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GS Paper: Indian Economy

  • RBI’s gold reserves rise to 794.64 tonne

    Central Idea: The RBI has increased its gold reserves by 34.22 tonnes YoY to reach 794.64 tonnes at the end of March 2023, according to the central bank’s data.

    What are Gold Reserves?

    • Gold reserves refer to the physical gold holdings that a central bank or a country holds as a part of its foreign exchange reserves.
    • Central banks may acquire gold reserves through various means, including purchases from other central banks, international organizations, or commercial banks, and from domestic production or importation.
    • Gold reserves are typically held in the form of gold bars, which are stored in secure vaults or depositories.

    Why Gold?

    • Gold is considered a safe-haven asset and has been historically used to back a country’s currency.
    • Holding gold reserves is seen as a way to hedge against inflation, currency fluctuations, and other economic uncertainties.

    Significance of Gold Reserves

    • Economic stability: Gold reserves are often seen as a symbol of economic stability and confidence, especially during times of financial crisis or uncertainty. Holding gold reserves can help central banks to maintain the stability of their currency and the economy.
    • Diversification: Gold is considered a safe-haven asset and can provide diversification to a country’s foreign exchange reserves portfolio. Diversification helps to reduce the risks associated with any single asset class.
    • Hedge against inflation: Gold is considered an inflation hedge as its value tends to increase during times of high inflation or when the value of a currency is depreciating. Holding gold reserves can help to protect the purchasing power of a country’s currency.
    • International transactions: Gold reserves can be used as collateral for loans and international transactions. Countries can also use gold reserves to settle international debts.
    • Confidence-building: The level of a country’s gold reserves can be an indicator of the country’s financial strength and stability. High levels of gold reserves can help to build confidence among investors and other countries.

    Breakdown of RBI’s gold reserves

    • Total: As of March-end 2023, the RBI held 794.64 metric tonnes of gold, including gold deposits of 56.32 metric tonnes.
    • Domestic and abroad: Out of the total gold reserves, 437.22 metric tonnes of gold is held overseas in safe custody with the Bank of England and the Bank of International Settlements (BIS), while 301.10 metric tonnes of gold is held domestically.

    How much do these gold reserves value?

    • In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 7.06% as of September-end 2022 to about 7.81% as of March-end 2023, as per the RBI’s report.
    • During the half-year period, the reserves increased from $532.66 billion as of September-end 2022 to $578.45 billion as of March-end 2023.

     

    New terminologies

    Foreign currency assets (FCA): a component of forex reserves that includes major traded currencies held by the central bank of a country.

    Special drawing rights (SDRs): an international reserve asset created by the International Monetary Fund (IMF) to supplement member countries’ official reserves.

    Reserve tranche position: a component of IMF’s financial accounts that represents a country’s reserve position in the organization.

    Back2Basics: Foreign Exchange (Forex) Reserve

    • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
    • They are commonly used to support the exchange rate and set monetary policy.
    • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
    • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
    • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

    India’s forex reserves cover:

    1. Foreign Currency Assets (FCAs)
    2. Special Drawing Rights (SDRs)
    3. Gold Reserves
    4. Reserve position with the International Monetary Fund (IMF)

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  • Europe de-recognizes 6 Indian clearing corporations

    Central Idea

    • The European Securities and Markets Authority (ESMA) has de-recognised 6 clearing corporations in India as Third Country Central Counterparty (TC-CCP) with effect from April 30.
    • However, it allowed European banks to continue business with them till April 2023 without penal consequences.

    What are Clearing Corporations?

    • Clearing corporations, also known as central counterparties (CCPs), are financial institutions that act as intermediaries between buyers and sellers in financial markets.
    • They help to manage the risk of default by ensuring that each party involved in a trade has the necessary funds or securities to fulfil their obligations.
    • Clearing corporations also ensure that trades are settled in a timely and efficient manner.
    • In the context of this article, clearing corporations refer to those involved in the clearing and settlement of trades in India’s cash and derivatives market.

    Decisions by ESMA

    • ESMA has withdrawn recognition of six Indian clearing corporations including- CCIL, Indian Clearing Corporation Ltd, NSE Clearing Ltd, Multi Commodity Exchange Clearing, India International Clearing Corporation, and NSE IFSC Clearing Corporation.
    • ESMA asked Indian regulators to sign an agreement to give it the power to monitor and supervise the clearing corporations.
    • Indian regulators refused to give supervisory power to foreign entities in Indian clearing corporations.
    • ESMA recognised these clearing corporations as Third Country Central Counterparty (TC-CCP) in the EU region.

    India’s rebuttal

    • ESMA had asked the RBI and the Securities and Exchange Board of India (SEBI) to sign an agreement giving it the power to monitor and supervise the clearing corporations.
    • Indian regulators did not agree to give supervisory power to a foreign entity on Indian clearing corporations.

     

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  • CBDC for efficient Cross-Border Payment

    cbdc

    Central Idea: RBI Deputy Governor T. Rabi Shankar commented on CBDC platforms and their potential impact on cross-border payments during the G20 TechSprint.

    About Central Bank Digital Currency (CBDC)

    • CBDC is a central bank-issued digital currency which is backed by some kind of assets in the form of either gold, currency reserves, bonds and other assets, recognised by the central banks as a monetary asset.
    • The present concept of CBDCs was directly inspired by Bitcoin, but a CBDC is different from virtual currency and cryptocurrency.
    • Cryptocurrencies are not issued by a state and lack the legal tender status declared by the government.

    Hurdles in Cross-Border Payments

    • Fragmented and truncated data formats: Lack of standardization in data formats creates inefficiencies in cross-border payments. Fragmented and truncated data formats create additional costs and delays in the processing of transactions.
    • Complex processing of compliance checks: Cross-border payments require compliance with different regulatory frameworks in different jurisdictions. Compliance checks can be complex and time-consuming, causing delays and additional costs.
    • Limited operating hours: Traditional banking systems have limited operating hours, which can cause delays in cross-border payments. International time zone differences also contribute to these challenges.
    • Legacy technology platforms: Traditional banking systems still rely on legacy technology platforms, which can be slow and outdated. This can lead to inefficiencies and delays in cross-border payments.
    • Long transaction chains: Cross-border payments often involve multiple intermediaries, which can lead to long transaction chains. Each intermediary adds additional costs and can increase the time it takes for a transaction to be completed.
    • Funding costs: Cross-border payments require funding in multiple currencies, which can lead to additional costs. Exchange rate fluctuations can also impact the cost of cross-border payments.
    • Weak competition: The lack of competition in the cross-border payments industry can contribute to inefficiencies and high costs. The dominance of a few large players can limit innovation and hinder the development of more efficient solutions.

    Potential benefits with CBDC

    • Less intermediaries: CBDC can reduce the need for multiple intermediaries in cross-border payments, leading to a faster and more efficient process.
    • Enhanced efficiency: It can increase the speed and efficiency of cross-border payments by reducing processing times and delays.
    • Enhanced integration: It can enable better integration between different payment systems, reducing fragmentation and increasing interoperability.
    • Enhanced technical compatibility: It can be designed to work with existing payment infrastructure, making it easier to adopt and integrate into the current system.
    • Enhanced safety: It can provide enhanced security measures that can help mitigate the risk of fraud and cyber-attacks in cross-border payments.
    • Mitigation of cross-currency risks: CBDC can help mitigate risks associated with cross-border and cross-currency transactions, such as exchange rate fluctuations, currency conversion fees, and transaction processing delays.

    How can this be implemented to practice?

     

    Description Examples
    Model 1 Enhancing Compatibility Among Domestic CBDC Systems Many central banks are working to enhance the compatibility of domestic CBDC systems. Common international standards are required, which require regulatory coordination and market practices.
    Model 2 Interlinking CBDC Systems CBDC networks are linked up by synchronizing payment actions without the need for a trusted third party or a common platform.
    Model 3 Establishing a Single mCBDC System Cross-border payments are processed through a jointly operated “corridor network”.

     

    RBI’s push for CBDC adoption @ G20

    • RBI emphasized the need for increased adoption of CBDCs across countries for them to play a role in the cross-border payments arena.
    • Countries need to decide to create CBDCs and create an infrastructure for various CBDCs to interface for CBDCs to be effective in cross-border payments.
    • RBI suggested India’s model of digitization, where the basic infrastructure was created by the public sector and the fintech/financial/start-up ecosystem was allowed to create innovative solutions, could also be successful with CBDCs globally

    Conclusion

    • CBDCs could bring about a significant change in the sphere of cross-border payments, but coordination across countries and between the public and private sectors is essential for that to happen

     

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  • Rural Real Wage Growth In India: The Importance of Accurate Data analysis

    Central Idea

    • Rural real wage growth is a crucial indicator of the well-being of individuals, particularly the poor, in India. Jean Dreze, a respected economist claims that rural real wage growth in India has been sluggish despite rapid economic growth. However as per Surjit Bhalla another economist, Dreze’s findings are based on weak statistical analysis and incomplete data. Surjit Bhalla’s and presents his own findings, which suggest higher wage growth rates for construction workers, non-agricultural laborers, and agricultural laborers.

    Contrast results for instance

    • For construction workers, Dreze obtains a rate of growth (CAGR) of just 0.2 per cent (actually 0.15 per cent); However, CAGR stands at eight times larger at 1.2 per cent.
    • For non-agricultural labourers (porters and loaders) the same yawning divergence: Dreze obtains 0.3 per cent, whereas it stands 1.2 per cent, and for agricultural labourers, 0.9 per cent vs 1.5 per cent.

    What is CAGR?

    • CAGR stands for Compound Annual Growth Rate. It is a measure used to calculate the average growth rate of an investment over a certain period of time, assuming that the investment has grown at a steady rate each year.
    • It takes into account the effect of compounding, which means that the investment’s growth in one year is added to the base value of the investment, and the total amount is then used to calculate growth for the next year.
    • CAGR is often used in finance to compare the performance of different investments or to forecast future growth.

    Why are the two results so different?

    • Differences in Method of Estimation: Dreze uses semi-log regression on eight observations to estimate the compound annual growth rate (CAGR) for each of three male occupations. His estimate of CAGR is not even significant at the 11 per cent level of confidence for two of these occupations – construction and non-agricultural laborers. Dreze does not uses a population-weighted average of year-on-year growth for each of the 38 sex-occupation categories to estimate CAGR accurately.
    • Differences in Time Period of Analysis: Surjit Bhalla also criticizes Dreze’s chosen time period of analysis, 2014-2021. As per Surjit Bhalla, that no study combines pre-Covid and Covid years without even a mention of the difference. Surjit Bhalla presents data for three time periods, including the normal 2014-2018, Covid 2019-2021, and all years 2014-2021.

    Why accurate rural wage data is important?

    • Poverty alleviation: Rural wage data is used to determine the poverty levels in a country, and accurate data is essential for effective poverty alleviation policies.
    • Income inequality: Accurate rural wage data can help policymakers understand the level of income inequality in rural areas and design policies to reduce it.
    • Agricultural productivity: Rural wage data is used to assess the productivity of the agricultural sector, which is a key source of income for rural households.
    • Labor market trends: Accurate rural wage data helps policymakers understand the trends in the rural labor market, such as changes in demand for different types of labor, and design policies to support employment growth.
    • Minimum wage determination: Accurate rural wage data is necessary for determining minimum wages for rural workers, which is important for protecting the rights of workers and reducing labor exploitation.
    • Social protection: Rural wage data is used to design social protection programs such as cash transfers, food subsidies, and public works programs to support the poorest households in rural areas.
    • Macro-economic policy: Rural wage data is used to inform macro-economic policies such as inflation targeting and monetary policy, as well as to evaluate the effectiveness of such policies on rural households.

    Conclusion

    • The issue of rural real wage growth in India is complex and requires a nuanced understanding of data selection, treatment, intensity, and estimation. There is need for a more comprehensive set of data and a different method of estimation.

    Mains Question

    Q. What is Compound Annual Growth Rate (CAGR). Why do you think, accurate rural wage data is so important?

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  • Indian Economic Growth Prospects: A Comprehensive Analysis

    Growth

    Central Idea

    • India has had an established track record of high growth, with an average annual GDP growth of 6.6% in the decade leading up to the Covid-19 pandemic. In fiscal 2023, India is seen growing at 7%, making it the fastest-growing large economy. But with an imminent global slowdown and the full manifestation of the lagged impact of interest rate hikes since May 2022, the economy is expected to decelerate and grow at 6% in fiscal 2024.

    Indian economic growth prospects

    • Growth accounting: Growth accounting provides a useful framework to analyse medium-term prospects by decomposing their drivers into the contribution of capital, labour and efficiency.
    • Economic growth next five years: Indian economy expected to grow at 6.8 per cent per year for the next five years with 52 per cent of it from capital, 38 per cent from efficiency and 10 per cent from labour.
    • Changing growth model: The growth model is changing to an infrastructure and manufacturing-driven one.
    • Capital spending: The Union Budget has raised capital spending by almost a third in high-multiplier infrastructure segments. But such support to capex will moderate in the years to come, given fiscal consolidation pressures.
    • Investment ratio: Investment as a percentage of GDP has already touched a decadal high of 34 per cent in fiscal 2023. So far, the onus to lift the investment ratio has been shouldered by the government. The contribution of the private sector to investments is set to improve, primed as it is with healthier balance sheets, cash reserves and low leverage.
    • Contribution of productivity to growth: The creation of physical and digital infrastructure in conjunction with efficiency-enhancing reforms will raise the contribution of productivity to growth. The economy is expected to continue seeing efficiency gains from reforms such as GST and Insolvency and Bankruptcy Code (IBC).

    What is holding back a swift and broad-based lift in private investments?

    • Economic uncertainty, primarily, and geopolitical events to a lesser extent.
    • Sustainability challenge looms for the manufacturing sector as manufacturing and infrastructure growth are carbon-intensive.
    • Low-quality skilling of the workforce is holding back its contribution to growth.
    • Quality and the skilling of the workforce
    • Falling labour force participation of women

    What is holding back in Labour’s contribution to growth?

    • Labour’s contribution to growth is likely to be low not because India does not have sufficient people in the working-age group, this cohort is 67 per cent of the population and is set to expand by 100 million over the next decade. It is the quality and skilling of the workforce that is holding it back.

    Why private investment is essential for Indian economic growth?

    • Capital formation: Private investment helps in creating capital formation, which is essential for economic growth. It helps in building infrastructure, creating jobs, and generating income, which in turn drives consumer spending and boosts economic growth.
    • Innovation: Private investment is often associated with innovation and technological advancements. Companies that invest in research and development (R&D) can develop new products and processes that can boost productivity and create new markets. This, in turn, can lead to increased profits and more investment in R&D, creating a virtuous cycle of innovation and growth.
    • Employment: Private investment creates jobs, which is critical for economic growth and development. When companies invest in new projects or expand their operations, they often need to hire additional workers, which reduces unemployment and boosts consumer spending.
    • Foreign investment: Private investment is also an important driver of foreign investment. When companies invest in India, they often bring new technology, skills, and expertise that can help boost local industries and drive economic growth.
    • Tax revenue: Private investment can also help increase tax revenues, which can be used by the government to fund public goods and services such as education, healthcare, and infrastructure.

    Steps taken by the government to encourage private investment

    • Investment-Friendly Policies: The Indian government has launched several investment-friendly policies, such as Make in India, Start-up India, and Digital India, to encourage private investment in the country.
    • Infrastructure Development: The government is investing heavily in infrastructure development, including roads, railways, airports, and ports, to create a conducive environment for private investment.
    • Tax Reforms: The Indian government has implemented several tax reforms, such as the Goods and Services Tax (GST), to simplify the tax structure and make it more investor-friendly.
    • FDI Liberalization: The government has liberalized foreign direct investment (FDI) norms in several sectors, including defense, insurance, and retail, to attract more foreign investment.
    • Insolvency and Bankruptcy Code (IBC): The government has implemented the Insolvency and Bankruptcy Code (IBC), which has made it easier for businesses to exit, and has increased investor confidence in the Indian economy.
    • Production Linked Incentives (PLI): The government has launched the Production Linked Incentives (PLI) scheme to encourage manufacturing in India and make it more competitive globally.
    • Easing of Business Regulations: The Indian government has eased several business regulations to improve the ease of doing business in the country and attract more private investment.
    • Skill Development: The government has launched several initiatives, such as Skill India and Pradhan Mantri Kaushal Vikas Yojana, to develop the skills of the Indian workforce and make it more attractive to investors.

    Facts for prelims: Steps taken by the government to encourage labour force participation of women

    Initiatives

    Description
    Maternity Benefit Programme A scheme to provide financial assistance to pregnant women and lactating mothers for their health and nutrition needs.
    Pradhan Mantri Ujjwala Yojana A scheme to provide LPG connections to women from Below Poverty Line households.
    National Urban Livelihood Mission A programme to provide self-employment opportunities and skill development training to urban poor women.
    National Rural Livelihood Mission A scheme to provide self-employment opportunities and skill development training to rural women.
    Mahila E-Haat A digital platform to provide a market for women entrepreneurs to sell their products online.
    Beti Bachao Beti Padhao A campaign to address the declining child sex ratio and to promote education among girls.
    Sukanya Samriddhi Yojana A savings scheme for the girl child to ensure their education and marriage expenses are taken care of.

     Way ahead

    • Focus on green transition: As the manufacturing and infrastructure growth are carbon-intensive, so it’s important to have a significant and simultaneous focus on green transition. Having a high sustainability quotient can only embellish India’s credentials as a production destination.
    • For instance: Research suggests that between fiscals 2023 and 2027, over 15 per cent of India’s capex could be towards green initiatives involving renewable energy, transportation, altering the fuel mix, and green hydrogen. In the fragmented geopolitical milieu, which is shifting towards supply-chain diversification and friend shoring, India can attract foreign investments.
    • Enhancing labour force participation of women: The labour force participation of women is falling. This will have to be reversed through employment policies and investing in the health and education of women.
    • For instance: According to a World Bank report in 2018, India could add 1.5 percentage points to its GDP growth by improving the participation of women in its workforce.

    Growth

    Conclusion

    • India is going to become a $5 trillion economy by fiscal 2029, given the current growth dynamics. However, the impact of climate risk mitigation will be felt across revenue, commodity prices, export markets, and capital spending. To win the growth marathon, India’s focus must be sharp on the drivers of pace.

    Mains Question

    Q. Highlight India’s growth prospects in the next five years? Discuss the significance of private investment for economic growth and enlist factors that holding back the private investment.

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  • What is the Consumer Confidence Index (CCI)?

    confidence

    Central idea

    • The Consumer Confidence Survey was conducted in the first half of March 2023 across 19 cities.
    • This article analyses the survey results, released this month, and breaks down the findings under different sections.

    What is Consumer Confidence Survey?

    • The Reserve Bank of India (RBI) conducts a Consumer Confidence Survey to measure consumers’ perceptions of the prevailing economic situation.
    • The survey is conducted across various cities and measures consumer confidence on parameters such as the economy, employment, price, income, and spending.
    • The survey consists of questions regarding consumers’ sentiments over various factors in the current situation and future.

    Here are a few parameters that help aggregate overall confidence:

    1. Spending: The consumer is asked about the willingness to spend on major consumer durables, purchasing vehicles, or real estate. This measures the overall spending scenario on necessities as well as luxuries for the next quarter.
    2. Employment: The consumer is asked about current and future ideas on employment situations, joblessness, job security, which reflects the sentiments of the current or expected employment in the country.
    3. Inflation: The consumer is asked about interest rates and levels of prices of all goods, tracking the price expected by consumers and their spending on basic necessities.

    About the Consumer Confidence Index (CCI)

    • CCI is a survey that is conducted every two months to measure how optimistic or pessimistic the consumers are regarding their financial situation.
    • The index measures the change in consumer perception on the financial situation in the last year and the future expectations index measures what the consumer thinks about his financial situation in the coming one year.
    • The main variables of the survey are: Economic situation, Employment, Price Level, Income and Spending.

    Current perceptions of the survey

    • The survey estimates current perceptions and a year-ahead expectations on the economy, employment, price, income, and spending.
    • The results show that consumer confidence continues to recover from its historic low of mid-2021, but still remains pessimistic at 87.0, a 2.2 point increase from previous results.
    • The assessment of inflation conditions improved for the current period reflecting a higher confidence in prevailing economic conditions.
    • With regards to spending, sentiments were positive with signs of improvement compared to the last round conducted in January 2023.

    What does this imply?

    • The survey shows that while consumer confidence is slowly recovering, it still remains pessimistic.
    • The survey results indicate positive sentiments on employment and spending, but a marginal dip in the country’s future economic situation.
    • Credit growth numbers indicate a rise in consumer spending.
    • The upcoming state and general elections could have an impact on the economy, and it remains to be seen how it will play out.

     

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  • Mapping India’s Export Hotspots

    export

    Central idea: The article discusses the top exporting districts in India and their contribution to the country’s overall exports. It also provides information on the top exported commodities in each district.

    Top Exporting Districts in India

    Rank District State Share of India’s Exports
    1 Jamnagar Gujarat 24%
    2 Surat Gujarat 4.5%
    3 Mumbai Suburban Maharashtra 4.5%
    4 Dakshina Kannada Karnataka –
    5 Devbhumi Dwarka, Bharuch, Kachchh Gujarat –
    6 Mumbai Maharashtra –
    7 Kancheepuram Tamil Nadu –
    8 Gautam Buddha Nagar Uttar Pradesh –

     

    Top Exporting Districts in Each State

    • Map 1 shows the district that formed the highest share of a State’s exports in FY23.
    • The size of the circle in the map corresponds to the value of exports.
    • Most top exporting districts in the north-eastern States formed as much as 90% of a State’s exports, while some top exporting districts formed only around 20% of a State’s exports.

    Top Exported Commodities

    • Jamnagar’s dominance can be attributed to the fact that it formed a lion’s share of India’s surging petroleum exports, while Kancheepuram’s most exported commodity was smartphones.
    • Map 1 also lists the top exported commodity of the top exporting districts in each State.

    Top Exporting Districts for Each Commodity

    • Maps 2A-2F show the top five exporting districts for the top six commodities exported by India.
    • They include petroleum products, precious stones and jewellery, rice, wheat and other cereals, smartphones and electronic parts, vehicles other than railways, and pharmaceutical products.

    Share of Top Exporting Commodity

    • Table 3 shows the share of the top exporting commodity of the top exporting district in India’s total exports.
    • For instance, Jamnagar’s petroleum products export formed 67% of India’s total exports for that commodity, while Surat’s precious stones and jewellery exports formed 36% of India’s total exports for that commodity.

     

  • India’s Forex Reserves rise $6.30 bn to $584.75 bn

    forex

    India’s forex reserves increased by $6.306 billion to $584.755 billion last week, according to the Reserve Bank of India (RBI).

    Why discuss this?

    • In October 2021, India’s forex reserves reached an all-time high of $645 billion.
    • Since then, the reserves have been declining.

    What is Foreign Exchange (Forex) Reserve?

    • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
    • They are commonly used to support the exchange rate and set monetary policy.
    • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
    • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
    • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

    India’s forex reserves cover:

    1. Foreign Currency Assets (FCAs)
    2. Special Drawing Rights (SDRs)
    3. Gold Reserves
    4. Reserve position with the International Monetary Fund (IMF)

    Countries with the highest foreign reserves

    • Currently, China has the largest reserves followed by Japan and Switzerland.
    • India earlier overtook Russia to become the fourth-largest country with foreign exchange reserves. (Data from August 2022)
    1. China – $3,349 Billion
    2. Japan – $1,376 Billion
    3. Switzerland – $1,074 Billion
    4. Russia – $597.40 Billion

    Why are these reserves so important?

    • All international transactions are settled in US dollars and, therefore, required to support India’s imports.
    • More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
    • It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis.
    • Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.

    Initiatives taken by the government to increase forex

    • To increase the foreign exchange reserves, the Government of India has taken many initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
    • Other than AatmaNirbhar Bharat, the government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
    • Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves.

  • Inflation in India is Driven by Food Prices

    Inflation in India

    Central Idea

    • The recent trajectory of inflation in India is attributed to the pricing power of five big corporates or ‘Big 5’ according to former Deputy Governor of Reserve Bank of India, Viral Acharya. However, the argument is flawed as the Indian inflation is different from the rest of the world, and it is driven by food price inflation. While corporate pricing power does exist, it is limited, and the extent to which it drives overall inflation is still debatable.

    The factor of food price inflation

    1. Divergence between Indian and Western inflation rates is not new:
    • Sudden surge of Inflation in India: After the global financial crisis of 2008, Indian inflation surged higher than the economies of the US and UK due to food price inflation caused by negative agricultural shocks and high procurement price hikes.
    • Core inflation: Food-price inflation tends to feed into core inflation, so it would be hasty to conclude that Indian inflation is higher than the West today due to corporate pricing power.
    • Food price inflation: Evidence suggests that in India, food price inflation affects core inflation, and food price inflation enters costs of the non-agricultural sector.
    1. Corporate pricing power in India:
    • Corporate pricing power and overall inflation: Corporate pricing power exists in Indian industry, but the extent to which it drives overall inflation in India is debatable. The question is how much corporate power is driving inflation beyond its obvious role in elevating the price level.
    • Prices of food: To measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
    • Inflation control strategy: India’s inflation control strategy needs to address the challenge of ensuring the production of food at affordable prices.
    1. Comparing WP inflation with CP inflation
    • Comparing WP inflation with CP inflation is to acquiesce in a mismatch.
    • The commodity basket corresponding to CP includes items that do not enter the wholesale price index, so we would be comparing apples with oranges.

    Inflation in India

    The argument is based on a short time period

    • WP inflation has eased considerably in the six months preceding March 2023, but CP inflation has not. However, a mismatch between WP and CP inflations is not new.
    • So, the maintenance of high price increases by firms in the retail sector even after wholesale price inflation has declined in 2022-23 may just be a compensating mechanism, i.e., the rising input cost of the retail sector is being passed on with a lag.

    Facts for prelims: WP inflation VS CP inflation

    Aspect Wholesale Price (WP) Inflation Consumer Price (CP) Inflation
    Definition Measures the change in average price level of goods sold by producers at the wholesale level Measures the change in average price level of goods and services purchased by households
    Captures Changes in prices of goods before they reach the retail market Changes in prices of goods and services at the retail level
    Indicator of Early indicator of changes in overall price level of economy Inflation that households experience in their day-to-day lives
    Impact Affects production cost and supply chain Affects purchasing power of consumers
    Calculation Based on price changes of goods sold in bulk to retailers or other businesses Based on price changes of goods and services purchased by households
    Usage Used by policymakers to monitor changes in cost of production and production-level inflation Used by policymakers to monitor inflation and make decisions related to monetary policy
    Examples Wholesale prices of raw materials, oil, and other commodities Retail prices of food, clothing, transportation, and other consumer goods and services

    Rising food prices driving current inflation

    • Over 75% of the direct contribution to inflation in the first three quarters of the financial year came from sectors in which the Big 5 are unlikely to be represented in a big way.
    • The contribution of food products alone was close to 50% in most time periods.
    • Rising food prices are driving current inflation in India.

    The current inflation control strategy

    • Considerable rise in food prices: In India, food prices have only risen, and in recent years their rate of inflation has been very high. For all the reforms since 1991, the real price of food, i.e., its price relative to the general price level, has risen considerably.
    • What matters most to public must be considered: In the context, to measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
    • Current strategy restricted to using the interest rate to dampen aggregate demand: India’s inflation control strategy is currently restricted to using the interest rate to dampen aggregate demand. This strategy avoids addressing the challenge of ensuring the production of affordable food.
    • Question mark on RBI’s ability to control inflation: The RBI has been unable to control even the core inflation which central banks are assumed to be able to control. A recent intervention explaining core inflation in India has highlighted the RBI’s inability to control inflation.

    Conclusion

    • Inflation is being discussed only in terms of core inflation, which excludes the inflation in food and fuel prices because these prices tend to fluctuate and even out the changes, so it is assumed that they do not require a policy response. However, this assumption is flawed in the context of India’s economy, as food and fuel prices have a significant impact on the economy and people’s livelihoods. Therefore, limiting the discussion to core inflation ignores the role of corporate pricing power and the impact of food and fuel prices on the economy.

    Mains Question

    Q. What is the factor that primarily drives inflation in India? Highlight the relationship between food price inflation and overall inflation in India?

  • RBI’s Pause On Repo Rate Hike: Concerns Over Inflation And Global Pressures Remain

    RBI

    Central Idea

    • The RBI has decided to not increase the repo rate amid continuing hikes by important central banks such as the US Federal Reserve (Fed) and European Central Bank (ECB), and domestic inflation concerns. However, if incoming data point to rising inflation risks, this decision could prove to be only a pause in the rate hiking cycle.

    The RBI’s decision to pause on rate hikes

    • The RBI feels that money market rates have effectively risen more than the 250-basis-point yank in the repo rate since May 2022, and hence it decided to pause and assess the impact of rate hikes.
    • The key reason behind the MPC decision is the expectation of a decline in inflation to 5.2% in the current fiscal, driven by a healthy rabi crop, normal monsoon, moderating international commodity prices, and the impact of rate hikes.
    • The RBI acknowledges the upside risks and stated its readiness to fight any unexpected rise in inflation.

    Impact on GDP growth

    • The RBI expects GDP growth to slow to 6% from 7% this fiscal as slowing global growth, domestic interest rates, and messy geopolitics bite.
    • Slowing global growth will be net negative for India’s exports, and the growing dependence on commodity exports makes India more vulnerable to global growth volatility.
    • Fiscal 2024 will, therefore, test the resilience of India’s domestic demand amid rising interest rates.

    Reasons for the expected cooling of consumer inflation

    • Fuel inflation expected to reduce: Fuel inflation is expected to reduce to 3% from a high of over 10% in the current fiscal because some easing of crude oil prices is likely as global growth slows down.
    • Decline in core inflation: Slowing domestic growth will ease core inflation from very sticky levels of over 6% last fiscal to 5.5% in the current one. However, the decline in core inflation will be limited as input cost pressures have not dissipated. To protect their margins, firms will continue to pass on input costs to end-consumer. Services inflation will also continue to exert pressure as the rotation of consumption demand from goods to services continues.
    • Moderate food inflation: Food inflation, which has a high weightage in the Consumer Price Index and has driven headline inflation in the past, is projected to moderate to slightly below 5%, assuming a normal monsoon. However, food inflation has always been volatile and carries upside risks largely because of climate-related factors affecting agriculture output and prices.

    How slowing global growth will have a negative impact on India’s exports?

    • The impact of the growth slowdown in the US and Europe is deeper than the recovery in China: The US and Europe have a combined GDP that is twice that of China. Therefore, the impact of the growth slowdown in the US and Europe will be deeper than the recovery in China. This will have a negative impact on India’s exports to the US and Europe.
    • India’s exports to the US and Europe are more than to China by a factor of six: India exports more to the US and Europe than to China by a factor of six. Therefore, the negative impact of the growth slowdown in the US and Europe will be felt more by India than by China.
    • India’s growing dependence on commodity exports makes it more vulnerable to global growth volatility: India’s exports of petroleum products and steel are growing, and this makes India more vulnerable to global growth volatility. As global growth slows down, demand for commodities is likely to decline, which will have a negative impact on India’s exports.

    External vulnerabilities

    • India’s external vulnerability is expected to decline with a narrower current account deficit (CAD) and modest short-term external debt.
    • The CAD is expected to narrow to 2% of GDP this fiscal from an estimated 2.5% last fiscal.

    Conclusion

    • The RBI’s decision to pause on rate hikes is driven by expectations of a decline in inflation. However, inflation risks remain, and the impact of rate hikes on GDP growth is expected to be significant. India’s external vulnerabilities are expected to decline, but the banking turmoil playing out amid interest rate hikes by important central banks and elevated debt levels remains a risk. The RBI’s decision to pause on rate hikes will be closely watched, and further rate hikes may be necessary if inflation risks persist.

    Mains Question

    Q. Enumerate the factors that led RBI to pause on rate hikes, and discuss the potential risks and impacts on the Indian economy?