Decoding the direction of monetary policy

Decoding the direction of monetary policy
The committee is now aiming to reach a position where it is able to maintain inflation close to 4%

Reserve Bank of India governor Urjit Patel, in an interview to Network 18, once again explained the rationale behind the change in policy stance of the monetary policy committee (MPC). On 8 February, the rate-setting committee changed the policy stance from accommodative to neutral in order to give itself more flexibility. The change surprised the market and many analysts interpreted this as an end to rate-cut possibilities in the current cycle. Consequently, bond yields shot up as the market was expecting the MPC to cut policy rates by 25 basis points (one basis point is 0.01 percentage point).

The policy statement clearly explained the reasons for changing the stance; this was also reiterated by Patel in the interview. For instance, lower headline inflation in recent months has been largely driven by a fall in food prices—which may rebound as the supply of cash improves in the economy. It is possible that food prices, particularly those of vegetables, fell because of a cash crunch in the aftermath of the government’s currency-swap initiative. Core inflation continues to remain sticky at about 5%. Global commodity prices have firmed up in recent months and the volatility in the foreign exchange market can also put upside pressure on inflation. The central bank expects inflation to remain in the range of 4-4.5% in the first half and 4.5-5% in the second half of the next financial year.

While the policy stance of the committee surprised many analysts, the sharp reaction of the market is equally surprising—it was, in any case, expecting a long pause after a 25-basis point cut. It is also likely that since the lending rates have come down significantly because of the currency swap, a rate cut at this stage would not have made much difference.

In terms of policy direction, there are at least two important points worth noting. First, a change in stance from accommodative to neutral does not necessarily mean that rates cannot be reduced from the present level. If inflation continues to undershoot the target, the committee may decide to cut rates at a later date. Differently put, it is difficult to argue that policy rates can only go up from the present levels. Second, the committee is now aiming to reach a position where it is able to maintain inflation close to 4%, which should be seen as a big positive for the economy.

After the rates were reduced in October, some market participants were of the view that perhaps the committee would be comfortable with inflation readings closer to the upper end of the given band. But that is not the case. The minutes of the December meeting, for instance, showed that in Patel’s view, “securing 4% (inflation target)—the central point of the notified target range—remains the primary objective”. If the committee is able to maintain inflation at about 4% on a durable basis, it will enhance macroeconomic stability in a big way and boost growth prospects. It will also open up space for a significant cut in policy rates. As Patel, in the above-mentioned interview, also explained: “The best way that a central bank can support growth on a durable basis is to ensure that the inflation is low, stable…. Very few countries grow at a high rate, if inflation is high and volatile. I think, in a way, we are doing our bit to support a higher growth rate but on a durable basis.”

Along with implications for economic stability and growth, it is also important for the rate-setting committee to maintain inflation closer to the target as it will cement its credibility. This will also help in dealing with short-run supply shocks. A recent working paper put out by the International Monetary Fund, Inflation-Forecast Targeting For India: An Outline Of The Analytical Framework, noted in this context: “As the FIT (flexible-inflation-targeting) regime gains credibility, and wins the public confidence in its ability to ensure price stability even in an economy subject to price level shocks, inflation expectations would remain aligned to the medium-term target, which in itself would ensure that the effects of supply shocks on inflation remain transitory.”

Therefore, the change in policy stance by the MPC should be seen from the broader perspective of its objective. To be sure, maintaining inflation close to the 4% level may not be easy for the committee due to the underlying complications of the economy. But keeping inflation close to the 4% target will not only help growth in the medium to long run, but will also build a strong track record for the committee which will have a bearing on its actions in the future.

Will low and stable inflation boost growth prospects?

Russia overtook Saudi Arabia as the world’s largest crude producer

Russia overtook Saudi Arabia as the world’s largest crude producer in December, when both countries started restricting supplies ahead of agreed cuts with other global producers to curb the worst glut in decades.

1. Russia – 10.9 million oil barrels / day – which make for 13.28% of the world’s oil production
2. Saudi Arabia – 9.9 million oil barrels / day – which are 12.65% of the total number of oil barrels produced in the world per day
3 United States – 8.45 million oil barrels / day – which are 9.97% of the world’s daily oil production.
4. Iran – 4.23 million oil barrels / day – 4.77% of the total daily oil production
5. China – 4.073 million oil barrels / day – 4.56%

Russia pumped 10.49 million barrels a day in December, down 29,000 barrels a day from November, while Saudi Arabia’s output declined to 10.46 million barrels a day from 10.72 million barrels a day in November, according to data published Monday on the website of the Joint Organisations Data Initiative in Riyadh. That was the first time Russia beat Saudi Arabia since March.

Saudi Arabia and fellow producers from the Organization of Petroleum Exporting Countries decided at the end of November to restrict supplies by 1.2 million barrels a day for six months starting Jan. 1, with Saudi Arabia instrumental in the plan. Non-member producers, including Russia, pledged additional curbs. Brent crude prices have climbed about 20 percent since the end of November.

The U.S. was the third-largest producer, at 8.8 million barrels a day in December compared with 8.9 million barrels a day in November, according to JODI. Iraq came in fourth at 4.5 million barrels a day, followed by China at 3.98 million barrels a day, the data show.

Saudi Arabia’s crude exports declined to 8 million barrels a day in December, from 8.26 million barrels a day, the biggest outflow for any month since May 2003, according to JODI data.

Weak official response to the pollution of Bengaluru’s wetlands threatens public health

Weak official response to the pollution of Bengaluru’s wetlands threatens public health

The extraordinary sight of a lake in Bengaluru on fire, with a massive plume of smoke that could be seen from afar, is a warning sign that urban environments are crashing under the weight of official indifference. If wetlands are the kidneys of the cities, as scientists like to describe them, Karnataka’s capital city has entered a phase of chronic failure. No longer the city of lakes and famed gardens, it has lost an estimated 79% of water bodies and 80% of its tree cover from the baseline year of 1973. Successive governments in the State have ignored the rampant encroachment of lake beds and catchment areas for commercial exploitation, and the pollution caused by sewage, industrial effluents and garbage, which contributed to the blaze on Bellandur lake. The neglect is deliberate, since some of the finest urban ecologists in the city have been warning that government inaction is turning Bengaluru into an unliveable mess. It is time the State government took note of the several expert recommendations that have been made, including those of the Centre for Ecological Sciences of the Indian Institute of Science. The priority, clearly, is to end pollution outfalls into the water bodies, which will help revive them to an acceptable state of health. Identifying all surviving wetlands and demarcating them using digital and physical mapping will help communities monitor encroachments, while removal of land-grabbers and restoration of interconnecting channels is crucial to avoid future flooding events.

Loss of natural wetlands is an ongoing catastrophe in India. A decade ago, when the Salim Ali Centre for Ornithology and Natural History released a conservation atlas for all States using space applications, it reported the tragic fact that 38% of wetlands had already been lost nationally; and shockingly, in some districts only 12% survived. The Centre has since issued rules for conservation and management, and chosen 115 water bodies in 24 States for protection support, but this is obviously too little. Moreover, research studies show that the concentration of heavy metals in such sites is leading to bioaccumulation, thus entering the plants and animals that ultimately form part of people’s food. It should worry not just Bengaluru’s residents, for instance, that soil scientists have found higher levels of cadmium in green vegetables grown using water from Bellandur. More broadly, the collapse of environmental management because of multiple, disjointed agencies achieving little collectively and legal protections remaining unimplemented pose a serious threat to public health. Every city needs a single lake protection authority. India’s worsening air quality is now well documented, and most of its wetlands are severely polluted. Citizens must assert themselves to stop this perilous course.

The historically low solar tariffs at Rewa

Solar energy has become the cheapest it has ever been in India, thanks to historically low tariffs achieved in the reverse auction bid for three units in the Rewa plant in Madhya Pradesh earlier this month. But what does this mean for the solar industry in India?

What exactly happened?

The two-day reverse auction bid for three 250 MW blocks in the Rewa solar plant in Madhya yielded a tariff of Rs 2.97 for each of the blocks and a levelised tariff of Rs 3.3 over the course of the 25-year power purchase agreement. The winners of each of the bids were Mahindra Renewables, ACME, and Solenberg Power. The Rewa plant is a joint venture of Solar Energy Corporation of India and Madhya Pradesh Urja Vikas Nigam (MPUVN).
A reverse auction in such a scenario is basically a situation where companies bid for a unit by offering the lowest tariffs at which they will sell the energy generated from the unit. The lowest tariff wins the bid.

How were such low rates achieved?

Companies bidding for the Rewa units were able to commit to such low tariffs because of various factors, some to do with the industry, and others to do with the specific bid.
The industry-related factors include the fact that solar energy producers in India have been able to greatly reduce their costs due to the import of cheap photovoltaic panels from China. In addition, in keeping with the government’s renewable energy push, especially its commitment to achieve 100 GW of solar energy by 2022, it has expedited the land acquisition process and has reduced excise duties on various components required to set up a solar plant.

Specific to the Rewa bid, the Madhya Pradesh government implemented a few favourable and unique structures in the project power purchase agreements. For example, it included a state government guarantee for the contracted capacity by the utility as well as a compensation for deemed generation in case of non-availability of grid. These factors allowed the bidders to commit to lower tariffs than they would otherwise have been able to.

What does this mean?

While this does mean that solar energy will be cheaper, several industry experts have warned that, at such low tariffs, margins are also very slim. This could mean that even a slight increase in input prices—such as pricier imports from China—could push many of these projects into unprofitability.

 

Scientists claim discovery of drowned Pacific Ocean continent Zealandia

The 4.5-million square km land mass is 94% under water and only its highest points — New Zealand and New Caledonia — are visible.

A continent two-thirds the size of Australia has been found beneath the south-west Pacific Ocean, scientists reported in the journal of the Geological Society of America.
Known as Zealandia, the land mass of 4.5 million square kilometres (1.74 million square miles) is 94 per cent under water and only its highest points — New Zealand and New Caledonia — poke above the surface.
“It’s rather frustrating for us geologists with the oceans being there,” said Nick Mortimer, a geologist at GNS Science in Dunedin, New Zealand. “If we could pull the plug on the oceans, it would be clear to everyone we have mountain chains and a big high-standing continent above the ocean crust.”
Mr. Mortimer was the lead author of the paper titled Zealandia: Earth's hidden continent which says the new discoveries prove what had long been suspected.
Suspected since the 1920s
“Since about the 1920s, from time to time in geology papers, people used the word ‘continental’ to describe various parts of New Zealand and the Catham Islands and New Caledonia,” Mr. Mortimer said. “The difference now is that we feel we’ve gathered enough information to change ‘continental’ to the noun, ‘continent.’”
Mr. Mortimer said geologists early in the previous century had found granite from sub-Antarctic islands near New Zealand and metamorphic rocks on New Caledonia that were indicative of continental geology. If the recent discovery is accepted by the scientific community, cartographers will probably have to add an eighth continent to future maps and atlases.
“The paper we’ve written unashamedly sticks to empirical observations and descriptions,” Mr. Mortimer said. “The litmus test will really be if ‘Zealandia’ appears in maps and atlases in five or 10 years’ time.”

Split 80 million years ago?

Zealandia is believed to have broken away from Australia about 80 million years ago and sank beneath the sea as part of the break up of the super-continent known as Gondwanaland.

Project Loon can now predict weather systems

Researchers at Google have moved a step closer to rolling out a network of huge balloons to provide Internet connectivity to billions of people around the world, particularly those in difficult-to-reach rural areas.
The Project Loon team, part of the company’s X research lab, said it can now use machine learning to predict weather systems.
The advance means Google has much more control over where its balloons reach, making it possible to focus on a specific region, rather than circumnavigating the globe.
“We can now run an experiment and try to give service in a particular place in the world with ten, twenty or thirty balloons,” rather than the hundreds needed previously, the company said.
“Real users” will be able to make use of the system in the “coming months”, however, the company did not specify where the initial roll-out would take place.
The company has experimented with beaming down connectivity from a network of huge, tennis-court sized balloons rather than undertaking huge construction projects to replicate connectivity networks in the developed world.
The balloons float in the stratosphere around 18 kilometres high. By raising or lowering altitude, the balloons can be caught in different weather streams, changing direction.

By using machine-learning algorithms, Google thinks it has found a way to predict weather with enough accuracy to make it possible to hover balloons over a relatively small area for a long period of time.

The firm was last year able to keep a cluster of balloons over Peru for three months.

Upsetting a very fine balance

Three recent instances invite disturbing questions about the transformation of the Supreme Court

Sixty-seven years ago, the framers of our Constitution made a simple — yet radical — choice. They decided to trust the Indian people. The Indian Constitution, with its guarantee of universal adult suffrage, transformed colonial subjects into free and independent citizens, who were to use their own reason in governing themselves.

Our Constitution’s framers also made another important choice. Having fought so long against a repressive government, they were aware of how easily power is used to crush free thought, open discussion, and civil rights. While they trusted the Indian people, they did not trust their rulers. And so, in the Constitution, they guaranteed to all citizens fundamental rights, including the fundamental right to the freedom of speech and expression, subject only to specified restrictions.

Two layers of safeguards

The framers were careful about the language they used: restrictions upon a fundamental right could be imposed only by law. Only an elected legislature, after careful deliberation, could decide to restrict some speech in the interests of an overwhelmingly important public goal. This could then be challenged before independent courts. Thus, the Constitution protected citizens’ rights through two layers of safeguards: the legislature had to make a law, and then the courts could be called upon to test its constitutionality.
In the years after Independence, the framers’ delicate balancing act — between State and citizen, between rights and public goals, between legislatures and courts — has sometimes come under immense strain, but has survived more or less intact. In recent months, however, that balance is once again under stress. Only this time, it is not because of an overbearing Executive or a pliant Parliament. It is because of the Supreme Court. In the course of its history, the Supreme Court has performed its role as the guardian of our fundamental rights with a debatable degree of success: upholding the law of sedition while striking down Section 66A of the Information Technology Act, upholding the law of obscenity while gradually liberalising it over the years, and so on. However, what is happening now is more serious: of late, the Court has begun to redefine its own role under the Constitution, transforming itself from the guardian of civil rights to a great, overarching moral and political censor. This is a role that the framers never envisaged. Given that there is nobody to guard the guardians, it is a role that vests great power — without any accompanying responsibility — in the Court. And it is a role that runs contrary to the very spirit of our Constitution, and specifically to its structuring principle of autonomous, thinking citizens.

Three instances

Three recent instances have accelerated this nascent trend. Recently, the High Court of Bombay found that certain scenes in the film Jolly LLB 2 “defame” the legal profession. Despite the fact that the film had been cleared by the Censor Board, the Court set up an entirely fresh committee to “review” the film, and ordered four “cuts” to be made. The producers moved the Supreme Court, arguing that while the High Court could, admittedly, review the decision of the Censor Board, it could not create an entirely new censoring mechanism. However, the Supreme Court refused to intervene or to hear the producers on the merits of their case until the High Court had passed its final orders. When the Bombay High Court finally mandated cuts, the producers — understandably — saw little point in going back to the Supreme Court. Facing huge commercial losses (the film was set to release in four days), they managed to bargain and reduce the number of cuts. The film was released. The precedent that it set, however, is disturbing.
While the Supreme Court saw nothing wrong with the Bombay High Court’s invention of a parallel censorship mechanism, it saw everything wrong with the fact that cinema halls were not playing the national anthem before every film. Acting upon a “public interest litigation”, and without any basis in existing law, in November 2016, the Court passed an “interim order” compelling all cinema halls to play the anthem. For a moment, forget about whether this is a good or a bad thing. Instead, consider the following: is it legal? It is constitutional? Is this kind of compelled performance of patriotism something India’s Supreme Court can impose upon India’s free and independent citizens? Somewhere, drowned underneath the drumbeats of patriotism, these crucial questions are going unanswered.
And lastly, only last week, the Supreme Court passed yet more interim orders, in a case involving sex-determination tests. Ostensibly, the Court was acting under the authority of the Pre-Conception and Pre-Natal Diagnostic Techniques Act of 1994, which prohibits advertisements regarding pre-natal sex determination.
However, fuelled by a sense of moral outrage, the Court had been passing a series of “interim orders” (eventually likely to become final) that were progressively increasing censorship; in the latest order, it directed search engines such as Google to constitute in-house committees to “block” access to such websites, and (in continuation of previous orders) to do so by blocking search “keywords”. In one stroke, the Supreme Court vested vast censorship powers in unaccountable private committees, something that Internet scholars and activists all over the world have repeatedly warned against. More worryingly, however, the Court’s orders amount to making entire swathes of the Internet off-limits for everyone, no matter what the purpose: research, investigation, or even simple curiosity. Or, to put it even more simply: because advertising for sex determination is illegal in India, the Court will make any attempt to look it up on the Internet also illegal. That is how totalitarian societies react to the Internet. It is not how the Supreme Court of India is expected to react.
The implications of these orders are frightening. Today, the Court wants Google to block access to search results involving the word “gender selection”. What will it be tomorrow? “Secession”? “Terrorism”? Or just about anything that the courts, in their wisdom, feel that Indian citizens cannot be trusted to read about?

Now, Supreme Censor?

There are a few unifying features about these three cases. All of them were brought to the Court as “public interest litigation”. There is a tragic irony here: public interest litigation began as a movement to democratise access to courts. It discarded traditional rules of evidence, and vested vast powers in courts to “do justice”. In 2017, the very dilution of rules and the existence of vast powers have become weapons in the hands of courts to cut down rights. More importantly, however, in all these cases, the Court’s censorial actions bear a tenuous connection — if any — to “law”. In the Jolly LLB 2 and National Anthem cases, the courts do not even attempt to demonstrate that what they are doing is within the legal framework. In the Sex Determination case, vague references are made to the IT Act, but that law simply does not contemplate judicial orders that make the Internet off limits. In short, the Court’s actions have upended the careful balance that the framers sought to achieve in the Constitution: instead of our elected representatives making laws, which the Court then tests for constitutionality, the Court has now begun to make its own laws limiting, restricting, and suffocating speech. And this is only the tip of the iceberg: the Supreme Court is currently hearing petitions seeking to ban pornography, order a keyword-block for rape videos, and ban racy pictures on condom packets. The Court’s jurisprudence also has an impact downwards: last year, the Madras High Court ordered that the teaching of the Tamil epic Thirukkural be made compulsory in all schools — again, in the absence of any law whatsoever.

In 2017, the Supreme Court has reduced us to passive subjects instead of active, thinking citizens. The Supreme Court tells us what we can watch and what we can’t watch. The Supreme Court tells us what we can search on the Internet, and what we can’t search. The Supreme Court tells us that we must be patriotic, and how, where, and when, we must be patriotic.

To the framers of our Constitution, who fought for political independence from colonial rule on the Enlightenment principle of “have courage to use your reason”, and who trusted the Indian people to make that most important of all decisions — the decision to choose their own rulers — we can only say that the transformation of the Supreme Court into the Supreme Censor would have come as an unpleasant shock