Thinking Rationally

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  • Adequacy of Reserve and Economic Capital Framework for RBI

    How much forex reserve should RBI have? How much capital should RBI have?  One simple answer to both these questions is- “it depends’.  The obvious follow-up question is – it depends on what?  And there is the rub.  Is it given for a central bank to “die, to sleep – to sleep, perchance to dream” of a tranquil crisis free state of economy when reserves are a luxury, a framework for economic capital for all contingent situations can be worked out. Politicians always seek simple solutions to complex problems. In today’s world, most of the national economies are highly interconnected and are subject to “butterfly effect”. When flap of wing of a butterfly in Mexico engenders a hurricane in China, we call it a “butterfly effect”. The mathematical discipline, called Chaos Theory that deals with such complex interconnected non-linear systems, is based on the assumption that such systems are inherently unpredictable.   There is thus neither any theoretical nor any empirical basis to expect that a central bank like RBI can  predict with a certain measure of uncertainty the capital required to tide over any severe shock in next one or two year.

    It is even debatable whether the concept of economic capital is applicable to a central bank. The economic capital of a firm is the amount of capital that would be required by the firm to remain solvent. The capital adequacy norm for a bank is a regulatory requirement towards that effect. The central banks, however, are not banks in ordinary sense. Although a central bank does function like a bank for government and banks, it is also an integral part of sovereign so far as it has unlimited power to issue risk free liabilities in its own currency. This prerogative of a central bank enables it to become the lender of last resort. Since, theoretically, a central bank can work with even negative capital, it is difficult to work out a threshold level of minimum capital that a central bank would require to remain solvent. Some recent evidences prove this point.

    In January 2015, the Swiss National Bank abandoned its pegged currency regime and allowed Swiss franc to float. Resulting appreciation in EUR/CHF rate led to a massive loss in SNB’s foreign currency portfolio. The bank’s estimated loss of CHF41 billion in the following 3 months period till March 2015 came to be about 6.5% of Swiss GDP.

    Another example of a technically insolvent central bank is the Czech National Bank (CNB).  CNB was operating, at the end of 2007, with an accumulated loss of CZK200 billion, which formed 57% of the central bank currency in circulation and 6.7% of the country’s nominal GDP. The bank’s own negative capital stood at CZK 176 billion.

    The following graph shows even for emerging countries, some central banks continued to function even after registering negative capital for extended periods.

    Even the Federal Reserve of USA registered a steep dip in its capital-to asset ratio – 0.77% at the end of 2013 from 3.54% at the end of 2006, the year preceding the onset of global financial crisis. It is nobody’s argument that the capital requirement of Fed can be a benchmark for any other central bank, as US dollar is the primary reserve currency of the world. However, the fact remains that even for Fed, resolution of a crisis is much more important than maintaining any debatable target capital adequacy ratio of a central bank.

    Since the main component of RBI’s capital is its reserve, search for an optimal capital adequacy ratio for RBI would boil down to a search for adequacy of its reserve. To a large extent the asset counterpart of RBI’s reserve (on the liability side) is its Foreign Exchange Reserve. In my earlier blog post I have provided the relevant numbers for RBI (here) . In this post I want to dwell on the IMF framework for assessment of FOREX reserve of a central bank.

    While building the framework, IMF’s main emphasis has been on the “key distinguishing characteristic of reserves- their availability and liquidity for potential balance of payment needs” (emphasis original). The global financial crisis has woken up all central banks, including those of advanced countries, to the critical role that availability of reserve plays in maintaining financial stability of a country. The IMF study has noted that most emerging market countries have “ accumulated more reserves in recent years than suggested by standard rules of thumb, with the median coverage ratio among EMs being around six months of imports, 200 percent of short-term debt, and 30 percent of broad money in 2009”. Analyzing the costs and benefits of reserves under macro-economic scenarios, IMF has worked out a new metric to assess adequacy of reserve. The metric for emerging market economies comprises four components- export income, broad money, short-term debt and other liabilities.  Computed reserve adequacy, based on this metric, for selected countries including India shows that India is not an outlier in terms of forex reserve it is currently holding.

    Finally, we hope that search for an optimal capital adequacy framework for a RBI would not turn out to be an exercise in futility. Let it not be : tale / Told by an idiot, full of sound and fury, /Signifying nothing.

    Table: Actual Forex Reserve maintained as percentage of required           

    Year RUSSIA BRAZIL INDIA INDONESIA KOREA CHINA
    2010 179% 129% 175% 94% 118% 197%
    2011 174% 156% 159% 144% 117% 175%
    2012 163% 159% 143% 90% 112% 160%
    2013 151% 159% 144% 123% 114% 155%
    2014 225% 155% 151% 126% 118% 137%
    2015 264% 192% 156% 122% 124% 120%
    2016 248% 165% 155% 128% 121% 106%
    2017 265% 162% 159% 128% 106% 97%

    Source:            http://www.imf.org/external/datamapper/ARA/index.html

    Table: Balance Sheet of Federal Reserve of USA

    Source: Carpenter, Seth et. Al; The Federal Bank’s Balance Sheet and Earnings: A Primer and Projections, International Journal of Central Banking March 2015

    IMF:  Assessing Reserve Adequacy February 2011

  • Reserve Bank without its Reserve

    Reserve Bank without its Reserve

     

    This is not the best of times for an economist to don the mantle of the governorship of the Reserve Bank of India. Whether it is the worst of the times- that only future can tell. Be that as it may, the public spat between the political executive and RBI management needs an objective assessment of their respective positions.  Whether RBI needs more or less autonomy is an issue that can be debated “ad nauseam” but the facts need to marshalled and evaluated before the central bank gets pilloried on the altar of political expediency.

    The issues in dispute are quite clear. Firstly, per the estimation of the central government, RBI’s reserves are way above the prudential level that is required to be maintained in accordance with the international best practices.  The sovereign, being the owner, has legitimate claim on the excess reserve which must be transferred to the government on demand. It is rightly argued that a central bank has two primary sources of income, namely seigniorage and a tax on the banking system. The authority to collect seigniorage and tax revenue always rests with the sovereign. RBI earns these incomes only as an agent of sovereign. Other incomes of a central bank, at least most of them, are returns on investments made out of these two incomes.

    The second issue clearly falls within the statutory remit of RBI.  In 2002, RBI introduced a supervisory framework called Prompt Corrective Action (PCA). Under PCA,   RBI has identified 3 parameters, namely capital to risk weighted assets ratio (CRAR), net non-performing assets (NPA) and return on assets (ROA) and has specified certain thresholds for each of them. RBI can initiate, at its discretion, punitive action against any commercial bank, found in breach of these thresholds. A bank under PCA faces severe restriction on sanctioning of new credit to borrowers below certain rating grades. Today 11 public sector banks are under PCA.  RBI has also tightened the extant rule for classification of NPA. In 2001, RBI had allowed certain relaxation in classification norm for loans under corporate debt restructuring mechanism.  This forbearance was withdrawn with effect from April, 2015. Through another circular issued on February 2018, RBI has made it mandatory to initiate a resolution plan for stressed asset as soon as a loan gets classified as NPA. There has been huge outcry from corporate borrowers as well the government demanding relaxation of the stringent norms specified in this circular. It has been argued that RBI’s rigid approach is starving the real sector of much needed credit.

    Let us first take up the issue of transfer of fund from RBI reserves to government.  Any transfer would entail a corresponding sale of asset. As on June 30, 2018, 73% of RBI’s assets were held in foreign currencies. Sale of domestic assets would immediately suck liquidity out of the market, putting upward pressure on yield- obviously not an outcome desired by the government.  So the only option available to RBI is to sell foreign assets. RBI’s foreign assets are recorded in two separate books of account, namely that of issue department and banking department. The foreign assets recorded in the book of issue department are maintained as backing of RBI’s monetary liability. A dilution of this backing would severely undermine people’s trust in Indian currency. So it can be safely presumed that the government would expect reserve fund transfer by sale of foreign assets of the banking department. As on June 30, 2018, the foreign assets of the banking department stood at around 8 trillion INR or 117 billion USD. How large is this reserve? The following table gives various indicators of a reserve’s adequacy.

    Table 1: Adequacy of Foreign Exchange Reserve of RBI

    Sr. No Particulars 2016-17 2017-18
    1 Forex asset of Banking department of RBI (in billion  INR) 9320 7984
    2 The amount at 1 in billion USD* 144 117
    3 Banking Departments Forex asset as% of Short term external debt 163.7% 114.2%
    4 Banking Departments Forex asset as% of Yearly Import 0.04% 0.03%
    5 RBI Balance sheet size (in billion INR) 33040.94 36175.94
    6 RBI BS in billion USD 511.31 528.89
    7 External liabilities (billion USD) 905 1037.3
    8 6 as % of 7 56% 51%
    9 RBI BS to Indian  GDP 22.5% 20.3%
    • RBI balances are as on June 30.
    • Using June 30 exchange rate.

    It is apparent from the above data that the discretionary component of RBI’s foreign exchange assets has registered a significant decline during the accounting year 2017-18.  The coverage of India’s short –term external debt by RBI’s discretionary foreign assets has also declined significantly during 2016-17.  At the end of December 2017, the banking department’s forex asset formed only 53.9% of India’s external liability on account of portfolio investment.  The portfolio investment is very sensitive to the interest rate changes in USA as  it affects risk adjusted dollar rate of return on investment.  High redemption of portfolio investment would put pressure on USD-INR rate and RBI has to ensure a smooth and calibrated movement in the exchange rate. Given the declared policy stance of US FED, RBI can ill afford to be complacent about the adequacy of its foreign exchange reserve held by the banking department.  Thus any liquidation of RBI’s foreign exchange assets to finance transfer of fund to the government would be a criminal dereliction of fiduciary duty that RBI is entrusted with.

    As regards adequacy of capital of central banks, it would be wrong to compare a central bank with commercial banks. For a commercial bank, the capital is the last buffer between solvency and insolvency, absorbing losses as they occur. For a central bank, this is ruled out by definition. As long as the domestic public is ready to hold central bank currency, there is no outside limit to a central bank’s power to create domestic liquidity. The recent “quantitative easing” policy of US FED and some other OECD countries is a testimony to this power of central banks.  However, a central bank has no inherent power to create foreign currency liquidity.  A central bank of an emerging market economy like India needs to build up foreign exchange reserve to assure foreign lenders/ investors about the capability of the bank to defend the value of central bank currency. Although “central banks need not have capital nor even positive net worth to function in a technical sense” ,loss of trust in central banks may lead to hyperinflation and  downgrading of country rating. Central banks of many advanced countries maintain very little capital, despite having a very strong balance sheet. Since these countries are financially strong enough to borrow in their own currencies internationally, there are no economic compulsions for the central banks of these countries to maintain a high capital to asset ratio. But for emerging market economies external currency risk can be a binding constraint on a central bank’s ability to maintain stability of the financial sector.

    The following tables provide a cross-country perspective about how central banks of other emerging countries are managing their balance sheet in regards to its size and currency composition.

     

    Net Foreign Assets of Central Bank as % of Total Assets of Central Bank Central Bank Asset Size as % of GDP at market price
    Country 2016 2017 2018 June 2016 2017
    Indonesia 75.0% 76.0% 73.5% 16.4% 16.7%
    Korea 72.2% 65.6% 66.6% 29.3% 27.2%
    Malaysia 90.4% 91.4%   36.6% 33.6%
    Mexico 92.5% 89.6% 94.1% 19.5% 17.4%
    Brazil 41.3% 39.9% 42.9% 45.7% 46.8%
    China 99.3% 99.2% 99.5% 0.3% 0.3%
    Thailand 89.5% 86.4% 84.8% 46.3% 47.6%
    Russian Federation 72.7% 73.2% 75.1% 35.7% 36.2%
    South Africa 77.7% 78.3% 78.8% 18.0% 16.1%

     

    Based on above data, it would be difficult to argue that RBI is pursuing an overtly conservative policy in regard to managing its balance sheet size and composition. For a country like India, where the commercial banking sector is largely owned and controlled by the government, capital adequacy of a central bank alone is of little consequence.  If both the central bank and public sector banks are owned by the government, then capital adequacy has to be assessed at the consolidated level rather than at stand-alone level.  In the absence of such a consolidated balance sheet we can look at a surrogate measure namely, capital adequacy at the consolidated banking sector level. The BIS data, given below, in this regard is quite revealing.

     

    Country Total Equity ( Asset-Liability) of the banking sector  data as on June 2018
    India 0.52%
    UK 6.97%
    USA 12.00%
    France 6.35%
    Germany 6.59%
    Italy 8.15%
    Ireland 8.46%
    Canada 6.27%
    Turkey 11.32%
    Spain 7.96%
    Australia 7.20%

    It is obvious that Indian banking sector is lagging way behind the banking sector of developed countries in respect of capital adequacy. In fact, the government must be made to understand that undercapitalization and not over capitalization is the bane of the Indian banking sector. Any debate on optimal economic capital for RBI would be an exercise in futility unless the broader problem of undercapitalization of the government owned commercial banks is addressed.

    As regards the second issue of adoption of PCA framework and a revised stress asset resolution framework by RBI and its stringent implementation by RBI, it can be argued that regulatory forbearance cannot be discretionary otherwise it would led to a chaotic and arbitrary regulatory regime.  If dues on a loan are not paid in time, there is a 90 day window available to the lender as well as the borrower to prevent the loan being classified as NPA. To ask RBI to be flexible about period this 90 day period would be a travesty of regulatory rule making. A rule becomes rule only when it is enforced.  Any deviation must also be specified and allowed under the rule itself. A regulator would turn out to be a toothless tiger if it makes rules and then allows it to be broken by regulated entities as they please.

    Although it is too early to say whether a future Dickens will describe the current time as the “age of wisdom” or “age of foolishness”, central banking in India today stands at a historical cross-road.  Either it will carry the can to the darkness of ignominy or it will uphold the high standard of professional integrity that is expected from an Institution created for this purpose.

  • Data Localization- Mercantilism in a Networked World

    Data Localization- Mercantilism in a Networked World

    Economic ideas do not die. They resurface again and again, repackaged and refurbished, when the time suits it. Mercantilism is such an idea that politicians and policy makers love to espouse, albeit periodically. The basic premise of this doctrine is that international trade is a zero-sum game. The role of state is to protect domestic industries by building tariff and non-tariff barriers and encouraging export. The obvious appeal of this doctrine to general people is not difficult to understand. It gels well with the notion of national security, national pride and preservation of national assets. It was expected that in the age of internet, such ideas would be considered anachronistic and would lose their currency. But that is not to be.

    Data is considered to be the most valuable asset of the 21st century. The most valuable companies of the world are those which are primarily engaged in data crunching. The business of Google, Uber and Amazon would come to a standstill if they could not access, process, and analyze data across time and geographies. Once nation-states realize that the most valuable assets of their citizens and territories are available for commercial exploitation freely, clamor for protection of these assets naturally arises. While individual citizens are rightful owners of their “personal data”, its exploitation without the consent of the concerned persons is a serious infringement of privacy of the person. The European Union (EU) has been in the forefront of creating a stringent legislative framework to protect the “personal data” of its “data subjects”. The EU’s General Data Protection Regulation (GDPR) ( see here)  is the most comprehensive regulation enacted so far by any competent authority anywhere. But the overarching requirement of privacy protection does not necessarily imply that all data originating within a nation’s jurisdiction are to be considered as national assets. If “data subjects” are given national tags, it follows that nations-states would consider within their right to create barriers to cross-border data flow. The recent “data localization” policy of RBI needs to be analyzed from this perspective.

    The term “data localization” is meaningful and relevant mainly in regard to data flow over the Internet, which is a network of computing devices without any single point of failure and consequent enabling of universal communication capability between all nodes. The internet service providers are not expected to control and be aware of what data flows through internet. Data localization, in essence, is a negation of this architectural construct of Internet. There are two forms of data localization. The first one localizes storage of data. It means that internet service providers must store data originating in a nation-state within the territorial boundary of that nation-state. The second form of data localization policy stipulates that routing of data packets must be confined within the country specific network. This form of localization is also called localized data routing. This is the most restrictive localization policy. Countries adopting data localization policy mostly adopt the first form of data localization. Chander and Le have identified following variants of this form of localization policy: ( see here  here )
    1. preventing information from being sent outside the country
    2. rules requiring prior consent of the data subject before information is transmitted across national borders
    3. rules requiring copies of information to be stored domestically
    4. a tax on the export of data

    Data localization policies are being adopted by many countries because of the genuine concern of many national governments about the disproportionate capability of USA to access sensitive data pertaining to the respective countries’ national security available on data stores of Internet service providers, many of which are located outside the national boundaries of the concerned states. The Snowden episode confirmed the existence of a nexus, probably forced, between US security establishment and US technology firms including Google and Yahoo. Subsequent to Snowden revelations the German Interior Minister declared that, “whoever fears their communication is being intercepted in any way should use services that don’t go through American servers.” (  Hill 2014)  The concerned ministers of France and Brazil unequivocally lent their support to data localization policy. It is beyond doubt that one of the important factor of data localization policy of non-US countries is their desire to minimize “their comparative disadvantage in Internet data hosting” vis-à-vis US and “their comparative disadvantage in Internet signals intelligence”. ( Selby 2017) ) Thus data localization policy is being adopted by countries cutting across political regimes as a comprehensive review by Chander and Le shows. 14 countries studied by them are: – Australia, Brazil, Canada, EU, France, China, Germany, Indonesia, Malaysia, Nigeria, Russia, South Korea and Vietnam, besides India.

    Accepting that above concerns of national governments is legitimate and requires to be addressed by the proponents of open and neutral Internet, a more informed and rigorous analysis is required to evaluate costs and benefits of data localization policy. It must be stated to the credit of the US technology giants that they are more concerned to uphold the sanctity of Internet than succumbing to the narrow national interest of US governments. For example, Microsoft, Google, Apple, Facebook and other technology firms successfully fought U.S. government in court “to gain legal authority to provide the public greater detail on the information the U.S. government collects from them”. (Hill 2014)  Many companies are taking steps to diversify their data center locations to escape stranglehold of US intelligence agencies.

    Tying data to territorial boundary, also termed as “Data Sovereignty”, is a natural extension of the concept of sovereignty to the virtual world. Sovereignty connotes supreme authority within a territory. The term authority refers to, in the words of philosopher R.P.Wolff, “the right to command and correlatively the right to be obeyed” (see here). In a modern democracy this authority is derived from a set of principles, objectives, practices and code of conducts called constitution. “Data Sovereignty” means that this supreme authority can be enforced on data originating and /or pertaining to the people subjected to this authority. But despite their best efforts, the modern nation states have not been able to quarantine their national data in their entirety. This diminishing effect to a sovereign’s authority over data of their citizen is the driving factor of data localization policies of different countries. Even a country specific domain name like www.abc.co.in does not indicate the physical location of the server which hosts the website and provides information or services. Thus Internet is indifferent to physical location of computing devices comprising the cyberspace. So defining “Data Sovereignty” in terms of territorial authority is a non sequitur.

    Recognizing the futility of transcribing laws enacted and bounded by physical space to cyberspace, Johnson and Post has called for “distinct laws” for this virtual space (see here). For example, how do we apply anti-trust laws to companies which operate only on cyberspace? The landline based telecom companies fought to restrict Internet based voice call (VOIP) but failed miserably. Digital currencies are being resisted by all central banks but there is no doubt that in the long run the central banks have to fall in line and adopt some form of central bank digital currency. Applicability or otherwise of country specific copyright laws to the cyberspace is another example of distinctive nature of cyberspace. A subscription based access to copyrighted contents on Internet has materially changed the consumers of these contents and its producers, resulting significant benefit to consumers in terms of reduced cost.
    The proponents of free trade policy have pointed out how data localization policy is reincarnation of mercantilism in a virtual world. Treating data as an asset, nation-states wants more of such assets to flow to its own territory while for cyberspace location of an asset is of no consequence.

    Let us, for example, suppose that Google is forced to store all data pertaining to Indian users of Gmail in India. First of all, how does Google identify a user as Indian? Presumably, it can be done by identification of IP address of the user. But what is to be done in regard to an Indian trying to register as Gmail user from abroad? Or when a foreigner is registering using an Indian IP? If an elaborate e-KYC norm is imposed on Internet users, it would be so cumbersome and costly for Internet service providers that the present practice of free Internet would be a casualty. Furthermore, if all data of a citizen are stored within the national boundary, the citizen might face difficulty to access her own data from abroad, if no mirror dataset is available in some other geography.
    Internet works on routing of messages. This works on Domain Names identification and resolution of address within a domain. Today there are about 330 million domains. Even if a sovereign authority blocks access of its citizens to some domains, new domains can be created within no time to bypass such blocking. China is reported to have created the most restrictive firewall for access to Internet by its citizens. This might have helped in creating some of the world’s largest Internet enterprises like Baidu, Tencent and Alibaba. But it will also prove to be the greatest hurdle to realization of China’s dream of becoming the world’s dominant superpower. It is doubtful whether world population at large would like to share the fate of Chinese citizen – described as “world’s biggest prison for netizens.”
    The hypothesis that data localization would prevent a foreign government’s ability to snoop on sensitive personal data of citizen of a nation-state is not borne out by some recent cyber-attacks, allegedly orchestrated by foreign governments. The alleged Russian interference in USA presidential election shows that in a networked world the security of data is not enhanced by creating physical access barriers to such data. The recent example of malware driven data hacking of Core Banking System of Cosmos bank of India is an example of the false assurance that location provides guarantee that data would be secure. It has been reported that NSA of USA has “even scaled the Great Firewall of China”. Thus data localization does not serve its primary purpose.

    From a technological point of view, data localization is not a very efficient solution for running any cloud based application. A massively large database must be partitioned and stored in distributed databases. Today one type of partitioning known as “sharding” is followed by most large databases. Sharding breaks down very large databases into smaller databases to manage data retrieval very fast. Even a single record can be sharded into smaller parts. Database sharding allows maintaining very large data in less expensive commodity servers. A cloud based application cannot scale up if it maintains large databases in one place. The cost of maintaining data can increase exponentially because such large database would require high-end computers.

    RBI’s data localization policy
    RBI in a circular dated 6th April 2018, instructed all payment system providers “to ensure that the entire data relating to payment systems operated by them are stored in a system only in India. This data should include the full end-to-end transaction details / information collected / carried / processed as part of the message / payment instruction. For the foreign leg of the transaction, if any, the data can also be stored in the foreign country, if required”. (see here)
    RBI’s data localization policy is driven by its intention to get unfettered access to payments data originating in India for surveillance purpose. RBI argues that such access is an absolute necessity for effective detection and prevention of any money laundering activity. The purported reason for requiring data storage “only in India” is that, in the event of any conflict with the country hosting Indian payment data of a service provider, Indian regulator may be prevented from accessing such data.
    Although such an eventuality cannot be ruled out, in today’s interconnected world no country can unilaterally deny access to payment data pertaining to citizens of another country. Many countries including India now share financial and taxation data with other countries through bilateral or multilateral agreements. For example, India has signed bilateral agreement with US Tax authority to identify, document, and report U.S. accounts to comply with the U.S. Foreign Account Tax Compliance Act known as FATCA. A U.S. account is an account maintained by a U.S. person (whether individual or entity) or by a foreign entity with U.S. ownership of more than 10% of the capital, whether directly or indirectly. OECD countries are signing similar financial data sharing agreements amongst themselves and with other non OECD countries under the Automatic Exchange of Information (AEoI) initiative of G20 countries. Obviously such sharing cannot be a one way traffic. India being a member of G20 can direct the payment service providers to store data with such countries with which it has such data sharing agreement. If such an agreement is made on reciprocal basis, outright denial of access to India’s own payment data can be of remote possibility. India can mandate payment service provider to share all cross-border transactions with RBI through a FATCA type agreement with the host country storing Indian payment data.
    As regards money-laundering and terrorist financing, India is a member of the Financial Action Task Force (FATF) and has implemented its recommendations. Data localization is not a recommendation of this international body. Additionally a government can enter into Mutual Legal Assistance Treaties (“MLATs”) with other countries to access data stored in another jurisdiction but needed for its own lawful investigative purposes.

    Data sans Frontier
    The pervasive effort towards data localization by nation-states is a reflection of deep insecurity that the nation states are feeling in a networked world. It is not understood that the rules of games have changed forever with the introduction of a radically different communication and workflow management architecture – that is Internet- that encompasses the entire world. The allurement of Mercantilism to the general public lied in its apparent pragmatism and simplicity. It ignored the feedback effect of such a policy and long-term consequences. The same is true of digital mercantilism that is driving the data localization policy.
    Internet was lapped up by nation-states when it appeared to be a mere new form of message transfer. It was not understood how the new technology is going to undermine the basis of nation-states- that is the sanctity of the national frontier. “America First” is a vacuous and anachronistic concept when the most valuable US incorporated firms produce goods and services cutting across the national boundaries.
    Let me conclude by referring to the reactions of policy makers when Galileo introduced his telescope to the policy makers. A senator in the Bretolt Brecht’s drama “Galileo” exclaimed- “the contraption lets you see too much. I’ll have to tell my women they can’t take baths on the roof any longer”. Galileo then attacked their materialist attitude saying: “These people think they’re getting a lucrative plaything, but it’s a lot more than that”. I am afraid that our policy makers are no better than these senators of Galileo’s time.

    References:

    Castro Daniel(2013)  The False Promise of Data Nationalism  paper published by The Information Technology & Innovation Foundation (ITIF)

    Drake William J  (2016)   Data Localization and Barriers to Transborder Data Flows:   Background Paper for World Economic Forum conference (http://www3.weforum.org/docs/Background_Paper_Forum_workshop%2009.2016.pdf)

    Hill Jonah Force (2014): The Growth of Data Localization post Snowden: Analysis and Recommendations for US Policymakers and Industry Leaders in Lawfare Research Paper series  July 2014

    Selby John (2017): Data localization laws: trade barriers or legitimate responses to cybersecurity risks, or both? in International Journal of Law and Information Technology, 2017

     

  • India’s Job Crisis- Myth or Reality?

    Prof Arvind Panagariya  (AP) in his 2nd May article (here) in the Times of India edit page has argued that the number of new job seekers on an annual basis cannot be more than 7.8 million between 2016 and 2021. His article is a rebuttal to the claim made by India’s main opposition party that around 12 million new job seekers are entering the Indian labour force every year. He has used Labour Force Participation Rate (LFPR) and the projected incremental population per annum in the age group 15 and above to arrive at this number.  Disregarding the issue of applicability of LFPR for the purpose at hand, his computation suffers from an obvious mistake- that is to compute flow from change in stocks between start and end of points of a time period. The measure of population is a stock measure as on a date.  To work out new entrants or inflow to this inventory we also need to measure the outflow of people from this inventory- that is death.  The overall death rate for Indian population is estimated to be 7.3 per 1000 of population.   Although death in the age group above 15 could be higher than this, let us apply the same to the initial stock of person – that is 928.6 million. So the number of person entering this age group ( 15 and above) would  stand corrected to 21.6 million instead of 15 million worked out by AP. Applying LFPR of 503 per 1000 persons , the estimated number of job seekers works out to around 11 million.

    It must be also noted that LFPR is not a parameter that results from the behavioral characteristics of the population. In the jargon that AP would be comfortable with, I would call it an endogenous variable, decided by the job prospect, income level and many other characteristics.  Its use as a predictor of number of job seekers is questionable. In fact he himself has underscored the conundrum of very low and declining LFPR of rural females.  The 5th Annual Employment-Unemployment Survey, conducted by Labour Bureau in the year 2015, puts the female LFPR at a measly 23.7 % at all India level.  For China, the comparable figure is 63.9. But for males, the LFPR figures for these two countries are close to each other.  Cultural and social mores cannot explain such huge difference in female LFPR, when women from the poor households are always ready to work, provided they get regular employment.  Self-employment cannot be an acceptable option for young females in many cases because of lack of safe environment for them.  The gender gap in self-employed workers under “Usual Principal Status” is little more than 8% at all India level.

    Instead of using population data and LFPR, we can look into some of other hard data. For example, let us consider the Gross Enrolment data by level of schooling, given in the annual publication- Educational Statistics at a Glance- by the Ministry of Human Resources Development. The latest publication gives the total enrolment for undergraduate studies in the year 2014-15 as 27 million students. Let us assume that average period for undergraduate studies as 4 year.  Thus we may expect that every year an inflow of around 6.8 million young educated Indian entering the job market.  Even if we assume 60% of this 6.8 million enters the job market this would imply the number of UG qualified job seekers would not be less than 4 million very year. So AP must provide more robust statistics to conclude that a figure of 11 or 12 million jobseekers can be considered as overestimation by a “solid 50%”. He needs a more solid ground for making that statement.

     

    Note: Labour Force Participation Rate – This is defined as the number of person /person days in the labour force per 1000 persons/person days.  The labour force comprises both employed persons and job seekers (unemployed). A person is included in the labour force if he or she is either engaged in economic activity for a relatively longer part of the  reference period ( usually one year) or making “tangible effort” to seek “work” or available for “work”.  Full time students are not considered as part of labour force.  There are five categories of employment; self-employed, regular wage/ salaried employee,  contract worker or a casual labour. In our calculation we have taken LFR rate (50.3%) from the Fifth Annual Employment Unemployment Survey of the Labour Bureau.

    NSSO report  Labour Bureau Report   Female LFPR study