Note4Students
From UPSC perspective, the following things are important :
Prelims level: Liquidity corrridor
Mains level: Paper 3- RBI innovative approach during pandemic
Context
Recently, the RBI has been at the receiving end for mission the inflation target.
Understanding the RBI’s rationale
- Supply side shock: Inflation has been largely the result of supply side shocks from vegetable prices, caused by crop damages due to unseasonal rains (tomato, onion and potato) in late 2019 and widespread supply-side disruptions after the outbreak of the pandemic.
- A narrow-minded focus on inflation caused by supply shocks would have constrained the MPC from supporting growth amidst the unprecedented loss of life and livelihood.
- Focusing on recovery: Therefore, it was necessary to provide a lifeline to the economy at that juncture by focusing on the recovery.
- Moreover, the wide tolerance band of 200bps +/- in the inflation targeting framework was specifically designed to accommodate such supply shocks, which provided the flexibility in the flexible targeting (FIT) framework.
- Taking into account objective of growth: In contrast to a pure inflation targeting framework (inflation nutters), the amended mandate of the RBI under FIT reads as “price stability, taking into account the objective of growth”.
- Therefore, the MPC was justified in looking through the higher inflation print during the pandemic while trying to resurrect growth.
No contradiction between Governor’s statement and MPC resolution
- Recently, the MPC highlighted inflation concerns and voted to raise the policy repo rate.
- The governor’s statement of the same day noted that the RBI will ensure an orderly completion of the government’s borrowing programme.
- Contradictory objectives: It is said that the above two actions created confusion as lowering inflation and lowering government bond yields are contradictory objectives.
- This justification is redundant as an orderly completion of the borrowing programme does not imply lowering yields.
- It basically ensures that the borrowing programme is completed seamlessly at low costs (ensured through auctions).
- Moreover, from a theoretical perspective, this is not inconsistent because controlling inflation and lowering inflation expectations bodes well for the term premia of bond yields — which moderate once expectations are anchored.
- Therefore, if inflation is reined in, the government stands to gain in terms of lower interest costs.
- Was width of corridor lost during pandemic? It is argued that the MPC kept repo rates unchanged while the RBI changed the reverse repo rate during the pandemic, meaning that the fixed width of the corridor was lost and the MPC lost its role in setting interest rates and so, its credibility.
- This argument does not stand scrutiny.
- During the pandemic, the policy repo rate was cumulatively reduced by an unprecedented 115 bps and the interest rate on the overnight fixed-rate reverse repo was reduced cumulatively by 155 bps.
- Assymetric corridor justified in crises: This measure was not incongruous with contemporary wisdom as an asymmetric corridor has been justified, particularly during crisis times (Goodhart, 2010).
- Given that elevated inflation concerns precluded the possibility of any further repo rate cuts (cumulatively reduced by 250 basis points since February 2019), financial conditions were eased substantially by reducing the reverse repo rate, which lowered the floor rate of interest in the economy.
- Since the mandate of the MPC is to control inflation for which the policy instrument is the repo rate, the RBI had used the LAF through changes in the reverse repo rate to alter liquidity conditions.
Trade offs involved in inflation targeting for emerging economies
- Inflation-targeting countries, because of their sole focus on inflation, experience lower inflation volatility but higher output volatility.
- Higher output volatility entails a higher sacrifice ratio — the proportion of output foregone for lowering inflation.
- For an emerging economy, the costs of higher output foregone against the benefits of lower inflation must always be balanced as potential output keeps on changing given the shift of the production function.
- Developed countries, on the other hand, operate near full employment — therefore, sacrifice ratios are lower.
- As a result, smoothening inflation volatility is relatively costless for them.
Conclusion
The RBI has innovated admirably under its current stewards during the pandemic, keeping in mind the task of reinvigorating the economy. Despite the existing targeting framework, it did not get fixated on a one-point agenda, daring to look beyond the inflation print.
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Back2Basics: Liquidity corridor
- The Corridor in monetary policy of the RBI refers to the area between the reverse repo rate and the MSF rate.
- Reverse repo rate will be the lowest of the policy rates whereas Marginal Standing Facility is something like an upper ceiling with a higher rate than the repo rate.
- The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: G-Secs
Mains level: Read the attached story
Government Securities (G-Secs) yields are at an all-time high.
What are G-Secs?
- These are debt instruments issued by the government to borrow money.
- The two key categories are:
- Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
- Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years
Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.
Why G-Secs?
- Like bank fixed deposits, g-secs are not tax-free.
- They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
- However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
- Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
How are G-sec yields calculated?
- G-sec yields change over time; often several times during a single day.
- This happens because of the manner in which G-secs are structured.
- Every G-sec has a face value, a coupon payment and price.
- The price of the bond may or may not be equal to the face value of the bond.
- Here’s an example: Suppose the government floats a 10-year G-sec with a face value of Rs 100 and a coupon payment of Rs 5.
- If one were to buy this single G-sec from the government, it would mean that one will give Rs 100 to the government today and the government will promises to 1) return the sum of Rs 100 at the end of tenure (10 years), and 2) pay Rs 5 each year until the end of this tenure.
- At this point, the face value of this G-sec is equal to its price, and its yield (or the effective interest rate) is 5%.
How do G-sec yields go up and down?
- Imagine a scenario in which the government floats just one G-sec, and two people want to buy it.
- Competitive bidding will ensue, and the price of the bond may rise from Rs 100 (its face value) to Rs 105.
- Now imagine another lender in the picture, which pushes the price further up to Rs 110.
What do G-sec yields show?
- If G-sec yields (say for a 10-year bond) are going up, it would imply that lenders are demanding even more from private sector firms or individuals; that’s because anyone else is riskier when compared to the government.
- It is also known that when it comes to lending, interest rates rise with the rise in risk profile.
- As such, if G-sec yields start going up, it means lending to the government is becoming riskier.
- If you read that the G-sec yields are going up, it suggests that the bond prices are falling. But the prices are falling because fewer people want to lend to the government.
- And that in turn happens when people are worried about the government’s finances (or its ability to pay back).
- The government’s finances may be in trouble because the economy is faltering and it is unlikely that the government will meet its expenses.
- By the reverse logic, if a government’s finances are sorted, more and more people want to lend money to such a G-sec.
- This in turn, leads to bond prices going up and yields coming down.
Try this PYQ:
Consider the following statements:
- The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
- Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
- Treasury bills offer are issued at a discount from the par value.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 3 Only
(c) 2 and 3 only
(d) 1, 2 and 3
Post your answers here.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: GST, Major sources of revenue
Mains level: Success and limitations of the GST regime
India recorded its second-highest monthly gross GST revenues in June at ₹1,44,616 crore, 56% more than a year earlier when the second COVID wave had hit economic activity.
What is GST?
- GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
- The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017. It is a single domestic indirect tax law for the entire country.
- It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
- Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.
Answer this PYQ in the comment box:
Q.All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the (CSP 2015):
(a) Contingency Fund of India
(b) Public Account
(c) Consolidated Fund of India
(d) Deposits and Advances Fund
Post your answers here.
What are the components of GST?
There are three taxes applicable under this system:
- CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
- SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
- IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)
Advantages Of GST
- GST has mainly removed the cascading effect on the sale of goods and services.
- Removal of the cascading effect has impacted the cost of goods.
- Since the GST regime eliminates the tax on tax, the cost of goods decreases.
- Also, GST is mainly technologically driven.
- All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.
Issues with GST
- High operational cost
- GST has given rise to complexity for many business owners across the nation.
- GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
- Petrol is not under GST, which goes against the ideals of the unification of commodities.
Take a look at the share of GST in government earnings for the previous fiscal:
UPSC can ask about the majority component of the Revenue Receipts of the govt. See how Corporate tax is nearing the GST revenues.
Do you think it will surpass GST revenue when the economy is fully recovered?
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Autonomous Flying Wing Technology Demonstrator
Mains level: India's defence exports, Atmanirbharta in defence
The Defence Research and Development Organisation (DRDO) has successfully carried out the maiden test flight of a new Unmanned Aerial Vehicle (UAV), an autonomous Flying Wing Technology Demonstrator, from the Aeronautical Test Range, Chitradurga, Karnataka.
About the Indigenous Drone
- The Unmanned Aerial Vehicle (UAV) is powered by a small turbofan engine.
- It is developed under unmanned combat aerial vehicle (UCAV) programme.
- It is designed and developed by Aeronautical Development Establishment (ADE), Bengaluru, a premier research laboratory of DRDO.
- The engine is Russian TRDD-50MT originally designed for cruise missiles.
- A small turbo fan engine is being developed indigenously for meeting the requirement.
Various initiatives by DRDO
- DRDO is in the process of developing UAVs of different classes to met the requirements of the armed forces.
- Rustom-2, the indigenous Medium Altitude Long Endurance (MALE) UAV under development, had crossed a milestone by reaching an altitude of 25,000 feet and an endurance of 10 hours.
- It is now being designed to reach an altitude of 30,000 feet and 18 hours endurance.
- An Unmanned Combat Aerial Vehicle is also on the drawing board.
Significance of the development
- Operating in a fully autonomous mode, the aircraft exhibited a perfect flight, including take-off, way point navigation and a smooth touchdown.
- This flight marks a major milestone in terms of proving critical technologies towards the development of future unmanned aircraft.
- This is a significant step towards self-reliance in strategic defence technologies.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: CDRI
Mains level: Disaster management
The Union Cabinet has approved the categorization of the Coalition for Disaster Resilient Infrastructure (CDRI) as an ‘International Organization’.
What is the news?
- The cabinet also signed as the Headquarters Agreement (HQA) with CDRI for granting it the exemptions, immunities and privileges as contemplated under the United Nations (Privileges & Immunities) Act, 1947.
- This will provide CDRI an independent and international legal persona so that it can efficiently and effectively carry out its functions internationally.
What is CDRI?
- The CDRI is an international coalition of countries, UN agencies, multilateral development banks, the private sector, and academic institutions that aim to promote disaster-resilient infrastructure.
- Its objective is to promote research and knowledge sharing in the fields of infrastructure risk management, standards, financing, and recovery mechanisms.
- It was launched by the Indian PM Narendra Modi at the 2019 UN Climate Action Summit in September 2019.
- CDRI’s initial focus is on developing disaster-resilience in ecological, social, and economic infrastructure.
- It aims to achieve substantial changes in member countries’ policy frameworks and future infrastructure investments, along with a major decrease in the economic losses suffered due to disasters.
Its inception
- PM Modi’s experience in dealing with the aftermath of the 2001 Gujarat earthquake” as the chief minister led him to the idea.
- The CDRI was later conceptualized in the first and second edition of the International Workshop on Disaster Resilient Infrastructure (IWDRI) in 2018-19.
- It was organized by the National Disaster Management Authority (NDMA), in partnership with the UN Office for Disaster Risk Reduction (UNDRR), the UN Development Programme, the World Bank, and the Global Commission on Adaptation.
Its diplomatic significance
- The CDRI is the second major coalition launched by India outside of the UN, the first being the International Solar Alliance.
- Both of them are seen as India’s attempts to obtain a global leadership role in climate change matters and were termed as part of India’s stronger branding.
- India can use the CDRI to provide a safer alternative to China’s Belt and Road Initiative (BRI) as well.
Why designated as International Organization?
- Deputing experts to other countries
- Deploying funds globally and receive contributions from member countries
- Making available technical expertise to assist countries
- Imparting assistance to countries in adopting appropriate risk governance arrangements and strategies for resilient infrastructure
- Aligning with the Sustainable Development Goals (SDGs), the Paris Climate Agreement and the Sendai Framework for Disaster Risk Reduction
- Leveraging international engagement to foster disaster-resilient infrastructure at home; and,
- Providing Indian scientific and technical institution as well as infrastructure developers an opportunity to interact with global experts.
Try this PYQ:
Q.Consider the following statements:
- Climate and Clean Air Coalition (CCAC) to Reduce Short Lived Climate Pollutants is a unique initiative of G20 group of countries
- The CCAC focuses on methane, black carbon and hydrofluorocarbons.
Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Post your answers here.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Rath Yatra
Mains level: NA
Lakhs of devotees thronged the coastal town of Puri town to witness the annual Rath Yatra with three decorated chariots of sibling deities Lord Balabhadra, Lord Jagannath and Devi Subhadra towed in front of the 12th century Shree Jagannath Temple.
About Jagannath Rath Yatra
- Ratha Jatra, the Festival of Chariots of Lord Jagannatha is celebrated every year at Puri, the temple town in Orissa, on the east coast of India.
- It involves a public procession with a chariot with deities Jagannath (Vishnu avatar), BalaBhadra (his brother), Subhadra (his sister) and Sudarshana Chakra (his weapon) on a ratha, a wooden deula-shaped chariot.
- The huge, colourfully decorated chariots, are drawn by hundreds and thousands of devotees on the bada danda, the grand avenue to the Gundicha temple, some two miles away to the North.
- It attracts over a million Hindu pilgrims who join the procession each year.
Back2Basics: Puri Temple Architecture
- Jagannath Temple is a very big temple and covers an area of 37000m2. The height of the outer wall is 6.1m.
- It is surrounded by a high fortified wall 6.1 m high is known as Meghanada Pacheri.
- The main portion of the temple is also surrounded by a wall known as Kurma Bheda.
- The temple is built in Rekha Deula style and has four distinct sectional structures, namely –
- Deula, Vimana or Garba griha (Sanctum sanctorum) where the triad deities are lodged on the ratnavedi (Throne of Pearls)
- Mukhashala (Frontal porch)
- Nata mandir/Natamandapa, which is also known as the Jagamohan (Audience Hall/Dancing Hall), and
- Bhoga Mandapa (Offerings Hall)
Try this question from CSP 2019:
Q.Building ‘Kalyaana Mandapas’ was a notable feature in the temple construction in the kingdom of-
(a) Chalukya (b) Chandela (c) Rashtrakuta (d) Vijayanagara
Post your answers here.
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