RBI RINGS ALARM BELLS: RISING STATE GOVERNMENT DEBT, DECLINING REVENUES - The Daily Guardian
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RBI RINGS ALARM BELLS: RISING STATE GOVERNMENT DEBT, DECLINING REVENUES

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The economic crisis in Sri Lanka, which has led to complete political and social collapse in the country has served as an alarming reminder of unsustainable public debt and its impact on the economy of a country. A recent article published by the Reserve Bank of India (RBI), written by a team of economists including Atri Mukherjee, Samir Ranjan Behera, Somnath Sharma, Bichitrananda Seth, Rahul Agarwal, Rachit Solanki, and Aayushi Khandelwal, under the guidance of Deputy Governor Michael Debabrata Patra, highlights that fiscal conditions in many states in India are showing warning signs of building stress. The article brings into focus the debt of many Indian states and the lack of sustainability in public finances. The main factors that affect this sustainability include a slowdown in tax revenue collection, higher expenditure, and an increased subsidy burden. Perhaps what is more worrisome is that for some states, the debt growth has now outpaced the growth in Gross State Domestic Product (GSDP), which when combined with increasing risks, puts the economy of these states in a precarious position. Overall, the fiscal position of many states, which had already been struggling to recover from the financial impact of the COVID-19 pandemic, has heavily deteriorated in the past year, due to a sharp decline in revenue, an increase in spending, and a sharp rise in debt to GSDP ratios.

Considering the economic crisis in India’s neighbouring country, Sri Lanka, the RBI has published an article on state finances to evaluate the states’ fiscal conditions.
Source: Wikipedia Commons

WHAT ARE THE KEY FINDINGS OF THE ARTICLE?

States including Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh, and Haryana were recorded as having the highest debt burden and account for half of the total expenditure by all the state governments in India. For these ten states, the ratio of their Gross Fiscal Deficit to GSDP is also equal to or more than 3.0 per cent in 2021-22, with Punjab being at the top at 9.60 per cent, followed by Andhra Pradesh at 6.1 per cent, West Bengal at 6.0 per cent, Haryana at 5.3 per cent, and Kerala at 5.1 per cent.

Additionally, eight out of these ten states also have an interest payments to revenue receipts ratio of more than 10 per cent and have been recording a decline in State’s Own Tax Revenue (SOTR), particularly Madhya Pradesh, Kerala, and Punjab. Ideally, the real rate of interest on debt should be lower than the real GDP growth rate. However, in the five states with the most debt, the rate of growth of public debt has turned out to be higher than GSDP growth most of the time in the last five years. The article warns that for the five most indebted states – Bihar, Kerala, Punjab, Rajasthan, and West Bengal – the debt stock is no longer sustainable, as the debt growth has outpaced their Gross State Domestic Product (GSDP) growth in the last five years.

The increased level of debt also implies that a state spends a significant share of its revenues on servicing the debt. Several states spend about 10 per cent or more of revenue receipts on interest payments, with Punjab and West Bengal spending more than 20 per cent.

Another key finding in the article is that the share of subsidies in total revenue expenditure has increased from 7.8 per cent to 8.2 per cent during 2019-20 and 2021-22 for 19 states. In fact, states like Punjab, Rajasthan, and Chhattisgarh spend more than 10 per cent of their total revenue expenditure on freebies. The poor financial situation of the state governments can also be attributed to declining tax and non-tax revenues, which affects their expenditure planning and increases their dependence on market borrowing. The tax revenue of various states, including Madhya Pradesh, Punjab, and Kerala, has been declining over time, making them fiscally more vulnerable.

Any further shocks or pressures, including the relaunch of the old person scheme by some states, rising expenditure on non-merit freebies, expanding contingent liabilities, and the ballooning of distribution companies, is likely to significantly increase stress risks in the fiscal conditions of many states, jeopardising the fiscal sustainability of these states. The report goes on to highlight that as per stress tests, the conditions of the most indebted state governments will continue to deteriorate further, with their debt-GSDP ratio likely to remain above 35 per cent in 2026-27.

The article states that the fiscal conditions among states in India are showing warning signs of building stress. Source: Wikipedia Commons

ARE FREEBIES AND SUBSIDIES TO BLAME?

Referring to the economic collapse in Sri Lanka, the article states that this was not only fueled by the pandemic, but also by the policy decisions of the government, particularly the provision of subsidies. The report raises similar concerns for several Indian states. As per the data of the Comptroller and Auditor General (CAG), the monitoring financial authority of central and state governments, the expenditure on subsidies by state governments had increased by 12.9 per cent during 2020-21, 11.2 per cent during 2021-22, while it had briefly contracted during 2019-20. The highest increase in the provision of subsidies was recorded in Jharkhand, Kerala, Odisha, Telangana, and Uttar Pradesh. Andhra Pradesh, Madhya Pradesh, and Punjab, for instance, incur a very high subsidy bill by doling out freebies that go over and above 10 per cent of their total revenue receipts. For states like Andhra Pradesh and Punjab, already battling with heavy indebtedness, freebies are a concern as their dole out is steadily inching up to more than 2 per cent of the GSDP.

According to the report state finances are vulnerable to a variety of unexpected shocks that might alter their fiscal outcomes, causing slippages relative to their budgets and expectations.
Source: Kundan kumar | Pixahive

The main areas in which subsidies were provided include education, rural development, social welfare (pension schemes), and energy (power subsidies). While some subsidies such as employment guarantee schemes, education, and health-care bring economic development along with being public goods, others such as loan waivers, electricity and water concessions could cause long-term economic stress on finances. This distinction between subsidies is critical for states to consider when evaluating the fiscal and long-term impact of providing them. While some freebies can benefit those economically disadvantaged, it is important to highlight their large fiscal costs and the inefficiencies in their provisions, which not only distort market prices but also cause the misallocation of resources.

The report mentions that the government of Sri Lanka had a huge deficit – it used to spend a lot more than it made in revenues and was already in debt to several international lenders and banks. In addition to this, the economic inefficiencies in the provision of subsidies contributed to rising inflationary pressures on the country, leading to a situation where ordinary citizens could not even afford basic necessities. In the recent past, political parties have resorted to using freebies as election promises in order to lure voters. The provision of continuous freebies without proper economic management will not only increase the fiscal debt of states but also generate long-term inflationary pressures on the economy. While freebies do not directly lead to enormous debt, their poor economic management does, and this has been seen in the cases of states such as Jharkhand and the Union Territory of Delhi, both of which recorded a budget surplus.

The report serves as a reminder to state governments to evaluate their fiscal debt burden and find avenues to improve the pressures on their economy. The focus of states needs to be on stabilising debt levels and restricting revenue expenses by cutting down the expenditure on non-merit subsidies (subsidies apart from those provided for merit goods such as food, education, and health). Other recommendations by the report include large-scale reforms in the power distribution sector, which would make discoms (power distribution companies) financially sustainable and operationally efficient and conduct regular fiscal risk analyses.

Contributing reports by Aparna Girli Babu and Ratika Khanna, Junior Research Associates at Polstrat, and Arin Prabhat, Ashita Koul and Kaustav Dass, Interns at Polstrat.

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STAGE SET FOR GUJARAT ASSEMBLY ELECTIONS 2022

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The stage is set for the December Assembly polls in Gujarat with parties conducting roadshows, yatras, voter registration, and awareness campaigns across the state in full force. The Bharatiya Janata Party (BJP), which has dominated the state almost entirely since 1998, faces a huge challenge – beating over 20 years of anti-incumbency. The party won the 2017 elections in the state, securing 99 seats in the 184 member Assembly with a vote share of 49.05 per cent. It faced tough competition from the Indian National Congress (INC), which used to dominate the political discourse in the state until the 1990s, and managed to secure 77 seats with a vote share of 41.44 per cent.

In the run-up to the Assembly elections in Gujarat slated for the end of 2022, the ruling Bharatiya Janata Party state chief addressed the party’s workers.

On 13 September 2021, Bhupendra Patel was sworn in as the 17th Chief Minister of Gujarat.

In the run-up to the Assembly elections in Gujarat slated for the end of 2022, the ruling Bharatiya Janata Party state chief addressed the party’s workers.

However, since then, the INC’s term in the state has been marred by a series of defections by major leaders from the party, as well as infighting, which led to a diminishing presence in the assembly (64 seats), while increasing the BJP’s tally to 112 seats. The Aam Aadmi Party (AAP), riding high from its victory in Punjab, has also thrown its hat into the fray. AAP continues on its mission to replace the INC as the major opposition national party in the state. The party is resorting to its tried and tested freebie and corruption-free formula, while also inducting local leaders and forging alliances with smaller regional parties. Most political analysts believe that the BJP’s strong on-ground organisational structure, clubbed with the use of heavyweights such as Prime Minister Narendra Modi and Home Minister Amit Shah, both of whom are from Gujarat, will be enough to ensure the party’s victory.

That being said, some also point out the fact that the BJP’s tally has reduced in every election since 2002, indicating some erosion in its vote base.

Source: republicworld.com

PARTIES’ PROMISES TO THE PEOPLE OF GUJARAT

Arvind Kejriwal held a meeting with Chhotu Vasava, chief of Bharatiya Tribal Party, and later jointly addressed the ‘Adivasi Sankalp Mahasammelan’.

Source: theweek.in

The BJP’s campaign in Gujarat was in full force right after the party’s victories in various states earlier this year, including Uttar Pradesh. Since then, both Prime Minister Modi and Amit Shah have been on several trips to the state, holding rallies and roadshows, and are constantly part of meetings in New Delhi and in Gujarat to chalk out election strategy. The BJP has been capitalising Narendra Modi’s popularity in the state and has targeted winning 150 seats in the December polls. The party has chalked out a strategy to woo not only its traditional urban voters, but also tribals, OBCs, Dalits, and the Patidars, a traditional vote bank of the Congress. Modi also visited Dahod, a tribal dominated area, which has been the bastion of the Congress so far. Despite the looming issues of anti incumbency, unemployment, price rise and an impending agricultural crisis, Modi, Shah,and the BJP enjoy widespread popularity in the state. The party is leaving no stone unturned to highlight that both Modi and Shah are sons of the Gujarat soil. The AAP also kickstarted its campaign in the state on the first day of Chaitra Navratri, from the Khodiyar Mata temple in Nikol area in Ahmedabad. AAP has so far been most successful in attracting the section of the Patidar community which has been disenchanted with the current dispensation. The party has staged its greatest show yet in the Surat civic polls, riding the wave of the Patidar disenchantment. It is continuing its tried and tested formula of promising free electricity, education, and the promise of eradicating corruption in the state. Dr Sandeep Pathak, who is credited to have played a key role in AAP’s Punjab performance, has been elected as the party’s in-charge of affairs in Gujarat, while Gulab Singh Yadav is the campaign in-charge. The AAP has focused on expanding its organisational base in the state while subsequently inducting a slew of prominent faces from different fields, including popular TV anchor Isudan Gadhvi, youth leader Yuvrajsinh Jadeja, farmer activist Sagar Rabari, and Patidar youth leader Nikhil Savani into its fold. It has also sealed an alliance with the Bharatiya Tribal Party (BTP) of Chotu Vasava which has two MLAs in Gujarat. As the elections inch closer, the AAP is likely to ally with more regional parties to secure its standing in the state. While incumbent Chief Minister Bhupendra Patel is the BJP’s Chief Minister face so far in the campaign, the AAP and INC are yet to announce a chief ministerial candidate. 

WILL THE INC STEP UP?

The Congress, which dominated politics in Gujarat till 1995, has been struggling since to find its foothold again. However, these polls are likely to be the toughest challenge for the party as it is tasked not only with defeating the BJP, which has dominated the state’s politics in recent years, but also protecting its base from parties such as the AAP and AIMIM. From July 2017 until now, the party has lost 29 MLAs, bringing its tally down to 64, with Hardik Patel’s defection being the sharpest blow to the party.

The performance of AAP in the Surat Municipal Election will motivate the party to be a significant challenger to BJP in Gujarat.

Some political analysts believe the party could give some competition to the BJP if it sticks to its KHAM (Kshatriya, Harijan, Adivasi, Muslim) vote bank and tries to woo disgruntled Patel community members who have started looking away from the BJP.

The high level of infighting in the party, lack of local leaders and on-ground support are huge roadblocks for the party on this journey to the 2022 polls.

The party is making some attempts to woo local leaders and the electorate. These attempts include the launch of their “27 years of Congress” vs “27 years of BJP” campaign, which compares the tenures of both parties in the state. Party leaders have also taken out a ‘padyatra’ (foot march) from the party headquarters to Lord Jagannath temple to seek God’s blessings for a landslide victory in the elections.

While the party has announced a ‘Dwarka declaration’, whereby it hopes to win 125 seats in the December polls, the diminishing footprint of the party, on ground and in the assembly, point to the fact that this might be a farfetched goal.

Caste groups and voting patterns in Gujarat

The highest concentration amongst various caste groups in Gujarat is that of Other Backward Castes (OBCs) who account for roughly 42 per cent of the population, with Koli (22 per cent), and Thakors (20 percent) being the major castes in the OBC group. Apart from this, Patidars account for nearly 15 per cent of the population, Scheduled Tribes (STs) for around 16 per cent of the population, Scheduled Castes (SCs) for nearly 7 per cent, Muslims account for 10 per cent, and others account for the remainder 10 per cent of the population.

The departure of Hardik Patel from the Congress might dent the party’s chances of forming the government in the state.

AAP will be contesting in the 2022 Gujarat Assembly elections and will be looking to make inroads in the state.

The BJP will look forward to continuing its dominance in the state.

Taking these numbers into account, it is easy to conclude that the OBC cluster is likely to be the most influential in Gujarat politics. However, in the past, due to the varying castes and social groups within the OBC cluster, the group has never voted collectively (as a bloc). In fact, smaller groups from the OBC cluster, such as the goldsmiths or sonars, and ironsmiths or lohars, have been asserting their demands as a bloc and demanding more representation in the politics of the state.

Given the recent political history of the state, one of the most important caste groups to have emerged is the Patidars. The Patidars, an economically and politically influential caste group, is spread across the state, with a higher concentration in North Gujarat and Saurashtra.

The Patidars were ardent Congress supporters in the 1970s. They shifted their allegiance to the BJP in the 1980s as the Congress shifted its focus to the famous KHAM alliance (Kshatriya, Harijan, Adivasi, Muslim), due to the the reservation dynamics and former prime minister Indira Gandhi’s “garibi hatao” slogan. In 2015, during large-scale demonstrations, protests, and riots by the Patidars in Gujarat (they were seeking Other Backward Class (OBC) status), Hardik Patel (former Working President of the Gujarat Pradesh Congress Committee) rose to prominence as an important political force in the state.

Patel led the issue of the Patidar agitation and became the face of the movement. His rise to prominence has been cited as one of the key reasons for the INC’s rise in vote share by roughly 8.4 per cent in the 2017 assembly polls.

Perhaps one of the biggest setbacks the Congress faced during campaigns for the 2022 Assembly Elections was the loss of Hardik Patel.

After being with the INC for years and in ardent opposition to the BJP, Patel joined the BJP on 2nd June 2022 after being expelled from the INC for “anti-party activities”. All parties have been trying to woo this influential community ahead of the December polls. In fact, during the foundation day event at a community temple, Prime Minister Narendra Modi termed the community, “Panidar (strong)”.

Similarly, the Koli community, which accounts for roughly one third of the state’s population has the power to influence results in over 82 assembly seats, and could have a dominating power in 45 of those seats.

However, in the past, the community has been left out of the political discourse in the state, primarily due to the low rate of literacy and poor economic standing of the community. This year, the community has stepped up to claim their political significance in the state and local Koli leaders, along with former BJP parliamentarian Devji Fatepara and former Cabinet Minister Kuvarji Bavalia, held meetings in various districts to narrow down on their demands as a community.

Major demands of the community include a Rs 1,000-crore budget provision for the Koli Development Corporation and adequate financial support for their businesses and the community’s welfare trusts.

Apart from the individual issues of community groups, rising unemployment and inflation in the state are going to be key points raised by the electorate during the December polls. While retail inflation hit an 8-year high of 7.8 per cent in April, wholesale inflation surged to a 9-year high of 15.08 per cent on the back of elevated food and energy prices in the same month. Typically, issues such as inflation and unemployment, while used as poll planks by opposition parties, haven’t had the impact desired by the opposition on the electoral outcomes of state elections. The impact these issues are likely to have on the assembly elections are yet to be seen.

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RETHINKING INDIA’S ENERGY BASKET

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An ever-expanding Indian economy, continuously pushing for industrialisation and urbanisation, is witnessing a heightened demand for energy each passing year. Between 2000 and 2022, India alone accounted for more than 10 per cent of the increase in global energy demand. Moreover, energy demand in India, on a per capita basis, has grown by more than 60 per cent since 2000 with huge variations across states. As the country shifts towards a cleaner fuel-based economy, as part of its commitment to the Paris Climate Agreement (2015), several initiatives have been taken to replace fossil fuel-based energy generation with renewables. The initiatives range from cross-country partnerships such as the International Solar Alliance, to efforts aimed at the domestic energy market such as the Faster Adoption and Manufacturing of Electric Vehicles (FAME) II scheme.

India is dependent on fossil fuel for nearly 70% of its energy needs. It has committed to net-zero emissions by 2070.

Over the years, while there has been a considerable increase in the share of renewable energy in India’s energy basket, fossil fuels, primarily coal, continue to dominate India’s energy composition. This is coupled with a year-on-year increase in the installed capacity addition in coal-based power plants, along with other fossil fuels. Recent developments such as the Russia-Ukraine conflict have led natural gas and other fossil fuel prices to increase drastically and have compelled India to change its clean energy transition plans. A lot remains to be done to truly make the leap to a cleaner and environmentally sustainable future for India’s energy needs.

FOSSIL FUELS

Over 80 per cent of India’s energy needs are met by three fuels: coal, crude oil, and solid biomass. Coal, one of the most polluting fossil fuels, is the mainstay of the Indian energy sector. As the demand for energy in India increased over the years, demand for coal has nearly tripled between 2000 and 2019. In 2020, coal accounted for 44 per cent of India’s primary energy demand, up from 33 per cent in 2000. Demand for crude oil, another key fossil fuel in India’s energy basket, is directly linked to rising vehicle ownership and road transport use. Despite increasing urbanisation and purchasing power of households, the demand for oil has remained consistent at 25 per cent between 2000 and 2020, but there has been a considerable increase in oil consumption in absolute terms. The share of natural gas, a relatively cleaner fossil fuel, (dubbed as the transition fuel in India’s plans to move away from coal) increased from 5 per cent in 2000 to 8 per cent in 2010, but fell to 6 per cent by 2020.

The central government’s push for cleaner cooking fuels through Ujjawala Yojana led to households in India moving towards Liquefied Petroleum Gas (LPG) as a fuel for cooking needs. This has nearly halved the share of traditional biomass as a source of energy from 26 per cent in 2000 to 13 per cent in 2020. Even though this is a big drop, according to the Indian Energy Exchange, 66 crore Indians have still not fully switched to modern, clean cooking fuels or technologies and continue to use biomass for their household energy needs. While there is potential for consumer demand for liquefied natural gas (LNG), another ‘clean’ fossil fuel, this need cannot always be met owing to several infrastructural bottlenecks and pricing constraints.

CASE FOR RENEWABLES

Even as India has pushed for a cleaner and greener economy by shifting to cleaner fuels, renewable energy’s share in India’s energy composition has remained near 9 per cent in the two decades between 2000 and 2020. However, within renewable energy sources, there has been a considerable shift toward solar energy over the years. This is because of both the central government’s push in favour of solar energy and the falling costs of installing solar energy equipment such as solar panels and photovoltaic cells. As of March 2022, renewable energy formed a quarter of India’s total installed power capacity and accounts for 13 per cent of the country’s electricity generation. According to the Central Electricity Authority (CEA), total non-fossil fuel installed energy capacity in India, as of May 2022, was 1,66,729 megawatts (MW) or 41.4 per cent of India’s total installed capacity. Within this, solar energy has the highest share at 14.1 per cent followed by hydro at 11.6 per cent and wind at 10.1 per cent. Waste to energy contributes the least to renewable energy in India at just 0.1 per cent of the total installed capacity.

Renewables, including hydro power but excluding nuclear energy, comprise 39.6 per cent of India’s total installed capacity. With the Indian government’s concerted efforts to push India towards a fossil fuel free economy, a total of 65.6 gigawatts (GW) of solar and wind capacity has been added to the grid since the beginning of the fiscal year 2015-16 (solar and wind energy are increasingly emerging as the prime sources of renewable energy in India). In the fiscal year ending March 2022 alone, India added a record 13.9 GW of solar capacity to the grid. Interestingly, in 2019, India added nearly five times as much solar capacity as it did in 2015. A key driver of the increasing reliance on solar energy as the most viable form of renewable fuel has been the global decline in costs.

FALLBACK IN CLIMATE COMMITMENTS

At the 26th Conference of Parties (CoP26), Prime Minister Narendra Modi declared a five-fold strategy — termed as the panchamrita — to transition India towards a cleaner and greener economy. The five-fold strategy included bringing non-fossil energy capacity down to 500 GW and meeting 50 per cent of India’s energy requirements from renewable energy by 2030 as two key measures. The commitments aimed to reduce the total projected carbon emissions of the country by one billion tonnes from 2016 onwards and reduce the carbon intensity of the Indian economy by less than 45 per cent by 2030.

As a part of the climate commitments made in 2016, India set a target of adding 175 GW of renewable energy capacity by 2022, comprising 100 GW of solar energy, 60 GW of wind energy, 10 GW of biomass power, and five GW of small hydropower. With just five months remaining in 2022, only around 57 per cent of the 100 GW solar target and 67 per cent of the 60 GW wind target has been met. India is projected to miss its 2022 solar and wind capacity targets by about 27 per cent and 18 per cent, respectively.

CLEANER AND GREENER ECONOMY

Between 2015 and now, India’s efforts towards advancing its transition to clean energy and mobility include its determined contribution to installing 500 GW of renewable energy capacity by 2030. The FAME II scheme is one such measure aimed at promoting the switch from petrol/diesel-based private vehicles to electric vehicles and involves a subsidy component to the purchaser of the electric vehicle in the form of an upfront price reduction. The National Electricity Plan 2018 is another such measure. It includes a timeline of retiring coal power plants older than 25 years in two phases, along with plans to reduce around 48 GW of coal capacity between 2017 and 2027 (CEA, 2018). In May 2018, the Indian government announced a National Wind-Solar Hybrid Policy to promote large grid-connected wind-solar photovoltaic (PV) hybrid systems. The policy aims at promoting new and innovative technologies and methods for combining wind and solar power.

The world’s largest renewable energy park of 30 GW capacity (a solar-wind hybrid project) is currently undergoing installation in Gujarat. Globally, India is ranked third for total renewable power capacity additions with 15.4 GW in 2021, following China (136 GW), and the United States (43 GW). Measures to push renewables, which include increasing government allocation for Production Linked Incentive (PLI) schemes to boost the manufacturing of high-efficiency solar modules, have added to India’s efforts for cleaner fuel. In June 2021, a global initiative to accelerate clean energy innovation among countries called Mission Innovation CleanTech Exchange was also launched.

Other indirect initiatives of the central government include Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM-KUSUM) to support the installation of off-grid solar pumps in rural areas and reduce dependence on the grid in grid-connected areas; SAUBHAGYA scheme to provide electricity to Indian households; Solar Charkha Mission (employment generation for nearly one lakh people through solar charkha clusters in rural areas); National Solar Mission and Renewable purchase obligation (RPO) – the mechanism by which distribution companies are obligated to purchase a certain percentage of power from renewable energy sources, among other measures.

India is highly dependent on coal as a source of energy. As of 2022, coal meets 44% of India’s primary energy demand, up from 33% in 2000. Souce: qz.com

FULL POWER AHEAD

Tremendous growth in renewable energy sources in India has tempered the growth in coal capacity, but has neither prevented the increase nor replaced it. Between 2015 and 2019, the rise in installed coal-fired capacity was higher than that of solar and wind (58 GW coal thermal capacity installed versus 49 GW solar and wind). This was in spite of renewables outpacing coal-fired capacity additions since 2017, coupled with a number of cancellations of approved coal projects.

According to the Central Electricity Authority (CEA), the main advisory body for the central government on policy matters and electricity systems, the country’s installed capacity of non-fossil energy for electricity generation — solar, wind, hydel, and nuclear will increase from 134 GW in 2019 to 522 GW in 2030. This will require solar and wind energy installed capacity to increase to 280 GW and 140 GW, respectively. While India has reduced support to the fossil fuel industry over the years, increasing demand for energy, external factors such as rise in prices of gas, and India’s dependence on imports for solar energy equipment have been major roadblocks in India’s transition to clean energy.

India was ranked third in renewable energy installations in 2021, according to the Renewables 2020 Global Status Report published by REN21. Source: thewire.in

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SINGLE-USE PLASTICS BANNED IN INDIA: WILL THIS WORK?

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On 1 July, the Centre banned the use of “single-use plastic” across India, including cigarette packs and cutlery. India has been struggling with the issue of plastic pollution. There is no organised system for managing plastic waste in the country, which leads to widespread littering. As per the World Population Review, India is one of the largest generators of plastic waste in the world (12,994,100 tonnes in 2022) and also generates the most plastic waste to be released into the oceans, second only to the Philippines. Single-use plastics are the biggest threat to the environment, wildlife, and to people. They contribute to rising pollution and the toxic chemicals released from them can affect groundwater, which in turn causes deadly diseases. According to a report from the Veolia Institute, since 1950, close to half of all plastics used worldwide have ended up in landfills or were dumped in the wild, and only 9 per cent of the used plastics have been adequately recycled. The ban – which had been in the pipeline for over a year – is not the first time the country has attempted to tackle the problem of single-use plastics. However, previous attempts at imposing the ban have been limited to certain states and products and have seen limited success due to enforcement issues.

According to a report by FICCI, about 60% of plastic waste in India is collected. The remaining 40% or 10,376 tonnes remain uncollected.

WHAT WILL THE BAN ENTAIL?

Single-use plastics include items that can only be used once and usually make up the highest share of manufactured plastics. Items such as grocery bags, food packaging, bottles, straws, containers, cups, and cutlery are all single-use plastics. Most single-use plastics are non-biodegradable. Instead, they slowly break down into smaller pieces known as microplastics. As per the ban, which came into effect last week, the manufacture, import, stocking, distribution, sale, and use of single-use plastics has been prohibited. This includes earbuds; balloon sticks; candy and ice-cream sticks; cutlery items including plates, cups, glasses, forks, spoons, knives, trays; sweet boxes; invitation cards; cigarette packs; PVC banners measuring under 100 microns; and polystyrene used for decoration. Previously, the Ministry of Environment, Forest and Climate Change had already banned polythene bags under 75 microns in September 2021, expanding the limit from the earlier 50 microns. From December 2022, the ban will be extended to polythene bags under 120 microns. Ministry officials have explained that the ban is being introduced in phases to give manufacturers time to shift to polythene bags with larger micron sizes, which are easier to recycle. Any violation of the norms — manufacture, import, stocking, distribution, sale, and use will attract penalties and punishments laid out under the Environment Protection Act, 1986. According to the Act, whoever fails to comply with the provisions may be punishable with imprisonment for a term which may extend to five years or with a fine up to Rs 1 lakh, or both.

The government is planning to set up control rooms at national and state levels to ensure effective implementation of the ban. Apart from this, special enforcement teams will be formed to check the illegal manufacture, import, stocking, distribution, sale, and use of the banned single-use plastic items. Central Pollution Control Board (CPCB) officials have also said that state governments will be setting up border checkpoints to stop the inter-state movement of any banned single-use plastic item. In addition to this, the government has, over the past year, focused on encouraging industries and MSMEs to come up with alternatives for plastic, including biodegradable plastic and compostable plastic. A grievance redressal app was launched so that citizens could act as watchdogs to help further enforce the ban. In the past, environmental activists and critics have highlighted the lack of enforcement of any bans or policies implemented by the government.

IMPACT OF THE BAN

The ban will play an enormous role in combating numerous environmental issues as well as have a positive impact on individual health. The production of plastic requires a huge amount of energy and resources, which in turn contributes to increased carbon emissions and ultimately, global warming. Reducing the use of plastic will result in fewer carbon emissions from producing, transporting, recycling, and disposing of the waste materials, in addition to reducing illegal plastic waste being dumped into the ocean. However, the practical implications of the ban, including the loss of industry and jobs should also be taken into consideration. Banning plastic bags will reduce retail employment. According to the All-India Plastics Manufacturers Association (AIPMA), 88,000 MSMEs across the country produce single-use plastic items and employ around one million people, who will lose their livelihoods due to the ban. According to the Federation of Indian Chambers of Commerce & Industry or FICCI, the ban will lead to an increase in the prices of fast-moving consumer goods (FMCG) products. It will also completely wipe out various low price point products (products that cost less than Rs 5 – such as shampoo sachets, detergent pouches, biscuit packets etc.) as production at these price points becomes unviable. Various industry representatives have asked the government for more time to phase out single-use plastic products, and have questioned the government’s move to ban several products that they claim are recyclable. As per the Thermoformers and Allied Industries Association (TAIA), the industry has a turnover of Rs 10,000 crore and directly employs two lakh people. The ban, it said, will render assets worth Rs 5,000 crore useless overnight. It will also affect the recycling industry, which indirectly supports 4.5 lakh people, it added.

The ban, effective from 1 July 2022, will be monitored and implemented by the Central Pollution Control Board.

India generates 15 million tonnes of plastic waste every year, but only one fourth of this is recycled due to the lack of a functioning solid waste management system.The ban may have a negative impact on street vendors who have to scramble to find affordable alternatives.

EVIDENCE FROM OTHER COUNTRIES

India is late in jumping on the bandwagon to ban single-use plastics. As many as 27 territories in the Caribbean subregion and 34 countries in Africa have passed a law banning plastics and successfully implemented it. In fact, Rwanda became the world’s first ‘plastic-free’ nation in 2009, ten years after it introduced a ban on all plastic bags and plastic packaging. Anyone who is caught with a plastic item faces a jail term of up to six months. On entering a border post into the country, vehicles are searched and any plastic bags or packaging are confiscated before they enter the country. Similarly, Kenya’s plastic ban is probably one of the strictest in the world. Anyone caught manufacturing, selling, or even carrying a plastic bag, either has to face four years of imprisonment or submit a fine of $40,000. Apart from this, a ban on single-use plastics also took effect in the European Union in 2021.

There are many lessons that can be learnt from years of policy implementation in countries across the world. One of the key steps is to ensure the regulation of the entire lifecycle of single-use plastics — from manufacturing and production, use and distribution, to trade and disposal. Governments often fail to incentivise the market of plastic alternatives. They are also unable to put policies in place that would require recycled content to be used in the production of plastic or biodegradable bags.

While banning single-use plastic by enforcing laws, accompanied with stringent punishments, is a step in the right direction, it is often found that statutory measures on their own are not sufficient to reduce the use of plastic. As India bans the use of single-use from 1st July, there are structural and behavioural changes required to reduce the use of plastic in the country.

Behavioural change campaigns could lead to a decrease in the use of plastic by consumers. Incentives could be provided to consumers to reduce the use of plastic. The case in hand is Ireland’s Plastax, which levies a charge on the use of plastic bags by the consumers. It led to a 90 per cent drop in the use of plastic bags, with one billion fewer bags used, and it generated $9.6 million for a green fund supporting environmental projects.

Another major issue that is going to trouble consumers, as well as business organisations, is that there is no clear guideline in place for alternatives that could fully replace plastics. There is an urgent need to invest in research and development into low cost and mass-produced alternatives to single-use plastic.

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SHIV SENA’S POLITICAL IMBROGLIO

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On 21 June 2022, Maharashtra Urban Affairs minister and senior Shiv Sena leader Eknath Shinde launched a rebellion against Chief Minister and Shiv Sena President Uddhav Thackeray. Shinde, along with 11 other Sena lawmakers, left for Surat in the neighbouring Bharatiya Janata Party (BJP)-ruled Gujarat. As the political crisis unfolded over the next few days, the roster of rebel Members of Legislative Assembly (MLAs) following Shinde allegedly jumped above 50 (as this goes to print), with 39 belonging to the Shiv Sena from its tally of 55 in the state assembly and rest either independent or coming from smaller parties. As the number of rebel MLAs increased, the Shinde camp shifted base to the north-eastern state of Assam, also ruled by the BJP, with families of some MLAs claiming they were held against their will. Interestingly, of the 39 rebel MLAs, nine are ministers in the Maha Vikas Aghadi (MVA) government, holding key portfolios of agriculture, urban development, finance and public health, amongst others.

The crises in India’s politically crucial and wealthiest state have escalated in less than a week as the fight has now reached the Supreme Court of India (SC). The rebel MLAs form a comfortable majority over the two-thirds, or 37, Sena MLAs required to bypass the anti-defection law and lay claim as a separate faction of the party. The Thackeray-led Shiv Sena has reached out to the Deputy Speaker of the Maharashtra Assembly to expel the rebel MLAs and prevent them from claiming Bal Thackeray’s legacy.

The Maha Vikas Aghadi (MVA) alliance is in turmoil as Eknath Shinde, a Cabinet Minister from Maharashtra and veteran Shiv Sena leader, rebelled against the party leadership after the recently concluded MLC elections.

Source: NDTV

During the 2019 Maharashtra Assembly elections, BJP and Shiv-Sena contested as alliance partners.

Source: Tv9 Marathi

GENESIS OF THE POLITICAL CRISIS

The political crisis unfolding in Maharashtra has its roots partly in the MVA coalition formed after the 2019 Maharashtra Assembly elections. While the elections gave a clear majority to the incumbent BJP-Shiv Sena alliance with 105 and 56 seats, respectively, seat-sharing agreement fell through as the alliance partners failed to reach an agreement over the ministerial berths and the chief minister’s post. The following days witnessed a curious turn of events from the implementation of President’s rule in the state to Nationalist Congress Party (NCP) leader Ajit Pawar’s failed rebellion to support the BJP under Devendra Fadnavis’ leadership. The BJP-Ajit Pawar government led by Fadnavis was sworn in with Pawar as the deputy CM but fell in less than three days as rebel NCP MLAs abandoned him. In an interesting turn of events, also involving the SC’s intervention to hold a floor test, NCP’s Sharad Pawar cobbled up an unusual coalition of parties with diametrically opposite ideologies as Uddhav Thackeray was sworn in as the 19th Chief Minister of the state. The MVA government comprising Shiv Sena, NCP, and the Congress had the backing of 163 MLAs, including independents and lawmakers from smaller parties.

Over the past two and a half years, the alliance has sailed through shaky waters with several within and outside the MVA also doubting the likelihood of the alliance completing a five-year term. Discordant MLAs across the three parties have shown unwillingness to support alliance partners and work together in ministries and departments apart from allegations of cross-voting in the Rajya Sabha and MLC elections. The recently concluded MLC and Rajya Sabha elections laid bare the deep fissures in the MVA with the Shiv Sena’s inability to transfer votes to the Congress MLC candidate. Subsequent cross-voting helped the BJP gain one extra MLC seat at the cost of the Congress. Adding to that, the Shiv Sena’s recent back and forth to fight the local body polls alone or in an alliance with the MVA partners has signalled the party leadership’s lack of faith in transferring its political coalition at the top to a social coalition and vote transfer to alliance candidates on the ground.

DISCONTENTMENT WITH INCUMBENT CHIEF MINISTER

Shiv Sena had formed an alliance with Congress, NCP and independent MLAs with Uddhav Thackeray as Chief Minister.

Source: India Today

Rebel leader Eknath Shinde has called the ruling MVA government an “unnatural alliance” and has referred to the rebellion as a desperate attempt to reinvigorate Balasaheb’s ideals and a critical step for the benefit of the Shiv Sainiks on the ground. What’s more, several key leaders were unhappy from the beginning as the Shiv Sena broke ties with the BJP, nurtured by Shiv Sena founder and party supremo Balasaheb Thackeray, after the 2019 elections. Many also felt that in spite of being the largest party in the coalition, two of the key portfolios- home (which is with NCP) and revenue (which is with Congress) remained elusive for the Sena MLAs. However, the Shiv Sena’s recent troubles are not simply a result of a poorly planned electoral coalition.

While Eknath Shinde and the rebel MLAs have expressed discontent in allying with the Congress, having vehemently fought over the years, Shiv Sena MLAs have also expressed their resentment with Chief Minister Uddhav Thackeray. Several MLAs have complained of the unavailability and inaccessibility of the Chief Minister to party MLAs, his biased favour of the alliance MLAs in the allocation of developmental funds, and their inability to meet him at the Chief Minister’s office. Senior leaders have expressed dissatisfaction at the rising clout of young leaders led by Chief Minister’s son and cabinet Minister Aaditya Thackeray and the consequent sidelining of seasoned leadership. Local leaders and MLAs such as Sanjay Shirsat also indicate the cadre’s unhappiness with the party’s move away from its core Hindu ideology, an unavoidable result of the party’s alliance with centrist NCP and Congress.

THACKERAY’S FIGHT FOR THE SENA

Shiv Sena MLAs have filed disqualification resolutions against rebels and counter resolutions have been filed by the rebels to quash the Deputy Speaker’s authority in the wake of the assumed loss of majority in the Maharashtra Assembly. The political crises may also jeopardise Uddhav Thackeray’s control over Shiv Sena and Bal Thackeray’s legacy. The rebel faction, in a direct attack on Thackeray’s leadership of the party, named their group Shiv Sena Balasaheb and has called out Uddhav Thackeray for his alleged inability to uphold Balasaheb’s ideals and ideology.

The rebel faction received a shot in the arm as the Supreme Court virtually put the disqualification proceedings initiated against 16 rebel Shiv Sena MLAs in abeyance. The court has extended the time for them to file their response to the notice issued by the Deputy Speaker of the Maharashtra Assembly till 12th July 2022. It has also questioned the legality of the Deputy Speaker to decide on its own removal.

Eknath Shinde along with other rebel MLAs are demanding withdrawal of Shiv Sena from the MVA alliance with Congress and NCP.

FUTURE OF SHIV SENA AND MVA

The MVA’s numbers appear to have fallen from 163 in the 288 seat Maharashtra Assembly as Shinde claims the support of 39 Sena lawmakers and six independents. The regime’s future looks bleak with its reduced numbers and is unlikely to prove its majority in the assembly. If the Shinde faction is able to hold fort and get a clean chit from the SC it could eventually back or even merge with the BJP and lead to a regime change, embarrassing the incumbent MVA government. It may give way to the formation of a new BJP government in the state, most likely under former chief minister Devendra Fadnavis’ leadership and with support from Shinde’s 45 plus MLAs. The BJP is the single largest party in the state assembly, holding 106 MLAs and, combined with 45 rebels, has the ability to cross the halfway mark of 144. However, not all rebel MLAs are willing to support the merger with the BJP.

While the BJP is coming across as a mute spectator and has called the crises an ‘internal matter’ of the Shiv Sena, purported meetings between Shinde, Fadnavis, and Union Home Minister Amit Shah cast aspersions on the party’s role in the crises or its final outcome. The next few days will be crucial not only for Eknath Shinde and his ability to lead one of the largest ever rebel factions that the state has witnessed, but also for Uddhav Thackeray, who is fighting to retain control of the Shiv Sena and the legacy of his father Balasaheb Thackeray.

Source: NDTV

Contributing reports by Arin Prabhat, Ashita Koul, Kaustav Dass, and Nehla Salil, Interns at Polstrat.

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INDIAN PRESIDENTIAL ELECTION 2022

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17 major opposition parties held a second meeting yesterday in New Delhi to discuss their candidates for the 2022 Presidential polls that are scheduled to be held on 18th July. The meeting was hosted by West Bengal Chief Minister and Trinamool Congress president Mamata Banerjee. Major parties in attendance included the Indian National Congress (INC), Communist Party of India (CPI), Communist Party of India (Marxist) (CPIM), Indian Union Muslim League (IUML), and regional parties such as Nationalist Congress Party (NCP), Rashtriya Janata Dal (RJD), Samajwadi Party (SP), and Janata Dal-Secular (JDS), amongst others. Some notable names missing from the meeting were the Aam Aadmi Party (AAP) and the Telangana Rashtra Samithi (TRS), which is led by Telangana Chief Minister K Chandrashekhar Rao. Industry experts wonder if the meeting is testing opposition unity ahead of the 2024 national elections. While the opposition parties came up with a list of candidates, the first three choices in their list, including NCP supremo Sharad Pawar, have so far declined the offer. Former Union minister Yashwant Sinha finally accepted the opposition’s offer as its joint candidate for the presidential polls. On the other hand, the Bharatiya Janata Party (BJP), which is in majority in the Lok Sabha and close to a majority with its allies in the Rajya Sabha, has an edge in the upcoming presidential polls. However, the party has not yet announced a candidate for the upcoming polls.

The Presidential elections are crucial as the opposition wants to put the BJP in a difficult situation, while the BJP wants to retain its dominant position.

HOW IS THE PRESIDENT OF INDIA CHOSEN?

The President of India is indirectly elected by an electoral college consisting of the elected members of both the houses of Parliament, the elected members of the Legislative Assemblies of the 28 states, and the elected members of the legislative assemblies of the Union Territories of Delhi, Puducherry, and Jammu and Kashmir. The 12 nominated members of the Rajya Sabha are not allowed to vote in the Presidential elections. This means that 4,120 members of legislative assemblies and 776 Members of Parliament (MPs) elect the President. As per the electoral college system, the value of votes that each Member of Legislative Assembly (MLA) and Member of Parliament has varies as per the population of the state. This means that the value of an MLA’s vote will vary from state to state in order to reflect the population of each state. A simple formula is used to calculate this. The total population of the state (as per the 1971 census) is divided by the total number of MLAs in the state, which is then multiplied by 1,000.

The BJP has to rely on parties like the Biju Janata Dal (BJD) led by Odisha’s Chief Minister Naveen Patnaik which has over 31,000 votes in the upcoming presidential elections.

A secret ballot under the transferable vote system is used to elect the President of India. Each MLA and MP ranks the presidential candidates in their order of preference, and the candidate with the lowest number of votes will drop out. Votes given to this candidate are then redistributed based on the next preference, and this goes on until one candidate secures the needed majority. In order to win, a candidate must have more than 50 per cent of the votes.

CURRENT STATUS

The election commission of India has scheduled the date for the presidential elections on 18th July, with the counting of votes to be held on 21st July. 4,809 electors comprising MPs and MLAs will vote to elect current President Ram Nath Kovind’s successor. Despite the BJP’s majority in the Lok Sabha and almost-majority in the Rajya Sabha, with an electoral college of around 10.86 lakh voters, the BJP-led National Democratic Alliance (NDA) is slated to have around 48 per cent of the total votes, and is expected to be able to win the support of non-aligned regional parties such as the Yuvajana Sramika Rythu Congress Party. Though the BJP’s equation with some of its allies has changed after the 2022 Assembly elections, it is still extremely likely that the BJP-led NDA will win the Presidential polls.

So far 15 candidates have filed their nominations for the Presidential polls since the process began on 16th June. As per the Election Commission of India (ECI), the last day to file nominations is 29th June. Even though 15 candidates have already filed their nominations, arguably, the two most important contenders will be the candidate of the ruling party (NDA) and the candidate supported by the opposition parties. Among the nominations, some candidates have contested the Presidential polls several times.

WHO ARE THE PROBABLE CANDIDATES?17 Opposition parties met on 15 June in New Delhi to decide on a joint candidate for the presidential election so that the votes are not divided amongst the opposition. Source: Wikimedia Commons

The BJP has not announced its presidential candidate yet. While it has the option of reaching a consensus with the opposition, it can also spring a surprise by fielding a random candidate like it did in 2017 with President Ramnath Kovind. Source: NDTV.com

Analysts and industry experts have suggested that the BJP-led NDA’s candidate is likely to be a surprise in line with its past patterns. As reported by OneIndia, the party is likely to meet on 21st June to discuss its Presidential candidate. This decision is being taken by a 14-member management committee comprising several Union ministers, the party’s three general secretaries, and other leaders.

Industry analysts have been talking about a few major probable candidates. One of the first names on this list is Kerala governor Arif Mohammad Khan. Khan, who has been a Union Minister, started his career as a student leader and later joined the Congress. Since then he has shifted between multiple parties, including the Janata Dal and BSP, until he finally joined the BJP in 2004, and successfully contested the Lok Sabha elections from Kaiserganj constituency. He has had a long political career and held several portfolios, ranging from energy to civil aviation.

Another major candidate from the BJP could be Draupadi Murmu, the Governor of Jharkhand. A tribal leader from Odisha, she is the only governor of Jharkhand to successfully complete a five-year term in the state. In the past, she has served as an MLA and as Minister of State for Commerce and Transport, as well as Fisheries and Animal Resources Development. Murmu is one of the first female tribal leaders to be elected as Governor of an Indian state and has championed the cause of working for the rights of the tribal population.

Senior BJP leader and former Lok Sabha Speaker Sumitra Mahajan’s name is also making rounds in the political corridor. Mahajan was only the second woman after Meira Kumar to be elected as the Lok Sabha speaker and was the longest-serving MP from the Indore constituency of Madhya Pradesh after she won elections consecutively from 1989 to 2019. Other major names include Chhattisgarh governor Anusulya Uikey, Karnataka Governor Thawar Chand Gehlot, Telangana governor Tamilisai Soundararajan, and Jual Oram – a tribal leader from Odisha – amongst many others.

The first and one of the most prominent names on the opposition’s list was that of Nationalist Congress Party (NCP) Chief and former Union Defence Minister Sharad Pawar. However, Pawar declined the nomination in a tweet. Following this, the opposition parties suggested the name of former Jammu and Kashmir Chief Minister, Dr Farooq Abdullah. However, he also said he wanted to “respectfully” withdraw his name from consideration as he wants to continue being involved in active politics and make a “positive contribution in the service of J&K and the country.” Following this, former West Bengal Governor Gopalkrishna Gandhi turned down the opposition’s offer to be the candidate for the polls. Major opposition parties met again in the capital on 21st June to discuss other probable candidates for the polls. After the second round of discussions, the opposition parties announced former Union minister Yashwant Sinha as its joint candidate. He has held important portfolios including Finance and External Affairs. Sinha was a member of the BJP till 2018, when he quit the party to join the TMC.

Contributing reports by Damini Mehta, Senior Research Associate at Polstrat and Arin Prabhat, Ashita Koul, Kaustav Dass, Nehla Salil, Pavitra Mohan Singh, Interns at Polstrat.

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REPO RATE TAKES A HIKE

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On 8 June 2022, the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) increased the policy repo rate under the liquidity adjustment facility (LAF) to 4.90 per cent, a hike of 50 basis points from the previous revision in May 2022. The move follows a sudden off-cycle revision in the repo rate in the month of May when the MPC increased the repo rate by 40 basis points to 4.40 per cent. Both moves aimed at curbing the heightened inflation levels caused by various domestic and international factors, including but not limited to the Russia-Ukraine conflict and the COVID-19 pandemic.

The Organisation for Economic Co-operation and Development (OECD) has cut down India’s GDP forecast from 8.1% to 6.9%.

The 08th June revision is the second consecutive hike in the benchmark repo rate after a year-long consistency by the RBI in an attempt to boost economic growth. The MPC at its meetings in April, June, August, October, and December of 2021 had kept the policy repo rate consistent at 4 per cent for the Financial Year 2021-22. RBI, in its Monetary Policy Statement of 08th June, emphasised that the current hike was ‘in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth’.

MONETARY POLICY AND DOWNWARD ECONOMIC TRENDSOn 8 June, the RBI hiked the repo rate by 50 basis points (bps) to 4.9% in a bid to tame soaring inflation in the country.

The RBI uses the benchmark repo rate as one of the main tools to regulate the monetary situation in the Indian economy. Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. A hike in repo rate increases the cost of borrowing in the economy for domestic consumers and businesses. It reduces their purchasing power and investment capacity thereby helping bring down inflation. However, a lower repo rate often helps in giving a push to economic activity by promoting lending by the banks (a fall in repo rate is an incentive for banks to reduce their Rate of Interest on loans).

The past two years witnessed a slowing down of economic activity owing to COVID-19-induced curbs and a global economic downturn. The Indian economy contracted by 23.8 per cent in the starting months of the COVID-19 pandemic from April to June 2020 and 6.6 per cent in the July to September quarter of 2020. Overall, according to the National Statistical Office (NSO), GDP contraction for the financial year 2020-21 was 6.6 per cent. In the financial year of 2021-22, according to NSO’s February estimates, GDP growth stood at 20.3 per cent in the April to June quarter and 8.5 per cent in the July to September period.

During this period, the RBI focused on promoting economic activity and lending in the economy through its monetary policy. To stave off the reduced economic activity, the MPC dropped its repo rate by 75 basis points in a month from 5.15 per cent in February 2020 to 4.40 per cent in March 2020. After reducing it further by 40 basis points, the repo rate remained consistent at 4 per cent for nearly two years from May 2020 to May 2022. According to the Ministry of Statistics and Programme Implementation (MOSPI) numbers, Consumer Price Index (CPI) general or headline inflation in India fell from a high of 6.73 per cent in July 2020 to to 4.06 per cent in January 2021 before rising back to 7.79 per cent in April 2022 (nearly an eight-year high). According to the most recent MOSPI figures, inflation for the month of May 2022 has eased to 7.04 per cent. However the falling inflation is unlikely to contribute much to slowing down the recent RBI rate hike cycle.

BROAD-BASED PRICE RISE

The Indian economy is currently facing high and rising inflation which has already breached RBI’s upper bound target range of 2-6%.Source: Financial Expres

In its June report, the RBI highlighted the broad-based nature of inflation which was showing up in rising prices of services and was no longer limited to goods inflation. Notably, between February and April of 2022, the headline inflation has risen by about 170 basis points. The wholesale price inflation, a measure of price rise at the level of producers, has consistently been in double digits for 12 consecutive months between April 2021 and April 2022. In November 2021, it touched a high of 14.87 per cent driven largely by the rise in crude oil prices in the international market. On the other hand, retail inflation, which directly impacts the local consumer, has been on a constant uptick since September last year, touching 6.07 per cent in February 2022. Retail inflation witnessed a rise mainly owing to rising prices of essentials like oils and fats, vegetables, and protein-rich items such as ‘meat and fish’.

The Russia-Ukraine conflict and the COVID-19 pandemic have disrupted supply chains and led to a shortage of various goods globally, resulting in inflation and economic distress in several countries. Moreover, sanctions on Russia have impacted the supply of crude oil and pumped up prices in international markets. The rise in fuel prices has a direct impact on transportation costs thereby pushing the prices of all other commodities.

The current repo rate hike of 50 basis points aims to deal with the impact of the above developments on the Indian economy. It is coupled with the MPC’s changed stance from May 2022 onwards from a ‘commitment to remain accommodative’ to ‘withdrawal of accommodation’. It reflects the RBI’s decision to shift its focus from giving a thrust to economic growth through reduced rates to controlling the rising inflationary trends through costly lending. While the repo rate remains below the pre-pandemic level of 5.15 per cent, this recent hike is a desperate attempt to bring prices of goods and commodities down and reel in inflationary pressures.

STATE OF INDIAN ECONOMY: PROJECTIONS

RBI Governor Shaktikanta Das has predicted that an increase in contact-intensive services is expected to lead to a rise in urban consumption and rural demand will increase with the onset of monsoon.Despite all the projections, India’s exports grew by 24% in just the first week of June and the Indian economy is still projected to be the fastest growing economy for a second year in a row.

RBI Governor Shaktikanta Das has predicted that an increase in contact-intensive services is expected to lead to a rise in urban consumption and rural demand will increase with the onset of monsoon.

Despite all the projections, India’s exports grew by 24% in just the first week of June and the Indian economy is still projected to be the fastest growing economy for a second year in a row.

According to the MPC’s June meeting, the Indian economy is expected to broaden its recovery going forward owing to several positive developments. Contact-intensive services are likely to bolster urban consumption, investment is expected to receive a boost through improved capacity utilisation, the government’s capex push, and strengthening of bank credit and rural demand, which is gradually improving from a normal south-west monsoon. However, several international organisations have cut down their projections for India’s GDP growth for the ongoing fiscal year. The Organisation for Economic Cooperation and Development (OECD) warns that the Indian economy is losing its growth momentum because of inflationary pressures from rising global energy and food prices even as monetary policy normalises and global conditions deteriorate. It has cut down its growth forecasts for India from 8.1 per cent predicted in March to 6.9 per cent in June 2022.

The World Bank has also cut down its GDP growth forecast for India for this fiscal thrice from the previous 8.7 per cent to 8 per cent in April and 7.5 percent in June 2022. The International Monetary Fund which, in January 2022, predicted a much higher growth rate for India this fiscal at 9 per cent has brought down its estimates too but remains positive that the country will clock a growth rate of 8.2 per cent (June estimates). The RBI’s real GDP growth projection for 2022-23 is retained at 7.2 per cent. According to the projections, the first quarter will record a growth rate of 16.2 per cent, declining significantly to 6.2 per cent, 4.1 per cent, and 4.0 per cent in quarters two, three, and four, respectively.

Persistent geopolitical tensions, sanctions on Russia, a resultant rise in crude oil prices and the lingering supply chain bottlenecks due to the COVID-19 restrictions have contributed to inflationary trends in India and abroad. Moreover, while the domestic restrictions on wheat export are expected to augment supply at home and ease off food inflation, heatwave-induced shortfall in rabi crops’ production may be a contributing factor to high food inflation in the country. The change in the RBI’s policy and a hike in repo rate is driven largely by the intent to deal with the impact of the above factors on the Indian economy and is likely to lead to a further hike in the coming fiscal year.

Contributing reports by Arin Prabhat, Ashita Koul, Kaustav Dass, Nehla Salil, and Pavitra Mohan Singh, Interns at Polstrat.

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