The reasons behind Indian (and South Asian) children being short

Here is an abstract from a paper by Jayachandran and Pande titled “Why Are Indian Children So Short?”:

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India's child stunting rate is among the highest in the world, exceeding that of many poorer African countries. In this paper, we analyze data for over 174,000 Indian and Sub-Saharan African children to show that Indian firstborns are taller than African firstborns; the Indian height disadvantage emerges with the second child and then increases with birth order. This pattern persists when we compare height between siblings, and also holds for health inputs such as vaccinations. Three patterns in the data indicate that India's culture of eldest son preference plays a key role in explaining the steeper birth order gradient among Indian children and, consequently, the overall height deficit. First, the Indian firstborn height advantage only exists for sons. Second, an Indian son with an older sibling is taller than his African counterpart if and only if he is the eldest son. Third, the India-Africa height deficit is largest for daughters with no older brothers, which reflects that fact that their families are those most likely to exceed their desired fertility in order to have a son.

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Bernanke, Summers and Krugman on secular stagnation (saving glut and liquidity trap)

Here is a summary of the interesting debate on secular stagnation started by Bernanke on his blog at Brookings.

Achieving full employment, low and stable inflation, and financial stability are the three core objectives of economic policy. Larry Summers argued that achieving these three objectives simultaneously is difficult because slowdown in population growth and the pace of technological advance result in lower capital investment by firms and subdued household consumption. It means difficulty in attaining full employment.

So, inadequate aggregate demand leads to low growth and less than full employment. Low aggregate demand will eventually lead to low aggregate supply as productive capacity of the economy is restrained. The solution is to jack up public infrastructure spending in case real interest rate cannot be lowered below a threshold (zero) to stimulate private investment. In the face of secular stagnation and relatively ineffective monetary policy, the US should turn to fiscal policy (productivity-enhancing public infrastructure spending).

Bernanke is skeptical that the US economy is facing secular stagnation. First, if real interest rate (nominal interest rate minus inflation) is negative, then any investment will appear profitable. Hence, prolonged subdued capital investment is not realistic right now. Second, the current slowdown may be caused by temporary headwinds that may be dissipating soon. Third, better investment opportunities abroad will mean that there are will be more outward FDI, which would weaken dollar and then boost US exports. This in turn will increase growth and employment. Returns to capital investment may not be low everywhere at the same time.

Summers responded that (i) saving and investment may not equate at full employment smoothly due to interest rate adjustment (secular stagnation is all about saving > investment); (ii) excess saving may flow abroad if returns to investment are attractive; (iii) at zero real interest rate, government debt service is very cheap and hence it can borrow without adding much debt overload to finance public infrastructure spending (Keynesian fiscal stimulus effect kicks in); (iv) savings-investment balance is for the global economy, so economies with excess savings may consider reducing their savings or increasing their investment (narrow the gap between desired savings and desired investment).

Bernanke responded again arguing that the secular stagnation hypothesis holds true if the whole world is suffering from such a phenomena. Else, such trends in the US would be negated by FDI and exports boost to other countries that have relatively better aggregate demand. Hence, another policy implication is that the US should work on lowering or elimination of FDI outflows and export barriers.

Paul Krugman added that Summers paid insufficient attention to international capital flows (which he agreed in response to Bernanke). But, this does not mean that even if they were accounted for the secular stagnation concerns are obviated. Secular stagnation occurs when “countries face very persistent, quasi-permanent liquidity traps”. Japan is an example. Japan faced really low nominal interest rate since 1990 and persistent deflation as well. Real interest rate was still positive and the other economies offered relatively better investment opportunities (the US and the EU saw such low rates only after 2008). But still Japan was stuck in low growth equilibrium for a long time. Policies to boost demand are the call of the hour right now.

[Presentation] Nepal’s economic outlook for FY2015 and FY2016

Here is the presentation made during the press conference on Asian Development Outlook 2015 in Kathmandu.

ADO 2015 Nepal

Nepal’s economic outlook for FY2015 and FY2016

The economic outlook is less favorable than in FY2014 (ends 15 July 2014)  because agricultural output is crimped by a weak monsoon and the political situation is fluid. The Constituent Assembly, the second of which was elected in November 2013, failed again to write a new constitution, this time by the 22 January 2015 deadline agreed by all political parties. There is yet no unanimity among the political parties on how to proceed. Many of the outstanding issues that the earlier Constituent Assembly failed to resolve remain contentious, leaving uncertainty over the future course of politics regarding such basic matters as the number, names, and functions of proposed federal states, as well as on the overall structure of governance.

The weak monsoon and such natural disasters as floods and landslides will affect the output of paddy, maize, and millet. Industry may see better conditions in the medium term following the government’s strong commitment under the FY2015 budget to ease business regulations by introducing updated policies and legislation, though a downside risk is that the unsettled political environment will derail legislative action. Nevertheless, news from the power sector bolstered business and investor confidence. The government concluded project development agreements in the first half of FY2015 for two 900-megawatt hydroelectricity projects promoted by Indian investors.

Considering the unfavorable monsoon and the lingering political uncertainty, GDP growth is projected to slow to 4.6% in FY2015, less than the government’s revised target of 5.0%. The Ministry of Agricultural Development projects paddy output to drop by 5.1%, and maize by 6.0%. Almost half of growth will come from services, particularly robust growth in wholesale and retail trade, tourism, and transport and communications. The reform-oriented budget calls for higher capital expenditure and for total planned spending to increase to 23.7% of GDP, up by 5 percentage points. This should help to underpin growth, especially in construction, even if capital spending falls modestly short. Assuming a stable political situation, a normal monsoon, a timely budget and its effective execution, and strong remittance inflows, GDP growth is expected to rebound to 5.1% in FY2016.

Despite the expected agricultural shortfall—and an increase in civil service salaries and allowances for a second consecutive year—average inflation is expected to continue to slow to 7.7%, lower than the target set by the central bank in its 2015 monetary policy, as neighboring India experiences markedly lower inflation and the drop in international oil prices passes through as lower administered fuel prices. Food inflation is expected to ease somewhat but will remain elevated owing to the smaller domestic harvest. Inflation is projected to edge lower in FY2016 to 7.3% on a better harvest, broadly stable oil and commodity prices, and central bank’s progress in efforts to rein in excess bank liquidity.

The external position is expected to weaken in FY2015 with lower surpluses in the current account and overall balance of payments. Though export growth is expected to stay at 5.0% and import growth to slow to 10.0% on lower prices for petroleum imports, the improvement in the trade deficit will likely be offset by some slowing in remittance inflows, narrowing the current account surplus to 2.7% of GDP. A pickup in export growth, strong remittance inflows and tourism receipts, and continued low global oil prices are expected to boost the current account surplus to 3.5% of GDP in FY2016.

Adapted from Asian Development Outlook 2015, Nepal chapter.

Inclusive Economic Growth in Nepal

The Inclusive Economic Growth in Nepal paper was awarded runner up prize by JPAID. Announcement below:

Realizing the demographic dividend in Nepal

This blog post is adapted from Macroeconomic Update Nepal, February 2015.

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The Central Bureau of Statistics (CBS) released new estimates for population for the next twenty years based on Population Census 2011. It shows that by 2031, Nepal’s population will hit 33.6 million in 2031, comprising of 51.4% female and 48.6% male. Similarly, urban population will reach 30.2% of total population in 2031 from 17.1% of total population in 2011. The country will still have a substantial share of population (69.8%) residing in rural areas as defined in the Population Census.

Total population is projected to grow by 1.4% until 2018, 1.3% over 2019-2021, 1.2% over 2022-2023, 1.1% over 2024-2025, 1.0% over 2026-2027, 0.9% over 2028-2029, and 0.8% over 2030-2031. The urban and rural population growth rates are projected to follow similar path.

The share of population of 15-49 age cohort is projected to increase from 50.6% in 2011 to 55.5% in 2031. Furthermore, the share of population below 24 years is projected to peak at 51.5% in 2018 and then gradually decline to 41.8% in 2031. The share of youth (15-24 years as per the UN definition) is projected to peak at 21.3% of total population in 2020 and then decline gradually to 16.4% of total population in 2031. According to the definition of youth prevalent in Nepal, the youth population (16-40 years) stood at 40.3% of total population 2011. This is expected to increase to 43.3% of total population in 2031.

The declining population growth rate and dependency ratio, rising life expectancy along with declining fertility and child mortality, and gradually peaking working age population or that of the youth population indicates that the country is reaching the unique point where it could exploit this demographic change to spur economic growth, provided that effective public policy is implemented. Else, this demographic bulge will continue to be a burden to the economy, resulting in more temporary out-migration for work overseas.

The economy needs to generate enough job opportunities by investing heavily in infrastructure (energy, transport, ICT, urban development) and human capital (quality and relevant education and healthcare) to galvanize the youth into building a strong and resilient economy, which should be characterized by a meaningful structural transformation and an accelerated inclusive economic growth process. The country will also have to effectively utilize knowledge, experience, and technology of other successful counties to ensure that such a process picks up high momentum in this short window of opportunity. Then only the youth will be able to more productive and competitive during their working years.

Major highlights of India’s budget for FY2016

Indian Finance Minister Arun Jaitley presented the budget for 2015-16 (FY2016 starts 1 April 2015 and ends 30 March 2016) today to the parliament. It is the first full budget by PM Modi’s government following the landslide election victory last year. Indian PM Narendra Modi termed it a “pro-growth budget” and a “pro-poor budget”. Essentially, the budget has a medium-term narrative with a strong focus on sustainable fiscal finance and accelerated economic growth.

Here are the major highlights of the budget:

• GDP growth target of between 8% and 8.5%.
• Inflation target of below 6% (as per RBI’s strategy)
• Revenue target (includes net tax revenue to center, non-tax revenue, recoveries of loans, and other receipts) of 8.7% of GDP
• Expenditure target of 12.6% of GDP
  • Capital expenditure target of 3.4% of GDP
• As a share of GDP, both revenue and expenditure targets appear lower than the provisional figure for FY2014
  • Capital expenditure allocation is nevertheless increased
• Fiscal deficit target of 3.9% of GDP
  • Fiscal deficit target of 3.0% of GDP over three years
  • Additional fiscal space will go into funding infrastructure investment
• Primary fiscal deficit (fiscal deficit minus interest payments) target of 0.7% of GDP

• Revenue reforms:
  • Reduce corporate tax from 30% to 25% over the next four years
  • Rationalization of various tax exemption and incentives
  • Efforts to implement GST from next year
  • No change in rate of personal income tax
  • Basic custom duty for some imported goods increased
    • Metallurgical coke from 2.5% to 5%
    • Tariff rate on iron and steel and articles of iron and steel increased from 10% to 15%
    • Tariff rate on commercial vehicle increased from 10% to 40%
• Divestment in loss-making units as well as some strategic divestment
• Stress on cutting subsidy leakages, not subsidies themselves. Rationalization of subsidies on cards
• NITI Ayog and States to work for the creation of a Unified National Agriculture Market
• Micro Units Development Refinance Agency (MUDRA) Bank to be created for refinancing all micro-finance institutions that lend to small businesses through Pradhan Mantri Mudra Yojana
• A sharp increase in outlays for roads and railways
  • National Investment and Infrastructure Fund (NIIF) to be established
  • Tax free infrastructure bonds for rail, road and irrigation projects
  • PPP mode of infrastructure development to be revisited & revitalized
  • 5 new ultra mega power projects, each of 4,000 MW
  • NITI Ayog to have units for innovation promotion platform and self-employment and talent utilization incubation
• Public Debt Management Agency to be set up in FY2016 by bringing both external and internal borrowings under one roof
• Sovereign Gold Bond as an alternative to purchasing metal gold scheme to be developed
• Gold import duty remains at 10%
• Main priorities: agriculture, education, health, MGNREGA, rural infrastructure including roads, manufacturing through Make in India program, catalyze private investment
• To make India the manufacturing hub of the world through Make in India and Skill India programs

Five major challenges identified in the budget:

• Agricultural income under stress
• Increasing investment in infrastructure
• Decline in manufacturing
• Resource crunch in view of higher devolution in taxes to states
• Maintaining fiscal discipline

Below is a snapshot of the performance of Indian economy sourced from Economic Survey 2014-15, Vol.2