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(PRELIMS + MAINS FOCUS)

RBI Monetary Policy Highlights

Part of: GS Prelims and Mains III – Indian Economy – Monetary policy; RBI and Banking 

Context: 

• RBI Governor Shaktikanta Das announced key policy decisions during the third review of the monetary policy since the COVID­19 pandemic spread in the country. 

Do you know? 

• Monetary policy is the process by which the RBI controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability. 
• RBI reviews its monetary policy every two months. 

Key highlights: 

1. Monetary Policy Committee (MPC) of the RBI decided to 

• keep the repo rate unchanged at 4 per cent (lowest since it was introduced in 2000) 
• continue accommodative stance of the monetary policy as long as it is necessary to revive growth and mitigate the impact of the pandemic 

2. RBI Governor announced stimulus measures, which included additional special liquidity of Rs 10,000 crore at repo rate to NABARD and NHB.

3. To enhance safety of cheque payments, it has been decided to introduce a mechanism of Positive Pay for all cheques of value ₹50,000 and above. 

4. RBI to set up an innovation hub

5. Priority sector lending to be given tostartups also 

6. Stressed MSME borrowers will be eligible for debt restructuring

7. RBI to announce additional measures to enhance liquidity support, ease financial stress, improve flow of credit and deepen digital payment system.

Link: The Hindu 

Status of economy, according to RBI: 

• Mutual funds have stabilised since the Franklin Templeton episode 
• Supply chain disruptions persist; inflation pressures evident across segments 
• Economic activity had started to recover, but surge in infection has forced imposition of lockdowns 
• Real GDP growth is estimated to be negative for 2020-21 
• Recovery in rural economy expected to be robust 
• Global economic activity has remained fragile. 

India-China: Concerns 

Part of: GS Prelims and Mains II – India and its neighbours; International Relations 

About: 

• India rejected the Chinese initiative to discuss the Kashmir issue in a closed-door meeting in United Nations Security Council (UNSC) and reiterated that Kashmir is a domestic issue. 
• China’s attempt did not attract sufficient support from the UNSC members.  

Do you know? 

• China had repeatedly attempted to bring Kashmir issue during UNSC meetings. 
• The frequency of such attempts by China has prompted diplomats to highlight the unequal nature of the UN organ, where the agenda is set by the permanent members (P5) of the UNSC. 
• Kashmir issue had not been taken up at the council since it last figured in the world body before the India-Pakistan war of 1971.  

India’s Global Hunger Index 

Part of: GS Prelims and Mains II – Health; Poverty; Social/Welfare issue 

About: 

• India ranked 102nd on the Global Hunger Index, despite high food production. 
• Nutritional security requires measures to improve protein and vitamin deficiencies. 

Global Hunger Index (GHI) Report 

• Prepared by the Concern Worldwide (an Irish agency) and the Welt Hunger Hilfe (a German organization) 
• The report is based on four GHI indicators namely, undernourishment, child stunting, child wasting, and child mortality. 
• India’s child wasting rate was extremely high at 20.8% – the highest 
• India’s rank has slipped from 95th position (in 2010) to 102nd (in 2019) 

Child wasting 

• Child wasting refers to the share of children under the age of five who are wasted, i.e, they have low weight with respect to their height, reflecting acute undernutrition. 

Indian pangolin

Part of: GS Prelims and Mains III – Conservation; Endangered Species 

In news: 

• Telangana Forest Department has exposed the rampant poaching of pangolins in the forests of Andhra Pradesh and Telangana. 
• Three to four kilograms of pangolin scales were seized, for seized from the gang, for which three to five animals might have been killed. 

Do you know? 

• Recently, China is reported to have imposed a ban on wildlife meat and removed pangolin scales from its list of approved traditional medicine, in the context of the COVID­19 spread. 
• Pangolins are among the world’s most trafficked mammals. 

From Prelims Point of view: 

Indian pangolin:  

• Has thick scaly skin  
• Hunted for meat and used in traditional Chinese medicine.  
• Pangolins are among the most trafficked wildlife species in the world.  
• Out of the eight species of pangolin, the Indian and the Chinese pangolins are found in India.  
• Both these species are listed under Schdule I Part I of the Wildlife (Protection) Act, 1972. 

IUCN Red List 

• Indian Pangolin: Endangered 
• Chinese Pangolin: Critically Endangered 

States get more funds to mount COVID­19 response 

Part of: GS Mains II – Centre-State Relations; Governance  

Context: 

• Union government released more than ₹890 crore as the second instalment of COVID­19 aid 
• The funds are part of ₹15,000­crore package announced in March to support the States’ emergency response and the preparedness of their health systems 
• The money was meant for patient treatment, manpower training and medical infrastructure. 

Do you know? 

• The first instalment of ₹3,000 crore was released in April to all States and UTs, and was used to ramp up testing facilities, augment hospital infrastructure and conduct surveillance activities, along with procurement of essential equipment, drugs and other supplies. 

Kisan Rail

Part of: GS Prelims and Mains III – Farmers/Agriculture; Infrastructure 

About: 

• Indian Railways said it will begin running Kisan Rail. 
• The first such train will run weekly between Devlali (Maharashtra) to Danapur (Bihar). 

About Kisan Rail  

• It was announced in the Union Budget 2020­21  
• This train will help in bringing perishable agricultural produce like vegetables and fruits to the market in a short period of time 
• The train with frozen containers is expected to build a seamless national cold supply chain for perishables 
• This train is a step towards realising the goal of doubling farmers’ incomes by 2022 (Ashok Dalwai committee on Doubling of Farmers’ Income.) 

US against Cuba on UNHRC seat

Part of: GS Prelims and Mains II – International affairs; International Affairs 

About: 

• U.S. urged UN members not to support Cuba’s bid to join the organisation’s Human Rights Council. 
• U.S. administration described Cuba’s sale of medical services, Havana’s main source of foreign exchange, as a form of human trafficking. 

Do you know? 

• The main criticism against HRC is that – it is made up of states not known for their human rights records. (who are outstandingly bad violators of human rights – China, Cuba and Jordan) 
• Countries grossly violating human rights are still elected as members to the body.  
• Cuba, which sat on the UNHRC in 2014­-2016 and 2017-­2019, has applied to fill one of the regional vacancies for 2021-­2023. 
• The seats are distributed geographically and are awarded for a period of three years. Members are not eligible for immediate re-election after serving two consecutive terms. 

About UNHRC 

• UNHRC is a United Nations body whose mission is to promote and protect human rights around the world. 
• It is an inter-governmental body within the United Nations system. 
• It meets at the UN Office at Geneva. The headquarters of UNHRC is in Geneva, Switzerland. 
• UNHRC was established by the UN General Assembly in 2006. It is made up of 47 member nations. 

Miscellaneous:

Person in news: Manoj Sinha and Murmu

About: 

• Former Minister of State for Railways, Manoj Sinha was appointed as the Lieutenant-Governor of Jammu and Kashmir after G.C. Murmu, a former IAS officer, resigned. 
• Murmu was appointed the Comptroller and Auditor General of India. 

(MAINS FOCUS)

ECONOMY/ GOVERNANCE 

Topic: General Studies 3

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment
• Government Budgeting. 

How to Finance the Stimulus: Debt Financing Vs Monetisation of Deficit

Context: Economic Slowdown aggravated by the onslaught of COVID-19 pandemic 

What should government do at this juncture of slowdown? 

• Government should intervene to revive the economy (Keynesian Economics) 
• For this, a greater public spending by government is considered as the sine qua non of such a revival 

What is the challenge of increased govt spending? 

• Greater public spending will increase the fiscal deficit and this expansion has to be financed. 

• Fiscal deficit is the total amount of borrowings required to bridge the gap between government’s spending and revenues. 

• There are different ways of financing the expansion 

• Raising Revenue: Theoretically fiscal deficit can be financed by higher taxes, but when the economy is slowing it is unpopular & prevents further spending by people 
• Debt Financing: This involves borrowing from public (issuing bonds), borrowing external sources like World Bank and the International Monetary Fund (IMF)  
• Direct Monetization of Deficit: This involves government selling treasuries to Reserve Bank of India (RBI)  

What are the challenges with Debt Financing? 

• Imposition of Changes: Borrowing from World Bank & IMF usually comes with conditionality on Economic restructuring (recall 1991 reforms that was part of bailout package) 
• Disturbs Inter-Generational Equity: Increased borrowings now means increase in interest payment for future generation and reduced scope for borrowing 
• Burden of repayment: Not only have the moneys to be repaid, they will have to be paid back in hard currency.  

• This would involve India having to earn hard currency by stepping up exports which is herculean task under present global mood of protectionism. 
• For ex: If a stimulus of approximately 10% of the GDP is envisaged, with exports at 25% of GDP, it would imply stepping up exports by close to 50%. 

• Takes Attention from Govt’s fight against COVID-19: A loan is bound to take some time to be negotiated, taxing the energies of a government that ought to be engaged in the day to day battle with COVID-19. 

What is direct monetisation or money financing? 

• In layman’s language, monetisation of deficit means printing more money.  
• In direct monetisation, the government asks RBI to print new currency in return for new bonds that the government gives to the RBI. 
• In lieu of printing new cash, which is a liability for the RBI (since, every currency note has the RBI Governor promising to pay the bearer the designated sum of rupees), RBI gets government bonds, which are an asset for the RBI 
• Government bonds are asset to RBI because they carry the government’s promise to pay back the designated sum at a specified date. 
• Now, the government would have the cash to spend and alleviate the stress in the economy  
• Note that this is different from the “indirect monetisation” that RBI does when it conducts the Open Market Operations (OMOs) and purchases bonds in the secondary market. 

Is direct monetisation practised in India? 

• Monetisation of deficit was in practice in India till 1997, whereby the central bank automatically monetised government deficit through the issuance of ad-hoc treasury bills.  
• Two agreements were signed between the government and RBI in 1994 and 1997 to completely phase out funding through ad-hoc treasury bills.  
• And later on, with the enactment of FRBM Act, 2003, RBI was completely barred from subscribing to the primary issuances of the government from April 1,2006 
• It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO (open market operations) route i.e. Indirect Monetisation 
• OMOs involve the sale and purchase of government securities to and from the secondary market by the RBI to adjust the rupee liquidity conditions 
• The implied understanding was that the RBI would use the OMO route not so much to support government borrowing but it would be used as a liquidity instrument. 

What are the disadvantages of Direct Monetisation which lead to its discontinuation? 

• High Inflation: Monetisation involve expansion of money supply that can potentially result in inflation 
• Reduces incentive for efficient Spending: Availability of direct monetization route means reduced incentive for government to be fiscally disciplined.  
• Promotes Populism: Governments would usually spend on populist measures rather than long-term structural measures knowing fully well that they have a way out for increased fiscal deficit.   
• Past Lessons: The usage of direct monetisation route recklessly caused fiscal indiscipline that ultimately led to the balance of payments crisis in 1991. 
• Rupee Depreciation: When there is excess supply of the currency due to printing of new currency, it could lead to a fall in rupee value, leading to its depreciation. 
• Lowers Investor Confidence: Markets/Investors will fear that the constraints on fiscal policy are being abandoned, when direct monetisation path is adopted. They may see the government as planning to solve its fiscal problems by inflating away its debt. 

Won’t indirect monetisation (through OMO) lead to Inflation? 

• Both monetisation and OMOs involve expansion of money supply that can potentially result in inflation. 
• However, the inflation risk that both carry is different. 
• OMOs are a monetary policy tool with the RBI deciding on the amount of liquidity to be injected in and when to. 
• In contrast, in direct monetisation, the quantum and timing of money supply is determined by the government’s borrowing rather than the RBI’s monetary policy, to fund the fiscal deficit. 
• If RBI is seen as losing control over monetary policy, it will raise concerns about inflation and RBI’s credibility to manage money supply. 
• Therefore, forsaking RBI credibility can be costly, with wider implications for the economy both in the short- and long-terms. 

Can Direct monetisation be used to finance the deficit in post-COVID period? 

• Change in economic situation calls for change in policies. 
• Inflationary impact of direct monetisation may not be very high at this juncture of Indian economy due to the demand slowdown the economy is experiencing.  
• Increased money supply will revive the depressed demand and kickstart production reviving the economy. 
• However, when the economy enters the recovery path, increased money supply could proportionately lead to a higher inflation rate.

Conclusion 

Money financing is a viable route to take us back to pre-COVID-19 levels of output 

Connecting the dots:

• Balance of Payment Crisis of 1991 

(TEST YOUR KNOWLEDGE)

Model questions: (You can now post your answers in comment section)

Note: 

• Correct answers of today’s questions will be provided in next day’s DNA section. Kindly refer to it and update your answers. 
• Comments Up-voted by IASbaba are also the “correct answers”.

Q.1) Which of the following is correct about ‘Repo Rate’? 

1. It is the rate charged by the central bank for lending funds to commercial banks. 
2. It is the rate at which scheduled banks can borrow funds overnight from RBI against government securities. 
3. It is the rate at which banks lend funds to RBI. 
4. It is the rate at which RBI borrows from its clients generally against government securities. 

Q.2) Consider the following statements Monetary Policy Committee (MPC) 

1. The MPC determines the policy interest rate required to achieve the inflation target 
2. It consists of 5 members out of which three are from RBI and the remaining two are nominated by the Central Government 

Which of the statement(s) given above is/are correct? 

1. 1 only 
2. 2 only 
3. Both 1 and 2 
4. Neither 1 nor 2 

Q.3) Ashok Dalwai Committee is associated with 

1. Doubling Farmers’ Income 
2. Farmers Suicide 
3. Irrigation and Drainage 
4. Urban Floods 

Q.4) Despite strict laws, the illegal trade of ‘Pangolin’ is threatening the very existence of the species. What is the status of India Pangolin under IUCN? 

1. Near Threatened 
2. Least Concern 
3. Endangered 
4. Extinct in the Wild 

Q.5) Consider the following statements about Global Hunger Index (GHI) 

1. It is jointly published by the International Food Policy Research Institute (IFPRI) and World Health Organisation (WHO). 
2. According to the recent index, India has a child-wasting prevalence over 20%. 

Select the correct statements 

1. 1 only 
2. 2 only 
3. Both 1 and 2 
4. Neither 1 nor 2 

ANSWERS FOR 6th AUG 2020 TEST YOUR KNOWLEDGE (TYK)

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