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Subject: Economics

  • How fiscal stimulus in the U.S. will impact emerging economies

    The article highlights how the faster recovery of the U.S. economy aided by the faster vaccination and stimulus packages may pose a policy challenge to the emerging economies.

    About the fiscal stimulus in the U.S.

    • With the recent passage of Biden’s $1.9 trillion coronavirus relief package, the cumulative fiscal stimulus amounts to 25 per cent of GDP. 
    • This reliance on fiscal stimulus is in sharp contrast to the policy response in the aftermath of the 2008 global financial crisis (GFC) when monetary policy was the main tool.
    • The over reliance on fiscal measures is because of the “liquidity trap” — interest rates are already treading close to zero.

    So, what does this mean for the US and emerging economies?

    • From the US perspective, this is good news.
    • The U.S. economy is expected to converge to the pre-pandemic GDP projection after the third quarter of 2021, exceeding it by 1 per cent in the fourth quarter.
    • The impact on emerging economies is less certain.
    • A booming US economy generally bodes well for global growth as higher demand “spills over” to the rest of the world.
    • However, the sectoral contribution to US growth presents a different picture this time.
    • Private consumption of goods (tradable) is already back to pre-pandemic levels, while consumption of services remains significantly below pre-pandemic levels.
    • As the vaccination drive gathers pace in the US and the economy slowly opens up, it should be fair to assume that the non-tradable sector would be driving growth.
    • But given the expected nature of the underlying growth, the positive impact on emerging economies will perhaps be softer.
    • With smaller fiscal stimulus in emerging economies and the slower vaccine roll, the US recovery largely being led by the non-tradable sector will result in a divergence in growth between the US and emerging countries.

    Policy challenge for emerging economies which is different from GFC

    • Post-GFC, a combination of zero interest rates and quantitative easing in advanced economies led to a significant surge in capital inflows to emerging countries in search of higher yield leading to an appreciation of their currencies.
    • Now, the situation is exactly the opposite.
    • The differential rate of recoveries has already led to capital outflow from emerging economies.
    • The rise in yield in the U.S. may further fuel capital outflows in coming days leading to tighter monetary conditions in emerging markets.

    What should be India’s policy response

    • As far as India is concerned, the macro-economic fundamentals are much stronger than during the taper-tantrum days.
    • The foreign exchange reserves remain at historically high levels, the current account situation is comfortable and the inflation rate remains within the target band of the RBI.
    • In the event of capital outflows, the RBI should let the currency depreciate as the first line of defence to preserve India’s external competitiveness and intervene only to smoothen out extreme volatility.
    • It should avoid the temptation to increase interest rates at the risk of hurting the pace of economic recovery.

    Consider the question “Uneven economic recovery on the global level poses a policy challenge to India. In this context, discuss the possible impact of uneven recovery and suggest the policy measures to deal with it.”

    Conclusion

    Uneven recovery at the global level demands an unconventional policy approach. The policy approach of India should be based on this premise.

    Back2Basics: Taper Tantrum

    • The phrase, taper tantrum, describes the 2013 surge in U.S. Treasury yields, resulting from the Federal Reserve’s (Fed) announcement of future tapering of its policy of quantitative easing.
    • The Fed announced that it would be reducing the pace of its purchases of Treasury bonds, to reduce the amount of money it was feeding into the economy.
    • The ensuing rise in bond yields in reaction to the announcement was referred to as a taper tantrum in financial media.

  • Why privatising public assets is poor economics

    The article highlights the issues with government expenditure driven by the selling of public sector assets.

    How public asset selling could affects private investment decisions

    • Public sector assets are not bought by reducing consumption or investment.
    • Current investment expenditure depends on decisions taken in the past and is more or less pre-determined.
    • Investment decisions that are taken today for fructification tomorrow that may be scaled down by such a purchase.
    • However, if investment decisions taken today are scaled-down, then it results in crowding out and such a strategy should be avoided anyway.
    • This implies that selling public sector assets therefore does not release any resources from private use for government spending.

    How selling public asset has same macroeconomic effect as fiscal deficit

    • In case of fiscal deficit, the government puts its bonds in private hands; in sale of a public asset, the government puts its equity held in public sector assets in private hands.
    • The macroeconomic consequences of a fiscal deficit on the economy are no different from those of selling public assets.
    • However, finance capital, and institutions like the IMF treat the sale of public assets on a different footing from a fiscal deficit, for ideological — not economic — reasons, because they ideologically favour a dismantling of the public sector.

    How fiscal deficit leads to wealth inequality

    • In a situation of demand-constraints, where unutilised capacity and unemployed workers exist aplenty, if an appropriate monetary policy is pursued, it can have no adverse effects whatsoever, except one: It increases wealth inequality.
    • The government expenditure financed by the fiscal deficit creates additional aggregate demand that increases output and incomes until the additional savings generated out of such incomes exactly match the fiscal deficit.
    • These additional savings accrue to the savers without their having to reduce their consumption, compared to the initial situation (that is, prior to government expenditure increase).
    • Since savings represent additions to wealth, this amounts to putting extra wealth into the hands of the rich.
    • Selling public assets puts into private hands public assets, and that too at prices well below the capitalised value of earnings.
    • This increases wealth inequality for two reasons:
    • First, it does so exactly as a fiscal deficit does.
    • Second, the public asset it puts in private hands is under-priced.

    Why tax financed government spending should be preferred

    • If the same government expenditure is financed by taxation, no matter who was taxed, then there would be no addition to private wealth and hence no increase in wealth inequality.
    • Which is why tax-financed government expenditure should always be preferred to fiscal-deficit-financed government expenditure.

    What alternative government have

    • The obvious one is wealth taxation.
    • Taxing away the private wealth created by a fiscal deficit leaves private wealth inequality unchanged at its initial level; it does not exacerbate it.
    • If the government is unwilling to impose higher wealth or profit taxes, it can raise GST rates on several luxury goods.

    Consider the question “How fiscal deficit financed government spending differs in its impact on weath inequality from the tax-financed government spending?”

    Conclusion

    Thus, selling public assets to finance government spending is both undesirable and unnecessary.

  • Applying the policy of self-reliance to health, infrastructure and green technologies

    The article highlights how Atmanirbhar Bharat policies can play important role in India’s post-pandemic recovery.

    Decline of trade-led catch-up growth

    • The Asian Development Bank identifies India as an outlier, with the country’s GDP growth likely to range between eight and 10 per cent — as against 7.7 per cent for China and seven per cent for the Asian region.
    • The convergence between the rich and poor countries in the 1990s and 2000s was founded on high relative growth rates driven by globalisation and export-led growth.
    • The World Bank and many international think tanks are now projecting a process of de-globalisation, reduction in exports, and reduced service exports from the tourism, travel and hospitality sector in response to COVID.
    • So, the phenomenon of trade-led catch-up growth is declining.

    How Atmanirbhar Bharat is different from past strategies

    • India’s import substituting growth strategy of the 1960s did not succeed because the high protective customs barriers led to the growth of non-competitive industries.
    • The current Atmanirbhar Bharat project is different because tariffs are low and public investment is focused on non-tradable infrastructure rather than commodity production.

    1) Atmanirbhar in heath: Atmirbhar Swasth Bharat

    • Atmanirbhar Swasth Bharat is a domestic non-trade dependent initiative which will invest over Rs 64,000 crore in setting up 17,800 rural and 11,000 urban health and wellness centres and 602 critical care hospitals in the country’s districts.
    • Today India has 29 health workers per 10,000 population, while we need 60 such professionals per 10,000 people, as per WHO norms.
    • Creating such a cadre will mean nearly four million new jobs, which can be self-paying.

    2) Infrastructure

    • China and emerging markets like Russia and Brazil have a fairly advanced transport and energy infrastructure.
    • India has a huge potential to renew its railways and highways and shift to solar energy from its current dependence on coal.
    • In fact, the country’s long-neglected fourth largest rail network in the world is undergoing rapid transformation.
    • While rail track coverage expanded by 5,000 km during 2010 to 2014-15, nearly 7,000 km of tracks were added between 2015 and 2020.
    • The Railways now aim to lay 9.5 km of track daily and have raised adequate capital for the same by leveraging domestic insurance funds.
    • Railways are also aiming for 100 per cent electrification and zero carbon footprint by 2024.
    • Electrified track has doubled from 20,000 km in 2012/13 to nearly 40,000 km in 2020.
    • The Centre’s decision to invest heavily in urban mass transit systems since 2014 has led to the rapid expansion of such services.
    • The resolution of financial problems of blocked PPP projects and smooth land acquisition process has increased the pace of construction of national highways.
    • Pace of construction of the national highway increased from 3,330 km per year during 2009-20014 to nearly 9,450 km in 2020-21.

    3) Renewable energy

    • Today over 55 per cent of India’s energy comes from coal but the share of renewable has been steadly increasing.
    • Starting with only 10 MW of solar power in 2010, India has installed nearly 35 GW of solar power by 2020.
    • This has been propelled by economic reforms which drove solar power prices down from Rs 17 per unit in 2010 to Rs 2.44 per unit in 2020.
    • The target of reaching 100 GW by 2022 can drive growth further.
    • Currently nearly 25 per cent of India’s electricity is used for pumping underground water for irrigation.
    • Providing irrigation energy from decentralised solar grids — solar power can be generated at the points on consumption.
    • This will reduce huge transmission losses and the associated carbon footprint of non-renewable energy sources.

    4) Privatising public sector outfits

    • The Centre’s shift towards privatising public sector outfits including banks, insurance companies and other PSUs can fund the growth of rail, road and energy infrastructure.
    • This will also foster efficiency in India’s credit system.
    • China achieved supernormal growth in infrastructure without access to international financing in the initial decades.
    • Recent studies have revealed that China’s financial decentralisation and commercial exploitation of state-owned lands was critical for the success.
    • In India, too, regional development authorities like the Mumbai Metropolitan Regional Development Authority and Maharashtra Industries Development Corporation have financed the metro, trans-harbour links and industrial infrastructure through a similar commercial land allocation model.
    • This model can be extended throughout the country to finance infrastructure expansion.

    Consider the question “How Atmanirbhar Bharat policies differ from the past import-substituting growth strategy? Examine the role Atmanirbhar Bharat can play in the post-pandemic recovery?” 

    Conclusion

    In such a way, Atmanirbharta with its various facets will pave the road of post-pandemic recovery.

  • National Bank for Financing Infrastructure and Development Bill, 2021

    Finance Minister has introduced the National Bank for Financing Infrastructure and Development (NaBFID) Bill 2021 in the Lok Sabha to pave way for setting up a government-owned DFI to fund infra projects.

    NaBFID Bill

    • The NaBFID Bill, 2021 was introduced in Lok Sabha on March 22, 2021.
    • The Bill seeks to establish the National Bank for Financing Infrastructure and Development (NBFID) as the principal development financial institution (DFIs) for infrastructure financing.

    What are DFIs?

    • DFIs are set up for providing long-term finance for such segments of the economy where the risks involved are beyond the acceptable limits of commercial banks and other ordinary financial institutions.
    • Unlike banks, DFIs do not accept deposits from people.
    • They source funds from the market, government, as well as multi-lateral institutions, and are often supported through government guarantees.

    Note every statement about DFIs such as – Terms of finance, Sources of funds, Savings option etc. 

    Key provisions of the Bill

    NBFID:

    • NBFID will be set up as a corporate body with an authorised share capital of one lakh crore rupees.
    • Shares of NBFID may be held by (i) central government, (ii) multilateral institutions, (iii) sovereign wealth funds, (iv) pension funds, (v) insurers, (vi) financial institutions, (vii) banks, and (viii) any other institution prescribed by the central government.
    • Initially, the central government will own 100% shares of the institution which may subsequently be reduced up to 26%.

    Functions of NBFID:

    • NBFID will have both financial as well as developmental objectives.
    • Financial objectives will be to directly or indirectly lend, invest, or attract investments for infrastructure projects located entirely or partly in India.
    • The central government will prescribe the sectors to be covered under the infrastructure domain.
    • Developmental objectives include facilitating the development of the market for bonds, loans, and derivatives for infrastructure financing.

    Functions of NBFID include:

    • extending loans and advances for infrastructure projects,
    • taking over or refinancing such existing loans,
    • attracting investment from private sector investors and institutional investors for infrastructure projects,
    • organising and facilitating foreign participation in infrastructure projects,
    • facilitating negotiations with various government authorities for dispute resolution in the field of infrastructure financing, and
    • providing consultancy services in infrastructure financing

    Source of funds:

    • NBFID may raise money in the form of loans or otherwise both in Indian rupees and foreign currencies, or secure money by the issue and sale of various financial instruments including bonds and debentures.
    • NBFID may borrow money from: (i) central government, (ii) Reserve Bank of India (RBI), (iii) scheduled commercial banks, (iii) mutual funds, and (iv) multilateral institutions such as World Bank and Asian Development Bank.

    Management of NBFID:

    • NBFID will be governed by a Board of Directors.
    • The members of the Board include: (i) the Chairperson appointed by the central government in consultation with RBI, (ii) a Managing Director, (iii) up to three Deputy Managing Directors among others.
    • A body constituted by the central government will recommend candidates for the post of the Managing Director and Deputy Managing Directors.
    • The Board will appoint independent directors based on the recommendation of an internal committee.

    Support from the central government:

    • The central government will provide grants worth Rs 5,000 crore to NBFID by the end of the first financial year.
    • The government will also provide a guarantee at a concessional rate of up to 0.1% for borrowing from multilateral institutions, sovereign wealth funds, and other foreign funds.
    • Costs towards insulation from fluctuations in foreign exchange (in connection with borrowing in foreign currency) may be reimbursed by the government in part or full.
    • Upon request by NBFID, the government may guarantee the bonds, debentures, and loans issued by NBFID.

    Prior sanction for investigation and prosecution:

    • No investigation can be initiated against employees of NBFID without the prior sanction of (i) the central government in case of the chairperson or other directors, and (ii) the managing director in case of other employees.
    • Courts will also require prior sanction for taking cognisance of offences in matters involving employees of NBFID.

    Other DFIs:

    • The Bill also provides for any person to set up a DFI by applying to RBI.
    • RBI may grant a licence for DFI in consultation with the central government.
    • RBI will also prescribe regulations for these DFIs.

    With inputs from:

    PRS India

  • Bad bank is good move

    The article explains the important role bad bank can play in cleaning up the balance sheets of the banks.

    How India banks dealt successfully with pandemic

    • Indian banks were written off in the early days of the pandemic due to expectations of an exponential jump in non-performing assets.
    • Only after the banks consistently talked about the lower number of restructuring requests, and the higher provision coverage ratios that the markets began to get convinced.
    • What finally turned the corner were the budget announcements related to the financial sector
    • There are several reasons for this good performance by the banks.
    • First, banks in India and globally were much better capitalised prior to the pandemic.
    • Second, Indian banks had built up a sizeable buffer to provide for bad assets negating any surprise on balance sheets during and even after the pandemic.
    • Third, independent research shows that as the size of the middle class grows to about two-thirds of Asian households.
    • Banks in Asia, including in India, have begun to adjust for this steady growth in the size of pie by experimenting with new business models, rationalising costs and providing faster and superior customer digital experience, as was clear during pandemic.
    • Fourth, Indian banks and the RBI brought about financial discipline much before the pandemic.

    Creation of Bad Bank

    • The budget this year has the provision for reation of a bad bank.
    • The proposed structure envisages setting up of a National Asset Reconstruction Company (NARC) to acquire stressed assets in an aggregated manner from lenders, which will be resolved by the National Asset Management Company (NAMC). 
    • A skilled and professional set-up dedicated for Stressed Asset Resolution will be ably supported by attracting institutional funding in stressed assets through strategic investors, AIFs, special situation funds, stressed asset funds, etc for participation in the resolution process.
    • The net effect of this approach would be to build an open architecture and a vibrant market for stressed assets.

    How it will work

    • Banks may first transfer those assets to the proposed bad bank with a 100 per cent provision on its book and then based on the experience they will decide on transferring assets with less than 100 per cent provisioning at a later date.
    • It is also being speculated that of the total amounts recovered, a specified percentage will be in the form of security receipts.
    • These receipts will reside in the bank balance sheets, but will carry a zero-risk weight, with full government guarantees for a specified period of time.

    How it will benefit the banks

    • The benefits of this process includes the recovered value, and significant lending leverage because of three factors:
    • One, capital being freed up from less than fully provisioned bad assets.
    • Two, capital freed up from security receipts because of a sovereign guarantee.
    • Three, cash receipts that come back to the banks and can be leveraged for lending, also freeing up provisions from the balance sheet.
    • There are several international success stories of a bad bank accomplishing its mission and there is no reason to believe why India cannot accomplish its objective.
    • The current Indian approach will drive consolidation of stressed assets under the AMC for better and faster decision making.
    • This will free up management bandwidth of banks enabling them to focus on credit growth, leading to an enhancement in their valuations.
    • Governance of the AMC and its independence is central to its successful functioning, there are multiple suggestions to make.
    • These include keeping majority ownership in the private sector, putting together a strong and independent board, a professional team, and linking AMC compensation to returns delivered to investors.

    Consider the question “What is a bad bank? How its creation could help the banking sector?”

    Conclusion

    The creation of a bad bank will help the banking sector contribute more in the growth of the country

  • Remission of Duties and Taxes on Export Products (RODTEP) Scheme

    The notification of benefit rates payable to exporters under the Remission of Duties and Taxes on Export Products (RODTEP) scheme is expected to take more time as it is facing ‘teething issues’.

    Try this PYQ:

    Q.Among the following, which one is the largest exporter of rice in the world in the last five years? (CSP 2019)

    (a) China

    (b) India

    (c) Myanmar

    (d) Vietnam

    RODTEP Scheme

    • RoDTEP is a scheme for Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
    • It has replaced the current Merchandise Exports from India Scheme, which is not in compliance with WTO norms and rules.
    • The new RoDTEP Scheme is a fully WTO compliant scheme.
    • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

    Why need such a scheme?

    • The scheme was announced last year as a replacement for the Merchandise Export from India Scheme (MEIS), which was not found not to be compliant with the rules of the World Trade Organisation.
    • Following a complaint by the US, a dispute settlement panel had ruled against India’s use of MEIS as it had found the duty credit scrips awarded under the scheme to be inconsistent with WTO norms.

    Back2Basics: Merchandise Exports from India Scheme (MEIS)

    • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
    • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and will be in existence till 2020.
    • MEIS intended to incentivize exports of goods manufactured in India or produced in India.
    • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
    • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

  • PM-Kisan: Income support to farmers needs to be more inclusive

    The article highlights the challenge of exclusion error in the PM-KISAN and suggests measures to deal with the issue by drawing on the success of KALIA and Rythu Bandhu.

    Exclusion in PM-KISAN

    • Budget FY22 announced an allocation of Rs 65,000 crore to the PM-Kisan scheme.
    • Since 2019, the PM-Kisan has been the largest component of the agriculture budget each year.
    • The scheme is targeted at farmers who own cultivable land as per land records of the state.
    • Unfortunately, this leaves out vulnerable sections such as tenant farmers, women farmers, tribal families and landless labourers.
    • The exclusion is the result of the challenge of first identifying these people, since our existing systems do not formally recognise them as farmers.

    The need to identify farmers

    • Despite 73.2% of rural women engaging in agriculture, only 12.8% are reported to own land.
    •  Among tribal communities, of the 20 million tribal families, less than 2 million have received individual forest rights pattas; the rest are ‘invisible’ and left out of government safety nets.
    • Landless agricultural labourers and tenant farmers account for close to 150 million people in rural India, and they too are not part of state land records.
    • Although there are multiple welfare schemes for farmers, there is no standard government definition of a farmer.
    • The 2007 MS Swaminathan Committee called out that the term ‘farmer’ would include any person actively engaged in growing crops and other agricultural commodities, and would include not only landholders, but also cultivators, labourers, sharecroppers, tenants and tribal families, amongst others.

    Learning from KALIA and Rythu Bandhu

    • Odisha has been a frontrunner in implementing an inclusive farmer welfare scheme, the KALIA.
    • The KALIA provides an unconditional income support of Rs 12,500 to landless agricultural households and an annual Rs 10,000 to small and marginal land-owning farmers as well as tenant farmers.
    • Odisha leveraged existing databases such as the Paddy Procurement Automation System, the Pradhan Mantri Fasal Bima Yojana and the National Food Security Act, and deployed close to 50,000 government staff at state, district and block levels to conduct extensive on-ground verification to identify eligible beneficiaries.
    • Telangana took a different approach prior to rolling out the Rythu Bandhu Scheme, a direct benefit transfer scheme for land-owning farmers.
    • The Rythu Bandhu Scheme targeted only land-owning farmers.
    • But the state took on the onus of updating land records before implementing the scheme.
    • The revenue and agriculture departments partnered to undertake a state-wide Land Records Updation Programme (LRUP).
    • This shows that updating and digitising land records databasse is possible with focused efforts.

    Way forward

    • Instead of every scheme having its own farmer beneficiary database, the ideal solution would be to leverage the existing land records databases in every state.
    • The design should ensure women’s names are not excluded.
    • Implementation of the Forest Rights Act 2006 needs to be accelerated so that tribal families receive forest rights pattas and become part of the land records database.
    • The next challenge is to build in incentives in the process to encourage the maintenance of the land record database, such that all future transactions such as sale, gift etc. are regularly updated to increase the reliability of the records.

    Consider the question “How lack of definition of farmer leads to inclusion and exclusion errors in the schemes for farmers. Suggest the measures to deal with the issue.”

    Conclusion

    The pandemic, more so than anything else, has highlighted the need for the government to have robust social security mechanisms to reach the most vulnerable sections of the population, and making PM-Kisan more inclusive is an important step in that direction.

    Source:

    https://www.financialexpress.com/opinion/pm-kisan-income-support-to-farmers-needs-to-be-more-inclusive/2217436/

  • Factors driving FDI in India

    The article explains the four factors that explain the FDI inflows in India.

    India’s economic decade

    • Almost every major global company is either contemplating or operating on the assumption that India is a key part of their growth story.
    • Google, Facebook, Walmart, Samsung, Foxconn, and Silver Lake have been just a handful of the firms that made huge investments in Inda.
    • As a result, India saw the fastest growth in Foreign Direct Investment (FDI) inflows among all the major economies last year.
    • Meanwhile, India’s latest FDI totals still lags behind the highest tallies in other markets such as China and Brazil.

    Issues faced by investors and factors driving investment

    • Frequent shifts in the policy landscape and persistent market access barriers are standard complaints levied against India by the business community.
    • The government’s push to build a “self-reliant” India has also rattled skittish investors and smaller companies that lack the resources to navigate on-the-ground hurdles.
    • Still, investors recognise that doing business in India — or any emerging market  — comes with inherent risks but that adaptation in approach is critical to success.
    • Four core dynamics drive this calculus and explain why multinational companies are making India an essential part of their growth story.

    4 Factors driving FDI in India

    1) India’s population

    • What India offers through its nearly 1.4 billion people and their growing purchasing power is uniquely valuable for multinationals with global ambitions.
    • No other country outside of China has a market that houses nearly one in six people on the planet and a rising middle class of 600 million.

    2) Shifting geopolitics

    •  Rising U.S.-China competition is forcing multinationals to rethink their footprints and production hubs.
    • Savvy countries such as Vietnam have capitalised on this opportunity to great effect, but India is finally getting serious about attracting large-scale production and exports.

    3) Digital connectivity

    • Cheap mobile data have powered a revolution across India’s digital economy and connected an estimated 700 million Indians to the Internet.
    • More than 500 million Indians still remain offline, this is a key reason why leading global tech companies are investing in India and weathering acute policy pressure.
    • Domestic Indian companies have also demonstrated their ability to innovate and deliver high quality services at scale.
    • The partnerships and FDI flows linking multinationals and Indian tech firms will continue to unlock shared market opportunities for years to come.

    4) National resilience

    • Despite facing the scourge of the novel coronavirus head on, India has managed the pandemic better than many of its western peers and restored economic activity even before implementing a mass vaccination programme.
    • These are remarkable developments, and yet they speak to India’s underlying resilience even in the face of historic challenges.

    Shared value creation

    • Unlocking opportunities in the Indian market cannot take the form of a one-way wealth transfer.
    • Companies need to demonstrate their commitment to India.
    • Successful companies do this by placing shared value creation at the heart of their business strategy.
    • They tie corporate success to India’s growth and development.
    • They forge enduring partnerships and lasting relationships, elevate and invest in Indian talent, align products with Indian tastes, and ultimately tackle the hardest problems facing India today.

    Consider the question “Despite the issues faced by the investors, India witnessed the fastest growth in the FDI inflows among all the major economies amid pandemic. In light of this, examine the factors driving the FDI in India.”

    Conclusion

    For leading companies with global ambitions and a willingness to make big bets, the rewards of investing in the Indian market are substantial and well worth pursuing.

  • Vehicle scrapping policy will help Indian steel reduce GHG emissions

    The article explains the advantages of the vehicle scrapping policy announced in the Budget FY22.

    Greenhouse gas contribution  steel industry

    • Steel industry uses carbon as the main reducing agent as also as a fuel for steel production.
    • GHG emissions of the Indian steel industry is 2.0-2.8 tonnes of CO2 per tonne of crude steel, against global average of 1.8 tonne of CO2.

    Scrapping policy

    • Two seminal announcements have been made in Budget FY22, viz. introduction of vehicle scrapping policy and doubling ship-breaking capacity to 9 million tonnes per year.
    • This will minimise dependence on import of scrap and cause a reduction of the GHG footprint of iron & steel.

    Producing steel using scrap

    • Most steel-producing countries are trying to bring down emissions by shifting from iron-ore-based production to scrap-based production.
    • This route can bring CO2 emissions down to below 0.5 tonne of CO2 per tonne of steel.
    • Although most steel-producing countries are using Electric Arc Furnaces (EAF) for scrap-based production, in India, both EAF and Induction Furnaces (IF) are used.
    • The main CO2 load in EAF-based steel production doesn’t come from the off-gas but from producing the electricity used in melting of the scrap.
    • Thus, this can be further reduced if renewable power is used as a source of electricity.

    Saving in forex spending

    • Availability of ferrous scrap in India is very limited—around 25 million tonnes annually from domestic sources.
    • In 2018-19 and 2019-20, the country imported nearly 6.5 million tonnes of scrap each year and thus large forex spending was incurrred.
    • With the announcement of vehicle scrapping policy, steel industry can expect enhanced indigenous availability of ferrous scrap.

    Strengthening the resource efficiency and circular economy

    • The quality of the steel produced is dependent upon the quality of input material and hence any improvement made in ensuring quality of scrap will have marked influence on the steel produced.
    • This shall strengthen the process of resource efficiency & circular economy as considerable natural resources shall be conserved with significant reduction in emission and it will help in moving towards a sustainable steel industry.

    Consider the question “Discuss the advantages of vehicle scrapping policy announced by the government in Budget FY 22.”

    Conclusion

    The announcement of the vehicle scrapping policy couldn’t have come at a better time for steel industry in India, as well since the country lacks desired quality of coking coal and natural gas is also imported.

  • How did inflation targeting really impact India?

    The article analyses the success of the inflation targeting mechanism in India and its impact on the growth of the economy.

    Background of the inflation targeting policy in India

    • It has been three decades since inflation targeting was first adopted in New Zealand and subsequently by 33 other countries.
    • India adopted it in 2016.
    • The primary goal of inflation targeting was to contain inflation at around 4 per cent, within the allowable range of 2 to 6 per cent.
    • The RBI has announced a formal review of the policy instrument now.
    • At the first meeting of the RBI Monetary Policy Committee in October 2016, it was also formally announced that the MPC considered a real repo rate of 1.25 per cent as the neutral real policy rate for the Indian economy.
    • By a neutral real policy rate, the RBI meant a policy rate consistent with growth at potential (i.e. growth at full employment).

    Has inflation targeting worked in India

    • The evaluation of IT must provide answers to the following two questions:
    • Did inflation decline post the adoption of inflation targeting and what was the role of IT in the decline in inflation?
    • Was the adoption of inflation targeting associated with the policy of the highest real repo rates in India — ever — for almost three years 2017-2019?
    • The answer is yes to the latter, but it also needs to be acknowledged that high real repo rates were the primary cause of the GDP growth decline in India from 8 per cent to 5 per cent.

    Need to take into account the global context of inflation

    • An interesting feature of the Indian defence of inflation targeting is that very few take into account the global context of inflation in which the decline in inflation has occurred in India.
    • A research paper by Balasubramanian, Bhalla, Bhasin and Loungani at ORF evaluates inflation targeting in a global context and separately for Advanced Economies (AEs) and Emerging Economies (EES).
    • Some facts from the paper are the following.
    • First, the annual median inflation in AEs has been consistently low, so low that many central banks have official campaigns to raise the inflation rate.
    • One conclusion might be that IT succeeded beyond anyone’s dreams in these economies.
    • But attributing this decline in inflation to IT would be erroneous.
    • Inflation is global and price-taking by millions of producers in the world means that no one producer or one country can influence the price of any item.
    • Oil has ceased to be a factor in global inflation, at least post the mid-1980s.
    • The lowest inflation in Indian history occurred during 1999-2005, averaged only 3.9 per cent.
    • The average median rate among EM targetters during 2000-04 was 4 per cent, and among the non-targeting countries was 3.8 per cent.

    Did fiscal deficit play role in inflation targeting

    • In 2003, India passed the FRBM act to control fiscal deficits and inflation.
    • There is precious little evidence, either domestically or internationally, about fiscal deficits affecting inflation.
    • For three consecutive years preceding the FRBM announcement, the consolidated Centre plus state deficits registered 10.9 per cent(in 2001), 10.4 and 10.9 per cent.
    • For the seven-year 1999-2005 period, consolidated fiscal deficits averaged 9.4 per cent of GDP.
    • Yet, that these years represented the golden period of Indian inflation — without FRBM and without IT.

    Cost of inflation targeting in India

    • There are also costs to inflation targeting in India.
    • It led to higher real policy rates, in the mistaken belief that high policy rates affect the price of food, oil, or anything else.
    • But high real rates affect economic growth, by affecting the cost of domestic capital in this ultra-competitive world.
    • It is very likely not a coincidence that potential GDP growth, as acknowledged by RBI, was reached just before the MPC took over decision making in September 2016. 
    •  Since then there was a steady increase in real policy rates, and a steady decline in GDP growth.

    Consider the question “How far has the inflation targeting mechanism been successful in India? Give reasons in support of your argument.” 

    Conclusion

    So, in the inflation targeting mechanism has not been successful in containing the inflation though there had a cost associated with it which we paid in the form of growth.