Book Summary: "Of Counsel: The Challenges of the Modi-Jaitley Economy"– Arvind Subramanian

Brief about the Book:

It correctly focuses on the misplaced priorities of policymakers to pamper the cereals sector and ignore the non-cereal industry in the agriculture policy. One practical and positive suggestion was how we can change crop sowing patterns to reduce pollution in NCR by moving farmers away from paddy to arhar. Unlike paddy straw (residue), arhar straw is green and can be ploughed back into the soil. It decomposes fast solving the issue of residue disposal for the farmer who can be incentivized to make the shift, by sharing with him the social benefits of this shift which are estimated to be approx. Rs. 13,000 per hectare. With this move, the problem of pollution reduces in NCR while farmer earns more.

Poverty alleviation programs have suboptimal outcomes due to poor targeting, what is worrying is that the current method of BPL identification may not yield the desired outcome due to the high churn rate in poverty. If BPL cards were given in 2011 based on 2004 data, 40% of the poor would not have BPL cards as 9% of Indian households fell into poverty in that period, while 65% of households who were poor in 2004 moved out of poverty by 2011. Hence, India needs a Quasi-Universal Basic Income (QUBI), a subsidy cost of 4% of GDP that can be channelled into income support in some form through QUBI using JAM.

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Book publication date: December 2018.

Brief about the Author:

Dr. Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, has been associated with the Institute since 2007. He was the Dennis Weatherstone Senior Fellow at the Institute during 2013–14 and was on leave for public service from 2014 to August 2023.

Previously, he was a senior fellow at the Watson Institute for International and Public Affairs at Brown University, a distinguished nonresident fellow at the Center for Global Development, a professor at Ashoka University, New Delhi, and a visiting lecturer at the Harvard Kennedy School. He served as the chief economic advisor to the government of India between 2014 and 2018. He currently advises the government of the Indian state of Tamil Nadu on macroeconomic and sectoral issues.

As chief economic adviser during 2014–18, Subramanian oversaw the publication of the annual Economic Survey of India, which became a widely read document on Indian economic policy and development. For example, the 2018 Survey had 20 million views from over 190 countries in its first year of publication. Major initiatives carried out during his tenure included a uniform nationwide goods and services tax (GST), a bankruptcy code to tackle the Twin Balance Sheet challenge, a financial and digital platform for connectivity (the so-called JAM trinity), and universal basic income schemes.

While at the Institute, Subramanian wrote two critically acclaimed books: Eclipse: Living in the Shadow of China's Economic Dominance, published by PIIE in September 2011, and India's Turn: Understanding the Economic Transformation, published by Oxford University Press in 2008. Foreign Policy magazine named him one of the world's top 100 global thinkers in 2011. He has written extensively for many academic journals on growth, trade, development, aid, India, Africa, and the World Trade Organization. His op-eds and essays have been cited and published in the Economist, Financial Times, Foreign Affairs, Washington Post, New York Times, Wall Street Journal, Newsweek, New York Review of Books, and the Business Standard, and he is a regular columnist for Project Syndicate.

Before joining PIIE, Subramanian was the assistant director in the research department of the International Monetary Fund. He served at the General Agreement on Tariffs and Trade (GATT) from 1988 to 1992 during the Uruguay Round of trade negotiations and previously taught at Harvard University's Kennedy School of Government and Johns Hopkins School for Advanced International Studies.

He obtained his undergraduate degree from St. Stephens College, his MBA from the Indian Institute of Management at Ahmedabad, and his M.Phil and D.Phil from the University of Oxford.

Of Counsel:- Book Review

Exordium:

He has put charts in the book which show that RBI holds 28% of its assets as capital which is the 5th highest in the world, while some countries’ central banks have negative capital (Israel, Thailand, Chile, etc.) as cost of liability is “zero” for central banks and they can get capital whenever they want. Based on an average capital-to-asset ratio of 8.4% across central banks, RBI is estimated to have Rs. 7 lakh crores excess capital.

While looking at the same issue from a VAR perspective, RBI has Rs. 4.5 lakh crores excess capital. The gap is primarily on account of other central banks calculating VAR with a 1% probability of an event occurring while RBI has a cushion for events with 0.001% probability.

CEA suggests that if the excess capital is used to extinguish government debt, the saving on the fiscal front can be as high as Rs. 30,000 to 45,000 crores annually as the Interest rates of G-Sec are as high as 7-8% while RoA of RBI is lower than 2%. It makes economic sense to return this excess capital through this non-inflationary structure.

On GST he makes a strong pitch for power to be included, as the cascading effect of state tax hurts the industry, and the cost for labour-intensive industries such as textile is 2% higher on account of this. This has a bearing on the competitiveness of our exports.

Chapter 1: Igniting Ideas for India:-

On 8 November, in a dramatic nationally televised speech that I watched in my room in North Block, the prime minister announced that the top two high-denomination currency notes of ₹ 500 and ₹ 1,000 would cease to be legal tender; that is, they would no longer be accepted as a government-certified means of payment.

It was an unprecedented move that no country in recent history had made in normal times. The typical pattern had either been gradual demonetisations in normal times (such as the European Central Bank phasing out the €500 note in 2016) or sudden demonetisations in extreme circumstances of war, hyperinflation, currency crises or political turmoil (Venezuela in 2016).

Chapter 2: Money and Cash:-

Carbon imperialism finds a lot of space in the discussion around climate change. We have a twin balance sheet problem and moving to renewable through subsidy at this point imposes a double cost for India, one is direct subsidy and the other is the capital needed to provide for losses of PSB who funded thermal projects.

He is of the view that for the next few years, we should increase thermal power usage. India should use as much coal as possible in the next few years while encouraging investment in research on green coal. Later after a few years we move towards renewable and reduce the thermal share to baseload requirements.

Chapter 3: The Great Structural Transformation (GST):-

The Indian initiative was, to put it mildly, unique. It presupposed an extraordinary amount of resilience in the economy, especially amongst the vulnerable, because it was going to be the first of two major shocks—along with the GST—to affect those in the cash-intensive, informal sectors of the economy.

Two years on, Demonetisation still consumes the attention of the commentariat, in part because of the mysteries surrounding its origins. I have little to add to the economics of the D-decision beyond what was said in three economic surveys that I oversaw. I do have some new thoughts, or rather hypotheses, on two demonetisation puzzles, political and economic.

Chapter 4: Climate Change and the Environment:-

During Dr. Subramanian's tenure as the Chief Economic Adviser, the Economic Surveys became an essential tool for understanding India’s economy. These surveys, presented annually, offered a comprehensive overview of the economic conditions, provided in-depth analysis of various sectors, and suggested policy measures.

Dr. Subramanian introduced several innovations and new frameworks in these surveys that greatly enhanced their analytical depth and practical relevance. One of the significant contributions was the introduction of the JAM trinity—Jan Dhan (bank accounts), Aadhaar (biometric identification), and Mobile—to promote financial inclusion and direct benefit transfers.

This framework was a cornerstone in explaining the potential for groundbreaking reform in subsidy delivery mechanisms and social welfare programs, aiming for greater efficiency and reduction in leakages.

Chapter 5: Agriculture:-

It correctly focuses on the misplaced priorities of policymakers to pamper the cereals sector and ignore the non-cereal industry in the agriculture policy. One practical and positive suggestion was how we can change crop sowing patterns to reduce the menace of pollution in NCR by moving farmers away from paddy to arhar.

Unlike paddy straw (residue), arhar straw is green and can be ploughed back into the soil. It decomposes fast solving the issue of residue disposal for the farmer who can be incentivized to make the shift, by sharing with him the social benefits of this shift which are estimated to be approx. Rs. 13,000 per hectare. With this move, the problem of pollution reduces in NCR while farmer earns more.

Chapter 6: The State's Relationship with the Individual:-

Poverty alleviation programs have suboptimal outcomes due to poor targeting, what is worrying is that the current method of BPL identification may not yield the desired outcome due to the high churn rate in poverty.

If BPL cards were given in 2011 based on 2004 data, 40% of the poor would not have BPL cards as 9% of Indian households fell into poverty in that period, while 65% of households who were poor in 2004 moved out of poverty by 2011. Hence, India needs a Quasi-Universal Basic Income (QUBI), a subsidy cost of 4% of GDP that can be channelled into income support in some form through QUBI using JAM.

Chapter 7: Speaking Truth to Power:-

The former CEO’s approach to The Fiscal Responsibility and Budget Management Act, 2003 (FRBM) was different as his focus was to remove the primary deficit (PD) which will, in turn, lead to a lower fiscal deficit. 

This framework was to ensure that India does not borrow to service debt. In the current scheme of things as long as growth is higher than the interest rate, India can have a high primary deficit with declining Debt/GDP ratios.

Average PD was 3.2% for the last decade, this can turn worrisome when growth is lower than interest rates. So positive primary deficit is a better measure of fiscal consolidation as it ensures the Debt /GDP ratio will fall over time.

However, as of now his view is seen as the introduction of another variable to the debate by the system in India and has not gained traction while PD has already been made an operational target by the IMF in some lending programs.

Chapter 8: What Do they Know of Economics Who Don't Know Globalisation and Tennis?:-

For too long, the World Trade Organization has languished to lift a reference from T.S. Eliot in his seminal poem The Waste Land'— by the waters of Leman' (Lake Geneva). Once the world's pre-eminent multilateral trade forum, the WTO has been steadily marginalized in recent years, and recent rebukes of globalization, such as the United Kingdom's Brexit vote and Donald Trump's election as US President, suggest that this trend will accelerate.

But these outcomes may have the opposite effect, owing to three key developments that could enable the revival of the WTO and of the multilateralism that it embodies.

The first development is the decline of alternative trade arrangements. The WTO reached its peak in the early years of this century, a few years after the Uruguay round of global trade negotiations concluded, and at a time when more countries notably China-were acceding to the organization.

However major trade players like the United States and the European Union subsequently shifted their focus from multilateral trade agreements to bilateral, regional and mega-regional deals. The mega-regional deals namely, the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership

Conclusion:

Subramanian reflected on the broader significance of the role of economic advisers in shaping national policy.

An effective economic adviser contributes not merely through policy recommendations, but by fostering a culture of evidence-based decision-making within the administration.

This involves a commitment to rigorous analysis, transparency, and a willingness to challenge the status quo when necessary.

Learning:

We need to search for other explanations.

One possibility is that people found ways around the note ban, for example by continuing to use the ₹ 500 note even after its use had been formally banned, so the currency shock wasn’t as big as conventionally measured.

Another possibility is that production was sustained by extending informal credit: people simply agreed to pay their bills as soon as currency became available.

Finally, to a certain extent, people may have shifted from using cash to paying by electronic means, such as debit cards and electronic wallets.

Or, there may be other, completely different explanations that have eluded my understanding of demonetisation, one of the unlikeliest economic experiments in modern Indian history.

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