1.Inflation may be the big economic issue of 2022

 

The Bank of England (BoE) on 15^th December became the first major central bank to increase its policy interest rate to combat inflation. BoE’s bank rate was increased by 0.15 percentage points to 0.25%.  The inflation target around which their monetary policy revolves is 2% and in November U.K’s CPI inflation was as high as 5.1%. It’s not just the level that forced the monetary policy action. The increase in the rate of inflation has been sharp. Between September and November, inflation increased by 2 percentage points.

The legal framework in the UK requires BoE’s governor to write to the chancellor of the exchequer explaining why the inflation level has breached the target and this letter is placed in the public domain.

Of relevance to India, is the BoE’s understanding of the underlying causes of the current spell of inflation and the likely trajectory. A cause common to all economies is the Covid-induced disruption of supply chains which has pushed up costs. In addition, on the demand side, the fiscal stimulus rolled out in the U.S has added to the upward pressure on prices.

BoE expects inflation to trend upwards in the early part of next year and peak at around 6% in April 2022. The upward trend in price level early next year is expected to reflect many of the current developments which will show up in prices with a lag.

The year 2022 may be one in which central banks will have to reverse priorities. Inflation may be back on everyone’s agenda.

2.GoI chips in: Semiconductor industrial policy is welcome. It now needs sharper focus

Semiconductors are the invisible engines of the world, running things as different as mobile phones and automobiles. The world’s fourth most traded product, its manufacture is limited to just a handful of countries. GoI on Wednesday announced a Rs 76,000 crore, or about $10 billion, incentive package to encourage its manufacture in India. The aim of the policy is to create a viable design and manufacturing system for semiconductors. It’s an industrial policy that hopes to capture a slice of the most important contemporary industrial equipment.

Semiconductor manufacture is unlike anything else. It has three defining features. One, is its complexity – its manufacture needs at least 300 different high-technology inputs. Second, this has resulted in a global supply chain that is also highly concentrated geographically. The chain spans just the US, Europe and East Asia. Within this chain, there’s an extraordinary degree of specialisation that makes it vulnerable to shocks. For example, 100% of the world’s most advanced (below 10 nanometres) semiconductor manufacturing facilities are located in just two countries, Taiwan and South Korea. Third, the product sucks in the largest investment on both R&D and manufacturing among all industries. It’s estimated that over the next decade about $3 trillion in investment will be needed.

The outcome of this unique structure is a winner-take-all dynamic where the top three companies in each stage of the supply chain pull in about 80-90% of the revenue. All of these factors will come into play when companies weigh GoI’s incentive package. The $10 billion should be seen as an indicative support because states will also add to it once firms move things forward. It’s at this stage that GoI and states will have to narrow the focus on which parts of the supply chain to encourage. Semiconductor foundries are the world’s most expensive factories, which fabricate chips in hyperclean facilities. They account for 65% of industry capital expenditure but only 25% of the value addition.

Therefore, to lower the risks of investment, India should look at specially wooing back-end of manufacturing such as assembly, packaging and testing. Once it stabilises and an ecosystem develops, front-end of manufacturing will follow. Simultaneously, GoI needs to leverage the presence of Indian engineers in chip design, the part of the chain that contributes the largest value. Hand-holding startups of entrepreneurial engineers can produce large payoffs. GoI has embarked on a bold industrial policy that now needs targeted attention.

3.In the name of the father: On why Ajay Mishra should go

Ajay Kumar Mishra’s continuation as Minister is morally untenable

A Special Investigation Team of the Uttar Pradesh police has concluded that the violence in Lakhimpur Kheri, U.P., on October 3 that claimed the lives of eight people was a “pre-planned conspiracy”. Union Minister of State for Home Ajay Kumar Mishra’s son Ashish Mishra is a key accused in the case. He was in a convoy of cars that mowed down farmers protesting against the controversial farm laws that have since been repealed. Two of the cars were owned by the Minister. In subsequent violence on that day, three BJP workers who were part of the convoy were lynched by the protesters. The charges are yet to be proved in a court, but the Minister is on the defensive as the Opposition stalled Parliament for two days, demanding his dismissal. The charges against his son are serious. The police have sought to drop the initial charges they had brought against the accused under Indian Penal Code (IPC) Section 304A (culpable homicide not amounting to murder), Section 279 (negligent driving), and Section 338 (causing grievous hurt). They now seek Section 307 (attempt to murder), Section 326 (causing hurt with dangerous weapon), Section 34 (acts done by several persons in furtherance of common intention), and Section 3/25 Arms Act against Mr. Ashish Mishra.

4.Wrong forum: On climate change and the UNSC

The attempt to securitise the climate change agenda could have unintended consequences

India’s negative vote at the UN Security Council (UNSC) on a draft resolution on climate change is a reflection of its long-held opposition to expanding the UNSC’s mandate into areas that are already being dealt with by other multinational fora. The resolution, piloted by Ireland and Niger and which had the support of a majority of the UNSC members, was voted down by India and Russia — it has veto powers — while China abstained. Their position is that the UNSC’s primary responsibility is “maintenance of international peace and security” and climate change-related issues are outside its ambit. But the supporters of the resolution argue that the climate is creating security risks in the world, which will exacerbate in the future with water shortage, migration and a destruction of livelihoods. Germany had circulated a similar draft last year which was never put to vote in the Security Council as the Trump administration opposed it. Now, with support from the Biden administration, the developed world is pushing to include what they call “climate security” in the agenda of the UNSC. While the urgency to take action to tackle climate change is appreciated, the attempt to securitise the climate agenda could have unintended consequences. Bringing the issue under the UNSC will also give more powers to the world’s industrialised countries, which hold a veto power, to decide on future action on climate-related security issues.

Currently, all matters related to climate change are being discussed in the UN Framework Convention on Climate Change (UNFCCC), a specialised agency.

5.No winners in Board games

The Board of Control for Cricket in India has the right to choose who will lead India, but it has handled the change badly

The power games that have dogged the Board of Control for Cricket in India’s corridors of power spilled on to the cricket field this week when the sport entered hitherto-uncharted territory. The weeks-long intrigue surrounding the future of Virat Kohli as captain in the game’s shorter formats snowballed into a battle of narratives between him and Sourav Ganguly, a former captain who is now the president of the board. At a media interaction, Kohli refuted Ganguly’s claim that they had spoken about his leaving the T20 captaincy and detailed the circumstances of his ODI demotion, conveyed to him during a call with the selectors. This isn’t a simple case of counter-narratives. It is a public announcement that the trust between India’s most successful batsman of this generation, and the all-powerful body that runs the sport, has been broken irreparably.

Kohli is statistically India’s most successful captain in history with a win rate of more than 59% in 66 Tests, over 70% in 95 ODIs, and over 64% in 50 T20Is; and an overall win rate of 63.5% in 211 matches across the three formats. To put this in perspective, MS Dhoni’s overall win rate was 53.61% in 335 matches, and Ganguly’s win rate was 49.48% in 196 matches. But while win-rate is the standard metric to measure captaincy, it is not the best one because it doesn’t factor in the conditions or the opposition. In Kohli’s case, there were several valid reasons for a change at the helm. Despite his record, the Indian team did not do well in ICC tournaments under his charge, and nor did Royal Challengers Bangalore win any IPL title; there were reports of rumblings within the dressing room; and several decisions taken by him about the playing XI were questioned by experts for flying in the face of logic. In any case, once he stepped down as T20 skipper, and given the IPL success story of Rohit Sharma who was appointed to replace him, having two captains for white-ball cricket was untenable. Finally, the decision on who will lead is ultimately the prerogative of the BCCI’s selectors.