Q.1) Briefly discuss the creation and drawbacks of Monetary Policy Committee. GS-3
Monetary Policy Committee :
- On 22 September 2016, India’s monetary policy framework took a significant step forward, with the formation of the monetary policy committee (MPC).
- The committee was created in 2016 to bring transparency and accountability in fixing India’s Monetary Policy.
- The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.
- It was expected that inflation forecasts and the accompanying commentary of the MPC would influence India’s public discourse and improve general understanding of how the economy works.
Why was the MPC created?
- Creating a committee can represent different viewpoints.
- It will help spreading responsibility for the decision can reduce pressure that falls on an individual.
- Committee will ensure broad monetary policy continuity when any single member changes
How has the MPC managed against these expectations?
- The results have been good and encouraging so far.
- The RBI has been consistent in its inflation-targeting narrative.
- The MCP is expected to adhere to the inflation “glide path” which was formulated under the previous governor, signifying continuity.
- The MPC’s track record on transparency has been impressive.
What are the drawbacks of MCP?
- There is room for improvement when it comes to forecasting.
- There is also a lack of transparency about forecasts of the key policy variable: interest rates.
- Currently, the RBI’s monetary policy stance is expressed in subjective terms as accommodative or neutral.
What is its solution?
- A useful tool to solve its drawback is a “dot plot”; a plot which shows where each member thinks the policy rate would be at the end of the year for the next few years and in the longer run.
- The dots need not be identified with individual members, as is the case for the US Federal Reserve dot plot.
- Dot plot gives a sense of future rate movements; it would be valued by markets, firms and households.
- It is amply clear that the MPC’s journey so far has been exemplary.
Q.2) The government has moved beyond ‘village electrification’ to ‘24×7 power for all by 2022.’ Discuss the initiative 24* 7 power for all by 2022. Also, briefly discuss the several new government’s initiatives for power generation in India. GS-2
24*7 power for all by 2022
- The central government has set out an ambitious goal by focusing on household electrification and reliable power supply.
- As per the Ministry of Power statistics, 43 million Indian households are yet to be electrified.
- In order to achieve the target by 2022, India needs to increase the rate of household electrification by at least four times.
Government’s new initiative for power generation for India
The Government of India has identified power sector as a key sector of focus so as to promote sustained industrial growth. Some initiatives by the Government of India to boost the Indian power sector:
- The Ministry of Power has taken various measures to achieve its aim of providing 24X7 affordable and environment friendly ‘Power for All’ by 2019, which includes preparation of state specific action plans, and implementation of Green Energy Corridor for transmission of renewable energy, among other measures.
- India has become an associate member of the International Energy Agency (IEA), which makes the Paris-based body more significant, indicating India’s growing status in playing an important role in the global energy dialogue.
- The Government of India plans to auction coal blocks for commercial mining by the end of December 2017, which would end the monopoly of state-run firms in coal mining and help in achieving the country’s target of producing 1 billion tonnes of coal by 2020.
- The Cabinet Committee on Economic Affairs (CCEA) has approved a new coal linkage policy, aimed at providing necessary supply of fuel to power plants through reverse auction
- The Government of India has announced plans to implement a US$ 238 million National Mission on advanced ultra-supercritical technologies for cleaner coal utilization.
- The Cabinet Committee on Economic Affairs (CCEA) has approved the enhancement of capacity of the Scheme for Development of Solar Parks and Ultra Mega Solar Power Projects from 20,000 megawatt (MW) to 40,000 MW, which will ensure setting up of at least 50 solar parks each with a capacity of 500 MW and above in various parts of the country.
- The Union Cabinet, Government of India has given its ex-post facto approval for signing of a Memorandum of Understanding (MoU) on Renewable Energy between India and Portugal, which will help strengthen the bilateral cooperation between the two countries.
- The Ministry of New and Renewable Energy plans to introduce a fixed-cost component to the tariff for electricity generated from renewable energy sources like solar or wind, in a bid to promote a green economy.
- The Union Cabinet has approved the ratification of International Solar Alliance’s (ISA) framework agreement by India, which will provide India a platform to showcase its solar programmes, and put it in a leadership role in climate and renewable energy issues globally.
The way ahead
- The Indian power sector has a venture potential of Rs 15 trillion (US$ 225 billion) in the next 4–5 years, thereby providing immense opportunities in power generation, distribution, transmission, and equipment.
- The government’s immediate goal is to generate two trillion units (kilowatt hours) of energy by 2019. This means doubling the current production capacity to provide 24×7 electricity for residential, industrial, commercial and agriculture use.
- The government has electrified 13,000 villages so far out of the total 18,452 villages and is targeting electrification of all villages by 2019, within the targeted 1,000 days.
- The Government of India is taking a number of steps and initiatives like 10-year tax exemption for solar energy projects, etc., in order to achieve India’s ambitious renewable energy targets of adding 175 GW of renewable energy, including addition of 100 GW of solar power, by the year 2022.
- The government has also sought to restart the stalled hydro power projects and increase the wind energy production target to 60 GW by 2022 from the current 20 GW.
Q.3) The various macroeconomic indicators of the Indian Economy have been on the downward spiral in the recent past. What are the reasons for slowdown? Suggest some ways to revive the economy? GS-3
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.
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- Services –Fall 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.
Handling the Banking crisis
- Either you have to write-off the loans and book losses, or ask shareholders to bring more equity capital.
- The new bankruptcy code and procedure is promising, but is as yet untested for timeliness and effectiveness.
- There is also a suggestion to collect all the bad loans (that is, toxic waste) from the various banks and move them to a freshly capitalised bank, the so-called “bad bank”. The bad bank would focus solely on liquidating the collateral, bringing in fresh owners and managers to run distressed companies.
- Once freed from NPAs, the existing banks can resume lending to the healthy sectors. This is a promising idea as well and worth pursuing. The government cannot shy away from funding the rescue of India’s banking. It has to provide capital to the new “bad bank” or to recapitalise the beleaguered public sector banks, where most of the NPAs reside.
On the expenditure side:
- On the spending side, the government can focus on the following four areas.
- First, provide fresh capital either to existing banks or the new “bad bank”.
- Second, provide some version of a wage subsidy as an incentive to labour intensive sectors. A version of this was offered to the textile and garment sectors last year, but can be improvised and extended. The successful model of Odisha in the garment sector can be replicated.
- Third, give a big boost to affordable housing, by funding land acquisition for the builder, and interest rate subvention for the home owner. The States of Kerala and Maharashtra have interesting and replicable models.
- Fourth, keep a big focus on exporters, especially in labour intensive sectors, including agriculture. This includes a weaker exchange rate, quicker refund of GST credit and expanding the scope of the Merchandise Export from India Scheme and Service Exports from India Scheme.
Long term solutions:
- The various rigidities in the market for land and labour have been holding back the economy for decades now, stopping investors from risking their capital on large-scale projects needed to boost growth. This needs to be addressed to find a viable solution to the problems.
- In the long term, in general, it is the capital formation that revives the economy. Investment is an immediate source of demand.
- Further, the overall unease involved in doing business in the country and the even larger uncertainty looming around the rules that govern the conduct of business have seriously held back growth.
- Effects of new tax regime should be carefully watched.
- Incentives to exporters and increase in budget expenditure to their interest.
- India should be prepared for the impending tightening of monetary policy regime in U.S. and other countries as India has survived the current deficit on account of a strong capital account surplus.
- Also, India should seek to resolve the impending issues with other countries and organisations such as EU(regarding IPR regime and others) so that the India-EU FTA process could be hastened which could prove to be a major boon for services sector. Similarly, India’s push for a Services pact along with a goods pact in RCEP is a step in the right direction.