Categories
9 PM Daily NEWS Brief

9 PM Daily Brief – 8th December 2016



  • Front Page / NATIONAL(The Hindu)

  1. RBI keeps base rate unchanged
  2. SC seeks Parliamentary panel report on Lokpal amendments
  • Editorial/OPINION(The Hindu)

  1. The Reserve Bank of India’s big surprise
  2. Demonetisation is for the long run
  • ECONOMY(The Hindu)

  1. Rural India hit most by cash crunch
  2. Notes withdrawal will not impact RBI balance sheet’
  • Indian Express

  1. The colour of polls
  2. Let the numbers speak
  • Live Mint

  1. India’s gains from lower oil prices at risk
  2. Regulating digital payment industry

Front Page / NATIONAL(The Hindu)


[1] RBI keeps base rate unchanged


 The Hindu

Context

Lowers the Gross Value Added growth projection for 2016-17 to 7.1 per cent from 7.6 per cent.

What is Gross Value Added growth?

It is the measure of the value of goods and services produced in an area, industry or sector of an economy.

  • In national accounts GVA is output minus intermediate consumption

What has happened?

In the 5th bimonthly monetary policy review,

  • Policy rate unchanged: RBI decided to hold the policy rate at 6.25 per cent citing uncertainties emanating from both domestic and global developments
  • CRR requirement removed: RBI has withdrawn the 100 per cent cash reserve ratio requirement that was imposed end of November. The central bank said the decision to withdraw 100 per cent CRR requirement was taken as the government had announced Rs 6 lakh crore of bonds, issued under market stabilization scheme, to clean up excess liquidity

What is Market Stabilization Scheme (MSS)?

The MSS scheme was launched in April 2004 to strengthen the RBI’s ability to conduct exchange rate and monetary management. The bills/bonds issued under MSS have all the attributes of the existing treasury bills and dated securities. These securities will be issued by way of auctions to be conducted by the RBI. The timing of issuance, amount and tenure of such securities will be decided by the RBI.

The securities issued under the MSS scheme are matched by an equivalent cash balance held by the government with the RBI. As a result, their issuance has a negligible impact on the fiscal deficit of the government.

Read more: MSS


[3] SC seeks Parliamentary panel report on Lokpal amendments


 The Hindu

Context

The Supreme Court on Wednesday directed the government to place on record a Parliamentary Standing Committee report suggesting amendments to the Lokpal law

SC is pushing for this reform

One of the amendments the Supreme Court has pushed for is to

  • Make the leader of the single largest opposition party in the House a part of the high-profile Search Committee to appoint the Lokpal in case there is no recognised Leader of the Opposition in the Lok Sabha. Currently, the 16th Lok Sabha has no recognised Leader of the Opposition (LoP)

Backdrop

SC was hearing the petition filed by NGO Common Cause seeking implementation of Lokpal law.

  • The Lokpal and Lokayuktas Act has not seen the light of day since it was made law in 2013. Subsequent amendments to the Act are hanging in limbo

Future hearing

A Bench led by Chief Justice of India T.S. Thakur asked the government to detail the changes required to make the Lokpal office functional. It scheduled the petition for hearing on December 14.

Note: This news is in continuation of the news published earlier in the Hindu on 24th November. We have covered that news in Brief dated 24th November 2016. Please go through the previous article first, to better appreciate current news article.


Editorial/OPINION(The Hindu)


 [1] The Reserve Bank of India’s big surprise


 The Hindu

Context

The Reserve Bank of India has surprised markets by opting to keep benchmark interest rates unchanged and cutting the outlook for full-year growth in the wake of last month’s decision to withdraw legal tender status to high denomination currency notes.

News: In the 5th bimonthly monetary policy review, RBI has kept interest rate unchanged

Reasons cited by RBI for doing so are,

  • The imminent tightening of U.S. monetary policy: There are expectations that US Federal Reserve will raise interest rates
  • The rise in oil prices
  • Domestic inflation trends

[2] Demonetisation is for the long run:


 The Hindu

Context

Author, an officer on special duty at NITI Aayog, tries to build a case for visualizing the benefits of demonetisation in the long run rather than focusing on short term adversarial impact.

Terms used: –

Crony Capitalism: It is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism.

In the first few paragraphs author has stated that the critics of demonetisation are absolutely right about the adverse short-term impact of the policy but the real impact of demonetisation must be weighed in the medium/long term

Stamping out cronyism

Author states that 25 years of liberalisation of Indian economy have resulted in far greater benefits than 4 and a half decades of socialism but with gradual opening of the markets, a problem was also introduced, that of crony capitalism.

Public perception: For demonetization

Author states that,

  • Public will see any pro-market move or policy as pro-crony unless government is firm on its agenda of weeding out crony capitalism from the economy. Hence, author states, the popularity of the demonetization move amongst public despite the hardships being faced is due to the fact that the move is perceived as a decisive act against those who made their money unscrupulously and then chose to hide it

 Making a case for free market

  • Before making a case for free market, our politicians have to show that they can effectively curb crony capitalism
  • Free markets and capitalism will get mass public support if everyone is on a level playing field and when the rich/well off pay their taxes which can then be used to invest in those left behind so that they too have an opportunity to rise

Way ahead

Author states that it is only a rule-based capitalism without crony capitalists that combined with a clean government can transform India

Conclusion

Author concludes on a positive note by stating that demonetization might not alter the behavior of entire dishonest community out there but it will certainly nudge a part of it in the right direction. Moreover, it will further bridge the trust deficit that prevails between the government and the governed.


ECONOMY(The Hindu)


[1] Rural India hit most by cash crunch


 The Hindu

Context

Article throws a light on the hardships faced by rural banks as they allege that Public sector banks are favoring their own branches in the urban sector vis-à-vis cash supply

Tough times for Rural banks

  • Regional Rural Banks (RRBs) with 25 crore accounts across the country received just about Rs.8000 crore of fresh currency from November 10 to November 30 which works out to a little less than Rs.350 per account holder

Steps taken to ease the situation

  • On November 21, Finance Minister asked bankers to set aside Rs.35,000 crore for rural India by December 30 to provide credit to farmers for the Rabi crop season
  • RBI advisory: RBI had also advised banks to ensure adequate cash supply for all RRBs, rural branches of commercial banks and branches located in Agricultural produce market committees (APMCs) to enable smooth procurement
  • Buying seeds with old notes: The Centre acceded to the rural bank unions’ demands to allow farmers to buy seeds with old Rs.500 notes and is also considering a demand to raise the credit limit under Kisan credit cards in a bid to compress cash demand for now.

[2] Notes withdrawal will not impact RBI balance sheet’


 The Hindu

Context

The currency note withdrawal will have no impact on the balance sheet of the Reserve Bank of India (RBI), asserted Governor Urjit Patel.

Speculation

There has been speculation that RBI could gain following the demonetisation exercise with its liabilities shrinking, as the black money in the system was not expected to be deposited in bank accounts. Every year, RBI transfers its surplus to the government.

  • It had been widely speculated that with the windfall gain, RBI could pay a special dividend to the Government. Reports have also suggested that the RBI Act may have to be amended if the Government wanted such a dividend.

Read More: Impact of demonetization on RBI’s Balance sheet, No bonanza for the government from cash destruction


Indian Express


[1] The colour of polls


 Indian Express

Context

PM’s move against black money prepares the ground for reforms of electoral finance.

Issue: Electoral reform

Few positive developments having a bearing on electoral reform

Curbing illicit electoral finance

It is a known thing in Indian electoral scene that political parties use money to bribe voters.

  • Earlier, it used to be just a few days before the elections, but ever since the Election Commission of India (ECI) put together expenditure control mechanisms in 2010, followed by a crackdown on unaccounted money as soon as the model code comes into play, political parties changed their strategy and advanced the activity by a few weeks. Since elections to five state assemblies are round the corner, this is the time when the money would have been moving
  • Some experts argue that demonetization was effectively targeted at this money flow and when government withdrew the legal tender on November 8 it turned this money into junk

Remove Exemption

Author points out that one of the subsidiary effect of demonetization has been the move towards digital payment mechanisms. Every citizen is being told to move to e-wallet and e-banking systems.

  • In such a scenario, the exemption allowed to political parties wherein the donations below Rs 20000 are not required to be paid “by-cheque only” should also be done away with as this is the root cause of 80 per cent of illegal political funding which all political parties show as cash donations.

PM’s directive

Author points out that the 3rd positive development has been PM’s directive to his party legislators to disclose all their bank transactions since November 8

Benami Act

Another positive development has been the passing of an Act to curb benami property deals

Law ministry rejects ECI’s proposal

In the context of these developments, one report came as a shock. This was the law ministry rejecting the ECI’s proposal to give it permanent legal powers to cancel polls on credible evidence of the use of black money.

ECI’s efforts to curb black money

Apart from repeatedly writing to government suggesting electoral reforms,

  • ECI set up an expenditure monitoring division in 2010

Suggested reforms

Author suggests electoral reforms,

  1. Ceiling for electoral expense: Prescribe a ceiling for political parties’ expenditure, like that for the candidates
  2. State funding: Consider state funding of political parties (not elections) with independent audit and a complete ban on private donations
  3. Bring political parties under RTI: Enforce internal democracy and transparency in the working of the political parties. Bring them under the RTI
  4. National Election Fund: Set up an independent national election fund where all tax-free donations could be made. It could be operated by the ECI or any other independent body
  5. Legally empowering ECI: Accept the ECI’s proposal to legally empower it to cancel elections where credible evidence of abuse of money has been found
  6. Decriminalization of politics: Debar persons against whom cases of heinous offences are pending in courts from contesting elections
  7. De-registering political parties: Empower the ECI to de-register those political parties which have not contested any election for 10 years and yet benefited from tax exemptions
  8. Making paid news an electoral offence: Make paid news an electoral offence with two years’ imprisonment by declaring it a “corrupt practice” (Sec 100 RP Act) and “undue influence” (Sec 123(2))

New Delhi Declaration

In December 2015, the ECI had organised a conference of SAARC countries in collaboration with the International Institute of Democracy and Electoral Assistance-IDEA on the scourge of money power in elections.

  • Resolution: The conference adopted a historic New Delhi Declaration laying down the guiding principles of transparency of electoral finance

Member countries of the region and IDEA are trying to get this declaration widely accepted. India, considered a gold standard of elections, has a moral responsibility to lead from the front.


[2] Let the numbers speak


 Indian Express

Context

The discussion on the fall in employment after the November 8 demonetisation relies on anecdotal evidence.

In the first two paragraphs author states that policymaking in India suffers from the lack of credible data

  • Policy for 2016 can’t be devised on the basis of a census or survey conducted in 2011-12

Author points out that there are only two surveys at present that can be considered respectable meaning surveys that have a proper sample design and that are spread over all states

  • CMIE in collaboration with the BSE
  • PRICE (People Research of India’s Consumer Economy)

PRICE survey

Author cites data from the survey PRICE did in August 2016interviewing more than 300,000 households. It also did a survey in 2014. Consequently author compares the data from two surveys.

Note: Some of the data cited can be utilized for exam purpose but remembering all of it not possible and not required too.

CMIE surveys

  • Consumer sentiment
  • Unemployment

Unemployment rate: No impact of demonetization

Only anecdotal evidence is being cited to ascribe everything after November 8th to demonetization but that is not the case. Author cites unemployment rate to prove his point.

  • All-India unemployment rate: Author states that the unemployment rate last updated on November 30th is around 5.69 per cent. This rate was 9.84 per cent on August 31, 8.97 per cent on September 30, 6.34 per cent on October 31
  • Rural unemployment rate: Author points out that rural unemployment rate has decreased like the all-India unemployment
  • Urban unemployment rate: For urban, the unemployment rate had declined to 6.89 per cent on October 31; it then rose to 7.05 per cent on November 30.

Hence, till the end of November, this indicator doesn’t reveal a great loss in jobs, either rural or urban

Conclusion

Author concludes by saying that any claim made should be backed by data and not by anecdotes as has been done after Nov 8

Read More: CMIE, BSE, PRICE


Live Mint


[1] India’s gains from lower oil prices at risk


 Live Mint

Context

In this article author talks about the impact of the rise in crude oil price after the OPEC deal on Indian economy

Author begins his article by stating that as public discourse right now is focussed on impact of demonetization move of the government, there is another matter which India should be concerned about, i.e. risk posed by prospective increase in crude oil prices in the coming months.

Why bother?

Because crude oil price increase will severely impact the inflation target of RBI, increase government spending and reduce private consumption

Why an increase in crude oil prices?

Prices have already spiked after the Organization of the Petroleum Exporting Countries (OPEC) on 30 November decided to cut production for the first time in eight years.

  • OPEC will reduce output by about 1.2 million barrels per day from January 2017
  • Non-OPEC members, including Russia, are expected to cut production by another 600,000 barrels per day

High prices not sustainable

Many analysts believe that high oil prices are not sustainable because of the following reasons,

  1. Weakened global demand: Global demand continues to remain weak and growth is unlikely to accelerate in the near term
  2. Shale gas will become attractive: At higher levels, US shale oil production, which suffered because of lower prices, will once again become attractive
  3. Monitoring of Non-OPEC oil producing countries is difficult: OPEC members have a tendency to cheat in order to take advantage of higher prices. Even if OPEC is able to keep a watch on the production levels of its members, it will be difficult to track a non-member country like Russia.

India benefited from low oil prices

Author states that India benefited due to lower prices as it depends on imports to cover over 75% of its requirement. Low prices were beneficial in following ways,

  • Helped contain Current Account Deficit
  • Helped lower inflation
  • Increased government revenues (Govt sensing an opportunity imposed higher taxes on petroleum products) which narrowed down fiscal deficit

An increase in oil price will reverse the gains India made earlier.

 Effects of price rise

If oil prices rise,

  • Government may have to roll back a part of the tax hike on petroleum products which will affect its revenues
  • Private consumption could also get affected because of higher fuel bills
  • Widening of CAD: Higher oil prices will also widen the current account deficit (CAD) while the rupee has been under pressure because of a strengthening dollar
  • Profit erosion: Companies that benefited from lower oil prices may also see lowering of profits as passing higher input cost to the consumer could be difficult at this stage

Read More: OPEC deal, after two years, why an OPEC deal now? 


[2] Regulating digital payment industry


Live Mint

Context

The payments terrain should expand and be enabled by regulations to accommodate new kinds of participants in the system

Author states that in the light of recent demonetization move and the subsequent push for digital banking means that the digital transaction regulatory framework requires a comprehensive legal framework assessment.

Present situation

At present, RBI is the sole regulator for the payments industry space and derives its power to oversee the payments industry from the Payment and Settlement Systems Act (2007) and its accompanying regulations (2008). Several circulars and guidelines have been issued for the regulator to govern prepaid instruments, intermediaries and the payment system operator.

Steps taken by RBI

  • Exemption from KYC hurdles: RBI has exempted e-wallets & mobile banking from KYC compliance for transactions under Rs20000
  • Two factor authentication: RBI has relaxed the security measure of requiring two-factor authorization to only when one loads money from other banking instruments

 What is 2-factor authentication?

Two-factor authentication is a security process in which the user provides two means of identification from separate categories of credentials; one is typically a physical token, such as a card, and the other is typically something memorized, such as a security code

Example: A common example of two-factor authentication is a bank card: the card itself is the physical item and the personal identification number (PIN) is the data that goes with it.

Benefits: Including two elements makes it more difficult for someone to access the user’s bank account because they would have to have the physical item in their possession and also know the PIN.

Steps that RBI should take

  • Singling out important payment systems: Author states that RBI should single out critical payment systems so that in the event of a failure the shock is not transmitted further to the entire financial spectrum
  • Customer protection/guarantee fund: RBI should also set up a customer protection/guarantee fund so that of the largest participant in the payment industry fails, the end customer is protected. This will reduce needless litigation by customers to get their grievances redressed
  • Self-certification: The system participant should be encouraged to submit a self-certification assessing and disclosing the technical risks it faces at an enterprise level that can expand into systemic risks

 Conclusion

Author concludes by saying that evolution of payment systems is taking place and regulatory framework should also evolve simultaneously to accommodate these changes

 Read More: RBI relaxes 2-factor authentication norms, Payment Systems

Print Friendly