GS-III: Institutions weakened, economy crippled.

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The credibility of the RBI, the CSO and the NITI AAYOG has taken a beating in recent times due to political interference. Why are the ambitions of economic development practitioners and reformers so often disappointed?

Institutions weakened:

The slowdown in GDP growth rate has been dissected digressed and disowned by analysts, commentators and policymakers. However the diagnosis is far from complete and the growth engine is running out of fuel.

Both the demand and supply side factors have been central in all the analyses but the crucial role of institutions in shaping the outcomes of both the factors in this episode of slowdown has been neglected.

A market centred economic model necessitates creating and sustaining credible institutions that further the efficiency of market mechanism.

The credibility of three such important institutions – the RBI, the Central Statistical Organisation and NITI AAYOG has taken a beating in recent times.

Major Factors Affecting India’s Growth:

Consumption:

Private consumption, which contributes nearly 55-60% to India’s GDP, has been slowing down.

While the reduced income growth of households has reduced urban consumption, drought/near-drought conditions in three of the past five years coupled with the collapse of food prices have taken a heavy toll on rural consumption.

Savings:

Savings in the household sector – which are used to extend loans for investment -- have gone down from 35% (FY12) to 17.2% (FY18).

Households, including MSMEs, make 23.6% of the total savings in the GDP.

Investment:

Gross Fixed Capital Formation (GFCF), a metric to gauge investment in the economy, too has declined from 34.3 per cent in 2011 to 28.8 per cent in 2018, government data show. Similarly, in the private sector, it has declined from 26.9% in 2011 to 21.4% in 2018.

NBFC crisis triggered by IL&FS default led to a liquidity crunch in the economy.

RBI’s Annual report highlighted that there are still structural issues in the land, labour, agricultural marketing and the like that need to be addressed.

Erosion in RBI’s autonomy:

The RBI which was clamouring for more autonomy has been systematically brought under the ambit of the central government.A three-pronged strategy resulted in this first the RBI was bypassed on matters relating to currency, secondly, its role as a regulator of the banking sector was questioned when banks flattered and finally, its reserve was siphoned. The net result has been that the RBI has been reduced into an institution which preside over a limited space of monetary policy that is inflation targeting.

Way Forward:

It is useful to focus on understanding and reforming the forces that keep bad institutions in place, especially political institutions and the distribution of political power. This requires understanding the complex relationship between political institutions and political equilibrium. The use of high-quality academic information which the present establishment lacks is valuable both to think about these issues and generate better policy advice.

GS-III: A climate emergency.

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The Indian government must take corrective measures immediately to combat climate change. A few generations from now our descendants may not see the animals and plants. Nearly 500 species have become extinct in just last century. We are depleting 25% more natural resources than the planet can sustain right now.

What is Climate Emergency?

There is no single definition of what that means but many local areas say they want to be carbon-neutral by 2030. It’s a much more ambitious target than the UK governments, which is to reduce carbon emissions by 80% (compared to 1990 levels) by 2050.

Climate Change is real:

Al Gore’s 2006 film, An Inconvenient Truth, awakened the world to the dire causes and consequences of global warming. It made an impact on millions and initiated global debates on climate change. However, many of us were sceptical of the warnings. Some of us did not believe that our planet would ever run out of resources. We thought that discussions would take place among scientists and environmentalists, but that the impact of climate change would never really be felt by us. And that if it were to be felt, it would take a long time, perhaps a couple of centuries.

In just 13 years, Al Gore’s predictions have become real and haunting. Now the effects of climate change are at our doorsteps. Cyclones such as Thane, Vardah, Ockhi and Gaja have affected Tamil Nadu in recent times; Chennai saw terrible floods in 2015. Floods wreaked havoc in Assam, Himachal Pradesh and Bihar this year, and Mumbai received record monsoon rains. Kerala witnessed floods for the second consecutive year. Cyclone Fani devastated Odisha, Cyclone Vayu ravaged Gujarat this year. All these are because of climate change. Meanwhile, Europe saw the highest temperatures ever in recorded history. This July, Paris recorded its highest temperature of 42.6°C.

Global warming will drastically affect agriculture the production of rice, wheat, maize and soya will decrease significantly. Apart from malnutrition, climate change will give birth to newer infections and illness. This imbalance will in turn affect the economy which will lead to conflict, war and global unrest. Global warming is already melting the polar ice caps. If this continues, sea levels will rise and submerge coastal cities. These natural disasters will make millions of people climate refugees.

The Intergovernmental Panel on Climate Change report states that averting a climate crisis will require reinvention of the global economy. By 2040,there could be global food shortages, inundation of coastal cities and a huge refugee crisis,

Steps to be taken:

• UN and climate experts have called for the declaration of a global climate emergency. Countries like the U.K., Canada, France and Ireland have already declared climate emergencies. So have local bodies and NGOs worldwide.
• Unfortunately India and U.S. are still slow to act. Which countries are responsible for historical emissions is now past the stage of debate. Global warming will affect every individual in every country.
• It is the duty of every human and government to take steps to stop the climate crisis. The Indian government should declare a climate emergency immediately.
• Immediate policy changes should include reducing the usage of fossil fuels by half by 2030, encouraging the use of public transport, increasing forest area, promoting non-conventional energy, devising good water management policies, implementing the plastic ban stringently, banning the burning of waste, promoting innovative urban planning policies and reducing mass rearing of cattle for human consumption.
• Let us all join together to save the only planet we have.

Call money rates should be close to the policy rate, says the liquidity panel.

GS-III: Call money rates should be close to the policy rate, says the liquidity panel.

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An internal working group formed by the RBI to review the current liquidity management framework has suggested that the framework should be guided by the objective of maintaining the target rate.

What is Call Money?

The call money market is an essential part of the Indian Money Market, where the day-to-day surplus funds (mostly from banks) are traded. The money market is a market for short-term financial assets that are close substitutes for money. The most important feature of a money market instrument is that it is liquid and can be turned into money quickly at a low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers.

The loans are of short-term duration varying from 1 to 14 days, and are traded in the call money market. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the Inter-Bank Market.

Way Forward:

The current provision of assured liquidity up to 1% of NDTL is no longer necessary since the proposed liquidity framework would entirely meet the system’s liquidity. In case the build-up of a large liquidity deficit or surplus is expected to persist it should be offset through appropriate durable liquidity operations.