Economic Research: Around The Indian Economy In Five Studies
Research Round-Up: Alternative measures for inflation, what's really bogging down investments, declining labour share and more.
There's economic research and then there's economic research.
The infamous "Ig Noble" prize, for instance, rewards the best satirical research. Recently, that prize was awarded to Pavlo Blavatskyy for discovering that the obesity of a country’s politicians may be a good indicator for corruption.
Not all economic research is as pointless. Academics spend long hours researching topics that will give us better insights into the economy.
Starting this month, BloombergQuint will do a monthly round-up of interesting and insightful research around the Indian economy. This month we focus on research around alternative measures for inflation, what is bogging down investments and if technology is truly to be blamed for the fall in labour share in the economy.
Do Budgets Pass The Gender Lens?
Published ahead of the union budget for FY23, this working paper applies the gender lens to the previous budget to arrive at the magnitude of gender budgeting.
Since 2005-06, a gender budget statement is published in expenditure budgets and has been mandatory in India.
Chakraborty’s analysis of programmes targeted at women and gender components in mainstream spending revealed that the gender budget was only around 5% of total budget and stood at 4.5% in FY22.
The Ministry of Women and Child Development constitute only around 10% of total programmes targeted specifically at women, as per budget estimates over the years.
The Ministry of Petroleum and Natural Gas dedicated 14% of its total budget to gender budgeting and was the largest targeted spender.
Other ministries where specifically targeted programmes were identified constituted less than 1% of the gender budget.
But the study also revealed that higher budgetary allocations per se don't ensure higher spending. The analysis of fiscal marksmanship—the deviation between what is budgeted and what is actual—revealed significant slippage in eventual spending.
The Economy's Labour Share Is On The Decline
This working paper finds that the aggregate economy-wide labour share in GDP declined from 54% in 1980 to 49% in 2016. Labour share is defined as the share of labour and wages in GDP.
Both intra- and inter-sectoral factors played a role in determining trends in the aggregate labour share.
The intra-sector decline in labour share is neither driven by technological progress nor by exposure to international trade, as one might think.
Instead, it is mainly driven by two sectors—real estate and construction, neither of which are susceptible to the effects of technological change or trade.
The inter-sector component, on the other hand, is driven by the economy’s structural transformation, which has favoured the high-skilled service sector and bypassed manufacturing completely. Within the organised manufacturing sector as well, the share of capital-intensive sectors has risen in value added to the economy. This segment has the lowest level of labour share.
In contrast, the share of unskilled manufacturing in economic value added has declined, leading to a decline in labour share within the formal manufacturing sector.
The message from the study appears to be that growth in the share of capital-intensive and high-skilled sectors leads to a decline in labour share.
The authors conclude that the apprehension regarding automation and globalisation eating up labour’s share of GDP might be pre-mature in the context of India. Instead, the nature of reallocation of economic activity between sectors has a more important role to play.
How Much Do Financial Conditions Influence Investments?
The paper documents the linkage between leverage of the corporate sector and investments. Expectedly, there is a negative correlation between the two.
The paper's findings suggest that leverage, measured as debt-to-equity ratio, of more than 60% negatively affects investment.
The current level of leverage of around 48%, as per latest available data for 2018-19, suggests that there is space for corporate borrowing which will lead to higher investment in a scenario where the macro-economy is conducive and better financial conditions prevail.
Going by the debt-to-asset ratio, a level above 28% acts as a deterrent for investments. At present this ratio is at 19%.
The study also finds that cash holdings of companies have a statistically significant negative relation with fixed investment. This implies cash holdings are not converting into fixed assets as Indian companies might be investing in financial assets rather than fixed assets to generate yield.
The capacity utilisation, interest coverage ratio and credit growth have a positive correlation with investment as expected. The weighted average call rate is found to negatively affect investment, as expected, as higher interest rates would increase the cost of funds for investment.
A Better Way To Measure Inflation?
No number of research papers are enough to fully explain inflation. Currently, while retail inflation is modest, consumers on the ground believe that the rise in prices is more than the numbers let on. As such, a central bank study of how inflation can be measured, beyond the government survey, assumes importance.
Constructing a reliable measure of the demand-supply mismatch and examining its usefulness in forecasting inflation is the key aim of this paper.
The model is based on once closely followed input-output relationships between different sectors, which map production in the economy.
There are two kinds of economic linkages—backward linkage and forward linkage, the paper explains. “An increase in production in the sectors which have more forward linkages (e.g. agriculture) provides a kind of supply boost to the economy, while an increase in production in the sectors which have more backward linkages (e.g. textiles) provides a kind of demand boost to the economy. “
This forms the basis of the demand-supply index created as part of the study.
The demand-supply mismatch index constructed is found to be positively correlated with headline inflation. The index exhibits a causal relationship with headline inflation and has superior inflation predictive power compared to other conventionally used measures of excess demand, the paper said.
Fight For Survival?
Social sector organisations, which aimed to help people through the Covid crisis, were equally affected by the sudden disruptions triggered by the pandemic. There was a significant reduction in funding available to them, and the lockdown and social distancing protocols affected their own staff and programmes, forcing them to adopt newer ways of functioning.
A situation assessment study, carried out over a five-month period during January-May 2021, shows that the future of several social sector organisations appears uncertain because of the shifts brought about by the pandemic. The organisations could not implement their existing programmes due to various constraints ranging from physical distancing norms, fund mobilisation and adapting to an online mode of working.
7% of the surveyed organisations said that there was no change to their programme, while 31% adapted all the programmes to the Covid-19 situation.
54% stalled a few programmes and adapted the rest to the Covid-19 situation.
42% saw a reduction in funding, 35% reallocated funds for relief work and 33% saw no new funds.
54% out of 107 organisations responded by saying that they received fresh funding during the April-December 2020 period.
Apart from the pandemic-related issues, most small organisations faced issues in fundraising due to the changes introduced by the Foreign Contribution (Regulation) Amendment Bill, 2020. 53% of the organisations interviewed anticipate a reduction in funding in the next two-three years.
Over the next few years, as such organisations respond to the needs of people severely impacted by the pandemic, there is a requirement for technology and skill upgradation. There is also a need for fund mobilisation from a diverse set of sources, the study found.
While larger organisations have the capacity to meet the regulatory, reporting and compliance requirements, smaller grassroots organisations are struggling to fulfil the needs, which may put survival in doubt.