THE HINDU EDITORIAL : NOVEMBER 9, 2018
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THE HINDU EDITORIAL : NOVEMBER 9, 2018
Dear Banking Aspirants,
THE HINDU EDITORIAL – November 9, 2018, is one of the must-read section for the competitive exams like IBPS Clerk 2018, Indian Bank PO & LIC HFL 2018. These topics are widely expected to be asked in the reading comprehension, Cloze Test or Error Detection in the forthcoming exams. So gear up your Exam preparation and learn new words daily.
A) Political economics: credit stimulus for MSMEs
The credit stimulus for MSMEs could have some unintended consequences
In the run-up to the general election next year, the Centre has announced an important credit stimulus package for micro, small, and medium enterprises (MSMEs). Among the many sops doled out under the new scheme, Prime Minister Narendra Modi has promised the sanction of business loans of up to ₹1 crore within a time frame of 59 minutes, in order to encourage faster credit flow to MSMEs. These companies will also receive an interest subvention of 2% under the scheme and support from public sector units, which will now be mandated to make at least 25% of their overall purchases from MSMEs. It is worth noting that MSMEs, which account for 30% of India’s gross domestic product (GDP), were hit hard by the twin shocks of demonetisation and the implementation of the Goods and Services Tax over the last couple of years. Further, in the aftermath of the IL&FS crisis, which has affected the amount of lending done by non-banking financial companies to the MSME sector, the government would be looking at the scheme as a tool to improve credit flow and the pace of job creation in the economy. A study by officials of the Reserve Bank of India in August 2018, however, showed that growth in credit flow to MSMEs had recovered to pre-demonetisation levels by the April-June quarter, just before the liquidity crisis.
The scheme has signs of state-led economic planning written all over it. The biggest risk of a credit stimulus is the misallocation of productive economic resources. Pumping extra credit into MSMEs now may well lead to a temporary boom and enable a feel-good atmosphere in the run-up to elections, but it can lead to a painful bust when the stimulus ends some day. Another unintended consequence is the likely deterioration in credit standards as financial institutions are pushed to lend aggressively to MSMEs. Efforts to expedite business loan approvals may be welcome from the point of view of growth and job creation, but they rarely end well when motivated by political reasons. Conceptually, the Prime Minister’s latest credit scheme is no different from the MUDRA loan scheme, which has been troubled by soaring bad loans. In September, former RBI Governor Raghuram Rajan had warned that loans extended under the MUDRA scheme could turn out to be the source of the next financial crisis. Care needs to be taken to see that the new MSME loan scheme does not pose a similar risk in the future. Also, the demand that PSUs must procure a quarter of their inputs from MSMEs could breed further inefficiency in the economy. In all, the MSME loan scheme is yet another example of how bad economics can make for good politics.
B) Independence and accountability: on RBI
As the RBI’s autonomy is debated, it needs to revisit its exclusive focus on inflation-targeting
Far from achieving a desirable ‘monetary-fiscal coordination’ in India today, the Reserve Bank of India (RBI) and the government give the impression that they are not on the same page even as far as an understanding of their roles is concerned. This may be seen in statements by them on websites, Twitter and in the old-fashioned mode of the public lecture given by the Finance Minister and a Deputy Governor of the RBI, respectively. The RBI suggests that its independence is being violated while the government rationalises its intervention in terms of its concern for the economy. How do we make sense of these positions?
Defining autonomy
Even at the time when the idea of central bank independence began to germinate some two decades ago, this was understood to mean a ‘functional’ independence. That is, the bank would be unconstrained by the government in its functioning, which includes both the instruments it uses and how it uses them. However, its autonomy was not to extend to ‘goal’ independence. What the goals of the central bank should be were to be chosen by the government without reference to the bank. The main issue here was whether the bank should focus on inflation alone or also on the level of employment. Within a decade of this debate, it had been conceded that the focus would be exclusively on the former, and monetary policy came to be identified with ‘inflation targeting’.
Two points may be mentioned in this context. First, the discourse was solely among interlocutors from Western democracies, ensuring the issues were those related to their economies. Second, even as the major central banks of the world shifted to inflation targeting, in yet another example of American exceptionalism, the U.S. did not revise the goals of the Federal Reserve. It was to continue focus on maximising employment while keeping prices stable, a sensible recognition of a possible trade-off between these goals. In India where for close to a quarter century political parties of all hues appear to suggest ‘what is good for America is the best for India’, this has been missed. In 2015 the RBI was by law, in line with a “modern monetary policy”, expected to target inflation. It was to remain the banking regulator though.
Once we are aware of how central bank independence was first sought to be understood and of the agreement between the RBI and the Government of India in 2015, it is not difficult to separate the grain from the husk in the public spat between the two playing out in the media. The issues of contention happen to be the corrective action to be taken for stressed banks, the prudential norms to be adopted by financial institutions, the easing of liquidity and the sharing of the surplus generated by the RBI. Here, barring the last, all others are in the RBI’s bailiwick so to speak. On the other hand, on the sharing of the surplus, it is understood that the Government of India legally is the owner of the surplus generated by the country’s public institutions. Even under this architecture, though, all care must be taken to ensure that the central bank’s reserves are of a level commensurate with the extent of the financial sector and the potential degree of systemic risk from its malfunctioning, which can vary. So, we can’t go just by formulae here.
Apart from the issue of sharing the surplus, the RBI should be left alone by the government to decide on the right course of action. This derives not so much from a notion of central bank independence as it does from the point of view of a credible governance policy. The Government of India would have chosen the Governor, participated in the choice of his deputies and had a say in the appointment of even the independent members of the central board of the RBI. In addition, the board has representatives of the government on it. It should now be left to this body to decide on the precise corrective action for banks with high NPAs, the desirable state of liquidity and the prudential norms to be observed by banks. The RBI is the banking regulator after all, and for the government to attempt to direct it would constitute micro-management.
Stability of the economy
Stepping away from legal niceties, there is reason to believe that some of the actions being sought to be imposed on the RBI today could jeopardise the stability of the economy. While acting as the lender of last resort can be stabilising, under no circumstances would it be advisable to lower prudential norms in the presence of stressed banks. The government’s concern for the health of the medium and small enterprises is well-founded. After all, they were among the most affected sections following the demonetisation of 2016. If, in the spirit of contriteness as it were, the government wants to reach out to them, the right course would be to provide interest rate subvention, rather than to force the RBI to tweak its lending norms. There is a severe lack of judgment in loan melas promising online sanction in less than an hour. There is the suggestion in this of the political business cycle, a government trying to nudge the economy prior to an election. The resistance of the RBI top brass to this desperate action is understandable.
Whatever may be the misfeasance of the government in its recent dealings with the RBI, however, it would yet be acceptable to review its own performance in the sphere in which it has an untrammelled independence, namely monetary policy. Under this arrangement it has control over the interest rate. Over 2013-2018 there has been a 5 percentage point swing in the real interest rate in India, moving from a negative to a positive level, making it among the highest in the world, much higher than that of China. This is clearly the consequence of an exclusive policy focus on inflation from even before inflation targeting was formally adopted by Parliament in India. It may well have contributed to slow industrial and export growth, due to a real appreciation of the rupee, and a rise in NPAs even after their existence had been recognised. If this is the monetary policy that central bank independence brings with it, we might just be a little sceptical of the value of the independence itself.
Enabling job creation
There is a certain populism inherent in privileging inflation control to justify extraordinarily high interest rates. While it would be bad economics to tolerate high inflation, the absence of inflation by itself only benefits those in employment, it does not assure jobs to the unemployed. Thus a monetary policy that ignores the impact of its actions on unemployment is not credible. Interestingly, the government and the RBI have always been on the same page as far as inflation targeting is concerned. The populist message that inflation erodes the income of the poor conceals the possibility that in the implementation such a policy could hold back job creation by restricting investment. The rising current account deficit, the slow growth of employment and the disappointing performance of manufacturing, the sector most closely affected by high interest rates, should prompt us to review how monetary policy is conducted in India. In the past, the RBI had a ‘multiple indicators approach’ which paid attention to inflation, growth and the current account. This may not have borne the precision conveyed by ‘inflation targeting’ but it did answer to Keynes’s dictum, “It is better to be vaguely right than to be precisely wrong.”
VOCABULARY
1) stimulus
Meaning : a thing or event that evokes a specific functional reaction in an organ or tissue.(n)
Tamil Meaning : ஊக்க
Synonyms : impetus , incentive
Antonyms : block
Example : “areas of the brain which respond to auditory stimuli”
2) sops
Meaning : a thing of no great value given or done as a concession to appease someone whose main concerns or demands are not being met.(n), soak up liquid using an absorbent substance(v).
Tamil Meaning : சலுகை
Synonyms : absorb , bribe
Antonyms : dry
Example : “my agent telephones as a sop but never finds me work”
3) doled
Meaning : distribute shares of something(v).
Synonyms : distribute
Antonyms : crave
Example : “the scanty portions of food doled out to them”
4) subvention
Meaning : a grant of money, especially from a government.(n)
Tamil Meaning : மானியத்திற்கு
Synonyms : grant
Antonyms : baffle
Example : “Ottawa has begun to cut federal subventions to the provinces”
5) mandated
Meaning : an official order or commission to do something(n).
Tamil Meaning : ஆணை
Synonyms : order
Antonyms : denial
Example : “a mandate to seek the release of political prisoners”
6) noting
Meaning : notice or pay particular attention to (something).(v)
Tamil Meaning : குறிப்பிட்டார்
Synonyms : perceiving
Antonyms : misperceiving
Example : “he noted his mother’s unusual gaiety”
7) Dictum
Meaning : a formal pronouncement from an authoritative source(n).
Tamil Meaning : கருத்து
Synonyms : precept
Antonyms : request
Example : “the dicta of High Court Judges”
8) unintended
Meaning : not planned or meant(adj).
Tamil Meaning : திட்டமிடப்படாத
Synonyms : accidental
Antonyms : intended
Example : “the unintended consequences of people’s actions”
9) deterioration
Meaning : the process of becoming progressively worse(n).
Tamil Meaning : மோசமடைவது
Synonyms : decline
Antonyms : rehabilitation
Example : “a deterioration in the condition of the patient”
10) aggressively
Meaning : ready or likely to attack or confront; characterized by or resulting from aggression(adj).
Tamil Meaning : ஆக்கிரமிப்பு
Synonyms : hostile
Antonyms : peaceful
Example : “he’s very uncooperative and aggressive”
11) expedite
Meaning : make (an action or process) happen sooner or be accomplished more quickly.(v)
Tamil Meaning : துரிதப்படுத்த
Synonyms : hasten
Antonyms : halt
Example : “he promised to expedite economic reforms”
12) soaring
Meaning : fly or rise high in the air(v).
Tamil Meaning : உயரும்
Synonyms : lofty
Antonyms : misfortunate
Example : “the bird spread its wings and soared into the air”
13) procure
Meaning : obtain (something), especially with care or effort(V).
Tamil Meaning : கொள்முதல்
Synonyms : obtain
Antonyms : abandon
Example : “food procured for the rebels”
14) concerned
Meaning : relate to; be about(v),a matter of interest or importance to someone.(n).
Tamil Meaning : அக்கறை
Synonyms : worried
Antonyms : casual
Example : “the story concerns a friend of mine”
15) rationalises
Meaning : attempt to explain or justify (behaviour or an attitude) with logical reasons, even if these are not appropriate(v).
Tamil Meaning : பகுத்தறிய
Synonyms : justify
Antonyms : accuse
Example : “she couldn’t rationalize her urge to return to the cottage”
16) intervention
Meaning : the action or process of intervening.
Tamil Meaning : தலையீடு
Synonyms : interference
Antonyms : challenge
Example : “a high degree of state intervention in the economy”
17) germinate
Meaning : come into existence and develop.(v)
Tamil Meaning : தளிர்
Synonyms : sprout
Antonyms : halt
Example : “the idea germinated and slowly grew into an obsession”
18) constrain
Meaning : compel or force (someone) to follow a particular course of action.(V)
Tamil Meaning : கட்டுப்படுத்தும்
Synonyms : compel
Antonyms : release
Example : “children are constrained to work in the way the book dictates”
19) conceded
Meaning : admit or agree that something is true after first denying or resisting it(v).
Tamil Meaning : ஏற்றுக் கொண்டு
Synonyms : allow
Antonyms : deny
Example : “I had to concede that I’d overreacted”
20) interlocutors
Meaning : a person who takes part in a dialogue or conversation.
Tamil Meaning : இடைத்தரகர்களுக்கு
Synonyms : speakers
21) recognition
Meaning : identification of a thing or person from previous encounters or knowledge(n).
Tamil Meaning : அங்கீகாரம்
Synonyms : gratitude
Antonyms : blame
Example : “she saw him pass by without a sign of recognition”
22) revise
Meaning : reconsider and alter (something) in the light of further evidence(v).
Tamil Meaning : திருத்தியமைக்கிற
Synonyms : correct
Antonyms : retain
Example : “he had cause to revise his opinion a moment after expressing it”
23) hues
Meaning : a colour or shade(n).
Tamil Meaning : சாயல்
Synonyms : tints
Example : “the water is the deepest hue of aquamarine”
24) though
Meaning : however (indicating that a factor qualifies or imposes restrictions on what was said previously)(adv).
Tamil Meaning : என்றாலும்
Synonyms : nevertheless
Example : “I was hunting for work. Jobs were scarce though”
25) husk
Meaning : the dry outer covering of some fruits or seeds(n).
Synonyms : shuck
Antonyms : core
Example : “the fibrous husk of the coconut”
26) spat
Meaning : eject saliva forcibly from one’s mouth, sometimes as a gesture of contempt or anger(v).
Tamil Meaning : சண்டை
Synonyms : squabble
Antonyms : agreement
Example : “Todd spat in Hugh’s face”
27) contention
Meaning : heated disagreement.(n)
Tamil Meaning : கருத்து
Synonyms : conflict
Antonyms : affection
Example : “the captured territory was the main area of contention between the two countries”
28) prudential
Meaning : involving or showing care and forethought, especially in business.(adj)
Tamil Meaning : விவேக
Synonyms : circumspect
Antonyms : misconsidered
Example : “the US prudential rules prevented banks from lending more than fifteen per cent of their capital to any one borrower”
29) surplus
Meaning : an amount of something left over when requirements have been met; an excess of production or supply(n).
Tamil Meaning : உபரி
Synonyms : excess
Antonyms : need
Example : “exports of food surpluses”
30) commensurate
Meaning : corresponding in size or degree; in proportion(adj).
Tamil Meaning : ஈடான
Synonyms : equivalent
Antonyms : inadequate
Example : “salary will be commensurate with age and experience”
31) precise
Meaning : marked by exactness and accuracy of expression or detail(adj).
Tamil Meaning : துல்லியமான
Synonyms : exact
Antonyms : inaccurate
Example : “precise directions”
32) vaguely
Meaning : in a way that is uncertain, indefinite or unclear; roughly(adv).
Tamil Meaning : தெளிவற்ற
Synonyms : unclearly
Antonyms : precisely
Example : “he vaguely remembered talking to her once”
33) subvention
Meaning : a grant of money, especially from a government.
Tamil Meaning : மானியத்திற்கு
Synonyms : grant
Antonyms : cripple
Example : “Ottawa has begun to cut federal subventions to the provinces”
34) nudge
Meaning : prod (someone) gently with one’s elbow in order to attract attention.(v),a light touch or push.(n)
Tamil Meaning : தூண்டல்
Synonyms : push
Antonyms : pull
Example : “people were nudging each other and pointing at me”
35) desperate
Meaning : feeling or showing a hopeless sense that a situation is so bad as to be impossible to deal with.
Tamil Meaning :
Synonyms : hopeless
Antonyms : hopeful
Example : “a desperate sadness enveloped Ruth”
36) misfeasance
Meaning : a transgression, especially the wrongful exercise of lawful authority.(n)
Synonyms : crime
Example : . It is a form of holding administrative subjects responsible for their misfeasance to compel administrative subjects to perform legal duties.
37) untrammelled
Meaning : not deprived of freedom of action or expression; not restricted or hampered.(adj)
Tamil Meaning : தடையற்ற
Synonyms : free
Antonyms : limited
Example : “a mind untrammelled by convention”
38) sceptical
Meaning : not easily convinced; having doubts or reservations(adj).
Tamil Meaning : சந்தேகம்
Synonyms : doubting
Antonyms : desirous
Example : “the public were deeply sceptical about some of the proposals”
39) erodes
Meaning : (of wind, water, or other natural agents) gradually wear away (soil, rock, or land)(v).
Synonyms : wears
Antonyms : fixes
Example : “the cliffs on this coast have been eroded by the sea”
40) conceals
Meaning : not allow to be seen; hide(v).
Tamil Meaning : மறைக்கவோ
Synonyms : disguises
Antonyms : acquaints
Example : “a line of sand dunes concealed the distant sea”
THE HINDU EDITORIAL : NOVEMBER 8, 2018
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