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Subject: Economics

  • Will the US raise interest rates in September?

    No.

    Based on the volatility we’ve been witnessing in the global markets, it seems unlikely that the Fed will hike interest rates in the September review.

    One of the external factors that the RBI has been watching closely for taking a call on its own interest rate stance is the behaviour of the US interest rate. Since Jan 2015, increasing number of Fed members, policy analysts and traders have opined that an interest rate hike in the US is a question of when, rather than of.

    The markets were largely expecting that the Fed would raise its interest rates in the September review. The RBI, which did not slash rates in last month’s policy review, also seemed to be waiting for some kind of a cue coming in from the Fed, before it could give a reduction on rates.

    Pre-volatility, why were the markets expecting the Fed to hike rates?

    The basic argument was that the jobs data from the Labor Bureau has been very good in the run-up to August. Unemployment rate in the US seems to be around 5.5% (see chart below). Now, the Federal Reserve believes that the “Natural Rate of Unemployment” for the US stands between 5% and 6%. This is the unemployment rate faced by the US when the labor resource is almost fully employed. Thus, any further reduction in the unemployment to say, 5%, would eventually spark off wage inflation and feed into an overall price hike.

    image001

    Has the inflation in the US been very high?

    Actually, no. But since monetary policy is as much about managing inflationary expectations as it is about curbing the actual inflation, the Fed was taking a view that the current jobs data seemed to show a trend of future potential inflation. It would be necessary to curb this potential overheating by hiking interest rates.

    image001

    How has the dollar been moving vis-a-vis other currencies in the past one year?

    Now this is one trend which is really interesting. If we observe the US Dollar Index (which is 6 currencies weighted against the dollar), we find that the dollar has pretty much strengthened against a basket of currencies since September 2014. The aggregate strengthening of the dollar over the past one year works out to a hefty 14%. So for a year now, the dollar has been getting stronger, which has been hurting the exports movement from the US.

    image001

    So what has changed now?

    Many things.

    • Since the Emerging Market economies have all witnessed considerable depreciations in this week, the dollar will emerge even stronger once the dust starts settling down. This by itself, should help the economic system to move from overheat to a more calm economy.
    • Add to this the fact that cheaper exports and cheaper oil should take the inflation southwards. Since the Chinese growth rate is expected to be soft in the coming fiscal, the biggest buyer of commodities will be showing low demands. This will cause commodities to remain low for a while, helping inflation to be controlled for all economies including the US.
    • Finally add to this the fact that the Chinese Central Bank PBOC has reduced its interest rates in an attempt to excite the real sector fundamentals into growth. Even with the US interest rates untouched, it really creates a differential between the US interest rates and the Chinese interest rates, which effectively helps in controlling overheat and dampening inflation in the US.
    • One last point before I wind up. Interest rates are changed in order to give critical direction to the economy. By that I mean, that interest rates are used as an instrument to change values in the real sector of the economy. However, that they have an impact on financial markets is also a given. When markets are already jittery and on tenterhooks, it would be pointless to rattle them some more by hiking the rates at this point.

    There seems to be no case left for a September hike anymore.

  • Differentiated Banks – Payment Banks, Small Finance Banks, etc.

    Payment Banks are the new stripped-down type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches. They are expected to increase the financial inclusion in the country by providing banking services to the people who are currently out of the reach of banking services.

    source
    • Features of Payment Banks
    • Why these Banks were set up?
    • Requirements for payment banks
    • Major difference between the payment banks, PPI and Commercial banks
    • Approved payment banks in India
    • Why does India need payment banks when we already have so many PSB?
    • How these Payment Banks Will Survive, when they cannot lend?
    • How can we make Payment Banks Viable?
    • Way ahead

    Features of Payment Banks

    • Payments Banks can accept demand deposits (only current account and savings accounts) with a ceiling limit of Rs.1 lakh per customer.
    • Payment Banks will pay interest at the rate notified by the RBI.
    • Payment Banks can issue Debit Cards but not credit cards.
    • Payment Banks cannot engage in lending services i.e. they cannot give loans, thus phasing out the fear of NPA.
    • The Deposit up to Rs.1 lakh is insured by the DICGC (Deposit Insurance and Credit Guarantee Corporation), same as in bank accounts.
    • Payment banks cannot involve in any credit risk and can only invest in less than one year G-Secs or treasury bills.
    • Payment Banks will charge a fee as commission. This will be the sole earning for the banks.
    • Payment bank will also have to maintain CRR (Cash reserve ratio) just like other Scheduled commercial banks (SBI, PNB, BoB, Dena, ICICI etc)

    source

    What’s the need for Payment banking in India?

    • The goal behind creating these payment banks is to bring about financial inclusion, by making it easier for anyone to get a bank account. That’s also why the cash limit in the accounts is set to just Rs. 1 lakh.
    • The Reserve Bank expects payment banks to target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost.
    • These banks will enable poorer citizens who transact only in cash to take their first step into formal banking. The innovation is also expected to accelerate India’s journey into a cashless economy.

    Approved payment banks in India

    source

    How will these banks will survive, when they cannot lend?

    The questions are being raised as to how these new banks will be able to survive in absence of income from lending.

    • The payments banks are expected to bring in to their fold millions of customers who are currently not within the fold of the formal financial system.  This would lead to large volumes of transactions fetching the payments banks fees – a charge of even 1 or 2 per cent on a large volume can be lucrative on normal cash transfers, which will include government’s direct benefits transfer programmes.
    • Moreover, new payments banks can also earn 7.0% or so on their investments in government securities.
    • With no need for any provisions or losses on NPAs for these payment banks, they may become fitter banks than existing banks.

    How can we make Payment Banks viable?

    • Payment Banks will need to be more like these innovative consumer products businesses (particularly digital businesses).
    • Digital technology, coupled with a rigorous approach to user interface/user experience and an asset-light strategy, making good use of cloud-based services, will play an important role in enabling Payment Banks to develop simple solutions and acquire customers at low marginal cost.
    • The success of payment banks will depend on low-cost technology and high volume of transactions so that charges are reasonable and yet, profits are made.
    • If the model is to be a success, a payment bank should neither offer fixed-deposit products nor savings bank accounts.
    • Payment banks should offer small-ticket loan products because these products are required in rural areas, as these will discourage borrowers from approaching local moneylenders.
    • If payments banks aren’t mandated to have a capital adequacy ratio, it will provide them relief.
    • RBI should also reconsider an entry capital of Rs 100 crore for smaller banks, since such low entry-capital requirement may let non-serious players to throw their hat in the ring. This will also help weed out non-serious players from the bank licence fray.

    Way ahead

    The concept of new payments bank is compelling as it opens another route for inclusive banking. While time will tell how successful this model will be in incremental terms, the RBI on its part has given permission to probably the best players who are capable of making this a reality.

    References:

  • Inland Waterways

    National Waterways Bill 2015: Time to take to Water

     

    The approval of the National Waterways Bill, 2015, by both Houses of Parliament clears the decks for increasing the use of India’s extensive network of rivers, canals and other water stretches for transport. Let’s see this in brief.

    Under bill, 106 additional inland waterways will be added to the list of national waterways, taking the number to 111

    Under Entry 24 of the Union List of the Seventh Schedule of the Constitution, the central govt can make laws on shipping and navigation on inland waterways which are classified as national waterways by Parliament by law

    Let’s see background of Inland Waterway Transport

    <Why Govt has cleared decks for National waterways?>

    • Inland Water Transport is considered as the most cost effective and economical mode of transport from the point of view of fuel efficiency
    • One horse power can carry 4000 Kg load in water whereas, it can carry 150 Kg and 500 Kg by road and rail respectively
    • Further in a study as highlighted by the World Bank, 1 litre of fuel can move 105 ton-Km by inland water transport, whereas the same amount of fuel can move only 85 ton-Km by rail and 24 ton-Km by road
    • Studies have shown that emission from container vessels range from 32-36 gCO2 per ton-Km while those of road transport vehicles (heavy duty vehicles) range from 51-91gCO2 per ton-km.(Environment friendly)
    • Many countries in Europe and elsewhere carry over 40% of their passenger and freight traffic through water. But in India this proportion is only 3.5 per cent
    • Inland water transport’s share in the country’s total transport sector is less than 0.4%
    • This is partly because of the inability to shift cargo between modes of transport without disruption

    Let’s learn about five existing and one proposed waterway

     

    1. Allahabad-Haldia Stretch of the Ganga Bhagirathi-Hooghly River
    2. Sadiya-Dhubri Stretch of Brahmaputra River
    3. Kollam-Kottapuram Stretch of West Coast Canal and Champakara and Udyogmandal Canals
    4. Kakinada-Puducherry Stretch of Canals and the Kaluvelly Tank
      Bhadrachalam-Rajahmundry Stretch of River Godavari and Wazirabad-Vijayawada Stretch of River Krishna
    5. Talcher-Dhamra Stretch of Rivers, Geonkhali-Charbatia Stretch of East Coast Canal, Charbatia-Dhamra Stretch of Matai River and Mahanadi Delta Rivers
    6. This is a proposed national waterway b/w Lakhipur and bhanga of the Barak river

    What are the Benefits of inland waterways?

    • Recognised as fuel efficient, cost effective and environment friendly mode of transport, especially for bulk goods, hazardous goods and over dimensional cargos
    • Reduces time, cost of transportation of goods and cargos, as well as congestion and accidents on highways
    • Immense potential for domestic cargo transportation as well as for cruise, tourism and passenger traffic.
    • Systematic development will open up progressive economic and transport opportunities in the country
    • Open up considerable investment and business opportunities in the areas like water-based tourism, construction and operation of terminals, creation of storage accommodation, and provision of other facilities required for smooth water-based navigation
    • Help to generate millions of new jobs

    Are there any limitations/ problems to implement this national waterway project?
    If any, How to solve those limitations?

    • India’s water channels will need to have adequate width, depth and air clearance. Many rivers are seasonal, with water flows declining sharply after the monsoon
    • Navigating such rivers in the lean season may, therefore, require regular and extensive dredging and desilting
    • Higher water salinity, especially in the coastal regions and estuaries, and constant inflow of silt in the rivers can also be problematic
    • Water highways will require more river ports with their support infrastructure – road and rail connections, warehouses and other services
    • Heavy investment will be needed also to procure equipment, including dredgers, shipping vessels and barges of different sizes

    What are the sources of funding and finances?

    • Financial approval of the competent authority for each waterway would be taken based on outcome of techno-economic feasibility studies, that are being undertaken by the Inland Waterways Authority of India (IWAI)
    • IWAI will develop the feasible stretch of National Waterways for shipping and navigation purpose through mobilization of financial resources
    • Govt will explore multiple sources of finance, including market borrowings and tapping the National Clean Energy Fund (NCEF) and the Central Roads Fund  (CRF)

    <The National Clean Energy Fund (NCEF) is a fund created in 2010-11 using the carbon tax – clean energy cess – for funding research and innovative projects in clean energy technologies of public sector or private sector entities, upto the extent of 40% of the total project cost. The Fund is designed as a non lapsable fund under Public Accounts>

    <Central Road Fund (CRF) is a non-lapsable fund created under Section 6 of the Central Road Fund Act, 2000 out of a cess/tax imposed by Union Govt on consumption of Petrol and High Speed Diesel to develop and maintain National Highways, State roads (particularly those of economic importance and which provides inter-state connectivity), rural roads, railway under/over bridges etc.> 

    To know what is cess, how it is different from tax and surcharge, click here

    1. Private participation in infrastructure is needed – but will be possible only if such ventures become economically viable. For this, they will require adequate and assured 2-way traffic
    2. But the traffic in bulk goods, such as coal, minerals, food grain, fertiliser and similar other commodities is often unidirectional, compelling the vessels to return empty or under-loaded. This aspect will need to be weighed and addressed
      Published with inputs from Arun

  • Rural Distress, Farmer Suicides, Drought Measures

  • Black Money – Domestic and International Efforts

    Are there any provisions in UN which can help us chase black money?

    United Nations Convention Against Corruption

    Yes, there are a few. And they might help us get black money back in India. Let’s look at the history of such negotiations to learn more about them and hone your understanding for Probable questions for IAS Mains.

    1. Tough negotiations on this subject in Vienna, Austria, in 2003 was a vital part of the United Nations Convention Against Corruption (UNCAC).
    2. The first breakthrough came when the group established asset recovery as a “fundamental principle” of the convention.
    3. Then it was only a matter of laying a framework, in both civil and criminal law, for tracing, freezing, forfeiting and returning funds obtained through corrupt activities.
    4. What did the convention accomplish? Legal obstacles should be tackled with international cooperation rather than by domestic laws.
    5. Some of the relevant provisions of the convention are crucial to the question of recovery of assets.
    6. It provides that each state party shall take such measures as may be necessary to permit its competent authorities to give effect to an order of confiscation issued by a court of another state party.They are also required to share information with the competent authorities of another state, when necessary, to investigate, claim and recover proceeds of offences.

    The UN, through its Office on Drugs and Crime, which leads the fight against illicit drugs and international crime, has been given the responsibility to implement the convention, particularly its assets recovery provisions.

    Refining India’s approach

    1. In the case of India, difficulties may have arisen not in establishing that the sums amassed abroad belong to India, but in proving that the assets were illegally obtained.
    2. There is a need of domestic management and disposal of seized and confiscated assets and the management of the return and disposal of assets recovered in the context of international corruption cases.

  • Cashless Society – Digital Payments, Demonetization, etc.

    In this article we will explain what Cashless economy is, what are the major advantages of cashless economy and what challenges India will face in moving towards a cashless economy.

    • What is a cashless economy?
    • Benefits of Cashless economy
    • Challenges in making India a cashless economy
    • Steps taken by RBI and Government to discourage use of cash
    • What else needs to be done?

    Introduction

    India continues to be driven by the use of cash; less than 5% of all payments happen electronically however the finance minister, in 2016 budget speech, talked about the idea of making India a cashless society, with the aim of curbing the flow of black money.

    Even the RBI has also recently unveiled unveiled a document — “Payments and Settlement Systems in India: Vision 2018” — setting out a plan to encourage electronic payments and to enable India to move towards a cashless society or economy in the medium and long term.

    What is a cashless economy and where does India stand?

    • A cashless economy is one in which all the transactions are done using cards or digital means. The circulation of physical currency is minimal.
    • India uses too much cash for transactions. The ratio of cash to gross domestic product is one of the highest in the world—12.42% in 2014, compared with 9.47% in China or 4% in Brazil.
    • Less than 5% of all payments happen electronically
    • The number of currency notes in circulation is also far higher than in other large economies. India had 76.47 billion currency notes in circulation in 2012-13 compared with 34.5 billion in the US.
    • Some studies show that cash dominates even in malls, which are visited by people who are likely to have credit cards, so it is no surprise that cash dominates in other markets as well.

    source

    Benefits of Cashless economy

    • Reduced instances of tax avoidance because it is financial institutions based economy where transaction trails are left.
    • It will curb generation of black money
    • Will reduce real estate prices because of curbs on black money as most of black money is invested in Real estate prices which inflates the prices of Real estate markets
    • In Financial year 2015, RBI spent Rs 27 billion on just the activity of currency issuance and management. This could be avoided if we become cashless society.
    • It will pave way for universal availability of banking services to all as no physical infrastructure is needed other than digital.
    • There will be greater efficiency in welfare programmes as money is wired directly into the accounts of recipients. Thus once money is transferred directly into a beneficiary’s bank account, the entire process becomes transparent. Payments can be easily traced and collected, and corruption will automatically drop, so people will no longer have to pay to collect what is rightfully theirs.
    • There will be efficiency gains as transaction costs across the economy should also come down.
    • 1 in 7 notes is supposed to be fake, which has a huge negative impact on economy, by going cashless, that can be avoided.
    • Hygiene – Soiled, tobacco stained notes full of germs are a norm in India. There are many such incidents in our life where we knowingly or unknowingly give and take germs in the form of rupee notes. This could be avoided if we move towards Cashless economy.
    • In a cashless economy there will be no problem of soiled notes or counterfeit currency
    • Reduced costs of operating ATMs.
    • Speed and satisfaction of operations for customers, no delays and queues, no interactions with bank staff required.
    • A Moody’s report pegged the impact of electronic transactions to 0.8% increase in GDP for emerging markets and 0.3% increase for developed markets because of increased velocity of money

    An increased use of credit cards instead of cash would primarily enable a more detailed record of all the transactions which take place in the society, allowing more transparency in business operations and money transfers.

    This will eventually have the following chain effect:

    1. Improvement in credit access and financial inclusion, which will benefit the growth of SMEs in the medium/long run.
    2. Reduce tax avoidance and money laundering thanks to the higher traceability of all the transactions.
    3. The increased use of credit cards will definitely reduce the amount of cash that people will carry and as a consequence, reduce the risk and the cost associated with that.

    Challenges in making India a cashless economy

    • Availability of internet connection and financial literacy.
    • Though bank accounts have been opened through Jan Dhan Yojana, most of them are lying un operational. Unless people start operating bank accounts cashless economy is not possible.
    • There is also vested interest in not moving towards cashless economy.
    • India is dominated by small retailers. They don’t have enough resources to invest in electronic payment infrastructure.
    • The perception of consumers also sometimes acts a barrier. The benefit of cashless transactions is not evident to even those who have credit cards. Cash, on the other hand, is perceived to be the fastest way of transacting for 82% of credit card users. It is universally believed that having cash helps you negotiate better.
    • Most card and cash users fear that they will be charged more if they use cards. Further, non-users of credit cards are not aware of the benefits of credit cards.
    • Indian banks are making it difficult for digital wallets issued by private sector companies to be used on the respective bank websites. It could be restrictions on using bank accounts to refill digital wallets or a lack of access to payment gateways. Regulators will have to take a tough stand against such rent-seeking behaviour by the banks.

    Steps taken by RBI and Government to discourage use of cash

    • Licensing of Payment banks
    • Government is also promoting mobile wallets.Mobile wallet allows users to instantly send money, pay bills, recharge mobiles, book movie tickets, send physical and e-gifts both online and offline. Recently, the RBI had issued certain guidelines that allow the users to increase their limit to Rs 1,00,000 based on a certain KYC verification
    • Promotion of e-commerce by liberalizing the FDI norms for this sector.
    • Government has also launched UPI which will make Electronic transaction much simpler and faster.
    • Government has also withdrawn surcharge, service charge on cards and digital payments

    What else needs to be done?

    • Open Bank accounts and ensure they are operationalized.
    • Abolishment of government fees on credit card transactions; reduction of interchange fee on card transactions; increase in taxes on ATM withdrawals.
    • Tax rebates for consumers and for merchants who adopt electronic payments.
    • Making Electronic payment infrastructure completely safe and secure so that incidents of Cyber crimes could be minimized and people develop faith in electronic payment system.
    • Create a culture of saving and faith in financial system among the rural poor.
    • The Reserve Bank of India too will have to come to terms with a few issues, from figuring out what digital payments across borders means for its capital controls to how the new modes of payment affect key monetary variables such as the velocity of money.
    • RBI will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development.
    • The regulators also need to keep a sharp eye on any potential restrictive practices that banks may indulge in to maintain their current dominance over the lucrative payments business.

    Though it will take time for moving towards a complete cashless economy, efforts should be made to convert urban areas as cashless areas. As 70% of India’s GDP comes from urban areas if government can convert that into cashless it will be a huge gain. Therefore different trajectories need to be planned for migration to cashless for those having bank account and for those not having.

    References:

  • Food Safety Standards – FSSAI, food fortification, etc.

    Food Safety Regulations in India and the Way Forward

    From junk food bans to street food regulations, FSSAI has been in news all the year round and most notoriously for the Maggie ban! UPSC does not necessarily goes for the most hot topic in news which is the Maggie ban in this context but this whole episode opens up a hitherto unknown organisation to us – The FSSAI.

    And what must a worthy IAS aspirant do? Study the ins and outs of this organisation – food safety regulations – its latest victories and controversies! And that’s not it, one more reason which makes this topic important is the declaration of the World Health Day’s 2015 theme – Food Safety.

    So, what all have been the cases of FSSAI activism this year? For starters, these guys banned junk food in Delhi school canteens!

    1. Acting on a public interest writ petition, the Delhi HC had earlier directed FSSAI to regulate sale of foods high in salt, fats and sugar in and around 50 metres of schools.
    2. Court also directed CBSE to consider including the adherence to these guidelines while giving affiliation to the schools.
    3. The draft guidelines suggested creation of a canteen policy and education program to inform students and parents of link between ‘High in fats, salt & sugar’ (HFSS) foods and non-communicable diseases like obesity, hypertension, diabetes etc.

    But what was the need to do this? Glad you wondered!

    A study published in the noted medical journal Lancet says India is just behind US and China in this global hazard list of top 10 countries with highest number of obese people.

    Fair enough, what about the street food that we devour?

    This is where CSE came in and presented a case for regulation on the street food. They want the agencies to:

    1. Strengthen the implementation and enforcement of the Food Safety and Standards Act (FSS) .
    2. Improve food testing laboratory infrastructure and skills.
    3. The Food Safety and Standards Authority of India (FSSAI) should set maximum residual limits for antibiotic residues in chicken etc.
    4. Set a national level disease surveillance and public alert system.

     

    All this is well and fine but you probably still want to know what happened with the Maggi case? More particularly, what was the issue with MSG (Ajinomoto)!

    Here’s all that we could find on the MSG/ Ajinimoto issue. UPSC Might not ask a direct question but can probably check you on a quick objective (IAS 2016) or you can use this as a quick criticism point on FSSAI’s propensity to escalate issues!

    Some major criticisms that came in the way of FSSAI:

    1. It is time we wake up and work on a science-based approach and move forward rapidly.
    2. If we have periodical evaluation in aviation for pilots, why not for analysts who test our food?
    3. Ideally, scientists should be involved in monitoring at every stage, including sampling protocols, setting standards, and testing and simulation.
    4. The state labs are short of analytical personnel and ill-equipped to perform to capacity as compared to private labs which are approved by FSSAI.

     

    Published with inputs from Sumer.

     

  • Plantation Agriculture – RISPC, Tea Act, etc.

  • Minimum Support Prices for Agricultural Produce

  • Disinvestment in India