💥Mains Ready By December. Smash Mains & Smash PYQ Admissions Open
Talk to Mentor

Civilsdaily

Login

Subject: Economics

  • Gujarat Maritime Cluster Project at GIFT City

    The Gujarat Maritime Cluster coming up in the GIFT (Gujarat International Finance Tec-City) City at Gandhinagar will be a dedicated system to address logistics of ports and seaways.

    Try answering this:

    Q.What do you mean by Central Business Districts? How it is different from a Special Economic Zone (SEZ)?

    What is a Maritime Cluster?

    • The concept of the maritime cluster is new to India, but these clusters have been driving some of the most competitive ports of the world like Rotterdam, Singapore, Hong Kong, Oslo, Shanghai, and London.
    • Simply put, a maritime cluster is an agglomeration of firms, institutions, and businesses in the maritime sector that are geographically located close to each other.

    Gujarat Maritime Cluster

    • While the project was conceptualized back in 2007, it received in-principle approval from the state government only in 2015.
    • The Gujarat Maritime Board (GMB), a nodal agency of the Gujarat government, has been trying to develop such a cluster at GIFT City in the state capital Gandhinagar.
    • This cluster will initially consist of Gujarat-based shipping lines, freight forwarders, shipping agents, bunker suppliers, stevedores, and shipbrokers with chartering requirements.
    • In the second stage, the cluster would attempt to bring Indian ship owners, ship operators, Indian charterers and technical consultants scattered in cities like Mumbai, Chennai, and Delhi to Gujarat.
    • Thereafter it would target to attract global players in the maritime sphere.

    Need for a maritime cluster

    • This project will try to bring back businesses that have migrated over the years to foreign locations due to the absence of the right ecosystem in the country.
    • Gujarat has a lot of ports and handles 40 per cent of the country’s cargo, but it does not target the entire value chain.
    • Since we didn’t have the ecosystem, a lot of Indian companies have moved to foreign locations. For instance, Adani Group has the biggest port in Gujarat, but for their chartering needs, they are based out of Dubai.

    Back2Basics: GIFT City, Gandhinagar

    • GIFT city is India’s first operational smart city and international financial services centre (much like a modern IT park).
    • The idea for GIFT was conceived during the Vibrant Gujarat Global Investor Summit 2007 and the initial planning was done by East China Architectural Design & Research Institute (ECADI).
    • Currently approximately 225 units/companies are operational with more than 12000 professionals employed in the City.
    • The entire city is based on concept of FTTX (Fibre to the home / office).The fiber optic is laid in fault tolerant ring architecture so as to ensure maximum uptime of services.
    • Every building in GIFT City is an intelligent building. There is piped supply of cooking gas. India’s first city-level DCS (district cooling system) is also operational at GIFT City.

  • [pib] PLI Scheme extended to 10 key Sectors

    The Union Cabinet has unveiled the Production-Linked Incentive (PLI) Scheme to encourage domestic manufacturing investments in ten key sectors.

    PLI Scheme

    • The PLI scheme aims to boost domestic manufacturing and cut down on imports by providing cash incentives on incremental sales from products manufactured in the country.
    • Besides inviting foreign companies to set shop in India, the scheme aims to encourage local companies to set up or expand, existing manufacturing units.

    UPSC can directly as the sectors included in the PLI scheme. Earlier it was only meant for Electronics manufacturing (particulary mobile phones).

    What was the earlier PLI Scheme?

    • As a part of the National Policy on Electronics, the IT ministry had notified the PLI scheme on April 1 this year.
    • The scheme will, on one hand, attract big foreign investment in the sector, while also encouraging domestic mobile phone makers to expand their units and presence in India.
    • It would give incentives of 4-6 per cent to electronics companies which manufacture mobile phones and other electronic components.
    • A/c to the scheme, companies that make mobile phones which sell for Rs 15,000 or more will get an incentive of up to 6 per cent on incremental sales of all such mobile phones made in India.
    • In the same category, companies which are owned by Indian nationals and make such mobile phones, the incentive has been kept at Rs 200 crore for the next four years.

    10 new sectors added

    The ten sectors have been identified on the basis of their potential to create jobs and make India self-reliant, include:

    1. Food processing
    2. Telecom
    3. Electronics
    4. Textiles
    5. Speciality steel
    6. Automobiles and auto components
    7. Solar photo-voltaic modules and
    8. White goods such as air conditioners and LEDs

  • Striking a fine balance in the review of RBI’s policies

    Judicil review of central bank action could impact several stakeholders at the same time. This type of problems could be termed as polycentric problems. The article disusses the issues with judicial reviews in such cases.

    Judicial review of central bank actions

    • The Supreme Court is currently considering if the RBI should extend the COVID-19 induced loan moratorium and waive the accrued interest on interest.
    • Earlier this year, the court struck down an RBI circular imposing a ban on virtual currencies.
    • Last year, it quashed RBI circular that mandated banks and financial institutions to initiate insolvency proceedings against defaulting companies with significant loan exposures.

    Unsuitable for adjudication

    • Legal scholars have long recognised that certain disputes are inherently unsuitable for adjudicative disposition.
    • The most influential arguments on this subject were advanced by the American legal philosopher Lon Luvois Fuller.
    • Fuller compared polycentricity with a spider’s web — a pull on one strand distributes the tension throughout the web in a complicated pattern.
    • Applied to adjudication, polycentric problems normally involve many affected parties and a somewhat fluid state of affairs.
    • The range of those affected by the dispute cannot easily be foreseen and their participation in the decision-making process by reasoned arguments and proofs cannot possibly be organised.
    • As a result, the adjudicator is inadequately informed and cannot determine the complex repercussions of a proposed solution.

    Complexity of functioning of bank

    • Disputes involving certain central bank functions are highly polycentric and are unsuitable for resolution through judicial review.
    • For example, consider monetary policy function.
    • This involves varying short-term interest rate to control supply and demand of money in the economy, which, in turn, influences economic activity and inflation.
    • If judicial review supplants the central bank’s decision on this rate with the decision of the adjudicator, the repercussions would affect every single borrower and saver.
    • Yet, the adjudicator can neither offer a meaningful hearing to all those affected parties, nor can he effectively process all the necessary information to determine an optimal solution.
    • Evidently, disputes about monetary policy rate are highly polycentric and are better resolved outside the court.\

    Which actions of banks should involve judicial review

    • Not all disputes involving central bank functions are polycentric.
    • For example, a dispute regarding imposition of a pecuniary penalty by a central bank could be resolved through judicial review.
    • If the adjudicator finds the central bank to be correct, it need not interfere.
    • If the adjudicator finds the central bank to be incorrect, it could modify or overturn the central bank’s decision.
    • Clearly, judicial review could be effectively used to resolve bipolar disputes involving the central bank if they exhibit low polycentricity.

    Need for striking the balance

    • Monetary policy and pecuniary penalties are at two extreme ends of the polycentricity spectrum.
    • There are, however, various central bank functions of intermediate polycentricity.
    • Consider prudential regulations such as bank capital regulation.
    • If judicial review supplants provisions of such regulations with the decision of the adjudicator, it may appear to directly impact only the banks and nobody else.
    • But in reality, it could impact bank lending, which, in turn, would have complex repercussions on the entire credit market and risk-taking abilities across the economy.
    • Effective hearing of all affected parties, directly or indirectly, would, therefore, be impossible.
    • Consequently, some bipolar disputes involving the central bank may be too polycentric for meaningful resolution through judicial review.
    • Judicial review could be purely procedural — the adjudicator could merely review whether the central bank’s action is within its legal mandate or not.
    • The adjudicator could at most nullify a procedurally invalid central bank action, but may never supplant the decision of the central bank with his own.

    Consider the question “Judicial review of the central bank actions could be different from the other judicial reviews. Examine the issues in such reviews by the judiciary.”

    Conclusion

    Adopting polycentricity test within constitutional jurisprudence would help sustain the legitimacy of judicial review while retaining the accountability of technocratic institutions such as the central bank.

  • India’s catch-up evolution in techno-policy landscape

    This newscard is an excerpt of the original article published in the DownToEarth.

    Central theme: India needs to work out problems in old policies and develop new ones that ensure a rapid tectonic shift in India’s technological future.

    Past lessons:

    (1) From Agriculture

    • The Father of the Green Revolution, Norman E Borlaug, was credited with the development of semi-dwarf, disease-resistant and high-yield variety of wheat that he introduced in India, Pakistan and Mexico.
    • Led by Mexico, and soon followed by India, many countries adopted what is now commonly known as the ‘Green Revolution’.
    • Even after suffering two famines and recovering from the colonial catastrophe, India transformed itself into a self-sufficient nation in terms of rice and wheat over the next two decades.

    Sustaining GR with farm mechanization

    • Nearing the end of this decade, farm mechanization in India stands at 40-45 per cent, which is low compared to the USA (95 per cent), Brazil (75 per cent) and China (57 per cent).
    • Renewal of focus on farm mechanization was afforded only in the 12th five-year plan through a sub-mission on agricultural mechanization.
    • Regional disparities aside, India has broken the inertia in adopting farm machinery when compared to previous decades that is largely owed to the current push by the Union government.

    Still stranded with Land reforms

    • Yet, the response came late as compared to other countries with similar levels of development and was off by decades when compared to advanced economies.
    • Indian policymakers are still catching-up when implementing agriculture reforms, including land record digitization that should have been done and dusted by now.

    (2) Agriculture to Industries

    • After adopting resistant-variety cotton, India became the largest producer and second-largest exporter of cotton.
    • But it lags significantly behind in exporting cotton fabric at 5-6 per cent of the global share as China leads at 51 per cent.
    • Even with technical textiles, India’s production share is at four per cent and we suffer from an overall trade deficit.

    Why do we lag?

    • The earlier policies have not been revamped to reorient them into improving the technologically laggard and decentralized small-scale industries.
    • The overall direction is guided by budgetary announcements and segregated schemes that often leads to ambiguity in policy.
    • The new textile policy that is expected to provide for the economy of scale through textile parks is yet to be rolled out and the dedicated National Technical Textile Mission has only been recently announced.
    • Both policies should have been in place a decade ago.

    (3) Automobile sector

    • India’s automobile sector is yet another example of playing policy catch-up.
    • None of the Indian companies has any substantial market share in electric vehicle (EV) production, and retail sale of EVs in India has not registered any significant growth.
    • The biggest hurdle to the growth of EVs in India, among others, is policy ambiguity in relation to conventional internal combustion (IC) engine vehicles that hamper strategic business decisions.

    Beyond lofty roadmaps

    • In June 2019, NITI Aayog claimed that only EVs would be sold in India after 2030, replacing conventional IC engine vehicles, a claim that was later refuted by the Union Minister of Transport.
    • Policy ambiguity and lack of clear-cut directives on such a revolutionary technology can create disarray within the industry and on the broader strategic direction of the manufacturing sector.

    (4) Gaps in data and privacy lawmaking

    • The world is fast changing with the advent of the fourth industrial revolution, artificial intelligence (AI) and quantum computing (QC).
    • Every dimension of technology will start interacting with each other as the physical operations will all be controlled and operated by intelligent and adaptive virtual systems.

    Here too, India lags

    • Advanced economies have already put data regulation guidelines in place. China and the United States are already far too ahead in their R&D and policy research into AI and QC.
    • India developed its national strategy for AI only in 2018 and still lacks a full-proof futuristic policy on quantum computing.
    • Revolutionary and disruptive technologies require full-proof futuristic policies and strategies for development, and not vision documents and segregated schemes.

    Dealing with data

    • As of November 2019, the Internet and Mobile Association of India put India’s active Internet users at 504 million; in 2020, India would register nearly 700 million internet users.
    • We generate a copious amount of data, which, when combined with personal data from individual users in India, demand a new legal and paradigm change.
    • India’s data fiduciary laws are still in their nascent stage.
    • Data Protection Bill based on the recommendation of the Justice BN Srikrishna Committee is still pending with Parliament.

    Not treating the symptoms

    • Every day millions of Indians share intricate personal details and data over the internet; a majority of active users are unaware of the threats posed by an open-access to data.
    • Political battles are slowly gaining traction on the internet by harnessing the loopholes in social media.
    • Threats of state surveillance loom over millions of Indians and even now, any legal framework to protect data or privacy is missing.

    What we can deduce from the above discussion?

    • The Indian State heavily influences the outcome of the country’s technological development, largely due to the significant presence of PSEs, the dominance of public expenditure in R&D and the type of mixed economy.
    • Therefore timely policy intervention is essential to drive technological development in India.
    • Policies also require time to materialise and bear fruit, and thus far, India’s track record in implementing policies does not inspire confidence.

    India isn’t always laggard

    • India has been able to harness the potential of technology in the past by timely policy intervention. India was an early bird to its environmental policies and space technology.
    • The United States set up its Solar Energy Research Institute in 1977 and India set up its Commission of Alternate Sources of Energy (CASE) in 1981.
    • Today, India leads by example in the share of renewable energy in its power generation matrix. India’s space technology is another success story that doesn’t miss the public eye.
    • Time and again, through innovation and research, Indian academia and industries have exemplified its willingness and capacity to change, and all it requires is the desired policy push.

    Conclusion

    • With the rapid pace of technological development, the Union government and states cannot set to lose out time, as they have done in the previous decades.
    • India must hunt for new technological innovations, fund research into prospective applications and build policies to facilitate the adoption of new technologies.
    • Ministries and public-funded research bodies must be re-tasked to actively seek out new and emerging technologies all across the globe.

  • Economic lessons from Vietnam and Bangladesh

    The article examines the emergence of Bangladesh and Vietnam as the major export hubs in the world and explains the lessons India could draw from it.

    Context

    • Bangladesh has become the second-largest apparel exporter after China.
    • Vietnam’s exports have grown by about 240% in the past eight years.

    Analysing Vietnam’s success

    • An open trade policy, a less inexpensive workforce, and generous incentives to foreign firms contributed to Vietnam’s success.
    • Vietnam’s open trade policy through Free Trade Agreements (FTAs) means trading partners do not charge import duties on products made in Vietnam.
    • Vietnam’s domestic market is open to the partners’ products.
    • Vietnam has agreed to change its domestic laws to make the country attractive to investors.
    • Over a decade or so, large brands such as Samsung, Canon, Foxconn, H&M, Nike, Adidas, and IKEA have flocked to Vietnam to manufacture their products.

    What explains Bangladesh’s success?

    • In Bangladesh, large export of apparels to the EU and the U.S. make the most of the country’s export story.
    • The EU allows the import of apparel and other products from least developed countries (LDCs) like Bangladesh duty-free.
    • India, as a good neighbour, accepts all Bangladesh products duty-free (except alcohol and tobacco).
    • Bangladesh may not have this facility in four to seven years as its per capita income rises and it loses the LDC status.
    • Bangladesh is working smartly to diversify its export basket.

    Lessons for India

    • The key learning from Bangladesh is the need to support large firms for a quick turnover.
    • Yet, most of Vietnam’s exports happen in five sectors, in contrast, India’s exports are more diversified.
    • The Economic Complexity Index (ECI), which ranks a country based on how diversified and complex its manufacturing export basket is, illustrates this point.
    • The ECI rank for China is 32, India 43, Vietnam 79, and Bangladesh 127.
    • India, unlike Vietnam, has a developed domestic and capital market.
    • To further promote manufacturing and investment, India could set up sectoral industrial zones with pre-approved factory spaces.
    • There should be no need to search for land or obtain many approvals.

    India should pursue organic growth

    • Most of Vietnam’s electronics exports are just the final assembly of goods produced elsewhere.
    • In such cases, national exports look large, but the net dollar gain is small. China also faces this issue.
    • Country’s Export to GDP ratio (EGR) indicates its export capacity.
    • Vietnam’s EGR is 107%, such high dependence on exports brings dollars but also makes a country vulnerable to global economic uncertainty. 
    • The U.S.’s EGR is 11.7%, Japan’s is 18.5%, India’s is 18.7%. Even for China, with all its trade problems, the EGR is 18.4%.
    • Most such countries, including India, follow an open trade policy, sign balanced FTAs, restrict unfair imports, and have a healthy mix of domestic champions and MNCs.
    • While export remains a priority, it is not pursued at the expense of other sectors of the economy.
    • The focus is on organic economic growth through innovation and competitiveness.

    Consider the question “While export is essential for the growth of the country, over-dependence on it and its promotion at the expense of the other sectors could do more harm to the economy than good. Comment.” 

    Conclusion

    With reforms promoting innovation and lowering the cost of doing business, India is poised to attract the best investments and integrate further with the global economy without increasing its dependence on export.

  • Regulation of Other Service Providers (OSP)

    The Department of Telecom (DoT) has eased the rules for registration, submission of bank guarantee and other norms for other service providers (OSP) in the business process outsourcing (BPO) and information technology-enabled services (ITes).

    Recall your basics from NCERT books… Sectors of the Economy … More precisely, the Tertiary, Quaternary and Quinary Sectors.

    What are Other Service Providers (OSP)?

    • OSPs or other service providers are companies or firms which provide secondary or tertiary services such as telemarketing, telebanking or telemedicine for various companies, banks or hospital chains, respectively.
    • As computers made their foray into the Indian information technology space, a number of such OSPs, which were either voice or non-voice based, came into the market.
    • The sector required minimal investment but gave great returns in business, which prompted a large number of individuals and companies to float other service providing firms.

    Registration of OSPs

    • The new telecom policy of 1999 suggested that all OSPs register themselves so that the government could keep a check on the usage of its resources.
    • Since most of these firms used leased telephone lines, this in turn used the telecom spectrum auctioned by the DoT, hence facing the regulation.
    • Further, the registration was also made mandatory to ensure that firms did not establish fake OSPs which swindled customers under the garb of providing telebanking and other such sensitive services.

    What were the various registration norms for OSPs?

    • To start services in India, OSPs had to register themselves with the DoT and declare to the government as to how many employees were working in the firm as well as the area of service it was engaged in.
    • For example, if a firm wished to provide telebanking services, it had to tell the government the number of people working with the BPO and the state that firms catered to.
    • Further, the OSPs also have to declare whether they were providing services to domestic firms or international firms, and the nature of services being offered.

    Significance of the new guidelines

    • The guidelines will make it easier for BPOs and ITes firms in many ways, such as cutting down on the cost of location, rent for premises and other ancillary costs such as electricity and internet bills.
    • The doing away of registration norms will also mean that there will be no renewal of such licenses and therefore will invite foreign companies to set up or expand their other service providing units in India.
    • This change, in line with the norms of countries in the West can also allow employees to opt for freelancing for more than one company while working from home, thereby attracting more workers in the sector.

  • Ghogha-Hazira Ferry Service

    PM has virtually inaugurated the Ghogha-Hazira Ro-Pax ferry service in Gujarat.

    Try this question from CSP 2016:

    Q.Recently, which of the following States has explored the possibility of constructing an artificial inland port to be connected to the sea by a long navigational channel?

    (a) Andhra Pradesh

    (b) Chhattisgarh

    (c) Karnataka

    (d) Rajasthan

    Ghogha-Hazira Ferry Service

    • It will work as a Gateway to South Gujarat and Saurashtra region. It will reduce the distance between Ghogha and Hazira from 370 km to 90 km.
    • It has a load capacity of 30 trucks (of 50 MT each) on the main deck, 100 passenger cars on the upper deck and 500 passengers plus 34 crew and hospitality staff on the passenger deck.
    • The reduced cargo travel time from 10 to 12 hours to about four hours will result in huge savings of fuel (approx 9,000 litres per day) and lower the maintenance cost of vehicles drastically.
    • The ferry service, while making three round trips per day on the route, would annually transport about 5 lakh passengers, 80,000 passenger vehicles, 50,000 two-wheelers and 30,000 trucks.

    Benefits

    • It will reduce the fatigue of truck drivers and enhance their incomes by giving them more opportunity to do extra trips.
    • It will give an impetus to the tourism industry with ease of access to the Saurashtra region and lead to the creation of new job opportunities.
    • With the onset of ferry services, the port sector, furniture and fertilizer industries in Saurashtra and Kutch region will get a big boost.
    • Eco-tourism and religious-tourism in Gujarat, especially in Porbandar, Somnath, Dwarka and Palitana will grow exponentially.
    • The benefits of enhanced connectivity through this ferry service will also result in increased inflow of tourists in the famous Asiatic lion wildlife sanctuary at Gir.

  • Fixing the rules of economy

    The article discusses the three fundamentals which need an examination to fix the issues faced by the economy. 

    Re-examining the fundamentals

    • India has an incomes crisis: incomes of people in the lower half of the pyramid are too low.
    • The solutions economists propose are: free up markets, improve productivity, and apply technology.
    • These fundamentals of economics must be re-examined when applied to human work.

    Three solutions and issues with them

    1) Freeing up the markets

    • It is suggested that markets should be freed up for agricultural products so that farmers can get higher prices; and freed up for labour to attract investments.
    • Without adequate incomes, people cannot be a good market for businesses.
    • In fact, it is the inadequate growth of incomes that has caused a slump in investments.
    • Ironically, the purpose of freeing up markets for labour is to reduce the burden of wage costs on investors just when wages and the size of markets must be increased.

    2) Increasing productivity

    • Productivity is a ratio of an input in the denominator and an output in the numerator.
    • The larger the output that is produced with a unit of input, the higher the productivity of the system.
    • Improvement of ‘productivity’ is key to economic progress.
    • Economists generally use labour productivity as a universal measure of the productivity of an economy.
    • Humans are the only ‘appreciating assets’ an enterprise has. They can improve their own abilities.
    • The values of machines and buildings depreciate over time, as any accountant knows.
    • Whereas human beings develop when they are treated with respect, and are provided with environments to learn.
    • For capital-scarce and human resource-abundant countries, such as many developing countries, the correct ratio of productivity is output per unit of capital.
    • This must be the driver of business as well as national strategies.
    • This was the strategy of ‘Japan Inc.’ to make Japan an industrial powerhouse.
    • This was E.F. Schumacher’s insight also.

    3) Use of technology

    • Schumacher, best known for his seminal idea ‘small is beautiful’ understood where capitalism powered with technology would be heading.
    • In his essay he wrote: “If we define the level of technology in terms of ‘equipment cost per work-place’, we can call the indigenous technology of a typical developing country (symbolically speaking) a £1-technology, while that of the modern West could be called a £1,000-technology.
    • The current attempt of the ‘developing ‘countries, supported by foreign aid, to infiltrate the £1,000-technology into their economies inevitably kills off the £1-technolgy at an alarming rate.
    • This results in destroying traditional workplaces at a much faster rate than modern workplaces can be created and producing the ‘dual economy’ with its attendant evils of mass unemployment and mass migration.
    • Schumacher had warned there was a malaise brewing beneath the drive to ‘Westernise’ and ‘technologise’ economies.

    Way forward: Social contract between society and workers

    • Workers provide the economy with the products and services it needs.
    • In return, society and the economy must create conditions whereby workers are treated with dignity and can earn adequate incomes.
    • Good jobs require good contracts between workers and their employers.
    • Therefore, the government should create a good society for all citizens, must regulate contracts between those who engage people to do work for their enterprises, even in the gig economy.
    • Goverment should push innovation in socially more beneficial directions to augment rather than replace less skilled workers.

    Conclusion

    The power balance must shift. Small enterprises and workers must combine into larger associations, in new forms, using technology, to tilt reforms towards their needs and their rights.

  • What is the Purchasing Managers’ Index (PMI)?

    The services sector has PMI has signalled first expansion since February this year.

    Try this PYQ:

    Q.Which of the following brings out the ‘Consumer Price Index Number for Industrial Workers?

    (a) The Reserve Bank of India

    (b) The Department of Economic Affairs

    (c) The Labour Bureau

    (d) The Department of Personnel and Training

    Purchasing Managers’ Index

    • 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.

    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.

  • Reinforcing the RBI’s accountability

    Inflation targeting and legal provisions

    • The inflation target, notified in August 2016, is 4%.
    • The upper tolerance level was set at 6% and the lower tolerance level at 2%.
    • Inflation was 6.7% in the January-March quarter, 6.6% in the April-June quarter and 6.9% in the July-September quarter.
    • Breaching limits for any three consecutive quarters constitutes a failure to achieve the inflation target.
    • In such an event, the Reserve Bank of India (RBI) is required to send a report to the Centre, stating the reasons for the failure to achieve the inflation target, the remedial actions it proposes to initiate, and an estimate of the time-period within which it expects to achieve the inflation target through the corrective steps proposed.
    • Through amendments passed by Parliament in 2016, these new provisions were written into the RBI Act.
    • They are aimed at ensuring enhanced transparency and accountability of the central bank.

    Reason given by the RBI for missing the target

    • The normal data collection exercise of the National Statistics Office was disrupted during the lockdown imposed due to the COVID-19 pandemic.
    • The minutes of the Monetary Policy Committee (MPC) meeting after its August policy review suggest that the RBI’s defence for the breach of the 4% inflation target and 6% upper tolerance limit was the handicap of data limitations.

    Issues with the reason given by the RBI

    • The range around the inflation target that the Ministry provided to the RBI is for accommodating constraints and challenges like data limitations.
    • The whole point of the range around the target, the statement emphasised, is that it “accommodates data limitations, projection errors, short-run supply gaps and fluctuations in the agriculture production”.

    Way forward

    • RBI should be made to explain what it plans to do to control inflation.
    • The central bank should be allowed to state expressly what support by way of government policy it needs to meet the inflation target.
    • This can only strengthen the RBI’s hand; it should not let go of the opportunity to reinforce the MPC framework.

    Conclusion

    Transparency can enable more informed decision-making within the government, greater public scrutiny of the RBI’s performance, and an improved inflation-targeting regime. To slack off on it would be to compromise with the credibility, transparency and predictability of monetary policy.