Economic Development: August 2023 UPSC Current Affairs | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly PDF Download

AMC Repo Clearing Limited

Why in News?

Recently, the Ministry of Finance inaugurated the Limited Purpose Clearing Corporation (LPCC) called AMC Repo Clearing Limited (ARCL).

What is AMC Repo Clearing Limited (ARCL)?

• About:
  • ARCL is a Limited Purpose Clearing Corporation that provides clearing and settlement services to all trades made in corporate debt securities on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
  • It received in-principle approval from the Securities and Exchange Board of India (SEBI) under the Stock Exchanges and Clearing Corporations (SECC) Regulations, 2018.
  • Also, ARCL has been granted Certificate of Authorization by RBI under Payment and Settlement Systems (PSS) Act, 2007 to offer Central counterparty clearing house (CCP) services for repo transactions in corporate debt securities.
• Functions:
  • ARCL offers triparty repo services and central counterparty services to facilitate repo transactions in corporate bonds, which are short-term borrowings backed by securities as collateral.
  • ARCL will help to widen and deepen the corporate bond repo market, which is currently underdeveloped and illiquid compared to the government bond repo market.
  • It allows holders of bonds to meet short-term liquidity needs without liquidating their assets, providing flexibility to market participants.
  • ARCL will also reduce the counterparty risk, operational risk and settlement risk for the participants in the corporate bond repo market.

Inflation and Current Outlook of Indian Economy

Why in News?

July 2023 witnessed a notable increase in Retail Inflation, reaching 7.44%, creating Goldilocks scenario for India, making investors and savers uncertain about the economic situation.

• A Goldilocks Scenario describes an ideal state for an economy whereby the economy is not expanding or contracting by too much. A Goldilocks economy has steady economic growth, preventing a recession, but not so much growth that inflation rises by too much.
  

What is the Current Economic Scenario of India and Projections?

• GDP Projection:
  • The projected GDP (Gross Domestic Product) growth for 2023-24 is 6.5%, while the benchmark Sensex index stands currently at 65,000 points.
  • However, if inflation remains high, it could affect returns on stock market investments.
  • Gold and bank deposit rates, on the other hand, are expected to remain stable in the coming months.
• Inflation Projection:
  • The Reserve Bank of India (RBI) anticipates inflation to stay above 5% until the first quarter of 2024-25, potentially reaching 6.2% in the current quarter (July-Sept) 2023, exceeding the RBI's comfort level of 4%.
• Food Price Pressures:
  • Food prices are expected to remain elevated for a few more months. July's data reveals a surge in vegetable prices (37.3%), along with inflation in cereals, pulses (both 13%), spices (21.6%), and milk (8.3%).
  • It is expected that government interventions and fresh crop arrivals will eventually ease this pressure.
• Interest Rates and Monetary Policy:
  • Due to the higher inflation projections, the possibility of a rate cut has been postponed to the next Fiscal Year (2024-25).
  • The Monetary Policy Committee (MPC) is likely to maintain policy rates in the upcoming meeting, with the first rate cut potentially occurring in the following fiscal year.
• Market Outlook:
  • Despite inflation and high interest rates, India's market has performed well.
  • Supported by strong earnings prospects and stable macro conditions, India has outperformed other markets.

What is the Impact of Such Rising Inflation on the Indian Economy?

• Impact on Markets:
  • When inflation is high, stock prices are undervalued, and the value of gold increases. Rising inflation reduces purchasing power, leading to lower real earnings.
  • Additionally, higher inflation results in higher Interest Rates, affecting the cost of equity.
  • The RBI's series of repo rate hikes since April 2022 has contributed to an overall increase in lending rates, affecting various types of loans.
• Income Redistribution:
  • Inflation can impact different groups within society unevenly. Creditors may lose out, as the value of the money they receive from debtors decreases.
  • Conversely, debtors could benefit by repaying loans with money that is worth less than when they borrowed it.
• International Competitiveness:
  • High inflation in one country can lead to a decrease in its international competitiveness. If domestic prices rise faster than those in trading partner countries, the country's exports may become less attractive on the global market.
• Wage-Price Spiral:
  • Inflation can sometimes trigger a cycle of rising wages and prices. Workers demand higher wages to keep up with rising costs, and businesses pass on those higher costs to consumers in the form of higher prices. This cycle can perpetuate inflation.

Way Forward

• Given the concerns about rising inflation, the government and the RBI need to work together to manage inflationary pressures. This could involve targeted measures to stabilize food prices, improve Supply Chain efficiency, and maintain a cautious monetary policy.
• The government should focus on maintaining a balanced budget, reducing unnecessary expenditure, and boosting revenue generation through reforms and measures that promote economic growth.
• The RBI should continue to adopt a vigilant and data-driven monetary policy approach. This may involve adjusting interest rates to manage inflation while also considering the impact on economic growth.

Self-Reliant India Fund for MSMEs

Context

• As part of the Aatmanirbhar Bharat package, the Indian government announced a Rs. 50,000 crore Equity Infusion for Micro, Small, and Medium Enterprises (MSMEs) through the Fund of Funds. The initiative aims to provide equity funding to viable and promising MSMEs to help them grow and become larger units.
  • The Self-Reliant India (SRI) Fund has been established to implement this plan, with Rs. 10,000 crores contributed by the Government of India and Rs. 40,000 crores from Private Equity and Venture Capital funds.
  • The SRI Fund operates through a mother-fund and daughter-fund structure for equity or quasi-equity investments. The NSIC Venture Capital Fund Limited (NVCFL) is registered as the Mother Fund under the SRI Fund implementation.
• The government has also taken several other initiatives to support the MSME sector, including the launch of the Champions 2.0 portal, the MSME Champions Scheme for financial assistance, budgetary support to Credit Guarantee Fund Trust for Micro & Small Enterprises, and the “Raising and Accelerating MSME Performance (RAMP)” program aimed at strengthening MSMEs’ access to credit and markets and promoting technology upgradation.

Concerns of Over Deflation in China

Central Idea

• China’s recent bout of deflation, marked by a decline in consumer prices for the first time in over two years, has sparked debates about its implications and causes.
• This article delves into the intricacies of deflation, its potential impact on economic growth, and the unique circumstances driving deflation in China.

Understanding Deflation

• Deflation Defined: Deflation refers to a sustained decrease in the general price level of goods and services within an economy.
• Historical Context: Historically, the terms “inflation” and “deflation” were linked to changes in the money supply, with “inflation” representing a rise and “deflation” a fall in money supply.

Concerns Associated with Deflation

• Economic Slowdown: Many economists view deflation as an indicator of dwindling demand for goods and services, potentially leading to an economic slowdown.
• Demand-Supply Dynamics: Falling prices may prompt consumers to delay purchases, hampering demand and triggering a ripple effect throughout the economy.
• Resource Utilization: A certain level of inflation is deemed necessary for optimal resource utilization, ensuring full economic potential is realized.

Varied Perspectives on Deflation

• Positive Instances: Some economies have experienced deflation during periods of robust growth. Japan witnessed increased real income levels despite persistent deflation.
• Economic Crises: Deflation can arise during economic crises when cautious spending and resource reallocation occur.
• Consumer Demand and Prices: Some economists argue that consumer demand dictates prices, rather than the other way around.

China’s Deflation Scenario

• Policy Measures: China’s central bank maintained low interest rates to stimulate demand amid the post-pandemic recovery.
• Property Sector Turmoil: China’s pre-pandemic property sector challenges, affecting GDP contribution, may be a root cause of the current deflationary trend.
• Complex Factors: While liquidity may not be the core issue, comprehensive analysis of money supply and monetary transmission is necessary to determine the underlying cause.

Deflation and India

Repercussions of Chinese Deflation

Positive Impacts:

• Cheaper Imports: If Chinese goods become cheaper due to deflation, it could lead to lower import costs for India, benefiting consumers and businesses that rely on Chinese imports.
• Lower Input Costs: Reduced prices for raw materials and intermediate goods from China could lower production costs for Indian industries that depend on these inputs.
• Global Supply Chains: If Chinese deflation reduces the cost of production within global supply chains, Indian businesses integrated into these chains might experience cost savings.
• Improved Trade Balance: Cheaper Chinese imports can contribute to a more favorable trade balance for India, especially if it leads to reduced import bills.

Negative Impacts:

• Export Competition: Cheaper Chinese exports due to deflation could increase competition for Indian exports in international markets, potentially affecting certain Indian industries.
• Import Dumping: A flood of cheap Chinese goods into the Indian market could harm domestic producers, leading to job losses and economic strain.
• Investment Flows: A slowdown in China’s economy caused by deflation might lead to reduced investor confidence and affect foreign direct investment (FDI) flows to India.
• Currency Effects: If China’s central bank devalues its currency to boost exports in response to deflation, it could lead to a stronger Indian rupee, impacting India’s export competitiveness.
• Commodity Prices: Reduced demand for commodities from China due to deflation could lead to lower global commodity prices, affecting Indian exporters of raw materials.

Conclusion

• China’s encounter with deflation amidst efforts to boost demand and stabilize its economy presents a multi-faceted challenge.
• Understanding the nuances of deflation, its interaction with demand dynamics, and China’s unique economic landscape are vital.
• As China navigates its path forward, policymakers must consider the interplay of factors, including the property sector’s impact and broader economic goals.

MPC Recent Decisions: Repo, Inflation Projection, I-CRR

Why in News?

• The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has recently opted to maintain the policy repo rate at 6.5%, while simultaneously revising its projection for retail inflation in the current fiscal year (2023-24).
• Additionally, a temporary 10% Incremental Cash Reserve Ratio (I-CRR) is imposed on banks to absorb excess liquidity.

What are the Key Decisions of the MPC?

• Repo Rate Unchanged: The RBI decided unanimously to keep the policy repo rate unchanged at 6.5% to balance economic growth and inflation control.
• Inflation Projection Increased: The projection for retail inflation in the current fiscal year has been raised by 30 basis points to 5.4%.
  • This adjustment acknowledges the upward trend in headline inflation, driven in part by rising vegetable prices.
  • While the spike in vegetable prices is expected to be temporary, external factors like possible El Nino weather conditions and global food prices pose potential risks.
• Projected GDP Growth: The MPC retained its projection for real GDP growth in 2023-24 at 6.5%.
• Incremental Cash Reserve Ratio (I-CRR): Effective from 12th August 2023, scheduled banks are required to maintain an I-CRR of 10% on the net increase in their demand and time liabilities between May 19, 2023, and July 28, 2023.
  • This move aims to absorb surplus liquidity, particularly due to the recent demonetisation of Rs. 2000 notes.
  • The RBI opted for I-CRR over a general CRR increase to prevent penalizing banks for their current deposits and to limit impacts on credit growth and the economy.
  • CRR rise would have restricted loan funds and raised borrowing costs. I-CRR only targets excess liquidity from demonetization without disrupting regular banking operations.
    • The existing CRR remains unchanged at 4.5%.
  • Also, the RBI clarified that the I-CRR is a temporary measure. In 2016, during the time of demonetisation, a 100% I-CRR was employed.

Is the Recent RBI's Move Related to the HDFC Ltd-HDFC Bank Merger?

• Speculation: The speculation is that the RBI's decision to introduce this additional CRR could be an attempt to offset any potential profits that HDFC Bank might have made during the grace period after the merger.
• Background: HDFC Ltd was not a bank, but it could raise deposits. However, it was not subject to the CRR rule. HDFC Ltd then merged with HDFC Bank, bringing in large amounts of deposits into the banking system.
  • After the merger, HDFC Bank was granted a grace period during which it did not have to deposit the usual 4.5% CRR on its newfound deposits.
  • This grace period allowed the bank to potentially invest these significant deposits elsewhere and earn profits from these investments.
  • The RBI's recent move of incremental CRR implies that banks, including HDFC Bank, have to keep an extra 10% of these deposits with the RBI.

What are the Other Measures that RBI can Adopt to Suck Excess Liquidity?

• Reverse Repo Operations: The RBI can conduct reverse repo operations, where it absorbs excess liquidity from banks by offering them government securities in exchange for funds.
  • However, recently RBI opted for using I-CRR instead of raising the reverse repo rate because increasing the reverse repo rate would have also increased the repo rate which would have tightened monetary policy and hampered economic recovery.
• Foreign Exchange Operations: Selling foreign exchange reserves can reduce liquidity in the domestic currency market.
  • This approach can be used cautiously, as it can impact the exchange rate and international trade.
• Moral Suasion: The RBI can communicate with banks and financial institutions to encourage them to voluntarily manage their liquidity positions and curtail excessive lending.

What are the Implications of Excess Liquidity in India?

• Positive Implications:
  • Lower Interest Rates: Excess liquidity can lead to lower interest rates in the economy.
  • When there is an abundance of funds, banks and financial institutions tend to lower their lending rates to attract borrowers.
  • This can stimulate borrowing and investment activities, promoting economic growth.
  • Stimulating Investment: With lower interest rates, businesses may find it cheaper to borrow and invest in expanding their operations, launching new projects, and creating jobs.
  • This can have a positive impact on economic activity and job creation.
• Negative Implications:
  • Inflationary Pressure: Excess liquidity can contribute to inflationary pressures in the economy.
  • When there is too much money chasing a limited supply of goods and services, prices can rise.
  • This can erode the purchasing power of consumers and reduce their overall standard of living.
  • Exchange Rate Volatility: Sudden inflows of foreign capital can lead to currency appreciation, making exports more expensive and imports cheaper.
  • On the other hand, outflows can lead to currency depreciation, which can impact trade balances and external debt.
• Asset Price Bubbles: While excess liquidity can boost asset prices, it can also lead to the formation of speculative bubbles.
  • If the increase in asset prices is not supported by fundamentals, it could result in a sudden collapse of prices, leading to financial instability.
• Income Inequality: The benefits of excess liquidity, such as increased asset prices, might disproportionately benefit the wealthy who have more exposure to these assets.
  • This can exacerbate income inequality in the economy.

How can High Inflation and High Liquidity be Managed Simultaneously

• Interest Rate Adjustment: The RBI can consider a cautious approach to interest rate adjustments.
  • While high liquidity might suggest lowering interest rates, the focus should also be on curbing inflation.
  • A balanced approach might involve incremental interest rate hikes to manage both liquidity and inflation concerns.
• Open Market Operations (OMOs) :The RBI can engage in controlled Open Market Operations, which involve selling government securities to counterbalance the liquidity injected into the system.
  • This can help mitigate the inflationary effects of excessive liquidity.
• Targeted Fiscal Measures: The Indian government can adopt targeted fiscal policies to address sectors contributing to inflation.
  • For instance, investing in agricultural infrastructure and supply chain improvements can help stabilize food prices, a current major driver of inflation in India.

Coking Coal

Coal Ministry has recently Identified more Blocks to Enhance Coking Coal Production.

About:

• Coal is a fossil fuel and is the altered remains of prehistoric vegetation that originally accumulated in swamps and peat bogs.
• The quality of each coal deposit is determined by: varying types of vegetation from which the coal originated; depths of burial; temperatures and pressures at those depths; and length of time the coal has been forming in the deposit.
• Coking coal is a high-quality coal that is low in impurities and has a high carbon content, which makes it ideal for use in the metallurgical process.
• Coking coal is used to produce coke, which is a porous, solid carbon material that is used as a fuel and a reducing agent in the production of iron and steel.
• Largest coal-producing countries in the world: China (3.7 billion tonnes), India (783 million tonnes), United States (640 million tonnes), Indonesia (616 million tonnes).

India’s Ageing Workforce

Context

An analysis of employment data from the Centre for Monitoring the Indian Economy (CMIE) reveals that India’s workforce has undergone a significant ageing trend over the past seven years.

Meaning of ‘India’s Workforce is Aging’: An ageing workforce basically means that if one looks at all the employed people in India, the share of young people is going down while the share of those closer to 60 years of age is going up.

Key findings:

Implications of these data

• Youth Population Growth ≠ Job Increase
  India’s expanding youth population does not automatically translate into more job opportunities for them. Despite the demographic advantage, youth struggle to secure employment and face tough competition from older counterparts.
• Youth Unemployment Peaks
  Unemployment is most pronounced among the youth, even considering the potential influence of higher education pursuits. This trend warrants attention from policymakers. Even non-CMIE surveys indicate that youth unemployment remains a prominent concern in India.

Conclusion

Addressing youth employability is vital alongside the broader goal of creating more job opportunities.
Definition of Youth: CMIE’s data defines youth as individuals aged above 15 and below 25. However, for the purpose of comparison, the workforce is divided into three groups: 15 to 30 years, 30 to 45 years, and 45 years and older.
Data on Female Labour Force Participation Rate (LFPR): As per the latest available Annual PLFS Reports, the estimated Labour Force Participation Rate (LFPR) on usual status for women of age 15 years and above in the country was 30%, 32.5% and 32.8% during 2019-20, 2020-21 and 2021-22, respectively, which shows an increasing trend.

State of Formal Employment In India

Why in News?

Employees Provident Fund’s (EPF) data indicates net increases in contributors, but this contradicts ground reports of Unemployment and Job Scarcity in India.

• The Indian government has been using the EPF’s data to measure the Formal Employment creation since 2017.

What is Formal Employment?

• About:
  • Formal employment refers to a type of employment where the terms and conditions of work are regulated and protected by labor laws and employment contracts.
  • It is characterized by certain features that distinguish it from informal or casual employment.
• Key Features:
  • Written Contracts: Formal employment typically involves a written employment contract that outlines the terms of employment, including job responsibilities, working hours, compensation, benefits, and other terms and conditions.
  • Social Security: Formal employees are often entitled to social security benefits such as health insurance, retirement funds, Provident fund, unemployment benefits, and other forms of financial protection.
  • Labor Rights: Formal employees have specific Labor Rights protected by law, such as the right to join trade unions, collective bargaining, protection against unfair dismissal, and access to legal recourse in case of disputes.
  • Regular Payment: Formal employees receive regular wages or salaries, usually on a fixed schedule, which provides a stable income source.
• Informal Employment:
  • Informal employment refers to work that is not regulated or protected by labor laws, lacks formal employment arrangements, and often operates outside the scope of government oversight.
  • Informal employment can lead to precarious working conditions and hinder economic growth as it may result in lower productivity and higher income inequality.

What does the EPF Data Say about Formal Jobs?

• EPFO's annual reports show a stagnant or declining number of regular contributors, those with consistent PF contributions, in recent years.
  • Between 2012 and 2022, the number of regular contributors to the EPF increased from 30.9 million to 46.3 million.
  • Between 2017 and 2022, the number of regular contributors increased only from 45.11 million to 46.33 million, showing a slowdown in growth during this period.
• Total EPF enrollments increased significantly, but the corresponding increase in regular contributors was minimal.
  • Between 2017-2022, overall EPF enrollments increased from 210.8 million to 277.4 million.
  • The difference between the total number of EPF enrollments (277.4 million) and the number of regular contributors (46.33 million) indicates that a significant portion of enrollments is not resulting in regular contributions.
• The majority of EPF enrollments are linked to temporary or casual jobs with irregular PF contributions.

• Factors Leading to the Decline in Contributors:
  • The EPFO disputed its own data and stopped publishing monthly reports on regular contributors.
  • The Pandemic further worsened the situation, leading to a decline in EPF contributors.
  • The Indian government neglected other sources of formal employment data, like the Directorate General of Employment and Training (DGET) , which has not been published since 2013.

What is the Scenario of the Job Crisis in India?

• Unemployment Rate:
  • According to the National Statistical Office’s (NSO) Periodic Labour Force Survey (PLFS) report for the year 2021-22, the unemployment rate for 2021-22 was 4.1%.
• Low Labor Force Participation Rates (LFPR):
  • According to Centre for Monitoring Indian Economy (CMIE), India’s LFPR fell to 39.5% in the financial year (2022-23).
  • This is the lowest LFPR reading since 2016-17.
  • The LFPR for men stood at a seven-year low of 66% while that of women was pegged at a mere 8.8%.
  • The LFPR is the share of the working-age population (aged 15 years and above) that is employed or unemployed, willing and looking for employment.

What are the Causes of Low Employment in India?

• Absence of Formal and Quality Job:
  • The absence of formal, well-paid, and regular employment inhibits the expansion of India's middle class, unlike China's growth model.
  • Lack of quality jobs leads to over-qualified youth competing for limited job openings, raising concerns about claims of strong economic growth.
• Social Factors:
  • In India, the caste system is prevalent. The work is prohibited for specific castes in some areas.
  • In big joint families having big business, many such persons will be available who do not do any work and depend on the joint income of the family.
• Dominance of Agriculture:
  • In India nearly half of the workforce is dependent on Agriculture. However, Agriculture is underdeveloped in India. Also, it provides seasonal employment.
• Fall Small industries:
  • The industrial development had adverse effects on cottage and small industries.
  • The production of cottage industries began to fall and many artisans became unemployed.
• Limitations in Education System:
  • Jobs in the capitalist world have become highly specialized but India’s education system does not provide the right training and specialization needed for these jobs.
  • Thus, many people who are willing to work become unemployed due to lack of skills.
  • How are the Rights of Labour Protected in India?
• Constitutional Framework:
  • Under the Constitution of India, Labour as a subject is in the Concurrent List and, therefore, both the Central and the State governments are competent to enact legislations subject to certain matters being reserved for the Centre.
• Judicial Interpretation:
  • In the case of Randhir Singh vs Union of India, the Supreme Court stated that “Even though the principle of ‘Equal pay for Equal work’ is not defined in the Constitution of India, it is a goal which is to be achieved through Article 14,16 and 39 (c) of the Constitution of India.
• Legislative Framework:
  • There have been several legislative and administrative initiatives taken by the government to improve working conditions and simplify labour laws. Most recent is the consolidated sets of 4 labour codes.
    • Code of Wages, 2019
    • Industrial Relations Code, 2020
    • Social Security Code, 2020
    • Occupational Safety, Health and Working Conditions Code, 2020.

Way Forward

• Relying on a single data source, like the EPF, overlooks the complexity of India's labor market. Comprehensive labor statistics, like the PLFS, provide a more accurate picture and call for urgent policy interventions to address the jobs crisis in the country.
• The formal job crisis in India requires a multi-faceted approach to address the underlying issues and create a conducive environment for formal employment generation.
• There is a need to encourage industries that have a higher labor intensity, such as manufacturing and certain services, to create more formal job opportunities and reduce reliance on informal sectors.
• There is a need to Investing in skill development programs that align with industry demands can enhance the employability of the workforce and lead to better-quality formal jobs.