1. RBI raises rates to tame inflation

MPC increases repo rate by 50 basis points, lifts FY23 inflation estimate to 6.7%

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Wednesday voted unanimously to raise the repo rate by 50 basis points to 4.90% in a bid to slow inflation which it estimates will average 7.5% in the current April-June quarter.

The RBI’s move will increase borrowing costs across the board, from those seeking loans to buy cars and homes, to MSME firms looking to raise capital.

The MPC also decided to remain focused on the withdrawal of accommodation which had been provided to support the COVID-19 hit economy, to ensure that inflation remains within the target going forward, while supporting growth, RBI Governor Shaktikanta Das said announcing the decision.

“Inflation has steeply increased much beyond the upper tolerance level. A large part of the rise in inflation is primarily attributed to a series of supply shocks linked to the war [in Ukraine]. In these circumstances, we have started a gradual and orderly withdrawal of extraordinary accommodation instituted during the pandemic,” he explained.

Based on the assumption of a normal monsoon in 2022, and average crude oil price (Indian basket) of $105 per barrel, retail inflation was now projected at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8%, with risks evenly balanced, the RBI said.

About 75% of the increase in inflation projections could be attributed to the food group, Mr. Das said, observing that “the recent spike in tomato prices” were adding to food inflation.

Growth forecast

The MPC retained its forecast for real GDP growth for 2022-23 at 7.2%. Output would expand by 16.2% in Q1, by 6.2% in Q2, 4.1% in Q3 and 4.0% in Q4, the RBI said.

“Further rate hikes remain clearly on the table, with the reference to the revised repo rate of 4.9% remaining below the pre-pandemic level,” said ICRA chief economist Aditi Nayar.

Mr. Das stressed that between February and April, headline inflation had increased by about 170 basis points (bps).

“With no resolution of the war in sight and the upside risks to inflation, prudent monetary policy measures would ensure that the second-round effects of supply side shocks on the economy are contained and long-term inflation expectations remain firmly anchored and inflation gradually aligns close to the target,” he said.

The baseline inflation projection of 6.7% for 2022-23 did not take into account the impact of monetary policy actions taken on Wednesday, Mr. Das added.

“We foresee further repo hikes of 35 bps and 25 bps, respectively, in the next two policies,” Ms. Nayar of ICRA said.

Not surprisingly, central banks were reorienting and recalibrating their monetary policies, Mr. Das said. Emerging market economies (EMEs) were facing bigger challenges from increased market turbulence, monetary policy shifts in advanced economies (AEs) and their spillovers.

Mr. Das said that the RBI would continue to be proactive and decisive in mitigating the fallout of the ongoing geopolitical crisis on the economy.

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.

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)
• Corridor
• Bank Rate
• Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio (SLR)
• Open Market Operations (OMOs)
• Market Stabilisation Scheme (MSS)

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:

1. To stabilize the business cycle.
2. To provide reasonable price stability.
3. To provide faster economic growth.
4. Exchange Rate Stability.

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. Ahead of sowing, Kharif MSP revealed

Congress says govt. has not matched UPA-era raise; AIKS says incremental increases won’t help

The Union Cabinet on Wednesday raised the minimum support price (MSP) for paddy by ₹100 a quintal for the Kharif season of 2022-23. The rates for 14 crops have been increased in the range of 4% to 8%.

This is similar to the increase in MSP in 2021-22, which was in the range of 1% to 7%.

At a press briefing after a meeting of the Union Cabinet, Information and Broadcasting Minister Anurag Thakur said Indian agriculture had scaled new heights in the past eight years because of the government’s beej se bazar tak (seed to market) vision.

“In today’s Cabinet meeting chaired by Prime Minister Narendra Modi, it has been decided that MSP rates for all varieties of 14 kharif crops have been increased.”

To boost morale

Mr. Thakur said the new rates had been announced before the beginning of the sowing season, for assured returns to the farmers and to boost their morale.

It would give farmers an indication of the price they would get and help them decide which crops to grow.

Paddy is the main Kharif crop, the sowing of which has already begun. The MSP for paddy (common), which was ₹1,940 a quintal in 2021-22, and paddy (grade A), which was ₹1,960 a quintal, had increased by ₹100. The highest increase had been for two varieties of jowar at the rate of 8%. And the lowest increase of ₹92 had been for maize, whose price was ₹1,870.

The present increase comes against the backdrop of spiralling input rates, especially due to a sharp increase in fertilizer rates. Mr. Thakur said that the government’s fertilizer subsidy bill had also simultaneously increased.

Doubled subsidy

“In spite of the global increase in prices of fertilizers, this year, we are giving subsidy worth ₹2.1 lakh crore. This is double what the government was paying last year, which was ₹1 lakh crore. We haven’t let the burden pass on to the farmers,” he said. The announcement did not generate positive sentiment among the farm unions.

All-India Kisan Sabha leader Hannan Mollah said that such incremental increase in prices would not make a difference.

He dismissed the announcement as an effort to hoodwink the farmers. “Fertilizers are selling at the price of gold and such marginal increases will not make a dent,” he said.

No statutory compulsion

Krantikari Kisan Union leader Darshan Pal Singh said the fundamental problem still remained, that the MSP was not a statutory compulsion.

“The government, at the end of the day, only procures four crops and that too from select States. We have been saying that the minimum bidding for the crop should begin from the MSP onwards. We shall begin the second round of our agitation for this soon,” he said.

The increase have been announced at a time when the government is struggling to procure crops in the wake of a high demand because of global supply disruption. Farmers are selling crops in the open market since they are getting better rates.

The Congress, meanwhile, said the rate of increase of MSP by the Narendra Modi government was far lower than what was done during the United Progressive Alliance regime.

Sharing comparative statistics, Rajya Sabha member and senior Congress leader Jairam Ramesh said, “The Prime Minister promised to double farmers’ income by 2022…that has remained a jumla. All he has managed to do is increase their costs. The numbers show how the UPA government consistently stood by the farmers and expose the hollow claims of the BJP.”

According to the chart he produced, the increase for paddy, for example, from 2005-06 to 2013-14 was 130%, while the increase from 2014-15 to 2022-23 under the BJP government, is 50%.

In all the 14 crops that were compared, the rate of hike during the UPA was higher than that of the BJP government.

Minimum Support Price or MSP

• MSP is the minimum price which the government pays for the farmers’ produce at the time of procurement. It is aimed at saving the crops from price fluctuations in the market.
• The MSP fixed by the government is considered as being remunerative for farmers.
• However, MSPs do not have legal backing.

History of MSP

MSPs were first introduced in 1966-67 when the country adopted Green Revolution technologies. To boost the domestic production and encourage farmers to plant the high yielding varieties, the government resorted to MSP. A minimum support price was guaranteed to them.

How is MSP fixed?

It is fixed by the centre based on the recommendations of the Commission for Agricultural Costs and Prices (CACP) which is a statutory body. CACP submits two separate reports for Kharif and rabi seasons and based on these, centre fixes MSPs twice a year.

CACP considers the following three costs while recommending MSP-

• A2 which covers all the cash and kind expenses of the farmers.
• A2+FL which takes into account the estimated value of the unpaid labour of family members.
• C2 which includes A2+FL along with the interests foregone.

Crops getting Minimum Support Price

As of now, 23 crops are being supported by the centre by fixing of MSP. They belong to the family of cereals (7), pulses (5), oilseeds (7) and commercial crops (4).

The crops are:

1. Paddy
2. Jowar
3. Bajra
4. Maize
5. Ragi
6. Tur (Arhar)
7. Moong
8. Urad
9. Cotton
10. Groundnut
11. Sunflower seed
12. Soya bean
13. Sesamum
14. Niger seed
15. Wheat
16. Barley
17. Gram
18. Masur (Lentil)
19. Rapeseed and Mustard
20. Safflower
21. Toria
22. Jute
23. Coconut – Copra and De-Husked Coconut

Why MSP is needed?

• To safeguard farmers from the market price fluctuations.
• The prices of farm commodities are dependent on various factors such as good harvest season which leads to fall in prices.
• In such cases, farmers might not prefer to sow the aforesaid crop next season. MSPs would encourage farmers to sow these crops and thereby maintain a healthy supply.

Facts you should know about the Minimum Support Price

• Although the government announces MSP for 23 crops, only 2-3 crops are effectively procured.
• The production of rice and wheat greatly increased at the expense of other crops like pulses.
• The significant increase in buffer stocks adds up to huge storage and transportation costs.
• Doing away with MSP without taking the farmers into confidence is not the right step.
• Also, other steps like improving the irrigation facilities, implementing land reforms and access to technology are necessary to make farming more remunerative to farmers.
• Implementing various suggestions given by Swaminathan commission would be a right step instead of considering MSP as the panacea.

Market Intervention Scheme

• It is a price support mechanism for those horticultural commodities which are not supported by MSP.
• The commodities covered are mostly perishable in nature. The scheme is similar to MSP but is temporary in nature.
• It is implemented for a limited period on the request of the concerned state government.
• The objective of this scheme is to protect the growers of horticultural crops from distress sales in the event of a fall in prices.

Recommendations of the Swaminathan Commission

MS Swaminathan commission was constituted by the centre in 2004 for recommending various measures to alleviate farmer’s distress. NCF submitted five reports in total and recommending various measures like-

• Insertion of Agriculture in the concurrent list of the constitution.
• Addressing the issue of land reforms and inequalities in landholdings.
• Increasing the investments in agriculture-related infrastructure.
• Establishment of soil testing laboratories for detection of micronutrient deficiency.
• Ensuring the availability of formal credit to the farmers.
• Setting up of Village Knowledge Centres or Gyan Chaupals.
• Ensuring the availability of farm inputs at affordable rates.
• Restructuring the microfinance policies.
• Focused Market Intervention Scheme for live-saving crops.
• Inclusion of millets and other nutritious cereals in PDS.
• Investing in post-harvest management to reduce the losses and facilitation of direct farmer- consumer linkage.
• MSP support to be provided to crops other than for paddy and wheat.
• Steps to be taken for forming a single Indian market which promotes grading, branding and packaging.
• Preserving the right of access to non-timber forest produce.

3. Editorial-1: Inflation’s long shadow

The Reserve Bank of India is finally acting to rein in galloping prices

The Reserve Bank of India (RBI) has now joined battle by pitching the need to ‘keep inflation and inflationary expectations under check’ front and centre of its policy approach. Just over a month after the RBI’s Monetary Policy Committee (MPC) decided at a surprise ‘off-cycle’ meeting to raise interest rates for the first time in almost four years, the rate setting panel has followed up with a further 50 basis points increase in the policy repo rate. Simultaneously, the MPC has made it clear it no longer intends to ‘remain accommodative’. It will instead stay focused on the withdrawal of the pandemic-triggered accommodation as it races to tame retail inflation and anchor it within the 2%-6% target band. In acknowledgment of the herculean task it faces, the MPC now projects retail inflation to average 6.7% over the entire fiscal year ending in March — a full one percentage point increase from the 5.7% it forecast in April. Price gains are now expected to accelerate at a 7.5% pace in the April-June quarter, a sizeable 120 basis points faster than previously estimated, before printing at 7.4% in Q2, a sharp 160 basis points quicker than April’s projection of 5.8%. The headline CPI-based inflation is now seen stuck above the RBI’s upper tolerance limit in Q3 as well, at 6.2%, before easing to 5.8% in the fourth quarter. The MPC has listed a slew of factors clouding the inflation outlook: the war in Ukraine and the consequent elevated commodity prices, the heat wave stunting rabi crop output, high edible oil prices, crude prices that continue to pose a pass-through risk to domestic pump prices of fuels, increases in electricity tariffs, and, crucially, manufacturing and services firms flagging input and output price pressures.

That inflation looms large over every other aspect of the outlook for the economy worldwide is also evident from the MPC’s pointed reference to ‘growing stagflation concerns’ that are amplifying the volatility in global financial markets. While the RBI has made brave to retain its April forecast for GDP growth in the current fiscal at 7.2%, citing an ongoing recovery including in contact-intensive services and an expected boost to rural consumption from rain-spurred kharif sowing and output, a 37% ‘below normal’ start to the southwest monsoon serves as an early cautionary augury. And it is precisely the “headwinds from accelerating inflation” and the resultant ‘erosion of purchasing power of consumers’ that the World Bank cited on Tuesday when it cut its forecast for India’s GDP growth for this year by 50 basis points to 7.5%. The only silver lining is the RBI’s finding in a quick survey, post the May 21 excise duty cuts on petrol and diesel, that show urban households’ three-months-ahead inflation expectations have moderated by 190 basis points. Governor Shaktikanta Das has cited this finding to underline that States too could do their bit to soften inflationary pressures by further reducing their value-added taxes on fuels.

4. Editorial-2: Safe foods

States need help in developing food lab infrastructure and enhancing manpower

Food safety and consumer empowerment are areas in need of constant attention in India, where enforcement is often lax. But in this, Tamil Nadu deserves credit for finishing at the top among 17 large States for food safety; it was ranked third in the previous edition of the State Food Safety Index. That Tamil Nadu, with 82 marks, is ahead of Gujarat by 4.5 marks and Maharashtra by 12 marks, highlights its creditable showing. Developed by the Food Safety and Standards Authority of India (FSSAI), the Food Safety Index evaluates States and Union Territories on these parameters, apart from their size: human resources and institutional data; compliance; food testing – infrastructure and surveillance; training and capacity building, and consumer empowerment. Tamil Nadu has improved its standing in ‘human resources and institutional data’, and ‘training and capacity building’. There has been incremental progress in ‘compliance’ (which measures overall coverage of food businesses in licensing and registration), and ‘food testing’ (which scrutinises availability of adequate testing infrastructure with trained manpower in the States/Union Territories for testing food samples). The State has performed marginally lower than what it did last year in ‘consumer empowerment’. But barring Tamil Nadu, there is nothing for the other southern States to cheer about despite the region being more advanced than the rest of India in many socio-economic indicators. Kerala, which came second last time, is now at sixth spot; Karnataka has retained its ninth position; Telangana slipped from 10 to 15 and Andhra Pradesh dropped to the last slot from the penultimate slot in the previous edition when 20 States were covered, unlike the 17 now. Among Union Territories, Puducherry rose from seventh to sixth spot.

But in an area such as food safety, States alone cannot make a big difference without the support of the Central government. Liberal assistance should be provided to the States and Union Territories as far as laboratory infrastructure and improvement of manpower, both technical and non-technical, are concerned. The private sector should come forward in a big way to have staff trained at their cost and where such persons are used productively for the purpose. There are inspiring accounts of the participation of some information technology majors in getting surplus food distributed to the needy, of course with the help of non-governmental organisations, and this should serve as a lesson to those who are still hesitant to make their contribution. What every player in the field of food safety should realise is that each one has a critical role to play, and there has to be collective and well-coordinated action.

5. Editorial-3: Pandering to pressure groups

The Kerala government is losing sight of the larger issues of conservation and sustainable development

In what seems to be a replay of the widespread protests in 2013 against the demarcation of Ecologically Sensitive Areas (ESA) for the conservation of the Western Ghats, the high ranges in Kerala, dominated by settler farmers, are again becoming restive. While it was the bitter opposition to the Gadgil and Kasturirangan Committee Reports that led to the protests earlier, this time it is an order issued by the Supreme Court mandating the maintenance of a 1 km Eco Sensitive Zone (ESZ) around forests that has triggered the unrest.

Last week, Kerala Forest Minister A.K. Saseendran stated that the order would pose a setback to the State’s efforts to exclude human settlements adjoining forest fringes from regulations on development. Following this, the High Range Protection Council, largely representing settler farmers and headed by the church, has threatened to launch another round of protests demanding legislation to bypass the order.

The apex court’s directive will force the State government to revise the ESZ of at least 10 of the protected areas which were earlier marked as zero following massive public resistance.

In 2014, the Kerala Assembly had unanimously adopted a resolution urging the Centre to exclude human settlements and agricultural land from the 123 villages identified as ESA by the Kasturirangan committee. The then Chief Minister Oommen Chandy told the House that Kerala’s stand was dictated by the larger interests of farmers. The government later said that only protected areas would be demarcated as ESA, inviting criticism from environmentalists who warned that it would prove disastrous for the fragile ecosystem of the Western Ghats. They feared that the political consensus on excluding populated areas from the ESA would defeat the very purpose of the notification.

Eight years later, Chief Minister Pinarayi Vijayan’s reaction to the Supreme Court order is similar to that of Mr. Chandy. He said the LDF government was not in favour of human habitations being turned into ESZs. Noting that Kerala had a peculiar situation in which regions in forest fringes were thickly populated, he said the government’s priority would be to protect people’s interests.

It is relevant that the order has not prescribed any new restrictions in the ESZs barring the ban on construction of permanent structures. The prohibited activities include commercial mining, setting up of sawmills and major hydel projects, commercial use of firewood, production of hazardous substances, and tourism activities such as flying aircraft and hot air balloons over the national park area and the discharge of effluents and solid waste to natural water bodies or terrestrial areas.

The draft notification issued by the Union Ministry of Environment in April to declare ESZs around the Neyyar and Peppara wildlife sanctuaries in Thiruvananthapuram had also run into a wall of protest, with local bodies expressing the fear that the regulations would hinder development activities and eventually lead to phased migration from the region.

Significantly, the final notification on demarcating ESAs in the Western Ghats spanning six States (Kerala, Tamil Nadu, Karnataka, Maharashtra, Goa and Gujarat) has been pending for almost nine years, with the stakeholder States demanding exclusion of more areas, notwithstanding the devastation caused by recurrent natural calamities.

The Kerala government is trying to keep the lid on the unrest by excluding inhabited areas from the purview of the regulations prescribed by the Ministry and the court. But in surrendering to the compulsions of politics and the clout of pressure groups and religious leaders, it is losing sight of the larger issues of conservation and sustainable development. A State with 25 protected areas can ill afford to turn its back on conserving these precious natural assets for posterity.

6. Independent central banks

How prioritising inflation comes at the cost of resolving economic crises

“The Economic Consequences of Banking Crises: The Role of Central Banks and Optimal Independence,” Daniel Hansen, May 2022, American Political Science Review, Volume 116, Issue 2, pp. 453 – 469

The independence of central banks from the control of governments has been seen as extremely crucial to achieve economic growth and stability. Economists strongly believe that people in government usually try to influence officials in the central bank to adopt easy monetary policy that is inimical to economic growth in the long-run. After all, easy monetary policy help governments to borrow money at low interest rates to fund populist spending and also helps in the easier availability of credit which many believe to be important for economic growth. Both these together can lead to a rapid rise in prices that can in turn lead to a loss of confidence and severely undermine economic growth.

Predefined inflation mandate

Moreover, an independent central bank that focuses primarily on keeping inflation within a predefined range will automatically keep other crises in check, it is believed. In short, the predominant view among economists today is that an independent central bank with an inflation mandate can promote economic growth by keeping inflation and banking crises in check at the same time.

“The Economic Consequences of Banking Crises: The Role of Central Banks and Optimal Independence” by economist Daniel Hansen of Carnegie Mellon University disagrees with the current mainstream view on the advantages of independent central banks. Hansen argues that the benefits that independent central banks claim to offer in terms of controlling inflation can actually come at the cost of underwhelming response to major crises. This, in turn, can lead to prolonged unemployment and other economic costs that can be avoided if central banks did not focus so much on controlling price inflation. In particular, Hansen notes that during times of crisis such as the 2008 financial crisis, the response of central banks such as the Federal Reserve was focused on keeping price inflation in check rather than on resolving the crisis.

Such myopic focus on price inflation, he argues, turned focus away from the urgent need to bail out the financial system by easing liquidity and led to unemployment, economic contraction and other negative effects. This, according to Hansen, resulted in economic costs that far outweighed the benefits of keeping price rise in check. Apparently, there can also be severe political consequences to central bank independence as tough economic conditions could lead to political turmoil. Economic contraction and high unemployment caused by central bank independence can also lead to populist backlash that further undermines economic growth, he argues. Many have argued that the rising populism in America led to the trade war between the U.S. and China.

More importantly, Hansen believes that an actual inflation mandate is not necessarily required to achieve the goal of central bank independence. He argues that central bank independence can be achieved simply through laws that prohibit the politically-motivated appointment/dismissal of central bank officials. If so, there is no need to create rules that tie the hands of central bank officials to maintain price inflation within a predefined range.

Critics of Hansen are likely to argue that in the absence of an explicit inflation mandate central banks may be prone to expanding money supply at a far more aggressive pace. This, in turn, could lead to business cycles marked by more severe economic contractions. Some may even argue that the idea of central bank independence itself is largely a myth as in many cases central bank officials are appointed by political authorities. Even in cases where central bank officials enjoy total independence from the executive wing of government, there is no reasonable guarantee that they will act with the best interests of the larger economy in mind. Central bank officials may well collude with politicians in return for various kinds of benefits. If it be the case, a predefined inflation mandate may offer at least some kind of protection from discretionary monetary policy actions.