don’t blame Borlaug for these problems. His legacy is the gift of life for millions.

It is true that our problems as they exist today need an overhaul in many existing systems and Borlaug is not responsible for them. However, one of Menon’s points needs to be stressed:

The Vishnu Mitter Institute of Paleo-Botany in Lucknow, for example, has studies showing that while there were over 127 varieties of rice alone being cultivated in the Indian subcontinent during the first two decades of the 20th century, these were steadily dropping and had reduced to 18 within the first two decades of the Green Revolution period. Along with everything else, the idea of agricultural and food diversity too was receiving a knock. Mono-culture and the idea of single-point control systems, so important for designing market strategies, became the norm.

Even as we continue to wage the battle against hunger in India today (another post on that later) somewhere along the way the ecological balance has been lost and we are all the worse off for that.  

Safe drinking water

My article in the Financial Express today about drinking water data reporting in India : Regional disparities abound in the states across the country and while govt. statistics report 88% of households have access to improved source of drinking water, the devil lies in the detail. It is time we moved to surveys on the quality of the water used, and not the source.


So what should be the objective of drinking water supply management in India? Not just increasing access to ‘improved’ sources of drinking water, but increasing access to a service that is reliable, affordable and sustainable both financially and environmentally. Such an objective will raise considerable debate over the right way forward. However, one golden principle stands out here—water is an increasingly scarce resource, so it has to be used most efficiently and equitably. Reporting appropriate data would go a long way in raising sensibility towards achieving the MDG of increasing sustainable access to safe drinking water.


For more details read, World Bank-Indicus Analytics report ‘India Water Supply and Sanitation’ 

Education and growth

A recent paper by Hanushek and Woessmann titled 'Poor student learning explains the Latin American growth puzzle' looks at why Latin America has performed badly, despite good educational levels. The answer lies in the quality of schooling and improvement in cognitive skills. They have put up an interesting graph linking skills to growth and not surprisingly Asia come out at the top, with Latin America and Sub-Saharan Africa at the bottom of the line.

Though this graph puts Asia at the very top, for us in India, the need for education reform and raising skills is well known. I had written a piece in the Financial Express last month, excerpts below:

As the accompanying table shows, in India unemployment is largely a problem of the youth. Experience counts more than education as labour stays in low skill jobs, learning as they go along. Just 2% of population in the age group 20-24 has had vocational training, while this percentage is more than 50% in developed countries, even Mexico and Peru are higher than India at 28% and 17% respectively. This shows up in a severe productivity problem, with low incomes for the earners, while industry faces a shortage of skilled labour.

	Unemployment rates (%) for various age groups using Usual Principal Activity Status
		Age Group
Educational Level	15-20 years	21-25 years	26-30 years
Not literate	3.1	1.3	0.5
Literate w/o formal school	6.0	1.6	1.6
Total Literacy Campaign	4.5	1.8	1.6
Others	7.6	4.0	2.4
Literate below primary	4.7	2.5	1.2
Primary	6.5	2.2	1.2
Middle	9.0	5.6	2.6
Secondary	18.9	11.2	5.1
Higher Secondary	30.8	17.3	6.2
Diploma/Certificate course	36.6	27.5	16.1
Graduate	-	31.7	12.4
Postgraduate and above	-	35.8	15.4
Total	8.7	8.1	3.5
Source: Indicus Analytics estimates from NSSO 61st round, 2004-05

As the India Labour Report 2008 pointed out, a three strand approach is needed in India:

The first strand, employment reform (to match labour supply to demand) should include changing labour laws to simplify definitions, compliance etc, that currently hinder expansion of organized employment, converting Employment Exchanges into Career Centers that offer assessment, counseling, apprenticeships, jobs and certifications etc.

The second strand is employability reform, which has already begun, to some extent, with the National Skill Development Policy 2008 and the PPP model for ITIs. Much more needs to be done though, e.g the NREGA could be used for providing apprenticeships and funding skill development.

The third strand in the strategy would be to prepare the supply for demand – education reform – which requires a policy shift from accreditation and regulation of capacity to measuring and publicizing outcomes and quality. Government financing has to be separated from delivery, which can be done through a broad based voucher programme. The list of change would include greater autonomy and governance reform in institutions, creating a performance management system for government school teachers with rewards and punishments for attendance and learning outcomes, creating a National Qualification Framework to allow two-way fungibility between vocational, college and school education with appropriate transfer of credits etc.

All this may seem a tall order, but without it, the country is destined to plod along slowly, developing internal fissures that may be beyond repair.

Global Financial Crisis: Questioning the questions

How has the crisis changed our thinking? Are we still asking the wrong questions? What implications does this have for policy making? RBI Governor sets out the right questions to ask in a lecture titled 'Global Financial Crisis: Questioning the questions':

Some excerpts:

Notwithstanding reams being written about resolving the present crisis and preventing another like this, global imbalances are not on the radar screen of policy debate. This is both perplexing and disturbing. Indeed, once the immediacy of the crisis is behind us, it will not be surprising if we head for another round of destabilizing global imbalances.

Resolving the problem of global imbalances does not mean eliminating them. As long as there is world trade, certain countries will have surpluses and certain others will run deficits. Global imbalances have been, are, and will continue to be inevitable.

So, to ask how we can eliminate global imbalances is clearly the wrong question. The right question is this: given that global imbalances are inevitable, how do we ensure that they do not build up to destabilizing levels?

***

The current monetary and fiscal stance is, however, not the steady state. The Reserve Bank needs to roll back the special monetary accommodation. For this to happen, there are two necessary conditions. First, the government will have to show a firm and credible commitment to fiscal responsibility by fleshing out the road map for fiscal consolidation. Second, there will have to be more definite signs of recovery. The Reserve Bank will maintain an accommodative stance until demand conditions improve and credit flow takes hold, but reversing the expansionary policies is definitely on the agenda on the way forward.

…there will need to be increasing coordination between monetary and fiscal policies. Central banks will have to take into account fiscal compulsions in their monetary stance while governments will need to commit to strict fiscal responsibility. To ask therefore how monetary and fiscal policies can go their separate ways is the wrong question. What is the right question? I submit the right question is: how can we coordinate fiscal and monetary policies to achieve the planned outcomes?

**

In a more global context, given the fall out from the crisis, to ask how central banks should revert to their sole inflation targeting mandate is the wrong question. The right question is this: what are the specific roles and responsibilities of governments and central banks in ensuring price stability, financial stability and macroeconomic stability?

***

The magic of the financial sector gave it such a larger than life profile that we began to believe that for every real life problem, no matter how complex, there is a financial sector solution. Now, of course, we know better – for every real life problem, no matter how complex, there is a financial sector solution, which is wrong...

.... However, our problem is a little different since we must regulate markets in a way that does not hamper development. But whose development do we focus on? As I have argued, what is important is the development of the real sectors not of the financial sector. To the extent that the financial sector helps deliver stronger and more secure long-term growth, its development is important. And our regulatory framework should be premised on this underlying argument. So, as we change or review our regulatory framework, the question we need to answer is whether an existing practice or a change in rule delivers higher and more secure real economy growth; not whether it develops the financial sector or accelerates its expansion.

All in all, this crisis has dealt a harsh blow to our confidence in the financial sector. But are we asking the right question? The question we are asking is how to put the financial sector back on the high growth trajectory. I believe we must be asking a different question, so that we can come up with effective and lasting solutions. That question is: how can we keep real sector growth on a high trajectory? And only in this connection, should we ask what the financial sector can do to help.

Economics and development choices

By Sumita Kale “It is true that the economic man is dead, but his funeral rites still remain to be properly celebrated by his legitimate heir, the behaviouristic man, who has emerged from the laboratories of the psychologist but has not yet taken his rightful position in the centre of economics.” No, this is not a quote from a modern behavioural economist, it was written eighty years ago, in 1925. 

This post is a tribute to a man who got the essence of economics right – Prof. Radhakamal Mukherjee, considered a leading sociologist and environmentalist but forgotten by economists. Reading Mukherjee is baffling, one wonders why the simple propositions were not taken seriously and were actually discarded, leaving economics to be a truly dismal discipline, bound in narrow confines by its graphs and equations. Thankfully some of his books are available online – Borderlands of Economics, Principles of Comparative Economics, Foundations of Indian Economics etc. 

Mukerjee’s take on economics is quite different from the way it is taught today- he blended it with geography, sociology and psychology, he brought in elements of biology and philosophy. This is an economics that makes a lot of sense. For instance, he divides the economic environment into three parts 1) Ecologic - comprising the climate and topography, land resources, mineral and water resources, plants, animals and man’s inter-relationships with the physical environment as indirectly affecting economic life 

2) Mechanical or technic - tools, weapons, capital and technology, systems of production, mechanisms of exchange, banking, instruments of credit etc. and 

3) Institutional - State, social groups, law, tradition, standards of social values and ideologies, private property, custom or competition etc. Economics should concern itself with all three, and not merely the second i.e. the price-cost economics. 

He went on to distinguish between laws, norms and ideals. The ecological environment is governed by laws, which have the same certainty as the laws in physical sciences. The mechanical or price and cost economics yields the norms of consistent action, an abstraction which can be justified only on the basis of statistical generalisations of past experiences or of a necessary law in ecological economics which produces it. The third gives rise to the ideals and policies of what men ought to do in concrete economic situations. 

He also brought in the aspect of time as being crucial since ‘laws, ‘norms’ and ‘ideals’ of economic activities are reached by a process extended over time. Without a clear understanding of these three categories, he said, economic analysis and prescription would be confused and divorced from reality. 

And this is actually what has happened, economics today is open to the charge of being an autistic discipline (check out the Post-Autistic Economics Network). It was in the divide between the village and the city that Mukherjee lost the debate on the path to follow for development – most modern planners wanted India to grow through cities, the Western model, while he saw this model as one that would lead to a breakdown in social stability. He decried the idea that villages are the source of energy and labour and the cities, the hub of growth. Rather than let villages be subservient to cities, he wanted them to live a life of their own, be vibrant with skills and knowledge, he wanted to bring industry to villages, to let villages grow into cities. For him the solution lay in setting up cooperatives, not just for providing credit, as is popular, but also to give the necessary support for farm inputs, marketing the produce etc. Revitalising agriculture was one step, the next was to enable diversification of economic activity in the village, away from agriculture – this was the opposite of the migration model that pushed people to the cities. 

Some of Mukherjee’s prescriptions were anathema to modern thinking – he saw the caste system as a source of social cohesion in India society, for instance. But what we have seen now is that somewhere in the quest for industrialisation and growth, the balance has been lost. The rural-urban divide continues to grow, a direct fallout of an imperfect understanding of the socio-economic reality. In 1916 Mukherjee wrote, “ How to bring life and progress to our villages is one of the most serious economic problems of the day.” Unfortunately, this remains a grave problem in the world today. 

Last year marked the milestone where the world became more urban than rural, but this is not quite an occasion to celebrate. To quote Prof.Wimberly, “So far, cities are getting whatever resource needs that can be had from rural areas. But given global rural impoverishment, the rural-urban question for the future is not just what rural people and places can do for the world’s new urban majority. Rather, what can the urban majority do for poor rural people and the resources upon which cities depend for existence? The sustainable future of the new urban world may well depend upon the answer.” 

 One can argue that a large part of the world’s current concerns on poverty, environment etc. could have been avoided if a more holistic view on development had been taken by economists and policy makers. Of course there will always be opponents to this view, but for them the counter argument would be : ‘unless you think outside your box, how would you know you are in the right box?”