RATIONALE FOR RATE-HIKE BY FED

Vashistha Ray

Would Federal Reserve, the central bank of the U.S, raise its policy rate sooner than expected? This is difficult to answer and no unanimity can be reached on this. Some believe that time is not ripe enough for the Fed to execute the rate-hike and it would hold on till September; while others find it imminent.

The rate-hike expectation led stock markets across Asia to crash on Monday. The expectation of rate-hike gained momentum after the latest data from the U.S last week showed that unemployment rate had fallen to 5.5% which is the lowest since May 2008. A selling- spree of stocks was seen following this report which resulted in tumbling of markets across Asia.

Indonesia’s Jakarta Composite, Taiwan’s Taiex and South Korea’s Kospi each declined by 1%. Benchmark indices of Indian stock market also fell by 2.1%. The 30-share Sensex lost 604.17 points to close at 28,844.78 while the broader Nifty declined 181 points to 8756.75. Monday fall was the highest in Indian stock market Since January 6.

The expectation –led crash of stock markets left the policy makers off- guard and they could do little to salvage the market. However, the development has sent a note of caution to them. They are now discussing a course of action that could be taken to protect the economy and market when expectation of rate-hike materializes and consequent capital flight to the U.S from Asian countries starts. The Governor of R.B.I Raghu Ram Rajan has also expressed his concern over this issue.

To what extent the fear or expectation of rate-hike by the Fed is justified?

Most of the major economies of the world such as Euro-zone, Japan and China are in recession. They are implementing expansionary monetary policy to spur growth and employment. The European Central Bank launched its pre-announced Quantitative-Easing (QE) program whereby it intends to purchase government bonds of euro-zone countries worth 60 billion euro each month. The exercise would continue till September,2016 when the target of bond purchase worth 1.1 trillion euro is achieved. Interest rate in Japan is already near zero per cent and it further intends to ease money supply in order to tackle its long-drawn recession. Chinese economy is also in trouble. Employment, export, and aggregate demand are sagging. Sentiments of investors are gloomy. People’s Bank Of China has thus decided for a monetary easing. Besides these economies, policy rate cut has been seen in various countries of the globe including India, Australia and Indonesia in recent past.

In such a time when the U.S economy is surrounded by a host of under-performing economies, any decision with regard to rate-hike may spell trouble for the economy. The move would appreciate the already over-valued greenback and raise the prices of American goods and services relative to her trade-partners. This would leave American goods less competitive in world market. With her trade-deficit rising each year, the U.S could ill-afford to hike the rate.

The major deterrent could be from ‘new normal’ of china which shifts focus of the government to structural reforms from growth. Apart from the largest exporter of the world, China is also the second largest importer country. It imports most of the services from the U.S economy. ‘New normal’ of china would sufficiently reduce its quantum of imports from the US. If the greenback further shot-up against Yuan following rate –hike by the US, China may be triggered to spur its service industry to replace imported services from the US.

So, external economic reasons may dissuade the Fed at this juncture to take this critical decision of rate-hike. However, the Fed may not work purely on external considerations. It has equally strong and valid domestic reasons to raise the rate sooner than later. The latest job data released by the US last week shows that unemployment in US has fallen to 5.5% which is the lowest since May, 2008. The Fed has expressed satisfaction at this rate of unemployment and with rising employment; it is fast loosing its ground for holding policy rate near zero percent. So far as recession in other countries is concerned, the US may ignore it before taking the decision of rate-hike. This is so because the US is self-contained and relatively a closed economy and only 30% of its GDP consists of foreign trade.

Most of the members of Monetary Policy Committee of The Federal Reserve, which decides about the policy rate, have articulated their views in favour of rate-hike. The Fed Governor MS. Janet who has till now been showing a ‘patience approach’ would find it difficult not to succumb to the pressure of other members of the committee when it meets to decide about a much-awaited rate- cut.

Dutch Disease In America

    

A long bout of inertia seems to have ended in the U.S. Economic activities are picking-up. People are finally out in search of jobs and they are succeeding in getting them. With unemployment vanishing and economic indicators improving, a mood of optimism & jubilation prevails all over the country. Technically, the U.S. is out of recession and it is treading on recovery-path. However, this path of recovery is not smooth. It is still fragile and threatened by a number of factors.

Of all the factors that may derail the process of recovery of American economy, the immediate threat is from ‘Dutch Disease’ the economy is slowly heading towards.

Dutch disease is an economic phenomenon which occurs when an industrial nation begins to exploit domestic natural resources that it previously imported. It is the result of resource boom or heavy production of natural gas, petrol, coal etc. Contrary to the popular belief that exploitation of own resources causes economic progress, Dutch Disease, if a nation is in its grip, may result in contraction in industrial and agricultural output and even de-industrialization of the economy. Let us understand how it happens:

Discovery and use of domestic natural resources by a nation may

1.     Obviate its need to import costly natural resources from other countries. This result in reduction in import bill and, hence, a reduction in supply of its currency in international market.

2.     Increase the earnings of the nation by exporting resources, if it is in excess of domestic requirements.

 This would put an upward pressure on currency and it value would appreciate. Appreciation of currency has its own disadvantage. It makes domestic goods costlier than foreign goods. Consequently, export of the country falls and import increases, resulting in reduction in demand for domestic goods. The export-based industries, thus, suffer in terms of loss of revenue and employment.

The term ‘Dutch Disease’ was coined in 1977 by ‘THE ECONOMIST’ to describe the decline of the manufacturing sector in the Netherland after the discovery of large natural gas field in 1959 and its consequent fall in its currency, Florin.

There are, however, several instances of occurrences of this phenomenon in the world economy. Cairns was the first to document Australian Gold Rush in 1859 and its possible impact on its currency. The UK and Norway became the victim of this disease when they extracted substantial quantities of petroleum from the North Sea during 1975-1990. Chile’s currency also appreciated in the late 2000, due to boom in mineral commodities prices.

And, now the US is slowly moving towards embracing the disease after shale gas revolution.

According to Energy Information Administration of US, crude oil production has increased by a little more than 61% since 2010. It is now producing 9.1 million barrel per day and the production is forecast to rise by 300,000 barrel a day during the next year.

Shale gas revolution in America has significantly reduced its dependence on imports from other countries. According to Energy department of US, the country consumed 20.8 million barrel per day in 2005. Out of this, 12.5 million or 60 % of total consumption was imported. In 2013, its total consumption was 19.0 million barrel / day and import was 6.6 million barrel or 35% of consumption. It is estimated that in 2015, the US would consume 19.1 million barrel per day and import only 4.1 million barrel per day (only 21% of consumption).

If these figures are to be believed, the US is able to reduce its import by (12.5-4.1)= 8.4 million barrel on daily basis as compared to a decade back. The dollar value of 8 million barrel at $ 60 per barrel is $ 480 million.

It, thus, implies that the US is saving this huge sum of money and consequently, supply of dollar has reduced by $ 480 million/ day, leading to its appreciation.

The US currency has been gaining strength against major currencies of the world for some time now. Its rise, while not extraordinary, is certainly significant. As this is being written, on a year-to-date basis, the dollar is up 8.8% versus the euro, 3.2% against the British pound and 2.4% against the Yen, with almost all of the gains coming since May.

At a recessionary time when euro-zone, Japan and China are offering heavy discount to overseas buyers to promote their export, appreciation of greenback has certainly hampered the global competitiveness of the USA. This has reduced its export and increased imports as is clear from given table:

Export/Imports of Goods	November, 2014	December, 2014	Direction
Export value	$193.4 billion	$194.9 billion	Down by $ 1.5 billion
Import value	$236.1 billion	$ 241.4 billion	Up by $ 5.3 billion

Source: Bureau of Economic Analysis

Goods and service deficit of the US has also increased from $ 39.8 billion in November to $ 46.6 billion in December and from $ 476.3 billion in 2013 to $505 billion in 2014.

Reduction in aggregate demand of US goods has caused industrial & agricultural output to fall. A comparison of industrial performance of US in 3^rd quarter, 2014 with that of 2^nd quarter, 2014 has been shown below graphically.

The graph shows that except mining, finance & insurance and real estate, all other segment of the industry has shown downward trend. Agriculture, forestry, fishing and hunting increased at 14.2% in 2^nd quarter as compared to only 7.6% only in 3^rd quarter. The performance of non- durable industry is very dismal in 3^rd quarter: from a positive 5% growth rate in 2^nd quarter, it entered the negative territory at around -6% in 3^RD quarter.

Though there could be other reasons also for dollar-appreciation, trade-deficit of US and its declining performance of industry, there is no denying the fact that dollar has shown an upward trend since the nation started reducing its imports of petroleum products.

The Fed decision, therefore, to hike the rate may further aggravate the global competitiveness of US.

 Though the ‘Dutch Disease’ poses real threat to the economy, it also offers an opportunity for them to set a path for long-term growth& development by promoting savings and utilizing funds in health and education sector.

As the price of crude oil has started moving in an upward direction, it would be interesting to see how the US economy manages its resource curse paradox.

                                                                                                                      

MODEL ANSWER: CIVIL SERVICE MAIN EXAM,2014, G.S-3 ?( ECONOMIC DEVELOPMENT) BY VASHISTHA RAY

 Q.4. “ In the villages itself no form of credit organization will be suitable except the cooperative society.”----  All India Rural Credit serve rural clients?

 Discuss this statement in the background of agricultural finances in India. What constraints and challenges do financial institutions supplying agricultural finance face? How can technology be used to better reach and serve rural clients?

Ans: Almost all the committees or working groups constituted to report on rural credit system in India since Royal Commission On Agriculture (1928) have opined that from the point of view of structural appropriateness, there is no alternative to cooperatives for provision of rural credit. The given observation made by All India Rural Credit Survey also reaffirms this opinion. The survey highlights the importance of cooperatives and shortcomings of other financial institutions supplying agricultural finances in India. These institutions are making strident efforts to cope with the credit requirements of the farmers. However, there are certain serious constraints and challenges faced by these institutions. They are as follow:

A.     Inadequate Availability

Availability of credit is inadequate compared with its requirement. Undoubtedly, the value of flow of credit has substantially increased over time. Yet, it continues to be less in relation to demand. There has been an exponential growth in demand for agricultural credit over time. It is partly because the farmers are shifting from non-institutional to institutional sources of credit. It is also because of expansion of commercial agriculture and a substantial rise in prices of modern agricultural inputs.

B.      Dismal Recovery

The recovery of credit has been far from satisfactory. This impedes the process of further lending. Nearly 40-42 per cent of the loans have remained unrecovered during the last 4 years.

C.      Marginalization Of Small Holders

In the matter of availability of credit small holders are often marginalized. This is owing to their low capacity to offer collateral for the loans. Accordingly, even when availability of credit has multiplied over time, those in dire need are often left high and dry.

D.     Unproductive Use

While on the one hand funds are scarce, on the other, unproductive use of credit continues to be a serious menace. The farmers in India are accustomed to make huge expenditure on family functions. This significantly reduces the very purpose of various agencies engaged in agricultural finances.

E.      Red –Tapism

Red- tapism has become a standard practice in official matters. Formalities are so cumbersome in obtaining institutional loans that the farmers are often compelled to divert upon to the non-institutional sources.

F.       Ignorance Of Farmers

Ignorance of farmers and lack of awareness among them has always worked as a serous impediments to serve rural farmers.

Technology can be used to educate and identify poor farmers. Delivery of funds to them can also be made speedy and efficient using technologies such as mobile banking. Farmers should be issued pass books linked to their aadhar- card showing details of their land and fixed assets . This will streamline the procedure for the grants of loans, avoiding much of red-tapism.

                                                    Vashistha Ray.

MODEL ANSWER: CIVIL SERVICE MAIN EXAM, 2014, G.S-3( ECONOMIC DEVELOPMENT) BY VASHISTHA RAY

Q.3. There is also a point of view that Agriculture Produce Marketing Committees (APMCs) set up under the state acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine.

Ans:  The given point of view clearly highlights the failure of APMCs in supervising and monitoring the activities of regulated market and thus in protecting the interests of farmers. 

APMCs have been set up by various states to monitor the activities of regulated market. The committee has representatives of state government, farmers, traders, commission agents and local body. The chairman of the committee is always a farmer. The main objective of this committee is to protect the farmers from the misery of distress sale to middlemen.

                 The committee has been entrusted with the task of providing storage facilities to farmers in regulated market. The committee also ensures that no broker or middlemen operates in regulated market. Only registered traders are allowed to purchase agriculture produce from farmers and that too at pre-announced prices. Weights & measures of traders operating in regulated market are always inspected and farmers are provided training by APMC to conduct business in regulated market.

                 Regulated market structure set up in India by respective state governments since 1951 under their respective APMCs acts has over the years brought discipline in the marketing of agriculture produce and taking care of various problems relating to malfunctioning of agricultural market.

          But over the years, it has been found that APMCs have failed to discharge their responsibilities. Farmers are not adequately informed about prevailing prices, weight & measures are not regularly inspected and training program conducted to increase the efficiency of market is irregular and unsatisfactory. There have been reports of collusion among various members of committee leading to rampant corruption in regulated market. All these along with the inefficiency of APMCs, farmers are denied fair and remunerative prices at the cost of agricultural development.

 The APMC act is also responsible for food inflation as it has created monopolies and distributional inefficiencies by not permitting private players and unregistered traders to set up the wholesale market in areas designated as regulated market by states. The committee also charges heavy mandi  fee from traders as well as farmers of regulated market. This  also becomes the cause of inflation. Since the time fruits and vegetables have been brought under the ambit of regulated market, food inflation has increased further.

 However, under model APMC acts,2003, private players have been allowed to purchase agricultural produce and develop agricultural infrastructure such as cold storage. Farmers are also sponsoring their own market in various states. These developments have brought in competition in agricultural market and thereby increasing the efficiency of APMCs. Vashistha Ray.

MODEL ANSWER: CIVIL SERVICE MAIN EXAM,G.S. -3(ECONOMIC DEVELOPMENT) BY VASHISTHA RAY

Q.2.While we flaunt India’s demographic dividend, we ignore the dropping rates of employability. What are missing while doing so? Where will the jobs that India desperately needs come Q.2. While we flaunt India’s demographic dividend, we ignore the dropping rates of from? (UPSC, CIVIL SERVICES MAIN EXAM, 2014, G.S -3 BY VASHISTHA RAY)

Ans: India found a much needed solace with the size of its population when the term ‘demographic dividend’ started gaining currency. Demographic dividend refers to benefits of having large population or labour force. india can certainly be the beneficiary of its demographic size as almost 63% of its population falls in the age group of 15-64 which are considered to be working population and developed and large economies of the world is going to face adequate labour shortage in days to come because of their negative population growth. However, the euphoric discussion of demographic dividend ignores dropping rates of employability in India. This is due to the following factors:

A.     Skill-deficiency

India’s employability is seriously handicapped by skill deficiency. Availability of jobs at domestic and international level requires educated and skilled labour-force. But unfortunately,  India has been a house of churning-out uneducated and unskilled labour-force. This is due to our inappropriate education system and inadequate on-job-training program. We have also failed to preserve and develop our traditional skills in handicrafts, artisans, astronomy and preparation of medicinal compound which could have been the source of employment.

B.      Complex Tax Structure

        The complex tax structure in our country has given birth to frequent disputes between government and investors or companies. This has worked as a disincentive to industrial growth and FDI. The protracted tax dispute between central government and Vodafone sent wrong signal to foreign investors and tarnished the image of India as investors’ friendly country. It was due to only  tax dispute with government that the largest plant of Nokia at Chennai employing thousands of Indian workers had to be shut-down.

C.      Structural Bottlenecks

        Structural bottlenecks in terms of red-tapism , delay in critical policy decisions , poor conditions or non-availability of infrastructure and complex labour laws have significantly discouraged entrepreneurs to initiate business enterprises. This has also reduced our employability.

D.     Low Level Of Competitivenes

  We are also losing outsourced jobs from advanced countries to china and other countries. This is primarily due to lack of suitable policy measures and low level of competitiveness in acquiring such jobs.

India can generate lots of jobs by developing its manufacturing sector which has ample potential to absorb unskilled, semi-skilled and skilled labour simultaneously. It can also get the required jobs from small-scale industries which are labour-oriented. Development of export based industries may have key to generation of job opportunities in India. We can also get jobs from FDI and outsourcing by developed countries.  Vashistha Ray

MODEL ANSWER: CIVIL SERVICES MAIN EXAM, G.S PAPER 3(ECONOMIC DEVELOPMENT)

Q.1. Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth of services vis-a vis industry in the country? Can India become a developed country without a strong industrial base? (CIVIL SERVICE(MAIN), 2014,G.S-3, ECONOMIC DEVELOPMENT: Vashistha Ray)

ANS: A careful study of India’s pattern of sectoral growth shows that in the four decade period, 1950-1990, agriculture share in GDP or agricultural growth declined by 25%, while industry and services gained equally. The growth of industry has stabilized since 1990, while the growth of services picked up in 1980s and accelerated in 1990s. at current level,  India’s service sector seems to have bypassed industrial sector. Following reasons could be attributed to huge growth of services vis-à-vis industry in the country:

A.      As income of people increases, demand for services such as health, education etc. increases by more proportionate than demand for industrial output. In India also, the rise of middle- class and upper- middle classes caused demand for services to increase significantly. This led to growth of services in India.

B.      Industrial growth is more dependent upon infrastructural development such as road and ports which acted as bottlenecks to growth. The growth of service sector is less impacted by such constraints. The phenomenal  growth of low skilled services activities has occurred due to reduced opportunities of manufacturing sector and the sophisticated and high skilled services have grown due to more intensive in skilled labour, with which India is well endowed.

C.      The growing external demand for miscellaneous services from India has also led to huge growth of service sector.

D.     The advent of IT revolution made it possible to deliver services over long distances at a reasonable cost. Trade in services, thus, increased world wide and outpaced industrial growth.

E.      Indias’s comparative advantage in huge labour force, skill & expertise proved to be more catalyzing factors for growth of service sector than that for industrial sector.

F.       The introduction of new economic reforms, 1991 in industrial, financial and fiscal areas also resulted in significant growth of services in post- reforms period.

In the age of globalization, India can definitely become a developed country without a strong industrial base. This would materialize if we specialize in export based services and enhance our skill and competitiveness in delivering services  through  appropriate policy measures.

RAAZ 3: A REVIEW

 

She wears all the costumes of modernity but carries a streak of attitude that shoves her back into dark medieval age. To her, do you know the best way to grind a rival into dust? Hard work? No. perseverance? No. staying at it? Don’t be naïve. All that is for losers. The foolproof way to make sure you stay on the top is, cue appropriate ghostly sound effects, kaala jaadu.
               Or at least that’s what the desperate Shanaya( Basu) believes, when new heroine-on-the-block Sanjana(Gupta) starts to get ahead. Nothing that friend and lover and director of her films Aditya(Hashmi) can do is enogh to console her.Shanya wants Sanjana out of her way at any cost. And she finds an answer in black magic.
                      Bhatt is an old hand at horror, going back and forth in time, doing victrian and contemporary, and, on occasion, medieval. Here, he sticks to the here and now,making bollywoo the backdrop: the film industry,going by scores of unpublished, ear-scorching accounts, is the place where anything can happen. So we are quite prepared o believe that Shanaya’s bitterness and envy has caused her to come unhinged, and her passes at the guy who hands her the tools for sanjana’s destruction, lead to a couple of shivery moments in the first half.
    The second half goes just the way so many fils do: down the chute. Or, in the instance of raaz 3, in that ‘in between place which are inhabited by prêt-aatmas. Right there, the little bit of frisson that the film managed to garner vanishes,maybe in that self-same place. Out come all the sadhus and babas with their mantras, and the bhagwan ki murti, and it all boils down to the same old battle against good and evil, borrowing from older horror topes from here and there.
                      Not only are the lines unintentionally hilarious, the characters are too. Especially the supporting cast, which ranges from a psychiatrist; a sorcerer with knowledge of kaalu jaadu whose pupil meets with a nasty ends, a murderous aatma who has the hots for a live woman, and so on. Excuse me while I choke.
           As to the main leads, Bipasha being bad should have led to something. But neither she nor the relative newbie Esha Gupta, who teeters between getting somewhere with saying her lines and flubbing them, are anything but gym-toned clothes-horses. Poor Hashmi pendulums between both, and tries hard to look all serious and buttoned down. But hold, may be he is not so por at all as he gets to smooch not one but two lovelies. And that, dear readers is not a raaz at all.
                                                                         Vashistha Ray.