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

Civilsdaily

Login

GS Paper: GS3

  • The inflation tightrope

    Context

    The Indian economy has been hit by inflationary shocks of late.

    Inflation story so far

    • RBI mandate: The inflation target of the Reserve Bank of India is 4 per cent, with a band of 2 per cent on either side.
    • Inflation was at or above the upper threshold of 6 per cent since the beginning of this year.
    • Only after inflation hit 7 per cent did the RBI raise the repo rate.
    • Increase in interest rate: The RBI has raised the cost of borrowing (by 90 basis points so far), with a promise of more to come.
    • Fuel taxes reduced: The central government has cut fuel taxes with alacrity, and has banned the export of certain items.

    Role of monetary authorities

    • Monetary authorities raise interest rates if inflation is above the preferred target, and vice versa.
    • What should be the interest rate? Interest rates should rise more than inflation so the “real” interest rates rise, causing a compression in demand (and a fall in economic activity), which in turn will reduce inflation.
    • The RBI embraced this idea. In 2016, an independent monetary policy committee was constituted.

    Effects of global inflation

    • Some part of inflation is coming from abroad is an added complication.
    • Outflow of fund: There has also been a steady outflow of foreign funds from the stock market.
    • Depreciation of rupee: This could cause the rupee to depreciate, in turn, raising the prices of imported goods thereby adding to the inflationary woes.

    Two ways in which the Indian economy is different

    1] Role of agriculture in Indian economy

    • India’s non-food and non-oil components of the consumer price index CPI are about 47 per cent.
    •  In comparison, for the ECB, it is less than one-third of the CPI.
    • Of course, the RBI has no control over international prices of food and oil, so it must squeeze less than 50 per cent of the domestic economy to lower inflation.
    • The real interest rise works through demand compression.
    • But the problem is on the supply side.
    • Also, as compared to the RBI, the ECB would suffer a lower rise in inflation, and has a larger menu on which to apply demand compression.

    2] Exchange rate and its effect on output

    • Until the 1970s, the accepted wisdom was that an economy had to achieve both internal balance and external balance.
    • Internal balance consisted of full employment and low inflation using monetary and fiscal policies.
    • Over time, the internal balance has come to mean, from a policy perspective, low inflation, since “the market” will ensure full employment.
    • External balance required a balanced current account over some horizon (“don’t get too much into foreign debt”), by using, for example, the exchange rate.
    • For the OECD countries, the external balance was not a constraint any longer, since they had made their currencies fully convertible, and international capital flows were unrestricted.
    • But this is not the case with India.
    • If it were so, no one would be interested in discussing the country’s foreign exchange reserves, because these could be generated instantaneously by exchanging the domestic currency for foreign exchange.

    India’s foreign reserves and its impact on competitiveness of Indian products

    • Until 2020, India had seen massive portfolio capital inflows when OECD interest rates were low, and its current account deficits were financed by foreign reserves.
    • But portfolio inflows can, and do, reverse themselves.
    • FII inflows also contribute to India’s lack of competitiveness.
    • The RBI bought foreign exchange (with rupees).
    • But fearing this would stoke inflation, it sold government bonds, and removed the excess liquidity.
    • This “sterilised intervention” saw the RBI’s foreign exchange assets going up, matched by a reduced holding of government bonds.
    • Thus, India’s foreign exchange reserves were not its “own”— there were liabilities against it.
    • India’s Dutch Disease: The RBI could have let the rupee appreciate or have accumulated foreign reserves.
    • It chose an intermediate solution — a mix of an appreciation and accumulation of reserves.
    • The appreciation caused by inflows reduced international competitiveness for Indian products.
    • In effect, we had our own episode of the “Dutch Disease”.

    Way forward

    • As the RBI raises interest rates, outflows will possibly slow down with the rupee appreciating.
    • That is not good for external balance.
    •  It is easy to see that inflation targeting could be at odds with external balance.

    Conclusion

    If inflation does prove stubborn, and fighting inflation is all that the authorities in India worry about, we could see an external crisis.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

    Back2Basics: What is Dutch Disease?

    • Dutch disease is an economic term for the negative consequences that can arise from a spike in the value of a nation’s currency.
    • It is primarily associated with the new discovery or exploitation of a valuable natural resource and the unexpected repercussions that such a discovery can have on the overall economy of a nation.
    • Symptoms include a rising currency value leading to a drop in exports and a loss of jobs to other countries.

  • Towards a single low tax regime

    Context

    The introduction of a uniform GST was a watershed moment in India since the country’s earlier regime of taxes and cesses. However, GST is still a complicated tax regime with different slabs.

    Unified single tax

    • Empirical data from across the world on the benefits of a unified single tax is incontrovertible
    • This needs bold and clear reformist thinking at the political level.
    • Imposing a high GST in some areas does not make sense.
    • ‘Sin’ taxes are at cross purposes with the government’s policy of generating growth and creating jobs under ‘Make in India’.
    • High taxes on air-conditioners, air conditioned restaurants, chocolates and luxury cars create an economic ripple effect downstream, in a complex web of businesses that have symbiotic relationships.
    • The effect finally reaches down to the bottom of the employment pyramid.
    • Distrust between State and centre: There is distrust between the States and the Centre on revenue sharing.
    • There is also anger at the Centre for riding roughshod over the States’ autonomy and disregarding the federal structure.

    Multiple rates: A major shortcoming in the structure of GST

    • One of the most important shortcomings in the structure of GST is multiple rates.
    • The committee headed by the Chief Economic Adviser estimated the tax rate at 15-15.5 per cent.
    • It further recommended that in keeping with growing international practice, India should strive towards a single rate in the medium-term to facilitate administrative simplicity and compliance, but in the immediate context, it should have a three-tier structure (excluding zero).
    • The structure finally adopted was to have four rates of 5, 12, 18, and 28 per cent besides zero, though almost 75 per cent of the revenues accrue from the 12 and 18 per cent slabs.
    • Why single rate structure? The reasons for adopting a single rate structure in most countries are:
    • To have a simple tax system,
    • To prevent misclassifications and litigations arising therefrom,
    • To avoid an inverted duty structure of taxes on inputs exceeding those on outputs requiring detailed scrutiny and refunds.
    • Why multiple rates? The main reason for rate differentiation is equity.
    • But it is argued that this is an inefficient way of targeting benefits for the poor. 
    • Although the exempted and low-rated items are consumed relatively more by the poor, in absolute terms, the consumption may be more by the rich.

    Way forward

    • Move people up the value chain: The plan must be to figure out how to rev up the economy by making the rich and upper middle class spend and move more people up the value chain instead of designing a tax system that keeps these products out of the new consumer class’s reach.
    • The same lack of logic applies to taxes on wine, rum and beer, which generate large-scale employment and are the backbone of grape and sugarcane farming and the cocoa industry.
    • In the automobile sector, the GST on electric cars, tractors, cycles, bikes, low-end and luxury cars ranges anywhere from 5% to 50%.
    • The sale of automobiles is the barometer of an economy.
    • Single tax slab: A directive to the bureaucracy is necessary to come up with just two categories: goods eligible for zero tax and goods that will fall under a single rate, say 10% or 12%.
    • Then there are items that are exempt from GST.
    • Bring fuels under GST:  Petrol, diesel, aviation turbine fuel are not under the purview of GST, but come under Central excise and State taxes.
    • A single low tax regime will ensure compliance, widen the tax net, improve ease of doing business, boost the economy, create jobs, increase tax collections and reduce corruption

    Conclusion

    The Finance Minister should take a cue from the Prime Minister, who hinted at major reforms in the aftermath of COVID-19, and do away with all the confusing tax slabs in one fell swoop.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • Why rice and wheat bans aren’t the answer to inflation

    Context

    There are reports suggesting that the government is mulling a ban on rice exports to tame inflation.

    Background

    • This is surely not the first time an attempt is being made to ban wheat and rice exports.
    • It was also done in 2007-08, in the wake of the global financial crisis.
    • Perhaps government will also impose stocking limits on traders for a host of commodities, suspend futures trading in food items, and even conduct income tax raids on traders of food.

    Issues in India’s rice export strategy

    • Highest ever volume: India exported the highest-ever volume of 21 million metric tonnes (MMT) of rice in 2021-22 (FY22) in a global market of about 51.3 MMT, which amounts to about 41 per cent of global exports.
    • Reduces price: Such large volumes of rice exports brought down global prices of rice by about 23 per cent in March (YoY), when all other cereal prices, be it wheat or maize, were going up substantially in global markets.
    • In fact, in FY22, the unit value of exports of common rice was just $354/tonne, which was lower than the minimum support price (MSP) of rice.
    • Below MSP buying or leakage from PMGKAY: This meant that rice exporters were either buying rice (paddy) from farmers and millers at below the MSP or that quite a substantial part of rice was given free under the PM Garib Kalyan Ann Yojana (PMGKAY) was being siphoned away for exports at prices below MSP.
    • Artificial competitive advantage: Free electricity for irrigation in several states, most notably Punjab, and highly subsidised fertilisers, especially urea, create an artificial competitive advantage for Indian rice in global markets.
    • Suggestion: This is a perfect case for “optimal export tax” — not a ban — on rice exports.
    • If we can’t raise the domestic price of urea, which is long overdue, we should at least recover a part of the urea subsidy from rice exports by imposing an optimal export tax.

    Why export ban on wheat and rice is not a solution

    • Small contribution of cereals in inflation: In May, the consumer price index (CPI) inflation was 7.04 per cent (YoY). The cereals group as a whole contributed only 6.6 per cent to this inflation.
    • Within that, wheat, other than through PDS, contributed just 3.11 per cent and non-PDS rice contributed 1.59 per cent.
    • So, by imposing a ban on wheat and rice exports, India can’t tame its inflation as more than 95 per cent of CPI inflation is due to other items.
    • Interestingly, inflation in vegetables contributed 14.4 per cent to CPI inflation, which is more than three times the contribution of rice and wheat combined. And within vegetables, tomatoes alone contributed 7.01 per cent.
    • What all this indicates is that agri-trade policies need to be more stable and predictable, rather than a result of knee-jerk reactions.
    • Irresponsible behaviour: Export bans on food items also show somewhat irresponsible behaviour at the global level, unless there is some major calamity in the country concerned.
    • The recently concluded WTO ministerial meeting as well as the G-7 meet expressed concerns about food security in vulnerable nations.

    Way forward

    • Efficient value chain and processing facilities: In commodities like vegetables, most of which are largely perishable, we need to build efficient value chains and link these to processing facilities.
    • The same would go for onions, which often bring tears to kitchen budgets when prices shoot up.
    • A switch to dehydrated onion flakes and onion powder would be the answer.
    • Our food processing industry, especially in perishable products, is way behind the curve compared to several Southeast Asian nations.

    Conclusion

    If India wants to be a globally responsible player, it should avoid sudden and abrupt bans and, if need be, filter them through transparent export taxes to recover its large subsidies on power and fertilisers.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • After Ukraine, the new energy disorder

    Context

    Our long-standing “friend“ (Russia) is now in the bad books of our other friends (the US and Europe) and in a deepening relationship with our adversary (China). The Gulf countries are crucial for our energy security but Russia has replaced them as our principal supplier

    How Ukraine war is changing the energy policies

    • Six months back before the start of the Ukrainian conflict, there was a deepening sense that fossil fuels and the industry built around them were in terminal decline.
    • After the Ukraine war began, the petroleum market is tight and prices are ratcheting up.
    • Oil prices are close to $120/bbl and gas prices have jumped 500 per cent year on year in Europe.
    • The regulatory constraints on petroleum exploration and distribution infrastructure have been eased and several countries have removed the output limits on thermal power generation and reopened the coal mines that were closed.
    • The share prices of the oil majors are trading at multi-year highs.

    Three issues that influences India’s energy policy

    1] Long term implications of buying oil from Russia

    • India is now a major purchaser of Russian crude.
    • Last month, it reportedly purchased an average of 1.2 mbd.
    • If this figure is correct, Russia is now our largest provider of crude oil surpassing Saudi Arabia and Iraq.
    • The reason for this ramp-up is the price discount offered by Russia.
    • The decision is driven by good economics and energy security.
    • The Western world does not, however, see it this way.
    •  The question does arise: What might be the medium to longer-term implications of our “support” to Russia on relations with Capitol Hill, the UK and the European Commission?

    2] Increased economic and energy ties of Russia and China

    •  Russia and China have, for long, shared the view that the US is their biggest security threat.
    • China also increased the purchase of Russian oil and gas.
    • This tightened economic and energy embrace has implications for India.
    • Several questions will need to be addressed.
    • Russia’s role in India-China conflict: How might a post-Ukraine weakened Russia that is in hock to China respond to India in the event matters deteriorate on our border with China?
    • Will they be reliable providers of crude oil, military equipment, minerals, and metals essential for our green transition?
    • Will they be politically autonomous or client states?

    3] Important role of the Gulf states

    • The Ukrainian crisis has forced a presidential u-turn. Later this month, President Biden will visit Saudi Arabia.
    • Several other European leaders will also beat a path to the Gulf, all in the hope of extracting a promise of higher production to lower oil prices and some to negotiate gas supply deals.
    • India needs the Gulf producers for supply security. But it also wants oil prices to come down.
    •  The position of these producers in the reordered post-Ukraine energy landscape is, therefore, of relevance.
    • Will they respond positively to the courtship of Russia/China, move back into the Western fold, or stay outside both orbits, neutral and opportunistic?
    • The answer will bear on India’s energy security.

    Way forward

    • Integrated energy policy: What we need is a mechanism for the development and execution of an integrated energy policy.
    • This is because currently there is no executive authority responsible for energy.
    • There are ministries responsible for components of energy policy but no formal mechanism for aligning their separate approaches.
    • The Ukraine war has disrupted the existing energy order.
    • The new energy (dis) order has created fissures that impact our national security, economic growth, trade, clean energy supply lines, transfer of technology and international relations.
    • We cannot, therefore, afford to continue with our existing siloed approach.

    Conclusion

    The Ukrainian crisis has radically altered the contours of the global energy landscape and created a tangle of relationships and issues for India. To smoothen this tangle and address the issues India should adopt “a whole of the system” approach to energy policy.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • Functioning of the National Investigation Agency (NIA)

    The National Investigation Agency (NIA) has taken over the probe into the terrible beheading of a person in Udaipur by Jihadi radicalists.

    What is the NIA?

    • Headquartered in Delhi, the NIA has its branches in Hyderabad, Guwahati, Kochi, Lucknow, Mumbai, Kolkata, Raipur, Jammu, Chandigarh, Ranchi, Chennai, Imphal, Bengaluru and Patna.
    • It is a central agency mandated to investigate all the offences affecting:
    1. Sovereignty, security and integrity of India
    2. Friendly relations with foreign states
    3. Offences under the statutory laws enacted to implement international treaties, agreements, conventions and resolutions of the United Nations, its agencies and other international organisations
    • The offense include terror acts and their possible links with crimes like smuggling of arms, drugs and fake Indian currency and infiltration from across the borders.
    • The agency has the power to search, seize, arrest and prosecute those involved in such offences.

    When did the NIA come into being?

    • In the wake of the 26/11 Mumbai terror attack in November 2008, which shocked the entire world, the then United Progressive Alliance government decided to establish the NIA.
    • In December 2008, former Union Home Minister P. Chidambaram introduced the National Investigation Agency Bill.
    • The agency would deal with only eight laws mentioned in the schedule and that a balance had been struck between the right of the State and duties of the Central government to investigate the more important cases.
    • The agency came into existence on December 31, 2008, and started its functioning in 2009.
    • Till date, the NIA has registered 447 cases.

    What are the scheduled offences?

    The list includes the

    1. Explosive Substances Act,
    2. Atomic Energy Act,
    3. Unlawful Activities (Prevention) Act,
    4. Anti-Hijacking Act,
    5. Suppression of Unlawful Acts against Safety of Civil Aviation Act,
    6. SAARC Convention (Suppression of Terrorism) Act,
    7. Suppression of Unlawful Acts Against Safety of Maritime Navigation and Fixed Platforms on Continental Shelf Act,
    8. Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act and
    9. Relevant offences under the Indian Penal Code, Arms Act and
    10. Information Technology Act
    • In September 2020, the Centre empowered the NIA to also probe offences under the Narcotic Drugs and Psychotropic Substances Act that are connected to terror cases.

    How wide is NIA’s jurisdiction?

    • The law under which the agency operates extends to the whole of India.
    • It also applies to:
    1. Indian citizens outside the country;
    2. Persons in the service of the government wherever they are posted;
    3. Persons on ships and aircraft registered in India wherever they may be;
    4. Persons who commit a scheduled offence beyond India against the Indian citizen or affecting the interest of India.

    How does the NIA take up a probe?

    • As provided under Section 6 of the Act, State governments can refer the cases pertaining to the scheduled offences registered at any police station to the Central government (Union Home Ministry) for NIA investigation.
    • After assessing the details made available, the Centre can then direct the agency to take over the case.
    • State governments are required to extend all assistance to the NIA.
    • Even when the Central government is of the opinion that a scheduled offence has been committed which is required to be investigated under the Act, it may, suo motu, direct the agency to take up/over the probe.

     

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • Researchers found gene regulating Nitrogen absorption in Plant

    Researchers led by those from the National Centre of Biological Sciences, Tata Institute of Fundamental Research, Bengaluru (NCBS-TIFR), have found a new pathway that regulates nitrate absorption in plants.

    Nitrogen in plant nutrition

    • Nitrogen is one of the most important macronutrients needed for development of a plant.
    • It is a part of chlorophyll, amino acids and nucleic acids, among others.
    • It is mostly sourced from the soil where it is mainly absorbed in the form of nitrates and ammonium by the roots.
    • Nitrates also play a role in controlling genome-wide gene expression that in turn regulates root system architecture, flowering time, leaf development, etc.
    • Thus, while a lot of action takes place in the roots to absorb and convert nitrogen into useful nitrates, the absorbed nitrates in turn regulate plant development apart from being useful as a macronutrient.

    What is MADS27?

    • The gene MADS27, which regulates nitrate absorption, root development and stress tolerance, is activated by the micro-RNA, miR444, therefore offers a way to control these properties of the plant.
    • The researchers studied this mechanism in both rice (monocot) and tobacco (dicot) plants.

    Regulatory switches

    • In addition to this route, several gene regulatory switches that regulate nitrate absorption and root development, such as the micro-RNA, miR444, are known in monocot plants, such as rice.
    • The micro-RNA ‘miR444’ is specific to monocots.
    • When this is not made, its target, MADS27, is produced in higher abundance, and it improves biosynthesis and transport of the hormone auxin, which is key for root development and its branching.
    • This regulatory miR444 switch is known to turn off at least five genes called MADS box transcription factor genes.
    • The speciality of the MADS box transcription factors is that they function like switch boxes of their own.
    • They bind to their favourite specific DNA sequences and they switch the neighbouring genes “on.”

    Why is the discovery important?

    • Presence of nitrates is important for the plant development and also for grain production.
    • However, the overuse of nitrates in fertilizers, for instance, can lead to the dumping of nitrates in the soil which leads to accumulation of nitrates in water and soil.
    • This accumulation adds to soil and water pollution and increased contribution to greenhouse gases.
    • Also, since the whole process of nitrate absorption takes place in the roots, a well-developed root system is needed for this to take place optimally.
    • At one level, it is known that the hormone auxin is responsible for well-developed roots across all plants.
    • A number of genes are known to help with auxin production, improved nitrate transport and assimilation in plants.

    Significance of MADS27

    • The MADS27 transcription factor has a three-pronged effect on the plant.
    • First, it regulates nitrate absorption by switching “on” proteins involved in this process.
    • Second, it leads to better development of the roots by regulating auxin hormone production and transport.
    • Finally, and somewhat surprisingly to the researchers, it helps in the abiotic stress tolerance by keeping the main stress player proteins “on.”

     

     

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • Mayurbhanj’s superfood ‘Ant Chutney’

    The Kai Chutney made from Red Ants by the tribals of Mayurbhanj district in Odisha are seeking a Geographical Indications (GI) tag.

    Ant Chutney

    • Despite this, weaver ants are popular among the people, mostly of the tribes,
    • This food item, rich in proteins, calcium, zinc, vitamin B-12, iron, magnesium, potassium, sodium, copper, fibre and 18 amino acids, is known to boost the immune system and keep diseases at bay.
    • Applied under food category, the GI tag will help develop a structured hygiene protocol in the preparation of Kai chutney for standard wider use.
    • Geographical Indications labels enhance the reputation and value of local products and support local businesses.

    How is the Chutney prepared?

    • Weaver ants, Oecophylla smaragdina, are abundantly found in Mayurbhanj throughout the year.
    • They make nests with leaves of host trees.
    • The chutney is prepared by mixing and grinding salt, ginger, garlic and chilly and is sold by tribal people in rural markets.

     

    Answer this PYQ in the comment box:

    Q.Which of the following has/have been accorded ‘Geographical Indication’ status?

    1. Banaras Brocades and Sarees
    2. Rajasthani Daal-Bati-Churma
    3. Tirupathi Laddu

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

    [wpdiscuz-feedback id=”g6v5t9ixgo” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

    Back2Basics:  Geographical Indication

    • A GI is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.
    • Nodal Agency: Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry
    • India, as a member of the World Trade Organization (WTO), enacted the Geographical Indications of Goods (Registration and Protection) Act, 1999 w.e.f. September 2003.
    • GIs have been defined under Article 22 (1) of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.
    • GI is granted for a term of 10 years in India. As of today, more than 300 GI tags has been allocated so far in India (*Wikipedia).
    • The tag stands valid for 10 years.

     

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • How the RBI unconventionally innovated policy to fight the pandemic

    Context

    Recently, the RBI has been at the receiving end for mission the inflation target.

    Understanding the RBI’s rationale

    • Supply side shock: Inflation has been largely the result of supply side shocks from vegetable prices, caused by crop damages due to unseasonal rains (tomato, onion and potato) in late 2019 and widespread supply-side disruptions after the outbreak of the pandemic.
    • A narrow-minded focus on inflation caused by supply shocks would have constrained the MPC from supporting growth amidst the unprecedented loss of life and livelihood.
    • Focusing on recovery: Therefore, it was necessary to provide a lifeline to the economy at that juncture by focusing on the recovery.
    • Moreover, the wide tolerance band of 200bps +/- in the inflation targeting framework was specifically designed to accommodate such supply shocks, which provided the flexibility in the flexible targeting (FIT) framework.
    • Taking into account objective of growth: In contrast to a pure inflation targeting framework (inflation nutters), the amended mandate of the RBI under FIT reads as “price stability, taking into account the objective of growth”.
    • Therefore, the MPC was justified in looking through the higher inflation print during the pandemic while trying to resurrect growth.

    No contradiction between Governor’s statement and MPC resolution

    • Recently, the MPC highlighted inflation concerns and voted to raise the policy repo rate.
    • The governor’s statement of the same day noted that the RBI will ensure an orderly completion of the government’s borrowing programme.
    • Contradictory objectives: It is said that the above two actions created confusion as lowering inflation and lowering government bond yields are contradictory objectives.
    • This justification is redundant as an orderly completion of the borrowing programme does not imply lowering yields.
    • It basically ensures that the borrowing programme is completed seamlessly at low costs (ensured through auctions).
    • Moreover, from a theoretical perspective, this is not inconsistent because controlling inflation and lowering inflation expectations bodes well for the term premia of bond yields — which moderate once expectations are anchored.
    • Therefore, if inflation is reined in, the government stands to gain in terms of lower interest costs.
    • Was width of corridor lost during pandemic? It is argued that  the MPC kept repo rates unchanged while the RBI changed the reverse repo rate during the pandemic, meaning that the fixed width of the corridor was lost and the MPC lost its role in setting interest rates and so, its credibility.
    • This argument does not stand scrutiny.
    • During the pandemic, the policy repo rate was cumulatively reduced by an unprecedented 115 bps and the interest rate on the overnight fixed-rate reverse repo was reduced cumulatively by 155 bps.
    • Assymetric corridor justified in crises: This measure was not incongruous with contemporary wisdom as an asymmetric corridor has been justified, particularly during crisis times (Goodhart, 2010).
    • Given that elevated inflation concerns precluded the possibility of any further repo rate cuts (cumulatively reduced by 250 basis points since February 2019), financial conditions were eased substantially by reducing the reverse repo rate, which lowered the floor rate of interest in the economy.
    • Since the mandate of the MPC is to control inflation for which the policy instrument is the repo rate, the RBI had used the LAF through changes in the reverse repo rate to alter liquidity conditions.

    Trade offs involved in inflation targeting for emerging economies

    • Inflation-targeting countries, because of their sole focus on inflation, experience lower inflation volatility but higher output volatility.
    • Higher output volatility entails a higher sacrifice ratio — the proportion of output foregone for lowering inflation.
    • For an emerging economy, the costs of higher output foregone against the benefits of lower inflation must always be balanced as potential output keeps on changing given the shift of the production function.
    • Developed countries, on the other hand, operate near full employment — therefore, sacrifice ratios are lower.
    • As a result, smoothening inflation volatility is relatively costless for them.

    Conclusion

    The RBI has innovated admirably under its current stewards during the pandemic, keeping in mind the task of reinvigorating the economy. Despite the existing targeting framework, it did not get fixated on a one-point agenda, daring to look beyond the inflation print.

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

    Back2Basics: Liquidity corridor

    • The Corridor in monetary policy of the RBI refers to the area between the reverse repo rate and the MSF rate.
    • Reverse repo rate will be the lowest of the policy rates whereas Marginal Standing Facility is something like an upper ceiling with a higher rate than the repo rate.
    • The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

  • What are G-Sec Yields?

    Government Securities (G-Secs) yields are at an all-time high.

    What are G-Secs?

    • These are debt instruments issued by the government to borrow money.
    • The two key categories are:
    1. Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
    2. Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years

    Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.

    Why G-Secs?

    • Like bank fixed deposits, g-secs are not tax-free.
    • They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
    • However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
    • Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

    How are G-sec yields calculated?

    • G-sec yields change over time; often several times during a single day.
    • This happens because of the manner in which G-secs are structured.
    • Every G-sec has a face value, a coupon payment and price.
    • The price of the bond may or may not be equal to the face value of the bond.
    • Here’s an example: Suppose the government floats a 10-year G-sec with a face value of Rs 100 and a coupon payment of Rs 5.
    • If one were to buy this single G-sec from the government, it would mean that one will give Rs 100 to the government today and the government will promises to 1) return the sum of Rs 100 at the end of tenure (10 years), and 2) pay Rs 5 each year until the end of this tenure.
    • At this point, the face value of this G-sec is equal to its price, and its yield (or the effective interest rate) is 5%.

    How do G-sec yields go up and down?

    • Imagine a scenario in which the government floats just one G-sec, and two people want to buy it.
    • Competitive bidding will ensue, and the price of the bond may rise from Rs 100 (its face value) to Rs 105.
    • Now imagine another lender in the picture, which pushes the price further up to Rs 110.

    What do G-sec yields show?

    • If G-sec yields (say for a 10-year bond) are going up, it would imply that lenders are demanding even more from private sector firms or individuals; that’s because anyone else is riskier when compared to the government.
    • It is also known that when it comes to lending, interest rates rise with the rise in risk profile.
    • As such, if G-sec yields start going up, it means lending to the government is becoming riskier.
    • If you read that the G-sec yields are going up, it suggests that the bond prices are falling. But the prices are falling because fewer people want to lend to the government.
    • And that in turn happens when people are worried about the government’s finances (or its ability to pay back).
    • The government’s finances may be in trouble because the economy is faltering and it is unlikely that the government will meet its expenses.
    • By the reverse logic, if a government’s finances are sorted, more and more people want to lend money to such a G-sec.
    • This in turn, leads to bond prices going up and yields coming down.

    Try this PYQ:

    Consider the following statements:

    1. The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
    2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
    3. Treasury bills offer are issued at a discount from the par value.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 3 Only

    (c) 2 and 3 only

    (d) 1, 2 and 3

     

    [wpdiscuz-feedback id=”044lnrh2wu” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

  • GST revenues surpass ₹1.44 lakh crore

    India recorded its second-highest monthly gross GST revenues in June at ₹1,44,616 crore, 56% more than a year earlier when the second COVID wave had hit economic activity.

    What is GST?

    • GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
    • The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017. It is a single domestic indirect tax law for the entire country.
    • It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
    • Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

    Answer this PYQ in the comment box:

    Q.All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the (CSP 2015):

    (a) Contingency Fund of India

    (b) Public Account

    (c) Consolidated Fund of India

    (d) Deposits and Advances Fund

     

    [wpdiscuz-feedback id=”jkgx8spg2w” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

    What are the components of GST?

    There are three taxes applicable under this system:

    1. CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
    2. SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
    3. IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

    Advantages Of GST

    • GST has mainly removed the cascading effect on the sale of goods and services.
    • Removal of the cascading effect has impacted the cost of goods.
    • Since the GST regime eliminates the tax on tax, the cost of goods decreases.
    • Also, GST is mainly technologically driven.
    • All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.

    Issues with GST

    • High operational cost
    • GST has given rise to complexity for many business owners across the nation.
    • GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
    • Petrol is not under GST, which goes against the ideals of the unification of commodities.

    Take a look at the share of GST in government earnings for the previous fiscal:

    UPSC can ask about the majority component of the Revenue Receipts of the govt. See how Corporate tax is nearing the GST revenues.

    Do you think it will surpass GST revenue when the economy is fully recovered?

     

    UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)