Gist of EPW June Week 1, 2023

The Economic and Political Weekly (EPW) is an important source of study material for IAS, especially for the current affairs segment. In this section, we give you the gist of the EPW magazine every week. The important topics covered in the weekly are analysed and explained in a simple language, all from a UPSC perspective.

TABLE OF CONTENTS

1. Indian Banks Need to Adopt the Basel III Internal Ratings
2. Monetary Policy in the Midst of Cost-push Inflation
3. Godna and the Gonds: From Tradition to Innovation 
(The Politics of Art, Body, and Identity)
4. Foreign Direct Investment

1. Indian Banks Need to Adopt the Basel III Internal Ratings

What are BASEL Norms?

• Basel Norm III is also known as the Third Basel Accord or Basel Standards. It is a regulatory framework followed on a voluntary basis on a global scale. 
• The framework deals with capital adequacy in banks, stress testing, and market liquidity risk. 
• The objectives of Basel III are to encourage better and more systematic risk management practices, especially in the area of core risks (credit, market, and operational), and to provide improved measures of capital adequacy for the benefit of supervisors and the marketplace more generally. 
• The Basel III reforms focus on enhancing capital adequacy, improving liquidity, and reducing systemic risks in the banking systems, and they have been adopted by banking regulators the world over, including the Reserve Bank of India.

Basel III Update

• The final Basel III accord encourages advanced risk management capabilities by stipulating three levels of increasing sophistication in the credit risk capital charge.
• The revised standardised approach (RSA) has been brought in to enhance the robustness and risk sensitivity of the standardised approaches for credit risk.
  • Under the RSA, banks are required to use credit ratings to conduct sufficient due diligence in lending.
• It has reduced mechanistic reliance on external credit rating agencies (ECRAs). 
• Large US banks have been operating under Basel III since 2014. European banks have adopted Basel III from 2013 onwards.
• Banks in India have implemented Basel III since 2014. However, no guidelines for adopting Final Basel III RSA or IRB app­roach have been issued by the RBI yet.
• The main thrust of the Basel III framework is to enhance the banking sector’s safety and stability as it emphasises the need to improve the quality and quantity of capital components. The deadline for implementing existing Basel III had been extended up to March 2020. It is further revised till April, 2024.

Image: BASEL 2 and 3 IRB implementation

Source: EP&W

Portfolio Credit Risk and Importance of IRB:

Image: portfolio risk position

Source: EP&W

• The above table summarises the portfolio risk position of major scheduled commercial banks in India in terms of credit risk and core equity capital (tier 1).
• These risk estimates would enable the RBI to understand the aggregate risk and solvency position of these banks.
• The average PD is the long-run average of their fresh slippage rate that has been estimated from the movement of non-performing assets (NPAs). 
• The fresh slippage rate (or marginal PD) in a year is the ratio of additions in gross NPAs to the three-year moving average of gross advances.

Following BASEL norms has enabled the banking sector in India to mitigate the risks that are arising out of banking default. This has made our banking sector more resilient to the global banking environment and enabled it to meet the challenges of the changing global order.

2. Monetary Policy in the Midst of Cost-push Inflation

Detail: 

What is inflation: 

• Inflation is the rate of increase in prices over a given period of time. The RBI basically uses three techniques to control inflation in the country.
  • The first route pertains to price control, where the state is perceived to control the inflation rate by imposing constraints on the mark-up of firms. 
  • The second route involves fiscal policy, where fiscal instruments are sought to be used to adjust aggregate demand or relax structural bottlenecks. 
  • The third route pertains to monetary policy.

Issues with the inflation targeting in today’ s world: 

• The New Consensus macroeconomic policy framework is that it puts the burden of controlling the inflation rate exclusively on monetary policy. 
• With fiscal policy being largely used to meet the deficit or debt targets set by the fiscal policy rule, the monetary policy seeks to control the inflation rate by adjusting demand and output.
• Since the inflation-targeting monetary policy seeks to control the inflation rate through the output channel,that to a large extent depends on the slope of the Phillips curve.
  • But if the Phillips curve is flat, then monetary policy becomes ineffective. Such a possibility calls forth the need to estimate the slope of the Phillips curve in India to analyse the extent of monetary policy effectiveness.

The New Keynesian 3-Equation Model and the Post-Keynesian Critique

• The theoretical foundation of inflation-targeting monetary policy in the contemporary period is based on 3-equation macroeconomic models. The latter outlines the mutual relationship among the 
  • Output gap, 
  • Inflation rate, and 
  • Interest rates. 
• There are three main building blocks in the 3-equation model. They are the IS curve, the Phillips curve, and a monetary policy rule.
• The positive responsiveness of the inflation rate to the output gap allows the central bank to influence the inflation rate by controlling the level of the output gap.
• The effectiveness of monetary policy in mitigating the inflation rate depends on the slope of the Phillips curve.
• The extent to which policy rate and output gap respond to changes in supply shocks would depend on the nature of policy rule. The policy rate and output gap for optimal monetary policy rule would remain unchanged if the Phillips curve is flat.

Observation:

• The  presence of a flat Phillips curve makes monetary policy ineffective in mitigating inflationary pressure. The presence of the Taylor-type monetary policy rule poses additional constraints on output amid cost-push inflation.
• The significant impact of cost-push factors explains both the causes of high inflation as well as the episodes of mode­rate inflation rate despite the ineffectiveness of monetary policy.
• The significant effect of terms of trade during the high inflation period points towards the presence of structural bottlenecks in India. In contrast to New Keynesian theories that seek inflation-targeting exclusively through the demand channel, the analysis highlights the need for relaxing supply constraints.

3. Godna and the Gonds: From Tradition to Innovation (The Politics of Art, Body, and Identity)

Gond tribes: 

• The Gonds form the second largest tribal group in India, with a population of 2.98 million (Census 2011). The community spreads across the states of Maharashtra, Madhya Pradesh, and Odisha in India. 

What is Godna? 

• Godna, a form of body art, is a significant aspect of many tribal cultures in India. Godna is an art of body tattooing done by inserting indelible ink into the dermis of the skin. The art is prominently practised by various tribal communities in India. 
• There are traces of Godna dating back to 200 BCE. It is drawn as a form of permanent jewellery and beautification that is believed to go beyond death.
• Each community practising the Godna art form has its own designs for the motifs and body parts for application, which signify different aesthetic values. 
• Besides the body, similar motifs are also seen on walls and floors on special occasions such as marriages and festivals.
• Godna for Gonds serves two main purposes. 
  • It epitomises a form of jewellery that with its inscription on the body is said to transcend death. This highlights a tribal culture that detaches itself from materialistic and worldly notions of wealth and beauty. 
  • Godna is also a representation of all the developmental milestones that a female in the community passes through, including physical and cultural milestones.
• Godna is culturally believed to be a harbinger of luck. For instance, people get Godna inscribed before the harvest season on their feet, and they are the ones who enter the field. 

Women and Godna:

• The process of applying Godna is performed traditionally by the women of a sub-community called the Godhanhari, and they are the sole torchbearers of knowledge transfer.
• Godna is also only applied to female bodies at different stages of life.
• Gond women decided to preserve their indigenous art form by shifting its inscription from their body to their textiles. With the help of the state handicraft department, Chhattisgarh, they formed a self-help group (SHG) called Nari Shakti.
• The entire initiative has not only provided the women with an alternate livelihood but has also earned them respect and recognition in their community. 
• The members of the group have received accolades from the state as well the central government for their work on preserving the tribal art form.
• The Gond women artists have travelled to multiple states and showcased their artwork to thousands of people. 
• The walls of Chhattisgarh Bhawan (the official building for  Chhattisgarh in National Capital, New Delhi) have been beautified by the Gond artwork of the Nari Shakti group.
• The initiative has not only empowered Gond women financially and socially but also strengthened their social mobility.

4. Foreign Direct Investment

What is foreign Direct Investment?

• Foreign direct investment (FDI) is a category of cross-border investment in which an investor of one economy makes an investment in the economy of another country. 
• Ownership of 10 percent or more of the voting power in an enterprise in one economy by an investor in another economy is generally considered FDI. 
• FDI is a key element in international economic integration because it creates stable and long-lasting links between economies. 
• FDI is an important channel for the transfer of technology between countries, promotes international trade through access to foreign markets, and can be an important vehicle for economic development.

Read more on FDI in the linked article.

Recent trends: 

• Gross FDI inflows have consistently picked up from $34.3 billion in 2012–13 to a record $84.8 billion in 2021–22. That is more than a twofold increase in just about a decade. 
• The ratio of gross FDI to gross domestic product (GDP) has also gone up from 2.3% in 2017–18 to 3.1% in 2020–21. However, it slid marginally after that to 2.7% in 2021–22.
• But there has been a reverse trend. The Reserve Bank of India (RBI) data for 2022–23 show that the total FDI inflows have gone down by 16.1% to $71 billion. That is a decline of almost $14 billion from the peak levels achieved in 2021–22.
• FDI in manufacturing has sharply fallen by almost one-third. The fall in FDI was even higher in segments like computer services, education research and development, transport, and construction. 
  • FDI inflows into these segments fell around 33%–50%. Other segments where the FDI fell include communication and business services.
• The FDI from major sources like the Netherlands, Mauritius and the United States (US) fell between 33% and 50%. In the case of Switzerland, the FDI fell from $4 billion to almost zero. 
  • However, the FDI from Cyprus, the United Kingdom, Japan, and the United Arab Emirates continued to remain buoyant. Similarly, Singapore, the largest FDI source, has also increased its FDI flows. 
• It is the US and countries in Europe that account for the bulk of the decline in FDI.
• The annual disinvestments and repatriations by foreign direct investors had remained below $10 billion till the middle of the last decade. However, it has suddenly surged since then and gone up almost threefold to around $30 billion in recent years.
  • The average ratio of disinvestments and repatriations to the gross FDI inflows has steadily soared. It has now gone up from 6% to 23% and further to 33% in each of the last three consecutive six-year periods.

The United Nations Council for Trade and Development had recently warned about a weakening and decline in the global FDI flows. Under this scenario, the government needs to take a dedicated step to ramp up the FDI regime in India. 

Read previous EPW articles in the link.

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