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RBI holds interest rates, warns against fiscal laxity:

Context:

By holding policy rates, the RBI shifts focus to the government to give a fillip to growth.

Introduction:

  • The Reserve Bank of India kept interest rates unchanged citing concerns about the upward risks to inflation and cautioned the government against steps to relax fiscal discipline to spur growth as such a move could adversely impact the deficit and add to inflationary pressure.
  • RBI’s Monetary Policy Committee (MPC) trimmed its forecast for economic growth in the current fiscal year in gross value added (GVA) terms to 6.7% and also raised its projected range for CPI inflation in the second half to 4.2-4.6%.

What is the reason behind RBI’s decision to keep key policy rate unchanged?

  • The various macroeconomic indicators of the Indian Economy have been on the downward spiral in the recent past. In such a scenario, reviving the investor sentiment and the demand is the key focus of the Government.
  • The Monetary Policy Committee (MPC) of Reserve Bank has decided to keep the key policy rate unchanged as it projects risks to inflation.

Factors responsible of economic slowdown:

A number of factors could be responsible for this:

1-   Merchandise exports:  One of the major reasons for the current deficit is the greater increase in merchandise imports than export.

2-   Increase import of Gold: Imports increased because of a rise in demand for gold (almost threefold) due to the upcoming festive season and tweaks in trade pacts with countries such as South Korea.

3-   ServicesFall in exports of Services due to domestic industry issues and increased protectionism worldwide.

4-   Agricultural vows :Shortage of agricultural goods and lower farm growth due to erratic monsoons, decreased government spending, hoarding, black marketing, inefficient procurement etc.

5-   Demonetisation: The effects of demonetisation such as reduced purchasing power, supply side inflation with decreased procurement of raw material, increased transportation costs, delayed payments, etc. Here, the effects on the real estate and construction sector have been specifically marked.

6-   Introduction of GST: The consequences of new tax regime such as uncertainty, delayed payments, increase in prices of commodities, increased vows of informal sector, etc.

7-   Delayed reforms:  In the long term, Delayed reforms such as Labour reforms (with no exit policy in India) and liberalisation discourage foreign investors to set up firms in India.

8-   The complexities of land acquisition, disputes with major countries over IPR regimes also contribute to the weak business sentiment.

9-   To complicate matters, we have almost nil Privacy laws, an unregulated and haywire e-commerce sector etc.

What does this growth trend imply?

  • There is no urgent requirement to lower any of policy rate
  • Central government has more time to observe and analyze the shifting global developments, like higher oil prices and rising interest rates, into domestic fiscal policy.
  • Once GST-led uncertainties are over, the government should take measures to support growth
  • What are the tools of monetary policy in India?

1-       Bank Rate:

  • A bank rate is the interest rate at which a nation’s apex bank lends money to domestic banks, often in the form of very short-term loans. Managing the bank rate is method by which central banks affect economic activity.

2    Liquidity Adjustment Facility (LAF):

Liquidity Adjustment facility was introduced in 2000. LAF is a facility provided by the Reserve Bank of India to scheduled commercial banks to avail of liquidity in case of need or to park excess funds with the RBI on an overnight basis against the collateral of Government securities.

3    Reverse Repo Rate:

Reverse Repo rate is the opposite of repo rate. If a bank has surplus money, they can park this excess liquidity with RBI and central bank will pay interest on this.

4-    Marginal Standing Facility (MSF):

This scheme was introduced in May, 2011 and all the scheduled commercial bank can participate in this scheme. Banks can borrow up to 2.5%percent of their respective Net Demand and Time Liabilities.

Qualitative Tools:

Margin Requirements:

Loan to Value is the ratio of loan amount to the actual value of asset purchased. RBI regulates this ratio so as to control the amount bank can lend to its customers.

Selective credit control

Under this measure, RBI can specifically instruct banks not to give loans to traders of certain commodities e.g. sugar, edible oil etc. This prevents speculations/ hoarding of commodities using money borrowed from banks.

Moral Suasion

Under this measure RBI try to persuade bank through meetings, conferences, media statements to do specific things under certain economic trends.

Steadying hand: (The Hindu, Editorial)

Context

The Goods and Services Tax Network (GSTN) is bracing itself for a “big challenge” set to emerge in the coming weeks as a ministerial panel Wednesday ruled out any further extension for filing GSTR 1 returns by traders. As it has been extended three to four times.

Sushil Kumar Modi, head of the five-member panel constituted to resolve the technology glitches being faced by traders on the network.

Challenges

  • GSTR 1 is outward and sales and GSTR 2 is purchase. It is auto-populated. Then there will be a matching of invoices of GSTR 1 and 2 which is a challenge
  • In GSTN, more than 90 lakh of taxpayers are registered but 90% of revenue is coming only from four lakh taxpayers.
  • For the month of July, 52 lakh dealers have filed the returns. But the detailed GSTR 1 has been filed by only 33 lakh, 43,000 dealers.

GSTR deadlines

The GST Council, in its September 16 meeting, had fixed

  • October 10 as the deadline for GSTR 1 relating to supplies made,
  • October 31 for GSTR 2 relating to purchases, and
  • November 10 for GSTR 3, a comprehensive one for the month of July.

Way out provided by panel

  • The tax network system developed by Infosys is capable to handle a large number of returns.
  • Infosys would send a team of qualified technicians to coordinate with the State tax administration to speed up and resolve technology issues
  • There are 27 States which constitute the Model 2 States. Model 1 States, like Karnataka, have developed their own backend. Model 2 States have had a problem creating the backend. Last meeting, we requested for developing a software for Model 2 States.
  • Now everything is automated. So, there will be no or minimum human intervention.

Waiting for the cut: (The Hindu, Editorial)

Background

  • Even as the economy slows down, the RBI has left its key policy lending rates unchanged while maintaining a “neutral” monetary policy stanc e.

Why did RBI take this step?

  • The upside risks to inflation — rising international oil prices, uncertainties in pricing behaviour of firms post-GST and a patchy monsoon — did not leave it with many alternatives.
  • RBI refrained from hawkishness due to the extraordinary concerns over growth.
  • The RBI scaled down its growth estimates for 2017-18 from 7.3% to 6.7%.

Concerns about the economy

  • The loss of momentum in the first quarter of 2017-18 and the first advance estimates of kharif foodgrain production are early setbacks which impart a downside to the outlook.
  • The implementation of the GST so far appears to have had an adverse impact, especially on the manufacturing sector in the short term.
  • This could further delay the revival of investment activity already impacted by the twin balance-sheet problem.
  • A weakening consumer confidence further clouds the horizon.
  • In terms of exports, India lags behind other emerging market peers.
  • There are also risks from the normalisation of monetary policy by the US Federal Reserve later this year.
  • That may well pose the risk of outflows considering that foreign portfolio investment in India has largely been in debt.
  • Uncertainty on inflation.

What could be done by the government

  • Speedily resolve the implementation problems linked to GST.
  • Get stalled projects off the ground.
  • Infusing more capital for banks to enable them to lend to firms, especially small and medium enterprises hurt most by the slowdown.

Coal-fired projections: (The Hindu, Editorial)

Context

  • The NITI Aayog’s Draft National Energy Policy (DNEP) has predicted that between now and 2040, there will be a quantum leap in the application of renewable energy together with a drastic reduction in fossil fuel energy intensity.

What are the expectations from this move?

  • Considering the economic and population growth, India’s annual per-capita electricity consumption is expected to triple, from 1075 kWh in 2015-16 to over 2900 kWh in 2040.
  • The DNEP is expecting a 100% electrification throughout India in the near term.
  • The government will be investing $2.5 billion to provide electricity connections to every home in India by the end of 2018.

Why is the policy more concentrating on Coal?

  • The DNEP is relying on coal power to sustain the nation’s base load requirement to meet rising energy demand. It proposes that coal will fuel 67% of India’s power generation in 2022.
  • The first step is that while India claims it will make a big push for renewables, it will continue to rely on coal for its baseload generation.
  • The second step is that even with this target, India will need only 741 million tonnes of coal in 2022 and 876 million tonnes in 2027. But the Ministry of Coal continues to push its ambitious targets to raise coal production to 1.5 billion tonnes by 2020, of which 500 million tonnes is expected to be produced by private coal mines and about 1 billion tonne by the public sector.

What are the hurdles?

  • Power plants, both public and private, have been running at merely 60% plant load capacity utilization.
  • Coal producers had to wait for a nod from the ministries of coal and power for support. Such support may not be forthcoming.
  • The power industry already suffers a high level of bank loan defaults, insolvency and other legal proceedings.

What are the subject of importance?

  • The DNEP has acknowledged that India’s oil consumption has grown 63% from 2005 to 2016 whereas the refining capacity has grown only by 15%.
  • Gas consumption has increased by 38% while production has actually fallen since 2012.
  • India’s energy security does require a large strategic storage of oil to take care of any vagaries in its international supply chain.
  • The peaking of India’s oil demand could have been envisaged but has not been identified in the DNEP.
  • On the one hand, the draft policy recognizes that by 2040, India’s oil import dependence may reach 55% from the current level of 33%. On the other hand, it offers nothing to curtail such dependence.

What is the way ahead?

  • The DNEP is offering to promote use of public transportation and railways to reduce oil consumption.
  • Unless electric transport is carefully planned, India’s dependence on imported oil is likely to continue.

RBI: Neutral over dovish: (Live Mint, Editorial)

Context:

RBI has kept the repo rate unchanged at 6%

What are the other recent declarations made by RBI?

  • Reverse repo rate kept unchanged at 5.75
  • Marginal standing facility (MSF) rate and the Bank Rate kept at 6.25 per cent
    Cash Reserve Ratio (CRR) kept unchanged at 4%
  • Statutory liquidity ratio (SLR) requirement has been cut by 50 basis points to 19.5 per cent.
  • Inflation projection has been narrowed down for the  second half of the FY18 to 4.2% to 4.6% from the earlier 4-4.5%
  • Growth estimate has been reduced to 6.7% from 7.3%

What is the reason behind RBI’s decision to keep key policy rate unchanged?

  • The Monetary Policy Committee (MPC) of Reserve Bank has decided to keep the key policy rate unchanged as it projects risks to inflation.

What is the current growth trend?

  • Economic slowdown
  • However, high frequency numbers are showing signs of revival, including auto-sales, PMI-manufacturing, core industries index etc.
  • Growth is expected to be 6-7% in the second half of the FY18.
  • However, full-year growth will still be at a three-year low

What does this growth trend imply?

  • There is no urgent requirement to lower any of policy rate
  • Central government has more time to observe and analyze the shifting global developments, like higher oil prices and rising interest rates, into domestic fiscal policy.
  • Once GST-led uncertainties are over, the government should take measures to support growth

What steps should the government take to support growth?

  • The government should put more emphasis on the recovery of non-performing assets
  • Emphasis should also be put on rebuilding banks’ balance sheets

Despite recent speculations of a fiscal stimulus, the government has not taken measures. Why so?

  • There is a need to strike a balance between growth and fiscal discipline.
  • More time is needed to assess downside risks to growth and revenue collections.
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