Learn Macro by Reading the Paper

Macro, and I’ve said this before, is hard.

But a useful way to start understanding it, at least in an Indian context, is by:

  • carefully reading a well written article
  • understanding and noting for oneself key concepts within that article
  • recreating the charts from that article
    • That includes figuring out the source of the data…
    • … as well as acquiring the ability to build out these charts
  • And most important of all, creating a piece of your own (could be a YouTube video/short, a blog, an Instagram story, a Twitter thread) that helps simplify the article you’ve read.1

Now, Arvind Subramanian and Josh Felman have generously obliged us by writing a well written article. I’ll oblige you by carefully reading it and annotating it, including pointing out key concepts, sources for data and recommendations for building out the charts.

That just leaves the last point for you, dear reader. We’ll call that homework.

Now, the well written article:

For more than a decade, India’s fiscal problem has been on the back-burner, acknowledged as a concern, but excluded from the ranks of pressing issues. Now, however, the problem is back with a vengeance. COVID has upended the fiscal position, and fixing it will require considerable time and effort, even if the economy recovers. This worrisome prospect has prompted calls for the Fiscal Responsibility and Budget Management Act (FRBM) to be dusted off, reintroduced, and implemented — this time, strictly and faithfully. But before we heed them, we need to understand why the previous FRBM strategy failed and how to prevent a repeat. We argue below that the new strategy will look nothing like the current FRBM.

https://indianexpress.com/article/opinion/columns/coronanvirus-india-economy-gdp-growth-post-covid-7261915/

First things first, what is FRBM?

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence. The main purpose was to eliminate revenue deficit of the country (building revenue surplus thereafter) and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008.

https://en.wikipedia.org/wiki/Fiscal_Responsibility_and_Budget_Management_Act,_2003

Think of it as a one-person Alcoholic’s Anonymous club. It is of the government, for the government and by the government, and the idea is to wean the government off a dangerous addiction that it is hopelessly affixed to: debt.


By the way, there are many reasons this is a good essay, not the least of which is how well structured it is. The first three sentences in the very first paragraph, excerpted above, point out the problem that is going to be addressed, without using any difficult words or jargon. Then they point out the tool that will be used to address the problem. Then they point out the tool itself has problems. Finally, the explain that the essay is about fixing those problems. And then the essay follows. You might want to keep this in mind when writing your own essays (or indeed creating your own podcasts/videos etc.)


Now, back to the essay:

  1. What is general government debt? Where can I access the data?
    Note the second hyperlink above: I’ve linked to the Fred St Louis page about India’s debt, which itself gets the data from the IMF. Here is the page from the Ministry of Finance’s own website titled Public Finance Statistics. It has not been updated since September 2015. Here is a Motilal Oswal report on the subject that pegs general government debt at INR 157,227 billion. (Exhibit 1 in the report). If you read footnote 3 of that exhibit, two things happen. The first thing that happens is that you realize that tracking down general government debt might take a while. The second thing that happens is you feel a rather large twinge of sympathy for the folks who have tried to do this exercise.
    Figure 1 in the well-written article that we are analyzing in today’s post doesn’t mention a source, unfortunately. So recreating that chart will involve a rather large part of our day – but I would strongly recommend that you do the exercise. If you want to analyze Indian macroeconomic data for a living, this will be a good initiation. And indeed, a write-up about this exercise alone is a worthy addition to your CV!
  2. Second r-g: what is r, and what is g?
    1. “r” is the policy rate, which in our case will be the repo rate. This is available on the homepage of the RBI, top-left, under current rates.
    2. Time series data? Available on the DBIE page, under key rates.
    3. “g” is the nominal growth rate of the economy, and can be found at MOSPI.
    4. A useful thing to do as a student is to try and recreate the chart in the well-written article.
    5. Pts 1 and 2 here will help you get most of the data, and try and use either Microsoft Excel or Datawrapper to recreate the chart.2
  3. Next, what is primary balance?3 Where does one get that data in India?4
  4. Next, this sentence from the article: “Simple fiscal arithmetic shows that debt does not explode when the former (primary balance) is greater than the latter (interest-growth differential)”. What is this “simple fiscal arithmetic”? They’ve explained it in equations 1 and 2 in this paper.5
  5. The next three paragraphs after Figure 1 in the article point out how precarious India’s situation is when it comes to government debt, and why. It is one thing to read about the equation in a textbook, it is quite another to “run” the numbers in practice. Give it a shot, please, and see if it makes sense.
  6. Next, this paragraph from the article:
    “First, India should abandon multiple fiscal criteria for guiding fiscal policy. The current FRBM sets targets for the overall deficit, the revenue deficit and debt. This proliferation of targets impedes the objective of ensuring sustainability, since the targets can conflict with each other, creating confusion about which one to follow and thereby obfuscating accountability.”
    This paragraph is a good way to understand the importance of reading In The Service of the Republic, by Kelkar and Shah (and also to read up about the Tinbergen Rule).
  7. The next three paragraphs after that are a good way to understand what Goodhart’s Law means in practice.
  8. And finally, see if you can explain to yourself why targeting the primary balance is better than other options. Personally, I agree that it is a better target, and I agree that rather than setting down a concrete number to reach, averaging out half a percentage point worth of reduction is better. In essence, what they’re saying is that you shouldn’t try to reach x kilos of weight on a diet, but lose x% body weight every month. As our ex-captain might have put it, process over results. One of our gods advocates this too, as Navin Kabra points out.
    My reservation comes from the fact that sticking to a diet is hard, and that is true whether you’re targeting a process or a target. In other words, it is the ongoing implementation of the plan that is the challenge, not it’s design!
  9. One last point: without creating something that you are willing to put up for public consumption, and highlighting on your CV as an exercise you have done – you haven’t really learnt. Reading either that article or this blog is the easy part – explaining it somebody else is the much more difficult (and causally speaking, therefore meaningful) bit.
  10. Please, do it!
  1. Skipping this last point is missing the point altogether, rascalla![]
  2. Document your learnings as you go along.[]
  3. Read the whole article, please. It’s a good way to clear your understanding of this topic, and it is free[]
  4. The Excel link under Deficit Statistics was down when I tried to access the data. Your mileage may vary.[]
  5. Page 3[]

Financing the stimulus #1

Devesh Kapur and Arvind Subramanian, writing in the Business Standard:

In principle, there are five ways of financing additional expenditures over the next 12 months or so:

  • Reduction in other expenditures (Rs 1-1.5 trillion)
  • Foreign borrowing, from official sources and non-resident Indians (NRIs; Rs 1-1.5 trillion)
  • Public financing by issuing g-secs (including to banks and LIC) (Rs 5 trillion)
  • Monetary financing or “printing money” (Rs 1-1.5 trillion)
  • Mobilizing additional resources via raising taxes and cutting subsidies (Rs 1-1.5 trillion)

The rest of the article explains their rationale behind each point above. Essential reading!