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GS Paper: GS3

  • A new global standard for AI ethics

    Context

    Artificial intelligence (AI) is more present in our lives than ever. From predicting what we want to see as we scroll through social media to helping us understand weather patterns to manage agriculture, AI is ubiquitous.

    Issues with AI  and it why it matters to India

    • Bias and discrimination: The data used to feed into AI often aren’t representative of the diversity of our societies, producing outcomes that can be said to be biased or discriminatory.
    • Errors in facial recognition: There are problems emerging in facial recognition technologies, which are used to access our phones, bank accounts and apartments, and are increasingly employed by law-enforcement authorities, in identifying women and darker-skinned people.
    • For three such programs released by major technology companies, the error rate was 1% for light-skinned men, but 19% for dark-skinned men, and up to 35% for dark-skinned women.
    • Biases in facial recognition technologies have led to wrongful arrests.
    •  Indeed, if the business model of how these technologies are developed does not change to place human interests first, inequalities will grow to a magnitude never before experienced in history; access to the raw material that is data is key.
    • These issues are of particular importance to India, which is one of the world’s largest markets for AI-related technologies, valued at over $7.8 billion in 2021.
    •  The National Strategy on Artificial Intelligence released by NITI Aayog in 2018 highlights the massive potential of AI in solving complex social challenges faced by Indian citizens across areas such as agriculture, health, and education, in addition to the significant economic returns that AI-related technologies are already creating.

    UNESCO agreement

    • To ensure that the full potential of these technologies is reached, the right incentives for ethical AI governance need to be established in national and sub-national policy.
    • India has made great strides in the development of responsible and ethical AI governance, starting with NITI Aayog’s #AIForAll campaign to the many corporate strategies that have been adopted to ensure that AI is developed with common, humanistic values at its core.
    • UNESCO’s recommendations: Last November 193 countries reached a groundbreaking agreement at UNESCO on how AI should be designed and used by governments and tech companies.
    • UNESCO’s Recommendation on the Ethics of Artificial Intelligence took two years to put together and involved thousands of online consultations with people from a diverse range of social groups.
    •  It aims to fundamentally shift the balance of power between people, and the businesses and governments developing AI.
    • Countries which are members of UNESCO have agreed to implement this recommendation by enacting actions to regulate the entire AI system life cycle, ranging from research, design and development to deployment and use.
    • This means they must use affirmative action to make sure that women and minority groups are fairly represented on AI design teams.
    • The Recommendation also underscores the importance of the proper management of data, privacy and access to information.
    •  It establishes the need to keep control over data in the hands of users, allowing them to access and delete information as needed.
    • It also calls on member states to ensure that appropriate safeguards schemes are devised for the processing of sensitive data and effective accountability, and redress mechanisms are provided in the event of harm.
    • Socio-cultural impact: The broader socio-cultural impacts of AI-related technologies are also addressed, with the Recommendation taking a strong stance that-
    • 1] AI systems should not be used for social scoring or mass surveillance purposes;
    • 2] That particular attention must be paid to the psychological and cognitive impact that these systems can have on children and young people;
    • 3] Member states should invest in and promote not only digital, media and information literacy skills, but also socio-emotional and AI ethics skills to strengthen critical thinking and competencies in the digital era.
    • In a number of countries, the principles of the Recommendation are already being used in AI regulation and policy.
    • Finland provides an example of good practice of this regard, with its 2017 AI Strategy.

    Conclusion

    The new agreement is broad and ambitious. It is a recognition that AI-related technologies cannot continue to operate without a common rulebook. Over the coming months and years, the Recommendation will serve as a compass to guide governments and companies, to voluntarily develop and deploy AI technologies that conform with the commonly agreed principles it establishes.

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  • What is the Controversy over GST levies on Food?

    From July 18, a 5% Goods and Services Tax (GST) has been levied on several food items and grains that are sold in a pre-packed, labelled form even if they are not branded.

    What is the news?

    • So far, these items, which include curd, lassi, buttermilk, puffed rice, wheat, pulses, oats, maize and flour, were exempted from the GST net.
    • The fresh tax levies have attracted an outcry from traders as well as consumers.

    What is GST?

    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
    • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

    What are GST Slabs?

    • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
    • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
    • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
    • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
    • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

    How did the rate hikes come about?

    • The 5% tax on unbranded packed food items was approved by the GST Council.
    • Some of the other items to have lost their tax-exempt status include bank cheques, maps and atlases, hotel rooms that cost up to ₹1,000 a night, and hospital room rents of over ₹5,000 a day.
    • The pre-packed items weighing over 25 kg would not attract GST.

    Why such move?

    • This move was part of a broader set of changes in the GST structure to do away with tax exemptions as well as concessional tax rates.
    • The Centre and States had discussed the need to raise revenues from the GST, which at the time of its launch five years ago, was premised on levying a ‘revenue-neutral’ rate of 15.5%.
    • All affected food items, including wheat, pulses, rice, curd and lassi, will be exempt from GST when sold loose.

    What has the government said on the issue?

    • FM has hit out at misconceptions about the GST levies on food items and dismissed suggestions that they were imposed unilaterally by the Centre.
    • The 5% levy, she said, was critical to curb tax leakages and was not taken by ‘one member’ of the GST Council alone as all States had agreed to the move.
    • When GST was rolled out, a GST rate of 5% was made applicable on branded cereals, pulses, flour.
    • This was later amended to tax only such items which were sold under a registered brand or brands on which enforceable right was not foregone by the suppliers.
    • This tax exemption triggered ‘rampant misuse’ by reputed manufacturers and brand owners leading to a gradual drop in revenues.

     

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  • Why is Karnataka opposing Centre’s draft Eco-Sensitive Area norms for Western Ghats?

    The Union Environment Ministry’s latest draft notification on Ecologically Sensitive Areas (ESA) in the Western Ghats is facing stiff opposition in Karnataka.

    What is the news?

    • The MoEFCC had issued a draft notification that demarcated large parts of Karnataka, Tamil Nadu, Gujarat and Maharashtra as eco-sensitive areas.
    • Among these states, Karnataka contains the largest geographical share of the notified areas in the Western Ghats, at 20,668 sq km.

    ESA in Western Ghats

    • In 2013, the Kasturirangan committee had submitted a report which recommended that 37% of the Western Ghats, covering an area of 59,940 sq km be classified as ESA.
    • On the basis of this, several drafts were introduced which were subsequently rejected by the surrounding states, including Karnataka.

    What is ESA?

    • Eco-Sensitive Zones (ESZs) or Ecologically Fragile Areas (EFAs) are areas notified by the MoEFCC around Protected Areas, National Parks and Wildlife Sanctuaries.
    • The purpose of declaring ESZs is to create some kind of “shock absorbers” to the protected areas by regulating and managing the activities around such areas.
    • They also act as a transition zone from areas of high protection to areas involving lesser protection.

    How are they demarcated?

    • The Environment (Protection) Act, 1986 does NOT mention the word “Eco-Sensitive Zones”.
    • However, Section 3(2)(v) of the Act, says that Central Government can restrict areas in which any industries, operations or processes or class of industries, operations or processes shall be carried out or shall not, subject to certain safeguards.
    • Besides Rule 5(1) of the Environment (Protection) Rules, 1986 states that central government can prohibit or restrict the location of industries and carrying on certain operations or processes on the basis of certain considerations.
    • The same criteria have been used by the government to declare No Development Zones (NDZs).

    Defining its boundaries

    • An ESZ could go up to 10 kilometres around a protected area as provided in the Wildlife Conservation Strategy, 2002.
    • Moreover, in the case where sensitive corridors, connectivity and ecologically important patches, crucial for landscape linkage, are beyond 10 km width, these should be included in the ESZs.
    • Further, even in the context of a particular Protected Area, the distribution of an area of ESZ and the extent of regulation may not be uniform all around and it could be of variable width and extent.

    Activities Permitted and Prohibited

    • Permitted: Ongoing agricultural or horticultural practices, rainwater harvesting, organic farming, use of renewable energy sources, and adoption of green technology for all activities.
    • Prohibited: Commercial mining, saw mills, industries causing pollution (air, water, soil, noise etc.), the establishment of major hydroelectric projects (HEP), commercial use of wood, Tourism activities like hot-air balloons over the National Park, discharge of effluents or any solid waste or production of hazardous substances.
    • Under regulation: Felling of trees, the establishment of hotels and resorts, commercial use of natural water, erection of electrical cables, drastic change of agriculture system, e.g. adoption of heavy technology, pesticides etc, widening of roads.

    What does the new draft notification for the Western Ghats say?

    • The draft notification demarcates 46,832 sq km in the five states Gujarat, Maharashtra, Karnataka, Goa and Tamil Nadu as ESA in the Western Ghats.
    • Kerala is excluded from the draft notification and it had earlier undertaken the exercise of demarcating ESA in the state by physical verification.
    • Among the five states, 20,668 sq km of the ESA lies in Karnataka, 1,461 sq km in Goa, 17,340 sq km in Maharashtra, 6,914 sq km in Tamil Nadu and 449 sq km in Gujarat.
    • According to the notification, the concerned state governments are responsible for monitoring and enforcing the provisions of the notification.

    What are the curbs that the state governments will have to implement?

    • The draft notification states there shall be a complete ban on mining, quarrying and sand mining in the ESA.
    • All existing mines are to be phased out within five years from the date of issue of the final notification or on the expiry of the existing mining lease.
    • It also bars setting up of new thermal power projects and expansion of existing plants in the sensitive area, and the banning of all new ‘Red’ category industries.
    • The construction of new townships and area development projects will also be prohibited in the areas.
    • ‘Orange’ category industries, with a pollution index score of 41-59, such as jute processing and ‘White’ industries that are considered non-polluting will also be allowed with strict compliance.

    What were the suggestions by the Kasturirangan panel?

    • The panel, formed in 2012, was tasked with the mandate of taking a “holistic view of the issue, and to bring synergy”.
    • It aimed to protecting the environment and biodiversity, while maintaining the needs and aspirations of the local and indigenous people, of sustainable development and environmental integrity of the region.
    • The report had recommended a blanket ban on mining, quarrying, red category industries and thermal power projects.
    • It also stated that the impact study of infrastructural projects on the forest and wildlife should be conducted before permission is given.

    What is Karnataka’s stand on the matter?

    • The Karnataka government has been firm in rejecting the implementation of the guidelines.
    • It has staunchly opposed to the Kasturirangan committee report on Western Ghats.
    • It urged that declaring Western Ghats as ESA would adversely affect the livelihood of people in the region.
    • Environmental experts consider the state government’s decision to be disastrous for the biodiversity of the Western Ghats.

     

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  • Despite pressures, the Indian rupee’s remarkable resilience

    Context

    The Indian rupee has depreciated by around 7% against the U.S. dollar, since the start of the year, in response to various domestic and global factors.

    What are the factors responsible for decline?

    • A widening current account deficit, persistent risk-off sentiment as a result of geopolitical tensions, ‘a strengthening dollar index, and continuous sell-off by foreign portfolio investors have all put pressure on the rupee’.
    • Reversal of monetary policy in the US: The runaway inflation levels since last year, which have seen consumer price index (CPI) inflation in the United States reaching a multi-decade high of 9.1% in June 2022, have prompted the reversal in the monetary policy stance of the US Federal Reserve.
    • With inflation rising unabated, the Fed is widely expected to continue raising interest rates.
    • Higher risk-free return in the US: As a result of higher risk-free returns being available in the U.S., there have been persistent outflows of foreign portfolio capital since October 2021, which, on a cumulative basis, stands at $30 billion this year.

    Comparison with the depreciation in the past

    • Even as the rupee has fallen sharply against the dollar, the depreciation has been relatively lower compared with past crises.
    • During the global financial crisis of 2008, the rupee had weakened by over 20% between December 2007-June 2009 and during the Taper Tantrum of 2013 for seven months from the start of the crisis in May 2013, the rupee had depreciated by over 11%.
    • Reduced external vulnerability: The relative lower depreciation this time is attributed to the lowering of India’s external vulnerability measured in terms of a relatively high import cover and low short-term external debt.
    • During the Taper Tantrum, India’s import cover stood at over seven months as compared to around 12 months in the current period.

    Decline in foreign exchange reserves

    • The Reserve Bank of India (RBI) has stepped in to arrest a large depreciation in the currency, with interventions in the spot and forward foreign exchange markets.
    • Consequently, India’s foreign exchange reserves have moderated by almost $55 billion from a high of $635 billion seen this year.
    • Elevated global crude oil prices have impinged on India’s oil import bill, in turn widening the trade deficit, thus increasing the demand for U.S. dollars, and affecting forex reserves further.

    Effects of weak rupee

    • Export to become competitive: Among the benefits is the premise that the rupee’s weakening should aid exporters in becoming more competitive.
    • However, the concomitant depreciation of currencies of some of India’s competitors such as South Korea, Malaysia and Bangladesh against the dollar, alongwith a high import intensity of some of its key export segments (petroleum, gems and jewellery and electronics), is likely to have blunted the ameliorative impact on India’s exports.
    • Increase in the price of imported commodities: a weaker rupee is driving up prices of key import commodities such as coal, oil, edible oil, gold, thus impacting the imported component of inflation.
    • Impact on the borrowers: The unhedged component of corporate debt denominated in dollars is also likely to bear the brunt of a weaker rupee.
    • Impact on investment: Most importantly, a continuously sliding exchange rate discourages foreign investors from making fresh investments, which keep losing value in dollar terms.
    • For this reason, it is ideal to provide confidence to investors by arresting a continuous slide in the exchange rate.

    Measure by the RBI to arrest the weakening of rupee

    • Apart from intervening in the forex market to arrest the fall in the rupee’s value, the RBI announced a slew of measures recently to liberalise foreign inflows into the country and make them more attractive.
    • Measures such include:
    • Promoting trade settlements between India and other countries in rupee terms.
    • Offering higher interest rates on fresh Foreign Currency Non-Resident (Bank) and Non-Resident External deposits.
    • A widening of investible universe of government and corporate debt, a relaxation of the interest rate.
    • Amount ceiling for External Commercial Borrowing loans, among others, have contributed to arresting the rupee’s slide against the greenback.

    Way forward

    • Inclusion of companies in glabal indices: The Government could encourage some of the large market cap companies (private and public sectors) to be included in the major global indices such as MSCI and FTSE.
    • This will help increase the weight of Indian equities in these indices, compensating for foreign portfolio outflows to some extent as investors are unlikely to be underweight on India.
    • India’s entry into bond indices: The Government could also expedite India’s entry into bond indices such as J.P. Morgan’s Emerging-Market Bond Index and Barclays Global Bond Index.
    • This will not only lead to forex inflows but also have a benign impact on interest rates.
    • Such measures will keep the forex war chest of the RBI at a comfortable level, providing the central bank the requisite ammunition in case there is further weakness.
    • The maintenance of the U.S.-India interest rate differential along with timely forex market interventions by the central bank to manage volatility will prove to be salutary in preserving the rupee value against the greenback.

    Conclusion

    Even as the rupee is expected to remain under pressure in the near term because of global uncertainty, high commodity prices and rising U.S. interest rates, mitigating measures have to be taken to partly arrest the slide.

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    Back2Basics: What is taper tantrum?

    • Taper tantrum refers to the 2013 collective reactionary panic that triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing (QE) program.
    • The Fed announced that it would be reducing the pace of its purchases of Treasury bonds, to reduce the amount of money it was feeding into the economy.
    • The ensuing rise in bond yields in reaction to the announcement was referred to as a taper tantrum in financial media.

  • What is Transition Tax Credit?

    Taxpayers who had missed out on getting the benefit of transitional tax credits during India’s switchover to the Goods and Services Tax (GST) regime five years ago, will now get a fresh window to avail them.

    What is Transitional Tax Credit?

    • A tax credit is a component of a company’s tax payment that can be applied to offset a subsequent tax obligation.
    • When India moved to the GST regime in 2017, companies had to transition the credit sitting on their books.
    • So, the closing balance in the old tax regime would become the opening credit balance under GST.
    • When India moved from the old indirect tax regime to GST, a one-time transition of credit was allowed.
    • That is, companies could set off part of the taxes paid during the old tax regime against future GST liabilities.
    • Many companies claimed that they had simply forgotten to claim the transitional credit.

    Why in news?

    • The Supreme Court has directed the revenue authorities to facilitate such credits.
    • The move is likely to benefit hundreds of GST assessees who had hitherto not been able to avail such credits.
    • They will be given two-month window to claim during September and October.

     

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  • Indian Antarctic Bill, 2022

    The Lok Sabha deferred the consideration and passing of the Indian Antarctic Bill, 2022 as the Opposition benches were empty due to the ongoing protests outside of Parliament.

    Indian Antarctic Bill, 2022

    Aims and objectives:

    • To provide for national measures to protect the Antarctic environment and associated ecosystems and to give effect to the Antarctic Treaty
    • To provide a harmonious policy framework for India’s Antarctic activities through a well-established legal mechanism
    • Facilitate activities of the Indian Antarctic programme, including management of Antarctic tourism and sustainable development of fisheries
    • To prohibit carrying of certain activities without a permit or the written authorisation of another party to the protocol
    • To provide for inspection in India by an officer designated by the Central government as an Inspector and to constitute an inspection team to carry out inspections in Antarctica
    • To prohibit drilling, dredging, excavation or collection of mineral resources or even doing anything to identify where such mineral deposits occur.

    Key feature: Committee on Antarctic governance

    • It will empower the government to establish a committee on Antarctic governance and environmental protection to monitor, implement and ensure compliance with the relevant international laws, emissions standards and rules of protection.
    • The panel is to be headed by the secretary of the Ministry of Earth Sciences, as ex officio chairperson.
    • Among other roles, he/she has also been the vice-president of the Scientific Committee on Antarctic Research of the International Science Council since 2018.
    • The committee will have ten members from various ministries, departments and organizations of the Union government, plus two experts on the Antarctic environment or other relevant areas.

    Prohibited activities

    The Bill prohibits certain activities in Antarctica including:

    • Nuclear explosion or disposal of radioactive wastes,
    • Introduction of non-sterile soil, and
    • Discharge of garbage, plastic or other substance into the sea which is harmful to the marine environment

    About Antarctica Treaty

    • Antarctica has a geographical area of 14 million sq. km and has had no indigenous population (i.e. “Antarcticans” don’t exist).
    • However, a few thousand people reside there, in some 40 research stations spread across the continent, throughout the year.
    • In 1959, 12 countries – Argentina, Australia, Belgium, Chile, France, Japan, New Zealand, Norway, South Africa, the USSR, the UK and the US signed the Antarctic Treaty.
    • Their aim was to prevent the continent from being militarised and to establish it as a center of peaceful activities.
    • Later, more countries, including India, have become party to the treaty, and today it counts more than 54 members.

    Significance of the treaty

    • The treaty requires each party to take appropriate measures within its competence, including the adoption of laws and regulations, administrative actions, and enforcement measures, to ensure compliance with the protocol.
    • Countries also signed the ‘Protocol on Environmental Protection to the Antarctic Treaty in 1991, which designates Antarctica as a “natural reserve, devoted to peace and science”.

    Need for the Antarctic Legislation

    • The growing presence of Indian scientists in Antarctica and the commitment to Antarctic research and protection prompted the government to adopt domestic legislation consistent with its obligations as a member of the Antarctic Treaty system.
    • These laws will enable India’s courts to deal with disputes or crimes committed in parts of Antarctica, and help build credibility vis-à-vis India’s participation.

     

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  • Karnataka tops India Innovation Index List

    Karnataka has bagged the top rank in NITI Aayog’s India Innovation Index, 2022, which determines innovation capacities and ecosystems at the sub-national level.

    India Innovation Index (III)

    • The release of the second edition of the index—the first was launched in October 2019—demonstrates the Government’s continued commitment to transforming the country into an innovation-driven economy.
    • The index attempts to create an extensive framework for the continual evaluation of the innovation environment of all states and UTs in India.
    • It intends to perform the following three functions-
    1. Ranking of states and UTs based on their index scores
    2. Recognizing opportunities and challenges, and
    3. Assisting in tailoring governmental policies to foster innovation
    • The states have been bifurcated into three categories: major states, northeast and hill states, and union territories/city-states/small states.

    Significance

    • The study examines the innovation ecosystem of Indian states and union territories.
    • The aim is to create a holistic tool that can be used by policymakers across the country to identify the challenges to be addressed and strengths to build on when designing policies.

    Highlights of the 2022 index

    • Karnataka has held this position, under the Major States category, in all three editions of the Index so far.
    • It was followed by Telangana, Haryana, Maharashtra and Tamil Nadu. Chhattisgarh, Odisha, Bihar and Gujarat were at the bottom of the index.
    • In the Index, Manipur secured the lead in the Northeast and Hill States category, while Chandigarh was the top performer in the Union Territories and City States category.

     

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  • Kali Bein and its cultural significance

    Punjab CM has been admitted to hospital, days after he had drunk a glass of water directly from the Kali Bein, a holy rivulet in Sultanpur Lodhi.

    What is the Kali Bein?

    • The 165-km rivulet starts from Hoshiarpur, runs across four districts and meets the confluence of the rivers Beas and Sutlej in Kapurthala.
    • Along its banks are around 80 villages and half a dozen small and big towns.
    • Waste water from there as well as industrial waste used to flow into the rivulet via a drain, turning its waters black, hence the name Kali Bein (black rivulet).
    • Dense grass and weeds grew on the water until a cleaning project started.

    Why did Punjab CM drink water from it?

    • The occasion was the 22nd anniversary of the cleaning project, which had started on July 16, 2000.
    • The project has been slow for years after having made remarkable progress in the initial years.
    • Nevertheless, when Mann drank water from it directly, it was a much cleaner Kali Bein than it was before 2000.

    Cultural significance

    • The Kali Bein is of great significance to Sikh religion and history, because the first Guru, Nanak Dev, is said to have got enlightenment here.
    • When Guru Nanak Dev was staying at Sultanpur Lodhi with his sister Bebe Nanki, he would bathe in the Kali Bein.
    • He is said to have disappeared into the waters one day, before emerging on the third day.
    • The first thing he recited was the “Mool Mantra” of the Sikh religion.

    How did the cleaning project start?

    • It was started by environmentalist Baba Balbir Singh Seechewal with a handful of followers, without government help.
    • They removed weeds, treated the water and spread awareness among residents.
    • Six years of hard work paid off when then President A P J Abdul Kalam visited the site in 2006 and praised them for their effort.
    • The then government in Punjab then announced that it would take up the project to stop the discharge of untreated water into the rivulet.

    What is its national significance?

    • At one stage, the project had become a role model for river cleaning missions.
    • The ‘Kali Bein Model’ was cited as the blueprint for the National Mission for Clean Ganga.
    • Uma Bharti, then Union Minister for Water Resources, River Project and Ganga Rejuvenation, visited the Kali Bein in 2015, and called it a Guru Sthan for the Ganga project.

  • The cost of misrepresenting inflation

    Context

    Globally, inflation is now the prime concern of governments, even as there is a speculation that a recession may not be far behind.

    Is inflation in India driven by the global factors?

    • The Governor of the Reserve Bank of India (RBI) has been reported as saying that there was a “need to recognise global factors in inflation”.
    • However, the current inflation in India is, even largely, due to global factors is wrong, and harmful.
    • While the price of edible oils and the world price of crude may have risen following the Ukraine war, the impact of this development on overall inflation in India, measured by the rise in the consumer price index, would depend upon their share in the consumption basket of households, which is relatively low.
    • For the commodity groups ‘fuel and light’ and ‘fats and oils’, chosen as proxies for the price of imported fuel and edible oils, respectively, inflation has actually been lower in the first five months of 2022 than in the last five months of 2021.
    • On the other hand, for the commodity group ‘food and beverages’, it was exactly the reverse, i.e., inflation has been much higher in the more recent period.
    • Contribution of domestic factors: The estimated direct contribution of this group to the current inflation dwarfs that of all other groups, establishing conclusively that the inflation is driven by domestic factors.

    Inadequacy of monetary policy to address the food-price driven inflation

    • Issues with the monetary policy: Starting in May, the repo rate has been raised.
    • Raising the interest rate in an attempt to control inflation, implicitly assumes that it reflects economy-wide excess demand.
    • Such a diagnosis of the current inflation is belied by the fact that the price of food is rising faster than that of other goods i.e., its relative price has risen.
    • So, the excess demand is in the market for foodstuff, and it is this that needs to be eliminated.
    • The inadequacy of monetary policy to address food-price-driven inflation has been flagged by economists internationally.
    • at the World Economic Forum’s annual meet held at Davos, Switzerland in June, Nobel Laureate Joseph Stiglitz observed that raising interest rates is not going to solve the problem of inflation. It is not going to create more food.
    • Jerome Powell is reported stating that even though the Fed’s resolve to fight inflation is unconditional, “a big part of inflation won’t be affected by our tools”.
    • This is an acknowledgement that there is only so much a central bank can do when battling inflation driven by the rise in energy and food prices.

    Way forward

    • Need for supply side interventions:  To hold on to the view that inflation in India is due to excess aggregate demand curable by raising interest rates ensures that attention is not paid to the necessary supply-side interventions.

    Conclusion

    India is suffering from undercurrent of a food price inflation, which, by exacerbating poverty, stands in the way of a more rapid expansion of the economy.

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  • India’s Tenfold Path to manage Exchange Rate Volatility

    The RBI is prepared to sell a sixth of its foreign exchange reserves to defend the rupee against a rapid depreciation after it plumbed record lows in recent weeks.

    Must read:

    [Burning Issue] Global Trade in Rupees

    Is there a forex crisis underway?

    • And the way in which India has tackled foreign exchange crises over the years has been quite profound.
    • A forex crisis can be loosely defined as one where the rupee starts depreciating rapidly or when forex reserves slide precipitously.
    • Ever since India’s reforms of 1991-92, the external sector has been liberalized, with even full capital account convertibility being considered at one point.

    In the rupee’s context, let’s look at options that have been used in the last three decades or so:

    (1) Selling dollars

    • The first course of action has been selling dollars in the spot forex market.
    • This is fairly straightforward, but has limits as all crises are associated with declining reserves.
    • While this money is meant for a rainy day, they may just be less than adequate.
    • The idea of RBI selling dollars works well in the currency market, which is kept guessing how much the central bank is willing to sell at any point of time.

    (2) NRI deposits

    • The second tool used is aimed at garnering non-resident Indian (NRI) deposits.
    • It was done in 1998 and 2000 through Resurgent India bonds and India Millennium Deposits, when banks reached out asking NRIs to put in money with attractive interest rates.
    • The forex risk was borne by Indian banks.
    • This is always a useful way for the country to mobilize a good sum of forex, though the challenge is when the debt has to be redeemed.
    • At the time of deposits, the rates tend to be attractive, but once the crisis ends, the same rate cannot be offered on deposit renewals.
    • Therefore, the idea has limitations.

    (3) Let oil importers buy dollars themselves

    • The third option exercised often involves getting oil importing companies to buy dollars directly through a facility extended by a public sector bank.
    • Its advantage is that these deals are not in the open and so the market does not witness a large demand for dollars on this account.
    • It is more of a sentiment cooling exercise.

    (4) Let exporters trade in dollars

    • Another tool involves a directive issued for all exporters to mandatorily bring in their dollars on receipt that are needed for future imports.
    • This acts against an artificial dollar supply reduction due to exporter hold-backs for profit.

    (5) Liberalized Exchange Rate

    • The other weapon, once used earlier, is to curb the amount of dollars one can take under the Liberalized Exchange Rate Management System.
    • This can be for current account purposes like travel, education, healthcare, etc.
    • The amounts are not large, but it sends out a strong signal.

    (6) Forward-trade marketing

    • Another route used by RBI is to deal in the forward-trade market.
    • Its advantage is that a strong signal is sent while controlling volatility, as RBI conducts transactions where only the net amount gets transacted finally.
    • It has the same power as spot transactions, but without any significant withdrawal of forex from the system.

    (7) Currency swaps

    • The other tool in India’s armoury is the concept of swaps.
    • This became popular post 2013, when banks collected foreign currency non-resident deposits with a simultaneous swap with RBI, which in effect took on the foreign exchange risk.
    • Hence, it was different from earlier bond and deposit schemes.

    Most preferred options by the RBI

    • Above discussed instruments have been largely direct in nature, with the underlying factors behind demand-supply being managed by the central bank.
    • Of late, RBI has gone in for more policy-oriented approaches and the last three measures announced are in this realm.

    (8) Allowing banks to work in the NDF market

    • First was allowing banks to work in the non-deliverable forwards (NDF) market.
    • This is a largely overseas speculative market that has a high potential to influence domestic sentiment on our currency.
    • Here, forward transactions take place without real inflows or outflows, with only price differences settled in dollars.
    • This was a major pain point in the past, as banks did not have access to this segment.
    • By permitting Indian banks to operate here, the rates in this market and in domestic markets have gotten equalized.

    (9) Capital account for NRI deposits

    • More recently, RBI opened up the capital account on NRI deposits (interest rates than can be offered), external commercial borrowings (amounts that can be raised) and foreign portfolio investments (allowed in lower tenure securities), which has the potential to draw in forex over time.
    • Interest in these expanded contours may be limited, but the idea is compelling.

    (10) Settlement in Rupees

    • RBI’s permission for foreign trade deals to be settled in rupees is quite novel; as India is a net importer, gains can be made if we pay in rupees for imports.
    • The conditions placed on the use of surpluses could be a dampener for potential transactions.
    • But the idea is innovative and could also be a step towards taking the rupee international in such a delicate situation.
    • Clearly, RBI has constantly been exploring ways to address our forex troubles and even newer measures shouldn’t surprise us.

     

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