Editorial Simplified: Jobless Growth Becomes more Systemic | GS – III


Relevance :  GS Paper III


Theme of the Article

Earlier confined largely to the organised sector, it has now spread to other areas, as revealed by the latest survey results.


Why has this issue cropped up?

The findings of the latest employment survey, called the Periodic Labour Force Survey (2017-18), are a cause for concern as the scenario is still far from anything that would denote decent employment. The two biggest issues here are: the shrinking share of the labour force; and the rising unemployment.


The data of concern

  • The labour force participation rate (% of people working or seeking work in the above-15 years age category) in the earlier survey of 2012 was 55.5%. This has shrunk to 49.7% in 2018.
  • There is an absolute decline in the number of workers from 467.7 million in 2012 to 461.5 million in 2018.
  • The figure for the overall unemployment rate at 6.1% is 2.77 times the same figure for 2012.
  • The highest unemployment rate of a severe nature was among the urban women at 10.8%; followed by urban men at 7.1%; rural men at 5.8%; and rural women at 3.8%.
  • Youth unemployment rate (unemployment among those in the 15-29 years age category) has reached a high 17.8%. Even here, the women stand more disadvantaged than the men, especially urban women, whose unemployment rate of 27.2% is more than double the 2012 figure of 13.1%.

Women labour

  • Given the sharp decline in women’s labour force participation rate, they have been losing out heavily due to the double whammy of exclusion from the labour force and an inability to access employment when included in the labour force.
  • The decline in women’s labour force participation from 31% to 24% means that India is among the countries with the lowest participation of women in the labour force.

Educated employment

  • The issue of educated unemployment, given its link with not just growth but also with transformative development, has never been as acute as at present.
  • What is significant is that the unemployment rates go up as levels of education go up. Among those with secondary school education, it is 5.7% but jumps to 10.3% when those with higher secondary-level education are considered. The highest rate is among the diploma and certificate holders (19.8%); followed by graduates (17.2); and postgraduates (14.6%).
  • Of course, educated persons are likely to have aspirations for specific jobs and hence likely to go through a longer waiting period than their less-educated counterparts. They are also likely to be less economically deprived. But the country’s inability to absorb the educated into gainful employment is indeed an economic loss and a demoralising experience both for the unemployed and those enthusiastically enrolling themselves for higher education.
  • Here again, the burden is the highest among urban women (19.8%) followed by rural women (17.3%), rural men (10.5%) and urban men (9.2%). Among the educated, women face a more unfavourable situation than men despite a low labour force participation rate.

Conclusion

The overall conclusion here is that the trend of ‘jobless growth’ that was till recently confined largely, if not only, to the organised sector has now spread to other sectors of the economy, making it more generalised. This calls for a thorough re-examination of the missing linkages between growth and employment.


Editorial Simplified: New framework | GS – III


Relevance :  GS Paper III


Theme of the Article

The SEBI regulations for mutual funds will help restore investor confidence.


Why has this issue cropped up?

After introducing a new standard framework for credit rating agencies last month, the Securities and Exchange Board of India came up with more stringent regulations to govern the management of mutual funds. The mutual fund industry came under its scrutiny after some mutual funds in the last few months had to postpone redemption of their fixed maturity plans (FMPs).


New SEBI Regulations

  • According to the new SEBI regulations, liquid mutual fund schemes will have to invest at least 20% of their funds in liquid assets like government securities.
  • They will be barred from investing more than 20% of their total assets in any one sector; the current cap is 25%.
  • When it comes to sectors like housing finance, the limit is down to 10%.
  • While the mandated investment in government securities will ensure a modicum of liquidity, the reduction in sectoral concentration will discipline funds and force them to diversify their risks.
  • Some mutual funds entered into standstill agreements with companies in whose debt instruments the funds had invested. This is not a welcome practice and goes against the interests of investors in the mutual fund. SEBI has done the right thing by banning funds from entering into such standstill agreements.
  • Further, SEBI has required that assets of mutual funds be valued on a mark-to-market basis in order to better reflect the value of their investments.

Caution needed

  • While SEBI’s intent to deal with the risks within the financial system is commendable, there could be unintended consequences to the regulator’s actions — which need watching.
  • One of the new regulations introduced by SEBI is to increase the exit load on short-term investments in liquid mutual funds to discourage sudden demands for redemption. This could possibly hinder fund flow into the bond market, which in India is already quite undeveloped when compared to the rest of the world.

The concern

  • While SEBI is doing a commendable job in disciplining the markets and intermediaries, the larger question is whether the regulator can really protect investors beyond a certain point.
  • Market investments involve risk, and investors seeking high returns may in fact be willing to assume the increased risk that comes with such investment.

Conclusion

What SEBI is probably more concerned about is the ripple effect of defaults and roll-overs on the system. Investor confidence can be shaken by defaults and that will have consequences for the economy. Viewed from this perspective, the regulator’s latest rules should be welcomed.


Editorial Simplified: Even central banks need ‘capital’ infusion | GS – III


Relevance :  GS Paper III


Theme of the Article

The RBI must function independently and not be a slave to outdated ideas.

Introduction

The central bank of a country sits at the pinnacle of its financial system and is mandated with ensuring its stability.

Time to reflect on role

  • RBI should not be considered venerable beyond querying.
  • Apart from monetary policy, fiscal policy should be used to stabilise the economy when needed.
  • Light regulation of the financial sector can lead to a crisis.

Lessons to learn

  • RBI should take into account the evolving understanding of macroeconomics globally.
  • RBI should put greater focus on fiscal deficit.
  • RBI should not constantly lecture on fiscal consolidation.
  • Inflation targeting should not lead to high policy rate as it affects investment.
  • RBI while focusing on inflation should not lose sight of brewing financial instability.

Conclusion

We need not just an independent RBI but also an RBI that does not follow some defunct school of thought.


Editorial Simplified: Even Central Banks need ‘Capital’ Infusion | GS – III


Relevance :  GS Paper III


Theme of the Article

The RBI must function independently and not be a slave to outdated ideas.


Introduction

The central bank of a country sits at the pinnacle of its financial system and is mandated with ensuring its stability.


Need of ‘capitals’

  • From time to time central banks are directly or indirectly involved in shoring up stressed commercial banks with capital infusion.
  • So, it may appear odd to suggest that occasionally even the central bank may need some of its own medicine. After all central banks make a surplus from their operations, and indeed pay a dividend to their governments.
  • The puzzle is resolved, however, when we recognise that capital is not only funds but also ideas.

Time to reflect on role

  • One of the ideas is related to the role of the central bank in the economy. An economic arrangement once made cannot be treated as settled for all time to come. This also holds true for central banks, often considered venerable beyond querying.
  • The global financial crisis has led to a substantial re-thinking of macroeconomics. The main revisions are that monetary policy defined by inflation targeting can no longer be treated as the centrepiece of macroeconomic policy, that fiscal policy should be used to stabilise the economy when needed and that financial regulation is a must.
  • The limitation of inflation targeting was understood when the ‘great moderation’, an extended period of low inflation in the west, ended in the financial crisis. It is this that has led to the view that light regulation of the financial sector can be a recipe for disaster.
  • It has come to be recognised that assertions of the impotence of fiscal policy may be exaggerated. There could be times when the private sector is held back by the state of the economy. In a recession this would delay recovery. Now fiscal expansion would be necessary.

Lessons to learn

  • It is hoped that the Reserve Bank of India and the economic policy-making establishment will take into account the evolving understanding of macroeconomics globally.
  • A continuously declining fiscal deficit has not restrained the RBI leadership from paying hawk-eyed attention to it, constantly lecturing the elected government of the perils of even the slightest deviation from the path of fiscal consolidation, when strictly it is not its business to do so. It should instead focus on putting its own house in order.
  • Ever since we have had de facto inflation targeting in India, from around 2013, the real policy rate has risen very substantially. This has been accompanied by declining borrowing in the formal sector likely affecting investment.
  • Ironically, we have had in India the replay of a scene from the global financial crisis where a central bank focusing on inflation loses sight of brewing financial instability. The crisis at IL&FS, with a group company defaulting on its payment obligations jeopardising the interests of hundreds of investors, banks and mutual funds is only a specific case in point. The larger story is of the steady rise in the non-performing assets (NPAs) of banks even as inflation was abating.

Conclusion

What we need is not just a central bank that is left to function independently, but also one that is not a slave to some defunct school of thought.


Gist of Editorials: Capital Buffers | GS – III


Relevance :  GS Paper III


Theme of the Article

The RBI’s draft norms for non-banking financial companies are timely.

Why has this issue cropped up?

RBI has released draft norms for NBFCs.

The proposed norms

  • NBFCs would have to comply with a higher liquidity coverage ratio (LCR).
  • NBFCs would have to maintain their LCR at 60% of net cash outflows initially, and improve it to 100% by April 2024.

Why new norms for NBFCs?

  • NBFCs are struggling to meet their obligations to various lenders.
  • NBFCs run the risk of being unable to pay back their borrowers on time.

Impact of these rules on NBFCs

  • Put significant pressure on the margins of NBFCs.
  • NBFCs may be forced to park their money in low-risk liquid assets.
  • Positive long term impact on the health of NBFCs and financial sector.
  • The new norms would discourage NBFCs from borrowing over short term.
  • This could compel NBFCs to shrink the scope of their lending.

Conclusion

The latest liquidity norms for NBFCs are still necessary to ward off systemic crises.


Editorial Simplified: The Sum and Substance of the Jobs Data | GS – III


Relevance :  GS Paper III


Rising unemployment must also be seen as a function of rising education and aspirations.


Why has this issue cropped up?

The staggering increase in the unemployment rate, from 1.7% in 2011-12 to 5.8% in 2017-18 for rural men and from 3.0% to 7.1% for urban men, has generated wide ranging hand-wringing.


Takeaways from the unemployment data

  • First, while the unemployment rate is a frequently used measure of poor performance of the economy, under conditions of rising school and college enrolment, it paints an inaccurate picture.
  • Second, the reported unemployment rate is dominated by the experience of younger Indians who face higher employment challenges and exhibit greater willingness to wait for the right job than their older peers.
  • Third, the unemployment challenge is greatest for people with secondary or higher education, and rising education levels inflate unemployment challenges.

How unemployment rate is calculated?

  • The unemployment rate is calculated by dividing the number of unemployed by the number in the labour forces, that is, the sum of employed and unemployed.
  • This statistic ignores people who are out of the labour force — students, homemakers and the disabled.

Analyzing the unemployment data

  • As long as the proportion of the population out of the labour force is more or less stable, the unemployment rate is a good indicator of the changes in the employment situation.
  • However, India has seen massive changes in proportion of individuals enrolled in an educational institution over the past decade.
  • For 15-19-year-old rural men, the proportion primarily engaged in studying increased from 64% to 72% between 2011-12 and 2017-18. As a result, while the proportion of the population aged 15-19 that is unemployed doubled from 3% to 6.9%, the unemployment rate tripled from 9% to 27%.
  • The proportion of the population that is unemployed has increased only slightly for population aged 30 and above but increased substantially for younger men.
  • For rural men (30-34), the proportion of unemployed increased from 1% to 2.3% while that for men (20-24) increased from 4.6% to 16.1%. Much of the increase in male unemployment is located among ages 15-29.
  • The unemployment rate has been traditionally high for men with secondary or higher level of education and this is the segment in which most of the increase in unemployment is located.
  • The unemployment rate for illiterate rural men increased from 0.5 to 1.7 between 2011-12 and 2017-18 but the absolute increase was substantially larger, from 3.8 to 10.5 for rural men with at least secondary education. Similar trends are evident for urban men.

Roots of India’s present day unemployment challenge

  • Part of India’s unemployment challenge lies in its success in expanding education while not expanding formal sector jobs.
  • Educational expansion affects the unemployment debate by skewing the unemployment statistics and by creating greater competition for well-paid jobs among a rising population of educated youth.
  • Rising prosperity allows young graduates to wait for well-paying jobs, creating an army of educated unemployed, before being forced to accept any work, frequently returning to family farms or starting small shops.

Conclusion

Creating jobs for an increasingly educated workforce and ensuring that the new workers are well equipped to enter the labour force are twin challenges that deserve greatest priority.


Editorial Simplified: Capital Buffers | GS – III


Relevance :  GS Paper III


Theme of the Article

The RBI’s draft norms for non-banking financial companies are timely.


Why has this issue cropped up?

Non-banking financial companies, already reeling under a painful liquidity crisis, are up against a fresh challenge in the form of new regulatory norms set by the Reserve Bank of India. The central bank has released draft norms on liquidity risk management for deposit taking and non-deposit taking NBFCs.


The Proposed Norms

  • According to these proposed rules, NBFCs would have to comply with a higher liquidity coverage ratio (LCR), which is the proportion of assets that an NBFC needs to hold in the form of high-quality liquid assets that can be quickly and easily converted into cash.
  • NBFCs would have to maintain their LCR at 60% of net cash outflows initially, and improve it to 100% by April 2024.

Why new norms for NBFCs?

  • The strict norms have to be seen in the context of the present crisis where even prominent NBFCs are struggling to meet their obligations to various lenders.
  • NBFCs, which are in the business of borrowing short term to lend long term, typically run the risk of being unable to pay back their borrowers on time due to a mismatch in the duration of their assets and liabilities.

Impact of these rules on NBFCs

  • The new norms would likely put significant pressure on the margins of NBFCs.
  • NBFCs may be forced to park a significant share of their money in low-risk liquid assets, such as government bonds, which yield much lower returns than high-risk illiquid assets.
  • While the profit outlook and other short-term financial metrics of NBFCs may be affected by the norms, there are good reasons to be optimistic about their long-term impact on the health of NBFCs and the wider financial sector.
  • This is particularly so in instances where panic sets in among short-term lenders, as happened last year when lenders, worried about the safety of their capital, demanded to be paid back in full. In other words, NBFCs rely heavily on short-term lenders rolling over their loans without fail in order to avoid any kind of liquidity crisis.
  • The new norms would discourage NBFCs from borrowing over short term to extend long-term loans without the necessary buffer capital in place.
  • This could compel NBFCs to shrink the scope of their lending from what it is today, but it would save them from larger crises and significantly reduce the need for the government or the RBI to step in as the lender of last resort.

Conclusion

NBFCs have done a tremendous job in recent years in widening and deepening access to credit by taking a share from the public sector banks, which have been severely affected by the bad loans crisis. However, the latest liquidity norms for NBFCs are still necessary to ward off systemic crises.


Gist of Editorials: Why the Integrity of Data Matter | GS – III


Relevance :  GS Paper III


Theme of the Article

The merger of the NSSO into the CSO is a cause for concern.

Why has this issue cropped up?

The government has decided to merge the NSSO into and under the CSO.

Reason for the Merger

Apprehensions have risen regarding the veracity of NSSO data.

The present System

  • Every year government departments send subjects to be investigated by NSSO.
  • The requests are sent to the National Statistical Commission (NSC).
  • The proposals are discussed at length and periodic surveys on important issues are also considered.
  • The results are discussed in detail by the NSC and are published after its approval.

Importance of Data

They have been used extensively for monitoring of trends and critical assessment of several important aspects of the economy and society.

Is apprehension about NSSO justified?

  • The NSSO surveys command wide respect among academics, State governments and non-governmental organisations.
  • The NSC commands confidence and respect both within the country and abroad.
  • Any apprehension will hugely dent the credibility of the Indian statistical system.

The problems with NSSO

  • Inadequate budgetary allocations;
  • Acute shortage of trained field staff;
  • Scale of surveys is un-manageably large mainly.

Solutions

There is the need to continue research on improving sampling design, field survey methods and validation of data. Correcting these deficiencies is entirely in the domain of government.

Conclusion

Increasing the role of CSO officials in running the NSSO will not solve these problems, but they can help by providing funds for specialised research on survey design and methodology.


Gist of Editorials: The key Agenda Must be to Accelerate Growth | GS – III


Relevance :  GS Paper III


Why has this issue cropped up?

Growth is slowing down. The growth rate in 2016-17 was 8.2%; in 2018-19 it was 7%.

Why Growth is Important

Only a fast-growing economy can create jobs and sustain social safety nets.

Investment rate Needs to Rise

  • Ratio of Gross Fixed Capital Formation to Gross Domestic Product has stayed low at 29 % in 2018-19.
  • For sustained growth, the ratio has to go up, and that too substantially.

How to Revive Investment

  • Government should prepare a programme of public investment for 2019-20.
  • A strong public investment programme can be a catalyst of private investment.
  • There have to be sector- or industry-wise plans.
  • NPA crisis needs to be resolved.
  • Setting up of long-term financial institutions, partly funded by government.

Job and Growth

  • It is faster growth and faster investment which will generate employment.
  • An improvement in the financial system may trigger some new jobs.

Way Forward

  • Agrarian distress needs to be tackled on a priority.
  • Making available inputs such as seeds and fertilizers at an affordable cost.
  • More attention must be paid to increasing agricultural productivity.
  • The glitches in implementation of GST should be removed.
  • Address bottlenecks in Insolvency and Bankruptcy Code.
  • Land reforms which enable entrepreneurs to buy land needs to take place.
  • Labour reforms should wait until the economy has picked up steam.
  • Monetary policy should keep a watch on prices.
  • Minimum income support should be implemented.
  • ‘Poor’ must be defined and properly identified.

Conclusion

For investment to happen, there must be social and political tranquillity.


Editorial Simplified: Why the Integrity of Data Matter | GS – III


Relevance :  GS Paper III


Theme of the Article

The merger of the NSSO into the Central Statistics Office is a cause for concern.


Why has this cropped up?

The government has decided to merge the National Sample Survey Office (NSSO) into and under the Central Statistics Office (CSO).


Reason for the Merger

Recent attempts to question the veracity of National Sample Survey (NSS) data and the way the issue has been handled have given rise to apprehensions within academia, State governments and the media about the prospect of radical changes in the present system for deciding substantive issues of scope, design, scrutiny and validation of the surveys.


The present System

  • Under the present system, every year various departments of government send a list of subjects that they would like to be investigated by the NSSO.
  • The requests are sent to the National Statistical Commission (NSC), which has respected economists, subject matter specialists and statisticians from government.
  • The proposals are discussed at length keeping in view the budget allocations, availability of trained field staff and supervisors. In doing so, the conduct of periodic surveys on important issues is also considered.
  • After providing for periodic repeat surveys of some important aspects, the subjects to be covered in a particular year and the scope of the inquiry are decided.
  • Once the field work is over, the groups decide the detailed tabulation programme, and the tables to be prepared for publication. The tabulated results are discussed in detail by the NSC and are published after its approval.

Importance of Data

They have been used extensively for monitoring of trends and critical assessment of several important aspects of the economy and society, such as poverty and inequality, consumption patterns, employment, household savings and investment, and health-seeking behaviour.


Is apprehension about NSSO justified?

  • The NSSO surveys command wide respect among academics, State governments and non-governmental organisations as the most reliable and comparable basis for discussions in the public, policy and even political arenas. This is based on their well-earned reputation for professionalism, independence and integrity.
  • Widespread apprehensions that the proposed absorption of NSSO into the CSO could compromise the surveys by subjecting their review and publication to government approval must therefore be allayed promptly in an unqualified manner.
  • The existing institutional arrangement in which the NSC, as a professional body independent of government, has not only functioned smoothly but also commands confidence and respect both within the country and abroad must be maintained.
  • Any attempt or even a suggestion that its substantive work, publication and free dissemination of data are subject to the department’s approval will hugely dent the credibility of the Indian statistical system.

The problems with NSSO

  • The NSSO doesn’t have adequate budgetary allocations;
  • there is an acute shortage of trained field staff;
  • the scale of surveys is un-manageably large mainly.

Solutions

  • The solutions call for action by the institutions responsible for gathering data by investing in continuing research on improving sampling design, field survey methods and validation of data. Correcting these deficiencies is entirely in the domain of government.
  • But there are also serious difficulties inherent in trying to get reliable and complete information through the interview method. Most respondents do not maintain any records or accounts of their transactions.
  • Since most respondents rely on recall, it is unrealistic to expect them to provide reliable information on the scope and detail sought by questionnaires.
  • Memory lapses and respondent fatigue lead to high incidence of non-response, indifferent response and biased response. These problems are particularly serious among the more affluent and better-educated sections of respondents.

Conclusion

Increasing the role of CSO officials in running the NSSO will not solve these problems, but they can help by providing funds for specialised research on survey design and methodology. The necessity and importance of such research calls for far greater attention and resources than they receive at present.