Read The Hindu Notes of 17th September 2018 for UPSC Civil Service Examination, State Civil Service Examination and other competitive Examination
Where goes the rupee?
There are several moderate but effective instruments available to the government to help the rupee find an equilibrium
The travails of the rupee have dominated newspaper headlines over the last fortnight. Its value has fallen precipitously against the dollar, and is now hovering around the 72 level; it was just under 64 at the beginning of the year. There is now intense debate in the media on whether the Reserve Bank of India (RBI) should step in and take steps to defend the dollar.
The U.S. honeypot
Finance Minister Arun Jaitley has rightly observed that external factors are the cause. In particular, global capital and perhaps currency speculators have been flocking to the American economy. This is not really surprising because the U.S. economy has become a very attractive option. Some months ago, U.S. President Donald Trump announced a massive decrease in corporate tax rates. More recently, the U.S. Federal Reserve has also increased interest rates. The icing on the global investors’ cake is the booming U.S. economy.
Not surprisingly, the dollar has appreciated sharply against practically all other currencies too. For instance, it has moved up against both the euro and the pound. Developing economies are typically even harder hit since global portfolio investors tend to withdraw from these markets, perhaps because their economic or political fundamentals are relatively more unstable. Countries such as Turkey and South Africa have experienced significantly higher rates of devaluation than India.
A long time ago, the ‘standard’ or textbook prescription for countries with severe balance of payments deficits was to devalue their currencies. The underlying rationale was that devaluation decreases the price of exports in foreign countries and so provides a boost to exports by making them more competitive. Correspondingly, imports become more expensive in the domestic economy, in turn reducing the volume of imports. Unfortunately, this seemingly plausible reasoning does not always work. For instance, if several countries are devaluing at the same time — as it seems to be happening now — then none of these countries benefit from their exports being cheaper abroad. In other words, there may not be any surge in Indian exports following the current round of devaluation. Neither will there be a huge fall in imports. Crude oil is by far the biggest item in the list of Indian imports, and this is price-inelastic. Imports from China now constitute a tenth of overall imports. Since the yuan has also depreciated against the dollar, there is not much reason to believe that Chinese imports will be costlier than earlier.
Ripple effects
Fortunately, the RBI has a huge stock of foreign exchange reserves and so the balance of payments situation is not (at least in the immediate future) the main cause of anxiety for the steady decline in the value of the rupee. What must concern policy-makers is that the slide in the rupee can have adverse effects on the domestic economy. For instance, the surge in the landed price of crude oil has already resulted in a steep rise in the prices of petroleum and diesel. Diesel price hikes increase the cost of transportation of goods being transported by road. Unfortunately, many food items fall in this category. Obviously, any increase in food prices must set alarm bells ringing in the Union Finance Ministry. The devaluation will also increase prices of imported inputs, particularly those for which there are no alternative domestic sources of supply. This can have some effect on output expansion. Many domestic companies that have taken dollar loans will also face significantly higher servicing costs.
Corrective options
What are appropriate policy responses in such a situation? Should the monetary and fiscal authorities sit tight, hope and pray that self-correcting mechanisms will gradually cause the rupee to appreciate against the dollar? Or should the RBI and the government come out with guns blazing? Certainly, neither the government nor the RBI can afford the option of inaction. The other extreme of knee-jerk, overkill options must also be avoided. Luckily, there are several moderate but effective instruments available to the government.
Consider, for instance, the problems caused by the spiralling prices of petroleum products. Both the Central and State governments earn huge revenues from excise duties and value-added tax (VAT) on petrol and diesel. In fact, excise duties were raised in the recent past by the Central government when crude oil prices were low, merely as a revenue-gathering device. Now that the rupee cost of crude has shot through the roof, the Centre should certainly lower duties. Rates of VAT should also be lowered by State governments. A small reduction in VAT may even be revenue neutral since VAT is levied as a percentage of price paid by dealer. Some State governments have done so. However, the Centre and most States are busy passing on the buck, because no one wants to part with tax revenue.
The RBI has several policy options. It could, of course, take the most direct route — of offloading large amounts of dollars. This would increase the supply of dollars and so check the appreciation of the dollar, but at the cost of decreased liquidity. Clearly, this weapon has to be used with caution. Of course, the RBI does intervene in the foreign exchange market from time to time to manage a soft landing for the rupee, and this has to continue.
The Central bank now has an explicit inflation target of 4%, a level that is almost certain to be breached if the rupee remains at its current level. This is very likely to induce the Monetary Policy Committee (MPC) of the RBI to raise interest rates again in order to dampen inflationary tendencies. But, the MPC must moderate any rate increase. Any sharp increase has an obvious downside risk to it — any increase in interest rates can have an adverse effect on growth. This can actually backfire if profitability of companies goes down. Any ‘big’ negative change in profitability may make foreign portfolio investors pull out of Indian stocks and actually exacerbate the rupee’s woes.
The NRI route again
Perhaps the best option for the government would be to borrow from non-resident Indians (NRIs) by floating special NRI bonds that have to be purchased with foreign exchange, and with maturity periods of at least three years. Interest rates have to be attractive, and investors must of course be protected from exchange rate fluctuations. Since interest rates in countries like the U.K. and even the U.S. are quite low, the promised interest rate does not really have to be very high by prevailing Indian levels.
This has been tried before, the last time being in 2013 when too the rupee was under stress. It worked then and there is no reason why it should not work again.
Hopefully, the storm will pass over and the rupee will soon find an equilibrium. In the near future, the rupee is unlikely to return to anything below 70 to the dollar. This should not be cause for much concern because the economy will adjust to the lower value of the rupee. What must be avoided is any sharp fluctuation in the exchange rate — in either direction. Much will depend on whether the economy can continue to grow at a reasonably high rate, for this will steady the nerves of portfolio investors and prevent them from pulling out of the Indian stock market.
Bhaskar Dutta is Professor, Ashoka University. The views expressed are personal
Covering the last field
Reinvigorate the crop insurance scheme to provide social protection to every farmer
Excess rains and floods in Kerala, deficit rainfall in eastern and north-eastern India, and associated large-scale crop losses have again highlighted the need for providing social protection to poor farmers. A highly subsidised Pradhan Mantri Fasal Bima Yojana (PMFBY) was launched in 2016 to provide insurance to farmers from all risks. Aiming to reduce basis risk and premium burden of the farmers, the scheme’s total expenses today are almost ₹30,000 crore. In comparison to earlier schemes, the PMFBY is more farmer friendly, with sums insured being closer to the cost of production. The scheme’s linkage with parallel programmes like the ‘Jan Dhan Yojana’ and ‘Digital India’ makes it a truly inclusive and welfare-based scheme. The scheme therefore led to increased coverage of 5.7 crore farmers in 2016 and the sum insured crossed ₹200,000 crore. However, notwithstanding its ambition and intent, the scheme since its operation has been scrutinised more for its misses than its hits.
Some handicaps of the scheme are: outmoded method of crop loss assessment; inadequate and delayed claim payment; high premium rates; and poor execution. Consequently, in 2017, the expansive coverage of the scheme suffered some setback as seen in a drop of nearly one crore farmers in enrolment (about 17%). Such shortcomings have inspired recent announcements such as that of Bihar to start its own scheme, the “Bihar Rajya Fasal Sahayata Yojna”.
Giving it teeth
In order to make the PMFBY a sustained developmental action for a comprehensive climate risk protection for every Indian farmer, the following action points are suggested.
Faster and appropriate claim settlement: Timely estimate of loss assessment is the biggest challenge before the PMFBY. The Achilles heel of the PMFBY (and most likely for the Bihar variant) is the methodology deployed for crop loss assessment: the crop cutting experiments (CCEs). CCEs are periodic exercises conducted nationwide every season to determine crop yields of major crops. Sample villages are chosen through scientifically designed surveys, and crops are physically harvested to determine yields. These experiments require huge capital and human resources and have to be done simultaneously all over India in a limited time. Therefore, they have large errors.
To improve the efficacy of the PMFBY, technology use must be intensified. With options such as available today, such as detailed weather data, remote sensing, modelling and big data analytics, the exercise of monitoring crop growth and productivity can be not only more accurate and efficient but also resource saving. Hybrid indices, which integrate all relevant technologies into a single indicator, are good ways to determine crop losses. Their deployment can assist in multi-stage loss assessment and thus provide farmers with immediate relief for sowing failure, prevented sowing and mid-season adversity apart from final crop loss assessment.
The whole process of monitoring can be made accessible and transparent to farmers, policy-makers and insuring agencies alike through an online portal. Immediate claims settlements can be made once this is linked to the process of direct benefit transfers.
Universal and free coverage for all smallholders: Farmers’ awareness about the scheme and crop insurance literacy remain low in most States, especially among smallholders in climatically challenged areas in most need of insurance. The complicated enrolment process further discourages farmers. To increase insurance coverage we should think of a system whereby farmers do not need to enrol themselves and every farmer automatically gets insured by the state. This will provide social protection to every farmer if the full premium of smallholders is also paid by the state. It is not an expensive proposition. Currently, farmers pay a capped premium rate of 1.5-2%, while the rest is shared equally between the States and the Centre. At this rate, if today all 14 crore farmers were to be insured under the PMFBY, they would need to pay the premium close to ₹10,000 crore annually. If no premium is charged from marginal and small farmers (who own less than 2 hectares and account for 12 crore out of 14 crore) and only partial subsidy on actuarial premium is given to others, almost the same revenue can be collected, but in the process, coverage can go up almost 100%. Such differential subsidies are already applicable in urban areas for water and electricity.
Improved and transparent insurance scheme design: Insurance companies are supposed to calculate actuarial rates, and based on tenders, the company quoting the lowest rate is awarded the contract. We have seen rates quoted by companies for the same region and for the same crop varying from 3% to more than 50%. Such large variations are irrational. One reason for such inflated premiums is lack of historical time series of crop yields at the insured unit level. To minimise their risks caused by missing data and to account for other unforeseen hazards, insurance companies build several additional charges on pure premium. Science has the capacity today to characterise risks and reconstruct reasonably long-time series of yields. The premium rates, and hence subsidy load on the government, can come down significantly if we make greater use of such proxies and appropriate sum insured levels.
If such a comprehensive social protection scheme is implemented, there would be opportunities for further rationalisation of subsidies. The government today spends more than ₹50,000 crore annually on various climate risk management schemes in agriculture, including insurance. This includes drought relief, disaster response funds, and various other subsidies. Climate-risk triggered farm-loan waivers are an additional expense. All these resources can be better utilised to propel farm growth.
Pramod Aggarwal is Programme Leader-South Asia, of the CGIAR Programme on Climate Change, Agriculture and Food Security
The power of Kudumbashree
The Kerala model can be implemented across India with the same secular and gender-sensitive spirit
Kumari died on September 1. She had contracted leptospirosis while doing relief work in Kerala after the floods, away from her own home which had not been affected. She was a health volunteer and prominent member of the Kudumbashree Mission in her panchayat in Ernakulum district. Kumari’s work and life symbolises the spirit of Kerala reflected in the inspirational way in which the people of the State have faced the worst disaster in a century.
United in relief work
Among the heroic stories of selfless community service are those of the Kudumbashree women, who have perhaps not got the attention they deserve. The attention is necessary not just to accord women relief helpers like Kumari recognition and appreciation, but also to understand how such an enormous, effective and well-planned intervention could be made across the State by women through their own initiatives.
One got a glimpse of the process at a district-level informal review meeting of around 60 key coordinators of Kudumbashree in Kozhikode, which suffered landslides and heavy rain. Women from working class families, women from the lower middle class and middle class, Muslim women and Dalit women were present. They were a microcosm of the 2.43 lakh groups functioning across the State.
Within a day or two of the deluge, the Kudumbashree members started contacting each other to discuss what they should do. They divided themselves into squads of five to six members and started relief work. They were helped by the district coordination team of five women, who were on deputation to the Kudumbashree Mission from the government. Within a short span of time, there were 7,000 women volunteers engaged in various tasks. When the situation in their district improved, some of them set out to neighbouring districts like Thrissur and Wayanad to help. Many of these women have family responsibilities, but they convinced their families of the urgency of the work at hand and set off with all the equipment required for cleaning which they themselves had collected through sponsorships. Some of them went to relief camps to distribute relief material; others went to tribal areas which had been badly affected by landslides.
Volunteers Zarina and Sudha said: “We saw mounds of foul-smelling black mud piled outside the houses blocking the entrances and, in some cases, partially covering the houses. There were dead animals too. At first we were looked at with suspicion. But when we started working, we saw relief on the tribal women’s faces. We all worked together. We stood, sometimes knee-deep, in the filthy mud and began removing it. It was difficult work and one group could clean only a few houses in a day. We knew we could fall ill or be stung by poisonous insects or snakes, but we were not afraid. Tribal women and members of Kudumbashree from nearby areas also joined us.”
Like Zarina and Sudha, around 4,00,000 women of Kudumbashree self-mobilised across the State to do relief work, including collecting, packing and distributing relief material, cleaning up public spaces and private homes, and counselling affected families and putting them in touch with concerned authorities. The Kudumbashree State Mission estimates that Kudumbashree groups cleaned up 11,300 public places including schools, hospitals, panchayat buildings, and anganwadi centres, and two lakh houses. Around 40,000 affected families received counselling and information assistance from Kudumbashree groups. To provide shelter to families rendered homeless by the floods, 38,000 Kudumbashree members opened up their own homes. Kudumbashree members also donated ₹7.4 crore to the Chief Minister’s Distress Relief Fund. This scale of voluntary relief work by women is quite unprecedented by any standard.
A unique model
How were these women motivated? The Kudumbashree model may provide some answers. Started in 1998 by the CPI(M)-led government, it was envisioned as a part of the People’s Plan Campaign and local self-governance, with women at the centre of it. In its conceptualisation, it was markedly different from the self-help group (SHG) movements in many parts of India. While the commonality with other States was in the thrift and credit activities at the grassroots level through the formations of saving groups, the structures differed.
Kudumbashree has a three-tier structure. The first is the basic unit — the neighbourhood groups (NGs). There could be several such units within a ward and they are networked through the area development societies (ADS). All ADSs are federated through the community development societies (CDS). There are core committees of elected coordinators at all three levels — at least five in each NG; seven or more at the ADS level, depending on the number of NGs; and around 21 at the CDS level. Unlike in other States, all the coordinators are elected in Kerala. Each Kudumbashree member has a vote. Direct elections for the NG coordinators are held every three years. These people, in turn, elect the coordinators of the ADS who elect the members of the CDS. A majority of the members of the coordinator groups have to belong to women below the poverty line or from comparatively poorer sections. There is reservation for Dalit and Adivasi women. At the district and State levels, employees/officers of the government are appointed on deputation to help the Kudumbashree groups. Thus, there is a socially representative leadership.
This secular composition acts as a facilitator for the secularisation of public spaces. In other States, SHGs came to be dominated by women from better-off families or from powerful castes. This led to unhealthy hierarchies in which poorer women and Dalit women were denied decision-making powers. Over the years, as women dropped out from these sections for a number of reasons, the social potential of the SHGs to challenge dominant structures of gender bias at the local level weakened.
The micro-enterprises undertaken by the women NGs in Kerala also strengthen community bonds. These include organic vegetable growing, poultry and dairy, catering and tailoring. The concepts and practices have expanded over the years. Today the community farms run by Kudumbashree groups are acknowledged as a critical avenue for the rejuvenation of agricultural production in Kerala. Kudumbashree training courses are quite comprehensive and include women’s rights, knowledge of constitutional and legal provisions, training in banking practices, and training in skills to set up micro-enterprises.
The Kudumbashree groups are therefore often seen as a threat by those who would like women to adhere to socially conformist roles. In earlier years, women of the Kudumbashree groups had to organise protests when the Congress-led government drastically cut the budgetary allocation of funds and floated a parallel Janashree project. The BJP and RSS have also floated parallel groups, but so far these groups have not been able to make much headway.
Although conceived, initiated and helped by the Left Front governments and supported by Left-oriented organisations, the Kudumbashree groups are not affiliated to any political party. This ‘Made in Kerala’ model can be implemented across India, if it is done with the same secular and gender-sensitive spirit.
Brinda Karat is a member of the CPI(M) Polit Bureau and a former Rajya Sabha MP
0Comments