News & Events
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1.Withdraw This Valuation Directive
The Securities and Exchange Board of India’s (Sebi) directive that mutual funds value perpetual bonds with special characteristics as if they would be redeemed in 100 years is disruptive and should be withdrawn. The present value of a bond’s maturity value 100 years from now would be a fraction of the value imputed on the assumption that the bond, which comes with call and put options, would be called by the issuer in the foreseeable future.
The Sebi directive would force mutual funds to book losses, once it kicks in from the beginning of April. Investors would seek to redeem their units and the funds, to dump the bonds, causing a major slump in unit values for no adverse development in a recovering economy.
Bonds that abate in case of specified developments — Additional Tier 1 bonds issued by banks to comply with Basel norms on loss-absorbing buffers in addition to core equity capital, catastrophe bonds issued by insurance companies to pay for natural disasters — carry explicit risk and a risk premium in their coupon. They serve as a high-yield chunk of a diversified portfolio of assets, not as the entirety of retirement savings.
A fund that specialises in investing in only such instruments is conceivable, with investors allocating to it thin slices of their varied mutual fund holdings. There would be nothing wrong with such an arrangement, provided the risk involved is clear to investors and the risk of heavy penalties in case of failure to disclose such risk is clear to mutual fund distributors. After the justified decision to write off Yes Bank’s Additional Tier 1 bonds, there is greater appreciation of the nature of such bonds. Sebi would do well to ask investors to value special bonds using their specific risk factors.
Sebi’s move to protect investors is likely to dent the market for bonds with special features. That is bad news for efforts to innovate ways of distributing risk across society’s capacity to bear such risk. Sebi, in its wisdom, should revisit its directive and withdraw it.
2. Mining Acquires An Emerald Sheen
A recent Economic Times ‘Live’ CEO Breakfast Series cast a hopeful light on the mining and metals corner of the economy normally associated with grime, age-old techniques and work practices, and carbon emissions. It turns out, mining companies could be among the early movers in the bold new hydrogen economy.
And, innovation in mining is not just confined to green fuels. Advanced analytics, automated mining platforms, robotics and electric earthmovers and other vehicles are, increasingly, par for the course in the Indian mining industry.
Steel and cement have traditionally had high carbon-emissions intensity. However, producers like JSPL are already taking the coal gasification route to make steel via the energy-efficient direct reduced iron (DRI) process.
The target now is to produce hydrogen from coal in the next two years to operate DRI plants. Abundant hydrogen has very high energy content by weight, and using renewable energy to produce hydrogen that, in turn, can be used as fuel in a great many places, displacing hydrocarbons, is a major way to cut the economy’s carbon emissions and to reduce our oil import bill as well.
Meanwhile, Tata Steel has been able to significantly reduce its coking coal imports in this pandemic year by upping domestic sourcing, shoring up beneficiation and revving up attendant logistical efficiencies. Steel output per annum nationally is set to rise by 20% to 120 million tonnes.
However, taxation, levies and royalty on mining surely need to be rationalised. And, we clearly need to remove opacity from the proposed ₹46,000 crore District Mineral Development Fund and its allocations. Extended bans, such as on Goan iron ore, thanks to judicial foot-dragging, are another obstacle the industry faces.
3.Quad summit: Delhi must drop its hesitations about platforms that push back against Beijing
Today’s first summit meeting of the Quad countries – India, Japan, the US and Australia – elevates this format and cements its role as a key pillar of the free and open Indo-Pacific architecture. Coming so soon in the Biden presidency, the summit signals his administration’s intent to pick up where the Trump administration left off in terms of balancing China’s aggressive behaviour. The Trump dispensation, however, went by its gut instincts and lacked a larger strategic vision. While it largely sought to push the Quad in a military direction, Biden is seeking to expand its scope and adopt a holistic approach to push back against Beijing.
This is smart strategy as military coordination without an economic and technological anchor is insufficient to meet the China challenge. It’s welcome, therefore, that the Quad which was earlier defined as a security dialogue is now being touted as a framework. The new accent is on resilient supply chains, emerging and critical technologies, maritime security and climate change. Hence, the idea is to draw red lines for China and insulate other countries from becoming dependent on Beijing’s economic and technological patronage. In fact, the US has already begun putting together a set of coalitions aimed at countering China’s dominance in key technologies like semiconductors, AI, quantum computing, surveillance technology etc.
These will set standards, establish best practices and eventually offer members market access and technology transfers as an alternative to Chinese products. India should fully capitalise on these coalitions to obtain cutting edge technology, boost domestic R&D and kick-start its own industrial reforms. After all, in order to counter Beijing, Delhi needs to increase its comprehensive national power by adopting an all-of-government approach. It’s on the right track in seeking to firewall critical sectors from Chinese equipment and cyberattacks – such as the recent intrusions into India’s power infrastructure. With telecom forming the backbone of a modern, digital economy, this sector must be shielded from predatory Chinese activities.
The Biden administration’s strategic approach is a good one, and Delhi can ill-afford to procrastinate about siding with the West and like-minded countries seeking to uphold international rules and freedoms, due to fear of what Beijing might think or its own ideological hobby horses. Delhi has a knack of missing international opportunities whenever they arise due to its lack of flexibility, which allows nimbler rivals to outmanoeuvre it. It must not miss the bus again, hoping to shine in splendid isolation.
4.How to keep FIT: Flexible inflation targeting has worked. We must stick to the 4% target
In August 2016, government legislated a new approach to managing inflation called flexible inflation targeting (FIT). The essence of FIT is that government, in consultation with RBI, fixed an inflation target to guide the central bank’s monetary policy. The target right now is 4% retail inflation, with a band of two percentage points on either side to provide flexibility. If average inflation goes beyond this boundary and stays there for nine consecutive months, it is regarded as failure. The life of this arrangement ends in March.
High inflation that persists has two negative effects. It hurts the economically vulnerable and will also eventually undermine fast economic growth. Keeping inflation under check has always been RBI’s main aim, but approaches have evolved with time. With FIT’s current arrangement ending in March, government should continue with the existing targets. Evidence shows that it’s met the goals and India has experienced a relatively benign phase of inflation. Also, expectations drive a modern economy. Switching inflation targets without adequate reason will erode the credibility of RBI and loosen expectations.
A common critique of FIT is that it’s blind to the economy’s need to grow. This is an incorrect argument. RBI’s legislation clearly calls for keeping inflation under check while being mindful of growth. The central bank doesn’t have a mandate to be unbalanced in managing inflation. Moreover, RBI’s record over the last two years shows that its monetary policy committee has been supportive of growth, even before the pandemic struck. If there’s a change to be made by the government, it should be to expand the ambit of policy rates to include reverse repo rate, or the interest rate at which RBI absorbs liquidity from banks. But the 4% target must stay.
5.Wooing the Hindu vote
In West Bengal, chief minister (CM) Mamata Banerjee declared she was born in a Hindu family, recited from Hindu scriptures, and warned the Bharatiya Janata Party (BJP) not to play the “Hindu card” with her. The card, one assumes, refers to the BJP’s effort to often portray itself as the defender of majority interests, and its rivals as somewhat insensitive to Hindus while being closer to Muslims. As a Hindustan Times data-based analysis showed, Ms Banerjee’s efforts at countering possible political polarisation on religious lines did not stop at the level of rhetoric. There has been a dip in the number of Muslim candidates the Trinamool Congress has put up in the elections — from 54 in the 2016 polls to 45 in 2021, with the biggest fall in south Bengal where the BJP is hoping to make substantial inroads. Not putting up a Muslim candidate, by this logic, prevents the BJP from turning the election into an “H-M”, Hindu-Muslim contest.
In Delhi, CM Arvind Kejriwal, on Wednesday, said his government’s ideal was “Ram rajya” — and enunciated a set of governance principles under the framework of what Ram rajya would constitute. In addition, he declared that his government would facilitate the pilgrimage of the city’s elderly to the Ram temple in Ayodhya once it is constructed. Mr Kejriwal has, for at least three years now, been carefully portraying himself as a Hindu leader — advertising his devotion to Hanuman, staying away from potentially polarising issues such as the Shaheen Bagh agitation and organising pujas under state government auspices, among other steps.
Ms Banerjee and Mr Kejriwal represent strong regional challengers to the BJP. And their position today is a reflection of how far the BJP has moved the needle of Indian politics. If secular politics, in the past, was electorally equated with being seen as sensitive to Muslim aspirations, secular politicians, today, are investing all their energy in both, not being seen as pro-Muslim, and being seen as adequately sensitive to Hindu sentiments. The Congress has attempted to do this too, most recently seen in the Rajasthan government’s decision to legalise mining to supply stones to the Ram temple construction. What this, however, indicates is that even if the Opposition is able to defeat the BJP electorally and politically, the BJP’s ideological dominance is only getting reinforced. This will have implications for representative democracy and inter-community ties.