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The Hindu Editorial Analysis | PDF Download

Date: 05 April 2019

No surprises

  • RBI’s reduction in benchmark rates is an acknowledgement of a slowdown in growth
  • There was no surprise in the 25 basis points cut in benchmark interest rates by the Reserve Bank of India in its first bi-monthly policy statement of the financial year announced on Thursday.
  • The market had anticipated such a cut and the only question was whether the central bank would surprise with a deeper 50 basis points cut. In the event, the Monetary Policy Committee (MPC) seems to have decided to hold its horses and settle for a conservative approach given the divergent sets of data that it was confronted with.
  • On the one hand, inflation, despite the mild spike in February, is well under control at 2.6% and is projected to average 3.2% to 3.4% in the first half of 2019-20. This is below the 4% target set for the MPC.
  • But there are some factors that could spring a surprise on the upside, such as the behaviour of the monsoon and the trend in global oil prices, both of which feed directly into inflationary expectations.
  • Early forecasts indicate a strong possibility of a below-normal monsoon due to El Niňo. Such an event would cast a shadow on agricultural output, and consequently the food prices. Similarly, global oil prices are now edging close to the $70 a barrel mark on the back of production cuts by the OPEC cartel.
  • While the soft growth trends in the global economy could act as a check on any runaway increase in oil prices, the chances of a sharp fall in the next few months appear remote at this point in time. If these are points of upward pressure on inflation, on the other side growth has been faltering in the last few months, going by both data on industrial output and overall GDP. The Central Statistics Office has revised the GDP growth for 2018-19 downwards to 7% while the RBI has projected a lower growth of 7.2% in 2019-20 compared to the 7.4% estimated in the last policy.
  • The 25 basis points cut is, therefore, an acknowledgement by the MPC of the slowdown in growth. It also signals a shift in policy since Shaktikanta Das assumed office as Governor of the RBI, whereby the MPC is not solely focused on inflation but also takes into account growth trends with equal seriousness. The MPC’s neutral policy stance is prudent given the uncertainties ahead as it gives the central bank the flexibility to tailor policy to emerging data sets. Meanwhile, Mr. Das has sent out a welcome, clear signal on the central bank’s commitment to the framework for resolution of stressed assets in the backdrop of the Supreme Court striking down its circular issued on February 12, 2018. While underlining that the RBI’s powers have not been compromised, he has indicated that the central bank will soon reissue the circular taking into account the apex court’s observations. This is as it should be.

Making democracy meaningful

  • Freedom must be foregrounded, and each person enabled to contribute her best to it
  • Within Indian common sense periodic elections, party-based competitive candidates, and universal adult franchise have turned out to be the primary ingredients of democracy. This common sense has come to cloud everything centrally associated with the idea of democracy in general and constitutional democracy in particular. Reading elections as democracy has also led to the equating of means with ends, celebrating the former, and abdicating it from all responsibility the latter demands. Denoting elections as ‘the festival of the masses’, a phrase that tweaks Mao’s dictum ‘revolution is the festival of the masses’, or terming India as the ‘largest democracy in the world’ tends to suggest a view of democracy in which the role of the masses decidedly ends at the hustings. This reduction of democracy to elections, today, threatens to undermine the core aspirations associated with it.
  • For appreciating such aspirations we do not necessarily have to revert to the classics on this term elsewhere, such as Rousseau’s Du Contrat Social, Tocqueville’s Democracy in America, Marx’s writings on the revolutions of 1848 in the Neue Rheinische Zeitung and Dewey’s Democracy and Education, but India’s own reflections on it in such works as B.R. Ambedkar’s Annihilation of Caste, K.M. Panikkar’s Caste and Democracy, Ram Manohar Lohia’s Marx, Gandhi and Socialism, Jayaprakash Narayan’s A Plea for Reconstruction of Indian Polity, and above all the Constituent Assembly Debates (1946- 1949). These later writings do have a place for elections and representation that they engender, but also call for pre-requisites for a fair election that claims to represent the will of the people, and stipulate conditions for its continued salience.
  • Elections as tools
  • Elections can hardly be termed as the sole and effective conveyor belts of popular will in India any longer. Probably, they were never so. But there were reasons to hope, as the poor and the marginalised, cutting across diversity and the social and gender divide, rallied behind it in strength. But the hype that has come to surround elections, the resources that it calls for, the close monitoring of the voters by boxing them in social straitjackets, and the media’s obsessive focus on elections as a gladiators’ den have deeply compromised elections as the preeminent device of representation of popular will.
  • In the process the electoral space of the poor and the marginalized has shrunk, as other devices have been put in place to elicit their assent.
  • The rectitude of the election machinery alone cannot ensure that the voter is enabled to make a deliberated choice of momentous significance to his everyday life, opportunities and access to resources.
  • Political parties with their stakes, almost without exception, have increasingly tended to fix the voters in social silos, rather than help them redefine their affiliations and connect to the wider social ensemble, if they choose to do so.
  • Redistribution of resources and opportunities has been lost in the endless litany of promises of goods and bounties. A promise, here and there, in the manifestoes of political parties that allude to redistribution sounds theatrical before their socially conservative stance.
  • Sections of the media have come to play second fiddle in amplifying the sound-bites of political leaders, deploying them to construct and reconstruct opponents, with specified social constituencies in view. • They have found jingoism and archaic frames easy to stoke rather than nudge public sensitivity to reinforcing the democratic temper.
  • Highlighting fragments from popular memory-lane, spreading isolated events wide across the political space, and nurturing the effect of simultaneity, particularly with certain audiences in view, have been the take of much reporting these days.
  • Negatively, the advances people had made in shaping their self-rule, in a context of bewildering diversity and complexity and widening inequalities, are given short shrift.
  • While elections have been successful in reproducing the order of things, they can hardly be considered as the tool of deepening democracy and the nursery of imagining alternative human possibilities.
  • Imaginary of democracy
  • There has been an ambivalence regarding elections as the route to democracy in India from early on, even before Independence. It is important to recall that the Indian National Congress rejected the Montagu-Chelmsford Reforms (1919) that expanded the then electoral base, and entertained grave doubts with regard to the provisions of the Government of India Act, 1935 till it accorded a qualified endorsement to it.
  • There have always been political tendencies in India after Independence, particularly on the Left, that have sought boycott of elections by appealing to a richer and thicker version of democracy. But there is little to suggest that those who sought to reject or do away with elections have had much success in putting together an alternative, or enjoyed significant and consistent mass support for any appreciable time across the complex and deeply plural social ensemble in India.
  • If the great scholarly account of W.H. Morris-Jones, Parliament in India, is to be believed, the 1951-52 general elections demonstrated to an incredulous world, entertaining deep doubts about the prospects of parliamentary democracy in India, the faith that people had come to repose in elections as a mode of choosing their rulers.
  • Subsequent developments, particularly the option of Left parties to take the parliamentary path, demonstrate that elections as a device of choosing representatives find deep echo in the public culture in India. The challenge that the democratic project confronts in India can scarcely be imagined by setting aside elections.
  • In the reflections on democracy in India, a distinct imaginary of the same stands out, i.e. a political community of free and equal citizens who wish to define their collective life in the indefinite future, irrespective of, and taking along, the differences among them.
  • There is a disconnect between this imaginary and the turn elections have taken in India today.
  • Looking ahead
  • As a political community, the bonds that unite Indians are not given but have to be forged, and have to be forged consciously and deliberately.
  • Certain inheritances, beliefs, memories and shared practices can be a great help in this direction, but it is also important to realise that they can be equally divisive.
  • India’s constitutional layout and public institutions can extend much support in streamlining and directing this political project, but cannot be its replacement.
  • In a complex society such as India, such a political project needs all layers of the political community. The deliberation and participation such a project calls for will remain merely a slogan unless we foreground freedom, and enable everyone to contribute one’s best to it.
  • There is no reason for anyone to participate in such a project unless it welcomes them as equals and enables them to pursue what they regard as the best for them. This calls for auditing the election promises of political parties, extending support to some measures and rejecting others.
  • Measures such as access to quality education in the mother tongue, neighbourhood schools, strengthening public health systems, public transport, entrepreneurship and skill development, universal social insurance, and reaching out to those who suffer disadvantages in accessing these measures are definitely in synchrony with the democratic project.
  • At the same time for a large number of Indians the beliefs they uphold, and the practices that ensue therefrom are central to their idea of themselves. There is no reason why India’s democratic project cannot encompass such embeddedness and aspirations. There is a dire need to create a helm to focus on India’s democratic project.
  • Constitution of the MPC 
  • The Central Government constitutes the MPC through a notification in the Official Gazette. Altogether, the MPC will have six members, - the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three members would represent the Government of India.
  • These Government of India nominees are appointed by the Central Government based on the recommendations of a search cum selection committee consisting of the cabinet secretary (Chairperson), the RBI Governor, the secretary of the Department of Economic Affairs, Ministry of Finance, and three experts in the field of economics or banking as nominated by the central government.
  • The three central government nominees of the MPC appointed by the search cum selection committee will hold office for a period of four years and will not be eligible for re-appointment.
  • These three central government nominees in MPC are mandated to be persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy.
  • RBI Act prohibits appointing any Member of Parliament or Legislature or public servant, or any employee / Board / committee member of RBI or anyone with a conflict of interest with RBI or anybody above the age of 70 to the MPC.
  • Further, central government also retains powers to remove any of its nominated members from MPC subject to certain conditions and if the situation warrants the same.

All you need to know about current liquidity crisis at India’s NBFCs

  • Debt-ridden IL&FS, in which various corporates, as well as mutual funds and insurance firms, had invested through short-term instruments like commercial papers and non-convertible debentures (NCDs), has been defaulting on its several debt-obligations since August.
  • Non-banking finance companies (NBFCs) in India are going through a rough phase following defaults by once a bluechip infrastructure lender, Infrastructure Leasing and Financial Services (IL&FS), on shortterm debt obligations. The liquidity crunch in the sector has created tensions between the Reserve Bank of India and the government. It may be noted that the government is willing to ease the liquidity crisis afflicting financial markets in the country by pushing the central bank for easier credit flow, while the RBI is arguing that the sector has access to enough money through normal channels.
  • NBFC sector crisis
  • Debt-ridden IL&FS, in which various corporates, as well as mutual funds and insurance firms, had invested through short-term instruments like commercial papers and non-convertible debentures (NCDs), has been defaulting on its several debt-obligations since August. IL&FS’ borrowings from banks and financial institutions adds to nearly Rs 63,000 crore as per the balance sheet of 2017-2018, according to the Ministry of Corporate Affairs (MCA).
  • There are concerns that many NBFCs could have their funds stuck in IL&FS debt instruments. Reportedly, approximately Rs 2 trillion ($27.23 billion) of NBFC and HFC debt is due for redemption by the end of December. Also, funding costs of NBFCs are likely to go up and could lead to a sharp decline in their margins.

What was the fund source of NBFCs?

  • NBFCs were the largest net borrowers from the financial systems with gross receivables of around Rs 419,000 crore and gross payables (loans) of about Rs 717,000 crore in March 2018. According to the breakup of gross payables, the highest funds the NBFCs received were from banks (44%), followed by mutual funds (33%) and insurance companies (19%).