1.The Goldilocks problem (The Business line)

2.How to curb ‘invisible money’ (The Hindu) 

3.Explained: Deploying artificial reefs to save sinking island

 

1.The Goldilocks problem (The Business line)

 Synoptic line: It throws light on the issue that what level of interest rate reduction would have been ‘just right’ for banks and the economy. (GS paper III)

Overview

  • With the fall in retail inflation, even after excluding food and fuel, given the comfort that the Reserve Bank of India expressed that some of the risks to inflation had either reduced or not materialised. 
  • With given the uncertainties of GDP outlook in the post-demonetisation, post-GST scenario, there was little option to cut rates, however RBI has cut the policy repo rate by 25 basis points. But it has kept the growth outlook unchanged at 7.3 per cent. 

What is Goldilocks Economy 

  • A Goldilocks economy is when growth isn’t too hot, causing inflation, nor too cold, creating a recession. It has an ideal growth rate as measured by GDP growth. It also has moderately rising prices, as measured by the core inflation rate.
  • It is a kind of an ideal economy that is growing steadily without any inflation concerns. At the same time, asset prices are rising with low interest rates and low unemployment rate in the economy. The inflation and growth levels are ideal, sothat they don’t cause recession.
  • Goldilocks economy is characterised by moderate economic growth and low inflation, it allows a market-friendly monetary policy. Regulators use fiscal and monetary policy tools to try and create a Goldilocks economy. External factors to the economy and regulators’ policy response to the factors, also determine whether an economy can achieve a Goldilocks state. 

The base effect 

  • With the recent rate cut it has been argued that a 50 bps cut would have helped in triggering higher credit flow to the retail sector and small businesses, and thereby revives growth. A sharper rate cut could help in ease the interest burden on the balance sheets of debt-ridden companies.
  • It could facilitate treasury gains especially for public sector banks. All this can simultaneously alleviate the twin balance sheet problem and help the transmission mechanism as the banking system gets prepared to start lending again.
  • In the Monetary Policy Committee’s majority of the wanted a deeper cut while one member voted to keep rates unchanged, the argument given to keep the rates unchanged is that the unprecedented low rate seen is due to base effect, and that outlook for inflation in the second half is higher and closer to the target of 4 per cent.
  • The MPC has identified farm loan waivers and implementation of the pay commission award by States as possibly resulting in as high as 100 bps increase in headline inflation over the baseline. Concerns have also been expressed by some market-watchers of the impact of rate cut on asset prices and liquidity chasing yields without factoring the risks.
  • The RBI has retained its growth projection at 7.3 per cent in view of some positive factors such as the impact of GST, good harvest and higher budgetary allocation for rural housing roads and bridges. It also expects the Government to do its bit to reinvigorate private investment and remove bottlenecks in the infrastructure sector.
  • Some analysts point out that growth negative indicators such as the slowing down of government revenue, company sales, bank credit, cement production and passenger vehicles are not consistent with the GDP data. It is presumed that the RBI sees these indicators as representing the short-term impact of demonetisation and transition to GST.
  • For the developmental and regulatory policies, RBI has laid considerable emphasis on making the transmission mechanism work. It has proposed setting up an internal working group to look into linking credit with market benchmarks, align the base rate better with the cost of bank funds.
  • RBI has also proposed setting up a task force on setting up a public credit registry for bringing greater efficiency in the assessment and pricing of credit. Other proposals relate to the introduction of tripartite repos in corporate bonds, simplified hedging mechanism and fixing a separate limit for FPI for bond futures.

Concerns

  • The move is surely going to hit the retirees and other investors who rely heavily on the fixed income products such as bank fixed deposits. The bank FD rates are already lying low and in all probability, will come down further.
  • Over the last few years, the interest rate has been on the downward swing. While, a low-interest rate regime helps borrowers, both individual and corporate, the investors mainly who rely on fixed income to meet their monthly household expenses may find it tough in the falling interest rate scenario.

Question– What is the appropriate level of interest rate reduction to reach a situation of goldilocks zone?

 

2.How to curb ‘invisible money’ (The Hindu)

Synoptic line: It throws light on the need to curb ‘invisible money’ in election process. (GS paper II)

Overview

  • Elections at regular interval are an important feature of democracy. Elections ensure that the will of the people is reflected in the formulation of public policies and decisions. It gives a chance to people to elect government of their choice and the elected government gets right to govern those who elected it. It provides an opportunity to the people to express their faith in the government from time to time and change it peacefully whenever there is any need.
  • Many factors pose as challenge to the election system in India. Recently the Finance Minister mentioned that the Election Commission has failed to curb ‘invisible money’ in polls is remarkable.
  • The political parties collect huge sums of money, mostly unaccounted for, from unknown sources through dubious means, especially during elections is generally accepted. There are no reliable estimates of the quantum of funds collected on behalf of parties or candidates, or the amount of money that goes into the electoral process. 

Analysis

  • The Election Commission (EC) works in accordance with Article 324 of the Constitution of India, the Representation of the People Act (RP Act), 1951 and the rules framed by the government there under, and various judgments of the Supreme Court and High Courts. The power to frame rules under the RP Act has not been given to the EC.
  • However various reform proposals by the EC have not been acted upon. It sent 22 proposals in 2004. In December 2016, it sent 47 proposals including those for “Election expenses and election petitions”, “Election campaign and advertisements”, and “Reforms relating to political parties”. The government’s actions, if any, are not available in the public domain.
  • There are also instances where the Supreme Court has directed reforms in its decisions, with the government and Parliament attempting to amend laws to prevent implementation of the judgments.
  • Government in the recent budget discussed the issue of “Transparency in Electoral Funding”. However significant proposals were made first to remove the limit of 7.5% on profits that a company can donate to a political party, and second to remove the requirement that the company making a donation to a political party disclose the name of the party and the amount donated. This proposal will lead to invisibility.

Recommended solutions 

  • The Law Commission has recommended the simple way of introducing “financial transparency and accountability in the working of the political parties” is to bring them under the Right to Information (RTI) Act, 2005.
  • The Central Information Commission (CIC) in a full bench decision (2013) has said that six national political parties were indeed ‘public authorities’ under the RTI Act as they fulfilled all conditions specified in Section 2(h) of the RTI Act which defines ‘public authority’.
  • However despite the 2013 decision, these parties have refused to accept RTI applications, blatantly defying the unanimous decision of a full bench of the highest statutory authority to implement a law passed unanimously by Parliament.
  • When a petition was filed in the Supreme Court to get the decision of the CIC implemented, the government said in a sworn affidavit submitted to the Supreme Court that political parties should not be under the purview of the RTI Act. The petition is still pending in the Supreme Court.

Way ahead

  • As per the Law Commission report democracy and accountability constitute the core of our constitutional system, the same concepts must also apply to and bind the political parties which are integral to parliamentary democracy.
  • It is the political parties that form the government, man the Parliament and run the governance of the country. It is therefore, necessary to introduce internal democracy, financial transparency and accountability in the working of the political parties.

Question– What are the appropriate strategies to curb the invisible money? How demonetisation had contributed in this aspect?

 

Explained

Deploying artificial reefs to save sinking island (GS paper III)

Introduction

  • Sinking islands may become a reality with sea level rise and climate change in decades to come. Tamil Nadu has hit upon a novel idea to protect such islands on its coast—deploying artificial reefs near vulnerable islands.

Artificial reefs to save islands

  • Artificial reefs, made of concrete, have been found capable of preventing further erosion of ecologically sensitive islands and regenerating coral biodiversity in the Gulf of Mannar. It has been successfully demonstrated in Vaan island in the Munnar region. The island which had sunken to a great extent over decades has regained some of its area.
  • Vaan is one of the 21 islands in the Gulf of Mannar, which was declared a marine biodiversity park in 1986. Indiscriminate mining of coral and destructive fishing practices in past decades have fully submerged two islands. Vaan was on the verge of submergence when the project began in 2015. Its area had been reduced from 16 hectares in 1986 to 2 hectares in 2014. The area of Vaan island has increased by 2.24 hectares in low tide and 1.8 hectare in mean tide between December 2015 and August 2016.  

Attempt by Tamil Nadu

  • It is the first attempt in India to protect and restore a sinking island. Deployment of artificial reefs parallel to the sinking island in the seaward side reduces the effect of currents and waves, enhances fish habitats for higher fish production and protection of fish diversity.
  • Natural corals get attached to artificial reefs over time and start regeneration. Following the success in Vaan, Tamil Nadu has proposed to undertake restoration of two more islands and has approached Green Climate Fund for funding of Rs 100 crore.
  • The project had two components in these phases coral rehabilitation and artificial reef deployment. In the first phase, three square kilometre degraded area around the island was rehabilitated with native coral species using standard coral transplantation techniques.
  • Rehabilitated coral sites were monitored regularly to document survival and growth of the transplanted corals. The survival rate is 80 to 90 per cent and spawning has been observed in transplanted corals.
  • None of the islands are inhabited but they support livelihoods. Therefore, one of the key objectives of the project is to undertake eco-development activities among coastal communities to enhance their adaptive capacity. In the second phase, artificial reefs were deployed.
  • The concrete reefs have been deployed 250 meters from the island in a semi-circular constellation. In the first two phases, 4,600 modules have been deployed in eight months. Now with the funding from Adaptation Fund, the plan is to take the total number of artificial reefs to 10,000 in two layers.

Reasons for erosion

  • Though the reason for erosion of islands is combination of several factors, experts point out that sea level rise due to climate variation is posing additional threat to coastal islands. “Low-lying coastal areas are more vulnerable to impacts of climate change as they are highly prone for inundation due to sea level rise. 

Question– In the wake of climate change, how deployment of artificial reefs assists in saving the sinking islands?