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Subject: Economics

  • What is Purchasing Managers Index (PMI)?

    India’s services firms saw growth in new business and output accelerate to a 11-year high in June, as per the survey-based S&P Global India Services Purchasing Managers Index (PMI).

    What is the news?

    • The index rose to 59.2 last month, from 58.9 in May, signalling a strengthening in demand across the services sector, which had borne the brunt of the COVID-19 pandemic.

    Purchasing Managers’ Index (PMI)

    • PMI is an indicator of business activity — both in the manufacturing and services sectors.
    • It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
    • It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
    • The PMI is compiled by IHS Markit based on responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers.

    How is the PMI derived?

    • The PMI is derived from a series of qualitative questions.
    • Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.

    How does one read the PMI?

    • A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
    • Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
    • If the figure is higher than the previous month’s then the economy is expanding at a faster rate.
    • If it is lower than the previous month then it is growing at a lower rate.

    What are its implications for the economy?

    • The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available.
    • It is, therefore, considered a good leading indicator of economic activity.
    • Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later.
    • Central banks of many countries also use the index to help make decisions on interest rates.

     

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  • The extent of poverty

    Context

    There has been an uproar about the working papers of the IMF and World Bank, reporting no or low poverty for India in the pandemic year or just before that.

    About the IMF paper

    • The paper by Roy and Weide (2022) for the World Bank explores the possibility of using CMIE (unemployment data) in poverty calculations after correcting for the unrepresentative character of its panel data by modifying the weightages of households for aggregation.
    • These adjustments carried out to remove the non-convergence of the CMIE data with other macro statistics have resulted in a poverty figure of 12 per cent.

    What does the poverty index measure or attempt to capture?

    • Its construction involves complex calculations — to identify a poverty basket of consumption, working out price indices for updation of the poverty line and then applying it to the income or consumption of households for determining their poverty status.
    • Absence of consumption expenditure: The computation becomes far more challenging in the absence of data on consumption expenditure as is the case in India and several developing countries.
    • Intending to provide inputs for policy making, researchers have evolved ingenious methods of estimating the data, using past datasets and those that have not been designed to get robust expenditure estimates.

    Background of poverty line in India

    • A nine-member working group set up by the Planning Commission proposed the poverty line at Rs 20 per capita per month in the early Sixties, loosely ensuring the adequacy of minimum requirements.
    • Poverty line based on calorie needs: Dandekar and Rath (1970) went into detail about minimum calorie needs, based on the average consumption pattern.
    • Issues with calorie based poverty line: During the Eighties and Nineties, it was realised that this linkage is getting blurred due to changes in the consumption pattern, microenvironment for living, etc.
    • Sukhatme argued that the emphasis on calories and nutrition is misplaced as the absorption of nutrients depends on physical health, particularly the presence or absence of gastrointestinal diseases.
    • Water and sanitation facilities were noted as important in determining the poverty line.
    •  It was accepted that the state, through poverty interventions, cannot and should not try to guarantee adequate nutrition to people.
    • Delinking the nutritional norms: The Tendulkar Committee formally announced delinking of nutritional norms from poverty in 2010.

    Extrapolating the consumption expenditure on NSS 2011-12

    • Bhalla, Virmani and Bhasin (2022) in their IMF Working Paper have developed a method of interpolation and extrapolation of the consumption expenditure of the NSS 2011-12 and building a series up to 2019-20.
    • They use the growth rate of private final consumption expenditure (PFCE) but bring in the distributional changes by allowing household consumption to grow as per the nominal per capita income in each state.
    • Takes into account rural-urban price difference: Rural-urban price differences are also introduced through separate poverty lines.
    • The method is reasonable except that it assumes the distributions to remain unchanged both within the rural and urban segments in each state over 2014-20.
    • Also, the growth rates of different commodities in the PFCE are significantly different and hence commodity-wise adjustments can be done to give higher weights to the items of consumption by the poor.
    • Taking into account the role of state: The most significant contribution of the study is its bringing in the differential engagement of the state in the provisioning of the essentials to the poor into poverty calculations.
    • This opens up the possibility of changes in the level of state engagement in poverty estimation, including free gas cylinders, etc.

    Conclusion

    People find the World Bank paper figures pegged at 12% more acceptable not because of the methodology but the magnitude. One does not know whether the poverty estimate would be a bit higher had the adjustments been carried out for a few other parameters and also at the state level.

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  • Hotels cannot force customers to pay Service Charge: Centre

    The Central Consumer Protection Authority (CCPA) issued guidelines asking hotels and restaurants not to collect service charge from customers.

    We often get to hear in news. Once a person had used a loo at a hotel in our national capital. She was charged ₹499 as a service charge in return of purchasing a water bottle!

    What is the news?

    • Under the guidelines, consumers can lodge complaints against hotels and restaurants by calling the number 1915.
    • The CCPA has issued guidelines under Section 18 (2) (I) of The Consumer Protection Act, 2019.
    • The CCPA was established in July 2020 to promote, protect, and enforce the rights of consumers as a class, and to investigate, prosecute, and punish violators.

    What are the guidelines?

    • The CCPA has issued five major guidelines regarding the levy of service charge by restaurants and hotels, which has for long been a contentious issue and has periodically triggered complaints from consumers.
    • The guidelines say:
    1. No hotel or restaurant shall add service charge automatically or by default in the bill;
    2. Service charge shall not be collected from consumers by any other name;
    3. No hotel or restaurant shall force a consumer to pay service charge and shall clearly inform the consumer that service charge is voluntary, optional, and at the consumer’s discretion;
    4. No restriction on entry or provision of services based on collection of service charge shall be imposed on consumers; and
    5. Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

    What can a consumer do in case of a violation of these guidelines?

    • The consumer has four options at different levels of escalation in case she spots the levy of service charge in her bill.
    • First, she can make a request to the hotel or restaurant to remove the service charge from her bill.
    • Second, she can lodge a complaint on the National Consumer Helpline (NCH), which works as an alternative dispute redressal mechanism at the pre-litigation level.
    • The complaint can be lodged by making a call on the number 1915, or on the NCH mobile app.
    • Third, the consumer can complain to the Consumer Commission, or through the edaakhil portal, http://www.edaakhil.nic.in.
    • Fourth, she can submit a complaint to the District Collector of the concerned district for investigation and subsequent proceedings by the CCPA.
    • A consumer can complain directly to the CCPA by sending an e-mail.

    What are the components of a food bill?

    • A restaurant bill in India comprises food charge (from the menu), with an addition of service charge (anywhere between 5 to 15 per cent) and a 5 per cent GST on this amount (IGST+SGST).
    • This is for all kinds of standalone restaurants.
    • In case a restaurant is located inside a hotel wherein room rate is upwards of Rs 7,500 (mostly in case of five-stars), the GST would be 18 per cent.

    Nature of Service charge

    • While the GST is a mandatory component as per law, the service charge is supposed to be optional.
    • It is the equivalent of what is known as gratuity around the world, or tip, in casual parlance.
    • Most restaurants decide the service charge on their own, and print it at the bottom of the menu with an asterisk.

    What do the restaurants say?

    • The levy of service charge by a restaurant is a matter of individual policy to decide if it is to be charged or not.
    • There is no illegality in levying such a charge.
    • Once the customer is made aware of such a charge in advance and then decides to place the order, it becomes an agreement between the parties, and is not an unfair trade practice.
    • GST is also paid on the said charge to the Government.

    Where does the fund go?

    • Restaurants claim that a major chunk of the service charge thus collected goes to the staff, while the rest goes towards a welfare fund to help them out during good and bad times.
    • It’s a default billing option, even as customers can choose not to pay it if they don’t want to.
    • Of course, they are paid the salaries but the service charge works as an incentive for them.
    • Restaurateurs also say that patrons can decide not to pay the charge and tip the server directly, but in this case, the backroom staff doesn’t get anything.
    • A service charge ensures all staff members are rewarded evenly.

    What is the issue then?

    • The issue is that almost all restaurants have put service charge (fixed at their own accord) as a default billing option.
    • And if a consumer is aware that it is not compulsory and wants it removed or wants to tip the server directly, the onus is on them to convince the management why they don’t want to pay it.
    • The department says they received several complaints saying it leads to public embarrassment and spoils the dining experience since at the end of it, they either pay the charge quietly and exit the place feeling cheated, or have to try hard to get it removed.
    • Also, there is no transparency as to where this charge goes.
    • The officials also say that collecting service charge on their own and paying GST on it to the government doesn’t make it authorised.

    Problems faced by customers

    • It is this component which has come under dispute from time to time, with consumers arguing they are not bound to pay it.
    • It also said that hotels and restaurants charging tips from customers without their express consent in the name of service charges amounts to unfair trade practice.

     

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  • 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.

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    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.

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  • 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.

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  • 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.

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  • 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.

     

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  • 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.

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    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

     

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