News & Events
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1. Let inflation-indexed bonds fix oversight
The government was wise to hastily withdraw the order slashing interest rates on assorted small savings schemes, not so wise to have announced such rate cuts during vital state polls. The government tweeted that the orders (read: to cut interest rates) were issued by ‘oversight’. Elections are underway in five crucial states, inflation is rising, and the country is facing the second wave of the pandemic that has hurt incomes and livelihoods. A crucial policy decision on cutting the administered interest rates on small savings ought to have been thought through and not the subject of any oversight.
The interest rate on small savings is benchmarked to the yield on 10-year g-secs, that is around 6.17% now. But the revised rates on five-year post office fixed deposits (5.8%) and National Savings Certificate (5.9%) that have now been withdrawn were lower than what this benchmark would have warranted. This is absurd. Higher inflation would also lead to negative real return for investors, hurting small savers further, many of whom depend on income from investments. Most bank fixed deposits too offer only about 6% or so for senior citizens. Where will scores of small savers and pensioners, whose returns have dipped over the years, invest?
The best way the government can help them is to launch inflation-indexed bonds that protect both the principal amount and the interest from the harsh effect of inflation. This makes sense as the appetite for risk in this segment to invest in equity is low, and some savings can be invested in bonds. Preserving the value of the principal and offering a positive rate of interest in real terms, after netting out the rate of inflation, will be a decent savings option for savers.
2. Target inflation? Just smell as sweet
As sweet cometh the hour, cometh the policy, whether clothed as inflation targeting, recession fighting or financial sector stabilising. What the conduct of the central bank has shown in the recent past is that whatever the nominal rigidity in the objective of monetary policy conduct, the policy, in practice, flexibly targets the immediate problem at hand. While the bimonthly setting of policy rates continues as a ritual, open market operations to increase or lower the supply of liquidity and correspondingly bend rates lower or higher and manoeuvres such as Operation Twist to alter short- and long-term rates make repo rates far less critical than they ought to be in a strict inflation-targeting model. And this is all to the good.
In a world of high levels of capital mobility across borders, financial stability is a very major consideration. Fiscal policy, monetary policy, exchange rate policy, export and import policy and capital controls must all move together to the choreography of macroeconomic stability in such a world. This is more than a little beyond simple-minded inflation targeting. The remarkable thing is that these individual policies have, indeed, been dancing as a practised ensemble, without necessarily being conscious of the coordination one has with another. Therefore, it matters little if the government retains the fiction that the goal of monetary policy is inflation targeting or not. More than setting policy rates, what must preoccupy the central bank is developing the market for corporate debt, complete with all the instruments required to mitigate the assorted risks that accompany the bond market.
Managing supply constraints is beyond the task of monetary policy. Whether the supply is of food commodities or of energy, policy would need to look through their first round price impact. The good news is that India’s monetary policy has been far less dogmatic than labels for methodology suggest. Inflation forecasting must become more realistic, however, to avoid unrealistic expectations sending policy rates too high.
3. Vaccination 3.0: India’s learning from the first two phases is, empower local decision-making
Commencement of vaccination for the 45+ age group – originally slated to begin only in August after the priority groups were inoculated – is wise improvisation amid the second Covid wave that recorded 72,000 infections and claimed 459 lives on Wednesday. The previous phases covering healthcare and frontline workers and senior citizens faltered, with scaling up remaining a challenge. Against an estimated 3 crore healthcare and frontline workers, 1.73 crore have taken the first dose and 91 lakh the second dose. Against an estimated 27 crore senior citizens and those with comorbidities, 3.05 crore senior citizens and 78 lakh people with comorbidities have taken first doses.
Obviously, there’s a long way to go even for these initial phases. India’s massive population requires administering 40-50 lakh doses daily from the present 20 lakh for vaccinations to have a telling effect on Covid-related illness and morbidities. The big puzzle remains why states aren’t able to scale up further. Greater supply choices and transparency would encourage them. Data is not readily available on doses SII and Bharat Biotech have provided to the Centre overall, doses released to various states, or how many doses will be supplied by companies in the coming weeks. Shoring Centre’s assurance that adequate doses will be provided, proactive release of vaccine stock data will both put public pressure and impart confidence to each state to make long-term vaccination plans.
Centralising decision-making in Delhi and state capitals isn’t helping. Low participation of private healthcare facilities could have much to do with slow approvals and erratic vaccine supply by state governments. SII’s plan to increase its output by 67% to produce 10 crore doses from May and Dr Reddy’s Laboratories’ reported capability to supply over 10 crore doses of Sputnik V per month suggest that 40 lakh daily doses is an achievable target. After two weeks, Centre must review and further lower the age restrictions if capacity utilisation remains low.
Industry, hurting from fresh movement restrictions, has asked for in situ vaccination at workplaces. Similarly, taking vaccination to residential neighbourhoods will tackle vaccine hesitancy as people see neighbours getting jabs. Gurgaon administration is setting up vaccine camps in premises of companies. Chennai corporation vaccinating those over 18 to mitigate vaccine wastage is another model for city and district administrations to follow. Central guidelines shouldn’t prevent this. Allow local capacity to find answers to local problems. Follow the learnings from Universal Child Immunisation.
4. Don’t take us for granted: Small savings interest rate formula needs to be reworked to help savers
In less than 24 hours, government reversed Tuesday evening’s decision to reduce the interest rate on small savings schemes. The episode highlights the flaws of the current approach to setting interest rates. These schemes are administered by government and their interest rate is linked to rates on comparable government securities, or GSecs. Since April 2016, government is supposed to reset these rates every three months. However, resets have been haphazard, rendering the formula of setting interest rates meaningless. There’s a reason for it.
Interest rates on GSecs are not truly market driven, even if these bonds are traded. RBI significantly influences these rates, depending on its monetary policy approach. First, the monetary policy committee sets a policy interest rate. This is backed by RBI using an array of instruments to push GSec yields to levels that meet its aims. Over the last two years, as economic growth has been prioritised over inflation, interest rates have been pushed lower. RBI and banks may crib that inflexible small savings rates distort monetary policy signals but governments face a different set of constraints.
Small savings schemes have for long been of great benefit to the Centre and states. Their popularity also shows how important they are as a risk-free long-term savings option for people. Interest rates on these schemes do need to be linked to monetary policy, but the current formula is suboptimal. We are in midst of a spell of financial repression to boost growth and help government borrowing. But if savers are taken for granted, there will be higher risks of financial instability. The formula needs to be reworked to cushion savers from the fallout of financial repression. That’s better than the seeming arbitrariness in reset of interest rates. Yesterday’s rollback just acknowledges the need to change the formula.
5.The fight for gender equality | HT Editorial
India has slipped 28 places to rank 140 among 156 countries in the World Economic Forum’s Global Gender Gap Report 2021, becoming the third-worst performer in South Asia. According to the report, India has closed 62.5% of its gender gap. Among India’s neighbours, Bangladesh is ranked at 65, Nepal at 106, Pakistan at 153, Afghanistan at 156, Bhutan at 130, and Sri Lanka at 116, making the region the second-lowest performer on the Global Gender Gap Index (GGGI). GGGI is based on four parameters: Economic participation and opportunity, educational attainment, health and survival, and political empowerment.
The world has fared the worst on the economic participation and opportunity sub-index. India has only closed 31.6% of the gap on this sub-index. Interestingly, this gap is not just seen in unskilled/low-skill segments but is equally pronounced in high-skill job segments. There is also a deeper problem. According to the Periodic Labour Force Survey 2018-19, the female labour force participation rates among women aged above 15 years are as low as 26.4% in rural areas and 20.4% in urban areas in India. A 2018 report of the NITI Aayog, which reviewed the performance of states on Sustainable Development Goals, showed all states performed poorly on gender equality.
Both supply and demand factors, economists point out, contribute to the low levels of employment of women — from domestic responsibilities to the lack of demand for their labour to inadequate support infrastructure. There has also been movement out of agriculture into informal and casual jobs. These challenges have now been exacerbated by the pandemic, which is likely to have a scarring effect on women’s future economic opportunities, risking inferior re-employment prospects and a persistent drop in income. Over the years, legal reforms, gender-responsive social protection and public service delivery systems, quotas for women’s representation, and support for women’s movements have made a difference. It is now more important than ever to scale up these gender-positive recovery policies and practices, and provide enabling conditions for women to be employed, including better and safer transport, provision of hostels, and social security. Women’s participation in the economy must improve substantially, as must India’s record on other parameters. The country’s development potential will remain unmet if half its citizens are excluded.