💥Join UPSC 2027,2028 Mentorship (July Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

GS Paper: Indian Economy

  • India’s equity market bubble

    Context

    Even as the real economy returns to the doldrums after being hit by the second wave of COVID-19 infections, the continuing bull run in India’s equity market in the April-June quarter has baffled many observers.

    V-shaped recovery of equity market

    • The benchmark BSE Sensex had nosedived to below 28,000 in March-April 2020, following the nationwide lockdown.
    • The equity market posted a sharp V-shaped recovery in 2020-21.
    • The Sensex surged beyond 50,000 in February 2021 and is currently closing on the 53,000 level.

    Factors suggesting bubble in equity market

    • There was an 81%-plus growth in the Sensex between April 2020 and March 2021 in the backdrop of real GDP growth plummeting to -7.3% during the same period.
    • While output contraction had reversed from the third quarter of 2020-21, the inflation rate also rose and remained way ahead of the real GDP growth rate in the last two quarters (Chart 1).
    • It is difficult to find any rationality behind the skyrocketing BSE Sensex in the context of such stagflation in the real economy.
    • Just like the fall in the equity prices was driven by the exit of foreign portfolio investors (FPI), the return of massive FPI inflows has driven the Indian equity bubble since then (Chart 2).
    • Net FPI inflows clocked an unprecedented ₹2.74 lakh crore in 2020-21, the previous high being ₹1.4 lakh crore in 2012-13.
    • The Reserve Bank of India (RBI)’s annual report (2020-21) to state stated that: “This order of asset price inflation in the context of the estimated 8 per cent contraction in GDP in 2020-21 poses the risk of a bubble.”

    Global factors

    • The global liquidity glut, following the expansionary, easy money policies adopted by the fiscal and monetary authorities of the OECD and G20 countries, has led to equity price inflation in several markets driven by FPIs, especially in Asia.
    • Following cues from the U.S. and the U.K., Asian equity markets in Singapore, India, Thailand, Malaysia and Hong Kong are currently witnessing price-earnings (P/E) ratios significantly above their historic means.
    • The BSE Sensex’s P/E ratio of 32 in end-June 2021 is way above its historic mean of around 20.

    What could burst the bubble?

    • Change in monetary policy: With COVID-19 vaccination and economic recovery proceeding apace in the U.S., the U.K. and Europe, fiscal and monetary policy stances will change soon.
    • Exit of FPIs: Once the U.S. Federal Reserve and other central banks start raising interest rates, the direction of FPI flows will invariably change bringing about corrections in equity markets across Asia.
    • India remains particularly vulnerable to a major correction in the equity market because of two reasons.
    • Low pace of vaccination: The pace of COVID-19 vaccination in India, given the vast population, lags behind most large countries.
    • In the absence of a substantial increase in the vaccination budget and procurement, large segments of the Indian population will remain vulnerable to a potential third wave of COVID-19, with its attendant deleterious impact on the real economy.
    • Weak fiscal stimulus: India’s economic recovery from the recession will remain constrained by the weak fiscal stimulus that has been delivered by the Central government.
    • Data from the IMF clearly show that while the total global stimulus consisted of additional public spending or revenue foregone measures amounting to 7.4% of global GDP, India’s fiscal measures amounted to 3.3% of GDP only.

    Consider the question “What are the factors driving equity market boom globally? What are the factors that could threaten such boom with a major correction?” 

    Conclusion

    With all agencies, including the RBI, downsizing India’s growth projections for 2021-22, it remains to be seen how long India’s equity bubble lasts.

    Back2Basics: P/E ratio

    • The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS).
    • The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
    • To determine the P/E value, one simply must divide the current stock price by the earnings per share (EPS).

    P/E Ratio=Earnings per share / Market value per share

     

  • [pib] Bad Bank launched for stressed assets

    The Government has launched a Bad Bank with all the regulatory approvals in place.

    What is a Bad Bank?

    • A bad bank conveys the impression that it will function as a bank but has bad assets to start with.
    • Technically, it is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
    • Such a bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
    • The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.

    Global examples of Bad Bank

    • US-based BNY Mellon Bank created the first bad bank in 1988, after which the concept has been implemented in other countries including Sweden, Finland, France and Germany.
    • However, resolution agencies or ARCs set up as banks, which originate or guarantee to lend, have ended up turning into reckless lenders in some countries.

    Do we need a bad bank?

    • The idea gained currency during Rajan’s tenure as RBI Governor.
    • The RBI had then initiated an asset quality review (AQR) of banks and found that several banks had suppressed or hidden bad loans to show a healthy balance sheet.
    • However, the idea remained on paper amid lack of consensus on the efficacy of such an institution.
    • ARCs have not made any impact in resolving bad loans due to many procedural issues.

    What is the stand of the RBI and government?

    • While the RBI did not show much enthusiasm about a bad bank all these years, there are signs that it can look at the idea now.
    • Experts, however, argue that it would be better to limit the objective of these asset management companies to the orderly resolution of stressed assets, followed by a graceful exit.

    Good about the bad banks

    • The problem of NPAs continues in the banking sector, especially among the weaker banks.
    • The bad bank concept is in some ways similar to an ARC but is funded by the government initially, with banks and other investors co-investing in due course.
    • The presence of the government is seen as a means to speed up the clean-up process.
    • Many other countries had set up institutional mechanisms such as the Troubled Asset Relief Programme (TARP) in the US to deal with a problem of stress in the financial system.

  • What the new Ministry of Cooperation needs to achieve

    Context

    Two weeks ago, the government created a new Ministry for Cooperation. India is, perhaps, the first country to have such a ministry. The Ministry can play an important role in the transformation of cooperatives in the country.

    How 1991 economic reforms benefited agriculture

    • On July 24, 1991, India decided to unshackle the spirit of private sector entrepreneurship through the move to de-license industry and reduce tariffs on a host of commodities.
    • Trade policy changes improved the terms of trade for agriculture and benefitted millions of farmers.
    • Agri-exports increased, but this led to higher domestic prices.

    The success story of dairy sector in India

    • In 1991, Manmohan Singh, then finance minister wanted to delicense the dairy sector as well, but there was stiff opposition from Verghese Kurien.
    •  It was after 10 years in 2002 that the dairy sector was fully de-licensed.
    • The competition between cooperatives and corporate dairy players has benefitted millions of farmers around the country.
    • With the entry of the private sector, the growth of the dairy sector accelerated at double the speed.
    • Today, both procure roughly the same quantities and growth in the organised private sector is faster than in cooperatives.

    Performance of cooperative movement in India

    • India’s experience with the cooperative movement has produced mixed results — few successes and many failures.
    • There are cooperatives in the financial sector, be it rural or urban.
    • But the performance of these agencies when measured in terms of their share in overall credit, achievements in technology upgradation, keeping NPAs low or curbing fraudulent deals has been poor to average.
    • Sugar cooperatives of Maharashtra initially touted as exemplars of the movement, are in the doldrums now.
    • Many are being sold to the private sector.

    Performance of cooperatives in dairy sector

    1) Amul

    • The performance of the cooperative champion, Gujarat Cooperative Milk Marketing Federation (GCMMF) — with its poster brand, Amul — has been most successful.
    • During Operation Flood, it received a lot of capital at highly concessional terms.
    • But its success is also the result of professionalism, business and, therefore, keeping politics away.
    • But despite the grand success of Gujarat’s milk cooperatives in Gujarat, the model did not spread to other states as successfully.

    2) Karnataka Milk Federation

    • In its eagerness to please milk farmers, the Karnataka Milk Federation (KMF), which sells its products under the brand name of Nandini, gives them Rs 5 to Rs 6 extra per litre.
    • This subsidy, given by the state government, cost the exchequer Rs 1,260 crore till 2019-20.
    • KMF procures a lot of milk and then dumps it at lower prices in the market for consumers.
    • This depresses prices in adjoining states like Maharashtra, affecting the fortunes of Maharashtra milk farmers.
    • If Maharashtra and Karnataka were two different countries, Maharashtra would be challenging Karnataka at the WTO.

    Way forward

    • The new Ministry of Cooperation can work towards ironing out distortions in state price policies due to subsidization such as in Maharastra and Karnatak milk prices.
    • Cooperatives desperately need technological upgradation. 
    • The Ministry of Cooperation can give them soft loans for innovation and technology upgradation.
    • But such loans should also be extended to the private sector to ensure a level playing field.
    • The Ministry of Cooperation needs to ensure the least political interference in the operation of cooperatives.

    Conclusion

    The new Ministry of Cooperation can work towards bringing in professionalism in cooperatives and make them more competitive.

  • RBI bars Mastercard from issuing new cards

    The Reserve Bank of India (RBI) has banned Mastercard from issuing new debit and credit cards to customers in India.

    Why such a ban?

    • According to the RBI, the US card issuer has failed to comply with the local data storage rules announced by the central bank in 2018.

    What is the RBI’s data localization policy?

    • In 2018, the RBI had issued a circular ordering card companies such as Visa, Mastercard, and American Express to store all Indian customer data locally.
    • This was aimed for the regulator to have “unfettered supervisory access”.

    Why such a policy by RBI?

    • The reason offered by the RBI was that local storage of consumer data is necessary to protect the privacy of Indian users and also to address national security concerns.

    Issues with the policy

    • Privacy: Customer privacy and national security are genuine concerns that need to be taken seriously.
    • Protectionism: However, data localization rules may sound too stringent and they could simply be used by governments as tools of economic protectionism.
    • Security: For instance, it may not be strictly necessary for data to be stored locally to remain protected.
    • Formal international laws to govern the storage of digital information across borders may be sufficient to deal with these concerns.
    • Discrimination: Governments, however, may still mandate data localization in order to favour local companies over foreign ones.

    Implications of the move

    • Indian banks that are currently enrolled in the Mastercard network are expected to make alternative arrangements with other card companies.
    • The RBI’s data localization policy, as it burdens foreign card companies, may end up favouring domestic card issuers like RuPay, which in turn can lead to reduced competition.
    • Mastercard owns about one-third of the market share in India, and the RBI’s ban is likely to significantly benefit its competitors.
    • This could mean higher costs and lower quality services for customers.

    Conclusion

    • In today’s digital economy data have turned out to be a valuable commodity, which companies, as well as governments, have tried to gain control over.
    • With no clear rules on who owns customer data and to what extent, conflicts over data ownership are likely to continue for some time.

  • A panoramic look at our three decades of economic reforms

    Context

    This month marks the 30th anniversary of the economic reforms launched by our then finance minister Manmohan Singh in his budget speech of 24 July 1991.

    After and before reform comparison

    •  The average annual growth over the past three decades has been 5.8% per annum.
    • It is slightly higher than 5.6% in the decade before 1991.
    • Clearly, our growth acceleration was not sustained, despite a pick-up in the pace of reforms.
    • However, on a long-term comparison, the economy did better than its 4.1% average of the first 40 years of independence.
    • But if we compare our first four decades with the pre-1947 phase, and on that score, we saw a massive growth improvement.

    Impact of reforms

    • Their biggest contribution was a change in India’s economic paradigm.
    • Every government after 1991 has embraced the philosophy of liberalization and privatization that those reforms initiated and has tried to outdo the previous regimes on that.
    • Still, 30 years on, the situation for most of our population remains unchanged.
    • The reforms created a class of rich entrepreneurs and a small but vocal middle class in urban areas.
    • But it also contributed to widening inequality, which has worsened after 1991 and is now at its worst level since 1947 on almost all dimensions.
    • The widening of disparities also occurred between urban and rural areas, between laggard states and developed ones.
    • Disparities have increased even further in terms of access to health and education and several other human- development indicators.
    • On most of these, be it education, health, women’s workforce participation and hunger, we remain at the bottom of any global chart of comparison.
    • The logic of reforms meant that expenditure on welfare and investment in human development were not a policy priority.
    • The situation is no different on employment, with data suggesting an absolute decline on this count and a historic rise in unemployment rates.
    • An official consumption survey that was not accepted about two years ago by the Centre had shown, a decline in real consumption and a rise in poverty.
    • Rising informalization and contractualization of the country’s workforce has been a factor in the worsening of most workers’ working conditions.

    Why reforms failed to deliver

    • In many ways, they are no different from our pre-reform economic policies, all of which were supply- side responses.
    • The reforms attempted to use the private sector for the task through a liberalized regulatory framework and business-friendly fiscal and monetary policies.
    • But an absence of concern for distributional inequities and aggregate-demand management has continued as the defining feature of our economic policymaking.
    • The consequences of supply-side- biased reforms will show up in a further worsening of income distribution and eventually slow growth down.

    Conclusion

    Things have taken a turn for the worse with the pandemic. The problem this time is not like the 1991 crisis. What is needed at this point is a fundamental shift in the way economic policy is designed, keeping people and workers at the centre of the exercise.

  • The proposed e-commerce rules shield vested interests

    Context

    The proposed Consumer Protection (E-Commerce) Rules, 2020, have been drafted ostensibly in the name of the consumer.  The rules are driven more by the desire to shield the traditional brick-and-mortar stores, and handicap e-commerce firms, especially the foreign ones.

    Issues with the provisions of draft Consumer Protection (E-Commerce) Rules, 2020

    1) Fall-back liability clause is unfair for those operating through marketplace model

    • Under this provision, e-commerce entities will be liable in case suppliers on the platform fail to deliver the goods to consumers, causing them a loss.
    • E-commerce firms in India operate through either the inventory model or the marketplace model.
    • As FDI is permitted only in the marketplace model.
    • Under the marketplace model, e-commerce platforms don’t hold inventory, but simply connect buyers and sellers.
    • Foreign players typically operate through this model. 
    • Considering that these platforms exercise little or no control over the inventory under this model, how can they be held liable for the sellers’ actions.

    2) Identifying goods based on country of origin and providing fair opportunity to domestic sellers

    • The draft rules also require e-commerce platforms to identify goods based on their country of origin.
    • And when goods are being viewed for purchase by consumers, the rules also mandate platforms to provide suggestions to ensure “fair opportunity” for domestic sellers.
    • This raises the question as to why the Make in India campaign is being pushed through the Consumer Protection Act.
    • Surely, if domestic manufacturers are competitive, consumers will automatically gravitate towards them.
    • Interests of consumers, not domestic manufacturers, should be at the core of the consumer protection framework.

    3) Overlapping/competing jurisdictions

    • Data protection: The draft rules have sought to safeguard consumer data by restraining e-commerce firms from sharing consumer data without consent.
    • But the data protection should be governed by the provisions under the Personal Data Protection Bill and not the Consumer Protection Act.
    • Considering the graded approach that is likely to be adopted under the Data Protection Bill, an e-commerce user’s data could be classified as per its vulnerability and be left under the jurisdiction of the data protection authority.
    • Dominant position: The rules also state that e-commerce entities are prohibited from abusing their dominant positions in the market. 
    • The “abuse of dominant position” has been given the same meaning as that prescribed under Section 4 of the Competition Act, 2002.
    • This will open the scope for new consumer protection authority to enter into issues of abuse of dominant position — the domain of the Competition Commission of India.

    Consider the question “Over-regulation tends to curb competition and create monopolies instead of ensuring its holistic growth dovetailed with fair competition. In light of this, examine the issues with the draft Consumer Protection (E-Commerce) Rules, 2020?”

    Conclusion

    The lines of demarcation that have been drawn up in the retail landscape — single brand vs multi-brand, online vs offline, domestic vs foreign — serve only to protect powerful vested interests, not benefit the consumer as is often proclaimed.

  • Growth matters but income levels matter more

    Context

    But the quest for sustained higher growth has been elusive for India for the last five years. The pandemic seems to make it more elusive.

    The magnitude of contraction in the economy

    • There is nothing encouraging in the provisional estimates of annual national income (2020-21), released by the National Statistical Office.
    • The agriculture sector continued its impressive growth performance, reiterating that it still remains as the vital sector of the economy, especially at times of crisis.
    • The manufacturing sector continued its subdued growth performance, failing to emerge as the growth driver.
    •  The contraction in trade (-18.2%), construction (-8.6%), mining (-8.5%) and manufacturing (-7.2%) is a matter of concern as these sectors account for the bulk of low-skilled jobs.
    • Gross Domestic Product (GDP) at Constant (2011-12) Prices in Q4 of 2020-21 is showing a growth of 1.6%.
    • The magnitude of contraction in the economy and the policy responses towards it raises an important issue of growth prospects for the next year.

    Contextualising the current growth rates in terms of following three macroeconomic data would provide us a better perspective on growth recovery.

    1) Rising unemployment

    • The unemployment data released by the Centre for Monitoring Indian Economy (CMIE) says, that in May 2021, India’s labour participation rate at 40 per cent was the same as it was in April 2021.
    • But, the unemployment rate shot up to 11.9 per cent from 8 per cent in April.
    • A stable labour participation rate combined with a higher unemployment rate implies a loss of jobs and a fall in the employment rate.
    • The employment rate fell to 35.3 per cent in May 2021 from 36.8 per cent in April 2021.
    • According to CMIE, over 15 million jobs were lost in May 2021.
    • May 2021 was therefore a particularly stressful month on the jobs front.

    Takeaway

    • Employment and aggregate demand in an economy are related via the channel of disposable incomes of workers.
    • Aggregate demand and output growth have a positive correlation.
    • Hence, the prospects of growth revival in the next year look bleak at the moment and from employment perspective.

    2) Low business confidence

    • It is the second important data point that needs to examined.
    • Business confidence index (BCI), from the survey by the industry body FICCI, plummeted to 51.5 from 74.2 in the previous round.
    • The survey also highlights the weak demand conditions in the economy.
    • Compounding this is the uncertainty arising out of the imposition of localised curbs due to the second wave of infections and a muddled vaccine policy in the country.

    3) Low PMI

    • Manufacturing Purchasing Managers’ Index (PMI) has slipped to a 10-month low indicating that the manufacturing sector is showing signs of strain with growth projections being revised lower.
    • Both BCI and PMI slipping down indicates that the overall optimism towards 2021-22 is low, which could impact investments and cause further job losses.

    Why focusing on supply-side will not work

    • Since last year, the policy responses have been to rely on credit easing, focusing more on supply side measures.
    • This policy stance is unlikely to prop up growth for three reasons.
    • First, the bulk of the policy measures, including the most recent, are supply side measures and not on the demand side.
    • Second, large parts of all the stimulus packages announced till now would work only in the medium term.
    • Third, the use of credit backstops as the main plank of policy has limits compared to any direct measure on the demand side as this could result in poor growth performance if private investments do not pick up.
    • Further, the credit easing approach would take a longer time to multiply incomes as lending involves a lender’s discretion and borrower’s obligation.

    Way forward

    • Growth recovery depends on demand recovery.
    • The combined increase in exports of April and May 2021 is over 12% indicating that global demand rebound is much faster than the domestic demand. 
    • What needs to be addressed immediately is the crisis of low domestic demand.
    • A tight-fisted fiscal policy approach comes at a time when conventional fiscal stimulus packages might not be enough as supply side issues arising out of episodic lockdowns need to be addressed simultaneously.
    • Focusing on short-term magnified growth rates resting on low bases might be erroneous, as income levels matter more than growth rates at this juncture.

    Conclusion

    India needs a sharp revival of demand for which higher per capita incomes are necessary.

  • SEBI needs to adopt dual approval system for independent directors

    Context

    While the regulators have taken giant strides to enhance board independence in India, one significant conundrum persists about appoint and removal process of the independent directors.

    How appointment and removal process affects the independence of independent directors?

    • Independent directors are appointed just like other directors through shareholder voting by a simple majority.
    • This confers a significant power in the hands of significant shareholders to handpick the independents.
    • In case of family-owned companies, it is not uncommon to appoint “friendly” independent directors.
    • As for public sector undertakings, there is a demonstrable affiliation between independent directors and the ruling political parties.

    Dual Approval System: Way forward

    • The above trends suggest that unless independent directors owe their allegiance to the shareholder body as a whole, independence is likely to remain largely in form and not function.
    • In its consultation paper, SEBI proposed a “dual approval” system.
    • Under this system, the appointment of an independent director required the satisfaction of two conditions:
    • First, the approval by a majority of all shareholders.
    • Second, the approval of a “majority of the minority”, namely the approval of shareholders other than the promoters.
    • SEBI recommended the same “dual approval” system for the removal of independent directors as well.
    • SEBI drew inspiration from Israel and the premium-listed segment of the United Kingdom, which confers greater power to minority shareholders in installing or dethroning independent directors.
    • SEBI has not yet made any mention of implementing the dual approval system.

    Issues with Dual Approval System

    • The first issue is that it militates against the majority rule principle that is intrinsic in a corporate democracy.
    • While understandable, that is hardly an immutable rule as corporate law does make exceptions in cases involving oppression of minority shareholders.
    • The second concern is that placing too much power in the hands of minority shareholders would be counterproductive, as it could result in a tyranny of the minority.
    • However, the dual approval system instead represents the best of both worlds. It does not negate the promoter’s involvement in the process of appointing or removing independent directors.
    •  Only consensus candidates would end up becoming independent directors.
    • The third issue is one of shareholder apathy: Will minority shareholders be motivated to exercise an informed and meaningful choice?
    • Minority shareholders tend to be passive when they are unable to influence the outcome of shareholding voting.
    • However, where they do have a significant say, like in the “majority of the minority” process, they are likely to be more active in exercising their franchise.

    Consider the question “How far has the provision of appointing independent directors to safeguard the interest of minority shareholders succeeded in its objectives? Suggest the changes to improve the challenges faced by the independent directors.”

    Conclusion

    In all, the appointment and removal system continues to undermine the independence and efficacy of corporate boards. The SEBI needs to implement the dual approval system at the earliest.

  • High forex reserves are no guarantee of monetary policy independence

    Context

    The ascending stock of forex reserves has led to the view this will enable the sole devotion of monetary policy to domestic objectives.

    Assessing the significance of forex reserves

    Let’s look into the experinec of China and India in this regard.

    1) Learning from China’s experience

    • In 2016, China had a strong external position—current account surplus and more than $3tn forex reserves.
    • However, investors’ expectations on renminbi (RMB) value began to shift due to rising concerns about its growth outlook, domestic rate cuts and eventual depreciation, and imminent tightening of US monetary policy, resulting in net capital outflows of $725 billio (bn) over the year.
    • This put sustained pressure upon the RMB.
    • Eventually, China resorted to capital control measures, which slowed the outflow and supported the RMB in the first half of 2017.

    2) India’s own historical record

    • India’s own historical record shows that, high or low, forex reserves didn’t prevent investors from reappraising positions.
    • India experienced this in case of oil prices (2018) or taper fears (2013).
    • The CAD was moderate, at 1.1% and 1.4% of GDP in two quarters to December 2017.
    • But as oil prices climbed, current account projections were rapidly revised to 2.5-3% of GDP in less than a quarter seeing the jump in the import bill, lagging exports and continuous outflow of portfolio capital.
    •  Reserves totalled $424 bn then (end-March 2018); foreign currency assets were $399 billion.
    • Against a mere $9 bn capital outflow, the peak-to-trough decline in reserves was $19 bn in April-June 2018, with 5% depreciation of the rupee.
    • The sharper, $21 bn fall in mid-April to July 20, 2018 equalled the reserves decline in April-August 2013 taper episode when the rupee depreciated three times more or 15%!
    • Forex reserves were much lower in 2013 ($255 bn range) and it had taken only a quarter for the current account gap to widen from 4.0% of GDP in April-June 2012 to 5.4% and a record 6.7% in subsequent two quarters to December 2012!

    Key takeaways

    • History shows that no level of reserves is a foolproof guarantee for macroeconomic stability or interest rate immunity.
    • The important lesson these episodes hold is that repressive attempts do not always convince markets or prevent shifts in expectations and often compel large, abrupt adjustment.
    • Investors reassess positions, including global factors, whatever the reserves’ stock.
    • The crucial role of reserves is psychological, i.e. market confidence and liquidity insurance that is immediate and unconditional that allows central banks to buy time, whether for a gradual adjustment, soft landing, or as the case may be.

    Distortion in bond market and RBI’s role in it

    • RBI has been systematically suppressing bond yields, particularly the 10-year benchmark, the reference rate for banks.
    • So effective was the repression that the bond market became irrelevant as yields altogether stopped responding to inflation or fiscal developments.
    • The 207-basis-point jump in retail inflation in a month in May, which exceeded expectations, caused not even a flicker in the yield premium for example.
    • This did not prevent responses elsewhere though – the overnight indexed swap (OIS), which signals future interest rate movements, increased 20-30 basis points at different tenures with fresh inflation risks.
    • Clearly, the market reading was inconsistent with RBI’s, whose rigid adherence to a particular level (6% in the case of the old, 10-year bond) was disregarded outright.
    • The monetary policy cue was not being accepted, failing to soothe ruffled feathers about inflation.

    Risk involved in RBI’s policy

    • If the global financial cycle were to suddenly turn, risk-aversion set in, or oil prices shoot up to risky levels, investors will undoubtedly look at actual differentials, not the one set in stone by RBI.
    • There will be exchange rate pressures, which RBI can no doubt manage with liberal reserves.
    • But the duration and degree of adjustment is not in RBI’s control, identically to the bond market one, where it has infinite capacity to keep local yields where it wants.
    • There’s a limit to how much foreign currency it can sell—the $609bn reserve holding is finite.
    • Currency depreciation can, therefore, worsen a bad situation as higher inflation pressurises domestic interest rates to rise.
    • RBI’s issuance of the new 10-year benchmark bond at 6.10%, which came as a surprise against its previous inflexibility, indicates RBI has internalised the above risks.
    • The disparate movements were undermining RBI,  whose commitment to continue the accommodative monetary policy as long as necessary to revive and sustain growth has been reassuring.

    Conlcusion

    When the economy is open, financially integrated and subject to cross-country dynamics, it is more prudent to let market forces play out a bit than persist with a stance that could turn unsustainable despite the high reserves.

    Back2Basics: What is Current Account Deficit (CAD) ?

    • The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.
    • The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account.
    • The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments (BOP).

     

  • New Ministry of Cooperation should enable people to leverage community networks

    Context

    India now has a Ministry of Cooperation that aims to strengthen the country’s cooperative movement. This is an opportune moment to look at the movement’s history, examine the potential of cooperatives and analyse the challenges they face.

    Development of Farmer Producer Companies in India

    • India’s significant tryst with dairy cooperatives began in the 1950s with the success of what we know today as Amul.
    • The nation took note of this initiative and the National Dairy Development Board was set up in 1965.
    • However, the expansion wasn’t working the way it had been envisaged.
    • The need for a new model was felt soon as cooperatives outside Anand were not holding regular and proper elections.
    • Their accounts were not audited.
    • As a result, a committee was set up in the Company Affairs Ministry to allow farmers to set up companies.
    • The Farmer Producer Companies (FPCs) would run on the principle of “one share one vote” and the essence of cooperatives would not be diluted.
    • The Parliamentary Committee looked into the Bill to give legal backing to FPCs, with this, the Companies Act (Second Amendment), 2002 became law.

    Funding the FPCs

    • The existing funding vehicles were designed to cater to cooperatives, not FPCs
    •  Around 2010, the Boston Consulting Group (BCG) had been commissioned to develop a plan for restructuring NABARD.
    • As a result, the restructured NABARD had a special window for FPCs.

    Community-based cooperatives

    •  The Cheliya community set up a chain of Hearty Mart “cooperative” supermarkets in villages in Gujrat using the franchise model.
    •  Just as the network of Charotar Patels that Kurien relied on in the case of Amul —Cheliya community have played a key role in the spread of the model.
    • The idea of leveraging the community network was tried in some parts of the country in the context of re-imagining economic infrastructure.
    • To deal with the electricity board failures, a distribution company was run on a community basis.
    • This model has, in fact, worked in places like Kanpur, even Kerala.

    Social cooperatives

    • The concept of social cooperatives builds on the idea of communities creating infrastructure by using local material and family labour.
    • These can be the village tank, paving the village road — with or without MGNREGA — finishing the last-mile construction of a canal network or even keeping watch on the contractor.
    • The pandemic seems to have increased the significance of community effort.
    • Reducing vaccine hesitancy, providing food to those waiting outside hospitals and, most importantly, looking after orphaned children are imperatives crying out for the cooperative model.

    Way forward for new Ministry of Cooperatives

    •  Keeping in mind social needs while using resources is a large part of the solution to our current predicament.
    • The pandemic will not follow the laws of corporate finance, cooperation has a lot to speak for itself, the new ministry should take this message.
    • The new work-from-home model will create several problems as well as offer opportunities.
    • The new ministry is a recognition of the needs of our times.
    • But it should not be just about pumping in money. 

    Conclusion

    This is the time to design models that help those who help themselves. We will wait expectantly to see how the new ministry works.