Growing Indian Agriculture by Leaving Farmers Alone

The Economic Times of India published an article titled “Need policies to ensure farmers get better prices: Arvind Panagariya” last week. Though the article itself is relatively short, it fits into a broader policy debate that is being held in the Indian government. Namely, there has been a lot of discussion recently about whether to tax rural farmers, and if so, how much. The Indian central government does not have the constitutional authority to levy taxes on agriculture, so the debate is focused on a state by state basis, where taxing agriculture is allowed.

The Context

The National Institution for Transforming India (NITI Aayog), the leading think-tank in India, and India’s prime minister, Narendra Modi, have stated a goal of doubling agriculture income in India by 2022. Supporting technology adoption and ensuring competitive prices domestically and internationally are the main intended methods to achieve this growth. While India’s economy has developed significantly in recent years, its poorest citizens are still largely living in an undeveloped economy. According to Arvind Panagariya, “80% of the poor… in rural areas are dependent on farming.” In addition, it appears that most farmers in India rely on agriculture for subsistence.

NITI Aayog leaders and the prime minister have been asked about taxation of agriculture income in India. Almost unanimously, policy leaders have stated that there is not even a question of taxing agriculture income. However, most reports do not give a complete picture to the phrasing of “no question” when it comes to taxing farmers. Do they mean that it is obvious a provision will be included to tax farmers in the future, or that it is obviously a bad idea to tax subsistence farmers and the rural poor.

In a separate report, the Chief Economic Advisor, Arvind Subramanian, suggested that taxation of agriculture income is possible. He added, policymakers must make a distinction between rich and poor farmers.

The Model

Luckily, there are clear models that address production and wealth gains over time. Depending on the structure of the tax, a farmer would consider it as a fixed cost or a variable cost in their production function. In a developing economy, we must also realize that any money a farmer has to pay to the government cannot be used to re-invest in their farm, either as better inputs or durable goods. When analyzing this issue, it is important to make the same distinction that Mr. Subramanian did. Wealthier farmers, or those who have commercialized and see yearly profits, have much more flexibility to be taxed.

Unless state governments face strains, taxing all farmers would make the poorest and subsistence farmers much worse off, since their year on year gains in wealth and potential reinvestment would be undercut. In general, taxing farmers as their income increases from subsistence to commercial would reduce productivity and would be counterproductive to alleviating poverty.

On the most basic level, taxing subsistence farming would push the poorest farmers into a worse position, and would not encourage adoption of new inputs and technologies. In order to commercialize and take advantage of the government’s push to raise prices for agriculture products, poor farmers need access to new technology. We discussed the incentives farmers face when adopting new technologies; they must be educated and the benefits must outweigh the costs.

These policymakers are correct in their belief that taxing agriculture should be out of the question. By taxing agriculture, subsistence and poor farmers face a greater cost or diminished benefit to their yearly yields. In the face of uncertainty, they will be less likely to experiment with new technologies and will not have the resources to try new crops and inputs. The agricultural technology adoption model shows farmers each running experiments over time is the best way to increase their output. By limiting the resources for experimentation, agricultural growth will be significantly slowed, and this effect will compound over time.

Another factor of the agricultural technology adoption model at play in this decision is “information neighbors”. The policymakers aim to increase the prices of crops. In order for their ultimate goal to be achieved, doubling rural income by 2022, the first phase must be giving farmers the means to adopt new technologies. However, the real gains in production are compounded over time as farmers experiment and communicate with their neighbors.

Conclusion

If India’s policymakers are serious about increasing agriculture productivity and income, then taxation is absolutely “no question”. In a country like the United States, where industrial agriculture is the norm, taxation is possible because of the surplus that farmers face. However, in India’s case most farmers need to be nudged into commercialized agriculture and educated about the new technologies available. In order to achieve this, the whole system should be tailored toward the goal. Also, based on NITI Aayog’s statistics, increasing rural income can benefit a huge portion of the impoverished population in India as well. Based on these facts, Indian policymakers have made the right decision for ensuring growth of agriculture output.

 

 

Sources Cited:

http://economictimes.indiatimes.com/news/economy/policy/need-policies-to-ensure-farmers-get-better-prices-arvind-panagariya/articleshow/58432724.cms

http://economictimes.indiatimes.com/news/politics-and-nation/bjp-to-promote-pm-narendra-modi-govts-pro-farmer-policies/articleshow/57918815.cms

http://economictimes.indiatimes.com/news/economy/policy/no-question-of-taxing-agriculture-income-arvind-panagariya/articleshow/58424238.cms

Image:

http://www.newsgram.com/what-indian-agricultural-sector-needs-to-learn-from-denmark/

 

Advertisements

Credit Plan to Revitalize Rural India

By: Tim O’Shea

Introduction

The rural population growth in India has been decreasing on average at a rate of 0.3 percent per decade since 1960, causing more and more entrepreneurs to migrate to big cities to find sustainable income. The Indian government is beginning to recognize a big need to increase rural production to further develop the economy. According to The World Bank database, since 1960 there has been a 15 percent decrease in rural population in India to 67 percent, and resulted in 0.64 percent annual growth for rural population in 2015. The decrease in rural population has been partially due to the volatility of the agriculture industry and the opportunity to make immediate cash in larger urban areas. This has resulted in 80 percent of the poor population in India living in rural areas; 62 percent of which is from seven states combined. The majority of agricultural expenses occur at the beginning of the season and the benefits are reaped at the very end, which is why local farmers will often not have enough money to make it through the entirety of the season. The linking of plant fruition to input requirements (animals, seed, etc.) remain uncalculated for farms in India causing them to overcompensate and waste money in certain areas. If farmers run out of money while still in season they will turn to local cash lenders to get them through the season. The current plan is to hook up over 85 million homes in poverty with up to $100,000 by 2019. The rural development ministry acknowledges the difficulty in starting and maintaining a farm, and wants to revitalize production or help farmers use their other skillsets to make money. The loans should be collateral-free and have subsidized interest rates to reward the use of national banks. With this plan there will be increased opportunities in the rural population of India from the increasing amount of loans being distributed.

Loan Supply and Repayment

Although microcredit has been around for centuries, there have been adjustments and changes made along the way to ensure maximum fairness for both parties involved. Theoretically, a bank gives a loan to a group of well-qualified farmers that are looking to get into the agriculture industry. If the farmers are able to cover variable and fixed costs, then they repay the bank with the amount they loaned out. If they are unable to repay the loan, they then are not allowed to take out loans in the future and suffer the social negligence from your partners because of being unable to repay the bank. The difficulty from this is the inability of knowing who are safe and risky borrowers to loan your money out to. The end goal being a provision of small scale financial services to poor borrowers for small businesses. The advantages from microcredit is the ability to deal with market failures and the joint liability aspect where communities are responsible for making sure everyone is doing their part. The rural development ministry headed by Amarjeet Sinha is using a subvention to cover 4 percent of the banks current 11 percent interest rates, causing the rural households to only have to cover 7 percent of the original loan interest rate. The hopes of increasing rural development have been laid out by the Indian government in an effort to “diversify livelihood opportunities,” said Sinha. In addition, the households in the backward districts (most underdeveloped) of India will get an additional 3 percent subvention which lowers their output requirements even more to cover the banks interest rates. The goal of the attempt by India is to lower costs and increase activity for all rural production through compatible incentives for local farmers.

The grouping together of people in poverty has been studied from the Tamil Nadu Panchayat Level Federation program and Telangana Stree Nidhi Cooperative which provide easy access of credit to groups in need. The Panchayat Level Federation formed Self Help Group’s (SHG) based off of different status levels to help give people a platform to share their experiences and increase transparency. However, problems still arise under these platforms when comparing the agricultural output statistics and the rural population growth. Rural population growth has decreased significantly and consistently over the last 20 years, but the total agriculture sector output in India has increased by over 20 percent in the last four years alone. This is because the State Bank of India in Tamil Nadu issues gold loans based off of the best looking loan portfolio. This gold loan is for more safe borrowers has a higher success rate than the traditional loan and ensures that the bank is automatically receiving gold in return, which makes it more appealing for the moneylender. As a result, 31.5 percent of the loans given out in India belong to 11,000 people within the country. Some people will use the loan amount to pay off a previous loan, further burying themselves in a debt crisis that they cannot solve. This shows huge amounts of disparity and unevenness of the loan process in India, which is why the credit program needs to be properly regulated when implemented for small scale rural businesses. This is accurate with our studies throughout the class and how the adverse selection model works in how risky match with other risky groups and safe like to match with safe.

Impact on households

With the increased amount of loans being given out to households, credit in India has been trending upward. The gold loan is creating a wider gap in agricultural production and not granting equal loans to all eligible parties. The goal of this micro-credit program is to reduce the poverty gap and dependence on local money lenders by promoting the efficient use of loans provided by the government. Non-affiliated moneylenders will come in and charge astronomical interest rates for farmers in need, usually to cover general upkeep charges of maintaining a farm or business because of the frontloaded costs. This subsidy from the government is aimed to be a reward like system for borrowing from the national bank and avoiding smaller micro lenders that will significantly upcharge the interest rates. Rural households in poverty will be able to borrow a smaller amount than they needed for less of a cost, which saves money in the short- and long-run for each household. Along with that, there have been expansions made in the dairy industry in an effort to decrease transportation costs and create more of a consistent revenue stream. The demand for dairy is fairly stagnant and can provide a good source of side income for farmers, so the market linkages between the two groups is huge. Credit in India will have to be monitored over the coming years because of the unpredictability of success rates. The rural population in India is a developing area that needs to be invested in to further develop and fully reach its potential. This is a groundbreaking proposition that could change the lives of the Indian economy forever because of the potential market size and the attempt to lower rural poverty numbers.

References:

Chitravanshi, Ruchika. “Government Planning an Easy Credit Scheme for Rural Households.” The Economic Times. Economic Times, 19 Apr. 2017. Web. 09 May 2017. <http://economictimes.indiatimes.com/news/economy/policy/government-planning-an-easy-credit-scheme-for-rural-households/articleshow/58250161.cms&gt;.

 

Schaffner, Julie. Development Economics. N.p.: Wiley, 2014. Print.

 

Janardhanan, Arun. “Tamil Nadu: Lion’s Share of Bank Loans against Gold, Villages Fall Prey toLoan Sharks.” LexisNexis® Academic. LexisNexis, 23 Mar. 2017. Web. 09 May 2017. http://www.lexisnexis.com/lnacui2api/results/docview/docview.do?docLinkInd=true&risb=21_T25937755023&format=GNBFI&sort=DATE%2CD%2CH&startDocNo=1&resultsUrlKey=29_T25937755016&cisb=22_T25937755015&treeMax=true&treeWidth=0&csi=354268&docNo=4

 

India’s Poverty Profile.” World Bank. N.p., n.d. Web. 09 May 2017.

<http://www.worldbank.org/en/news/infographic/2016/05/27/india-s-poverty-profile&gt;.

Finance runs afoul

An inquiry into why financial companies might not be following the rules.

A recent article by published the Times of India titled “Finance companies not following rules: Self-help groups,” reported on the ongoing protest of women in Nashik. These women from a number of self-help groups (SHGs) were out protesting to demand an inquiry into multiple micro finance companies in the district. The protesters claimed that these financial companies were not following the rules agreed upon between the financial companies and the SGHs. These rules mostly dealt with contact between financial companies and SGH members. Two stated violations were contacting SGH members outside of agreed upon hours and harassing SGH members to repay debts of other SGH members. Other allegations included the charging of exorbitant fees, forced recovery (also known as seizing property), and that these companies have been forging groups to increase their business. The protesters are demanding that the collector, the government, and the Reserve Bank of India review the performance of these financial companies. An employee of a micro finance company did respond for the article and denied the allegations saying the protesters were all made aware of the terms and refuse to pay it back. They further made the statement that while some collection agents do play foul they are easily identified and reprimanded.

The protestors make troubling claims that suggest behavior different than what the theory of micro credit predicts. The claim that companies are setting up their own groups to expand their business goes against the main strength of micro credit theory; which is that by lending only to groups, the groups that arise are positively assorted matches. Micro credit uses these positive assorted matches to reduce the risk of the lender by shifting it onto the borrower. In micro credit if one member of the group fails to repay all the members lose access to credit. This risk is what causes the positive assertive matching because risky people who need the extra income of their peers to cover their loan if their project fails, and safe borrowers want to match with safe borrowers to make sure they don’t have risk losing access since they wouldn’t be able to cover another members’ share of the loan if they failed.

If the claims made by the protestors are true then the companies are ignoring the benefits this positive assertive matching provides, and assuming that they are rational there must be something the model is missing. One solution could be that there are strong laws in favor of property seizure in the region. If a contract is binding and legally strong enough to allow for easy seizure of property maybe the risk of failure is not a deterrent. By expanding their business and including the amount they must be repaid they don’t have to fear if their loan fails as long as the signer has the required wealth. Based on the protestors testimony we can assume that the seizure of property is not outside of the finance companies reach, since they are protesting forced recovery. The extra cost of seizure or its ease could also help explain the allegations that these firms are charging exorbitant prices. If it is difficult to seize property the extra price could cover the cost. The flip side of the coin is that if seizure is easy maybe it is worth increasing the price as failure of a loan can be recouped through property seizure.

Another possibility is that these financial companies are not truly following the microfinance model and are instead using a model closer to the neoclassical model. This model differs from the micro credit model because it doesn’t utilize the benefits of positive assertive matching and instead has individuals responsible for themselves. This decreases the chance that the lender will get repaid because the borrower doesn’t have a group to fall back on to repay his share. Because of the decrease in chance that the lender gets repaid they charge higher prices than they would under a grouped positively assorted micro finance system. This could help explain why the prices were viewed as exorbitant. The question that must then be answered is why would a company using this model bother with forming groups instead of individual contracts. One reason would be that by creating groups of shared liabilities they are able to solve the problem of ex ante moral hazard. Ex ante moral hazard is that the borrower might choose a risky project that has a higher chance of failure and thus not being able to repay the lender. By forming groups, they can rely on a sort of social pressure to not put the group at risk or to force the group to repay the failure. With the ability to force recovery the company now doesn’t have to worry about ex post moral hazard, the risk that the borrower doesn’t repay, because even if they don’t repay the company can seize the borrower’s assets.

A third possibility is that the financial company employee is telling the truth. This is the easiest possibility to explain in economic theory. If the employee is telling the truth then the current model of micro financial theory is working as intended, and the problem lies with the protestors trying to shirk from their obligations. If there are existing cultural standards that would make the recovery of loans impossible the borrower would be much better off. They would have the support of the government and not have to repay the money that they borrowed.

The current situation shows a desire for credit in the area, otherwise people would not be protesting the financial institutions and instead just ignore them. We can also assume that access to credit is under supplied if there are claims about exorbitant fees because any company charging exorbitant fees would be undercut and removed from the market in a perfect equilibrium. In conclusion, we can see that the entire story is not being told in this article. If it were we would know why the claims made by the protesters seem to contradict the micro credit theory, why the company might be using the neo-liberal credit model, or the incentives provided to the protesters for shirking from their repayment.

Medical Care for Young Mothers and Children in India

Improving take-up of immunization and quality of health care
By Rishabh Chatterjee

blog
Image Credit: Huffington Post

Sanchita Sharma’s “Baby steps: Our infants are surviving, but they need better medical care,” published in the Hindustan Times, addresses three major policy issues in India: the infant mortality rate, vaccinations, and the quality of health care.

Key Takeaways of Article

The infant mortality rate in India has reduced due to more mothers giving birth at public health facilities (as opposed to home births) as well as the number of children receiving vaccinations increasing. The infant mortality rate is down to 41 in 2017 (per 1,000 live births), from 57 in 2005 (National Family Health Survey-4). While this is a marked improvement, 20% of under-five deaths in the world still occur in India. Close to half of these deaths are attributed to vaccine-preventable and treatable infections like diarrhea and pneumonia.

The article advocates for the use of vaccines to reduce deaths from these preventable causes, reasoning that “vaccines are the quickest and the most cost-effective way to bring down disease and death.” Despite its sporadic delivery over the past two decades, routine immunization has played a large part in reducing the annual under-five deaths from 3.3 million deaths a generation ago to 1.3 million deaths today (NHSF-4). The Indian government is rolling out four new vaccines this year to combat under-five deaths from polio, diarrhea, measles-rubella, and pneumonia. Sharma notes that under-five deaths are expected to fall sharply with the rollout of these vaccines.

Two crucial issues come into play regarding why take-up of routine vaccinations has not reached 100% among Indian households. Take-up simply refers to the percentage of households who choose to provide immunization that is available for free to their children. Nachiket Mor, director of the Bill and Melinda Gates Foundation (BMGF) in India, noted that availability of vaccines is not the issue, but rather the issue is of accessibility. Many individuals are unable to gain access to treatment, preventing India from providing routine vaccinations to 100% of its citizens. A second issue preventing take-up is that India has had its share of conspiracies regarding vaccines, such as misled parents denying their children polio drops for fear of impotence and MMR for fear of autism. These conspiracies delay children receiving the vaccinations they need to reduce preventable and treatable diseases.

The article also touches on the quality of care at public health facilities. More than half of India’s children are born in a public health facility, making the quality of care available critical to the health of the mother and child. In fact, the BMGF notes that quality of care has surpassed immunization as the top strategic priority of the organization in India, with emphasis on understanding the level of treatment options available from delivery to when the baby leaves the facility. One way the BMGF is addressing quality of care is by sending out nurse mentors to public health facilities in Bihar and across 25 districts in Uttar Pradesh, where about 40% of India’s 27 million births take place.

Relation to Empirical Evidence

The article mentions the unfortunate reality that India has had “its share of conspiracies around vaccines,” with many families electing not to vaccinate their children due to misconceptions regarding side effects of certain vaccines. This is consistent with a key point made in a Dupas (2011) paper titled Health Behavior in Developing Countries, which reviews studies of health-seeking behavior in low-income nations and discusses its implication for policy. “Information campaigns carried out by governments with a bad track record might be doomed to fail…In India, few children with diarrhea were treated with ORT in the early 1990s, despite 10 years of vigorous ORT campaigning by the Indian government (Rao et al. 1998). One could hypothesize that the lack of success of the Indian government’s ORT campaign was related to the forced sterilization effort carried out by the government…between 1975 and 1977, and the subsequent distrust, among the population, of any government initiative related to family issues.” This point made in the Dupas (2011) paper about a general mistrust of government-led health initiatives can be seen in the article as well, with Sharma writing that misled parents are, “denying their children…vaccines for fear of big pharma dumping unwanted products in India.” As long as skepticism remains in some households over take-up of vaccines, the delay in immunization means India will continue to lose mothers and young children to diseases that are preventable.

Let’s now look at another major takeaway of the article: the importance of quality health care. This topic relates to Das et al. (2008): The Quality of Medical Advice in Low-Income Countries. The empirical paper provides an overview of recent work on quality measurement of medical care and its correlates in four low and middle-income countries—India, Indonesia, Tanzania, and Paraguay. A pertinent conclusion reached is that competence of doctors in developing countries is low and that further, the quality of care provided to patients is even lower than would be suggested by a doctor’s competence. The newspaper article provides new evidence that is consistent with the results from the Das et al. paper. The article states, “The Gates foundation is working…to improve women and newborn care at public health facilities,…[where] stillbirth rates, maternal deaths, asphyxiation at birth and sepsis are very high. We have 200 nurse mentors in Uttar Pradesh who go from facility to facility to provide additional training and guide the nurse through the process,” said Mor. The BMGF is very aware of the issue mentioned in the Das (2008) paper regarding the quality of care provided by doctors and nurses in India. They are addressing the issue of competence by sending mentors across these two states to improve education among nurses who assist in childbirth. The Dupas (2008) paper suggests that intervening in such a manner is useful as a conclusion reached in the paper is that training matters for doctors, while experience does not.

The Dupas paper refers to a Banerjee et al. (2010) study in Udaipur, India that addresses two main points of the newspaper article: quality of public health facilities and lack of accessibility. The study observes that public health facilities that are supposed to provide free immunization are subject to high rates of absenteeism, with 45% of medical staff absent from work on any given day. Many households in low-income nations face high transportation and opportunity costs, and because a full immunization complement requires at least five trips to a public health facility, unreliable service often prevents households from fully immunizing their children. The Udaipur study shows that increasing the reliability of the supply- by holding well-advertised immunization camps with consistent hours of operation – can have a significant impact on immunization rates, from 49% of children having at least one immunization when the supply is unreliable, as opposed to 78% when the supply is reliable.

Conclusion

There are some valuable conclusions that can be reached after considering empirical evidence and points mentioned in Sanchita Sharma’s newspaper article. The vaccine complement is fully available, but getting take-up to 100% remains an issue for two main reasons. 1) Mistrust exists regarding government-led health initiatives for some Indian citizens, delaying and in some cases preventing children from receiving immunization and 2) High rates of absenteeism among medical staff at public health facilities often prevents households from fully immunizing their children. Another major takeaway is that the quality of care available to mothers and children at public health facilities is underwhelming. Current efforts by the BMGF in India to provide training to nurses is a step in the right direction according to empirical evidence.

 

Works Cited

Banerjee, Abhijit Vinayak, et al. “Improving immunisation coverage in rural India: clustered randomized controlled evaluation of immunisation campaigns with and without incentives.” Bmj 340 (2010): c2220.

Das, Jishnu, Jeffrey Hammer, and Kenneth Leonard. 2008. “The Quality of Medical Advice in Low-Income Countries. “Journal of Economic Perspectives, 22(2): 93-114.

Dupas, Pascaline. “Health behavior in developing countries.” Annual Review of Economics 3.1 (2011): 425-449.

“Key Findings From NHSF-4.” National Family Health Survey, India. National Family Health Survey, 2009. Web. 08 May 2017. <http://rchiips.org/nfhs/factsheet_NFHS-4.shtml#&gt;.

Sharma, Sanchita. “Baby Steps: Our Infants Are Surviving, but They Need Better Medical                Care.” Hindustan Times. HT Media Limited, 04 Mar. 2017. Web. 02 May 2017.

Remittances in South Asia and Development Economics

Using a recent report on remittances to motivate a discussion on how remittances play into Developmental Economics

Nafee H. Ahmed

qatar

Migrant Workers from South Asia working in Qatar (picture by European Pressphoto Agency)

On April 21 2017, The Times of India published an article which summarized the findings of a recent World Bank Report on remittances. The article referenced a few interesting facts which can motivate a discussion on how remittances relate to development economics. After discussing remittances in depth one can revisit the article to see how well developmental economic theory reflects real world events.

The article highlights that India received more money in remittances than any other country in 2016; Indian workers sent home 62.7 billion American dollars in total. The article also notes that the total amount of money in remittances to India fell by 8.9 percent in 2016 and contextualizes that drop by explaining that the total amount of money in remittances sent to all developing countries fell by 2.4 percent in 2016. The article later reveals that money in remittances sent to South Asia fell by 6.4 percent.

This article claims that the primary cause of migrant workers sending less money home is related to lower oil prices and lower economic growth among countries in the Arabian peninsula; many Indian migrant workers work in these countries lower economic growth in these countries can decrease the amount of money migrants can send home.

The article provides a useful list of the countries which received the most money in remittances. In terms of absolute dollars those countries are India, The Philippines, China, Mexico and Pakistan; however, the countries which take the most money in remittances as a percentage of that country’s GDP are Kyrgyz Republic, Nepal, Liberia, Haiti, and Tonga.

The Importance of Remittances

Remittances are an important topic for two main reasons. Firstly, remittances are major component of the economy in many developing countries. The Times of India article referenced above divulged that remittances account for 6.0 percent of Bangladesh’s GDP, 6.9 percent of Pakistan’s GDP and 2.9 percent of India’s GDP.

 

Secondly, there is evidence that remittances decrease poverty in developing countries. In 2005, an article in the journal, World Development, by Richard Adams and John Page found a relationship between remittances and poverty. Adams and Page claimed, “both international migration and remittances have a strong, statistically significant impact on reducing poverty in the developing world … After instrumenting for the possible endogeneity of international remittances, a similar 10 percent increase in per capita official international remittances will lead, on average, to a 3.5 percent decline in the share of people living in poverty.” (Adams and Page  1660).

 

Remittances and Growth

 

Katushi Imai et al.’s article, “Remittances, Growth and Poverty: New Evidence from Asian Countries,” provides a strong claim that that remittances have a positive relationship with GDP growth. The authors’ model found that, on average, a 10 percent increase in a country’s remittance payments as a share of that country’s GDP increased that country’s rate of growth in GDP per capita. The authors also provide an intuitive explanation for why higher levels of remittances are related to higher economic growth, stating “The existing literature (for example, Barajas et al., 2009) identifies various channels through which remittances enhance growth, including the boosting of capital accumulation, labour force growth, and total factor productivity …” (Imai et al. 530-531).

 

A link to the article “Remittances, Growth and Poverty: New Evidence from Asian Countries” can be found here: http://www.sciencedirect.com/science/article/pii/S0161893814000209

 

Applying Remittances to a Growth Model in Development Economics

 

If one accepts that remittances positively influence GDP growth in developing countries, then one can also look at traditional growth models in Development Economics and apply the value of remittances as an additional variable. Many models in Developmental Economics relate economic growth to other variables. If economic growth has a positive relationship with one variable, then the value of remittances a country receives should also have a positive relationship with that same variable.

 

Consider two examples with a common model in Development Economics, The Solow Model:
The Solow Model is a common model of economic growth which relates several variables to economic growth. In summary, The Solow model describes economic output as an equation determined by physical capital, labor, the depreciation of physical capital, and the savings rate of a population. More Modern versions of the model add even more variables into this equation including the education level of a workforce and the level of population growth.

An intuitive video series by explaining the Solow Model can be found here: https://www.youtube.com/watch?v=eVAS-t83Tx0&list=PL-uRhZ_p-BM6L_I3IHvE85NHooK2Ln9Rm

 

One can use the Solow model to find how remittances are related to other economic variables. I created the following two examples trying to fit remittances into the logic of the Solow Model

 

1)

The Solow model implies that the levels of economic growth in a country decreases with respect to time when holding all other variables constant. Assuming positive relationship between remittances and economic growth then allows the Solow model to imply that the value of remittances a country receives will also decrease with respect to time holding all other variables constant.

 

2)

The Solow model implies that smaller economies experience higher levels of economic growth than large economies when holding all other variables constant. Assuming the same positive relationship between remittances and growth then allows the Solow model to imply that smaller economies will receive more in remittances than large economies holding all other variables constant.

Back to the Original Article

 

Looking back to the original Times of India article, we can check if our ideas about remittances derived from growth models match data from the real world. When applying remittances to the Solow model one can predict that over time, countries will receive less money in remittances as a share of that country’s GDP. While the original article does note a decrease in remittances compared to previous years, this is because of factors not related to the countries receiving remittances but rather problems in the countries from which migrant workers send remittances. The original Times of India article also claims that World Bank projections show that South Asian countries will not see significant growth in remittances in the near future. This projection is not necessarily proof that applying remittances to the Solow growth model is correct, especially since the projection was based on factors outside of South Asia, but the World Bank’s projection does not contradict the idea that a developing country might receive less money in remittances over time.

 

Applying remittances to the Solow model also allows one to predict that the countries which receive the most remittances as a share of the country’s GDP should also be very small economies. The Times of India article confirms this prediction; data from the World Bank database reveals that none of the countries which receive the most money in remittances as a share of the country’s GDP have a GDP per capita higher than 5,000 dollars.

 

The original Times of India article predicts a decreased level of remittances in South Asia for next year. Given the evidence examined in this blog post, this may have a potential negative impact on economic growth, something which businesses, policy makers, economists, and other observers should note in the coming years.

Works Cited

 

Academic Articles and Textbooks:

Adams, Jeffrey and John Page. “Do international migration and remittances reduce poverty in developing countries?” World Development, vol. 33, no. 10, Oct. 2005, pp. 1645-1669. Science Direct.

 

Imai, Katsushi et al. “Remittances Growth and Poverty: New Evidence from Asian Countries.” Journal of Policy Modeling, vol 36, no. 3, June 2014, pp. 524-528. Science Direct.

 

Mankiw, Gregory. Macroeconomics. 8th ed., Worth Publishers. 2012.

 

Photographs/ Videos:

Construction workers queue for buses back to their accommodation camp in Doha, Qatar. 19 Nov. 2013. European Pressphoto Agency, Frankfurt. http://www.epa.eu/economy-business-and-finance-photos/sports-events-sports-organisations-soccer-human-rights-heatlh-at-work-construction-property-photos/foreign-laborers-work-in-doha-photos-51109917

 

“The Solow Model of Economic Growth.” Youtube Playlist, uploaded by Marginal Revolution University. 28 March 2016. https://www.youtube.com/watch?v=eVAS-t83Tx0&list=PL-uRhZ_p-BM6L_I3IHvE85NHooK2Ln9Rm

Websites:

“India tops global remittances at $62.7 billion in 2016: World Bank.” Times of India, 21 April 2017. http://timesofindia.indiatimes.com/business/india-business/india-tops-global-remittances-at-62-7-billion-in-2016-world-bank/articleshow/58302262.cms

 

“DataBank World Development Indicators.” The World Bank, 1 May 2017, http://databank.worldbank.org/data/reports.aspx?Code=NY.GDP.MKTP.KD.ZG&id=1ff4a498&report_name=Popular-Indicators&populartype=series&ispopular=y#

Understanding Loan Waivers in India

The costs and benefits of waiving debt to farmers and banks. By Sarang Yeola

Image Source: Asia Times

The full article “Yogi Adityanath fulfills poll promise” can be found at the following link https://goo.gl/bGvV1U

Earlier this month, Uttar Pradesh’s newly elected Banathiya Janata Party Chief Minister, Yogi Adithyanath, implemented a plan to relieve the debts of over 21.5 million small and marginal farmers. This program will cost the UP government $5.6 billion (INR 36,359 crore). The bill allows for the waiver of loans of up to $1,500 (INR 1 lakh). Due to this policy’s popularity among farmers, other states in India are planning to also follow suit in enacting similar policies. (1 USD  65 INR).

Lending And Income For Farmers

This program is to help relieve the stresses due to the many uncertainties of farming in India. These stresses are the result of the fact that they make revenue through a seasonal income, in that they spend most of their money at the beginning of the season and only make money during the harvest. Farmers can acquire this startup money in a few ways [1], namely through loans from banks and informal moneylenders or savings from the previous years. The size of formal bank loans and savings helps with startup costs and the flexibility of informal moneylenders helps with management of purchases through the rest of the season. However, with some risk brought upon by weather inconsistency and other shocks, these debts will sometimes build up. High costs of borrowing sometimes of up to 50% [2] interest from informal money lenders cause debts that become so large that farmers will have pay off those loans with other lower interest loans, forcing them into a cycle of indebtedness. These debts can often be detrimental to the mental health of the farmers as numerous suicides farmer suicides [2] are often the linked to the amount of debt owed.

Effect on Credit Reallocation

UP’s new loan waiver plan is the largest in India since the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) passed in 2008. The UP government has justified the program by citing the need for relief to the 700,000 farmers who remain in debt. The idea here being that any returns on investment are used to pay off previous debts and farmers’ incentives for investment are driven down by their current debt situation. By waiving these debts, the Indian government targets the economic stagnation caused by the burden on farmers and thus they have more freedom to make economic decisions and thus encouraging more economic activity. A World Bank study [3] on the effects of ADWDRS, shows that it did not have an effect on productivity, wages, or consumption successful in reallocating capital more efficiently.

With a historical context in mind, there are benefits of credit reallocation that we should also expect from the new UP loan waiver. Banks are more conservative to whom they chose to give loans, thus leading to an increase in the ratio of “safe” over “risky” lenders. Assuming that the banker can determine the reliability of the borrower, the new policy should cause interest rates to decrease safe borrowers no longer subsidize those with bad credit—the risky type. With lower interest rates the cost of investment is lower and farmers will be willing to consume and invest more, spurring economic growth.

Moral Hazard

While there may be benefits in this credit reallocation, the ADWDRS study also found that there were increasing defaults on loans. Specifically, that “Banks that received a greater share of bailout funds are significantly more likely to experience an increase in defaults after the program, and districts in which bank branches were more exposed to the bailout experience a decline in loan performance after the program” (51). The paper shows that an increasing deviation in the bailout exposure corresponds to an approximately 1.6% increase in the shares of non-performing loans and 2.4% increase in the share of non-performing credit.

These results are likely due to a behavioral change caused by the loan waiver, which changes the mindset of borrowers so that they begin to think that future loans will also be waived. This behavioral uncertainty is an example of ex-post moral hazard as the lenders do not know if the borrower’s project is successful and therefore cannot tell when the borrower does default if he/she is doing it willfully. The UP’s new loan waiver program can only exacerbate this problem of moral hazard as more people will be exposed to debt waiver and therefore loan performance will decrease even more drastically. Since there were already issues about growth previously according to the analysis of ADWDRS, the behavior will only further be affected by another debt waiver. Since that idea of there being more waivers down the line, the probability of someone willfully defaults.

Conclusions

The new debt relief plan in Uttar Pradesh can have positive impacts on helping farmers trapped in cyclic debt work their way up helping improve morale and mental health of farmers. Though their economic effects in the longer run may introduce problems in increased defaults on loans, costing the government and banks even more and negating the positive effects of consumption and production. It will be interesting to see how the other states the nation responds, knowing that the desires of farmers contradict the historical outcomes of similar debt relief programs.

References

  1. Miller, Emily. “Looking at rural debt through the eyes of India’s farmers.” (2017) http://scid.stanford.edu/news/looking-rural-debt-through-eyes-indias-farmers
  2. Giné, Xavier, and Martin Kanz. “The economic effects of a borrower bailout: evidence from an emerging market.” (2014). https://ssrn.com/abstract=2524163
  3. Behere, Prakash B., and Manik C. Bhise. “Farmers’ suicide: Across culture.” Indian journal of psychiatry51, no. 4 (2009): 242. http://www.indianjpsychiatry.org/text.asp?2009/51/4/242/58286

Micro Irrigation in Northern India

an analysis of Micro Irrigation and its potential to change agricultural industry in Northern India
By Matthew Terpstra

Micro-Irrigation-System-Post

source: https://www.tes.com/lessons/GFrasG4idfQ0bg/micro-irrigation-image

Farmers in Northern India are in the midst of a water crisis. Due to droughts and over usage of ground water supply farmers are faced with decisions to make about their irrigation technology.  Northern India is home to some of the largest farms in the nation, which are responsible for the growth of some very essential foods. The state of Haryana, located in Northern India, has come up with an idea to require farms within 36 of their blocks to begin using micro irrigation. This change could help India’s agriculture in more ways than one, “This shift in the irrigation system would not only help in maintaining eco-balance but also lead to energy conservation” says the Economic Times Bureau.

 

Micro irrigation is an alternative technique to get water to massive amounts of plants throughout a farm. It has many benefits as well as costs associated with it. Along with more efficient use of water while simultaneously minimizing pests and diseases within each plant. It also allows for specialization among plants of different ages. For example, newer plants might require more water than older ones and micro irrigation allows you to spray more water on the roots of newer plants and less water on that of the older plants. Yet micro irrigation has some downsides, to start, it costs a lot of money to run the pipes through each row of plants. Additionally, it requires a lot of maintenance, the various filters within the system must be cleaned and replaced periodically. In order to make this program worth it for the many farms in the state of Haryana, the government has decided to provide incentives to farmers who take up this new technology.

 

India’s agricultural industry has been facing various issues with their agricultural expansion. Some of these issues include agricultural productivity, poverty in agriculturally based communities, and environmentally friendly sustainable solutions to agricultural productivity(WorldBank.org). Micro irrigation could be the solution that India needs to solve these issues. An inspiring story of a farmer in Southern India using micro irrigation provides farmers in Northern India with hope. The District Collector in the area credits micro irrigation to the success of this farm, “If it can improve yield and also cut on costs, nothing like this facility” (Nadul). Even with these facts it is unknown whether or not farmers in these 36 blocks of Haryana will use the technology.

 

Take Up of technological advancements

 

It is difficult to know whether or not farmers will take to this new technology. Throughout history it is evident that farmers will only use new technology if they are clear of the costs and benefits of the technology. Since the farmers will be heavily subsidized by the government they may be able to get a larger take up on the technology. Yet they may still face issues with take up due to the complications of micro irrigation. Because the plants require far less water they run on a system and this system may be too complicated for the average farmer in India to use.  This is where a system of social learning and Target Input Models could be extremely useful to the farmers of Haryana.

 

We also see in various studies in Development Economics that take up of technological advancements in the agricultural industry is extremely low unless farmers see success stories or are able to learn from their neighbors. This is evident in not only stories of micro irrigation but any form of technological advancements. This situation in Haryana is similar to the situation outlined in Conley and Udry. This paper describes the use of a fertilizer on Pineapples in Ghana and how farmers use their “information neighbors” in order to make decisions for their farm. Along with these “information neighbors” farmers use a Target Input Model in order to make a decision of whether or not to use a new technology. This target input model is essentially an outline of what they know about the new technology and how it could either benefit of cost them more in the end. This farmer learns about the inputs that they use once their yield comes in. Like the story in Ghana, Northern Indian farmers could be the lead farmers in water conservation technology.

 

Conclusions

 

The take up of micro irrigation in Haryana could have huge implications to the future of agriculture in India. Micro Irrigation would not only provide a sustainable solution to the growing groundwater problem within the entirety of India, but would also increase crop yield and lower costs for farmers. The people of Haryana need to realize that they are on the cornerstone of an agricultural revolution and could have major implications to the health of farms in the future. The Haryana government has taken a big step in making this a requirement in their 36 blocks and could be leading the charge to more efficient water usage within India. These farmers are in a unique situation from other developing countries, where the classic learning by doing model may not happen fast enough. Farmers must take the subsidies that they can get from the government and implement this system to not only save their farms but also that of many farms in the future.

 

Works Cited

 

India: Issues and Priorities for Agriculture. Retrieved April 24, 2017, from http://www.worldbank.org/en/news/feature/2012/05/17/india-agriculture-issues-priorities

 

Nadu, T. (2012, July 19). Drip irrigation, a success story. Retrieved April 24, 2017, from http://www.thehindu.com/todays-paper/tp-national/tp-tamilnadu/drip-irrigation-a-success-story/article3660659.ece

 

Saving Water: Micro-Irrigation. Retrieved April 24, 2017, from http://www.sjrwmd.com/waterconservation/savingwater/microirrigation.html

 

Times, E. (2017, April 12). Haryana government to promote micro irrigation by providing incentives to farmers. Retrieved April 24, 2017, from http://economictimes.indiatimes.com/news/economy/agriculture/haryana-government-to-promote-micro-irrigation-by-providing-incentives-to-farmers/articleshow/58149242.cms