Mechanization and agricultural productivity

An interesting news report in today's Kantipur Daily. It quotes a farmer using a preseason maize planter who says that mechanization has decrease cost by 46% and increased output by about 10-12%. This is significant because the large outmigration has created a shortage of workers in agricultural sector, affecting total output. Agriculture Tools Research Center Ranighat in Birjung helped the farmers in Parsa to adopt mechanized agricultural tools. The planter costs about NRs 250,000. 

 मेसिनमा बीउसँग मल पनि एकै पटक प्रयोग गर्ने सुविधा रहेकाले समय र श्रमको बचत गर्न सकिन्छ । भर्टिकल प्लेट टाइप मिटारिङ मेकानिज्म भएकाले बीउ टुक्रिने समस्या पनि छैन । खनजोत गरेको र नगरेको दुवै खेतमा मेसिनबाट मकै लगाउन सकिने मिश्राको भनाइ छ । मकै लगाउने पारम्परिक तरिकाभन्दा कम समय, ऊर्जा, श्रम तथा खर्चमा बढी जग्गामा मकै लगाउन सकिने उनले बताए ।

उच्च गुणस्तरको मकै उत्पादन हुने र यसले कुल उत्पादकत्व पनि बढाउने उनले जनाए । यस उपकरणको कार्यक्षमता प्रतिघण्टा ०.३ हेक्टर रहेको मिश्राको भनाइ छ । तराई तथा भित्री मधेशको समथर क्षेत्रमा यो उपकरण प्रयोग गर्न सकिन्छ । कार्यालय तथा किसानको खेतमा समेत गरिएको परीक्षण उत्पादनमा ३५२२ हाइब्रिड जातको गहुँ प्रतिहेक्टर ९ देखि १० टनसम्म उत्पादन भएको मिश्रा बताउँछन् । परम्परागत विधिले मकै खेती गर्दा प्रतिहेक्टर उत्पादन ७ देखि साढे सात टन मात्र हुने गरेकामा यस उपकरणको मद्दतले झन्डै १२ प्रतिशतले उत्पादन बढाएको उनले जनाए । मजदुरको अभाव र जलवायु परिवर्तनले बालीनालीको उत्पादन घट्दो क्रममा रहेको समयमा यान्त्रीकरणले किसानलाई बढी लाभ मिल्न सक्ने उनको भनाइ छ ।

Post pandemic economic recovery in Nepal

It was published in The Kathmandu Post, 14 March 2022.

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Medium-term economic recovery

A course correction beyond the band-aid nature of policy reaction is warranted.

The weaknesses of the economy, masked by pandemic-related fiscal and monetary relief measures and regulatory forbearances, are starting to unravel. Economic growth is persistently below target, the budget deficit is large and widening, public debt is increasing sharply, current account and balance of payments deficit are growing, and foreign exchange reserves are falling. The overall macroeconomic situation and growth outlook are not encouraging. A course correction beyond the band-aid nature of policy reaction is warranted to ensure the country has the available resources to finance the investment needed for medium-term economic recovery.

Deteriorating situation

The economy contracted by an estimated 2.1 percent in fiscal 2019-20, the first contraction in over four decades, as demand, supply and health shocks disrupted economic activities. A sharp and considerable economic rebound is unlikely due to a setback in agricultural output, especially a shortage of chemical fertilisers, and the continued deceleration of remittances that affect households’ purchasing power. Gross domestic product (GDP) growth may hover around 5 percent as base effect (which refers to the tendency of achieving an arithmetically high rate of growth when starting from a very low base) dissipates, and remittances decelerate (which constrains aggregate demand).

The state of public finance is also not encouraging given the large and growing fiscal deficit, which refers to expenditure net lending minus total receipts. Federal receipt, which includes foreign grants, is estimated to reach 23.7 percent of GDP this fiscal, but federal expenditure is estimated to top 34.8 percent of GDP, of which recurrent expenses account for 65 percent. Despite expenditure and revenue shortfalls relative to budget targets, the deficit will likely be over 6 percent of GDP. Note that the spending pattern has not changed much with capital spending absorption capacity still low, and over 50 percent of actual capital spending bunched in the last quarter, raising concerns over the quality of assets and fiduciary risks. It was just 16 percent of the budget estimate in the first seven months of this fiscal.

Capital spending is beset with structural weaknesses (low project readiness, weak contract management, and high staff turnover), allocative inefficiency (ad hoc allocation, lack of adherence to medium-term framework, and weak project pipeline), and bureaucratic delays (political interference at operational and management levels, weak intra- and inter-ministry coordination, and maze of approvals). Meanwhile, outstanding public debt has nearly doubled in a matter of just five years, reaching 40.7 percent of GDP in 2020-21.

The financial sector is also not in good standing. An aggressive increase in credit relative to deposits, which has fallen in tandem with the deceleration of remittances, has contributed to a chronic liquidity crisis. The liquidity situation used to be periodic in the past, that is it fluctuated in line with capital spending. However, it has been persistent in recent years, implying structural weaknesses and increased vulnerabilities in the financial sector. The outsized real estate and housing bubbles and the bullish stock market are not in sync with the macroeconomic fundamentals. It could pose a significant challenge after pandemic-related regulatory forbearances and relief measures are withdrawn. The elevated inflationary pressure, primarily due to supply disruption, rise in fuel and commodity prices, and Nepali rupee depreciation, will worsen the matter.

The external sector is in bad shape. The current account deficit in the first six months of this fiscal year is already higher than the whole of the last fiscal year. This is mainly due to the widening trade deficit and deceleration of remittances, which is not expected to recover soon. Consequently, the balance of payments is negative and foreign exchange reserves are falling steadily. Now, foreign exchange reserves are sufficient to cover 6.6 months of merchandise and services imports. It was about 14 months of import cover in mid-July 2016. Given the currency peg with the Indian rupee, vulnerability to natural disasters and the need for an additional buffer for remittances and tourism-related vulnerabilities, the optimal level of reserves is estimated to be 5.5 months of prospective import of goods and services.

Medium-term priority

Economic recovery will only be strong and sustained if medium-term priority is reoriented to reduce reliance on exogenous factors to support growth, poverty and inequality reduction, revenue mobilisation, and financial and external sector stability. For instance, the pattern and intensity of monsoon rainfall largely dictate agricultural output in the absence of reliable supply of farm inputs such as year-round irrigation, timely availability of chemical fertilisers, cheaper access to finance, and connectivity to link farmgate and retail markets, and farmers and consumers. Similarly, remittance income largely dictates consumption, especially private consumption, accounting for 90 percent of total consumption and demand in services and industrial sectors. This is neither resilient nor sustainable. Policy effort should be directed towards reorienting the sources of growth to more reliable factors through investment in physical infrastructure and human capital development, private sector development, and public sector reforms. These are essential to boost aggregate output and productivity.

Creating fiscal space required to boost spending on physical infrastructure and human capital development in the public sector is essential. This can be done through expenditure management and/or higher revenue mobilisation. Reduction of recurrent spending through expenditure consolidation or by plugging in leakages (for instance, in the distribution of allowances, unnecessary recruitment, and mundane charges), enhancing budget transparency and policy direction, accounting for fiscal risks and liabilities, and decreasing fiscal burden due to loan and share investment in non-performing public enterprises are some of the areas that require urgent attention for expenditure management. Since raising taxes is not ideal given the already high rates, efforts should be redirected at enhancing revenue administration, including reducing tax expenditures (subsidies, rebates, concessions), broadening the tax base, and divesting the government’s share in public enterprises and the monetisation of their assets. These will be helpful to create the fiscal space needed to finance medium-term recovery and promote competitive and cooperative federalism.

Similarly, financial sector volatility and vulnerabilities need to be curbed by using macroprudential tools. Credit growth needs to be consistent with deposit growth, asset-liability mismatch minimised, sectoral bubbles contained, and evergreening of troubled assets discouraged. These contribute to high volatility of liquidity and hence unpredictable interest rates. The current monetary policy and financial sector architecture do not adequately stop the misallocation of resources to sectors that do not contribute much to boosting domestic economic activities and job creation.

Another priority area should be private sector development to boost competitiveness and unshackle the economy from the grip of sectoral cartels and crony capitalists that distort factor and product markets. A holistic review of policies, rules and regulations is needed to get a clear picture of why investment is not increasing as expected despite the slew of legal changes enacted in the last five years. This review should also answer why special economic zones remain vacant and what needs to be done, the possibility of providing relatively cheaper electricity to businesses to boost cost competitiveness of industrial and services sectors, and the effectiveness of Investment Board Nepal in promoting investment and public-private partnership.

Agriculture productivity shocks and nonagricultural employment in India

Abstract from Jonathan Colmer's published paper in American Economic Journal: Applied Economics, 13(4):101-24

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To what degree can labor reallocation mitigate the economic consequences of weather-driven agricultural productivity shocks? I estimate that temperature-driven reductions in the demand for agricultural labor in India are associated with increases in nonagricultural employment. This suggests that the ability of nonagricultural sectors to absorb workers may play a key role in attenuating the economic consequences of agricultural productivity shocks. Exploiting firm-level variation in the propensity to absorb workers, I estimate relative expansions in manufacturing output in more flexible labor markets. Estimates suggest that, in the absence of labor reallocation, local economic losses could be up to 69 percent higher. 

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CBS projects Nepal's GDP to contract by 1.9% in FY2020 (using new base, FY2011=100)

On 4 March 2021, Nepal’s Central Bureau of Statistics released national accounts statistics that were rebased to 2010/11 (FY2011) from earlier 2000/01. According to the latest rebased national accounts statistics, the size of economy was about USD 34 billion in FY2020 (USD 32.4 billion without latest rebasing). Likewise, the new base yields nominal GVA 5% higher than nominal GVA under the old base. In FY2011, the rebased GDP was USD 21.6 billion, which is 14.3% higher than USD 18.9 billion under the old base. Since the nominal GDP is now going to be larger than in the previous FY2001 base series, several statistics related to fiscal, monetary and external sectors that are expressed as a share of GDP could see slight downward revision. FYI, fiscal year (FY) starts from mid-July of t-1 year and ends on mid-July of t year (for instance, FY2020 refers to the period between mid-July 2019 and mid-July 2020). 

The use of new base (FY2011=100) has yielded different GDP growth estimates. The CBS has released data spanning FY2011-FY2020. The last two years are revised and provisional estimates. So, these will be revised next year too. For now, GDP is estimated to contract by 1.9% in FY2020 (FY2001=100 base showed it would have grown by 2.3%) as the impact of COVID-19 disrupted labor, capital, supply chains and healthcare services, resulting in employment losses and business disruptions. A country-wise lockdown in Nepal started on 24 March 2020 (which is towards the end of second month of third quarter) and lasted well into the fourth quarter. Lockdown was relaxed in September. The country did not fully open at least until the end of 2020 (international travel remains restricted though). 

Agricultural sector is expected to grow at 2.2%, down from 5.2% in FY2019, owing to delayed monsoon, shortage of chemical fertilizers, use of substandard seeds, and an armyworm invasion. The lockdowns disrupted agricultural labor, harvest and supplies too. This, however, is the only silver lining as the other two sectors are expected to contract. In an op-ed published in The Kathmandu Post on 19 October 2020, I argued that GDP in FY2020 will contract.

Industrial output is projected to contract by 4.2%, down from 7.4% growth in FY2019, as mining and quarrying, manufacturing, and construction activities were battered by the lockdowns and subdued demand. However, with the addition of new hydroelectricity in the national grid and improvements in water supply, electricity and utilities subsector is expected to grow by 25.6%. 

Services output is projected to contract by 3.6%, down from 6.8% growth in FY2019 owing to the severe impact of lockdowns and supplies disruptions on wholesale and retail trade, transportation and storage and accommodation and food service activities.  These are high contact services activities. They together account for about 22% of GDP. Within services sector, public administration and defence, and mandatory social security payments are expected to grow at a rate higher than in FY2019. This reflects the increased government expenditure to support various temporary relief and income support measures for those affected by the pandemic. 

In the chart above also, notice that GDP growth reached a high of 9% in FY2017 as economic activities rebounded (plus some base effect) after the devastating 2015 earthquakes and 2016 border blockade. 

On the expenditure side, while consumption is expected to grow at 4%, slightly lower than 5.8% in FY2019, investment and net exports are expected to contract. Investment (gross capital formation) is expected to decrease by 21.2%, largely contributed by a fall in private investment. Public gross fixed capital investment is expected to contract by 5.4%, continuing on a contractionary trend since FY2018 as public capital spending continues to fall short of budgeted amount. Private gross fixed investment is expected to contract by 2.8%, down from 20.8% growth in FY2019, as the lockdowns created adverse environment for private sector. A larger export contraction compared to import contraction is expected to lead to overall contraction of net exports.

Here are some observations regarding the rebasing of national account statistics.

First, rebasing is a welcome development given that it helps to capture some of the structural changes in an economy over a period of time. It often includes inclusion of more of existing, new or disaggregated sectors, which usually happen in services sector as it tends to change more with time. The latest FY2011 series also incorporates recommendation of UN SNA 2008 (in place of SNA 1993) and adopts updated industrial division classification. So, it is inching toward more data accuracy and consistency with international practices. This is the fifth rebasing of national accounts statistics, following rebasing in FY1965, FY1975, FY1985, FY1995, and FY2001. I hope the CBS releases national accounts statistics for years prior to FY2011 using the new base so that historical comparison is consistent.

The new base series includes 18 subsectors and is updated to international standards industrial classification (ISIC) rev.4. The old base series included 15 subsectors and was consistent with ISIC rev.3.1. The value of economic activities each year (GDP) under the new base is higher for three reasons: (i) wider coverage of economic activities all subsectors except public administration and defense and other services (arts, recreational, etc); (ii) changes due to methodology especially for financial intermediation, and real estate and professional activities; and (iii) change due to classification especially for real estate and professional activities, public administration and defense, and other services. Overall, changes due to methodology, and wider coverage and use of new ratios accounted for 0.48% and 13.58%, respectively, increase in GDP in FY2011 under the new base. 

Agriculture, forestry and fishing is now clubbed as one sector in the new series. In the industry sector, electricity, gas and water subsector is divided into two subsectors: electricity, gas, stream and air conditioning supply; and water supply, sewerage, waste management and remediation activities. So, the industry sector in the new base has five subsectors. Services sector is the one that has gone through most changes, particularly inclusion or expansion of new economic activities. Wholesale and retail trade now also has repair of motor vehicles and motorcycles. Hotels and restaurants subsector is now accommodation and food services activities. Transport, storage and communications is divided into two subsectors: transport and storage, and information and communication. Real estate, renting and business activities are now divided into three subsectors: real estate activities; professional, scientific, and technical activities; and administration and support service activities. 

Second, rebasing, to some extent, captures the structural changes in the decade between the rebasing. Between FY2001 and FY2011, the share of agriculture and industry sectors declined, but that of services sector increased. This confirms the unusual structural transformation whereby the decline in agriculture sector is picked up by the increase in services sector, bypassing the industrial sector. Moreover, the larger share of services sector is also due to wider coverage of economic activities and changes in methodology and classification. Even with this, wholesale and retail trade, and vehicular repair activities as a subsector accounts for about 15.2% of GDP, which is similar to the share of the entire industry sector (mining and quarrying; manufacturing; electricity, gas, steam and air conditioning; water supply, sewerage, and waste management; and construction). The massive post-earthquake reconstruction boosted mining and quarrying, and construction activities, leading to a slight uptick in the share of industry sector in GDP from FY2017 onwards. 

Third, rebasing increased the share of services sector in GDP and hence the severity of impact of the pandemic as well. The high contact services such as wholesale and retail trade, and repair activities; transportation and storage; and accommodation and food service activities were also the most affected by the lockdowns and social distancing norms. This contributed to the larger contraction of services sector in FY2020 and its eventual effect on GDP contraction.

Fourth, on the expenditure side, the rebasing exercise has reinforced the argument that consumption is higher than earlier reported. It is largely fueled by remittance income, which has drastically increased since FY2001. Investment, exports and imports were lower than expected. In FY2011, the share of consumption in GDP was 86% under old base but 92.9% under the new base. It increased to 91.1% of GDP in FY2020 under the new base with private consumption accounting for about 88% of total consumption. 

Gross capital formation, or investment in general terms, was markedly down in FY2011: 27.7% of GDP under new base compared to 38% of GDP under the old base. It increased to 31.3% of GDP in FY2020. Notice that under the old base investment was reported to be about 50.2% of GDP, but almost half of it was change in stocks, which is derived residually and hence includes statistical discrepancy/error as well. Under the new base, statistical discrepancy has been as high as 9.5% of GDP (in FY2018). It is estimated to be 4.6% of GDP in FY2020. Public investment is reported to be higher under the new base than under the old base but private investment is reported to be lower under the new base. Over years, while public investment, as a share of GDP, is declining (thanks to receding public capital spending absorptive capacity), private investment is increasing, reaching 23.9% of GDP in FY2020. 

Imports of goods and services are expected to be 28.4% of GDP under the new base as opposed to 32.9% of GDP under the old base in FY2011. Imports are expected to be 33.6% of GDP in FY2020 (under old base it was reported to be 40.1% of GDP). Exports of goods and services are expected to be about 6.7% of GDP in FY2020, down from 7.8% of GDP in FY2011. 

Fifth, using the new base gives a higher per capita GDP as GDP itself is revised upward. For instance, the value of goods and services produced in the country in FY2020 (or GDP) was USD 32.4 billion under the old base. It has increased to USD 33.9 billion under the new base, which means size of the economy increased by about USD 1.5 billion. Per capita GDP is now estimated to be USD 1134 and per capita GNI USD 1148 in FY2020. Per capita GNDI (which includes remittance inflows as well) was USD 1430 in FY2020 (or 126% of GDP). These are all in nominal terms. 

Since consumption is too high, gross domestic savings is automatically low. It dropped to 8.9% of GDP in FY2020 from 15.7% of GDP in FY2019. Gross national savings was about 35% of GDP in FY2020, down from 42.5% of GDP in FY2019. 

Sixth, since nominal GDP has increased, all other macro indicators expressed as a share of GDP have also been automatically revised downward. Tax revenue will be about 17.8% of GDP. There may not be much change in fiscal deficit as a share of GDP because expenditure will also be arithmetically lower. Current account deficit will now be around 0.8% of GDP. Merchandise exports and imports will be 2.7% and 29.7% of GDP, respectively in FY2020. Workers’ remittances would drop to around 22% of GDP in FY2020. Outstanding public debt in FY2020 was 36% of GDP (37.7% of GDP under the old base), up from 27.1% of GDP in FY2019.

Seventh, rebasing is a good exercise and needs to be done periodically. Let us hope that the CBS will publish national accounts estimates (both real and nominal) for years prior to FY2011 as well using the new base year. This is important to ensure correct comparison and interpretation. Creating a back series using the new base year is an important exercise for the statistics bureau. Otherwise, people will start reporting real GDP growth using old base year for up to FY2011 and then use the latest base year FY2011 onwards. 

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The CBS also released quarter data for up to the first quarter of FY2021. The economy contracted, y-o-y in the last quarter of FY2020 by 15.4% and then further contracted by 4.6% in the first quarter of FY2021. The impact of COVID-19 and the lockdowns on the economy is clearly visible from the slump in GDP numbers in the two quarters. This has technically pushed the economy into recession as two consecutive quarters of GDP contraction is usually referred to as recession. This quarterly series is also based on the new base. The CBS has not released full related sectoral data and the chart below is from the presentation slides CBS uploaded in its website.. 

Key highlights of Nepal's 15th five-year plan (FY2020-FY2024)

National Planning Commission recently published the 15th five-year plan (FY2020-FY2024) taking also into account the effect of COVID-19 pandemic on the government’s priorities and the economy. This plan is considered as a first phase of a 25-year long-term economic vision that aims to position Nepal as a high-income country with per capita income of USD 12,100 by FY2044.  Its theme is 'generating prosperity and happiness' and aims to create the foundation of prosperity and happiness through economic, social and physical infrastructures to accelerate economic growth. 

The government is expecting Nepal to graduate from LDC category to a developing country status within this plan (by 2022 with per capita income of USD 1,400). This plan is expected to contribute to efforts to ensure that Nepal reaches a middle-income country status by FY2030 (with per capita income of USD 2,900) and achieve the SDGs as well. By the end of FY2024, per capita income is estimated to reach USD 1,595.

The plan emphasizes boosting investment in the sectors or thematic issues that are considered as drivers of economic transformation. These include transport, ICT, energy, education and healthcare, tourism, commercialization of agriculture and forest products, urbanization, social protection, subnational economy, and good governance, among others.

 By FY2024, the government wants to achieve a double-digit growth rate, increase per capita income of USD 1,595, reduce population under absolute poverty line to 9.5%, and increase share of formal sector employment to 50%. 

Some of the major national targets for 15th five-year plan (FY2020-FY2024) are as follows:

• Average GDP growth (at basic prices): 9.6%
• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15.7%
• Share of essential goods (agri, livestock, food items) in total imports: 5%
• Population under the absolute poverty line: 9.5%
• Population with multidimensional poverty: 11.5%
• Share of formal sector employment: 50%
• Unregistered (formal) establishment: 10% of total establishment
• Literacy rate (15+ years): 95%
• Road density: 0.74 km of road per sq km of land
• Households with access to electricity: 95%
• Population with access to internet: 80%
• Electricity generation (installed capacity): 5,820 MW
• Renewable energy: 12% of total energy consumption
• Per capita electricity consumption: 700 kwh
• Agricultural productivity (major crops): 4 MT per hectare
• Irrigable land with year-round access to irrigation: 50%
• Per capita tourist spending: USD 100 per day
• Human development index: 0.624
• Gender development index: 0.963
• Population covered by basic social security: 60%
• Social security expenditure: 13.7% of budget
• Global competitiveness index: 60
• Ease of doing business index: 68
• Travel and tourism competitiveness index: 3.8
• Corruption perception index: 98
• Nepali citizens with national ID card: 100%
• Population affected by disaster incidents: 9.8%

The NPC estimated average growth in agriculture, industry, and services sectors to be 5.4%, 14.6%, and 9.9%, respectively. By the end of the 15th plan, the government is targeting to increase the share of industry and services sectors to 18.8% and 58.9%, respectively, while the share of agriculture sector is to decrease to 22.3%. To achieve the stated average growth rate, the NPC estimated that NRs 9.229 trillion (at FY2019 constant prices and based on ICOR of 4.9:1; FYI, a lower ICOR indicates efficient production process) investment will be required over the plan period. Public, private and cooperative sectors are expected to contribute 39%, 55.6%, and 5.4%, respectively of this required investment.  

[The government is considering FY2019 as a base year for the long-term economic vision. So, the data is presented in FY2019 constant prices. However, this is not much helpful in doing comparative analysis including that of long-term plans and targets. National account estimates, public finance, and periodic surveys - based on which the numbers are estimated eventually- are either presented with different year as base year (FY2011 for NEA for now) or are in current prices (fiscal, monetary, external sectors, and household surveys.]

As a share of GDP by FY2024, the expected impact on macroeconomic indicators are as follows:

National accounts (focused on increasing investment through savings mobilization)

• Average GDP growth (at producers' prices): 10.1%
• Per capita income: USD 1,595
• Export of goods and services: 15%
• Gross domestic savings: 22%
• Gross national savings: 47.5%
• Gross fixed capital formation: 41.6%

Fiscal sector (focused on allocation and implementation efficiency, and fiscal discipline for expenditure management; maximize revenue mobilization and taxpayer-friendly tax administration)

• Total budget: 43.3%
• Recurrent expenditure: 17.9%
• Capital expenditure: 18.6%
• Financial management: 6.8%
• Revenue: 30%
• Income tax: 10%
• Foreign debt: 5.7%
• Domestic borrowing: 4.3%

Monetary and external sector (focused on controlling inflation, balance of payments stability, and financial stability)

• Average annual Inflation: 6%
• Export of goods and services: 15%
• Import of goods and services: 49%
• Remittances: 22.1%
• Foreign investment: 3%

Meanwhile, the average financing gap to achieve the SDGs is estimated to be NRs 585 billion per year for the entire period of 2016 to 2030 (SDG period). It is on average 8.8% of GDP for 2016-19, 12.3% of GDP for 2020-22, 13% of GDP for 2023-25, and 16.4% of GDP for 2026-30. The overall annual financing gap is estimated at 12.8% of GDP throughout the period of 2016 to 2030.

INR 1 trillion Agriculture Infrastructure Fund in India

On August 9, PM Modi launched the Rs 1 lakh crore Agriculture Infrastructure Fund (AIF) to be used over the next four years. 

This article in Mint explain what it is about: 

The scheme will provide better warehousing and cold storage facilities for farmers, Modi said, adding, new jobs will be created as food processing and post-harvest facilities are set up in rural areas. The scheme will enable startups to scale up their operations and India to build a global presence in organic and fortified food, he said. The fund was launched with ₹1,128 crore of new loans disbursed to more than 2,200 cooperative societies. During the event, the Prime Minister also transferred ₹17,100 crore to farmers under the PM-Kisan direct income assistance scheme.

Under the infrastructure scheme—part of the federal government’s Atmanirbhar Bharat package announced in May—banks and financial institutions will provide ₹1 trillion in loans to cooperative societies, farmer producer companies, self-help groups, entrepreneurs, startups and infrastructure providers. The objective is to provide medium to long-term debt financing for setting up of post-harvest infrastructure and community assets for marketing of farm produce. According to the guidelines, all loans up to ₹2 crore will be disbursed with a 3% interest subsidy. The loans will be disbursed over four years— ₹10,000 crore in 2020-21, and ₹30,000 crore in the next three years.

This article in The Indian Express explains how it will be implemented and the potential roadblocks.

The fund will also be used to provide loans, at concessional rates, to FPOs and other entrepreneurs through primary agriculture credit societies (PACs). NABARD will steer this initiative in association with the Ministry of Agriculture and Farmers Welfare.

“The fund is a major step towards getting agri-markets right,” writes Ashok Gulati, the Infosys Chair Professor for Agriculture at ICRIER. But he points out some missing parts of the puzzle. Firstly, unless NABARD ensures that FPOs get their working capital at interest rates of 4 to 7 per cent — like farmers get for crop loans — the mere creation of storage facilities will not be enough to benefit farmers. “Currently, most FPOs get a large chunk of their loans for working capital from microfinance institutions at rates ranging from 18-22 per cent per annum. At such rates, stocking is not economically viable unless the off-season prices are substantially higher than the prices at harvest time,” he writes. The second missing item is the future of the agri-futures markets. A vibrant futures market is a standard way of hedging risks in a market economy. Several countries — be it China or the US — have agri-futures markets that are multiple times the size of those in India.

Rural resurgence in India and impact of QE on emerging markets

A rural resurgence will fuel India's economic recovery

Shantanu Nandan Sharma writes in The Economic Times that rural economy will drive overall recovery and that a normall monsoon raises the prospects of bumper Kharif harvest as well as higher consumption demand. Also, tractor sales have are up while auto sector is in a slump. 

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But a good monsoon is not the only reason why policymakers and India Inc alike are anticipating a rural resurgence. They point out to three things: First, farming continued even during the lockdown that started March 25, while manufacturing languished. Second, more land has been under cultivation this year, according to preliminary assessments by government agencies. Third, many factory workers who returned to their rural hometowns as jobs evaporated in the cities are now involved in farming activity. These factors, and the lack of any other positive sentiment in the near-term, have convinced corporate India, particularly those with a wider rural portfolio, to focus on consumers in Bharat.

[...]The consensus that rural India will lead the nation’s economic revival has been backed by recent sales numbers, too. Tractor sales — seen as an important barometer of the rural economy — were up in May. In June, numbers released by companies so far have shown a massive demand for tractors. Escorts Ltd, for example, said it saw a 23% sales growth in the domestic market. Mahindra & Mahindra reported a 10% rise in sales in June. Even the tax numbers have a rural flavour. A simple analysis of the June numbers of the goods and services tax (GST) shows shrinkage of revenue in Delhi, Haryana and Gujarat — states with a substantial urban population. A comparatively robust growth was registered in the predominantly rural states. For example, in June, Madhya Pradesh and Chhattisgarh saw an impressive GST growth of 24% and 22%, respectively, from a year ago.

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Impact on emerging markets of unconventional monetary policy in advanced economies

In an op-ed published in Mint, Amandadeep Mandal and Neelam Rani argue that the long-term assets purchase program (quantiative easing, QE) of advanced economies have lowered bond yield, which can boost India's growth prospects provided that the economy is operating below capacitieis. Central banks in the US, the UK, Australia, Canada, EU, Japan, New Zealand, and Sweden have announced QEs aimed at purchasing assets (either sovereign or corproate bonds or mortgage backed securities or all). These have spillover effects in emerging markets-- higher volatility in capital flows, currency and financial markets. In case of QE exit, emerging markets may see capital outflows, volatility-spikes in financial markets, currency depreciation, and increase in government yields.

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In restricting the pandemic and the related economic downturn, many developed economies faced short-term interest rates nearing zero, or even slipping to negative. Several central banks around the world engaged in unconventional monetary policy interventions in the form of long-term asset purchase programs, commonly referred to as quantitative easing (QE). Since March, eight central banks of the developed economies made QE announcements. Notably, US initially announced a $700 billion purchase on 16 March, followed by an announcement of ‘unlimited’ purchase on 23 March. UK announced a purchase on $200 billion on 19 March.

[...]While the central banks of developed economies aim to mitigate the dysfunctionalities in their targeted markets, the QE interventions will have spillover effects linked with higher volatility in capital flows, currency and financial markets in developing economies, including India. An impulse study of QE-triggered US and UK interest rate shock on Indian 10-year sovereign bonds suggests that the spillover effect is immediate and the associated implied volatility subsides in 10 days. The impact primarily depends on the cyclical position of the Indian economy and the stability of its financial system, in other words the scale of its market imperfections.

The lower bond yields, resulting from QE of developed economies can boost India’s growth opportunities, provided we are operating below capacities. In contrast, they can overheat the economy if we are working above capacity, which we are certainly not. Nevertheless, the spillover of QE interventions in developed economies can potentially destabilise the currency and the financial markets. This is primarily because of the incapacity of the growing economies to absorb the capital and the potential speculations in the markets, leading to excessive credit growth and pricing bubbles. Such market volatility fuels financial turmoil. However, with increased Indian financial market depth and regulations in the recent time, we expect to contain such speculative bubbles in the near future.

[...]Starting from October 2020, we can anticipate a potential exit of QE programs by the developed economies. This can lead to an outflow of capital and volatility-spikes in the financial markets. We are most likely to witness depreciation in currency and fall of equity prices due to portfolio rebalancing. Government yields are also expected to go up.

The degree of the impact of a QE exit on the Indian economy and its financial stability will depend on several factors: i) the scale of India’s exposure to the developed economies, through financial linkage and trade, ii) India’s cyclical economic position, i.e. if we are slowing down, then reversal of capital flows will widen the output gap, iii) size of current account deficits, i.e. higher debt levels will make an economy more vulnerable, iv) the depth of Indian financial markets – greater the depth, greater will be its sensitivity to movements of assets in the developed economies, v) the policy interventions that will be aimed to mitigate the effects of capital outflows and vi) the economic impact of the policies taken to prevent the spread of the covid-19, such as the lockdown measures.

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Here is an ADBI working paper by Bhattarai, Chatterjee and Park on the same topic but looking at the effect of QE in the US on emerging market economies before 2015. They show that an expansionary US QE shock appreciates the local currency against the US dollar, decreases long-term bond yields, and increases stock prices of emerging market economies. They do not find significant and robust effects on output and consumer prices in the emerging market economies. Capital inflows and exchange rate appreciation might have opposite effects on output. 
  

Impact of lockdown on employment, remittances and food security in Nepal

Measuring the human cost of lockdown in Nepal

Mushfiq Mobarak, Bishal Chalise and Corey Vernot write in Nepali Times:  

One of us (Mobarak) has been leading a team collecting large-sample data on the rural poor across 90 villages in Kailali and Kanchanpur to track labour mobility, wages, remittances, food security, and mental health before and after the lockdown. We collected five rounds of data from 2,600 households in monthly intervals since September 2019, and conducted the most recent round of phone surveys in April, 2020 immediately after the lockdown measures were enforced.

[...]Total hours in income-generating (wage or non-farm business) work for prime-age males have decreased 75% since January. Men are spending a bit more of that time on their own farm, but even accounting for that, total work hours are significantly below even the pre-harvest lean season in October. [...]The lockdown has had even larger effects on migrant families, because there has been a 61% dip in the remittance receipts since lockdown. A large part of this is because migrants who would normally be away, earning income elsewhere, were forced to return home; 65% of the migrants who were in either India or other cities in Nepal during 1 January – 1 April 2020 returned home in a rush during the first two weeks of April. Further, individual migrants who are still away are only able to send half of what they used to send before the lockdown. [...]Some 65% of our respondents worried about having enough food in the house when we spoke to them in late April. As a benchmark, that number was 67% in September-October 2019 (during the pre-harvest lean season), and 43% in January after the rice harvest. 

[..]In an experiment, when we provided some of these poor, rural, migrant-dependent households loans during the pre-harvest lean season in 2019, they invested a large portion of that money buying fertiliser. Agricultural investment was significantly higher than those who did not receive such loans.

Actual fiscal stimulus in India

On 12 May 2020, Prime Minister Narendra Modi announced a special economic package worth INR 20 lakh crore (INR 20 trillion or about USD 267 billion), which taken together with the earlier announcements by the government and RBI is equivalent to about 10% of GDP, with a focus on a self-reliant India (Atmanirbhar Bharat). On 26 March 2020, the government had announced an economic relief package (PMGKP) worth INR 1.7 lakh crore while the RBI offered liquidity support of INR 3.7 lakh crore in March and INR 2 lakh crore in April. 

The Atmanirbhar Bharat Abhiyan (ABA) has five pillars and will focus on land, labor, liquidity, and laws.

1. Quantum jump in economy 
2. Modern infrastructure
3. Technology-driven system/reforms
4. Vibrant demography
5. Strong demand 

The main idea is to build back better so that the eventual economic recovery is better than before and India is better positioned to respond to any future health or natural crises. Some of the measures (such as direct cash transfers and food subsidy) are designed to negate the effect of crisis such as COVID-19. The reform measures will not only enhance efficiency across sectors, but also ensure quality and push India towards a self-reliant economic regime. 

The government is aiming for bold reforms in supply chain in agriculture, rational tax system, simple and clear laws, competent human resource, and a strong financial system. Make in India campaign will benefit from these reforms as the emphasis is on meeting demand locally but competitively. The expectation is that these measures will lead to the emergence of confident and resilient India that depends on its strengths and also integrates with the global economy. 

Following up on PM Modi’s announcement, on 13 May 2020, Finance Minister Nirmala Sitharaman, provided details, in five tranches (Part 1, Part 2, Part 3, Part 4, and Part 5), of the comprehensive package. 

The extra fiscal spending will be a fraction of INR 20 trillion as most are related to providing or leveraging liquidity, providing guarantees, and regulatory tweaks. The guarantees and backstops increase contingent liabilities on government, to the extent they are utilized. The following table gives an overview of the estimated fiscal cost or stimulus (1 USD = INR 75).

Self-reliant India movement economic package
Sectors	INR crores	USD billion	Fiscal stimulus or cost
Before May 13
Revenue loss due to tax concessions since 22 March	7,800		Tax relief
PMGKY	170,000	22.7	102,600
Emergency Health Response Package	15,000	2.0	15,000
Total	192,800	25.7
Tranche 1-For businesses including MSMEs
MSMEs
Emergency collateral-free working capital facility	300,000	40.0
Subordinate debt for stressed MSMEs	20,000	2.7	4,000
MSME Fund of Funds	50,000	6.7	10,000
EPF
Extend EPF support for 3 more months	2,500	0.3	2,500
Reduction in employer & employee contribution to 10% from 12% for 3 months	6,750	0.9	Tax relief
NBFCs/MFIs
Special liquidity scheme for NBFC/HFC/MFIs	30,000	4.0
Partial credit guarantee scheme	45,000	6.0	20% of loss if incurred
DISCOMs
Liquidity injection	90,000	12.0
Tax relief
TDS and TCS reduced by 25% for FY2021	50,000	6.7	Tax relief
Total	594,250	79.2
Tranche 2-For poor, including migrants and farmers
Migrant workers welfare
Free food grains supply to migrant workers for two months	3,500	0.5	3,500
Farmers and small businesses
2% Interest subvention for 12 months for Shishu MUDRA loanees	1,500	0.2	if incurred
Credit facility for street vendors	5,000	0.7	if incurred
Extension of Credit Linked Subsidy Scheme under PMAY (Urban)	70,000	9.3	if incurred
Additional emergency working capital for farmers through NABARD	30,000	4.0	if incurred
Concessional credit to PM-KISAN beneficiaries	200,000	26.7	if incurred
Total	310,000	41.3
Tranche 3-Formalizaiton of Micro Food Enterprise (MFE)
Strengthen infrastructure logistics and capacity building
Agri Infrastructure Fund	100,000		100,000
Formalizaiton of Micro Food Enterprise (MFE)	10,000		10,000
Pradhan Mantri Matsya Sampada Yojana (PMMSY)	20,000		20,000
Animal Husbandry Infrastructure Development Fund	15,000		15,000
Promotion of herbal cultivation	4,000		4,000
Beekeeping initiatives	500		500
TOP to TOTAL	500		500
Total	150,000	20.0
Tranche 4-New horizons of growth- Structural reforms in eight sectors
Social infrastructure VGF	8,100		8,100
Total	8,100	1.1
Tranche 5-Government reforms and enablers
MGNREGS	40,000		40,000
Total	40,000	5.3
RBI measures-actual	801,603	106.9
Grand total	2,096,753	279.6	335,700
Share of total			16.0
FY2020AE NGDP		2,998.6	22489420
Share of NGDP FY2020AE			1.5

When the size of fiscal stimulus is expressed as share of GDP, then one confusion is which year’s nominal GDP to use. If folks use FY2020 advanced estimate of nominal GDP, then it may not be correct because nominal GDP is sure to decline as the advance estimate was released before COVID-19 pandemic. But then, if folks revise FY2020 nominal GDP downward then the size of fiscal stimulus as a share of GDP will increase compared to FY2020 AE. If folks are using FY2021 nominal GDP forecast, then the variability in size of fiscal stimulus is unsurprising. Furthermore, note that some of the fiscal stimulus may not be realized in FY2021 itself. So, expressing fiscal stimulus as a share of GDP is not uniform across estimates by different organizations. That said, most of the estimates are between 1-2% of GDP. 

While some argue that the economic package is inadequate to address the economic challenges, other counter that it is appropriate for the time being.