The central bank of a country sits at the pinnacle of its financial system and is mandated with ensuring its stability. From time to time central banks are directly or indirectly involved in shoring up stressed commercial banks with capital infusion. So it may appear odd to suggest that occasionally even the central bank may need some of its own medicine. After all central banks make a surplus from their operations, and indeed pay a dividend to their governments. The puzzle is resolved, however, when we recognize that capital is not only funds but also ideas.
Time to reflect on role
In the context, one of the ideas is related to the role of the central bank in the economy. That this issue is being brought up more than half a century after a central bank was instituted in India need not be interpreted as some weakness in the original conception. An economic arrangement once made cannot be treated as settled for all time to come. This also holds true for central banks, often considered venerable beyond querying. It’s time to reflect on the role of the central bank in India as we hear of impending changes in the higher echelons of the Reserve Bank of India (RBI). The media coverage has focused on differences among some of its functionaries and the government of India but this is besides the point as there has been complete agreement between them on the role of monetary policy. Moreover for about five years now, the government and the RBI have, as though in concert, implemented a deflationary macroeconomic policy via fiscal contraction and monetary tightening, respectively. One of Prime Minister Narendra Modi’s finance ministers claimed credit for the government for having ushered in a period of macroeconomic stability. What this achieved for the economy is a different matter.
A combination of low inflation and small budget deficits was among the prescriptions of the Washington Consensus that reigned for about a decade and a half from the 1990s. With the implosion of the former Soviet Union and the folding up of its east European satellites, this consensus had, via the clout of the U.S., placed a straitjacket on policy makers in the so-called emerging markets, like India. In that moment of triumph it had been thought that the business cycle, or the oscillating trend in market economies, had been permanently tamed. However, as is so often the case in the life of economies, the cunning of history can derail progress with nary a warning. This arrived in the form of the global financial crisis in 2008, which originating in the U.S. soon spread across the world including India. Growth slowed and unemployment rose. The Obama Administration did not hesitate to intervene drastically, strongly supported by the Federal Reserve Bank. The fiscal deficit rose three-fold and the money supply ballooned. Interestingly, inflation did not rise.
A rethink in macroeconomics
The global financial crisis has led to a substantial re-thinking of macroeconomics. The main revisions are that monetary policy defined by inflation targeting can no longer be treated as the centerpiece of macroeconomic policy, that fiscal policy should be used to stabilize the economy when needed and that financial regulation is a must.
The limitation of inflation targeting was understood when the ‘great moderation’, an extended period of low inflation in the west, ended in the financial crisis. It is this that has led to the view that light regulation of the financial sector, as advised by the then Governor of the Federal Reserve Alan Greenspan, can be a recipe for disaster.
Finally, it has come to be recognised that assertions of the impotence of fiscal policy may be exaggerated. There could be times when the private sector is held back by the state of the economy. In a recession this would delay recovery. Now fiscal expansion would be necessary. Apart from theoretical demonstration of the stabilizing potential of fiscal policy the belief that the explosion of the U.S. fiscal deficit following the crisis actually saved the day has very likely contributed to the rethinking.
The general consensus now is that there should be no going back to the pre-crisis practices of narrow inflation targeting, inflexible fiscal policy, and kid gloves for the financial sector.
Lessons to learn
It is hoped that the Reserve Bank of India and the economic policy-making establishment will take into account the evolving understanding of macroeconomics globally. It is unfortunate that policymaking in India has been stuck in the past. This would not have mattered if the consequences were benign. The government has taken credit for attainment of macroeconomic stability, defined by low inflation, even as unemployment has been rising since 2011.
A continuously declining fiscal deficit has not restrained the RBI leadership from paying hawk-eyed attention to it, constantly lecturing the elected government of the perils of even the slightest deviation from the path of fiscal consolidation, when strictly it is not its business to do so. It should instead focus on putting its own house in order. Two instances of a failure to do so may be mentioned. Ever since we have had de facto inflation targeting in India, from around 2013, the real policy rate has risen very substantially. This has been accompanied by declining borrowing in the formal sector likely affecting investment. Inflation has come down but it was already trending downward, possibly due to the slowing growth. Subsequent inflation reduction has been assisted by the declining price of oil. Evidence of the role of inflation targeting in reducing inflation in India is weak, as summarized in the study ‘The dynamics of inflation in India’ (Working Paper 485, Centre for Development Studies, Thiruvananthapuram, May 2019) by M. Parameswaran and myself. Ironically, we have had in India the replay of a scene from the global financial crisis where a central bank focusing on inflation loses sight of brewing financial instability. The crisis at IL&FS, with a group company defaulting on its payment obligations jeopardizing the interests of hundreds of investors, banks and mutual funds is only a specific case in point. The larger story is of the steady rise in the non-performing assets (NPAs) of banks even as inflation was abating.
A popular reading is that recently the RBI has had to face some pressure exerted by the government’s nominees. This may well have been the case.
But what we need is not just a central bank that is left to function independently, but also one that is not a slave to some defunct school of thought.
It has many mandated functions, among them ensuring an adequate supply of clean currency notes in denominations sought after by the ordinary Indian.
Chennai has been reeling under its worst water crisis in decades with its four main reservoirs (Sholavaram, Chembarambakkam, Poondi and Red Hills) nearly empty. The city has not had rain in nearly 200 days; only over the past few days has the city seen light rainfall. Groundwater too has been over-extracted. The Tamil Nadu Chief Minister has announced that 10 MLD (million litres a day) of water will be transported to the city for the next six months from Jolarpettai, Vellore district. The Tamil Nadu government has also accepted Kerala’s offer to provide water.
At the political level, rainwater harvesting (RWH) was initiated in 2000 at Sathyamurthy Bhavan. Subsequently the government under J. Jayalalithaa mandated RWH in Tamil Nadu, from 2003 onwards. This meant that building approval for new apartments and dwellings were not to be granted by the Chennai City Corporation unless the building plan included a RWH component. The order also mandated that all existing buildings in Tamil Nadu install RWH structures.
Sixteen years later, we are back to square one. An audit by the nongovernmental organisation Rain Centre has shown that most government buildings in Chennai do not have a functioning RWH structure; these include several police stations and municipality buildings. Now, the Greater Corporation of Chennai has ordered the inspection of RWH structures, much after the crisis.
The issue with any crisis in India is the fire-fighting strategy that we adopt as a response as opposed to systematized solutions. These stop-gap arrangements are soon forgotten when things temporarily go back to normal instead of making an attempt to deeply ingrain these practices in the system. This level of action, especially during the floods, is usually undertaken at the level of the National Disaster Management Authority and the National Disaster Response Force. Local follow-up measures that are necessary to sustain results are ignored. During the floods in Chennai in December 2015, the encroachment of wetlands was widely cited as a key issue. Vanishing catchment areas had resulted in floods. Three-and-a-half years later, no formal mechanism has been put in place to check whether wetlands are being desilted and whether we can avoid a similar flood-like situation again.
Need for water governance
According to a recent NITI Aayog report, 21 Indian cities will run out of groundwater by 2020 if usage continues at the current rate. Water governance in cities across India has been ad hoc. Learning their lessons from the Chennai crisis, other metropolitan cities should now set up urban water planning and management boards, a permanent body similar to urban development authorities, that regulate the supply, demand and maintenance of water services and structures.
On the supply side, this authority should monitor and regulate groundwater in Chennai. Water supply by private tankers must also be regulated with pricing for their services having reached exorbitant levels. This year, a tanker of approximately 12,000 litres cost â‚¹6,000 in several places, almost seven times the cost of water supplied by Chennai Metro Water. Last year, the same amount of water cost â‚¹2,000.
Additional desalination plants should also be commissioned as this water can result in water prices reaching to below 6 paise a litre. Experts are of the opinion that the beds of existing lakes can be deepened for greater water storage and better water percolation. Desalinated water is less expensive than water supplied by private tankers. However, since Chennai Metro Water charges a flat rate for use of this water, there is no incentive for judicious use.
Thus, on the demand side of things, Metro Water and groundwater use should be measured and priced progressively, similar to the electricity tariff, where the quantity of use determines the price. The board can practice differential pricing and cross-subsidise those households with a lower per capita income use of water. For this to be implemented effectively, water meters are a must.
The urban water management board should also oversee the desilting of lakes in the city on a regular basis. The management of lakes comes under the Public Works Department, which works in isolation from Chennai Metro Water. This lack of coordination leads to a water policy that operates in silos. The board must also have regulatory powers to monitor the maintenance of RWH structures at homes and in offices. In existing RWH structures, pipes are either broken or clogged, filtration equipment is not cleaned, bore pits have too much silt and drains are poorly maintained.
The body also needs to work in coordination with governments on granting approvals to new mass working spaces. Water scarcity has resulted in the IT corridor in Chennai suffering, with most companies even asking employees to work from home. The myopic policies of the government in providing incentives to the IT corridor without looking at their water-use necessities and asking them to make provisions for this has cost them dearly. This is in contrast to the manufacturing sector around the Sriperumbudur-Oragadam belt, where a number of companies and large manufacturing units have been able to maintain production due to efficient water management practices. For example, in one unit, there is a rainwater harvesting pond and all buildings inside the complex are equipped with facilities for artificial ground water recharge.
The scarcity of essential resources not only leads to economic losses but also social unrest; an extreme case in Chennai resulted in a woman being attacked over water troubles. We must also learn from the experiences of other cities across the world such as Cape Town, South Africa, where water saving is being driven through the concepts such as Day Zero, thus prompting better and more efficient use of water. A sustainable governance solution to this problem along with public participation is essential to ensure that our future generations do not suffer as a result of our failures.
Boost for Marathas
The Bombay High Court verdict in favour of the quota needs examination
The Bombay High Court verdict upholding reservation for Marathas in public employment and education must come as a major relief to the Maharashtra government, which has faced strident agitations from the community in the past for reservation benefits. When Maharashtra enacted special legislation to confer reservation benefits in education and public employment on the Maratha community last year, a formidable legal challenge was expected. The law created a group called ‘Socially and Educationally Backward Class’ and included Marathas as the sole group under the category, and extended 16% reservation outside the existing quotas for Scheduled Castes and Tribes, and other tribes and backward classes. The foremost hurdle was the fact that the additional Maratha component would take the reservation up to 68%, thus going beyond the limit of 50% imposed by the Supreme Court. Secondly, there were doubts whether one particular caste group could constitute a special class. The 487-page judgment is a brave effort at answering these difficult questions. Significantly, it has ruled that there were “exceptional circumstances and an extraordinary situation” to warrant the crossing of the 50% limit. It has upheld the government’s decision to accept the Maharashtra Backward Classes Commission’s report on the backwardness of the Maratha community, faulted it for exceeding the panel’s recommendation for 12-13% reservation and pulled back the figure to the recommended level. The failure to treat this group as backward for decades has pushed its members deeper into social and educational backwardness. Thus, it says, an extraordinary situation has been created wherein the State had to treat them as a separate category.
The High Court’s reasoning may not convince many. For one thing, it is doubtful whether a politically influential and dominant community can be treated as a special category in itself, even if it is educationally backward and under-represented in the services owing to lack of reservation benefits. The uplift of the Marathas can be achieved by including it in the OBC list. If there were concerns about too large a population sharing too small a quota, the existing OBC reservation could have been expanded, instead of Marathas being given separate reservation. Further, Marathas have been classified as the only member of the newly created ‘SEBC’. The court seems to have ignored the fact that being socially and educationally backward is the constitutional reason for OBC reservation. It is befuddling how ‘SEBC’ can be a separate category outside the OBCs. Further, whether adequate grounds have been established to make an exception to the 50% limit will likely be examined by the Supreme Court closely. Mere expansion of the reservation pool is unlikely to be a constitutionally permissible reason for it.
The Prime Minister’s Science, Technology and Innovation Advisory Council (PM-STIAC) in an overarching Council that facilitates the PSA’s Office to assess the status in specific science and technology domains, comprehend challenges in hand, formulate specific interventions, develop a futuristic roadmap and advise the Prime Minister accordingly. PSA’s Office also oversees the implementation of such interventions by concerned S&T Departments and Agencies and other government Ministries.
Centre releases action plan on higher education
The Centre has released a five-year vision and action plan to transform higher education by doubling enrolment and employability, addressing inequalities of access, and revamping governance and funding mechanisms.
As The Hindu reported last month, the Education Quality Upgradation and Inclusion Programme (EQUIP) is likely to involve investment of â‚¹1.5 lakh crore over the next five years, much of which will have to be raised from the market.
It was drafted by 80 experts in 10 teams headed by eminent academicians, scientists and industrialists over the last two months and was submitted to Human Resource Development Minister Ramesh Pokhriyal Nishank on Friday.
The plan has suggested more than 50 initiatives with timelines, implementation methods and funding requirements, with quality and access as its major goals. After further consultation within the Ministry, the plan will be submitted for Cabinet approval, an official statement said.
China tests new ballistic missile JL-3
China has successfully tested its latest submarine-launched ballistic missile, the JL-3, official media here reported.
The scheduled test was normal, China’s Ministry of National Defence said on Thursday, when asked about the alleged test launch of a JL-3 submarinelaunched ballistic missile (SLBM) on June 2, state-run Global Times reported.
Military experts told the daily that the JL-3 is China’s latest SLBM under development that is expected to reach targets farther away with higher accuracy and capable of carrying more warheads than China’s current SLBMs. The SLBM might have a range of up to 14,000 km and be equipped with 10 independent guided nuclear warheads, the daily quoted Russia Today as saying.