ECONOMIC AFFAIRS
TABLE OF CONTENTS
1. WORLD ECONOMIC OUTLOOK, IMF
2. ADB PROJECTED INDIA’S GDP GROWTH
3. RBI’S MONETARY POLICY
4. CHINA’S NEW DIGITAL CURRENCY
5. BRITAIN’S NEW DIGIITAL CURRENCY
#WORLD ECONOMIC OUTLOOK: IMF
• The International Monetary Fund projected a 12.5% growth rate for India in the year 2021. It is stronger than that of China which was the only major economy globally to have a positive growth rate amid the pandemic in 2020.
• The global financial institution in its annual world economic outlook stated that the Indian economy is expected to grow by 6.9% in 2022. The statement was made ahead of the IMF’s annual spring meeting with the World Bank.
• India’s economy in 2020 had contracted by a record 8%, said IMF as it projected a 12.5% growth rate for the country in 2021. On the other hand, China, which was the only economy with a positive growth rate of 2.3% in 2020, has been projected to grow by 8.6% in 2021 and 5.6% in 2022.
Stronger recovery for the global economy in 2021 and 2022:
• Gita Gopinath, the Chief Economist at the International Monetary Fund stated that a stronger recovery for the global economy has been projected in 2021 and 2022 compared to IMF’s previous forecast. IMF now projects growth to be 6% in the year 2021 and 4.4% in 2022.
• The global economy in 2020 had contracted by 3.3 percent. As per the report, after an estimated contraction of 3.3 per cent last year, the global economy is expected to grow by 6 per cent in 2021 and moderate to 4.4% in 2022.
Smaller contraction for 2020 than projected:
• The contraction for the year 2020 is 1.1% points smaller than projected in October 2020 World Economic Outlook.
• It clearly reflects the higher-than-expected growth outturns in the second half of the year as most regions after the lockdown was eased and economies started adapting the new ways of working.
• According to Gita Gopinath, the policymakers will require to continue supporting their economies. It will require better-targeted measures to leave space for prolonged support if needed. With multi-speed recoveries, a tailored approach is required, with the policies formulated to the stage of the pandemic, the structural characteristics of individual countries, and the strength of the economic recovery.
• The emphasis of the countries must be on escaping health crisis by prioritizing vaccinations, health care spending, and health care infrastructure. Fiscal support must be well-targeted to the affected households and firms.
Steps to be taken once the health crisis is over:
• Once the global health crisis is over, the policy efforts by the world economies must focus more on building inclusive, resilient, and greener economies in order to boost theeconomic recovery and for raising the potential output.
• Gopinath states that the priorities must include green infrastructure investment in order to help mitigating climate change, strengthen social assistance to arrest rising inequality and invest in digital infrastructure to boost production capacity.
• The global economy has shrunk by 4.3% in 2020. It was over two and half times more than during the 2009 global financial crisis.
#ADB PROJECTED INDIA’S GDP GROWTH
• The Asian Development Bank projected that the gross domestic product (GDP) of India will rebound strongly by 11% in the Financial year 2021 ending on March 31, 2022.
• The projected growth will be because of the continued economic recovery boosted by the vaccine rollout, increased public investment, and a surge in domestic demand.
• The forecast by ADB assumes that the COVID-19 vaccines are deployed extensively all over the country and that the second wave of the pandemic is contained.
• ADB, in its latest flagship economic publication, Asian Development Outlook (ADO) 2021, projects the economic growth of India to moderate to 7% in FY 2022 as the base effects disappear.
• The Indian economy is expected to have contracted by 8% in FY2020 in line with the second advance estimate of the government.
India’s economic activity to continue its recovery:
• According to Takeo Konishi, ADB Country Director for India, the Indian economy faced its worst contraction in FY 2020 because of the pandemic outbreak.
• With the ongoing vaccination drive and large government stimulus, India’s economic activity will continue its recovery started from the third quarter of Financial Year 2020. It will rebound strongly in the current financial year with an increase in domestic demand, particularly in the urban services.
• Konishi added that the Indian Government’s boost to the public investment through its incentives for manufacturing, infrastructure push, and continued support to increase rural incomes will support the country’s accelerated recovery.
What measures by the government will help in an economic recovery?
• The economic activity of India will continue to recover with the help of the government’s measures including the large stimulus package in FY2020 as well as an increase in the capital expenditure budget in FY 2021.
• Increased expenditure by the Indian Government on water, health care, and sanitation will strengthen the nation’s resilience against future pandemics.
• Private investment has been expected to pick up as well as the accommodative credit conditions. Domestic demand is also expected to remain the main driver of growth.
• A faster vaccine rollout will help in increasing the urban demand or the services while the rural demand will be boosted by the government’s support to farmers and agricultural growth.
• The agricultural sector will be further boosted by the forecast of a normal monsoon and the bumper harvest of the summer crops.
• Push to the manufacturing sector by the Indian Government through the production-linked incentive scheme will further expand domestic production and will help integrate domestic manufacturing with global supply chains.
Inflation projected to be moderate in FY2021 and FY2022
• The Asian Development Bank has projected inflation in India, after rising to 6.2% in FY2020, to be moderate to 5.2% in FY 2021 as the supply chain recovery and good harvest contain domestic food inflation.
• Inflation has been expected to further ease up to 4.8% in Financial Year 2022 on the moderating domestic demand s the economy returns to normal. As per Asian Development Outlook, this will help the central bank in maintaining an accommodative stance by ensuring ample liquidity as well as keeping the long-term interest rates from rising.
Downside risks that can impact the recovery:
• According to ADB, an uncertain pandemic trajectory with a prolonged second wave of Coronavirus pandemic despite the vaccination push can affect India’s economic normalization.
• However, the forecast by ADB, expects the economic impact of the second wave to be relatively low compared to the first wave in line with the global experience.
• Other downside risks to the economic recovery include the further tightening of global financial conditions on the fast recovery in the developed nations, which will further apply pressure on India’s market interest rates.
#RBI MONETARY POLICY: RATES REMAIN UNCHANGED
The Reserve Bank of India (RBI) has released the Monetary Policy Report for the month of April 2021.
Unchanged Policy Rates:
o Repo Rate - 4%.
o Reverse Repo Rate - 3.35%.
o Marginal Standing Facility (MSF) - 4.25%.
o Bank Rate- 4.25%.
GDP Projection: Real Gross Domestic Product (GDP) growth for 2021-22 has been retained at 10.5%.
Inflation: RBI has revised the projection for Consumer Price Index (CPI) inflation to:
5.0% in Quarter 4 of 2020-21.
5.2% in Quarter 1 of 2021-22.
5.2% in Quarter 2 of 2021-22.
4.4% in Quarter 3 of 2021-22.
5.1% in Quarter 4 of 2021-22.
Accommodative Stance: The RBI decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.
Support to Financial Institutions:
RBI would extend fresh support of Rs. 50,000 crore to the All India Financial Institutions for new lending in Financial Year (FY) 2021-22.
National Bank for Agriculture and Rural Development (NABARD) will be provided a Special Liquidity Facility (SLF) of Rs. 25,000 crore for one year to support agriculture and allied activities, the rural non-farm sector and Non-Banking Financial Companies (NBFCs) - Micro-Finance Institutions (MFIs).
An SLF of Rs. 10,000 crore will be extended to the National Housing Bank for one year to support the housing sector.
Small Industries Development Bank of India (SIDBI) will be provided Rs.15,000 crore under this facility for up to one year for funding of Micro, Small and Medium enterprises (MSMEs).
All three facilities will be available at the prevailing policy repo rate.
Government Securities Acquisition Programme (G-SAP) 1.0:
About: The RBI, for the year 2021-22, has decided to put in place a secondary market Government Security (G-sec) Acquisition Programme or G-SAP 1.0. It is part of RBIs Open Market Operations.
Under the programme, the RBI will commit upfront to a specific amount of Open Market Purchases of government securities.
The first purchase of government securities for an aggregate amount of Rs. 25,000 crore under G-SAP 1.0 will be conducted on 15th April, 2021.
Objective: To avoid volatility in the G-sec market in view of its central role in the pricing of other financial market instruments across the term structure and issuers, both in the public and private sectors
Significance: It will provide certainty to the bond market participants with regard to RBI’s commitment of support to the bond market in FY22.
The announcement of this structured programme will help reduce the difference between the repo rate and the 10-year government bond yield. That, in turn, will help to reduce the aggregate cost of borrowing for the Centre and states in FY 2021-22.
It will enable a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions.
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates.
The slope of the yield curve gives an idea of future interest rate changes and economic activity.
Key Terms
Repo and Reverse Repo Rate: Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Here, the central bank purchases the security.
Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.
Bank Rate: It is the rate charged by the RBI for lending funds to commercial banks.
Marginal Standing Facility (MSF): MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely. Under interbank lending, banks lend funds to one another for a specified term.
Open Market Operations: These are market operations conducted by RBI by way of sale/purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
If there is excess liquidity, RBI resorts to sale of securities and sucks out the rupee liquidity.
Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market.
It is one of the quantitative (to regulate or control the total volume of money) monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.
Inflation: Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
Inflation measures the average price change in a basket of commodities and services over time.
Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
Consumer Price Index:
It measures price changes from the perspective of a retail buyer. It is released by the National Statistical Office (NSO).
The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.
#CHINA’S NEW DIGITAL CURRENCY
• China in February 2021 launched the latest round of pilot trials of its new digital currency, with reported plans of a major roll-out by the end of the year and ahead of the Winter Olympics in Beijing in February 2022.
• While several countries have been experimenting with digital currencies, China’s recent trials in several cities have placed it ahead of the curve and offered a look into how a central bank-issued digital tender may impact the world of digital payments.
About China’s Digital Currency
• Officially titled the Digital Currency Electronic Payment (DCEP), the digital RMB (or Renminbi, China’s currency) is, as its name suggests, a digital version of China’s currency.
• It can be downloaded and exchanged via an application authorised by the People’s Bank of China (PBOC), China’s central bank.
• China is among a small group of countries that have begun pilot trials; others include Sweden, South Korea and Thailand.
How is it different from an e-wallet?
• Unlike an e-wallet such as Paytm in India, or Alipay or WeChat Pay in China, the Digital RMB does not involve a third party. For users, the experience may broadly feel the same. But from a legal perspective, the digital currency is different. This is legal tender guaranteed by the central bank, not a payment guaranteed by a third-party operator.
• There is no third-party transaction, and hence, no transaction fee. Unlike e-wallets, the digital currency does not require Internet connectivity. The payment is made through Near-field Communication (NFC) technology.
• Also, unlike non-bank payment platforms that require users to link bank accounts, this can be opened with a personal identification number, which means “China’s unbanked population could potentially benefit”.
How widely is it being used in China?
• Following trials launched last year shortly after the COVID-19 pandemic struck, 4 million transactions worth $300 million had used the Digital RMB, the PBOC said in November.
• In the latest round of trials in February to coincide with the Chinese New Year holiday, Beijing distributed around $1.5 million of the currency to residents via a lottery, with “virtual red envelopes” worth 200 RMB each (around $30) sent to each resident.
• Shenzhen and Suzhou were other cities that distributed currency as part of pilot trials, which the Ministry of Commerce said will be expanded in coming months, with a wider roll-out expected before the Winter Olympics.
What are the reasons behind the push?
• Tame Private dominating Digital Payment Market: While digital payment platforms have helped to facilitate commerce in China, they have placed much of the country’s money into the hands of a few technology companies.
• By 2019, Alibaba (which is behind Alipay) controlled 55.1% of the market for mobile payments in China. Tencent (which owns WeChat Pay) controlled another 38.9%.
• The trials by Chinese authorities coincided with moves by Chinese regulators to tame some of its Internet giants, like Alibaba and Tencent.
• Financial Stability: A key objective of China’s sovereign digital currency was “to maintain financial stability should ‘something happen’ to Alipay and WeChat Pay.
• Counter rise of Cryptocurrencies: Chinese regulators have also warily viewed the rise of cryptocurrencies. The central bank-issued digital RMB will turn the logic of decentralised cryptocurrencies on its head, without the privacy and anonymity they offer, by giving regulators complete control over transactions.
• Global motivations: Beyond China’s borders, DCEP could help facilitate the internationalisation of the renminbi.
#BRITAIN’S NEW DIGITAL CURRENCY: BRITCOIN
British authorities are exploring the possibility of creating a Central Bank Digital Currency, being touted as "Britcoin."
It is a step towards future proofing Pound Sterling (currency of the United Kingdom) against cryptocurrencies and improving the payments system.
About Britcoin:
In the wake of declining cash payments in the country partly due to the Corona pandemic, the Bank of England and the Treasury are considering creating Digital Currency.
The Digital currency, if passed, would exist alongside cash and bank deposits and act as a new form of money to be used by households and businesses in England.
It would sit at the interface between cash and private payments systems and would not necessarily be based on distributed ledger technology.
This ‘britcoin’ would be tied to the value of the pound to eliminate holding it as an asset to derive profit.
The move could have an economic impact in the form of wider investment into the UK tech sector and lower transaction costs for international businesses.
Britain’s digital currency would be different in a key sense as if passed, it would be issued by state authorities. Currently, only the Bahamas has such a currency, though China is trialing it in several cities.
Digital Currency:
Digital currency is a payment method which is in electronic form and is not tangible.
It can be transferred between entities or users with the help of technology like computers, smartphones and the internet.
Although it is similar to physical currencies, digital money allows borderless transfer of ownership as well as instantaneous transactions.
Digital currency is also known as digital money and cybercash. E.g. Cryptocurrency.
Central Bank Digital Currency:
A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region).
Fiat Currency: It is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
Each unit acts as a secure digital instrument equivalent to a paper bill and can be used as a mode of payment, a store of value, and an official unit of account.
Benefits: CBDC aims to bring in the best of both worlds—the convenience and security of digital form like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system.
New forms of digital money could provide a parallel boost to the vital lifelines that remittances provide to the poor and to developing economies.
It will ensure that people are protected from financial instability caused due to the failure of private payments systems.
Ensures that central banks retain control over monetary policy against the remote possibility that payments might migrate into cryptocurrencies over which they have no leverage.
Risk Associated: There is a need to enforce strict compliance of Know Your Customer (KYC) norms to prevent the currency’s use for terror financing or money laundering.
Existence of digital money could undermine the health of commercial banks as it removes deposits on which they primarily rely for income.
India’s Stand on Digital Currency:
Reserve Bank India (RBI) had considered crypto currencies as a poor unit of account and also demonstrated by their frequent and high fluctuation in value.
According to RBI, it pose several risks, including anti-money laundering and terrorism financing concerns (AML/CFT) for the state and liquidity, credit, and operational risks for users.
However, it is considering developing a sovereign digital currency when the time is appropriate.
