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11th January 2021 – Editorials/Opinions Analyses

Content

  1. Planning an exit out of the easy money regime
  2. The front seat in electric mobility

Editorial: Planning an exit out of the easy money regime

Context:

  • The Reserve Bank of India (RBI) embarked on an extraordinary expansionary policy to manage the financial pressures unleashed by COVID-19. It slashed policy interest rates aggressively, flooded the market with an unprecedented amount of liquidity and instituted a slew of measures for targeted assistance to especially distressed sectors.

Relevance:

  • GS Paper 3:  Indian Economy (issues re: planning, mobilisation of resources, growth, development, employment); Inclusive growth and issues therein.

Mains Questions:

  1. The RBI’s main challenge would be in managing the tension between restraining inflation and supporting recovery. Discuss. 15 Marks

Dimensions of the Article:

  • What is Inflation Targeting?
  • Status of Inflation targeting in India
  • Challenges related to Monetary Policy:
  • Inflation targeting during Covid time:
  • Way Forward:

What is Inflation Targeting?

Inflation targeting is a monetary policy strategy used by central banks for maintaining inflation at a certain level or within a specific range. In general, central banks normally follow a policy of keeping inflation sufficiently low. In the recent past, several countries have been opting for inflation targeting as a monetary policy objective due to following reasons:

  • It has strong correlation with market demand.
  • The idea is predictable and easy to understand for private sector and residents.
  • Inflation Targeting mechanisms generally increase transparency.
  • Stabilizing impact on other economic parameters like exchange rate volatility etc.

Status of Inflation targeting in India

  • Control over inflation: Inflation reduced from a high of more than 10% before 2014 to a more comfortable value after IT. For instance, the average inflation rate between October 2016 and March 2020 was below 4%.
  • Stability in Inflation expectations: The inflation forecasts of financial professionals and the responses to inflation forecasts of households declined with the shift to IT, although household expectations of inflation continue to consistently exceed actual outcomes. As a result, increases in actual inflation now do less to excite inflation expectations, indicative of improved anti-inflation credibility.
  • Behavior of ancillary variables: The IT regime has had a stabilizing effect on ancillary variables like exchange rates, equity markets etc. For example, the money market conditions have been broadly orderly and in tandem with the changes in repo rate.
  • Increased expression of diversity at policy level: The working of MPC has saw expression of independent viewpoints from both external and internal members. This indicates towards improved robustness of the Monetary Policy Framework which indirectly ensures a delicate balance between price stability and economic growth.

Challenges related to Monetary Policy:

  • Narrow objective: Some experts argue that RBI has objectives to take care of other parameters like economic growth, stable exchange rate and financial stability, and cannot restrict itself to the single objective of inflation.
    • For instance, some market stakeholders believe that the RBI does not cut rates easily or as much as they would like to see. This is interpreted as the RBI not giving growth as much importance as inflation.
  • Pre-requisites of effective inflation targeting: IT demands a number of pre-conditions for its successful implementation in the long-term such as independence of central banks, well developed financial markets, flexible exchange rate, etc. Most emerging economies, including India may not be able to fulfil it in the near future.
    • The consequence of not fulfilling these preconditions could be that the transmission mechanism of the IT system in the country may not be very strong. For example, sometimes change in Repo Rate by RBI is not effectively transmitted to change in inflation levels.
  • Issue of accuracy and limited availability of data: An inflation-targeting regime requires vast amount of data in the form of assessment of inflation in the medium term, forecasts on economic growth and other indicators of financial stability like estimates of foreign investment etc. There is a limited buffet of indicators that the RBI can use. Also, several institutions including the RBI have questioned the accuracy of the data given large discrepancies and considerable time-lag in data collection.
  • Designed for demand driven inflation systems: It is argued that the IT system is mainly designed for countries where the inflation is due to demand factors, whereas in India, it is the supply side factors which are causing inflation.

Inflation targeting during Covid time:

  • The outbreak of such pandemic and its effect on the economy creates a precarious situation where the economy faces a negative supply shock as well as a negative demand shock, as firms halt investment projects and households increase their precautionary saving and see their incomes fall.
  • This creates ambiguity for the IT regime because raising the policy rates can further dampen the demand and economic growth. Also, cutting the policy rates could spur inflation and decrease the confidence of market participants in the IT regime consequently triggering non-responsiveness on MPC decisions.
  • Being on the safe side, the standard course of action for an inflation-targeting central bank would be to cut rates – or at least to refrain from raising them – if the negative supply shock is temporary. If the shock is temporary, there will be higher prices and inflation now but lower prices and less inflation, or even deflation, in the future. The central bank should therefore be able to “look through” today’s inflation and adopt a relatively long horizon when formulating its inflation forecast.

Way Forward:

  • Coordination between Monetary Policy and Fiscal Policy: Many central banks (e.g., UK) worldwide have the concept of a non-voting representative from the Treasury who attends meetings, expresses the views of the Ministry of Finance, and participates in the discussions. A government non-voting member is a way to coordinate and yet not interfere. This could ensure the much-needed balance between inflation control and economic growth.
  • Improving data collection and analysis framework: Reforming the data collection methodologies and framework on lines of draft National Statistical Commission Bill, 2019 can be envisaged.

Editorial: The front seat in electric mobility

Context:

  • The lithium and cobalt industry are likely to grow domestically to support the switch to electric vehicles.

Relevance:

  • GS Paper 3: Environmental conservation; Environmental pollution and degradation; Environmental Impact Assessment

Mains Questions:

  1. Reducing dependence on crude oil will save the government money, reduce carbon emissions, and build domestic energy independence. In this context discuss the significance of electric vehicles in India. 15 Marks

Dimensions of the Article:

  • Significance of Electric Vehicles in India:
  • Challenges related to Electric Vehicles in India:
  • Measures taken by the Government:
  • Way Forward

Significance of Electric Vehicles in India:

  • In India, transport sector is the second largest contributor to CO2 emissions after the industrial sector. Road transport accounts for around 90% of the total emissions in the transport sector.
  • Increasing vehicle ownership has led to increased demand for the fossil fuels. Given the large import dependence of the country for petroleum products, it is imperative that there be a shift of focus to alternative fuels to support our mobility in a sustainable manner.
  • High availability of skilled manpower and technology in manufacturing and IT software.
  • Shared mobility in India with the coming up of Taxi aggregators such as Ola and Uber increasing exponentially. This has increased a) Vehicle utilisation, which plays to the economic advantages of EVs, and b) Natural and large-scale purchases of EVs.
  • The climate commitments coupled with the increasing awareness of the consumers on environmental aspects are likely to enhance the share of electric vehicles in the future demand of automobile sector.
  • According to NITI Aayog, if India reaches an optimum EV sales penetration by 2030, a saving of 846 million tons of net CO2 emissions and oil savings of 474 MTOE can be achieved.

Challenges related to Electric Vehicles in India:

  • Charging infrastructure: The market share of EVs increases with increasing availability of charging infrastructure. This is primarily due to the limited driving range of batteries in the EVs. In India, the limited availability of charging infrastructure seems to be a major impediment to increased adoption of EVs.
  • Battery Technology: Since the battery is the heart of any EV, development of appropriate battery technologies that can function efficiently in the high temperature conditions in India need to be given utmost importance.
  • Charging time: Compared to conventional vehicles, even fast chargers can take around half an hour to charge an electric car while slow chargers could take even 8 hours.
  • Funding: Assuming a moderate level of adoption, India needs about $6 billion for charging infrastructure, $4 billion in incentives and a further $7 billion to build battery capacity, according to estimates by Goldman Sachs Group Inc.
  • Cost to Consumer: Even if the charging issue was adequately addressed, EVs are currently priced nearly double the cost of comparable range diesel/petrol cars. Currently, Indian market share of electric cars is a meagre 0.06% when compared to 2% in China and 39% in Norway.
  • Multiple Agencies: Currently, EV makers, have to deal with the Ministry of Heavy Industries and Ministry of Road Transport for guidelines, the Ministry of Power on charging infrastructure, as well as the Ministry of Finance and GST Council over taxation issues.

Measures taken by the Government:

  • “National Electric Mobility Mission Plan 2020 (NEMMP)” was conceived with an objective to achieve sales of 60-70 lakh units of total EVs by 2020. 
  • In 2015, the Faster Adoption and Manufacturing of Electric vehicles (FAME) scheme was launched to fast track the goals of NEMMP with an outlay of Rs. 795 crores. The initial outlay was for a period of 2 years, commencing from 1 April 2015, which was extended up to 31 March, 2019.
  • FAME India Phase II has been launched, with effect from 1 April 2019, with a total outlay of Rs. 10,000 Crore over the period of three years. Emphasis in this phase is on electrification of public transportation.
  • Recently approved “National Mission on Transformative Mobility and Battery Storage” which will drive mobility solutions that will bring in significant benefits to the industry, economy and country.
  • States ‘Initiatives: Several states, including Karnataka, Kerala, Telangana, Maharashtra and Andhra Pradesh, Uttar Pradesh, Uttarakhand, have drafted EV policies to complement the national policy and address state-specific needs.
  • Ministry of Power has issued a policy on charging infrastructure and has issued a notification clarifying that charging electric vehicles will be a service, not a sale of electricity.

Way Forward

  • Providing Charging infrastructure has to be at the centre of any policy push. Charging points can be rolled out on a city-by-city basis. Recently, Government released guideline on Charging Infrastructure for Electric Vehicles.
  • Increasing efficiency of vehicles: Incentivising developments to increase vehicle efficiency, thereby reducing energy consumption, can enable to a vehicle to travel the same distance on a smaller battery pack.
  • Import Duty and Make in India: Finished electric cars and chargers should have highest import duty; subsystems like batteries, air-conditioners, power-modules and drive-trains will have lower than this highest import duty; and subsystems like battery-cells, motors, controllers, ICs, magnets, and connectors will have zero duty.
  • Standard for Chargers: Department for Science and Technology (DST) should develop indigenous standards through the grand challenge method through active participation of industry, academia and other stakeholders.
  • Focus on small and public vehicles to make early impact: While encouraging the sale of private EVs, India’s focus, at least in the first few years, should be on small, public and rural transportation. It is possible for India to have a unique impact and scale early with two-wheelers and three-wheelers, including three-wheeler goods vehicles. Special attention is needed to get these vehicles to become economically viable and flourish. 
  • Research and Development (R&D): It is imperative that India quickly develops strong R&D capacity leading to commercialization in EV subsystems.
  • Power Electronics Industry: Finally, EVs use power-electronics extensively. India would need a new power-electronics industry which can help develop and produce high-efficiency sub-systems for EV industries
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