Rbi Defending Rupee Capital Account Convertibility Bidishanomics Ep 6

TITLE: RBI ‘defending’ rupee,capital account convertibility,& can tax policy drive jobs|#Bidishanomics Ep 6 CHANNEL: ThePrint DATE: 2026-04-27 ---TRANSCRIPT--- Hello and welcome to another episode of Bidishaomics. I am Sabika Syad and with us Dr. Bidisha Bhachara our consulting editor for economics who takes your questions dear members on global economy India’s position and everything you send our way. Pisha quite a few layered questions this time. Uh the first one I’ll take is by Goautam Singh. They’re asking with the recent rapid depreciation of the rupee, they’ve seen the RBI taking multiple steps and quick succession like swaps, then restrictions on NDS and now relaxing some of these in the last week, which puts us not in a good light globally and invites more speculation when it’s seen RBI in its defending zone which can turn to worse as we’ve seen in multiple examples historically. The Nariman committee report in 1991 that guided towards a path to full capital account convertability which would be a sign of maturing economy and reflect confidence but the conversations or the glide path seem to have died down. Is it so or is the government or the RBI taking certain steps towards the goal? This is definitely a layered question but thank you Goautam for asking this question because I feel like both the areas talking about RBI’s um activities lately and also capital account convertability it does lead to uh certain confusions and this question so I’ll try to simplify this as much as possible and I’ll break it into two parts. The first part I’ll talk about rupee and RBI’s actions. When the rupee comes under pressure that is it starts moving or there are disorderly movements the Reserve Bank of India steps in to either smooth out the flows uh so that to stop as such you know effective or immediate ups or downs for that matter and there are certain tools that the RBI uses. one it can absolutely sort of go and to the foreign exchange market and sell dollars to calm down um you know the depreciation or the sudden depreciation of the rupee. The other thing that it can do is basically look into or check the liquidity in the system the domestic system as to how is the money circulating within the system. Then comes the word that he mentioned in his question which is swaps uh which is FX swaps. Now what does that mean? That means for a short period of time RBI basically provides dollars to banks so that they don’t run short of dollars and takes it uh back later on. Um because at this point in time the the most important thing that we need in an economy is liquidity. Finally he also if I’m not wrong he did mention about NDFs which is non-deliverable forwards. So what RBI can also do the fourth tool is basically it can act on or influence offshore markets such as the non-deliverable forwards where basically traders can bet on uh you know the future value of the rupee without exactly buying or selling of the currency but they can predict as to in which direction is the rupee heading towards. Now coming to um understanding an important point that not all these activities that RBI has been doing are necessarily to for a particular or catering to a particular problem. Now here is a subtle point that needs to be mentioned. Okay, which is expectations. In earlier episodes we have discussed regarding this. So the rupee or any currency for that matter, there are certain times when the rupee just doesn’t get affected by trade or basic fundamentals but also by market sentiments or expectations of how globally markets are behaving. Let me give an example. For instance, we just spoke about the offshore markets right there. If traders have start betting and they have start predicting that the rupee will weaken even further that sentiment can come back into the domestic markets and amplify the fall of the rupee even further and worsen the exchange rate depreciation. Now that gets very risky for RBI to handle. So which is why the non-deliverable forwards the NDFs then comes looking into the liquidity system and also the swaps. The swaps are basically to cater to ensuring that liquidity is maintained in the system and the banks don’t run short of dollars because investment is something that we have to keep intact at this point in time uh in order to improve our current account deficit which it is in order to make sure that because it’s an emerging economy there are not too much of capital outflows happening uh from the economy. Uh so this is where the swap bit comes into the picture and when we are talking about you know the very first of buying and selling of dollars that’s definitely um because to make sure I mean the exchange rate regime that um India follows or the RBI um follows is the managed floating exchange rate regime which is something that we do not peg our exchange rate you know against the dollar there’s no particular one peg like like for instance in Saudi Arabia does. Uh so in that instance what happens is whenever uh usually our exchange rate or our currency is determined by the demand and supply in the foreign exchange market but there are times when there are sudden movements or sudden ups and downs the RBI interferes and tries to smooth out the system. So that is exactly what the RBI is doing. Now coming to the next portion and before I get into capital account convertability it’s important to understand that right now RBI is not only dealing with actual economic pressure the RBI is also dealing with market sentiments which are moving at a faster pace than the underlying economy. Moving to uh you know now we’ve understood that this is not something that is happening in a hapazard manner. This is fine-tuning basically in real time. And um the question about you know does this signal it’s it’s a very important question where he mentioned if I’m not wrong that signaling is important certainly it is important which is where um because what happens is if um you know traders think or investors think for instance that the RBI is defending um the rupee at a particular exchange rate then then basically the pressure or the speculative pressure amplifies in that situation and that worsens the rupee even further. Uh which is where we’ve earlier just spoken about the managed floating exchange rate regime. Um that’s what the RBI has been maintaining and it has been doing um an quite a good job when it comes to smoothing out the process and sort of you know buying and selling of dollars in the foreign exchange market. Coming to capital account convertability he did mention about the Narimha committee. Um so capital account convertability in simple words if I have to define it is basically how money can move effectively in and out of an economy

that is nothing but capital account convertability. Now the narimhum committee report specifically focused on strengthening the financial system in the early 1990s. Um however um the more direct road map for capital account convertability was actually given by tarapur committee uh which was towards the late uh 1990s. So here basically the transition of you know the direct road map towards capital account convertability uh was more um focused on of course it was supposed to be gradual but it was also based on certain conditions. Now what were those conditions? The first being um low stable inflation. The second being um meeting certain fiscal deficit targets or fiscal discipline. The third being strong banks also holding strong foreign exchange reserves. And the fourth being strong financial institutions basically markets, stock markets, different you know bond markets and all. Now here the question is the question that he asked is has the gold disappeared? Not at all. But uh the evolution of that goal has changed. Why? Because over time since 1990s India has opened up as an economy to a great extent. The foreign direct investment is playing a very important role. Then comes you know foreign portfolio inflows have opened up even further. Indians can invest abroad within safe limits. But when it comes to short-term capital, this is where of course the government tries to play safe and they try to be cautious. uh why we’ve had examples of when capital whenever there are any kind of tensions even right now the tensions in the Middle East but the classic example is the 2008 global financial crisis when immediately whenever there are certain global or geopolitical risks capital starts moving at a very fast pace because investors immediately start looking for safer options and especially in terms of emerging economies capital starts flowing out uh so that gets a bit risky because If capital starts flowing out all of them which is the full capital account um convertability uh in that particular situation the pressure on the rupee will be even further and the rupee will depreciate even further and then it might get very difficult for us to manage or for the central bank to manage. So uh so full capital account convertability in my opinion would not be a wise move. Um definitely sort of making sure looking at the system if the system is strong then definitely to an extent if there are risks available outside if you can see that investors can at any point in time move their capital to safe haven assets to US treasury bonds to US treasury markets then definitely not so that would be my response when coming to capital account convertability. Right. Right. Vidisha the next question is by Bluetooth XW. They’re asking how do international countries accept any other country’s currency value against its own currency as all countries want their own currency to be stronger or weaker according to its needs. Um so this question does sound um simple but it’s a very fundamental question I I believe uh because um it’s important to understand that in today’s day and age um countries don’t really sit together and decide on what everybody’s exchange rate would be. First exchange rate is basically um a country decides the currency against compared to another currency. That is the definition of exchange rate. Now in this particular situation there is just like stock market there is a global market out there where basically exchange rates are determined on the basis of demand and supply. For instance, if most people go to the foreign exchange market and demand dollars, then dollars become stronger. If the demand for rupee weakens then rupee depreciates. It’s as simple as that. Now in this particular situation, now what are the factors that determine which currency anyone would prefer over another currency? There are primarily three reasons. First obviously being trade. So India say for instance at this point we are taking oil. So India imports oil um from the Middle East and in this particular situation India imports oil it has to pay dollars. Now our primary currency is rupees. So we will have to now buy dollars. So we go to the foreign exchange market we purchase dollars and as a result of which the demand for dollars increases and even without us you know uh even without the core fundamentals changing the rupee weakens relative to the dollar. Coming on to and multiple other countries do the same as well. Moving on to the second reason would be investment. This is again where we talk about the safe haven bit and why uh there are multiple pieces that I’ve written regarding this be it the ddollarization debate or um you know at this point in time why did at the peak ward situation of US, Israel, Iran why did gold behave um in in an absurd way? Um it was because there was sort of you know the the way investors looked at safe haven assets when it came to uh US dollar and gold. Uh this is where investors basically like to um park their funds in areas which are stable which uh and sort of in markets that they can trust and as a result of which if they plan to invest say for instance in the United States then they would have to pay dollars to invest there and as a result of which again they would purchase more dollars and dollars strengthen right as a result of which say for instance tomorrow if investors find India optimistic they would have to go to the foreign an exchange market and purchase rupees and as a result the value of the rupee increases. Finally coming on to the third reason which is trust and stability. Um now this is where the US dollar tends to win because 58 to 60% of the global foreign exchange reserves is still denominated in the US dollars. Uh so any economy uh which would show strong stable inflation and also a stable economy and strong growth to an extent strong markets not just stock markets but bond markets um even from a foreign exchange market point of view um then automatically um that currency would be preferred over the other currency and the trust and stability factor also plays an important role as to why would anybody prefer one currency over another. Moving on to the second part of your question which was if countries want their currencies to be stronger or weaker can they control it? Right? The answer to this would be partly but not completely. Now if I say but not completely and how much can they control it that depends on the system of the exchange rate that they choose to follow. Now there are predominantly three different kinds of exchange rate systems. The first is the floating exchange rate system. This is something that the US market follows that the United States follows where the the currency is decided on the basis of the demand and supply within the market. The market decides the currency basically in that particular situation there is no intervention as such whatever is happening around and it is based on the demand and supply. Moving on to the another exchange rate system which is the fixed exchange rate system. This is where Saudi Arabia basically they fix their currency pegged at let’s say it’s usually the US dollar. Um now in that particular situation what happens is because there are millions of transactions that take place in the foreign exchange market on a daily basis. So there um when a currency is pegged against the dollar in order to hold on to that peg or defend that peg um that country has to consistently keep buying and selling currencies. So usually it is said that if a country decides to follow or if an economy decides to follow fixed exchange rate regime they need to hold large amount of foreign exchange reserves. Okay. Otherwise it’s a little risky and thanks to oil Saudi has that. Moving on to the third kind of exchange rate regime which is something that India follows which is the managed floating exchange rate regime. Here also predominantly the currency is decided on the basis of the demand and supply in the market. However, still whenever there are certain um fast-paced movements, certain absurd movements, disorderly movements, whenever there’s a sudden increase in the value of the currency and a sudden fall because we always keep talking just about depreciation, it’s also important to understand the other way around. And I’ll get to it why because sometimes countries don’t necessarily prefer strong currencies. So now um this is where uh basically you know the central bank intervenes whenever there are disorderly movements and um they sort of buy and sell currencies using their foreign exchange reserves and um as a result it kind of evens out um so this is the managed floating exchange rate regime. Moving to uh moving on to the point that I talked about as to um it’s a very important insight that needs to be understood here is that um countries don’t necessarily and especially emerging countries don’t necessarily prefer a strong currency. Okay. Because here and this is a very early piece uh back in August or September 2025 one of the very first pieces that I had written which was titled as let the rupee fall. Okay. So um why because when a currency is strong imports are cheaper and uh that’s beneficial for consumers but exports become less attractive because they become costlier as the my as the value of my currency is higher compared to the currency of the country I’m trading with. Now in that particular situation if I am an emerging economy if I’m looking to diversify exports if I’m looking to um increase exports and export production then having a very strong currency would not necessarily work in my favor. Um so there are times definitely when um countries do prefer having a slightly or a at least in a particular band certain amount of depreciation. Uh so this is something that also needs to be um kept in mind and of course there’s a limitation um as you know going back to the very question that even if a country wants a certain exchange rate can it fully control it not necessarily as we’ve understood this is a foreign exchange markets where millions of transactions from a trade perspective from an investment perspective from an offshore onshore trading perspective is happening and as a result of which it’s practically ally impossible to control a particular exchange rate. Um there are definitely ways of controlling it. Either have huge huge foreign exchange reserves or um have certain controls on the monetary movement. Now both of them are very difficult to do and especially given the current geopolitical situation it’s extremely difficult. Um so that would be my response to this. Right. Thank you for going into s such details because as people who are maybe not so privy or maybe do not have the kind of um interest in those we don’t realize how such simple things are actually so who which are so fundamental actually have so much going behind them nowisha the next question is by narendra a very loyal viewer there is saying capitalist profiter black marketer adulteration all these labels were stuck to industrialists and traders in postindependence era Public was very poor. So the target became the business community. Trade unions exploited it. Labor laws made it difficult to run an industry or business with honest compliance. Debt tapism and corruption hit the business community. It all resulted in the slow death of industry in many states. West Bengal up Bihar states slowly de-industrialized. What can shift all these deeprooted divisive mindset in our public and bureaucracy? Uh thank you Narendra firstly for asking this question. uh because I feel like here a behavioral aspect of economics comes into the picture um which is not much discussed but thanks to these questions that we get to discuss uh these aspects as well uh but first here I would like to start from the historical context right right from 1951 when India launched the very first five-year plan up till the 1991 specifically um the economy in general was heavily controlled by a state it was a state-led development model which was uh primarily known as the license raj now in this particular situation if any business wished to start or even expand for that matter it would have to go through dozens and dozens of permissions that it would have to seek from the government uh specifically you know starting with um let’s say I mean getting a door constructed to hiring the right kind of workers refers to what would be the kind of products and how many of them would be produced in the factory for every single thing they would need to seek permission. Now that gets very um difficult for a business to function or even expand for that matter and here I would like to talk about the behavioral aspect or a very key economic idea which is incentives. Now what are incentives? Basically incentives basically imply how people behave given the system that they are placed in. Right? Now if the system is simple, clear, transparent, fair, um people usually adhere to the system, they adhere to the rules and they follow them accordingly. When the system is too complicated and not very transparent, people usually try to go around the rules and not really stick to the rules. Now this is exactly what had happened around uh this time and here we are talking about 30 decades of different issues that had taken place before the liberalization reforms. So here um firstly I would like to talk about just to add on to this it’s important to understand the economic reality of the 1960s 197 especially 1950s60s and ‘7s when there was a big uh sort of economic reality India was a very poor lowincome country now in that particular situation uh when when it’s a lowinccome country there of course there were scarce resources scarcity was quite high and now in economics terms whenever there’s scarcity of a particular commodity which doesn’t have a substitute say for instance the prices increase. Now when the prices increase obviously it looks lucrative to the producers and they say okay fine this is good because we are earning more profits but especially in case of a poor country when consumers look at the price rise um they see it as exploitation. So how economics works and how economics was being perceived there was a big gap between the two at that point in time. Moving on to um the labor union bit that he mentioned in his question especially around 1960s and 1970s there were these strong labor unions that were um sort of um rising in in different parts of the country especially in states like the west Bengal. Now a good thing about it was it was protecting workers from exploitation from corruption. Um however the bad thing about it was um that certain rules or certain labor um unions became so rigid that it was getting difficult for businesses or firms to adjust to expand to even comply with. Okay. So the balance kind of somewhere got or the line kind of somewhere got blurred out as a result of which there came in red tapism or the bureaucratic controls. So first you already have you know um first we started with the license rajabit then you have the economic situation during that period then you have as we just spoke about the labor unions and now add on to the fourth layer which is red tapism discretion bureaucratic controls which basically means too many unnecessary procedures complicated systems which even businesses are not being able to decipher in that particular situation. This is kind of an environment that is enabling corruption and it did so. Now over time especially in the 1970s and the 1980s what we witnessed um especially in terms of um Uttar Pradesh and Bihar there was a lot of capital outflow and it suffered a lot in terms of private sector growth or businesses or firms expanding and that did uh dent that did put a dent in the economy of Uttar Pradesh and Bihar specifically and multiple other states as well. Now comes the turning point. In 1991, there were certain reforms that we usually call as liberalization reforms which focused on reducing licensing, making rules simpler, increasing more private sector participation, having more conversations with the private sector uh which automatically started sort of you know changing the um sentiment to an extent but not entirely as he very correctly stated. Now coming to Narendra’s question on how do you change a mindset that has been built over decades and by decades we we are here talking about 30 years three decades right so here specifically um I would say my answer to this would be that don’t start with the mindset it’s important to first start with the system first being that make the rules simpler and way more transparent uh because the the minute the rules are more complicated. That doesn’t only um lead to corruption but it also leads to you know different kinds of loopholes. Um as a result of which every business would sort of try to not comply with these certain rules and as a result we would never be able to achieve the level of firm formalization that we target to. Second comes building trust through visible outcomes. Now until and unless people see results they will never trust the system and we have an excellent example of this from the 2000s onwards the IT and the services showed remarkable results and that to a great extent changed the mindset in people in this country about businesses because of the sort of global reputation that India had due to IT and services because of the revenue that it earned because of the growth that that revenue earning led to. So this is something that needs to be focused on then coming to balancing labor protection with the kind of business regulation. So it shouldn’t come across that the labor protection rules or the labor rules are so difficult or so rigid that the business are not flexible enough or the firms aren’t flexible enough to expand. So that balance needs to be maintained and specifically talking about reducing discretion in governance. Uh so this cautious kind of um spending especially from 2010 onwards and definitely after 2014 2015 um sort of single window systems and uh digital compliance or digital use digitization in general um reduced uncertainty to a great extent reduced human discretion uh a lot of mistakes reduced delays uh to a great extent. So that has improved the mindset um a great deal but not completely. So my um response would again be that instead of focusing on the mindset instead of trying to sort of you know tell people to change their mindset regarding this exploitation bit it’s important to show visible results through changing the system. So yeah, now that we’re talking about what industries need to do to be sustainable, Sapati is asking a question saying that can differential corporate tax rates steer corporations to invest more in R&D which is research and development employ compensation and hiring and the simple reinvestment of profits. um to an extent yes. The short answer would be to an extent yes but not completely because I believe that be it hiring or be it you know research and development um or be it growth or expansion uh is primarily driven by demand and not just the tax benefits or exemptions definitely uh when it comes to uh first um I mean firstly what is a corporate tax it’s basically a tax on company’s profits now there are differential tax rates certainly which which kind of imply that uh there are certain tax exemptions or reduction in tax rates given uh the kind of activities that certain companies do. Let’s say for instance small companies might have to pay lower tax rate or a manufacturing firm that is just starting out might have to pay a a less percentage of tax rate. Usually it’s 15% for India. Um there are other countries countries like Ireland have 12.5%. So these are and different other countries do. So usually globally the range is between 23 to 25%. Um now in this particular situation um if if I remember until 2020 uh we had something called the super deduction which um did promote research and development because companies were said that of course uh you can reduce the kind of tax the tax bill that you pay if you invest more um or have a different department for that matter on research and development. um and that did promote to a great extent research and development. However, um there were certain companies that started to exploit that um as well where they um started passing off certain activities as R&D and uh so these are the loopholes basically I mean until and unless again here even even here incentives play an important role or price as signals play an important role. Uh so um coming to first I I’ll go one by one. He first spoke about research and development. We’ve spoken about the super deduction bit. Um then moving uh to jobs and hiring. Now governments can uh definitely encourage hiring uh but until and unless there is demand for that commodity or demand for that particular software uh I don’t think companies would be extremely incentivized to hire. Moving on to the next point that he mentioned about higher salaries. This is even more limited because higher salaries right now depend on worker productivity. They depend on skills. They depend on competition for talent as a result of which tax incentives or differential tax rates to an extent might help but will not be and also given the geopolitical situation I don’t think it’ll be of great benefit. Now coming to the last point that he mentioned in the question which was reinvestment of profits. This is where tax policy might work because uh if firms or if businesses are encouraged to reinvest the profits that they’ve earned instead of distributing them that actually leads to future growth and future expansion of their businesses and automatically overall economic growth. This is where actually the differential tax rates might help. Um but there is a limit as I earlier mentioned a limitation in each and every one of them. Um because a company will only invest whenever they will see a good opportunity regardless of how less a tax bill that they might have to pay or how much exemption they get. Um so yeah that would be my response. So Bidisha our last few questions are follow-ups. one is on our uh earlier episode and two are on your column on Japan. So first I’ll take the followup on our episode. This is by Madu Sudan. They’re asking uh they’re saying thanks for suggesting that governments must incentivize increase in human jobs you mentioned such as healthcare and teaching. They’re asking what do you find lacking in this regard and what solutions do you see? Do state governments bear more responsibilities in such incentivization? Uh firstly thank you for following our episode. uh so and of course uh the question is uh quite important and targeted as well. We did discuss regarding uh you know focusing government increasing policy focus more on healthcare education uh social sector specifically. Um now firstly I will address the area of the firm formalization bit that was talked about. So here formalization basically means that when a firm or moves from the informal to the formal kind of setup there are certain regulations that it now needs to follow. One being you know written contracts then you have social security then you have certain uh minimum wages that need to be paid. Um so in these areas of course once when the system or the laws are kind of uneven the implementation is uneven or they are complicated. Um then as a result of which there are a lot of businesses and firms that prefer not going via the formalization route. Moving to uh specifically the healthcare education bit what can be done? Um now given the WH standard or norm usually the ratio of you know one doctor to the number of people is approximately 1 is to 1,000 but in India it is um 1 is to approximately 1500 where it’s very clear that we need more doctors in this system. Uh then of course uh teaching professions there are multiple government schools out there uh you know not enough teachers and um even in in teacher training institutes as well uh the recruitments or uh you know people applying for these courses have also dropped to a great deal. So this is where again I’m I’m very glad that most of these questions um you know for in some way or the other hinted at specific aspects of behavioral economics or the incentive bit um which is why here um sometimes when rules are complicated the compliance is costly or um there are no u enough um let’s say facilitation in this area when it comes to teacher training because all of these be it healthcare be it teaching they require certain amount of training, they require certain amount of um facilitating incentivization. uh but if that does not happen to a great deal or the investment does not happen to a great deal um then I mean definitely you know that respect for that particular profession also not just in terms of finance but even rewarding uh these professions the pay that you know a teacher gets a high school teacher or a middle school teacher is much lower compared to how much they should be. So these um sort of payment regulations should also be adhered to. Um also understanding you know increasing um infrastructure that is something that the government is already working on but um sort of fast pacing it. Um of course it seems a little difficult given you know the tensions in the Middle East today. There is some different issue that’s happening in the global world order which has already affected markets and as a result it’ll affect trade and hence as we’ve earlier discussed multiple times that the only way we can cater to this trade deficit is not through the services sector but through the manufacturing sector. So automatically certain investments or allocations that the government might have made during the budget they might have to park it now or sort of reallocate it to the manufacturing sector. And this is where social sector gets um hurt the most or affected the most. Very similar to you know between the two kinds of expenditure revenue expenditure and capital expenditure. Capital expenditure is the one which gets postponed the most. Uh so um here this uh should not be done. Uh it should be made sure that at least some amount of investment in the education uh bit of infrastructure or healthcare infrastructure needs to be um consistently done. Right. So um this is an area that the government needs to do and there has to be a policy focus and also um talking about again coming back to firm formalization because there is also among the small businesses or tier 2 tier three cities as he talked about specifically you know because tier 2 tier three cities have an unmet demand. They have a huge section of workforce who are waiting to be who are looking to be skilled who are waiting to apply you know into into these opportunities be it teaching be it healthcare in any kind of social security benefits as well. So tier 2 tier three cities would be a great point to begin with. Okay. Yeah. Yeah. Bidisha. So the next question is also by Madu Sodan. First they’re thanking you for your episode on Japan’s economy. They’re saying it was really enriching. Now the next question they’re asking is also a followup from our earlier episode where we had talked about contractual labor. They’re asking a question regarding the formalization of the contractual labor that we had spoken about. They’re saying since tier 2 and tier three cities have most of the informal workforce, how do you see the role of local municipalities, corporators and local governance in their formalization and in integrating local employers in formalization? So firstly it’s important to understand uh the roles that the center the state and the local bodies must play when it comes to firm formalization. In my opinion the center should design the policies and provide the right kind of funds. States should focus on efficiency of those policies and local bodies should focus on delivery. So this policy, efficiency and delivery, these have to be very clearly defined among the three, right? So um as we just spoke about firm formalization, we spoke about written contracts, we spoke about social security benefits, sometimes the compliance rules are so complicated that businesses decide that it’s much better to rely on the informal workforce than move to formalization. And uh as a result of which because any business is always focusing on cost cutting and increasing the profits as a result. It’s never only focusing on revenue generation but reducing the cost over time as well. And when you’re moving to form to formalization of course the certain costs would increase but here incentives have to play an important role where the government steps in and says if you become if you become a part of the formal workforce where you will have to pay certain taxes or you know you get certain social security benefits the incentives to move from informal to formal kind of increases. Um as a result of which businesses feel incentivized say for instance there are certain taxes that they can let go of for instance or uh when it comes to the setup or you know single window system single window clearances um or digitization systems for that matter uh this is an area that the government can because we have a very strong digital public infrastructure that the government can um make the system much much more transparent uh much more fair. Uh so this this is kind of the area this is the area where policy focus has to introduce incentives to be able to encourage firm formalization. Also there is an important point uh that was mentioned in this question uh which was linking certain services to formalization. Uh so if a business specifically is is formal let’s say they get benefits um as I was just talking about certain incentives of formalization um they get benefits such as easier access to credit um you know eligibility for certain government schemes or say better infrastructure access uh so these are the areas that um sort of the government can focus on and encourage firm formalization in my opinion uh because it’s not really um you know we can’t as I mentioned mentioned in one of my earlier episodes as well that we cannot really blame the MSMES, we cannot really blame the firms, we cannot um especially small businesses uh when they are decide to not formalize when they decide to keep working with this contractual labor uh because the incentives that the government or the policy focus towards them is very limited. So that so these are the areas I feel that the uh that the government can act on as a result uh which can increase form formalization. Right. Pisha the last question for this episode is by Vizard Buzz. They’re also referencing your latest article on Japan. They are saying that you argue that its economy challenges conventional macroeconomic rules. If that’s the case, what alternative framework should economists use to understand inflation and employment dynamics beyond the Philips C? Um firstly thank you for um reading the Japan piece and we link it um here as well. Uh so um this basically came out of a 3rd April IMF report. um a article 4 consultation report that IMF released on Japan where I noticed that you know um the wage growth is quite strong and unemployment is very low and um all in all the economy is in a stable position and just from the very basic textbook economics macroeconomics that we’ve studied the Philips curve uh you know when unemployment is low inflation increases but inflation is quite moderate it did increase but it’s still around the 2% % Bank of Japan’s target which is practically that increase is a very moderate mild increase for that matter. uh now in this situation it’s important to understand you know I wouldn’t say very similar to but um in response to one of the answers to the earlier questions uh we we did speak about um you know the three decades of mindset change uh that we just spoke here as well there seems to be a broken linkage between wage growth and inflation or price rise um I’ll tell you exactly what happened because for decades um you know growth has been uh very stable. Um the I mean the total GDP has been quite quite low for that matter and in this particular situation the Japanese economy or people in general are not used to price increases. So even if there is right now a wage growth because labor shortages are at an all-time high since the 1990s as has been reported by IMF. um in that particular situation if prices increase that would be a big shock to the Japanese economy and hence firms are absorbing part of the shocks and they are not uh sort of pushing the cost to the prices. So as a result of which there’s a big part of the cost that are being absorbed by the firms. uh so hence you know the wage growth is kind of not translating into inflation uh growth or inflation increase again you know a behavioral change or a mindset change um that’s that’s taking place here as well. So now as we spoke about the break in this link there’s another factor that is playing an important role here which is playing an important role in every economy at this point which is expectations given the fact that expectations have taken sort of the driver’s seat and Japan in general expect have been expecting low inflation and have been experiencing low inflation rather I would say for 30 years right so in this particular situation consumers are extremely ly sensitive to price increases. They can expect um that okay fine for now probably inflation has increased a little bit but tomorrow it’ll go down again and the economy would stabilize. Uh so and here also productivity helps absorb the pressure. In Japan the productivity is quite strong. Uh so that is also helping absorb uh you know certain costs which is not resulting in the increase in uh sort of prices um compared to the wage growth. uh so the economy is quite strong it’s quite stable but of course the Japanese situation kind of makes us realize and rethink that probably GDP or growth rate uh or even you know the other factors a GDP deflator inflation these are not the only metrics that should be used to understand a country’s health uh it’s important to go beyond um the actual rates the actual factor factors and look into factors such as in the future how are people thinking about the future about certain parameters which is where expectations come into the picture which is where productivity comes into the picture uh so so these are the factors that need to be augmented I would say in the Philips curve and um then the evaluation should take place not just in terms of Japan but any economy for that matter right Medisha that’s the end of our episode today thank you so much for digging in so deep Even for such simple questions that make us think sharper. Thank you viewers for your questions that always keep us curious. We’ll be back next week with another episode of the Disha.