Tuesday, 30 September 2014

A CALL FOR MONETARY POLICY REFORM

Monetary policy is the policy of a central bank that deals with supply of money. This means that central bank can help injecting liquidity or can absorb the same looking into overall prospect of economy.
Banks are the main financial institutions in a country that help in mobilization of public money for investment. Thus the regulator, in case of India, RBI can use various measures, both qualitative and quantitative to change the potential of banks with regard to lending and borrowing. There has been continuous reform in the monetary policy framework from Ways and Means Advances era to global integration of monetary policy as well as change in inflation targeting criteria. These steps were encouraging and came as a rescue of the banks from the financial meltdown directly. However, various measures call for a reform in the broad term for the overall growth budding.






Reserves Paradox

CRR (Cash Reserve Ratio) and SLR (Statutory liquidity Ratio) are the portion of net demand and time liabilities (NTDL) that it has to keep with RBI in form of cash and with itself in the form of public sector bonds; gold etc respectively. CRR are nothing but a tool to regulate direct money supply. It is just a type of non-performing asset that is kept with RBI. It does not earn interest and neither is used for any investment by RBI. It is a run-off on the bank and thus must be eliminated. The point of its use in short term liquidity changes can be counteracted by various qualitative measures like moral suasion and selective credit controls etc.
The RBI has recently decreased SLR by 0.5 percentage point in the consecutive monetary policy review and brought it to 22%. However, this has had little impact on the overall liquidity environment as banks have been investing in these securities over and above their SLR limits. These securities are considered risk free as well as also help in meeting their Basel Requirements. Thus there has been inertia on the part of the banks to change this structure. Amendments made to RBI Act 19354 and Banking Regulation Act, 1949 in 2007, have capped the SLR to 40% which needs to be abolished. The investment by banks needs to be reduced and shall be made at a maximum of 2% points above the minimum SLR. Thus banks will not be able to invest in these securities and gold above a particular limit. This will help in decreasing the over-dependence on Government securities as well as increases the credit worthiness in the country. Further, SLR shall be broad based to include some other instruments of financial market like corporate bonds having a tangible net worth above a particular limit and also a positive credit rating from various credit rating agencies.


More than just inflation targeting




In the recent times, monetary policy has become synonymous to price control or inflation. The hawkish stand of RBI has made it more complacent for maintaining a status quo on the liquidity adjustment measures. Urjit Patel committee recommended a change in the inflation targeting stand of RBI from WPI to CPI which is more inclusive and broad based as it contains the services as well. This has made it almost impossible for a rate cut. However, RBI has overlooked other features of the monetary policy that needs to be considered: financial stability and exchange rate.
It may be right that RBI has taken right steps with regard to exchange rate when there was a run-off of the rupee. However, it has been quite late in its stand and thus led to havoc in the economy. There is a need for proper integration of exchange rate in the overall monetary policy and pre-emptive steps shall be taken before eleventh hour. There must be more information exchange with various central banks. As the Federal Reserve is conceiving a change in its quantitative easing and thus bound to have ramification on the inflow of dollars, there is a need for more emphasis on these mechanisms. This will, in the long run, may have a sentimental impact on the investors, traders etc. While talking about financial stability, though it is not an exclusive domain of the central bank , but it has to be considered while chalking out any of the new strategy whether it is with regard to change in rates or overall policy environment.
The various paradigms changes in the monetary policy frameworks are in the right direction but RBI needs to be more pragmatic with the dynamic economic realities and thus needs a transformation in its structural parameters.


Saturday, 27 September 2014

My Opinion On Some Recent issues

ABOUT CHANGES IN MGNREGA

India is a welfare state that seeks to provide for inclusive development. It means that state exist and is grounded in inalienable rights of the citizens. Looking into DPSP (Directive Principles of state policy) and increasing disparity, government had launched a scheme back in 2005 named MGNREGA.


Background

It is a government scheme that provides for “Right to Work” through 100 days og guaranteed employment to the ‘willing’ adult members of a family. The scheme has been instrumental in lifting people out of poverty as well as increases their skills and provide for their development. Though various issues related to scheme has been discussed and challenged due to wide ranging corruption and lack of better asset creation or any other sea change in the overall village economic life.
However, it is still the most popular schemes that has provided for electoral benefits for a party, increasing standard of living among other things.

The proposal

There has been a proposal to revamp the scheme. It has been decided to increase the material to labour ratio to 49:51. Further it shall be extended to the tribal and severely poor areas unlike it’s universality at present. The argument based on the premise that it will cut wasteful expenditure and bridge fiscal deficit. Further, it will help in the durable asset creation as more material will be used and thus capital formation.
However, one point that has been overlooked by the government is the present labour to cost ratio of 60:40 and the proposed ratio despite of the under-utilization of funds in the past for material cost. It has been seen that only 27% of the materials funds have been used. This means that, the new proposal will eat into the wages component by decreasing the number of beneficiaries. Further, it will lead to more contractors in the areas due to increase in material cost and thus may lead to increased corruption, exploitation of the gullible tribals and illiterate poors. It may lead to delay in the projects as well.
In addition the purpose of providing jobs will be undermined as migration of people to nearby tribal areas or urban areas, exacerbating the problem which the scheme seeks to address which may lead to social tensions in tribal helmets.
It will also lead to increased seasonal1 and disguised2 unemployment because of lack of opportunities.
Thus it is necessary to take prudent decision to link socio-economic profile with the development needs of the areas so that it will remain inclusive, do not lead to differentiated development and do not lead to exploitation

Notes
1.      Seasonal employment : It is a form of unemployment in which the labour doesnot get to work for a particular season. Like in case of agriculture, seasonal employment is endemic.
2.      Disguised employment : It is a form of employment in which more people are working on the same job though it could have been performed by few.






ABOUT SUPREME COURT CANCELLING COAL BLOCK ALLOCATION


The Supreme Court decision to cancel the coal block allocation since 1993 has been based on their flawed allocation. SC, in its previous judgment with regard to 2G spectrum allocation, contended that natural resources are public resources and government have propriety right over them because people of India give them this right. Therefore any arbitrariness in their use and allocation like “first come, first serve” is out of sync with merit and reality. It has led to windfall gains for private companies and loss to the public exchequer in the form of meager fee, royalty charges and cess etc (pointed out by CAG). Further there is a lack of transparency in the tender process and thus was opened to political miscalculations, nepotism, personal gains which against the principle of competitive bidding.
The decision will have far reaching repercussions. First of all, it will cancel allocation process and propriety of firms over the blocks. This will lead to loss to companies as well as that to the banks who disbursed loans to develop the coal blocks (IDBI alone has exposure of Rs 2000 crore). Further, it will have a negative bearing on the investment sentiments as it has been seen by the firms as a suspicion towards government policy. Thirdly, it will increase the imported amount of coal as CIL(which has 80% of coal reserves) has not been able to come on its production target and due to its monopoly.. This will have a bearing on Current Account Deficit (CAD). It will also impact the present power production of about 24000 MW as plants will run of out the material. In addition, the industries dependent on coal like steel etc will be affected severely. Given the fact that IIP is already suffering a setback, decreasing growth prospect, this will add fuel to the fire.
However the judgment will provide a new paradigm for competitive bidding and bringing in transparency though various negative impacts do have a bearing.




ISRO's MISSIONS AND ITS CRITICISM(Are they relevant)


India’s space missions are driven by technological advancements and collective wellbeing. Though some missions have been questioned over their relevance to the poor and overall developmental paradigm, most of them are biased and futile.
The recent MARS ORBITOR has been conceived as the cheapest mission in the world and will not only help to understand Marsian surface but will also help in increasing the credibility of the ISRO. Thus there are chances of increased collaboration between ISRO and other space agencies for launch of their vehicle. Thus India can become a destination for satellite launch vehicles thus contributing for inward flow of money and precious dollars.
In addition, various satellites of India are for national security, climate/weather forecasting as well as relaying information which has been instrumental in disaster prevention and its management (the like of Orissa Phalin) as well as providing support for mapping the agricultural land (as has been used to indicate about degraded land and which can again be used).
Further, it has been providing education (tele-education through edusat programs) and health services (tele-medicine) to remote areas through the use of ICT which has been used to uplift the masses not only in India but abroad as well. The use of communication technology is providing more consciousness to the people and hence more mobilization for their rights.
Thus space programs are not only technologically acceptable but in a long run seek to uplift poor through education and address their hunger through increasing agriculture production.