The latest International Monetary Fund (IMF)-World Economic Outlook update in July 2019 has confirmed a growing belief that global growth has decelerated and dark clouds seem to be looming in the near term. Specifically, the IMF has downgraded global growth multiple times since October 2018 and now projects it to be 3.2% compared to 3.6% in 2018.
The China factor
While the deceleration in economic activity is broad-based among both the advanced and developing economies, particular attention should be paid to China. The country has faced strong headwinds to growth both because of the ongoing supply-side reforms, including dealing with financial risks (reining in of shadow banking and hidden debt of local governments), as well as the negative effects of escalating tariffs and their consequent impact on its exports and investment. It is noteworthy that China is one of the few major economies that is expected to continue to decelerate into 2020 (along with Japan which is faced with acutely unfavourable demographics and seems unable to escape persistent deflationary pressures).
As corporates look to reconfigure their China-centric supply chains (both in response to the ongoing policy uncertainties and rising protectionist sentiments), many export-dependent Asian economies that are a part of the intricate production networks have also inevitably been hard hit. While there have been some short-term beneficiaries of the export and trade diversion from China to countries such as Vietnam, the global external demand slowdown has more than outweighed these gains.
For instance, given Singapore’s small size and acute openness, it has often acted as a recession barometer for the rest of Asia. Latest data show that exports from the city state have collapsed and the Singapore economy is expected to face stagnation in 2019 on the back of a sharp slowdown in the manufacturing sector. This does not bode well for other trade-dependent economies in the region.
Asian banks to the rescue?
In response to the global economic slowdown as well as generally subdued inflationary pressures, many Asian central banks (India, China, Indonesia, Malaysia, the Philippines, South Korea) have begun to ease monetary policy. However, this generalized loosening has happened largely following the recent signals from the U.S. Fed that it is set to embark on a new round of rate cuts in response to the slowdown in the United States and the rest of the world. In fact, in his congressional testimony on July 10, 2019, chairman Jerome Powell emphasized the slowdown in global growth as the main reason for the Fed moving towards a more accommodative stance, leading some to suggest that he has become the “world’s central banker”.
The recent wave of rate cuts in Asia is consistent with research which suggests that emerging economies tend to be cautiousabout lowering interest rates when the base country (usually the U.S.) does not do so as they are concerned about potential capital flight and sharp currency depreciations which in turn could have negative repercussions on domestic firms and other entities with unhedged external borrowings in foreign currencies. However, when interest rates in the base country decline, while emerging economies may experience massive surges in capital inflows if they stand pat on interest rates, they can maintain monetary policy autonomy via a combination of sterilized foreign exchange intervention (leading to sustained reserve accumulation) as well as tightening of capital controls and/or use of macro prudential policies (MaPs).
Alternatively, if the emerging economies are themselves faced with an economic slowdown, they are comfortable lowering their interest rates along with the base country, as is the case currently in Asia. This said, it is wise for Asian policy makers to ensure that they have enough ammunition to manage a prolonged downturn given that 2020 is “precarious” with many downside risks, as the IMF’s chief economist, Gita Gopinath, put it.
RBI’s monetary policy stance
Where does all of this leave India? On the one hand, since India has not been well-integrated with the Asian and global supply chains, it has not been as impacted directly by the China-U.S. trade war. On the other hand, given existing acute domestic bottlenecks, policy missteps and ongoing structural challenges, India has not been able to reap significant benefits as an alternative production and export platform to China.
On the back of a prolonged downturn in the capex cycle, the IMF has downgraded projected growth for India to 7% in 2019. This is broadly in line with the forecasted range by the Reserve Bank of India (RBI). While this growth is admirable relative to other major countries, it is well below the country’s likely potential growth of 7.5% and 8%.
In view of this “growth recession” and subdued inflation, along with a lack of fiscal space, and with the government having been distracted by the general election, the RBI moved much earlier than most of its Asian counterparts in taking steps to lower interest rates, having cut rate multiple times by 25 basis points since October 2018 to a nineyear low in nominal terms. The concerns here however have been threefold.
One, despite the rapid interest rate cuts, India’s real interest rates are still higher than most other countries, though it remains unclear what the neutral real interest rate consistent with India’s potential output actually is. The statement by RBI Governor Shaktikanta Das following the June 2019 interest rate cut that the RBI’s policy stance “has again changed… from ‘neutral’ to ‘accommodative’” presumably suggests that he views current real interest rates to be below equilibrium. This is rather odd in view of the fact that real rates have actually risen in recent times.
Two, more than most other countries in the region, an ongoing concern for India is that interest rate policy transmission to bank rates tends to be rather slow and limited. This is likely due to a combination of factors: the banking system has been faced with a deterioration in asset quality and remains saddled with bad debts; there has been and anaemic deposit growth; and there is limited scope to reduce deposit rates.
Three, despite the interest rate cuts, India’s real effective exchange rate (REER) has actually appreciated somewhat (around 7%) since October 2018, consistent with the fact that real interest rates have not declined. This lack of price competitiveness boost is especially of concern given that external demand is expected to remain subdued and uncertain and other regional currencies may themselves face depreciations pressures following the dovish policy stances by their central banks which could possibly translate to further REER appreciation in the rupee.
Sovereign bond issue
Going forward, if India is to succeed in its ambition of becoming a $5-trillion economy by 2024-25, there can be no substitute for undertaking the necessary structural reforms needed to jump-start private investments and longer-term growth.
However, in the short term, in all likelihood, monetary policy will have to remain accommodative (more so than what it is currently) and much greater attention will be needed to be paid on how to revive public capex without raising the cost of capital further.
In the face of constraints in raising revenues in a slowing economy, the government’s preferred solution seems to be to issue overseas sovereign bonds rather than streamline subsidies and revenue expenditures. The proposed $10 billion sovereign issuance is manageable vis-à-vis the countries stock of forex reserves, while India’s sovereign external debt (as share of GDP) is modest at present. However, increases in external borrowings add an additional element of risk to the economy. Such a move also likely complicates monetary policy further, as any adverse exchange rate movements will lead to a ballooning of interest payments on government debt which is already eating up around a quarter of budgetary spending. It is not clear that the current policy mix is ideal for India.
I have had the good fortune to work in, visit and learn about protected areas and wildlife habitats across India since 1980. Beginning in the late 1980s, I have written and spoken about the ecology and conservation of Indian wildlife to numerous and varied audiences. One question that is invariably asked by foreigners is how India has managed to conserve such a diversity of wildlife given its large population and development challenges. To me it has always been clear that the tolerance and, in many cases, the reverence that local communities have for Nature has been absolutely vital for the sustained success of the conservation efforts of the government and other agencies. Not to forget the widespread and long conservation track record of the local communities; the state of sacred groves is a very good example.
The Forest Rights Act (FRA) is a piece of social legislation which aims to address the historical injustice that our forest dwelling communities have had to face for nearly 150 years by providing them with security of tenure over land for cultivation and habitation through individual rights. It also provides access to a variety of resources through more than a dozen types of community forest rights. The FRA also empowers forest dwelling communities to protect, regenerate, conserve and manage any community forest resource which they have been traditionally protecting and conserving for sustainable use. It has the provision for creating critical wildlife habitats within protected areas which currently is the strongest conservation provision among existing laws of the country.
It is extremely unfortunate that the very constitutionality of the FRA was challenged in the Supreme Court in 2008 by about half a dozen conservation organisations . The court has tagged many other cases including from several High Courts which are currently being heard jointly. The court’s order of February 13, 2019 since put in abeyance by its order dated February 28, 2019 highlights the very tardy implementation of the FRA by the State governments.
One of the key arguments of the petitioners has been that it is beyond the legislative competence of Parliament to enact the FRA as ‘land’ is a state subject. Tenuous as this is, if this argument of the petitioners is accepted, the Wildlife Protection Act and the entire architecture of forest laws will have to be dismantled as ultra vires as all of them deal with ‘land’, including the Indian Forest Act and the Forest (Conservation) Act.
The February 13 order of the Supreme Court directs the eviction of lakhs of forest dwellers whose claims have been rejected under the FRA. With recent media reports showing that many State governments have admitted to the Supreme Court that their implementation of the FRA has been incomplete and flawed — with due process not having been followed especially while rejecting claims — the misguided and unmeritorious nature of this whole legal challenge becomes very clear.
What the FRA is
The FRA has been savagely criticized as a land distribution legislation, which it is not. The FRA very clearly states that forest dwellers who are either Scheduled Tribes or Other Traditional Forest Dwellers are only entitled to claim both individual and community forest rights through a clear process of submitting a claim and after its verification and subsequent approval or rejection. For the rejected cases, an appeal process has been outlined. The FRA aims to only confirm tenure and access rights which in some sense the forest dwellers have been exercising de facto but under severe restrictions and control especially by the forest department. In fact, it is the failure of the state to settle pre-existing rights under existing forest and conservation laws that created the situation of historical injustice.
The FRA does not sanction any fresh clearance of forest, as individual rights over land will only be granted if the forest dweller was in possession of that parcel of land on December 13, 2005. It also limits the extent of land that can be granted to the area that was occupied on December 13, 2005 and places an upper limit of four hectares per claimant for individual rights. These provisions are often overlooked or deliberately suppressed by those who criticise FRA.
The FRA, by design, has tremendous potential to strengthen the conservation regime across India by recognizing rights of forest dwellers over land and community forest resources, a key factor for conservation to succeed as shown both by research and practice in many countries.
By democratizing forest governance and conservation through the provision of rights and authority to local communities and gram sabhas for conservation and management of forests, the FRA will empower gram sabhas of the forest dwelling communities to halt the destruction of forests, as especially highlighted in the Niyamgiri case.
Implementing the FRA in letter and spirit with empathy for forest dwellers will be a decisive step by India to achieve conservation justice.
At a crossroads
India’s transport sector needs reform; changes to the Motor Vehicles Act are a start
India’s Motor Vehicles Act, 1988 has remained in hibernation, unable to meet the needs of a large economy that is witnessing rising travel demand, fast-paced motorization, major shifts in technology and deteriorating road safety. The amendments to the Act voted by Parliament seek to address some of these challenges, notably in forming a National Transportation Policy and a National Road Safety Board, providing for stiffer penalties for violation of rules, and orderly operation of new-generation mobility services that use mobile phone applications. Union Transport Minister Nitin Gadkari has countered the charge that the changes are anti-federal in character — the proposed amendments were reviewed by 18 State Transport Ministers, and the Bill reflects the modifications they suggested. Also, the Rajya Sabha introduced last-minute changes, making concurrence of, rather than consultation with States necessary when issuing fresh schemes for national, multimodal, and inter-State transport. This new provision also includes last mile connectivity, accessibility, mobility as a whole and rural transport. There is a dire need for reform in these areas, and State governments have tended to ignore these aspects. During the previous NDA government, Mr. Gadkari blamed obstruction by a ‘corrupt’ Regional Transport Office system for the delay in amending the MV Act. An amendment in the Rajya Sabha allows for RTOs to visit dealerships to register vehicles. This is not much of a change over the practice of dealers taking vehicles to RTO offices. The onus is on States to show that the purchaser will not have to pay a bribe.
Going forward, the Centre must deliver on its promise that the amended Act will help reduce dependence on personal vehicles, and present its National Transport Policy without delay. States must be incentivized to provide clean, comfortable and affordable services for all users, including people with disabilities. It is relevant to point out that the National Urban Transport Policy of the UPA failed to achieve this. Mr. Gadkari’s emphasis is on structural reform and an upgrade to subsidized electric buses for low-cost air-conditioned travel. But State Transport Corporations must adopt modern management practices. New regulation can certainly shake up the status quo, facilitating transparent investment by any intending operator and removing vested interests, particularly in inter-State and multi-State coach services. But some of the other amendments are less promising. A sharp increase in fines has little chance of improving safety. Studies show that sustained, zero tolerance enforcement of even small fines reduces violations, while stringent penalties are either not enforced or lead to more bribery.