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GS Paper: Indian Economy

  • India’s 1991 Crisis and the RBI Governor’s Role

    S. Venkitaramanan, former Governor of the RBI

    Central Idea

    • S. Venkitaramanan, former Governor of the Reserve Bank of India (RBI), passed away, leaving behind a legacy of significant contributions.
    • His tenure is marked by crucial interventions during India’s economic crises and a commitment to open dialogue and innovative policies.

    Navigating the Balance of Payments Crisis

    • Economic Turbulence in 1990: India faced a severe balance of payments crisis due to reduced remittances and increased oil prices.
    • Critical Measures: Under Venkitaramanan’s leadership, the RBI took bold steps, including pledging gold reserves, to avert a default on international payments.
    • Impact of Gold Pledging: This move, though criticized domestically, was crucial in maintaining India’s international credibility and financial stability.

    Role in Economic Reforms

    • Import Compression Strategy: Venkitaramanan initiated a program of import compression, significantly reducing the current account deficit.
    • Foundation for Future Reforms: These measures laid the groundwork for the economic reforms introduced by the Narasimha Rao government and Dr. Manmohan Singh.

    Challenges and Controversies

    • The Harshad Mehta Scam: Venkitaramanan’s tenure was marred by the securities scandal involving Harshad Mehta, overshadowing his earlier achievements.
    • Public Perception: Despite his significant contributions, the public memory often overlooks his role in steering India through economic turmoil.

    Remarkable Openness and Inclusivity

    • Engagement with Diverse Opinions: Venkitaramanan was known for his openness to different viewpoints, engaging with economists and critics alike.
    • Innovative Approach to Policy Making: His willingness to consider varied perspectives contributed to more inclusive and effective economic policies.

    Legacy in the RBI and Beyond

    • Establishment of the Development Research Group: Venkitaramanan’s vision led to the creation of this group, aiming to foster interaction between the RBI and independent economists.
    • Influence on Current Economic Policies: His belief in relying on India’s intellectual resources continues to influence the RBI’s approach, though challenges like inflation management persist.

    Conclusion

    • Enduring Impact: S. Venkitaramanan’s tenure as RBI Governor was marked by courageous decisions and a commitment to intellectual openness.
    • Remembering His Contributions: While his term had its challenges, his role in safeguarding India’s economy and fostering a culture of dialogue and research within the RBI remains a significant part of his legacy.
    • Inspiration for Future Leaders: His approach to economic policy and management continues to serve as an inspiration for current and future leaders in the field.

  • Analyzing the Slowdown in India’s Core Sector

    Central Idea

    • India’s eight core sectors experienced a significant slowdown, growing by 7.8% in November, down from 12% in October.

    About Core Industries in India

    • The main or key industries constitute the core sectors of an economy.
    • In India, eight sectors are considered the core sectors.
    • These sectors are in decreasing order of their weightage: Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.

    About Index of Eight Core Industries

    • The monthly Index of Eight Core Industries (ICI) is a production volume index.
    • ICI measures the collective and individual performance of production in selected eight core industries viz. Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity.
    • Before the 2004-05 series six core industries namely Coal, Cement, Finished Steel, Electricity, Crude petroleum and Refinery products constituted the index basket.
    • Two more industries i.e. Fertilizer and Natural Gas were added to the index basket in the 2004-05 series. The ICI series with base 2011-12 will continue to have eight core industries.

    The components covered in these eight industries for compilation of the index are as follows:

    1. Coal – Coal Production excluding Coking coal.
    2. Crude Oil – Total Crude Oil Production.
    3. Natural Gas – Total Natural Gas Production.
    4. Refinery Products – Total Refinery Production (in terms of Crude Throughput).
    5. Fertilizer – Urea, Ammonium Sulphate (A/S), Calcium Ammonium Nitrate (CAN), Ammonium chloride (A/C), Diammonium Phosphate (DAP), Complex Grade Fertilizer and Single superphosphate (SSP).
    6. Steel – Production of Alloy and Non-Alloy Steel only.
    7. Cement – Production of Large Plants and Mini Plants.
    8. Electricity – Actual Electricity Generation of Thermal, Nuclear, Hydro, imports from Bhutan.

    Recent data: Sector-Wise Growth Details

    • Decline in ICI: The ICI witnessed a 3.34% drop from October, marking its lowest since March 2023.
    • Sector-Specific Trends: Notably, only refinery products and coal showed month-on-month growth, with significant year-on-year increases.
    • Steel Production: Growth in steel production hit a 13-month low at 9.1%.
    • Crude Oil and Fertilizer: Crude oil saw a contraction, while fertilizer production growth decelerated.
    • Natural Gas and Electricity: Both natural gas output and electricity generation growth slowed down considerably in November.

    Comparative Analysis with Previous Year

    • Year-on-Year Comparison: The core sectors had a 5.7% growth in November 2022.
    • Influence of Base Effects: Last year’s high growth in certain sectors like cement significantly influenced this year’s comparative figures.

    Economic Insights and Projections

    • Bank of Baroda’s Perspective: The slowdown in fertilizer growth aligns with the end of the rabi sowing season, as per the bank’s chief economist.
    • IIP Forecast: The core sectors are expected to contribute to an IIP growth of 7%-8%.
    • Economists’ View: Experts predict a continued slowdown in core sector growth due to strong base effects from the previous fiscal year.

    Future Expectations and Challenges

    • India Ratings and Research Predictions: A slowdown in core sector growth is anticipated in the coming months, influenced by the strong base effect.
    • Broader Economic Impact: This slowdown is indicative of larger economic challenges, potentially affecting future policy and market expectations.

    Conclusion

    • Economic Resilience Test: The trends in India’s core sectors underscore the challenges in sustaining growth amid diverse economic conditions.
    • Need for Strategic Economic Planning: Addressing these slowdowns will require astute economic planning and possibly new strategies to boost growth in these key sectors.

  • There is no substitute for an industrial policy

    Make In India Registration

    Central idea 

    Make in India (MII) represents a departure from India’s historical self-sufficiency approach, prioritizing global competitiveness. The article critiques potential protectionist tendencies within MII, emphasizing the need for job creation and competitiveness. The efficacy of MII in delivering on promises, particularly in labor-intensive sectors, is a key focus for evaluating its impact.

    Key Highlights:

    • Make in India (MII) diverges significantly from India’s historical self-sufficiency approach, focusing on global competitiveness rather than isolation.
    • The article critiques potential protectionist tendencies within MII, drawing attention to historical pitfalls of reckless protection in the 1970s and 1980s.
    • The piece discusses the critical need for MII to deliver on promises, particularly in creating a competitive manufacturing sector, and emphasizes the importance of job creation for India’s abundant labor force.

    Key Challenges:

    • Concerns are raised about the implementation of MII, especially in sectors where tariff duties are increased for protection, potentially leading to negative consequences.
    • The article questions the efficacy of MII in comparison to its objectives, urging a closer examination of its impact on job creation and competitiveness.

    Key Terms:

    • Make in India (MII): A policy initiative launched in 2014 to transform India into a global manufacturing and design hub.
    • License Raj: A regulatory system in India during the pre-1991 era that required businesses to obtain licenses for various activities, leading to bureaucracy and inefficiency.
    • Production-Linked Incentive (PLI): A scheme aimed at attracting investments in key sectors and cutting-edge technology to enhance efficiency in the manufacturing sector.

    Key Phrases:

    • “MII is very different from self-sufficiency, and we should move on from this baseless comparison.”
    • “Every country that has ‘taken off’ before us has been export competitive.”
    • “Devising an industrial policy for mass job creation in India is the touchstone against which success ought to be gauged.”

    Key Quotes:

    • “Job creation for our abundant factor, especially women, is key, and that is only possible with labor-intensive manufacturing.”
    • “In the absence of high frequency data on PLI, either on value added or jobs generated, a moral compass to shape a better world ought to be employed in abundant measure.”

    Critical Analysis:

    • The article critically examines the potential protectionist aspects of MII, drawing parallels with historical challenges.
    • It highlights the importance of job creation, especially in labor-intensive sectors, as a crucial metric for evaluating the success of MII.
    • The absence of high-frequency data on PLI is emphasized, calling for a balance between data interpretation and moral considerations in policymaking.

    Way Forward:

    • The article suggests that industrial policies, including the National Industrial Policy (NIP), should prioritize labor-intensive sectors to promote mass job creation.
    • It emphasizes the need for MII to continue focusing on excelling in labor-intensive manufacturing for the overall betterment of India’s economic landscape.

  • RBI reports reduced risk of Stagflation in India

    stagflation

    Central Idea

    • The Reserve Bank of India (RBI) officials have reported a decreased risk of stagflation in India, now estimated at 1%, down from 3% in August

    What is Stagflation?

    Details
    Definition   An economic condition characterized by stagnant growth, high unemployment, and high inflation.
    Indian context Fluctuating growth rates; periods of slowdown have raised concerns about stagnation.
    Inflation Dynamics in India Historically high at times, often driven by rising food and fuel prices.
    Supply Shocks Vulnerable to global oil price fluctuations and agricultural supply shocks (e.g., monsoon variability).
    Past Episodes Elevated stagflation risks were noted during the Asian Crisis, Global Financial Crisis, taper tantrum, and COVID-19 pandemic.

    Methodology for Assessing Stagflation

    • Two-Pronged Approach: RBI assessment utilized two methods: analyzing periods of low economic growth with high inflation, and employing ‘at-risk’ frameworks, namely “Inflation at Risk” (IaR) and “Growth at Risk” (GaR), using quantile regression.
    • Determinants of Stagflation: Key factors identified include supply-side shocks, commodity price spikes, tighter financial conditions, and currency depreciation.

    Key Risk Factors for India

    • Financial Conditions and Rupee Depreciation: Financial conditions and the depreciation of the rupee against the U.S. dollar are significant risk factors for stagflation in India.
    • Empirical Evidence: The integrated IaR and GaR frameworks corroborate these findings, although the impact of crude oil prices on domestic fuel prices has limited predictive power for stagflation.
    • Global Concerns: Post-pandemic, higher commodity prices and the U.S. dollar’s appreciation raised global stagflation concerns.

    Back2Basics: Economic Conditions: Definitions and Concepts

    Explanation
    Depression A sustained, long-term downturn in economic activity.

    Characterized by significant decline in GDP, high unemployment, low spending, and reduced industrial output.
    Deflation A general fall in the price level of goods and services over some time, indicating negative inflation rates.
    Disinflation A decrease in the rate of inflation, i.e., a slowdown in the rate at which prices increase.

    Example: Inflation rate falling from 8% to 6%.
    Reflation Economic measures, such as increasing money supply or reducing taxes, aimed at stimulating the economy to reach its long-term growth trend after a downturn.
    Skewflation A situation where the price of some items rises significantly while others remain stable.

    Example: Seasonal rise in the price of onions while other prices are stable.

  • India’s Disinvestment Strategy amidst upcoming Elections

    Central Idea

    • India’s disinvestment process, primarily focusing on minority stake sales rather than full privatisation, is expected to fall short of its fiscal year 2024 target.
    • The government’s cautious approach, influenced by the upcoming general elections, has led to a slowdown in the privatisation of major public sector undertakings (PSUs).

    Disinvestment Performance and Targets

    • Past Achievements: Over the past decade, disinvestment has generated over ₹4.20 lakh crore, but the current fiscal year’s target appears challenging.
    • FY24 Target: The government set a disinvestment goal of ₹51,000 crore for FY24, a reduction from the previous year’s estimate.
    • Major PSUs on Hold: Plans for the privatisation of Bharat Petroleum Corporation Ltd (BPCL), Shipping Corporation of India (SCI), and CONCOR have been deferred.
    • Progress So Far: Approximately ₹10,049 crore, or 20% of the budgeted amount, has been raised through IPOs and OFS.
    • Pipeline Projects: Strategic sales of CPSEs like SCI, NMDC Steel Ltd, BEML, HLL Lifecare, and IDBI Bank are planned but face delays due to various procedural hurdles.

    Factors Influencing Disinvestment

    • Political Considerations: Strategic disinvestment decisions are being influenced by the upcoming elections, leading to a cautious approach.
    • Challenges in Strategic Sales: The sale process involves multiple stakeholders and complex procedures, making it a lengthy affair.
    • Public and Political Resistance: Certain sectors, particularly defence and shipping, face opposition to privatisation, causing delays and policy reassessments.
    • Economic Think Tank Views: Observers note a recent slowdown in PSU stake sales, attributed to regulatory processes, global economic volatility, and shifting government priorities.

    Historical Context and Government Policy

    • Post-2014 Strategy: Since 2014, the government has revived its disinvestment policy, focusing on stake sales and listing of PSEs on the stock market.
    • Union Budget 2023-24: The disinvestment target for FY24 is the lowest in seven years, with the government yet to meet the target for 2022-23.
    • Reasons for Disinvestment: The government undertakes disinvestment to reduce fiscal burdens, finance deficits, invest in development, and retire debt.
    • Types of Disinvestment: The process includes minority disinvestment, majority divestment, and complete privatisation, managed by the Department of Investment and Public Asset Management (DIPAM).

    Recent Disinvestment Performance

    • Meeting Targets: The government has met its disinvestment targets only twice since 2014.
    • Challenges in Execution: Strategic sales have been complicated by various factors, including market volatility and political opposition.

    Future of Disinvestment in 2023-24

    • No New Additions: The government plans to continue with the already announced privatisation of state-owned companies without adding new ones.
    • Challenges and Vision: Observers suggest that disinvestment should align with the government’s long-term vision for privatisation and sectoral presence, rather than being driven solely by revenue needs.

    Conclusion

    • Strategic Policy Shifts: The government’s disinvestment strategy is evolving, balancing between raising revenues and managing political and public sentiments.
    • Impact of Upcoming Elections: With general elections approaching, the focus on disinvestment might shift, impacting the progress and priorities of stake sales.

  • [pib] RAMP Programme

    Central Idea

    • Union Minister for MSME launched three sub-schemes under the RAMP (Reforms and Acceleration in MSME Performance) programme.

    About RAMP Programme

    Details
    About World Bank assisted Central Sector Scheme.
    Launch FY 2022-23
    Supported By Ministry of Micro, Small and Medium Enterprises (MoMSME), Government of India.
    Primary Aim – Improve access to market and credit for MSMEs.

    – Strengthen institutions and governance.

    – Enhance Centre-State linkages and partnerships.

    – Address delayed payments and promote greening of MSMEs.
    Key Components – Preparation of Strategic Investment Plans (SIPs) by states/UTs.

    – Apex National MSME Council for monitoring and policy overview.

    Details of the Launched Schemes

    MSME Green Investment and Financing for Transformation Scheme (MSME GIFT Scheme) MSE Scheme for Promotion and Investment in Circular Economy (MSE SPICE Scheme) MSE Scheme on Online Dispute Resolution for Delayed Payments
    Objective To assist MSMEs in adopting green technology. The government’s first scheme to support circular economy projects in the MSME sector. Combines legal support with IT tools and Artificial Intelligence to address delayed payments issues.
    Support Mechanisms Offers interest subvention and credit guarantee support. Aims to achieve zero emissions by 2070 through credit subsidy. Focused on aiding Micro and Small Enterprises.
    Unique Features – Encourages eco-friendly practices in MSMEs.

    – Financial incentives for green technology adoption.

    		 – Promotes sustainable and eco-friendly business models.

    – Supports long-term environmental goals.

    		 – Innovative use of technology for dispute resolution.

    – Aims to streamline payment processes and reduce conflicts.

  • Call for Reform in Sovereign Credit Rating Process  

    Central Idea

    • India’s Chief Economic Adviser, V Anantha Nageswaran, emphasizes the need for reform in the sovereign credit rating process.
    • The aim is to accurately reflect the default risk of developing economies and reduce their funding costs.

    What are Sovereign Credit Ratings?

    • A sovereign credit rating is a measure of a country’s creditworthiness, or its ability to meet its financial obligations.
    • It is an assessment of the credit risk associated with a country’s bonds or other debt securities.
    • The rating is assigned by credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings.
    • S&P and Fitch rate India ‘BBB-‘ and Moody’s ‘Baa3’, all indicative of the lowest possible investment grade, but with a stable outlook.

    India’s Pursuit of a Credit Rating Upgrade

    • Current Rating: India is at the lowest possible investment grade but is seeking an upgrade due to improved economic metrics post-pandemic.
    • Government Engagement: Continuous efforts are being made to engage with global credit rating agencies for an improved rating.

    Challenges in the Current Rating Methodology

    • Opacity and Impact: CEA points out the opaqueness in rating methodologies and the difficulty in quantifying the impact of qualitative factors.
    • Bandwagon Effects and Biases: The significant presence of qualitative factors leads to cognitive biases and concerns about the credibility of ratings.

    India’s Engagement with Rating Agencies

    • Meetings with Top Agencies: Finance ministry officials have met with representatives from Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings.
    • Current Ratings: While S&P and Fitch rate India at BBB, Moody’s rates it at Baa3 with a stable outlook.

    Parameters and Issues in Sovereign Rating

    • Typical Parameters: Agencies consider factors like growth rate, inflation, government debt, and political stability.
    • Qualitative Component: Over half the ratings are determined by qualitative factors, often non-transparent and perception-based.
    • Dominance in Ratings: Institutional Quality, often measured by World Bank’s Worldwide Governance Indicators (WGIs), is a significant determinant for developing economies.
    • Issues with WGIs: These metrics are non-transparent, perception-based, and may not represent a sovereign’s willingness to pay.

    CEA’s Recommendations  

    • Need for Transparency: Sovereigns are expected to be transparent; similarly, rating agencies should make their processes clear and avoid untenable judgments.
    • Potential Benefits: Enhanced transparency could lead to more reliance on hard data and possible credit rating upgrades for many sovereigns.
    • Access to Private Capital: Improved ratings can help developing countries access private capital crucial for addressing global challenges like climate change.
    • India’s Export Targets: With initiatives like production-linked incentives and Make in India, India aims for a $2 trillion export target by 2030.

    Conclusion

    • Advocacy for Change: Nageswaran’s comments highlight the need for a more equitable and transparent sovereign credit rating process.
    • Broader Implications: Such reforms could not only benefit developing economies like India by reducing funding costs but also contribute to a more accurate and fair global financial system.

  • India Tops Global Remittance Inflows in 2023: World Bank Report

    remittance

    Central Idea

    • In 2023, India witnessed the highest remittance inflows globally, amounting to USD 125 billion.
    • The surge was influenced by various factors, including India’s currency agreement with the UAE.

    World Bank’s Analysis on Remittance Growth

    • Report Findings: The World Bank’s report indicates a slowdown in remittance growth in India to 12.4% in 2023, down from 24.4% in 2022.
    • Increased Share in South Asia: India’s share in South Asian remittances is expected to rise to 66% in 2023 from 63% in 2022.

    Global Remittance Scenario

    • Other Leading Countries: Following India, the top remittance-receiving countries are Mexico (USD 67 billion), China (USD 50 billion), the Philippines (USD 40 billion), and Egypt (USD 24 billion).
    • Significance in GDP: In economies like Tajikistan, Tonga, Samoa, Lebanon, and Nicaragua, remittances form a substantial part of the GDP, highlighting their critical economic role.

    Contributing Factors for India

    • Key Drivers: Declining inflation and robust labor markets in high-income countries contributed to increased remittances.
    • Major Sources: Significant remittance flows came from the US, the UK, and Singapore, as well as from the GCC, particularly the UAE.
    • UAE’s Role: The UAE is the second-largest source of remittances to India, accounting for 18% of the total.

    India-UAE Currency Agreement Impact

    • February 2023 Agreement: The agreement to promote local currency use in cross-border transactions and interlink payment systems has boosted remittances.
    • Dirhams and Rupees Usage: The use of dirhams and rupees in transactions is expected to channel more remittances through formal channels.

    Global Remittance Trends

    • Growth in Low- and Middle-Income Countries: Remittances to these countries grew by an estimated 3.8% in 2023.
    • Future Concerns: There is a risk of real income decline for migrants in 2024 due to global inflation and low growth prospects.

  • RBI tightens norms for Alternative Investment Funds (AIFs)

    Central Idea

    • The Reserve Bank of India (RBI) has introduced tighter norms for Regulated Entities (REs) to curb the practice of evergreening loans through investments in Alternative Investment Funds (AIFs).
    • The norms apply to all banks, all India Financial Institutions, and Non-Banking Financial Companies (NBFCs), including Housing Finance Companies.

    About Alternative Investment Funds (AIFs)

    Details
    Definition AIFs are privately pooled investment vehicles established in India, collecting funds from sophisticated investors for investing.
    Regulation Governed by the SEBI (Alternative Investment Funds) Regulations, 2012.
    Formation Can be formed as a company, Limited Liability Partnership (LLP), trust, etc.
    Investor Profile Aimed at high rollers, including domestic and foreign investors in India. Generally favored by institutions and high net worth individuals due to high investment amounts.
    Categories of AIFs Category I: Invests in start-ups, early-stage ventures, SMEs, etc. Includes venture capital funds, angel funds, etc.

    Category II: Includes funds not in Category I/III, like real estate funds, debt funds, etc. No leverage or borrowing except for operational requirements.

    Category III: Employs complex trading strategies, may use leverage. Includes hedge funds, PIPE Funds, etc.
    Fund Structure Category I and II AIFs must be close-ended and have a minimum tenure of three years.

    Category III AIFs can be open-ended or close-ended.

    Background and Regulatory Concerns

    • Investment Practices: REs often invest in units of AIFs as part of their regular investment operations.
    • RBI’s Observations: The RBI noted certain transactions involving AIFs that substituted direct loan exposure with indirect exposure, raising regulatory concerns.

    RBI’s New Guidelines

    • Restriction on Investments: REs are prohibited from investing in any AIF scheme that indirectly or directly has downstream investments in a debtor company of the RE.
    • Mandatory Liquidation: If an AIF scheme, where an RE is already an investor, makes a downstream investment in a debtor company, the RE must liquidate its investment in the scheme within 30 days from the date of such investment by the AIF.
    • Provision for Existing Investments: For existing investments in such schemes, REs have 30 days from the issuance of the circular to liquidate. Failure to do so requires them to make a 100% provision on these investments.
    • Capital Fund Deductions: Investments by REs in subordinated units of any AIF scheme with a ‘priority distribution model’ are subject to full deduction from the RE’s capital funds.

  • Hindutva Rate of Growth: Debates and Comparisons in the Indian Economy

    Central Idea

    • A popular orator and a Parliamentarian, introduced the term “Hindutva rate of GDP growth” during the discussion.
    • This term is distinct from the ‘Hindu rate of growth’, a phrase coined by economist Raj Krishna in 1982 to describe India’s modest growth rate of 3.5%.

    Understanding the ‘Hindutva Rate of Growth’

    • Argument: The MP attributed India’s recent economic growth, including a 6.3% GDP growth rate, to the policies of Prime Minister Narendra Modi, aligning spending with ‘Dharma (the order)’.
    • Historical and Religious Context: He linked economic transformations to key events in India’s history, including the Ram Temple movement and the Supreme Court’s Babri Masjid judgment.

    Comparative Analysis of Growth Rates

    • Per Capita Income Disparity: Despite high GDP growth rates, India’s per capita income remains low compared to developed countries.
    • Post-Covid Growth Calculation: 7.8% ‘Hindutva rate of growth’ refers to the average GDP growth post-Covid, excluding the year of the pandemic.
    • Comparison with ‘Hindu Rate of Growth’: Including the Covid year in calculations, the growth rate closely resembles the criticized ‘Hindu rate of growth’.

    Economic Growth during Different Governments

    • Growth under Modi vs. UPA: The average GDP growth rate under PM Modi is 5.8%, compared to 6.8% under the Congress-led UPA.
    • Impact of Global Crises: Both governments faced major global crises, with the UPA dealing with the Global Financial Crisis and the Modi government facing the Covid-19 pandemic.
    • Historical Growth Trends: Comparing growth rates across different eras, including PM Vajpayee’s and PM Narasimha Rao’s tenures, provides a broader perspective on India’s economic trajectory.

    Conclusion

    • Similarity to Historical Growth Rates: The ‘Hindutva rate of growth’ closely aligns with historical growth rates, challenging its portrayal as a significant departure from the past.
    • Electoral Implications: The discussion raises questions about the role of economic performance in India’s electoral politics, especially in the context of the BJP’s focus on ‘Hindutva’.