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Subject: Economics

  • What is Small Savings Scheme?

    Economists expect the Centre to raise the interest rates paid on small savings schemes for the July to September 2022 quarter.

    Small Savings Scheme

    • Small Savings Schemes are a set of savings instruments managed by the central government with an aim to encourage citizens to save regularly irrespective of their age.
    • They are popular as they provide returns higher than bank fixed deposits, sovereign guarantee and tax benefits.

    How is it managed?

    • Since 2016, the Finance Ministry has been reviewing the interest rates on small savings schemes on a quarterly basis.
    • All deposits received under various schemes are pooled in the National Small Savings Fund.
    • The money in the fund is used by the Centre to finance its fiscal deficit.

    What are the different saving schemes?

    The schemes can be grouped under three heads –

    1. Post office deposits
    2. Savings certificates and
    3. Social security schemes

    (1) Post Office Deposits

    • Under this we have the savings deposit, recurring deposit and time deposits with 1, 2, 3 and 5 year maturities and the monthly income account.
    • The savings account currently pays an interest of 4% per annum and can be opened individually or jointly with an initial investment of Rs 500.
    • The recurring deposit that pays 5.8% a year compounded quarterly matures after 60 months from the date of opening.
    • It allows investors to save on a monthly basis with a minimum deposit of Rs 100 per month.
    • Investments under the 5-year time deposit up to Rs 1.5 lakh further qualifies for benefit under section 80C of Income Tax Act.

    (2) Savings Certificates

    • Under this, we have the National Savings Certificate and the Kisan Vikas Patra.
    • The National Savings Certificate pays interest at a rate of 6.8% per annum upon maturity after 5 years. The interest that is earned is reinvested into the scheme every year automatically.
    • The NSC also qualifies for tax saving under Section 80C of the income tax act.
    • The Kisan Vikas Patra, which is open to everyone, doubles your one-time investment at the end of 124 months signifying a return of 6.9% compounded annually.
    • The minimum investment amount is Rs 1000 while there is no upper limit.

    (3) Social security schemes

    • In the third head of social security schemes, there is Public Provident Fund, Sukanya Samriddhi Account and Senior Citizens Savings Scheme.

    a. Public Provident Fund

    • The Public Provident Fund is a popular saving option for long term goals like retirement.
    • It pays 7.1% a year and qualifies for tax benefit under Section 80C of the Income Tax Act.
    • Upon maturity of the account after 15 years, it can be extended indefinitely in blocks of 5 years.
    • The accumulated amount and interest earned are exempt from tax at the time of withdrawal.

    b. Sukanya Samriddhi Account

    • The Sukanya Samriddhi Account was launched in 2015 under the Beti Bachao Beti Padhao campaign exclusively for a girl child.
    • The account can be opened in the name of a girl child below the age of 10 years.
    • The scheme guarantees a return of 7.6% per annum and is eligible for tax benefit under Section 80C of the Income Tax Act.
    • The tenure of the deposit is 21 years from the date of opening of the account and a maximum of Rs 1.5 lakh can be invested in a year.

    c. Senior Citizen Savings Account

    • And finally, the 5-year ​​Senior Citizen Savings Account can be opened by anyone who is over 60 years to age.
    • It carries an interest of 7.4% per annum payable quarterly and qualifies for Section 80C tax benefit.
    • These time-tested and safe modes of investments don’t offer quick returns, but are safer when compared to market-linked schemes.

     

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  • What does our Current Account Deficit (CAD) show?

    The data for the country’s current account balance for the fourth quarter of FY 2021-22 shows a decrease in the deficit to 1.5% of gross domestic product (GDP) from 2.6% of GDP in Q3 FY 2021-22.

    What is Current Account Deficit (CAD)?

    • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
    • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
    • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

    Components of Current Account

    Current Account Deficit (CAD) =

    Trade Deficit + Net Income + Net Transfers

    (1) Trade Deficit

    • Trade Deficit = Imports – Exports
    • A Country is said to have a trade deficit when it imports more goods and services than it exports.
    • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
    • A trade deficit represents an outflow of domestic currency to foreign markets.

    (2) Net Income

    • Net Income = Income Earned by MNCs from their investments in India.
    • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
    • This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding.
    • Net income is measured by the following things:
    1. Payments made to foreigners in the form of dividends of domestic stocks.
    2. Interest payments on bonds.
    3. Wages paid to foreigners working in the country.

    (3) Net Transfers

    • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners.
    • It Includes Remittances, Gifts, Donation etc

    How does Current Account Transaction takes place?

    • While understanding the Current Account Deficit in detail, it is important to understand what the current account transactions are.
    • Current account transactions are transactions that require foreign currency.
    • Following transactions with from which component these transactions belong to :
    1. Component 1 : Payments connection with Foreign trade – Import & Export
    2. Component 2 : Interest on loans to other countries and Net income from investments in other countries
    3. Component 3 : Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with Foreign travel, Education and Medical care of parents, spouse and children

    What has been the recent trend?

    • In Q4 FY 2021-22, CAD improved to 1.5% of GDP or $13.4 billion from 2.6% of GDP in Q3 FY 2021-22 ($22.2 billion).
    • The difference between the value of goods imported and exported fell to $54.48 million in Q4FY 2021-22 from $59.75 million in Q3 FY2021-22.
    • However, based on robust performance by computer and business services, net service receipts rose both sequentially and on a year-on-year basis.
    • Remittances by Indians abroad also rose.

    What are the reasons for the current account deficit?

    • Intensifying geopolitical tensions and supply chain disruptions leading to crude oil and commodity prices soaring globally have been exerting upward pressure on the import bill.
    • A rise in prices of coal, natural gas, fertilizers, and edible oils have added to the pressure on trade deficit.
    • However, with global demand picking up, merchandise exports have also been rising.

    How will a large CAD affect the economy?

    • A large CAD will result in demand for foreign currency rising, thus leading to depreciation of the home currency.
    • Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments (FDI).
    • However, worsening CAD will put pressure on inflow under the capital account.
    • Nevertheless, if an increase in the import bill is because of imports for technological upgradation it would help in long-term development.

    Should a widening CAD worry policymakers?

    • Data shows the trade deficit widened to $24.29 billion in May 2022 from $6.53 billion a year ago.
    • Merchandise exports in May 2022 rose by 20.55% over May 2021, while merchandise imports rose by 62.83%.
    • However, if increasing imports is accompanied by an expansion in industrial production, it is a sign of economic development.
    • Immediately after the covid-19 lockdown, after a long time, the country experienced a current account surplus.

     

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  • What is GST Compensation Cess?

    The Centre has extended the time for levy of GST compensation cess by almost four years till March 31, 2026.

    What is the news?

    • The Goods and Services Tax (Period of Levy and Collection of Cess) Rules were notified in 2022 by the Finance Ministry.
    • The levy of cess was to end on June 30 but the GST Council, chaired by Union Finance Minister decided to extend it till 2026.

    What is GST?

    • GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
    • 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).

    Compensation Cess under GST regime

    • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
    • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
    • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
    • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

    Alternatives to prevent losses

    • The input tax credit can help a producer by partially reducing GST liability by only paying the difference between the tax already paid on the raw materials of a particular good and that on the final product.
    • In other words, the taxes paid on purchase (input tax) can be subtracted from the taxes paid on the final product (output tax) to reduce the final GST liability.

    Distributing GST compensation

    • The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
    • The compensation fund so collected is released to the states every 2 months.
    • Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

    Significance of GST compensation

    • States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
    • GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
    • Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

     

    Try this question from CSP 2018:

    Q.Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

     

    [wpdiscuz-feedback id=”0fc3cnkef0″ question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

     

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  • Need for transparency in RBI’s policy making

    Context

    Modern inflation targeting central banks are often bound by explicit statutory mandates. Critics have argued that the RBI ignored its statutory inflation targeting duty.

    Why transparency and predictability of the central bank is important?

    • Prior to the 1990s, central banks preferred secrecy.
    • Surprising market: The common wisdom was that the efficacy of monetary policy depended on taking markets by surprise.
    • This belief started changing gradually with the adoption of inflation targeting.
    • Influencing the inflation expectations: Targeting inflation required central banks to influence households’ and firms’ decisions.
    • Thus emerged the need for central banks to be transparent and predictable.

    Independence with accountability of the Central bank

    • There was growing international recognition that central banks as monetary authorities should enjoy a relatively higher degree of independence from governments.
    •  In a democratic polity, this could only be expected in exchange for increased accountability.
    • As a result, regulatory governance gradually emerged as a relevant consideration for independent central banks over the last three decades.

    Regulatory governance at the RBI

    • The regulatory governance discourse in India came into the focus with the report of the Financial Sector Legislative Reforms Commission in 2013.
    •  Like a state, regulators usually enjoy significant legislative, executive and judicial powers and should be subject to appropriate accountability mechanisms.
    • These should include internal separation of powers; a well-structured regulation making process overseen by the board, through public consultation and cost-benefit analysis; duty to explain its actions to regulated entities and public at large; regular reporting requirements; and judicial review.
    • Based on these recommendations, the Ministry of Finance released a handbook in 2013 for voluntary adoption of these enhanced governance standards by all financial sector regulators.
    • These developments turned the spotlight on the RBI’s regulatory governance.

    Reasons for the criticism of the RBI

    • Targeting exchange rate: The central bank appears to have ventured into uncharted legal territory by possibly targeting the exchange rate instead of inflation.
    • Regulatory governance issues: Separately, critics have also highlighted broader regulatory governance challenges at the RBI.
    • For instance, its alleged use of informal nudges to restrict a foreign player’s access to the Indian payment ecosystem goes against an adverse Supreme Court ruling.
    • Such criticisms underline an urgent need to improve the credibility of the central bank’s rule of law quotient.
    • Least responsive in legislative function:  A 2019 research paper found the central bank’s legislative functions to be the least responsive in comparison to three other regulators – SEBI, TRAI and AERA.
    • RBI’ss consultation papers usually presented only one solution and did not offer merits and demerits of multiple possible solutions.

    Implications of weak regulatory governance: Judicial scrutiny

    • Weak regulatory governance resulted in weak regulations, inviting judicial scrutiny.
    • Changes in master circular: In 2019, the Supreme Court effectively rewrote RBI’s master circular on wilful defaulters to provide additional procedural safeguards to borrowers.
    •  Striking down of crypto ban: In 2020, the court struck down an RBI circular that sought to ban its regulated entities from dealing or settling in virtual currencies.
    • The court found that the RBI had neither adduced any cogent evidence of the likely harm, nor had it considered any less intrusive alternative before issuing the circular.

    RRA 2.0 suggestions for the RBI

    • The recent report of the Regulations Review Authority 2.0 (RRA) offers useful suggestions to improve the central bank’s regulation-making process.
    • The RBI had set up the Review Authority 2.0 (RRA) in April 2021 to streamline its regulations.
    • Skill improvement in regulatory drafting: RRA has advocated for skill development in regulatory drafting inside the RBI.
    • Public consultation: To improve regulatory governance at the RBI, RRA suggested that its regulatory instructions should be issued only after public consultation, except if they are urgent or time sensitive.
    • They must contain a brief statement of objects and reasons clearly explaining the rationale behind their issuance.
    •  Although much softer than the FSRLC standards, RRA nevertheless signal a progressive step forward.

    Conclusion

    The RBI should heed these recommendations. It should ideally hardcode the suggested principles into a secondary legislation that is binding on itself. That would be the best way to signal that the central bank takes regulatory governance and rule of law seriously.

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  • Agreement on Fisheries Subsidies (AFS)

    Context

    The recently concluded twelfth ministerial conference of the World Trade Organisation (WTO) adopted the trade agreement called the Agreement on Fisheries Subsidies (AFS).

    About the AFS

    • WTO negotiations on fisheries subsidies were launched in 2001 at the Doha Ministerial Conference, with a mandate to “clarify and improve” existing WTO disciplines on fisheries subsidies.
    • At the 2017 Buenos Aires Ministerial Conference (MC11), ministers decided on a work programme to conclude the negotiations by aiming to adopt, at the next Ministerial Conference, an agreement on fisheries subsidies which delivers on Sustainable Development Goal 14.6.
    • The recently concluded twelfth ministerial conference of the World Trade Organisation (WTO) adopted a sustainability-driven trade agreement called the Agreement on Fisheries Subsidies (AFS).

    Provisions adopted in the AFS

    • Prohibits three subsidies: Fundamentally, AFS prohibits three kinds of subsidies:
    • First, illegal, unreported, or unregulated (IUU) fishing.
    • Second, fishing of already over-exploited stocks.
    • Third, fishing on unregulated high seas.
    • Two-year transition period for developing countries: As part of special and differential treatment (S&DT), developing countries like India have been given a two-year transition period for phasing out the first two kinds of subsidies within their Exclusive Economic Zone (EEZ).
    • However, the final negotiated outcome, most crucially, lacks the much-needed discipline on subsidies for fishing in other members’ waters and those that contribute to overcapacity and over-fishing (OCOF).
    • Limited AFS: WTO member countries agreed to a limited AFS sans regulations disciplining OCOF subsidies, which have been pushed to the future and are expected to be completed within four years.
    • If negotiations fail, the AFS will stand terminated, as provided in Article 12.
    • Meanwhile, all countries can continue providing most OCOF subsidies, that is, except for fishing on unregulated high seas.

    What are the implications for India?

    • Longer transition period required: India has been demanding that developing countries be given a longer transition period of 25 years to put an end to OCOF subsidies within their EEZ.
    • Economic growth through ocean resources: Given its long coastline of nearly 7,500 kilometres, the blue economy — sustainable use of ocean resources for economic growth — occupies a cardinal place in India’s development trajectory.
    •  India has set a target of exporting marine products worth $14 billion by 2025.
    • Policy space for marine infrastructure: India needs the policy space to invest in developing the marine infrastructure to harness the full potential of the blue economy.
    • Livelihood concerns: Moreover, India needs to protect the livelihood concerns of close to four million marine farmers, the majority of whom are engaged in small-scale, artisanal fishing, which does not pose a great threat to sustainability.
    • However, India’s demand for a longer transition period was not acceptable to many countries who insisted on this period being seven years

    The disparity between Developed countries and Developing countries

    • India rightly contends that WTO disciplines should not be developed in a manner that throttles its emerging sector while richer nations continue to negotiate exemptions for indefinite subsidisation and exclusion of horizontal, non-specific fuel subsidies in the text.
    • Rich countries have historically provided massive subsidies to build capacity for large-scale fishing and fishing in distant waters, thereby contributing the most to depletion.
    • India provided subsidies worth a mere $277 million in 2018, in sharp contrast to the top five subsidisers: China, EU, US, South Korea, and Japan, whose subsidies range from $7,261-$2,860 million respectively.

    Way forward

    • Comprehensive agreement: For the sake of sustainability, countries need to overcome their differences soon and forge a comprehensive agreement with the inclusion of meaningful S&DT, else they risk the indefinite continuation of harmful subsidies by all players.
    • One balancing act could be to consider different ways to effectuate such flexibilities while accommodating the demands in a more targeted manner.
    • Strengthening infrastructure: India could strengthen infrastructure and mechanisms to be able to utilise any future exemptions.

    Conclusion

    For India, the AFS is less-than-perfect, with a potential of no real outcome at the end of four years if the negotiations fail. But negotiations over the global commons are not easy.

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  • The tricky restructuring of global supply chains

    Context

    After the go-go 1990s and 2000s the pace of economic integration stalled in the 2010s, as firms grappled with the aftershocks of a financial crisis, a populist revolt against open borders and President Donald Trump’s trade war.

    Background of globalisation

    • After the Berlin Wall fell in 1989, main theme of globalisation was efficiency.
    • Companies located production where costs were lowest, while investors deployed capital where returns were highest.
    • Governments aspired to treat firms equally, regardless of their nationality, and to strike trade deals with democracies and autocracies alike.
    • Low prices: All this kept prices low for consumers and helped lift 1bn people out of extreme poverty as the emerging world, including China, industrialised.

     

    Recent worries with globalisation

    • Volatile capital flows destabilised financial markets. Many blue-collar workers in rich countries lost out.
    • Recently, two other worries have loomed large.
    • Cost in case of disruption is high: First, some lean supply chains are not as good value as they appear: mostly they keep costs low, but when they break, the bill can be crippling.
    • Covid-19 was a shock, but wars, extreme weather or another virus could easily disrupt supply chains in the next decade.
    • Dependencies on autocracies have increased: The second problem is that the single-minded pursuit of cost advantage has led to a dependency on autocracies that abuse human rights and use trade as a means of coercion.
    • Hopes that economic integration would lead to reform—what the Germans call “change through trade”—have been dashed: autocracies account for a third of world gdp.

    The fragile state of the international trade and beginning of new phase in globalisation

    • The pandemic and war in Ukraine have triggered a once-in-a-generation reimagining of global capitalism in boardrooms and governments.
    • Supply chain resilience: The supply chains are being transformed, from the $9trn in inventories, stockpiled as insurance against shortages and inflation, to the fight for workers as global firms shift from China into Vietnam.
    • Preferring security over efficiency: This new kind of globalisation is about security, not efficiency: it prioritises doing business with people you can rely on, in countries your government is friendly with.
    • One indication that companies are shifting from efficiency to resilience is the vast build-up in precautionary inventories: for the biggest 3,000 firms globally these have risen from 6% to 9% of world gdp since 2016.
    • Many firms are adopting dual sourcing and longer-term contracts.
    • Investment pattern is inverted: The pattern of multinational investment has been inverted: 69% is from local subsidiaries reinvesting locally, rather than parent firms sending capital across borders.
    • Strategic autonomy: The industries under most pressure are already reinventing their business models, encouraged by governments that from Europe to India are keen on “strategic autonomy”.
    • Moving towards vertical integration: The car industry is copying Elon Musk’s Tesla by moving towards vertical integration, in which you control everything from nickel mining to chip design.
    • Long-term supply deals: In energy, the West is seeking long-term supply deals from allies rather than relying on spot markets dominated by rivals.

    Challenges

    • Protectionism: The danger is that a reasonable pursuit of security will morph into rampant protectionism, jobs schemes and hundreds of billions of dollars of industrial subsidies.
    • Long-run inefficiencies: The long-run inefficiency from indiscriminately replicating supply chains would be enormous.
    • Were you to duplicate a quarter of all multinational activity, the extra annual operating and financial costs involved could exceed 2% of world gdp.

    Way forward

    • Restraint: Because of the above challenges, restraint is crucial.
    • Diversification: Governments and firms must remember that resilience comes from diversification, not concentration at home.
    • Diversify in the areas controlled by autocracies: The choke-points autocracies control amount to only about a tenth of global trade, based on their exports of goods in which they have a leading market share of over 10% and for which it is hard to find substitutes.
    • The answer is to require firms to diversify their suppliers in these areas, and let the market adapt. 

    Conclusion

    Will today’s governments be up to the task? Myopia and insularity abound. But if you are a consumer of global goods and ideas—that is to say, a citizen of the world—you should hope globalisation’s next phase involves the maximum possible degree of openness.

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  • Communication gap between the MPC and RBI

    Context

    Communication is a critical element of monetary policy. Yet there seems to be a gap between what the MPC says and what the RBI does.

    About MPC

    • The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016,  to provide for a statutory and institutionalised framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth.
    • Highest monetary policy-making body: By law, the Monetary Policy Committee is the highest monetary policy-making body in the land, tasked with deciding monetary policy changes at regular intervals.
    • Composition: The MPC will have six members – the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three members would represent the Government of India.
    • The MPC will be chaired by the Governor.
    • Under the inflation targeting regime, the most important role in communication belongs to the MPC.

    Communication with public

    • Monetary policy changes are communicated through formal statements, with the discussions underlying these decisions also being published, so that the public can understand why the MPC decided the way that they did.
    • Communication gap: Over the past few years, a communication gap seems to have opened up between what the MPC has been saying and what the RBI has been doing, thereby potentially eroding the credibility of the IT framework.
    • Influencing inflation expectations: Communication is an important part of the ability of the central bank to influence inflation expectations. 

    Following are the ways which indicate the communication gap between the RBI and the MPC, with several implications for the credibility of the MPC.

    1] Separate statements

    • During the first few years of the inflation-targeting regime from 2016 to 2018, the process of communication worked quite well.
    • On the days of policy announcements, the governor and his deputies would participate in a press conference.
    • From 2019 onwards, however, things began to change.
    • Governor’s separate statement: The RBI began to release a separate governor’s statement on the day of the monetary policy meeting, presenting an inflation outlook and even explaining the decision taken by the MPC.
    • MPC statement: It has overlapped with the MPC statement; at times, it has seemed somewhat different.
    • For example, following the June 8 Monetary Policy Review the MPC highlighted inflation concerns, and voted in favour of raising the policy repo rate.
    • On the same day, a governor’s statement mentioned that the central bank will also remain focussed on the orderly completion of the government’s borrowing programme.
    • Confusion: The issuance of two such different statements can lead to confusion, especially as lowering inflation and lowering government bond yields are contradictory policy objectives.

    Why is communication so crucial? To influence inflation expectations!

    • If the public believes the central bank is committed to keeping inflation under control, then it will act accordingly.
    • Firms will moderate their price increases, fearing that large price rises will make them uncompetitive.
    • Meanwhile, workers will accept moderate wage increases, while investors will accept low interest rates on their bond purchases.
    • With everyone acting in this way, it will be easier for the central bank to ensure that inflation indeed remains low.
    • Anchored inflation expectations: If inflation expectations are well anchored, then it becomes relatively easy for the central bank to ensure that inflation returns to the target level before too long.

    2] Change in the Monetary Policy Corridor width during pandemic

    • Deciding the repo rate: The most important task of the MPC, enshrined in the RBI Act (Amended), 2016 that introduced IT, is to decide the repo rate, since this has long been the lynchpin of India’s monetary policy framework.
    •  Ever since the early 2000s, policy had aimed to keep overnight money market rates in a corridor, with the lower bound established by the reverse repo rate and the upper bound by the repo rate.
    • Since the width of this corridor was fixed, once the repo rate was decided, the reverse repo rate was automatically determined, and market overnight rates adjusted accordingly.
    • During the Covid-19 pandemic, the RBI constantly adjusted the reverse repo rate even as the MPC kept the repo rate unchanged.
    • As a result, the fixed width of the corridor was lost, and the MPC lost any role in determining interest rates.

    3] Introduction of policy instruments outside the remit of MPC

    • During pandemic, the RBI introduced a number of new policy instruments, again outside the remit of the MPC.
    • GSAP: It brought in the GSAP programme through which it pre-commited to buying a certain amount of dated government bonds in order to control their yields.
    • Variable reverse repo auctions: It then introduced variable reverse repo auctions, and more recently, replaced the reverse repo rate with the long-dormant standing deposit facility rate.
    • The rationale for this was not explained in the MPC statement.
    • All unconventional monetary policy announcements were kept outside the MPC statement.
    • This raised the questions about the role of the committee in deciding monetary policy actions at a crucial time like the pandemic.

    4] Intervention in the foreign exchange market

    • The RBI has been intervening in the foreign exchange market to manage the rupee.
    • Forex interventions by definition influence the domestic monetary base and inflation.
    • Yet the MPC in its monetary policy statements does not discuss either the exchange rate dynamics or the forex interventions.
    • Just as it does not discuss the RBI’s interventions in the bond market to lower the yields.

    Way forward

    • In its latest two statements, the MPC indicated that policy would now be focusing on bringing India’s inflation rate under control.
    • Clear policy framework: If the RBI is going to be successful in this endeavour, the first step must be to close the communication gap, by reintroducing a simple and clear policy framework and restoring the central role of the MPC.

    Conclusion

    The net result of all these actions is a potential loss of both clarity and credibility. The communication gap will need to be closed in order for the RBI to become successful in bringing inflation back to its 4 per cent target level.

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    Back2Basics: Monetary Policy Corridor

    • The Corridor in the 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.
    • As per the monetary policy of the RBI, ideally, the call rate should travel within the corridor showing a comfortable liquidity situation in the financial system and economy.

    What is GSAP?

    • The G-Sec Acquisition Programme (G-SAP) is basically an unconditional and a structured Open Market Operation (OMO), of a much larger scale and size.
    • G-SAP is an OMO with a ‘distinct character’.
    • The word ‘unconditional’ here connotes that RBI has committed upfront that it will buy G-Secs irrespective of the market sentiment.

  • Recruitment of 10 lakh people in “mission mode

    Context

    The government recently announced that 10 lakh government jobs will be provided over the next 18 months on a “mission mode”.

    Background

    • The government recently announced it would recruit 10 lakh people in “mission mode” over the next one-and-a-half years.
    • The announcement came at a time when the unemployment rate for youth (aged 15-29 years) in urban areas has been hovering at over 20 per cent for the last several quarters.
    • According to the Quarterly Bulletin of Periodic Labour Force Survey (PLFS), the youth unemployment rate, according to current weekly status, stood at 20.8 per cent in urban areas during October-December 2021.
    • The annual PLFS report too shows that the overall youth unemployment rate, according to usual status (ps+ss), was at 12.9 per cent — 18.5 per cent in urban areas and 10.7 per cent in rural areas — during July-June 2020-21.

    Three takeaways from the announcement

    • One, the creation of employment is indeed a problem and can no longer be hidden from the public discourse.
    • Two, the private sector, especially modern sectors such as the service and manufacturing sectors, which are dominated by multinational companies, have not created many jobs.
    • Even if the Information Technology sector or the modern gig economy have created jobs, these are either very high-skilled jobs or low-skilled ones.
    • Three, the government in the Nehruvian scheme of development occupied an important place in the labour market.
    • The government is now forced to step in as persistently rising inflation, unemployment and underemployment threaten to politically affect it.

    Employment data and issues with it

    • Government is at present relying on the Employees’ Provident Fund Organisation/National Pension System/Employees’ State Insurance Scheme registrations and exits as indicators of the formal labour market.
    • This could be misleading as companies may be increasing registrations to cross the threshold to become eligible to fall under any of these.
    • Formalisation: Hence, this might be more a case of formalisation rather than employment generation.
    • Second, media reports show that more than 85% of those aspiring for those 10 lakh jobs could be consumed by existing vacancies in Central government departments (8,72,243).
    • The decline in PSU jobs: Third, 241 central public sector enterprises (CPSEs) have been shedding jobs in recent years.
    • The decline in quality of jobs: Even though the labour force and workforce participation rates have increased marginally, there is a decline in the quality of jobs, viz. there is a rise in the unpaid segment of the self-employed and a rise in the share of the agricultural sector in total employment over the last three Periodic Labour Force Surveys (43% to 47%).

    Role of the private sector

    • The private sector creates jobs in response to market forces and while taking into consideration radically altering technological developments.
    • We cannot avoid placing the government at the centre of employment creation beyond a certain point.
    • Projects in the modern private sector consume a lot of capital to generate very few jobs.
    • For instance, recently, there was a report that the Adani Group has invested â‚č70,000 crore (or â‚č700 million) in Uttar Pradesh to create merely 30,000 jobs.
    • Foreign Direct Investment, which at any rate is highly capital-intensive, goes mostly into the non-manufacturing sectors.

    Way forward

    • The government’s role in employment generation has entered into popular discourse and discussions on policy formation.
    • The government should play a significant role soon.
    • Government as principal employment generator: The government should re-establish its role as the principal employment generator through jobs in its ministries and CPSEs and through assured employment generation programmes like MGNREGA.

    Conclusion

    Employment is not merely about numbers and growth figures.  We need to concentrate on enabling the creation of decent work and a sustainable labour market to which India is committed as a member of the United Nations and the International Labour Organization.

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  • What is a ‘Black Swan’ Event?

    A study by the Reserve Bank of India (RBI) has spoken about the possibility of capital outflows to the tune of $100 billion (around Rs 7,80,000 crore) from India in case of a major global risk scenario or a “black swan” event.

    What is a ‘black swan’ event?

    • A black swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world.
    • These events are said to have three distinguishing characteristics –
    1. they are extremely rare and outside the realm of regular expectations
    2. they have a severe impact after they hit and
    3. they seem probable in hindsight when plausible explanations appear

    When did the term originate?

    • The black swan theory was put forward by author and investor Nassim Nicholas Taleb in 2001, and later popularised in his 2007 book – The Black Swan: The Impact of the Highly Improbable.
    • It is described as one of the 12 most influential books since World War II.
    • In his book, Taleb does not try to lay out a method to predict such events, but instead stresses on building “robustness” in systems and strategies to deal with black swan occurrences and withstand their impact.

    Behind the metaphorical name

    • The term itself is linked to the discovery of black swans.
    • Europeans believed all swans to be white until 1697, when a Dutch explorer spotted the first black swan in Australia.
    • The metaphor ‘black swan event’ is derived from this unprecedented spotting from the 17th century, and how it upended the West’s understanding of swans.

    When have such events occurred in the past?

    • Interestingly, Taleb’s book predated the 2008 global financial crisis – a black swan event triggered by a sudden crash in the booming housing market in the US.
    • The fall of the Soviet Union, the terrorist attack in the US on September 11, 2001, also fall in the same category.

    Is the Covid-19 pandemic a black swan event?

    • Taleb does not agree with those who believe it to be one.
    • Rather, he called it a “white swan”, arguing that it was predictable, and there was no excuse for companies and governments not to be prepared for something like this.
    • While the outbreak of any pandemic is difficult to individually predict, the possibility of one occurring and having a major impact on systems around the world was known and documented.

     

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  • Major reforms in Banks Board Bureau (BBB)

    The Union Finance Ministry is working to expand and relaunch the Banks Board Bureau (BBB) by bringing in more representatives from the insurance sector.

    What is Banks Board Bureau (BBB)?

    • Banks Board Bureau (BBB) is an autonomous body to Promote excellence in Corporate Governance in Public Sector Financial Institutions.
    • The BBB works as step towards governance reforms in Public Sector Banks (PSBs) as recommended by J. Nayak Committee.
    • It was formed in 2016 to select executive directors, and managing directors and chief executives of state-run banks.
    • It is tasked to search and select personages for Board of Public Sector Banks, Public Sector Financial Institutions and Public Sector Insurance Companies and recommend measures to improve Corporate Governance in these Institutions.
    • It has been selecting directors and chairmen and managing directors of PSU general insurance companies since 2018.

    Its establishment

    • The Central Government notified the amendment to the Nationalised Banks (Management and Miscellaneous Provisions) Scheme, 1980.
    • It provided the legal framework for composition and functions of the Banks Board Bureau on March 23, 2016.
    • The Bureau accordingly started functioning from April 01, 2016 as an autonomous recommendatory body.

    Functions of BBB

    The mandate of the Bureau is to advise the Central Government on –

    • Selection and appointment of Board of Directors in Nationalised Banks, Financial Institutions and Public Sector Insurance Companies (Whole Time Directors and Chairman)
    • Matters relating to appointments, confirmation or extension of tenure and termination of services of the Directors of mandated institutions
    • Desired management structure of mandated institutions, at the level of Board of Directors and senior management
    • Suitable performance appraisal system for mandated institutions
    • Formulation and enforcement of a code of conduct and ethics for managerial personnel in mandated institutions
    • To build a data bank containing data relating to the performance of mandated institutions and its officers
    • Evolving suitable training and development programs for managerial personnel in mandated institutions
    • To help the banks in terms of developing business strategies and capital raising plan and the like;
    • Any other work assigned by the Government in consultation with RBI

    Why such move?

    • The revamp is, in part, pushed by a Delhi High Court order last year.
    • It observed that the bureau was not a competent body to recommend appointments at PSU general insurers.
    • It held that circulars enabling BBB to select general managers and directors of PSU insurers were not legally valid.

    Reasons behind the revamp

    • FM aims to legally empower the body to recommend candidates for public sector insurers, and accelerate top-level hiring at all state-run financial institutions.
    • The ministry plans to identify new members, restructure the bureau, and refer the new names to the appointments committee of the cabinet (ACC) in a couple of months.
    • The revamped BBB may also get a new name to indicate its remit over a wider set of financial institutions.

    Significance

    • A revamp of the BBB will enable it to recommend full-time appointments at financial institutions where the current executives are given additional charge through interim arrangements.

     

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