Union Budget 2020: Expectations & Reactions

The Union Budget 2020 was one of the most anticipated one in the recent history. From tweaks in long-term capital gains to GST rate-cuts in daily used items, this budget has a multitude of aspects associated with it. Today, we are sharing our experts’ view on the budget expectations and their reactions to the Union Budget 2020. Everything is compiled for your convenience.

The consolidated post: Budget 2020

Expectations

The union budget 2020 needs to urgently address the economic slowdown issue, boost consumption and increase GDP. One would also expect increase in 80C deduction limit to increase investments and leave more disposable income in the hands of individuals – Kasturi Ghatak

Expectations from the Union Budget 2020-

Focusing on current slowdown and maintain fiscal discipline

1. Fiscal reform measures to stimulate consumption and growth

2. Relief in the form of change in tax slabs, raising standard deduction limit to boost demand and household savings (giving more money in the hands of the taxpayers)

3. Government funding through issuance of sovereign bonds in the international markets

4. Measures to boost rural demand

5. Banking sector reforms by addressing NPA issues and NBFC crisis to ease credit flow to boost demand. – Antara Mukherjee

The union budget 2020 needs to urgently address the economic slowdown issue, boost consumption and increase GDP.  – Kasturi Ghatak

This Union Budget slingshot will whizz, whir and bring down income inequality, stimulate spending and boost cross country and industrial activities – Nidhi Sinha

A Saturday that shall mark the onset of India’s rise to dominance in the global capital markets over the next decade. Sensex to mount 47K by Mar 21. #Budget20 – An Intueri consultant

Increase in public spending, cheaper credit availability, revive rural consumption, increase healthcare spending to prepare for global health emergencies #budget2020 – Akhil Ashok

Expectations from the budget to include GST rate cuts on items of daily use and important sectors such as the automotive sector – Aranya Kalia

Ambarish Dasgupta’s Budget expectations: My expectation is more from Budget speech than the budget per se.

Those are:

a. Come out of denial mode on the situation of the economy and transparently explain to common Citizens like us if anything has really gone wrong in economy in the eyes of the government and if they admit so then explain  what are those factors that caused the slump and where did our policies, measures go wrong or fell short. Why has this stagflation come in, why has growth slowed, why has unemployment increased , why has consumption and private expenditure decreased, why has private investment slumped – what are the answers to those immense number of why going across the minds of all people. Let there be a very transparent, open explanation of the macro situation as of now as against our expectations which were there while Last budget happened and the identification of the causes which might have caused the variation of actual from estimates.

b. What should follow then is the outlining of policy changes, reforms, measures that Government should take to address those causes which stymied the growth in 19-20. What would prevent recurrence of that in 20-21 – even if we don’t expect a turnaround  in short term we need to know what alternate steps are being taken to arrest that rather  than wishing the malaise away and thinking market will automatically correct the financial parameters and nothing needs to be done. Please note this budget has a different significance as many of the parameters have gone back to the numbers which we had 30 years back , and therefore against such backdrop an usual budget speech proclaiming future investment numbers as we usually hear in all Budgets will possibly not be a very welcome one.

c. Then one can move into the usual bunch of financial stimulus packages for sectors and schemes that Government usually does in every budget but without addressing the points above if they again move into the usual budget speech, I think trust of people on Budget process and speech which is certainly declining and looked at with some cynicism, can’t be restored.

d. Lastly I will have an interest in what Govt does in a completely apolitical way for the States which have different ruling parties than in centre. Number of such states have increased since last budget and therefore this point comes up – to have an egalitarian growth all around the country, they will certainly have to focus on each and every state and create packages suited to their strengths and weaknesses ,  needed for a sustainable  growth in those states and therefore in India. Will be interested to hear that and in particular for my own state Bengal.

Reactions:

The jury is still out on whether #Budget2020 will spur investment and consumption, too early to tell in my opinion.

Direct tax announcements were directed at making investments domestic/foreign easier in Indian companies and the lives of investors/entrepreneurs much easier –

for example, the abolishment of Dividend distribution tax, 100% tax concession for sovereign funds to invest in Infrastructure, tax holiday for startups have been extended, etc.

Sadly the healthcare sector did not see any game-changing announcement which was expected in light of a global health emergency that emerged from right next door- Akhil Ashok

Gutful transition to wisdom of ancient Indian philosophies in Union Budget, kudos! Analytics, quantum computing, IoT, 3D printing and AI got rightly highlighted, however tangible plans and policies to harness these emerging technologies for the economic rejig was expected- Nidhi Sinha

Expectations from Union Budget 2020

My expectation is more from Budget speech than the budget per se. Those are:

a. Come out of denial mode on the situation of the economy and transparently explain to common citizens like us if anything has really gone wrong in economy intheeyes of the government and if they admit so then explain what are those factors that caused the slump and where did our policies , measures go wrong or fell short. Why has this stagflation come in , why has growth slowed , why has unemployment increased , why has consumption and private expenditure decreased , why has private investment slumped – what are the answers to those immense number of why going across the minds of all people. Let there be a verytransparent, open explanation of the macro situation as of now as against our expectations which were there while last budget happened and the identification of the causes which might have caused the variation of actual from estimates.

b. What should follow then is the outlining of policy changes,reforms, measures that Government should take to address those causes which stymied the growth in 19-20. What would prevent recurrence of that in 20-21 – even if we don’t expect a turnaround in short term we need to know what alternate steps are being taken to arrest that rather than wishing the malaise away and thinking market will automatically correct the financial parameters andnothing needs to be done. Please note this budget has a different significance as many of the parameters have gone back to the numbers which we had 30 years back , and therefore against such backdrop an usual budget speech proclaiming future investment numbers as we usually hear in all Budgets will possibly not be a very welcome one.

c. Then one can move into the usual bunch of financial stimulus packages for sectors and schemes that Government usually does in every budget but without addressing the points above if they again move into the usual budget speech, I think trust of people on Budget process and speech which is certainly declining and looked at with some cynicism, can’t be restored.
d. Lastly I will have an interest in what Govt does in a completely apolitical way for the States which have different ruling parties than in centre. Number of such states have increased since last budget and therefore this point comes up – to have an egalitarian growth all around the country, they will certainly have to focus on each and every state and create packages suited to their strengths and weaknesses , needed for a sustainable growth in those states and therefore in India. Will be interested to hear that and in particular for my own state Bengal.

– Ambarish Dasgupta

Impact of International Trade on Indian Grassroots: Why India dissented from RCEP

A reluctant participant in the dragged out RCEP negotiations that began in 2012, India gradually warmed up to the idea of greater economic integration to move up the global value chain. Although protectionist forces opposed the RCEP since its inception, liberal advocates of laissez-faire pushed for the free trade agreement.

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement originally devised to consist of 16 countries across the Asia-Pacific region. At the RCEP’s administrative core is ASEAN: an intergovernmental grouping of 10 Southeast Asian countries – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. It was proposed that the ASEAN bloc will be joined with six member-states: China, Japan, India, South Korea, Australia and New Zealand.

While the RCEP is administratively built around ASEAN, the main mover is China. The world’s largest trading bloc was pushed by Beijing starting 2012 to counter a free trade agreement that was in the works at that time: theTrans-Pacific Partnership. The US-led Trans-Pacific Partnership excluded China and hence the RCEP was Beijing’s balancing act. The Chinese government inculcated ways to expand its market through this regional trading bloc. For example, there is no coconut cultivation in China, but the Chinese import them from other countries and then process and export.

Indian diplomat, counsels, farmers and politicians dissented from joining the RCEP. Trade deficit, unemployment, decrease of domestic produce in the country, anti-dumping measures are a few reasons for this opposition.

Areas of disagreement with the RCEP member-states: Why India opted out

1. Base Year: There is a disagreement between India and the RCEP members on fixing the base year. The base year is the first of a series of years in an economic or financial index. For example, to find the rate of inflation between 2013 and 2018, 2013 is the base year or the first year in the time set. The base year can also describe the starting point from a point of growth. India opposed to the proposal that 2013 be treated as the base year for reducing tariffs, effectively implying that member countries should slash import duties on products to the level that existed in 2013. India is pushing for 2019 as the base year, given that import duty on many products such as textiles and electronic products has gone up in the last six years.

2. Rules of Origin: Rules of origin are the criteria needed to determine the national source of a product. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports. As per RCEP, China and Korea may be using countries like Indonesia and Thailand as “proxy” countries from where, the good which is actually originating in China or Korea, will be imported to India. Countries like Indonesia and Thailand are getting involved in the Chinese and Korean markets by staging that they qualify as the Minimum Value-Addition Criteria as Assembly Plants, from where the export to international markets will take place. Hence, such an act may lead to India becoming a dumping ground.

3.Trade Deficit: India registered a trade deficit in 2018-19 with as many as 11 RCEP member countries. China is India’s largest trading partner while we are China’s 11th largest trading partner India had a trade deficit of $104 billion with RCEP countries. More than half of this was with China at $53 billion. This raised worries about India being flooded with Chinese goods once the RCEP deal takes effect.

4.Indian sectors facing the consequence of RCEP: Various domestic industries including dairy, textile and automobiles have raised serious concerns and opposed the pact over tariff-related issues, especially with China. Pharmaceutical, steel, and chemical industries are also impacted.

5.Import Tariff imposed on countries: India wants exemptions built into the ratchet obligations as part of the pact. A ratchet obligation implies that a member country cannot be raising tariffs once the pact comes into effect. An exemption would imply that a country will be able to erect restrictive measures later on grounds of protecting the national interest. Under RCEP, India would have been required to eliminate tariffs on 74% of goods from China, Australia, and New Zealand, and 90% of goods from Japan, South Korea, and ASEAN. Amidst an economic slowdown, India faced the risk of becoming a dumping ground for foreign goods.

6.Protection of domestic data: There is also the issue of data localisation under the RCEP deal. India wants all countries to have the right to protect data. This would imply that countries can share data only where it is “necessary to achieve a legitimate public policy objective” or “necessary in the country’s opinion, for the protection of its essential security interests or national interests”.

7.Impact on specific products: Natural rubber, cardamom, tea and coffee, spices, rubber, coconut and oilseeds, milk, groundnut, oil palm, mustard, sunflower, soybean will be affected adversely. The idea is to understand that if the import of such products increases in the market, rural India gets hit.The RCEP would allow the dairy industry of Australia and New Zealand to compete with our resource-strapped farmers.

IMPACT OF RCEP ON INDIAN FARMERS

India’s farmers were worriedthat they would be unable to compete on a global scale.For example,the milk industry is a huge source of income for crores of farmers and they will be unable to face off against the highly developed dairy industry of New Zealand and Australia.Both these countries are eyeing the huge market in India.

It is notable that New Zealand exports 93.4 percent of its milk powder, 94.5 percent of its butter and 83.6 percent of its cheese production. Removal of tariffs, which at present are 60 percent for milk powder and 40 percent for fats, will allow the dumping of these products.  The presence of China, Australia, New Zealand, and Japan in RCEP will also affect sericulture, horticulture as well as floriculture in India. The farmers are also fearing that the RCEP might allow cheap imports of palm oil from Malaysia and Indonesia and rubber, tea, cardamom and vanilla from other Southeast Asian countries.

Some of the Indian sectors effected by the RCEP are listed in this article:

1.Dairy: Farmer group representatives said that dairy cooperatives in India earn about Rs 280 to Rs 300 a kilogram of milk powder. They are worried that milk powder from Australia or New Zealand might become available at Rs 180 to Rs 200 a kilogram.

2.Spice: The India-Sri Lanka FTA’s impact was high on spice farmers. Pepper started coming from Vietnam through Sri Lanka. In 1999, the price of pepper was 720 per kg, which has now reduced to 330 per kg. Today, Lankan nutmeg, pepper and other spices are still coming to India and impacting our farmers.

3.Coffee: The price of raw coffee beans was Rs 63 per kg in December 1999. This got reduced to Rs 18 per kg in 2004. Hindustan Lever and Tata, both processing companies of processed tea and coffee, were the beneficiaries, while farmers were biggest losers. Tata transferred their plantation asset to some other company, because they could now import tea from outside and sell it India.

4.Fisheries: Another sector coming under threat is fisheries. Some of the countries are interested to open up the sea for Deep Sea Fishing (DSF) vessels. When the new DSF vessels enter the Indian Exclusive Economic Zones (EEC), they will go dry in a short span of time. If huge vessels operate in our fragile fisheries zone, our fishing resources will be exhausted within no time. This will displace 7.5 million fisherfolk.

5.Sugar: Farmer agitations are going on in most of the sugar producing states. Nowhere are farmers getting the due MSP. Sugar factory owners complain that retail prices of sugar have come down to Rs 40-42 per kg. This is due to import of sugar. Even though we increased import duty to 100 per cent, import is increasing, and export is decreasing.

6.Wheat: Wheat production provides livelihood to more than 6.7 crore Indians. There were bulk imports on account of the Indian government and the private sector manufacturers of bread, biscuits and noodles. These lead to a price crash of Rs 2.65 in the market.

WAS OPTING OUT OF RCEP THE CORRECT DECISION?

However, many corporates and economists still believe that India’s manufacturing industry needs the pressure of external competition to secure global competitiveness it lacks.Without access to trading blocs, Indian industry would be limited to the home market, denying the growth of international expansion.It was being argued that the RCEP would facilitate India’s Micro, Small and Medium Enterprises (MSMEs) to effectively integrate into the regional value and supply chains. Moreover, RCEP can bring reforms in business competitiveness and policy reforms for India from these nations.

The exports category of T-shirts and singlets demonstrates how staying out of trade pacts is not sustainable. The US, a key market for India, imposes 32% tariff rate on India’s exports in this category, but nothing on exports from South Korea, as it enjoys zero tariffs under the US-Korea FTA. South Korea, a key competitor of Indian apparel exports, also enjoys zero tariffs under the EU-Korea FTA.

As per the Ease-Of-Doing-Business Index, except for Cambodia, Laos, and Philippines, all other RCEP nations rank higher than India, and hence can boast of better business conditions for attracting investments.

As India has now opined to step out of RCEP, foremost alternative is to engage with the RCEP nations bilaterally. In no circumstances, should India give out any impression that we are withdrawing from one of the most dynamic regions of the world.India has an existing trade agreement with the ASEAN and bilaterally with Singapore, Malaysia, Thailand, Indonesia,Japan, and South Korea. Clearly, the inclusion of India in the RCEP could have given more market access to the rest of the three countries namely, China, Australia, and New Zealand.

It is equally important is to see how Indian institutions are meeting with global commitments that have geo-strategic and geo-political implications. If India wants to arrive at a solution for RCEP soon much more diplomatic efforts are required with the RCEP nations.Production and post-production competitiveness of Indian products must be boosted to promote exports, which remain critical to maintain a favourable balance of payment situation and create jobs.

If Indian grassroots are marred, domestic surplus is fed to cattle and unemployment moves up because of such FTAs, then what is the purpose of advancing in global trade? By implanting innovative solutions, there are various ways of positioning domestic produce in global value chains. The focus of the Indian economy needs to be on how surplus from the farmers can reach places which are unfed, and national value chains. This will help us achieve optimum allocation of resources. Filing intellectual property rights on domestic produce will protect and help in international market expansion. As the seedling of commerce is growth of revenue, India should focus onexport-oriented strategies than reducing tariff barriers on imports and improve FTAs with RCEP nations.

The US-China “Phase-1” Trade Deal: A Commentary

Story So far

On the 526th day of the US-China trade war, the two superpowers reached an agreement on a trade deal. To be very clear this has been termed as a “Phase-1” trade deal. At this juncture, it’s important to take a step back and see what has transpired in these 500+ days of the trade war and what has finally prompted the two nations to arrive at this deal.

On July 6th, 2018, US triggered the trade war with its first China specific tariffs. Soon followed multiple announcements by both countries declaring tariffs on each other’s goods. China responded immediately by halting their purchase of US produced Soybeans and this marked the beginning of the trade war. 50 days later the first round of talks commenced which ultimately ended in no real breakthrough or decision being taken.

On the 150th day, following a dinner at the G20 summit, a temporary truce was announced to de-escalate trade tensions. A 90-day moratorium was placed in which both nations agreed not to increase or impose any new tariffs. China even lowered tariffs temporarily and resumed buying US Soybeans.  This helped in bringing both parties to the table once more, and multiple negotiations and talks both in Washington and Beijing took place. A key decision that was taken at this stage was to set up Trade Deal Enforcement offices, a positive sign that both countries intended to arrive at a deal. But then again, this positive mood was short lived.

Mr. Trump raised tariffs once more and China responded in Kind. The Huawei fiasco didn’t help relieve the tensions. Both countries set up their own version of a blacklist. Day 348 arrived – Xi and Trump decided to rekindle trade talks that halted. The G20 seems to be a good place for countries to rekindle their friendships. In Osaka, the two premiers decided to meet in person to discuss the trade dispute.

Exceptions and Escalations

Shortly before the schedule G20 meeting, USTR (Office of the US Trade Representative) announced a process by which US interested parties can request the exclusion of certain Chinese products subject to additional tariffs. A great gesture but signs that the US has started to feel the pain. A tentative truce was reached days before the G20 summit.

A year had almost gone by since the beginning of the trade war. US and China agreed to restart trade talks and Mr Trump even suggested relaxing some of the restrictions placed on Huawei. But hardly 10 days pass by and Mr Trump threatened to introduce a new set of Tariffs. Name calling and Tit-for-Tat tariffs continued, and the tariff war started escalating once again.

The 13th round of trade talks were held in Washington and further exceptions and delays were announced in the scheduled tariffs.

On the 463rd day was the first time the “Phase-1” deal was announced but it still required several more weeks to finalize. The following weeks saw more exclusions being announced and a phone call that resulted in an “in-principle” approval on the trade points. The tariff roll back was discussed for the first time and both sides agreed to a proportionate and simultaneous roll back once the deal was signed.

A few statements by Mr Trump sent mixed signals to the world but on the 526th day, 13th of December 2019, the Phase one deal was officially announced.

Terms of the deal

While neither side has released specific details, here are the largely quoted terms of the deal –

  • The US will not to proceed with 15 percent tariffs on US$160 billion worth of consumer goods scheduled to take effect December 15 and will reduce the September 1 tariffs on US$120 billion of Chinese goods – halving it from 15 to 7.5 percent. However, the 25 percent tariffs on US$250 billion of Chinese imports will maintain, and further reductions will be linked to progress in future trade negotiations.
  • China has not publicly confirmed much of this, especially the purchase agreements, but on its part will increase the purchase of US goods and services by at least US$200 billion over the next two years. It has agreed to suspend retaliatory tariffs also scheduled for Sunday, implement intellectual property safeguards, and have a tariff exclusion process in place. It appears that among its potential purchases, China will import US agricultural products worth US$40 billion to US$50 billion – in each of the next two years.

Impact of the deal

  • Does this deal have an impact on US trade deficit with China? While there is a commitment from China to increase purchase of US agricultural produce, energy, pharmaceuticals and financial services, no hard targets were mentioned.
  • Intellectual property rights have been a hotly contested topic during this trade war, and the Phase-1 deal includes stronger Chinese legal protections for patents, trademarks, copyrights, etc. It also mentions commitments from China to follow through on previous promises to remove / eliminate any pressure on foreign companies to transfer technology to Chinese firms as a condition for market access.
  • Currency was another key point in the trade negotiations. China was accused of manipulating its currency for trade advantage. The deal contains language that includes pledges by China to refrain from such activities.

How will these be enforced? There is a dispute resolution arrangement which finally results in tariffs being imposed on the faulting party.

Is the Trade – War finally over?

No, the trade war isn’t over. This is a welcome change of tone from both sides and a temporary relief to world markets. It has helped reduce the tensions. While the Americans have pressed the Chinese negotiators to give commitments on hard amounts, the Chinese have agreed to market demands only.

Therefore, we can expect more tweets but given that the elections are closing in, Mr. Trump will be otherwise occupied with the upcoming impeachment trials and his own re-election. This might have also prompted the Americans to reach a deal in the first place. It is impossible to predict the future, but one can hope that for now the Tit-for-Tat tariff war is probably on hold.

Inclusive Growth in India

Absolute poverty has fallen substantially over the last couple of years, with most of this decline contributing positively to rapid economic growth in developing countries. However, the acknowledgment that economic growth often does not meet the needs of the poor has encouraged the current discussion on the need for inclusive growth. Economic growth in the absence of measures to ensure the sustained impartial and reasonable distribution of the benefits of growth has frequently disseminated the concentration of wealth in the hands of those already better off. As a consequence, Governments and donors in many developing countries have come to comprehend that in order to considerably reduce poverty they must promote inclusive growth. A commonly used definition, employed by the World Bank, which defines inclusive growth as an absolute reduction in poverty associated with the creation of productive employment rather than direct income redistribution schemes. The World Bank maintains that inclusive growth should take into account both ‘the pace and pattern of growth’; these are considered to be linked and should therefore be addressed together.

Defining inclusive growth, rapid pace of economic growth is necessary for substantial poverty reduction and for the growth to be sustainable in the long run, it must be broad based across sectors and inclusive of large part of a country’s labour force.

Promoting inclusive growth requires policymakers to address both growth and income distribution, so it requires an understanding of the relationships between growth, poverty and inequality. Economic growth is a prerequisite for poverty reduction when income distribution is held constant. The acknowledgment that inequality affects the impact of growth on poverty reduction has led to a broad agreement that it is necessary to look beyond a ‘growth-first’ agenda in order to successfully deliver inclusive growth.

A robust inclusive growth strategy will complement policies to stimulate economic growth with those that foster equality of opportunity, alongside a social security net to protect the most vulnerable. As such, economic policies to promote structural transformation and create productive employment for poor people will need to be complemented by investments in human capital and other programmes to support social inclusion and equal access to jobs.

The United Nations 17 Sustainable Development Goals (SDG) are

Countries have committed themselves to time-bound targets of prosperity, people, planet, peace, partnership (five P’s) keeping in line with the United Nations 2030 agenda and the Sustainable Development Goals. The Paris Agreement, which is part of the SDG framework, requires every country to achieve net zero greenhouse gas emissions by mid-century (Masson-Delmotte et al. 2018). In order to achieve results in SDG, policy frameworks adopted by the Governments play a crucial role. The three principle layers to measure government efforts to implement the long-term objectives of the 2030 Agenda and the Paris Agreement:

  • High-level public statements by governments in support of sustainable development [monitored by- a) tracking the existence and the content of Voluntary National Reviews (VNRs) under the High-Level Political Forum for the 2030 Agenda; b) monitoring heads-of-states’ and cabinet members’ speeches in support of the goals];
  • Strategic use of public practices and procedures for the goals (coordination mechanisms, budget, procurement, human resource management, data and audits);
  • Content of government strategies and policy actions.

The SDG index summaries countries’ current performance and trends on the 17 SDGs.India ranks 115 in 2019.

In the context of India’s inclusive growth trajectory, the strategies of Inclusive growth and development came into the attention in the progressing policies of emerging market economies (EMEs) with higher economic growth rates. With an accelerated economic growth rate, Indian policy makers too moved their concentration on Inclusive growth and expansion while formulating the 12th five-year plan.Thus, the plan targeted deprived sections of the Indian population, health, employment, rural urban infrastructure, women and child development and social security measures against the backdrop of the strategy.

From a peak of 8.1% in the fourth quarter of 2017-18, growth in gross domestic product (GDP) has now decelerated to a six-year low of 5% in the fiscal first quarter, with a slowdown visible across all sectors. Particularly important in this context is the compression of government expenditure, Central government revenue grown only 6% last year, more than 11% short of the budget estimate. Accordingly, expenditure growth was compressed to 6.9% last year, down from more than 11% the year before. Weak revenue growth meant devolution to states also fell short, forcing them to cut expenditure. This compression of government spending at a time when all major components of aggregate demand were already slowing has been an important driver of the sharp decline in economic growth. The country is now requiring an inclusive macroeconomic strategy to revive aggregate demand in the short run, while initiating structural reforms to sustain growth over the long-term. For inclusive growth in India macroeconomic activities, initiated and supported by the government, should be planned to uplift the standard of living of common people and must not be concentrated only to increase the pace of the growth process.

In this regard, while assessing India’s progress on SDG, we note that India submitted the VNR in 2017 and is due in 2020 again. According to VNR 2017 developed by NITI Aayog, Government of India is strongly committed to Agenda 2030, including the SDG.

Following goals were focused on performing SDG India Index at State level:

·         SDG 1: No Poverty

·         SDG 2: Zero Hunger

·         SDG 4: Quality Education

·         SDG 5: Gender Equality

·         SDG 6: Clean Water and Sanitation

·         SDG 8: Decent Work and Economic Growth

·         SDG 9: Industry, Innovation and Infrastructure

·         SDG 10: Reduced Inequalities

·         SDG 11: Sustainable Cities and Communities

·         SDG 15: Life on Land

·         SDG 16: Peace, Justice and Strong Institutions

The Index tracks the progress of all the States and UTs on a set of 62 Priority Indicators, measuring their progress on the outcomes of the interventions and schemes of the Government of India. The SDG India Index is intended to provide a holistic view on the social, economic and environmental status of the country and its States and UTs. A composite score was computed for each State and UT of India based on their aggregate performance across 13 of the 17 SDGs. The SDG Index Score for Sustainable Development Goals 2030 ranges between 42 and 69 for States and between 57 and 68 for UTs. Among the States, Kerala and Himachal Pradesh are the front runners with an SDG India Index score of 69. Among the UTs, Chandigarh is a front runner with a score of 68.

Need for inclusive growth strategy

According to the Planning Commission of India (Planning Commission, 2007), the concept “Inclusion” should be seen as a process of including the excluded as agents whose participation is essential in the development process, and not welfare targets of development programs.

In the context of the above interpretation of the term, sustained inclusive growth in India possibly requires changes in prevailing growth approach and a definite line of deed to include the excluded representatives. After pursuing the current growth strategy for a long time, economic inequality in India is still very severe.

Key elements of inclusive growth

 Since globalization, significant improvement in India’s economic and social development made the nation to grow strongly in the 21st century. The following factors encouraged India to concentrate more on inclusive growth:

  • India is the 7th largest country by area and 2nd by population. It is the 12th largest economy at market exchange rate and 4th largest by PPP. Yet, India is far away from the development of the neighbourhood nation, i.e., China.
  • The exclusion in terms of low agriculture growth, low quality employment growth, low human development, rural-urban divides, gender and socialite qualities, and regional disparities etc. are the problems for the nation.
  • Reducing poverty and other disparities and raising economic growth is the key objectives of the nation through inclusive growth.
  • There are so many studies that estimate that the cost of corruption in India amounts to over 10% of GDP. Corruption is one of the ills that prevent inclusive growth.
  • Although child labour has been banned by the law in India and there are stringent provisions to deter this inhuman practice, still, many children in India are unaware of education as their lives are spoiled to labour work.
  • Literacy levels have to rise to provide the skilled workforce, required for higher growth.
  • Economic reforms in the country are overwhelmed by outdated philosophies and allegations by the politicians and opposition parties in India.
  • Achievement of 9% of GDP growth for country as a whole is one of the boosting factors which gives the importance to the Inclusive growth in India.
  • Inclusiveness benchmarked against achievement of monitor able targets related to
    • Income &Poverty
    • Education
    • Health
    • Women & Children
    • Infrastructure
    • Environment
  • Even at international level also, there is a concern about inequalities and exclusion and now they are also taking about inclusive approach for development.

Impact of Inclusive Growth

In the context of the above findings about income disparities and economic inequality in India, it appears that certain fundamental changes are to be initiated in the growth strategy to adequately enhance productive employment opportunities for the economically weaker sections of people. Accessing opportunity in the growth process by the hitherto excluded poor, low-income and the unemployed is to be ensured for any meaningful implementation of inclusive growth in India.

Extension of irrigation facility in India is one area which needs instantaneous attention in the interest of inclusive growth in the country. Conservative estimates show that nearly 60% of India’s arable land is rain dependent. It means only 40% of agricultural land is fully under all-season irrigation facility. Another estimate shows that yearly average rainfall in India is 3 lakh cubic feet and only one third of that is retained in the country and two lakh cubic feet drains down to sea. It implies that without distressing the ground water level and just by using a considerable part of the unutilized rainfall, irrigation capacity can be extended immensely. Hence, adequate investments to quickly extend the spread of minor/major labour-intensive irrigation projects will not only improve land yield but also provide access route of the previously excluded agents to enter the growth process. Certainly, there are hurdles for jumpstart extension of irrigation facility; but the hurdles should not be impossible in the interest of common people of India.

Secondly, everybody agrees that in the present global economic scenario, educated workers are more productive than illiterate labours. However, according to Census Data of India nearly 26% Indians were not literate at all in 2011 which is far below world average. Hence, erasing illiteracy and massive expansion of primary and technical education can enhance labour productivity and gainful employment opportunity of the excluded agents in the current growth process.

Thirdly, In India 70% of health-related expenditure is made by individuals and only 30% is spent by the government – just the opposite scenario of many countries. It is also estimated that only due to increasing medical expenditure 38 million Indians are joining below-poverty-line population every year. Hence for a meaningful inclusive growth and poverty reduction, massive extension of affordable healthcare, control of drug prices, free availability of drinking water and sanitation facilities are to be ensured.

Emphasis on the building of physical infrastructure, particularly roadways, railways, ports and cold chains, is another area which is to be improved rapidly. In a huge country like India physical infrastructure is far behind Asian front-runners. But targeted development of physical infrastructure can create large scale employment opportunity to the army of unskilled/semi-skilled workers in India.

Conclusion

Thus, the key implications from the above discussed concept of inclusive growth would essentially include ensuring fiscal health of India with ever increasing role of government in the economic sphere, effective use of resources and increasing devolution and decentralisation, strengthening competitive pressures, transforming workforce structure, size, and human resource management arrangements, changing budget practices and procedures, and introducing results-oriented approaches to budgeting and management thereby enhancing efficiency of public sector to achieve sustainable development goals. With an improved go-to-policy response of the Government, a conducive environment with a well-functioning financial structure provided by the government can help other relevant stakeholders and achieve broad based impacts on the economy.

Today, Indian companies too are mapping their business actions to SDGs. Broadly, companies focus on SDG 4 (quality education), SDG 8 (decent work), SDG 5 (gender equality), SDG 13 (climate action), SDG 6 (clean water and sanitation). Existing programmes of companies are also being linked to SDG while some are linking to their branding efforts. Essentially, the SDGs have the potential to provide a framework for mobilizing corporates to invest in sustainable development in an ongoing and scalable way while keeping their business interests intact. The SDG serves guidelines for businesses to assess and manage social, economic and environmental risk, while contributing to bettering their reputation, image and their strategic position in the world’s markets.

As inclusive growth is considered as a prime focus by the Government, policy reforms in this respect have a critical yet broad-based impact on industries and market. All players in the system are affected in a certain matter depending on nature of its business. In today’s scenario, amidst all the global happenings we pause to look at the domestic prevalent factors from a fiscal angle that drive businesses and contribute to markets and economy at large.

Scaling and Replication of Social Enterprises in India

In a nation with an estimated population of 1.37 billion people, an extensive range of social enterprises can make an impact. From public services to financial services, to technology, social enterprises can play a key role in a diverse economy like India. Ridley-Duff and Bull (2011) defined a social enterprise as an organization that applies commercial strategies to maximize improvements in human and environmental well-being, rather than maximizing shareholder profits.

The development of this study is for  entrepreneurs to evaluate scaling opportunities in social enterprises that want to expand. Indian social enterprises have large national and international markets where their services can be having moving impacts.

This framework is geared towards replication and scaling of programs commenced by Indian social enterprises in market expansions. It includes methods/strategies for scaling impact for a broad set of investors and entrepreneurs to build such projects.

A social enterprise is legally structured as a for-profit entity with a clear social impact goal defined. In India, there are five options to set up a for-profit social enterprise: Sole proprietorship, partnership, limited liability partnership, a private firm and as a co-operative. 80% of Indian social enterprises are structured as a for-profit private limited company (PLCs).

Support at various stages of incubation

Over the years, the main operational problems faced by social enterprises have been accessing resources and funds, management challenges, task and mission challenges, and social perception challenges.

  • Idea/ seed stage incubation: Presently, social incubator UnItdIndia provides support to idea-stage social entrepreneurs that are looking to develop and pilot their social impact ideas, by providing capacity support, mentorship and small capital.
  • Early-stage incubation: Villgro based in Chennai is a comprehensive social incubator providing seed fund, mentorship; working space and network to social enterprises. It is also working on building active ecosystems in metro and tier 2 and 3 cities by conducting workshops, offering fellowships and organizing mentorship/ networking events.
  • Accelerator: Villgro also has an accelerator program. There are mainstream accelerators and programs that support startups and a small percentage (2-5%) of social enterprises.

 Corporate Structure, Competitive Analysis, and Market Entry

To understand the viability of a business model, we must understand whether the corporate structure allows for growth, requisite of licenses, participation and compensation of the board of advisors. Every social enterprise must assess competitors, make a market differentiator, and understand the customer’s perspective on the service rendered. Once the market entry impediments to startup are understood, we start building the business model of the enterprise.

Millennium Alliance, which is a consortium of public-private partnerships, has supported the scaling of social innovations in 22 states of India including low-income states such as Bihar, Uttar Pradesh, Odisha, Chhattisgarh, Madhya Pradesh, and Rajasthan. It funded Waterlife, which provides sustainable, affordable, and safe drinking water through Community Water Systems. Billions of people globally do not have access to safe water, leading to waterborne diseases. It built a successful operation in India in partnership with the government, NGO, Panchayats, SHG, Commercial institutions as well as international agencies. At present, this social enterprise has found a large market in Rwanda, where more than 60% of people do not have access to safe water.

 Business Models of Social Enterprises

 The business model is based on the social impact it wants to make or the social problem it is trying to solve. Key features of social enterprise are: the benefactors of the impact and target customers paying for the product or service might or might not be the same; enterprises can be structured for impact investments with options of debt or equity; and enterprises internally functions like any other commercial business in terms of management, operations, people and resources. A few business models operating in the social enterprise section are:

3.1. Self-Sufficiency Social Enterprise: Most self-sufficient social enterprises are brand-new social enterprises or companies that lack management talent. Such enterprises can merely break even and lack the resources to realize their social mission or create profits.

3.2. Mission-Driven Social Enterprise: Mission-driven social enterprises closely resemble non-profit organizations, and always work on a specific social issue more deeply than profit creating social enterprises do. Such enterprises have ideal social missions, but lack appropriate business models to realize those missions. Social Blood is an organization that helped the needy connect with blood donors through Facebook. Social blood has partnered with several blood banks in the U.S. and has helped over 300,000 people.

3.3. Profit Creating Social Enterprise: Profit creating social enterprises closely resembles for-profit organizations. The familiar problem faced by profit creating social enterprises is that they frequently can only help a small number of people, or only slightly mitigate a social problem. However, such enterprises create less social value than benchmark targeting social enterprises. Oorja Solutions is a relevant example of this business model. It is an energy services company in the business of replacing diesel engines with affordable, reliable solar energy systems for a productive power in rural markets. Their first service, Oonnati, provides irrigation water on a pay-per-use basis to smallholder farmers.

3.4. Benchmark Targeting Social Enterprise: Benchmark targeting social enterprise is the ideal form of social enterprise. Benchmark targeting social enterprises not only achieve profits from their products or services but also reinvest those profits into realizing their social mission. An example of such a social enterprise is Science for Society, another startup backed by Millenium Alliance. SCD is an electricity-free solar-powered food dehydrator that reduces moisture content in agro-produce so that it can be stored up to 1 year without any chemicals and earn additional income through the sale of such products. This leads to the creation of a scalable ecosystem of producers, local administration and monitoring partners and buyers of dehydrated products.

Case Studies on Expansion

1. Expansion Strategy of One Acre Fund in South Africa: More than 50 million smallholder farmers in Sub-Saharan Africa are locked in annual cycles of hunger because they’re unable to grow enough food to feed their families. Malnutrition can have serious, lifelong effects, especially for children, robbing them of their full potential as they grow up. One Acre Fund has catered to millions of such farmers to diminish such social issues. They appointed one manager who managed 5 staff recruited in South Africa who further managed 5 farmers. This model helped to scale One Acre Fund, at a very large and replicable model serving more than 800,000 farmers.

2.  Expansion Strategy of Robin Hood Army: India based Robin Hood Army is a zero-funded organization which helps to get surplus food from restaurants to serve less fortunate people. It has successfully served more than 20 Million people across 140 cities.

Untapped Potential Scope in Energy Market for Social Enterprises

According to the International Energy Agency, 77 million households in India still use kerosene for lighting. 280 million people in rural India and 24 million people in urban India are without access to electricity. Hence, more innovative social solutions need to come up with replicable and scalable models. Enterprises can provide electricity through micro/ mini-grids that use technologies such as biomass-gasifier, small hydro, solar photovoltaic and wind to supply power to unelectrified and under-electrified communities.

Many parts of India receive 300 days of annual sunshine which presents an opportunity for constant solar power generation. At present, solar only covers 3% of 100 GW potential capacity. Providing clean energy products (solar lanterns, solar home systems (SHS), solar pumps, solar photovoltaic water heating and energy-efficient cookstoves) for efficient lighting and heating/ cooking is one of the ways of using solar energy to generate power and heat.

Recommendations

At present, India has a large untapped potential in the social sector for an extensive range of services like Medtech, Agritech, EdTech, Skilling, Employability, Cleantech and Renewable Energy. In terms of scaling up impact,  the number of individuals and organisations benefiting from social enterprises can be substantial.

1. Finding Funds which support such social causes – Impact and Venture Capital funds are increasingly investing capital in such enterprises. In India, the social impact startups are growing at 20 per cent annual rate while there are more than 400 such startups The Indian government is planning to have its own stock exchange for social or impact startups, in the lines of Social Stock Exchange in the UK, SASIX in South Africa, Impact Investment Exchange in Singapore, SVX in Canada.

2. Understanding Economic Indicators – Social Enterprises may consider hiring a consulting firm to understand the international economic indicators impacting their market. Consultants may refer to Risk Mitigation Techniques which may help to improve trade in specific markets. Understanding the various political, economic, social, technological and legal factors impacting the market, is crucial for the success of a business.

3. Conduct Competition Analysis – Market share of each competitor, and the services rendered by them are one of the key elements in a market entry strategy. Enterprises stand a chance to have sustained success when bringing in innovation, which is scalable and impactful. Entrepreneurs must see if they can have intellectual property rights on such products and services innovated by them.

4. Investing in Potential Industries – As mentioned in this report earlier, solar power energy utilisation can lead to several impactful innovations. Moreover, with the graduation of thousands of engineers in India every year gives the nation the human capital we require to  meet this milestone. Further, the healthcare industry in India has grown to $81.3 billion (Rs 54,086 lakh crore) in 2013 and is now projected to grow to 17 percent by 2020, up from 11 percent in 1990. This industry promises huge potential to impact.

5. Build for A Cause – Entire ecosystems are collapsing. Animals are endangered because of climate change. Global warming is increasing precipitation, melting glaciers and expanding seas leading to an increase in floods, hurricanes, and storms. We should nurture a society of entrepreneurs, who will grow up to change thoughts to things because in a world where you can grow up to be a lot many things, grow up to be kind.

Author: Anisha Aditya

Corporate Performance Management – How Can it Benefit Your Company?

What is Corporate Performance Management (“CPM”)?

CPM is a broad term that encompasses the methodologies, metrics, processes and systems used to monitor and manage the business performance of an enterprise (Source: Gartner).

In simple terms, to demystify the concept, CPM is a health check-up. Based on the results you take steps to change your lifestyle and improve the metrics where you went below the benchmark.

CPM is no different, but this time it is for an enterprise and not for a human being or a machine. It is a lot more difficult and each year the benchmarks keep changing.

Why is CPM important?  A challenging external environment!

 Leading a company in the 21st century, especially when globalization and free trade is under threat, is no easy task.   Disruption is always around the corner. Be it from regulatory bodies, technology disruption, economic disruption, or innovative business models. It is inevitable that someone or something is disrupting your industry or market.

A very astute observation made by an investor at a conference recently comes to mind -“There was a time when a company could/would stay on the S&P 500 for 40-50 years. Now this has reduced to 20-30 years”.

Corporate Performance Measurement

Needless to say, these are challenging times. So how does one ensure steady and sustainable growth?

How does one deliver a stellar corporate performance when faced with these challenges?

What does a stellar corporate performance look like? 

High operating profits, steady double-digit growth, excellent customer satisfaction levels?

Corporate performance can be measured in a myriad of ways, but at the end of the day does the organisation deliver consistent returns to its shareholders, excite its customers, reinvent itself when the time is right, innovate and solve the problems customers didn’t even know they had?

Expectations from corporates have changed drastically and keeping up with shareholder and customer expectations isn’t enough.  Going beyond the call of duty and delivering beyond their expectations is what a stellar performance looks like.

Why do many fail to deliver a consistent performance / why don’t companies succeed in transforming themselves? 

As an HBR article titled “Managing the right tension” points out, 3 issues plague organisations – Profitability vs Growth, short term vs long term, and the whole organisation vs the parts. Organisations struggle to handle these 3 seemingly conflicting issues.

These objectives can seem like they are conflicting or competing with each other. Progress in one is usually at the expense of another. Going for high growth damages profitability and working towards profitability hampers growth. At the same time a leader’s focus or efforts to build a long-term sustainable growth strategy for the company often comes at the expense of present-day performance.

Inevitably, most companies end up undertaking a transformation program focusing on a single lever – cost reduction / downsizing. This is done to deliver better bottom line numbers. But corporate performance isn’t dependent only on a single lever and isn’t a one-dimensional activity.

Another common pitfall is a Business Unit (“BU”) based approach. Each BU has its own set of goals and interests. If left to their own, the transformation will only benefit the BU and not the strategic interest of the organisation. While each individual BU will have to pull up their socks and transform, this must be done with the goals of the corporate entity in mind. The need of the organisation as a whole is primary.

Another common pitfall is a tactical one. Since KPI’s vary by function and BU, there is a lack of unity or consistency in data description/categorization among them. Decision making hence becomes difficult and reporting of data is the main culprit behind this. Resolving these inconsistencies can be costly in terms of both time and money.

These are a few common issues that organisations face and one should attempt to avoid them during the CPM Program.

Why do you need a CPM program? 

The question is no longer “Should I change / adapt”. You should have transformed yesterday.  It is therefore not a question about should you, but how do you transform. And what should you transform into?

This is entirely dependent on your external environment, stakeholders, and customers. It can be overwhelming at times, but a structured approach can be a north star and guide the organization along this process.

This approach ought to answer important strategic questions such as –

  • What do I need to excel at? Drivers of Excellence / Competitive Advantages
  • How do I know if I am in fact excelling at this?KPI’s
  • How much should I achieve now? Targets 
  • What do I need to do to excel at this?Initiatives
  • What will this require in terms of investments?Budgeting

What are the enablers of CPM?

The key enabler for CPM is access to quality information that is actionable. This is done through technology interventions.

  • Tracking the KPIs that are relevant
  • Data sets with appropriate and universal taxonomy across the organisation
  • Dashboards that are easy to read and act upon
  • Real time business analytics

enablers of CPM

Having an ERP system is a no brainer but how to effectively use an ERP is still an area on which most organisations still spend sleepless nights on. Analytic tools / BI tools play an important role in data analysis and representation, and ERP/CRM systems are important when it comes to data collection

Approach

Building long-term growth strategies must be based on credible and comprehensive market, customer, and competitor insights. These insights must then be translated into specific growth opportunities, and a strategy is then designed to capitalize on those opportunities.  This foundation helps ensure that the resulting strategic plan is connected to meaningful targets for the company as a whole.

A 3 phased approach such as the one shown below which has been adapted from those of leading institutions such as MIT Sloan and of CPM practitioners, can be used by organisations to give their CPM programs a structured approach. Beginning with a Strategic Alignment exercise, followed by measuring existing and to be states, and creating a sustainability framework to ensure continuous transformation is ingrained into the culture of the organisation, the CPM program can deliver sustained benefits and transform the organisation to deliver stellar performance in the long run.

Approach

Strategize – This phase focuses on aligning the organisations interests with functional and individual interests. Identifying the KPIs relevant for the pressures faced by the organisation both externally and internally.

Strategize

Measure – In this phase the focus is on collecting relevant quantitative and qualitative data which will be analysed, and the insights presented to the leadership in a well structured and articulated format, ripe for decision making.

Measure

Sustain – Performance is also enabled by the organisations culture, systems, and processes. This phase will see the organisation taking pragmatic steps towards institutionalizing the changes into the DNA of the organisation.

Sustain

Key Takeaways

  1. CPM involves conducting a health check for the organisation with real actionable data and insights and taking decisive strategic actions basis the insights.
  2. Sustained stellar corporate performance can be achieved through a structured program
  3. Align strategy at the corporate, functional/department, and individual level
  4. Measure the KPI’s and enable this through technological interventions
  5. Sustain the change through a cultural shift by institutionalizing systems and processes

A Comparative Study of China and India’s AI Policy

The output of human civilization has so far been primarily driven by human intelligence and when machine intelligence combines with human intelligence, the sky is the limit. Artificial Intelligence has gained significant disruptive power over the last two decades. The 4th Industrial Revolution (Industry 4.0) pioneered by AI implementation shall be the differentiating factor for economies to establish prowess in today’s connected world. Established enterprises, start-ups, and even non-profit organizations continue to develop solutions with the help of government initiatives, fostering growth in AI implementation in diverse fields.

Countries across the world are becoming increasingly aware of the potential economic and social benefits of AI development and the AI+X mechanism – the concept of choosing a process and its synchronization with AI.

The two biggest countries of Asia – China and India, boast of a strong AI talent pool and enterprises and institutions that continue to strive for advanced research and innovation. The increased leverage of AI in both these economies will see major disruptions not only in defense and manufacturing but also in social welfare and communication. Comprehending AI’s transformative potential, the bureaucracy has stepped up and formulated policies to govern and to incentivize AI-based implementation for a competitive global advantage in the crucial sectors. A comparative study shall help us evaluate our strategic positioning and understand where organizations can make further impact in an AI-driven economy. Here, we highlight the key aspects of the official AI policy reports of these two countries.

China’s Artificial Intelligence Development Plan, 2017

Chinese enterprises and institutions have made substantial progress in highly recognized AI research, and the government, recognizing its potential to propel China’s global dominance, has realized the urgency for legislative simplifications, infrastructure support, and grooming and retaining top AI talent. Thus, in July 2017, the State Council of China released a comprehensive AI policy report: ‘Artificial Intelligence Development Plan’ to develop the roadmap for AI leadership under an ethical and supportive regulatory system and open source collaboration.

The report covers strategic goals divided into three steps. The first step is the setting up of an AI infrastructure at an advanced level as compared to the world by 2020. The second step, which is to be completed in 2025, aims to establish China in the ‘world-leading level’ in AI breakthrough and to establish AI as the primary driving force behind China’s industrial transformation with the help of a ‘breakthrough’ in artificial intelligence basic theory. The industry scale of core artificial intelligence is estimated to be worth 400 billion yuan and that of the related industries to be higher than 5 trillion yuan. The third step is to achieve global supremacy in AI impact and be the ‘innovation center of the world’.

China plans to adhere to the ‘Three in One’ approach of promotion of R&D in the field of artificial intelligence, product and application development, and industry development and training to maximize productivity as well as enhance societal welfare. Artificial intelligence shall be used as the key driver to protect and safeguard national security.

The country is also focussing on interdisciplinary exploratory research to promote integration with diverse fields such as neuroscience, quantum science, psychology, mathematics, and sociology. To enhance China’s competitiveness, ‘open, stable and mature’ technology systems shall be developed in the form of algorithms, hardware, and the data. The system development shall have the potential to address multiple issues and yet be reconfigurable, energy-efficient and also possess a high learning ability. Extensive research and China’s AI ambitious goals shall be established through the construction of innovation platforms to invite and to expedite top research projects that will focus primarily on smart robots, intelligent vehicles, virtual reality, smart terminals and a new generation of Internet of Things (IoT). Cultivation of a high level of talent to build robust infrastructure shall be achieved via specialized channels such as revision of enterprise human cost accounting policies, cross-integration of AI training with professional education and incentivizing top-notch research work to encourage productive output.

National Strategy for AI discussion, NITI Aayog, 2018

India showcases a promising scenario, thanks to its strong talent pool, a notable list of world-class educational institutions and companies that are dominating the global IT landscape. However, India couldn’t achieve global recognition primarily due to the lack of top-notch research in AI at a significant scale. So, NITI Aayog has stepped up for the formulation of a comprehensive AI strategy with a core focus on infrastructure development and holistic collaboration. It aims for an #AIforAll campaign where AI shall also be used for social inclusion and not just for defense, military, and advanced computing applications. In an ‘AI+X mechanism’, where AI is an enabler for increased productivity and efficiency rather than a complete overhaul, the key focus areas for AI intervention shall be healthcare, agriculture, education, smart cities and infrastructure, smart mobility and transportation. The key challenges identified in these sectors include among others a low intensity of AI research, insufficient talent to research and to implement AI at scale, high resource cost, ambiguous privacy issues, and unattractive intellectual property regime to incentivize adoption.

The report provides more than 30 policy recommendations to develop a two-tiered strategy, which is aimed at improving the research ecosystem as well as developing skilling initiatives to feed the ecosystem. Initially, the ‘Centres of Research Excellence’ (CORE) shall enhance quality research and publications focussing on AI. Investment, both domestic and foreign, shall be made to develop a state of the art infrastructure in liaison with the concept of an ‘AI garage’. Just like the strategy of the Centre for Data Ethics and Innovation in the UK for implementing ethical research, the COREs shall be monitored by a consortium of Ethical Councils that shall define the standard practices, based on OpenAI charter, for the development of AI-based research and products.

The fundamental research activities shall be the feeder for the ‘International Centres for Transformational Artificial Intelligence’ or ICTAIs. They shall focus on investing, developing and accelerating AI-based applications, majorly in the domain of societal importance. It shall be a public-private partnership with a seed funding in the range of INR 200 – 500 Crore per ICTAI, to cover the operational expenses and infrastructure CapEx for the first 5 years. These institutions shall comprise of a strong governance board, comprising of leadership from both industry and academia and may allow a reasonable say in the board for an industry partner with a significant contribution. The ICTAIs shall be strategically located and preferably close to academic institutes to hire top-notch talent. National AI fellowships can be availed if finances are a constraint for talent attraction.

The policy also speaks about developing AI talent at the grassroot levels by introducing AI modules in the mainstream curriculum and incentivizing the development of MOOCs and open-sourced learning forums. Besides this, the development of a National AI Marketplace (NAIM) has been proposed in three different modules to minimize resource allocation for model development.

Overall, the strategy has been to develop India as a ‘playground’ for global AI development so that global enterprises or institutions can develop breakthrough and scalable solutions here. These solutions are expected to be capable of solving problems for both developed and emerging economies. It indicates that ‘Solve for India’ is claimed to be solved for 40% or more for the world.

Conclusion

The above discussion clearly reflects how the two countries have formulated their AI strategy with two different perspectives. China is clearly gearing up for a global supremacy with a totalitarian regime and wants to develop a state-of-the-art AI infrastructure in isolation.

On the other hand, India aspires to be the global AI lab for emerging economies. China plans to invest billions of dollars not only in AI but also in related industries to build up a robust infrastructure for AI proliferation. The ability to develop and maintain database for training models and ease of its accessibility hold tremendous competitive advantage for China, an area India must look upon. Planned investment by the Indian government is proportionately smaller but inviting FDI, highlighting low operational costs and collaborative research, can open doors to significant fund flow. ‘AI+X’startups and enterprises must have access to global VC funds and regulatory simplifications should be deployed for companies going beyond borders to solve problems. The new investment on COREs shall benefit India’s highly cited research output and improve its H-index, but similar to China’s strategy, incentivization of top talent to reduce brain drain needs a long-term plan. In short, there is little doubt that by leveraging globalization and unparalleled infrastructure, these two nations – India and China –  will emerge as the future AI labs of the globe.

–              Rajarshi Chowdhury

Cautious over Financial Instability, The RBI approves Surplus Transfer of Funds to the Government

The Central Board of the Reserve Bank of India (RBI) on August 27th 2019 decided to transfer a sum of Rs 1.76 Lakh crore to the Government of India (Government) comprising of Rs 1.23 Lakh crore of surplus for the year 2018-19 and Rs. 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the meeting.

The Expert Committee led by Dr Bimal Jalan, reviewed the Extant Economic Capital Framework of the RBI including surplus distribution policy of RBI in the light of cross country practices, statutory mandate under section 47 of the RBI act and impact of RBI public policy mandate and financial stability considering on its balance sheet and risks.

In the RBI, there are three different funds that together comprise its reserves. These are the Currency and Gold Revaluation Account (CGRA), the Contingency Fund (CF) and the Asset Development Fund (ADF). Of these, the CGRA is by far the largest and makes up the significant bulk of the RBI’s reserves. The fund, which in essence is made up of the gains on the revaluation of foreign exchange and gold, stood at Rs 6.91 lakh crore as of financial year 2017-18. The CGRA has grown quite significantly since 2010, at a compounded annual growth rate of 25%.The CF is the second biggest fund, amounting to Rs 2.32 lakh crore in 2017-18. It is designed to meet contingencies from exchange rate operations and monetary policy decisions and is funded in large part from the RBI’s profits. The Investment Reserve Account (IRA) and ADF constitute a small portion of the RBI’s reserves.

A peek into RBI’s key reserves

The Math Behind the Transfer

The Jalan committee recommended that the RBI should maintain a Contingent Risk Buffer — which mostly comes from the CF within a range of  6.5-5.5% of the central bank’s balance sheet. Since the latest CF amount was about 6.8% of the RBI’s balance sheet, the excess amount was to be transferred to the government. The committee also decided, for the year under consideration, to use the lower limit of 5.5% of the range it recommended. So, basically, whatever was excess of 5.5% of the RBI’s assets in the CF was to be transferred. That amount was Rs 52,637 crore.

Regardingthe RBI’s economic capital levels — which is essentially the CGRA — the committee recommended keeping them in the range of 24.5-20% of the balance sheet. Since it stood at 23.3% as of June 2019, the committee felt that there was no need to add more to it, and so the full net income of the RBI — a whopping Rs 1,23,414 crore — should be transferred to the Centre.

As on June 30, 2019, the RBI stands as a central bank with one of the highest levels of financial resilience globally.

That Rs 1.23 lakh crore plus the Rs 52,637 crore is what comprises the Rs 1.76 lakh crore that the RBI has decided to transfer to the government. It must be noted that this Rs 1.76 lakh crore includes the Rs 28,000 crore interim dividends earlier transferred to the Centre and does not come over and above it. Given that the RBI has already paid an interim dividend of Rs 28,000 crore to the government, net amount transferrable will be around Rs 1,48,000 crore. For 2019-20, the government had already budgeted dividend of Rs 90,000 crore from the central bank.  This implies a clear windfall gain of Rs 58,000 crore ($8 bn) or about 0.3 percent of GDP in FY20.

How Is the Transfer Going to Impact the Economy?

Undoubtedly, the fiscal position improves materially to a large extent post RBI announcement on August 27. The 52,000-crore pay-out will help bridge the revenue shortfall and allow the government the space to still keep the fiscal deficit to the budgeted 3.3 per cent of GDP.

There is a distinct slowdown in the economy which can be attributed to tighter funding conditions, a sharp decline in consumer confidence, a negative central government fiscal impulse as well as global headwinds. The policy response so far is to mitigate the current slowdown has been mainly in the form of monetary action wherein policy rates have been reduced four times by 110 bps from August last year till date. The government has exercised restraint in easing fiscal policies. Despite the slowing economy, the FY20 Budget did not envisage any additional stimulus through the reported fiscal deficit figures, with the FY20 targeted fiscal deficit almost flat at 3.3 percent of GDP, compared to 3.4 percent for FY19.

The current slowdown seems more extended compared to previous episodes of growth deceleration seen during demonetisation or in 2013 following the taper tantrum. Hence, the government could utilise this amount for specific expenditure outlays. If the government chooses to do so, it will have a direct positive impact on growth and also create some inflationary pressures. It is worth noting that if the government decides to spend the amount to support growth, it will be first big push through fiscal stimulus during the last decade. In 2009 after the global financial crisis, the government had spent $6.5 billion, which was equivalent to 0.5 percent of the 2008 GDP, according to IMF.

In an alternative scenario, the government might not spend the windfall gain to propel growth. It could do so because given the slowdown, there is significant downside risk to tax collections. In such a scenario, the surplus from the RBI should help offset the expected shortfalls in various tax revenues in 2019-20 and aid the government in meeting its fiscal deficit target. While a lot depends on the manner of utilisation of excess proceeds, the surplus gain from the RBI is still positive news for equity markets. The surplus of Rs 58,000 crore can help the government tide over any future revenue shortfall implying that risk of fiscal slippage has reduced considerably.In all likelihood, surplus from the RBI will act as cushion against a possible shortfall in revenue collection in FY20 and not as a growth booster.

Furthermore, the RBI is expected to maintain surplus liquidity of around 1 per cent of NDTL (Net Demand and Time Liabilities) for some more months to come to allow the transmission of their rate cuts to flow through the banking system onto the economy. Also, continued lending rate cuts by the banks is expected in the months to come, implying lower returns from liquid and money marketfunds for investors.

Therefore, productive utilization of funds is critical as in the last few years share of capital expenditure as percent of GDP has been falling. In India, majority government spending is to boost consumption than investments, and thus, the RBI’s surplus funds is needed to be used appropriately to have a sustainable multiplier effect on overall development of the economy.