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28 May 2016 K2_CATEGORY IAS Blog

Introduction: The article talks about the Monetary Policy Framework Agreement to target inflation in India and the need of gradual transformation in monetary policy framework.

Topics:General Studies, Paper III

  • In the Budget Session of parliament, the RBI Act, 1934, was amended as part of the finance bill. Inflation targeting has now become law.
  • Successful inflation targeting requires reforms that have not been implemented so far. Such as:
    • A well-functioning bond market,
    • End of financial repression,
    • A competitive banking sector,
    • An independent government debt manager and
    • Full understanding and commitment on part of government to low and stable inflation.
  • Monetary Policy Framework Agreement (MPFA):
    • The Monetary Policy Framework Agreement (MPFA) signed in February 2015, for the first time, put in place an inflation target agreed upon by the RBI and government.
    • As a first step towards making a commitment to low and stable inflation, this was a significant step.
    • Many an expert committee had recommended that India should do what most other countries, including emerging economies, had done, and adopt inflation targeting as the objective of monetary policy.
    • The MPFA made CPI the mutually agreed target. Last week through the amendment to the RBI Act, Parliament made CPI the target.
  • Balancing low and stable inflation with economic growth:
  • The inflation target in the MPFA chosen by government and the RBI was 6 per cent by January 2016 and then 4 per cent for 2016-17 and thereafter (with a band of 2 per cent).
    • This sudden jump down in the inflation rate will be unrealistic and difficult to maintain. There should be a slower and smoother path to achieve long term stability as was seen in case of Chile and other such countries.
  • One of the biggest monetary policy problem in the past one year has been lack of transmission.
    • It appears that given the lack of other reforms in the financial markets such as the creation of a well-functioning bond market, a competitive and market-oriented banking system, and a bond-currency-derivative nexus, monetary policy transmission does not happen easily.
    • In this set-up, it is unlikely that the three-year path to a low and stable inflation envisaged in the MPFA can be achieved in a hurry. We need a gradual transformation through proper targeting of inflation.
  • The independent monetary policy requires government to give clear signals to RBI not to peg the exchange rate.
    • One reason for the high interest rate regime has been the reluctance to ease liquidity after the shock to the rupee following the taper talk in May 2013.
    • The unstated mandate of the RBI seems to be that it has to manage the exchange rate and prevent it from depreciation.
  • Inflation in WPI is determined by global commodity prices and not by domestic monetary policy. So, RBI should not try to target what is beyond its control.
  • From the point of view of the domestic mandate, inflation measures based on CPI i.e ‘core inflation’ are the most common target for inflation-targeting countries.
  • CPI is the measure consumers relate to. WPI does not represent anyone’s basket, and at best, represents the price of inputs and outputs for producers.
  • The choice of CPI is superior to the WPI because it measures the cost of living for consumers. Even though food is volatile, but because it matters to households, it is the rise in cost of living they care about.

Question: High inflation rate has been one of the major obstacle for Indian economy to achieve high growth in past few years. In the light of this statement, analyse the creation of Monetary policy framework agreement. Can this agreement act as the sole panacea for all monetary policy evils.

Suggested Approach:

  1. Start with the need to target inflation and the mandate of RBI.
  2. Highlight positives and negatives of MPFA.
  3. Suggest further measures needed to tackle inflation along with MPFA.

Link: http://indianexpress.com/article/opinion/columns/raghuram-rajan-rbi-subramanian-swamy-policy-inflation-2822458/

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Source: The Indian Express

28 May 2016 K2_CATEGORY IAS Blog

Introduction: The article discusses about the need of strong regulator for Railways in order to control its mounting losses in passenger segment.

Topics:General Studies, Paper- III

  • Railway’s losses in the passenger segment have gone up fivefold over the last decade which has distorted the national carrier’s functioning.
  • Very low fares for suburban passengers has led to over- charging in the high end passenger segment and in the freight segment.
  • Railways has lost considerable market share due to this mismatch in fares. For example:
    • From a small fraction of the Railways upper class passenger business in early 2000, the number of domestic air travelers today is more than 50 times the number travelling in AC-1 and six times the number travelling on AC-2.
    • In the case of freight, the Railways share has fallen to 31% today.
  • This shows the need for regulator at the earliest to control mounting losses.
  • Once a regulator comes in, the belief is, much of this will get fixed.
  • The power to implement the decision will be with political class which might not implement due to political considerations.
  • But, the decision taken by the government will be appealable in court.
  • Apart from setting tariffs, an independent regulator is critical if the Railways are to invite private sector participation—without an independent arbiter, there is always the likelihood that the Railways will stifle the competition.
  • The problem, however, is that with the Railways looking at bringing in a regulator through an executive order within a few months, the regulator will be quite toothless, more so since it will have to report to the Railways.
  • Under the law, the power of tariff-setting only lies with the government so even if the regulator is chosen by a committee headed by the Cabinet Secretary, it cannot set any tariffs.
  • The ministry is right when it says that, in any case, till the Railways adopts commercial accounting which could take two years, no regulator can do much since there will be no data to work on.
  • It is also true that it will take the regulator some time to be able to finalise principles for tariff determination.
  • Given this, the ministry feels that it is important to start right now, and when Parliament amends the Railways Act to allow a regulator to set tariffs, the regulator can be fully empowered.
  • Given the regulator will have limited powers anyway, and that there will be no appellate authority, it is probably best to drop the half-way house and to move a Bill that gives birth to a fully empowered regulator.
  • While a part of the regulator’s job is setting tariff principles or common-carrier rules for sharing infrastructure, for the process to have any legitimacy, an appeals process is critical—both users of railway services and the Railways itself have to be able to appeal an order for it to have any credibility
  • The executive order process, however, does not even allow for an appeals process.

Question: Indian Railways is often called as the lifeline of the nation. But, railways is bleeding due to inefficient freight fixing. In the light of this statement, discuss about the idea of setting up of a railway regulatory board. Suggested Approach:

Suggested Approach:

  1. In the introduction, highlight about the mounting losses of railways.
  2. Discuss major features of Railway regulatory board.
  3. Point out the shortcomings, if any.
  4. Suggest further practical measures.

Link: http://www.financialexpress.com/article/fe-columnist/editorial-regulating-railways/266970/

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Source:The Financial Express

28 May 2016 K2_CATEGORY IAS Blog

Introduction:The article discusses about India’s efforts to enter into Nuclear Suppliers Group and the China’s reservation to it.

Topics:General Studies, Paper III

  • India’s entry into the 48-member Nuclear Suppliers Group (NSG), whose members can trade in and export nuclear technology, has emerged as the latest battleground in the growing Sino-Indian contestation.
  • With India’s push for admission into the NSG gaining momentum ahead of the annual plenary session of the group next month, Beijing is making it clear that it intends to make life difficult for India
  • China role and argument:
    • China has relied on an obstructionist argument and called for further discussion on whether “India and other countries” that have not signed the Nuclear Non-Proliferation Treaty (NPT) can join the NSG.
    • China is claiming that a “compulsory” requirement for NSG membership is that “the NSG members must be signatories to the NPT”.
    • China has also encouraged Pakistan to apply for NSG membership so as to link New Delhi’s entry with that of Islamabad’s, knowing well that there will be few takers for Pakistan’s case.
    • China is taking such a strong stand on this issue despite the fact that its own non-proliferation track record remains abysmal.
    • China has played a major role in the development of Pakistan’s nuclear infrastructure. The Pakistani nuclear weapons programme is essentially an extension of the Chinese one.
    • Despite being a member of the NPT, China has supplied Pakistan with nuclear materials and expertise and provided critical assistance in the construction of Pakistan’s nuclear facilities.
    • The Sino-Pakistani nuclear relationship is perhaps the only case where a nuclear weapon state has actually passed on weapons-grade fissile material and bomb design to a non-nuclear weapon state.
    • After the 2008 US-India civilian nuclear pact, China made it a point to further enhance nuclear cooperation with Pakistan, despite criticism from other nuclear powers.
    • When the NSG was approached for a waiver for the passage of the US-India pact, China was the last state standing in opposing it.
    • When it failed to scuttle the deal, China quickly moved to sign an agreement with Pakistan for two new nuclear reactors at the Chashma site, in addition to the two that it was already working on in Pakistan.
    • This action was in clear violation of NSG guidelines that forbid nuclear transfers to countries not signatories to the NPT or adhere to comprehensive international safeguards on their nuclear programme.
  • The role played by U.S.:
    • The US and other supporting members have called for India’s inclusion based on New Delhi’s non-proliferation track record and the US-India civilian nuclear accord.
    • The US state department is of the view that “India meets missile technology control regime requirements and is ready for NSG membership.” The US has been declaring its support for India’s full membership since 2010.
  • Indian government’s efforts:
    • The Modi government is investing a lot of diplomatic capital in seeking NSG membership.
    • It has reached out to the New Agenda Coalition, a group of states in the NSG that includes Ireland, the Netherlands and Switzerland, which remain committed to disarmament, and has been able to secure their support.
    • The NSG chairperson, too, visited India last year to take this process forward. Membership of the NSG will be the final step in India’s inclusion in the global nuclear order.
  • The current scenario:
    • Today, India wants to be part of the decision-making at the highest levels of global nuclear architecture.
    • As a rising and responsible nuclear power, it should be a part of this structure and it will also be good for the NSG if India is part of the decision-making process.
    • China has taken a hard line on this issue and it seems unlikely that it will change its opposition to India’s entry.
    • To many in India, this will further reinforce the perception that China is willing to sacrifice a long-term strategic partnership with a rising power for the short-term objective of trying to scuttle its rise.
    • This won’t be helpful for Sino-Indian ties, but Beijing wants to go down fighting. New Delhi should brace itself for a bumpy ride ahead.

Question: Membership in the Nuclear Suppliers Group will be the final step in India’s inclusion into global nuclear order. In the light of this statement, comment on the obstacles in joining this group and the benefits of joining. Suggested Approach:

Suggested Approach:

  1. Give a brief introduction about the NSG.
  2. The obstacles in the form of role played by China and signing of NPT.
  3. Benefits of joining this group.

Link: http://www.livemint.com/Opinion/YscXkydO5bKjQGuzmwMq1K/Indias-NSG-bid-China-in-the-way.html

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Source:Livemint