CURRENT TOPICS -- BSC APRIL 2019

Current Topics

7 Feb Monetary Policy: On feb 7, RBI announced a monetary policy-the first under the governorship of Shaktikanta Das. In an interesting move, the RBI decided to change the stance from ‘calibrated tightening’ to ‘neutral’ and to reduce the repo rate by 25bps to 6.25% with a 4-2 vote. The rate cut decision has been justified on the basis of a sharp reduction in projected headline inflation by the central bank. The combination of a reflationary Budget presented on Feb 1 along with the latest monetary easing announced by the RBI will provide a further boost to consumption demand in the election bond country. The shift in stance provides flexibility in addressing challenges to sustained growth. Thus, there is a clear shift from an unnecessary emphasis exclusively on inflation to a balanced objective of price stability and growth. The 6 member MPC(monetary policy committee) headed by RBI governor, also announced the limit of collateral free farm loans given by banks to be raised to Rs.1.6 lakh from Rs.1 lakh. Consumer Price Index (CPI)  inflation has been revised downward to 2.8 percent for Q4FY19, 3.2-3.9 percent for Q3FY20, and 3.4 percent for HIFY20. Headline inflation is projected to remain soft in the near term, reflecting the current low levels of inflation and the benign food inflation outlook. The bank has also eased the external commercial borrowing (ECB) norms for corporates, using which they can borrow upto $750mn through the automatic route without the restriction of end-use to repay existing rupee loans. This is being done to relax the funding pressure arising from the tightening credit conditions in the domestic market. This becomes relevant especially in the context of funding constraints faced by NBFC and companies undergoing insolvency and bankruptcy process. The reduction in interest rates could also strengthen the expansionary phase and help India achieve a GDP growth of nearly 10 per cent by encouraging the housing sector through lower monthly installments, and micro, small and medium enterprises (MSMEs) through extending credit to new start-ups and Mudra loans. Thus the monetary policy is supporting the efforts of the fiscal authority which has the primary objective of growth and generating employment. In the ensuing year, given that the projected inflation rate is expected to be less than 4 per cent, and real interest rate in the range of 3 per cent-plus, there is scope for further reduction in nominal interest rates. 

NSSO unemployment Survey: It is not a surprise that unemployment has hit the headlines two months before the elections. We have two angry and polar-opposite viewpoints. A leaked National Sample Survey Office (NSSO) report says that in 2017-18, the unemployment rate was 6.1 percent and the highest in 45 years. The Centre for Monitoring the Indian Economy (CMIE) says that by Dec 2018, the unemployment rate had shot up to 7.4 per cent. If this data is correct, the situation is both worrying and steadily getting worse. This also explains why, when the Railways last year advertised 89,400 jobs, over 23mn people applied So do we have a real and growing hunger for jobs? Step back a bit and you'll discover another truth. The unemployment rate has steadily been rising since 2011-12. At the same time, the labour force participation rate has steadily been falling since 2004-05. So the jobs and employment problem is a concern that stretches back over a long time. The sharp spike in the NSSO's  unemployment rate, from 2.2 per cent in 2011-12 to 6.1 per cent in 2017-18, is misleading, for we are comparing a peak steroid-driven performance year with one in which both Demonetisation and GST combined to depress jobs growth in the informal sector. Plus, we are seeing the after-effects of a prolonged period of farm distress and weak rural wage growth, which has forced people to leave the farm and seek wage incomes. If we see the jobs problem as more of a wage crisis in an aspirational India,
it would imply that even when lower- wage jobs are available, many unemployed people may prefer to stay out of the job market for longer than they would have earlier. The rise in open unemployment may be indicative of a degree of returning optimism in the job market. This is because unemployment rates are related to economic outlook. If people think the economy is sinking many of the unemployed may temporarily drop out of the job market. Paradoxically, this may sometimes show as an actual dip in the unemployment rate In Jan-Apr 2017, for example, CMIE's four-monthly data showed that 1.5mn jobs were lost post demonetization. Unemployment rate actually crashed from 6.79 per cent to 4.71 percent, and further to 3:91 percent in May-Aug 2017, when GST too kicked in. The reason can be surmised. More people may have stopped looking for work when conditions looked bleak. Conversely, it is possible to speculate that as economic optimism returns, more people may start looking for jobs, and this may create a temporary spike in the formal unemployment rate. The CMIE study's unemployment rate peaked in May-Aug 2016 at 9.23 per cent, when a good monsoon had improved the jobs climate, a figure far higher than 5.67 per cent in May-Aug 2018, when total
employment was actually falling.

CAG report on Rafale : The Comptroller and Auditor General (CAG) report on the Rafale deal is a mixed bag for the Opposition and the Govt, giving them both enough ammunition to ensure that the politics around the fighter jets continues. Submitted on 13th Feb, the report broadly states that the deal under NDA at 7.87bn euros for 36 jets was 2.86 percent cheaper than the price that was being negotiated by the UPA in 2012. While this could be seen to validate the govt's position that better terms have been achieved, the number falls well short of the nine per cent reduction that top ministers have claimed publicly in the last few months. The CAG has also said that money saved by the removal of banking and performance guarantees winning companies have to give these in standard commercial contracts has not been factored in and that the benefits of these would be accrued by Dassault Aviation. It essentially says that the price finally agreed to by the Indian side should have been even lower as the banking charges had been waived off. The primary goal of Defence procurement is to reinforce the nations defence capability. The CAG report makes it clear that the present govt's Rafale deal has made a shortfall of 70 percent on this vital count. On terms of faster delivery, the CAG gives the govt little credit for shaving off just one month in the delivery time for the jets that were bought for urgent requirements. It has also said that the govt could have used comparative pricing from the unsolicited offer by Euro fighter to determine a better price. On the lower price of the Rafale jets under NDA, the CAG finding seems to indicate that the main savings were made under the India Specific Enhancements section- money spent on making the fighter jet compatible with special requirements of the air force that included taking off from high- altitude runways. The reduction of 17 percent achieved in this contributes the most to the lower price of the jet deal. These enhancements had cost upwards of 1.3bn euros in the contract. On other issues, the CAG said that the basic price of the aircraft was similar in both the deals being negotiated. On dispute resolution and safeguards, the CAG report says that India will have to go into arbitration with the French vendors if any trouble comes its way in terms of deliveries or quality of work and that the French govt will only ensure that the vendors pay up if the Indian side wins these arbitration proceedings. This is contrary to the earlier safeguards proposed that the vendors' banking guaranteeś can be encashed if any violations are found. The CAG report did not look into the offsets yet as those are to be submitted to the govt by Dassault only in Oct this year.

SC upholds IBC: The Supreme Court judgment upholding the validity of the Insolvency and Bankruptcy Code 2016 (IBC) in its "entirety" could have a major impact on the country's economic landscape. The genesis of this Judgement is the Allahabad High Court ruling in Apr last year which declined to give private power companies any interim relief on the Feb 12 RBI circular, which tightened bad loan norms from Aug 27. It also mandated insolvency proceedings by lenders against defaulting power projects. RBI's Feb 12 circular said defaulters had to be admitted to the National Company Law Tribunal (NCLT) within 180 days. Power companies had sought a relaxation on this as had the govt, while the banking regulator had sought a transfer of all cases filed in various high courts to the SC. This ruling will come as a serious jolt to operational creditors of bankrupt companies, whose hopes were raised after the court had on Dec 17 suggested they be given a voice, including voting rights, in the resolution proceedings in proportion to their debt. IBC has been severely tested since its enactment, with the Centre being forced to amend a couple of its provisions in order to plug some loopholes that enabled defaulting borrowers to challenge the legislation. Borrowers were never going to take the IBC lying down, and that is exactly what happened; over the last two years, they have challenged various aspects of the law. In the event, the apex court's stamp of approval on the entire Code is a strong signal to borrowers and banks even as it brings a sense of relief to the Centre. One of the major challenges mounted against the IBC was by operational creditors, who are owed money by the company in the normal course of operations for supply of goods and services. In the payment waterfall prescribed under Section 53 of the IBC, in the event of liquidation of the company or its sale to another entity, their dues rank below those of financial creditors, workmen and employees. This was challenged by the operational creditors, who wanted equal treatment with financial creditors in the waterfall mechanism. Several landmark cases that were referred to the NCLT under the IBC remain stuck there, including that of the high-profile Essar Steel, as a result of its operational creditors seeking equal treatment. With the Supreme Court now rulin that there are "intelligible differentia" between operational and financial creditors, an avenue that defaulters used to stymie proceedings has been closed. Repayment of financial debt by borrowers infuses capital into the economy as lenders can on-lend the money that has been repaid to other entrepreneurs, thus aiding economic activity, the judges observed. The apex court has also clarified that a mere relationship with an ineligible person cannot disqualify someone from becoming a bidder for a troubled asset.

Rahul’s Minimum Income Guarantee: The threat of automation and the widening divide between the rich and the poor have pushed the world to consider different income redistribution concepts in the past few years. And one of the concepts that have received the most attention is the idea of a universal basic income, or UBI. Until a few years ago, UBI the idea that govt guarantee a fixed monthly income to every citizen of a country- was largely a utopian one. The idea of UBI was discussed in India, like it was in the rest of the world. But that debate took place largely on the sidelines. However, that idea entered the mainstream when Congress chief Rahul Gandhi announced that if his party was voted to power in the upcoming general elections, it would ensure a minimum income guarantee (MIG) for the poor. The most popular version of UBI is one where every single citizen of a country regardless of her social, educational or economic standing gets a guaranteed monthly income. In India, the concept of UBI is slightly different. The concept was studied during the ruling Narendra Modi govt's term. In 2016-17, the Economic Survey of India studied the idea and presented a model for UBI. The basic premise of this model was: "A just society needs to guarantee to each individual a minimum income which they can count on, and which provides the necessary material foundation for a life with access to basic goods and a life of dignity." This model suggested providing 27,620 per annum to 75 per cent of India's population. The income was based on Suresh Tendulkar's poverty line of 2011-12 inflation indexed to 2016-17. UBI is built on the idea that everyone is included, with the presumption that richer people might be convinced to exclude themselves. But an MIG for poor households would mean the Congress having to define who exactly is poor. And once poverty is defined, the govt will have to figure out how to identify households that fit into the category, and how to ensure that no one is excluded. Now, Rahul Gandhi's plan seems to target only the poor. He has not said whether his proposed MIG will cover 22 per cent of the population (as fixed by Tendulkar) or 29.5 per cent (fixed by C Rangarajan). Also, Rahul Gandhi has not declared what the "minimum income" would be. Tendulkar and Rangarajan headed committees that studied poverty in India. Both arrived at different qualifications of poverty. The essential difference between UBI and MIG is this: UBI provides a monthly stipend that would ensure that a person would be above the poverty line without any other source of income. MIG, on the other hand, is pretty much at the discretion of the govt of the day - it can be equal, more or less than the poverty-line expenditure.

Govt vs Twitter: Jack Dorsey has joined the list of global CEOs who have been at loggerheads with the Indian govt over the last 12 months. The Parliamentary Panel on Information Technology has summoned the head of micro-blogging site Twitter to appear before it on Feb25. Dorsey has had a tricky relation with India-one of the fastest growing markets for Twitter- with one-sixth of its 126mn users worldwide. A parliamentary panel wanting to question Twitter CEO Jack Dorsey isn't quite as outrageous as many have made it out to be. Now, he finds himself in another tough situation as the committee members took a serious note about Jack Dorsey not appearing before it. While representatives from Twitter's India office reached the meeting venue, they were reportedly not called in for deliberations by the panel. Declining to answer summons appears to have become something of a pattern with Twitter. The company had earlier declined to appear in the US and in Singapore. The summoning came days after the members of Youth for Social Media Democracy' staged a protest outside the office of Twitter India in Delhi. Some of the protestors accused the micro blogging website of spreading selective fake news. The Twitter officials were invited amid the growing concerns about safeguarding citizens' data privacy and possibility that social media could be used to interfere in elections. The panel was scheduled to hear the views of the representatives of Ministry of Electronics and IT and Twitter on Safeguarding citizens' rights on social/online news media platforms, If anything affects the life of Indian citizens, Parliament has not just a right but a duty, to keep itself abreast of the issue, and a good way to do this is to depose individuals/officials; and it is only when Parliament is fully abreast of issues that it can effectively either control govt or guide it to do the right thing. The summons issued to Twitter India comes months ahead of the general elections, during which social media is expected to play a major role. Concerns over the spread of fake news on social media have become more pronounced in India in recent times. Just asking a Dorsey to depose doesn't mean Parliament is giving him any directives; both sides need to understand one another's perspective and this meeting should help and just as it is possible that India's lawmakers don't fully understand how Twitter functions or its legal and other compulsions, Twitter probably doesn't fully understand the Indian context. Facing heat over allegations of in the country, Twitter said was committed to remain unbiased and that its product and policies are never based on political ideology. The govt has been taking a strong view of misuse of social media platforms and is also proposing to amend IT rules to it curb fake news and increase accountability of such apps.

Ramphosa visits India: South African President Matamela Cyril Ramaphosa was on his first state visit to India on Jan 25-26. President Matamela and Prime Minister Narendra Modi held extensive discussions on a wide range of issues of bilateral, regional and global importance. As the chief guest at the Republic Day celebrations, Ramaphosa followed in the footsteps of President Nelson Mandela, who played this role to perfection in 1995. This year is the 150th birth anniversary of Mahatma Gandhi, a common hero to both countries. In the post-Cold War era, the relationship between the two countries has improved significantly with India and South Africa having fostered a strategic partnership through the Red Fort Declaration of 1997 and the Tshwane Declaration of 2006. The recent visit of Ramaphosa was the latest development towards re-energizing the ties. Indeed, it gave a big boost to security and defence  cooperation, with the two sides having agreed to enter into a three-year strategic engagement. India and South Africa are two major regional powers in the Indian Ocean. Both are strategically located and feel that cooperation between them is indispensable to maintain peace and security in the region. It is in this context that the South African National Defence Force will participate in the first Multinational India Africa Field Training Exercise at Pune in March.  The South African defence industry has reaffirmed its desire to work with India in the manufacturing of defence hardware, which is a significant step towards meeting India's defence requirements and turning this country into an arms-manufacturing hub. It is in this light that the Ministry of Defence has lifted the ban on South Africa's state-owned defence company, Denel SOC ltd. Another aspect of India-South
Africa relations are their expanding defence company, Denel SOC Ltd. economies, with bilateral trade set to rise to $10.65bn in 2018-19 from $9.38bn in 2017-18.The formation of the Joint Working Group on Trade and Investment and President Ramaphosa's assurance to simplify and reform the South African business visa regime will further strengthen bilateral trade and economic ties at a time when China has made huge investments in Africa and is trying to engage this continent in its Belt Road Initiative. India feels that expanding economic ties with South Africa and other African countries, would enable it to contain China's growing clout. Energy shortage is an important reason for India to aggressively purse its foreign policy towards Africa. This continent has huge energy reserves, while India imports 70 per cent of its oil needs. Thus South Africa, which has a huge uranium reserve, can play an important role in providing sustained supply to help India's nuclear plants.

US pulls out from Afghanistan: The longest war in American history may come to an end following an agreement in principle between the US and the Taliban in Doha. This is the first time the US and the Taliban negotiated face to face, the negotiations were made public and the principle accord that was reached addressed the two most important requirements that each side demanded from the other. The Taliban agreed to prevent militant groups like al-Qaeda from using the Afghan territory to plan attacks on the US and its allies. In return, the US-led military coalition would withdraw its forces. In a major departure from the policies of the Obama administration, Trump invited India to help the US to work towards conflict resolution in Afghanistan. As was widely anticipated, he put Pakistan on notice for encouraging terrorist organizations to destabilize neighbouring countries and warned the country that "it has much to lose by continuing to harbor criminals and terrorists". The present situation in Afghanistan can be described as a strategic stalemate. The Afghan National Army (ANA), supported by the US-led International Security Assistance Force (ISAF), is not losing, but the resurgent Taliban now controls about one-third of the country. While the ANA controls most of the large towns, the writ of the Taliban runs in huge areas of the countryside. The understanding between the two sides is that they must agree on all conflicting issues as a prerequisite to reaching a comprehensive agreement. Although this obviously is necessary, it will be a mistake to link each pending issue to another. That is, even if a serious disagreement emerges over a given conflicting issue and the talks break down, once negotiations resume, they would not start from scratch. It will be extremely important to agree on a process that would establish a sequential order of specific
steps. This process should begin by requiring the Taliban to declare a ceasefire, against which 10-15 percent of US troops will be withdrawn. This should be followed by an interest-
based negotiation between the Taliban and the central govt to reach a lasting political solution, against which another segment of American forces will be pulled out. The sequential quid pro quo on many issues still to be negotiated will cement the negotiating process and ensure the desired outcome. With the withdrawal of US-led ISAF likely to begin soon, the cliched Taliban taunt, "You have the watches, but we have the time," has begun to ring true. The worst-case scenario for India would be the Taliban's return to power in Kabul. If that happens, Pakistan's ISI would be sure to divert many of the hardcore Taliban fighters to Kashmir. India's national interest lies in formulating a comprehensive strategy, jointly with the Afghan govt, that ensures that a Taliban takeover can be prevented.

Crisis in Venezuela: On Jan 23, at the urging of the Trump administration, Juan Guaido, declared himself the interim President of Venezuela. He challenged the govt of President Nicolas Maduro, plunging Venezuela into a deep political crisis. Guaido is now backed by most Western and several right-wing Latin American govts, but progressive govts on the continent, including Mexico and Bolivia, have urged that Venezuelan sovereignty be respected. Guaido's attempted coup continues a 20-year-long effort by traditional Venezuelan elites and successive US govts to dismantle the popular movements that gained ascendancy with the election of Hugo Chavez in 1999. Maduro, who lacks ex- president Chavez's charisma and political acumen, turned to legal stratagems to deal with these political headwinds. The Venezuelan Supreme Court stayed the election of three opposition lawmakers on grounds of  voting irregularities. The opposition, which had a slim "super-majority" in the assembly, ignored the court, leading to a constitutional crisis. In 2017, the opposition leader Henrique Capriles, whom Maduro had defeated in 2013, was disqualified from holding public office due to "administrative irregularities". These dubious legal manoeuvres gifted the opposition an opportunity to de-legitimize the Maduro govt. Its extreme sections boycotted the 2018 presidential elections. The lack of opposition participation was later used by Guaido to claim that "Maduro's re-election was illegitimate". US policy towards Venezuela over the past two decades can be understood by recognizing its dual aims. Washington's preferred outcome is the establishment of a client regime in Caracas. This explains the Trump administration's choice of Guaido as a tool: as someone with no independent political base, he can be trusted to obey Washington's dictates. However failing that, the US govt has been determined to prevent the emergence of a viable alternative to the neoliberal economic order, even if this involves large-scale destruction in Venezuela. India is one of the largest purchasers of Venezuelan oil, of which it imports about 300,000 barrels a day. The recent US sanctions have left Venezuela with significant surplus capacity. This provides India with an opportunity to increase Venezuelan oil imports, for which Venezuela has already agreed to accept Indian rupees. Such a payment-mechanism would allow the Indian govt to reduce its external deficit without drawing down on forex reserves. On the other hand, Venezuela could use rupees to purchase food and medicines from India. This arrangement would displease Washington. It would undermine US sanctions and pose a long-term threat to the domination of the dollar in international oil trade.

George Fernandes Dies: George Fernandes, who died on Jan 29 aged 88, was the ultimate "true revolutionary". He managed to disrupt the entire railway network with his successful all-India strike in 1974.The strike lasted 20 days, and dealt a body blow to the Congress govt. In 1974-75, he threw himself in the JP Movement against high-level corruption, rising prices, electoral malpractices. It was a movement initiated by students in Bihar in 1974 and led by Jayaprakash Narayan (JP). During the Emergency imposed by Indira Gandhi in 1975-77, Fernandes was charged in the Baroda Dynamite case, but managed to defy arrest for a whole year. And then came the day when he was brought to court in chains, and in complete defiance of the might of the Indian state, he vowed to fight against Indira Gandhi's dictatorship. That photograph of a chained Fernandes as also of him successfully fighting from prison the 1977 elections, from Muzaffarpur in Bihar on a Janata Party ticket- is now an an indelible part of the Indian story. Fernandes wanted to bring Naxalites into the mainstream. He was in contact with Kashmiri militants to resolve the Kashmir tangle. He opened his doors to refugees from Tibet and Myanmar, and to the Nagas, and the main gate at his Krishna Menon Marg home in Lutyens' Delhi, when he was a Union defence minister, was always open and unmanned. Ram Manohar Lohia, the original author of anti Congressism in the country, was his mentor. Fernandes took on the Congress frontally when he defeated the party strongman SK Patil in his own den in Mumbai in 1967, and was hailed as a "giant killer" all over the country. This was followed by the onset of Janata Party govt in 1977, which dethroned the Congress. Fernandes took up the post of Union minister for industries in Morarji Desai's govt, and was credited with forcing IBM and Coca-Cola to cease trading in India by charging them with foreign exchange violations. Fernandes cast his lot with the anti-Congress forces again in the 1987-89 period, working with VP Singh who dethroned Rajiv Gandhi, despite his brute majority of 415 Lok Sabha seats in the 1989 general elections. And he made common cause with the Bharatiya Janata Party-led National Democratic Alliance against the Congress during 1998-2004. Many of his colleagues were taken aback when he aligned with the BJP later, a party he had criticized for its ideology, after having formed the Samata Party in 1994. In 2009, Fernandes was elected for the final time, unopposed- this time to the Rajya Sabha. However, a year later he would retire from public life for good, and was soon reported to be suffering from Alzheimer's disease and Parkinson's disease. In the last eight years of his life, Fernandes was largely a private figure, cared for by loved ones away from the public gaze. He left one son - Sean Fernandes, a US-based investment banker – by Leila Kabir, whom he married in 1971.

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