1. RBI raises rates, vows nimble policy
Policy repo rate raised by 50 basis points to 5.4%
With inflation remaining at ‘elevated levels’, the Monetary Policy Committee (MPC) of the Reserve Bank of India unanimously decided to raise the policy repo rate by 50 basis points (bps) to 5.4%.
“Inflation is projected to remain above the upper tolerance level of 6% through the first three quarters of 2022-23, entailing the risk of destabilising inflation expectations and triggering second round effects,” the MPC said in a statement, explaining the rationale for its decision on Friday. “Given the elevated level of inflation and resilience in domestic economic activity… further calibrated monetary policy action is needed to contain inflationary pressures, pull back headline inflation within the tolerance band closer to the target, and keep inflation expectations anchored so as to ensure that growth is sustained,” it added.
The MPC also said it would remain focused on “withdrawal of accommodation” to ensure that inflation remains within the target, while supporting growth.
The RBI retained its inflation and GDP growth projections for the current fiscal year ending in March 2023 at 6.7% and 7.2%, respectively.
Addressing a press conference, Governor Shaktikanta Das said the RBI would use a “whatever-it-takes” approach to ensure a safe and soft landing for the economy despite the uncertainties.
The policy response to the unfolding economic situation would be “calibrated, measured and nimble”, Mr. Das said.
“In an ocean of high turbulence… Indian economy is an island of microeconomic and financial stability,” Mr. Das asserted.
“Economic growth is resilient and all this [financial stability, microeconomic stability, resilience of growth] has become possible despite two Black Swan events [pandemic and Russia’s invasion of Ukraine] happening one after the other and despite multiple shocks,” Mr. Das said.
Observing that there were signs that Consumer Price inflation (CPI) had peaked and was expected to moderate going into the fourth quarter, Mr. Das said, “but inflation still remains at uncomfortable and unacceptably high levels.”
“And therefore, monetary policy has to act as there are also several uncertainties clouding the outlook,” he added.
Mr. Das said the excess liquidity in the system was being gradually brought down.
On the external sector, Mr. Das said the Current Account Deficit (CAD) would remain within manageable limits and the RBI had the ability to finance the CAD. “The forex reserves remain strong and RBI will effectively deal with excess volatility of the exchange rate and the umbrella remains strong,” he added.
Monetary Policy Committee
The Monetary Policy Committee (MPC) is a committee constituted by the Central Government and led by the Governor of RBI. Monetary Policy Committee was formed with the mission of fixing the benchmark policy interest rate (repo rate) to restrain inflation within the particular target level. The RBI governor controls the monetary policy decisions with the support and advice of the internal team and the technical advisory committee.
Initially, the main decisions related to interest rates were taken by the Governor of RBI alone before the establishment of the committee. MPC was constituted under the Reserve Bank of India Act, 1934 as an initiative to bring more transparency and accountability in fixing the Monetary Policy of India. MPC conducts meetings at least 4 times a year and the monetary policy is published after every meeting with each member explaining his opinions.
Use of Monetary Policy
- Monetary Policy is the process of regulating the supply of money in an economy by the monetary authority of the country.
- The Monetary Policy, generally, adjusts the inflation rates or interest rates to sustain the price stability and to maintain the predictable exchange rates with foreign currencies.
- The Reserve Bank of India is the central banking authority of India, which controls the monetary policy in conjunction with the central government’s developmental agenda.
- The Reserve Bank of India is authorized to make monetary policy under the Reserve Bank of India Act, 1934.
- Monetary policy is either contractionary or expansionary and is often seen separate from the fiscal policy which deals with taxation, spending by government, and borrowing.
- When the total money supply is increased rapidly than normal, it is called an expansionary policy, while a slower increase or even a decrease of the same refers to a contractionary policy.
Objectives of Monetary Policy
Monetary Policy was implemented with an initiative to provide reasonable price stability, high employment, and a faster economic growth rate. The major four objectives of the Monetary Policy are mentioned below:
- To stabilize the business cycle.
- To provide reasonable price stability.
- To provide faster economic growth.
- Exchange Rate Stability.
Instruments of Monetary Policy
There are both direct and indirect instruments used for implementing monetary policy. Few include:
- Repo rate
- Reverse Repo rate
- Liquidity Adjustment Facility (LAF)
- Marginal Standing Facility (MSF)
- Bank Rate
- Cash Reserve Ratio (CRR)
- Statutory Liquidity Ratio (SLR)
- Open Market Operations (OMOs)
- Market Stabilisation Scheme (MSS)
How was the Monetary Policy Committee formed?
Urijit Patel Committee first proposed the idea for the formation of a five-member Monetary Policy Committee. Later, the government proposed the setting up of a seven-member committee. MPC is assisted by the Monetary Policy Department (MPD) of the Reserve Bank in the formulation of the policy. The monetary Policy Committee came into force on 27th June 2016. The Financial Markets Operations Department (FMOD) operationalizes the monetary policy, mainly through day-to-day liquidity management operations.
Structure of the Monetary Policy Committee
- Monetary Policy Committee (MPC) was constituted as per Section 45ZB under the RBI Act of 1934 by the Central Government. The first meeting of MPC was conducted on 3rd October 2016 in Mumbai.
- The committee determines the policy interest rate required to achieve the inflation target.
- The MPC is required to meet at least four times in a year.
- The quorum for the meeting of the MPC is four members.
- Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.
- Once every six months, the Reserve Bank is required to publish a document called the Monetary Policy Report to explain the sources of inflation and the forecasts of inflation for 6-18 months ahead.
2. Edirorial-1: Lessons for India from the Taiwan standoff
New Delhi must note that Taiwan’s close economic links with China have not stopped Taipei from asserting its rights
The brief visit by the United States House Speaker, Nancy Pelosi, to Taiwan, against stern warnings issued by China, has the potential to increase the already deteriorating relationship between the U.S. and China, with major implications for Taiwan. For China, its claims about a rising superpower might ring hollow if it is unable to unify its claimed territories, in particular Taiwan. For the U.S., it is about re-establishing steadily-diminishing American credibility in the eyes of its friends and foes. For Taiwan, it is about standing up to Chinese bullying and making its red lines clear to Beijing. The crisis that began with the visit of Ms. Pelosi to Taipei is still unfolding and there is little clarity today on how it will wind down even though it is unlikely to lead to a full-scale invasion of Taiwan or a war between China and the U.S.
For those of us in India watching the events as they unfold around Taiwan, there are valuable lessons to be learnt. To begin with, consider this. A small island of 23 million people has decided to stand up to one of the strongest military and economic powers on the planet, braving existential consequences. India is a far more powerful nation armed with nuclear weapons and with a 1.4 million standing military against whom China has only marginal territorial claims. And yet, India continues to be hesitant about calling China’s bluff.
To be fair, there is growing recognition in New Delhi that it is important to meet the challenge posed by a belligerent China, but there appears to be a lack of clarity on how to meet this challenge. To that extent, the Taiwan crisis offers New Delhi three lessons, at the very least.
The most important lesson from the Taiwan standoff for policymakers in New Delhi is the importance of articulating red lines and sovereign positions in an unambiguous manner. New Delhi needs to unambiguously highlight the threat from China and the sources of such a threat. Any absence of such clarity will be cleverly utilised by Beijing to push Indian limits, as we have already seen. More pertinently, Beijing, like everyone else analysing the Indian reactions to the standoff at the Line of Actual Control (LAC) in 2020, realises that one of the major reasons behind New Delhi’s rather muddled articulation of the Chinese aggression two years ago is domestic political calculations.
Till date, India’s leadership has not clarified to the country what really went on at the border in 2020 and whether China continues to be in illegal occupation of Indian territory. When domestic political calculations prevent India’s leaders from acknowledging the China threat, it provides Beijing the cover of ambiguity to pursue its territorial claims vis-à-vis India.
Moreover, Chinese Psy-Ops will continue to exploit the absence of a national position or narrative in India about the threat that China poses. Even worse, ambiguous messaging by India also confuses its friends in the international community: If India does not clearly articulate that China is in illegal occupation of its territory, how can it expect its friends in the international community to support India diplomatically or otherwise? In other words, India’s current policy of ‘hide and seek’ vis-à-vis China amounts to poor messaging, and confusing to its own people as well as the larger international community, and is therefore counterproductive.
Appeasement is bad strategy
Taiwan could have avoided the ongoing confrontation and the economic blockade during Chinese retaliatory military exercises around its territory by avoiding Ms. Pelosi’s visit to Taipei, or perhaps even keeping it low key. Instead, it chose to go ahead with the visit, with high-profile meetings and statements in full public view, thereby making it clear to China that it is unwilling to back down from its declared aims, no matter what the consequences were. Appeasement of China, Taiwan knows, is not the answer to Beijing’s aggression.
China today is a revisionist power, challenging the regional order; is intent on using force to meet its strategic objectives, and is desirous of reshaping the regional balance of power to suit its interests. With such a power, appeasement might work in the short term, but will invariably backfire over the long term. If so, we in India may be guilty of playing into Chinese hands by committing four mistakes.
First, India’s policy of meeting/hosting Chinese leaders while the Chinese People’s Liberation Army (PLA) continue(d) to violate established territorial norms on the LAC is a deeply flawed one. Recall the stand-off at Demchok and Chumar during Chinese President Xi Jinping’s visit to India in 2014, and the visit of the Chinese Foreign Minister, Wang Yi, earlier this year, to India again, even as Chinese troops continue to be in occupation of Indian territory. While one could argue that diplomacy must go on despite the problems on the border, there is indeed a danger of Beijing viewing such diplomacy as examples of India’s acquiescence despite provocations.
The second mistake is unilaterally catering to Chinese sensitivities even during the standoffs between the two militaries. For instance, the parliamentary delegation visits and legislature-level dialogues between India and Taiwan have not taken place since 2017, coinciding with the Doklam standoff which took place that year. Why bother respecting Chinese political sensitives around Taiwan or Tibet when it is in illegal occupation of Indian territory, and seeks more territory from India?
The third mistake was the soft-peddling of the Quad (Australia, Japan, India and the United States) when China objected to it. During the 2000s, India (as well as Australia) decided to soft-peddle the Quad in the face of strong Chinese objections. It is only in the last two years or so that we have witnessed renewed enthusiasm around the Quad. In retrospect, appeasing Beijing by almost abandoning the Quad was bad strategy.
Perhaps the gravest mistake India has made has been the non-acknowledgement of the PLA’s intrusion into Indian territory in 2020, and its capture and occupation of Indian territory along the LAC since. Let us be clear: unwilling to acknowledge China’s illegal occupation of Indian territory along the LAC, for whatever reason, amounts to an ill-advised appeasement strategy, which must end.
It is often argued that the growing economic and trading relationship between India and China is reason enough to ensure that tensions between the two sides do not escalate, and that the two sides must find ways of co-existing peacefully. While it appears to be a sound argument, let me pose that argument somewhat differently: is the economic relationship reason enough for India to continue to ignore recurring Chinese incursions on the LAC and keep making territorial compromises? Put differently, given that the economic relationship is a two-way process and that, as a matter of fact, the trade deficit is in China’s favour, China too has a lot to lose from a damaged trade relationship with India. More so, if the Taiwan example (as well as the India-China standoff in 2020) is anything to go by, trade can continue to take place despite tensions and without India making any compromises vis-à-vis its sovereign claims.
Consider this. Mainland China is Taiwan’s largest trading partner, and China has an annual trade deficit of around $80 billion to $130 billion with Taiwan. More so, investments from Taiwan to China were to the tune of $198.3 billion by 2021, whereas investments from mainland China to Taiwan were only $2.5 billion from 2009 to 2021. In other words, Taiwan knows that despite the sabre-rattling by Beijing, given the economic interdependence between the two sides, China is unlikely to stop trading with Taiwan for, after all, China is dependent on the semiconductors produced in Taiwan in a big way.
In other words, the close economic relationship with China has not stopped Taiwan from asserting its rights, nor has it backed down under Chinese threats. So, should India, a far bigger economy and a military power, buckle under Chinese pressure worrying about the economic relationship with China? India for sure should do business with China, but not on China’s own terms.
3. Editorial-2: Addressing the challenges in new-age digital commerce
Online Dispute Resolution, or ODR, can help mitigate litigation risk and provide insights into consumer problems
India’s consumer behaviour has experienced a radical transformation at the most fundamental levels. The rise in smartphone use fuelled by affordable data plans has catalysed an online revolution in the country. The novel coronavirus pandemic has further accelerated the process of digital inclusion, and it is now not only routine to transact online and have food, personal care items or anything else delivered at the one’s doorstep, but it is also common to learn online, have medical consultations online, and even resolve disputes online.
These realisations have given India the opportunity to disrupt the status quo with its innovative abilities. Systems such as the Unique Identification Authority of India (UIDAI) and Aadhaar, the Unified Payments Interface (UPI) and the Ayushman Bharat Digital Mission have reengineered markets.
Despite the rapid advancement of digital platforms on the one hand and the pervasiveness of the Internet-enabled phone on the other, small enterprises such as local kirana stores have not gained from this. Online purchases from “near and now” inventory from the local store remain in a digital vacuum. This is because, to sell on numerous platforms, sellers must maintain a separate infrastructure, which only adds costs and limits participation. The distinct terms and conditions of each platform further limit the sellers’ flexibility. Consequently, small and medium-sized businesses have lost their freedom to choose and participate in the country’s e-commerce system at their will and on their terms. Alarmingly, centralising digital commerce transactions on a single platform creates a single point of failure.
Wider choice and access
Given this objective, the Department for Promotion of Industry and Internal Trade (DPIIT) of the Government of India established the Open Network for Digital Commerce (ONDC) to level the playing field by developing open e-commerce and enabling access to small businesses and dealers. The ONDC network makes it possible for products and services from all participating e-commerce platforms to be displayed in search results across all network apps. For instance, a consumer shopping for a product on an e-commerce app named “X” would also receive results from e-commerce app named “Y”, if both X and Y integrated their platforms with the ONDC. This achieves the dual objective of wider choice for consumers on the one hand and access to a wider consumer base for sellers on the other.
The ONDC began its pilot in five cities in April 2022, i.e., New Delhi, Bengaluru, Coimbatore, Bhopal and Shillong. Currently, the pilot has expanded to 18 cities, and there are immediate plans to add more cities. With India’s e-commerce industry set to reach $200 billion by 2027, this shift from a platform-centric paradigm to democratisation of the nation’s online market will catalyse the inclusion of millions of small business owners and kirana businesses.
Disputes will be the obvious by-product of this e-commerce revolution. Therefore, it is imperative to support this initiative with a modern-day, cost-effective, timely and high-speed dispute resolution system. The framework must adequately and efficiently cater to facets such as participants residing or operating in different geographic regions and the mass prevalence of low-value online transactions. Online Dispute Resolution, or ODR as it is popularly called, has the propensity to work alongside the incumbent setup and deliver quick, affordable and enforceable outcomes. The ODR is not restricted to the use of legal mechanisms such as mediation, conciliation and arbitration in an online environment but can be tailormade for the specific use case keeping the participants in mind. While the ODR commonly involves case management systems, integration of communication technologies such as email, SMS, WhatsApp, Interactive Voice Response, audio/video conferencing, overtime and with appropriate data sets in place, it can also involve advanced automation, the use of technologies such as artificial intelligence and machine learning to enable resolutions at the same time as it would take to initiate a transaction over the network.
From making dispute resolution simple to handling complex multi-party disputes; from 24×7 accessibility from the remotest regions to availability in regional languages; from enabling a safe and secure online infrastructure to ensuring minimal touchpoints, the ODR can not only digitise the entire value chain but can also facilitate an enhanced user experience.
Many e-commerce companies have turned to the ODR with the realisation that in order to maximise transactions it is important to ensure a positive dispute resolution experience. For example, the eBay Resolution Center uses the ODR and resolves over 60 million disputes between small traders every year through a platform that enables dealers and purchasers to directly communicate and, for the most part, without the assistance of a third party. Alibaba, one of the world’s largest retailers and e-commerce companies, too has adopted the ODR to resolve disputes arising out of transactions over the platform.
There is growing adoption
The ODR is no more a distant dream for India as well. Governments, regulators and private enterprises have been adopting and encouraging its use. For instance, the National Payments Corporation of India (NPCI) has mandated platforms in the UPI ecosystem to adopt the ODR for complaints and grievances connected to failed transactions. Ingram, SEBI SCORES (or the Securities and Exchange Board of India SEBI COm plaints REdress System), RBI CMS (or the Reserve Bank of India Complaint Management System), MahaRERA (or the Maharashtra Real Estate Regulatory Authority), MSME Samadhaan (or the Micro Small and Medium Enterprises Delayed Payment Monitoring System), and RTIOnline (or the Right to Information Online) are other examples of ODR systems that are widely used in the country.
The ODR will help mitigate litigation risk and provide valuable insights into problems faced by consumers. The courts and consumer forums can do away with matters which do not warrant their intervention, thus easing the judicial logjam. Consumers are provided with another choice for effective redress of their grievances, thereby building trust, confidence and brand loyalty. A dispute resolution framework that includes a customised ODR process can play a role in the network achieving its steep five-year target of adding $48 billion in gross merchandise value to India’s e-commerce market, a network of 90 crore buyers and 12 crore sellers with the least hiccups.
4. Editorial-3: A fresh opportunity
Bill’s withdrawal is a chance to check lacunae, but a data protection law brooks no delay
The stated reason for the Government’s withdrawal of the Personal Data Protection Bill, 2019, was that it will come up with a “comprehensive legal framework” on data privacy and Internet regulation. The Government has averred that a new draft will be in sync with the principles of privacy, in line with Supreme Court guidelines based on the landmark judgment on privacy, i.e., Justice K.S. Puttaswamy vs Union of India, and would consider the Joint Committee of Parliament’s recommendations on the framework to regulate the digital ecosystem. The 2019 Bill had been rightly criticised by stakeholders, including Justice B.N. Srikrishna — he chaired a committee of experts that had authored a draft bill in 2018 — for overemphasising the national security angle, among other reasons. The 2019 Bill diverged from the Srikrishna Committee Draft in the selection of the chairperson and members of the Data Protection Authority (DPA) that shall protect the interests of data principals, and in the leeway given to the Union government to exempt its agencies from the application of the Act. The 2018 draft Bill allowed for judicial oversight in the selection process for the DPA, while the 2019 Bill limited the composition to the executive. The 2018 Bill allowed for exemptions to be granted to state institutions from acquiring informed consent from data principals or to process data in the case of matters relating only to the “security of the state”; it also called for a law to provide for “parliamentary oversight and judicial approval of non-consensual access to personal data”. In contrast, the 2019 Bill added “public order” as a reason to exempt a government agency from the Act, besides only providing for these reasons to be recorded in writing.
By choosing to withdraw the Bill, it is unclear whether the Government would address the demand for a realignment of the legislation with the 2018 draft Bill that came about after extensive consultations with civil society. Or whether this would be more in line with the JPC report, which has also been criticised by civil society for retaining provisions that allow the Government access to private data of citizens without sufficient safeguards. Dissent notes to the JPC report, by Congress MP Jairam Ramesh for example, went on to criticise the leeway granted to the Government on exemptions and how the ground of “public order” and not “security of the state” was liable for misuse. It is not clear if the Bill’s withdrawal is linked to opposition to mandatory “data localisation” from multinational Internet companies. Meanwhile, the lack of a proper data protection law in the country is an anomaly when compared with major countries. If the Government is indeed committed to a comprehensive legal framework on data privacy and protection, it must revert to the baseline provided in the Justice Srikrishna Committee recommendations and enact a law within a reasonable timeline.
5. Editorial-4: Sticking to commitments
India must set an example by balancing energy use and climate goals
Ahead of the 27th Conference of the Parties of the UNFCCC (COP 27), in Sharm El-Sheikh, Egypt, in November, the Union Cabinet has approved India’s Nationally Determined Contributions (NDC), a formal statement detailing its action plan to address climate change. The 2015 Paris Agreement requires countries to spell out a pathway to ensure the globe does not heat beyond 2°C, and endeavour to keep it below 1.5°C by 2100. The subsequent COPs are a quibbling arena where countries coax, cajole and make compromises on the cuts they can undertake over multi-decadal timelines with the least impact on their developmental priorities. While the end product of the COP is a joint agreement, signed by all member countries, the real business begins after, where countries must submit NDCs every five years, mapping what will be done post 2020 to stem fossil-fuel emissions. India’s first NDC, in 2015, specified eight targets, the most salient of them being reducing the emissions intensity of GDP by 33%-35% (of 2005 levels) by 2030, having 40% of its installed electricity capacity sourced from renewable energy, and creating an additional carbon sink of 2.5-3 billion tonnes of CO2 equivalent through forest and tree cover by 2030. Being a large, populous country, India has high net emissions but low per-capita emissions. It has also, by participating in COPs for decades, made the case that the existing climate crisis is largely due to industrialisation by the U.S. and developed European countries since 1850. However, years of negotiations, international pressure and clearer evidence of the multi-dimensional impact from climate change have seen India agree to move away from fossil fuels over time.
At COP 26 in Glasgow in 2021, Prime Minister Narendra Modi laid out five commitments, or ‘Panchamrit’, as the Government references it, which included India increasing its non-fossil energy capacity to 500 GW by 2030 and achieving “Net Zero” by 2070, or no net carbon dioxide emitted from energy sources. However, the press statement on the Cabinet decision was silent on whether India would cut emissions by a billion tons and on creating carbon sinks. While India is within its right to specify its emissions pathway, it should not — at any forum — promise more than what it can deliver as this undermines the moral authority that India brings to future negotiations. India has expressed its intent, via several legislations, to use energy efficiently and many of its biggest corporations have committed to shifting away from polluting energy sources. Going ahead, these should be grounds for India, at its pace, to be an exemplar for balancing energy use, development and meeting climate goals.