We need Paris: on U.S pulling out of climate deal (The Hindu - 03 June 2017)

     The U.S. strikes a blow to the climate pact, but the rest of the world must step up the efforts

     In abandoning the Paris Agreement on climate change, U.S. President Donald Trump has chosen to adopt a backward-looking course on one of the most important issues facing humanity. Ignoring scientific evidence on carbon emissions, Mr. Trump has carried his contempt for environmental regulations to an extreme with the decision to pull out of a hard-won compact that seeks to make the world safer for future generations. His move is incongruent with economic reality, because the most valuable American companies in manufacturing, computing, banking services and retailing, ranging from General Electric to Apple and Tesla, all see a future for growth and employment in green innovation, and not in fossil fuels. Some of them have begun reaping the benefits. For poorer residents of various countries, though, weakening of the climate agreement and failure to progressively reduce carbon emissions by 2020 and beyond threaten to impose misery and deepen poverty. Every successive year is becoming hotter than the previous one, and the ice sheets in West Antarctica and Greenland, which hold the key to sea levels, have recorded a steady loss in mass. As a major legacy polluter, the U.S. has a responsibility to mitigate the damage. This is something that Barack Obama recognised, but Mr. Trump has abdicated.

     It is heartening, however, that there is strong support for the Paris Agreement among many individual States and cities in the U.S., while the European Union and China, which together represent about 39% of man-made emissions, now effectively lead the effort to cut greenhouse gases. Energy efficiency is having an impact, and has levelled off coal use in America; it has in fact fallen over the past four years, including in 2016, in spite of an overall rise in energy consumption. Mr. Trump’s assertion that he represents Pittsburgh, not Paris, is clearly misplaced. India, which he has unfairly blamed for seeking climate funds and building coal plants, should strengthen its pledge to cut the emissions intensity of GDP by 35% by 2030, based on 2005 levels, and expand its ambitious renewable energy programme. The wider challenge now is to maintain the momentum on climate finance for mitigation and adaptation, since the U.S. pledge of $3 billion to the Green Climate Fund made earlier is unlikely to be fulfilled. Funding is crucial for poorer countries in order to cope with extreme weather events and sharp variations in food production caused by climate change. The U.S. exit should not affect the overall goal, which is to keep the increase in global average temperature over pre-industrial levels to less than 2°C. Equally, the principle of common but differentiated responsibilities that underpins the UN climate framework, and casts a duty on industrial powers responsible for the world’s accumulated carbon emissions, needs to be strengthened.

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GDP slowdown: Demonetisation’s fallout has hurt the economy but there are reasons to be optimistic (The Times of India - 02 June 2017)

     

India’s economy, or gross domestic product, grew a disappointing 6.1% in the January-March quarter of 2016-17. This growth rate however was not surprising. A deceleration in the pace of economic growth was evident from the beginning of the financial year. This was worsened by the disruption on account of demonetisation. Despite a slowdown in economic growth some positive features such as macroeconomic stability are reasons to remain optimistic. But they need to be complemented by a sharper approach to economic policy making. This will put India on an elevated economic trajectory.

       The highlight of January-March quarter data is that the widely anticipated fallout of demonetisation showed up. Sift the data and what is apparent is that agriculture was a saving grace on account of a good monsoon last year, and government spending shored up consumption. But it is worrisome that construction, a key provider of jobs for surplus rural labour, shrunk by 3.7%. Demonetisation appears to have taken a toll here. Other areas in the economy’s service sector such as trade have also been adversely affected by demonetisation. Consequently, the quarterly growth in gross value added was just 5.6%, the fourth consecutive quarter which witnessed a slowdown.

      GDP data also showed that some of the longer term problems continue to cast a shadow on the economy. The anaemic pace of increase in bank credit and a contraction in fresh investments checked economic momentum. Fixed investment as a proportion of GDP has been declining which means demand from consumers is the main driver of economic momentum. This feature is linked to troubles of banks. Indebted corporates have not been able to service their loans to banks, which has led to the latter’s problems of bad loans – making banks risk averse when it comes to disbursing fresh loans. The end result of these enduring problems is that the economy is functioning below potential.

      Looking ahead, there is reason to be optimistic, as some of the problems on account of demonetisation have faded following the introduction of new currency. But other enduring problems need to be forcefully tackled. The recent ordinance empowering RBI to deal with bad loans needs to be followed through. Government should also be ready to recapitalise banks that have to take a hit on account of resolving bad loans. Once health of banks improves, the Indian economy will be on a firmer footing.

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Back to basics: on the dip in GDP growth (The Hindu - 02 June 2017)

The dip in GDP growth in the January-March quarter points to the need for a policy reboot

India’s economy, measured by the gross domestic product, grew at 7.1% in 2016-17, the slowest pace since the National Democratic Alliance government came to office in 2014, and significantly lower than the 8% growth clocked in 2015-16 (revised data). On the face of it, this is in line with the estimates put out by the Central Statistics Office in early January and at the end of February. A top government economist has lashed out at ‘messiahs of doom’ who had predicted a 2% decline in growth due to the Centre’s decision to demonetise ₹500 and ₹1,000 currency notes last November. But scratch deeper, and those naysayers don’t appear to be too far off the mark. Growth in the final quarter of 2016-17 was just 6.1%, all of 1.8 percentage points lower than the 7.9% recorded in its first (which decelerated to 7.5% and 7% in the second and third quarters, respectively). In fact, the only reason the 7.1% estimate has held up is because growth for the previous quarters was revised upwards. Finance Minister Arun Jaitley is, however, right when he points out that growth had already been slowing down, so ascribing the entire downturn to demonetisation is not fair. Yet, whichever way one looks at it, the note ban seems to have exacerbated the problem, particularly for India’s large informal economy that the poor depend on, as even the World Bank has now noted.

Consider these underlying trends. Discounting the healthy growth in GVA (gross value added) from agriculture and government spending, real GVA grew by just 3.8% in the fourth quarter, down from 8.4% in the first — indicating that private spending and investment collapsed. Private consumption grew at the slowest pace in five quarters, even as construction (with a high dependence on informal/migrant labour) and manufacturing activities dipped sharply. Industry has renewed pleas for the Reserve Bank of India to cut policy rates and shift back to an accommodative stance. While lower inflation and growth may soften the RBI’s outlook, there is little that monetary policy alone can do at this juncture to revive animal spirits. Banks, the primary beneficiaries of demonetisation, are flush with funds but credit growth is at multi-decade lows — and the twin stress on banks’ and their borrowers’ balance sheets is spreading to other sectors such as telecom. With the direction of global headwinds remaining uncertain, growth in government spending budgeted to be lower this year compared to last year, and private investment virtually absent, these GDP numbers should serve as a reality check. Returning to the 8% growth mark is going to be a big challenge. While the government has vigorously underlined its reform achievements of the last three years, such as the Goods and Services Tax that rolls out in July, a mission-mode reforms reboot is urgently needed. And that can only begin if the problem is suitably acknowledged by policymakers.

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World Bank report concludes Modi’s demonetisation had more pluses than minuses (Hindustan Times - 01 June 2017)

Shock therapy can work, even in India, but not without leaving some burn marks. The World Bank’s latest India Development Update attempts to make another assessment of the impact of the Narendra Modi government’s demonetisation experiment. It does not shy away from saying that demonetisation caused considerable distress among informal sector workers in general. But its general conclusion is that ‘notebandi’ had many more pluses than minuses and its negative fallout was limited. Part of the reason for this, however, was simple luck: A normal monsoon helped cushion the rural economy.

The report interestingly looks at the velocity of M1 money supply, a way to measure the number of transactions in cash, bank accounts and normal places people keep their money. The velocity fell from 5.7 to 5.6 between the last quarter of 2016 and the second quarter of 2017. This would be expected but the fall was remarkably small, indicating that a national inclination for jugaad found ways around the lack of physical banknotes. The bank predicts a sharp rebound in velocity in the coming quarters.

The report repeats what other studies have shown, that India’s GDP growth rate dipped but only marginally during the demonetisation period. It estimates GDP growth rate was at 7.3% in the first half of the fiscal year and dropped a mere one-third of one percentage point in the second half. However, like everyone else who has come out with such a figure, the bank admits it has no clear means to calculate the impact on the informal sector. But certain parts of the formal economy proved quite resilient: Air travel by the urban middle class was wholly untouched by ‘notebandi’.

There are clues to the degree of turmoil in the informal sector. Demand for jobs in the formal sector by February, for example, matched the entire demand of 2016. This is a clear sign of how many jobs were lost during demonetisation. However, this also underlines a key advantage of demonetisation, at least if it is merged with a widespread digitisation of financial transactions: It is helping push India out of the shadow of its black economy.

Formalisation of the economy has numerous gains: It means better wages and conditions for workers, greater revenue for government, less corruption and more transparency, and higher productivity and investment levels overall. There are many who speak in favour of the informal sector. But the poor man’s economy has a crucial flaw. Because of its static productivity and technology levels it keeps its inhabitants in poverty. If India’s economy is substantially whitened, demonetisation will be remembered as the act that began the process.

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