July 2018


Over the past month, media coverage focused on a mix of political and economic news. Topics which received extensive news coverage include the outcome of a no-confidence motion raised against the central government, a depreciation in the value of the Rupee and the government’s decision to raise subsidies for farmers.

Results of the No-Confidence Motion against the Government

Earlier this month, a motion of no-confidence was raised in the Parliament against the Narendra Modi-led government. While the motion was defeated by a comfortable majority, it drew attention to the growing political role played by Rahul Gandhi, the President of the Congress Party.  Various media publications weighed in on the implications of the motion on India’s political landscape.

The Hindu lauded Rahul Gandhi’s speech as a morale-booster for the Congress Party. “…it was the Congress’s rookie President, Rahul Gandhi who stole the show. He set the tone – if not the agenda – for 2019, with an unequivocal message that love and tolerance, not hatred and lynchings, was the way forward for India, indeed, that there was no substitute for the Gandhian ideals of truth and non-violence. Minutes before he walked across to Mr. Modi, he said, ‘You may hate me, you may be angry at me; you may even call me [inept]. You can hurl abuses at me, but I do not have any anger or hate for you. I am Congress, and all of them (the Opposition) are the Congress. This feeling and the Congress have built this nation. And you should never forget that.’ For Mr. Gandhi, not the most articulate and effective speaker, it was an enormous achievement, and the platform provided by the Opposition-backed no-confidence motion was perfect. Television viewers across the country were able to see for themselves that even eight hours after Mr. Gandhi ambushed Prime Minister Narendra Modi with a warm – and completely unexpected – hug on the floor of Parliament, he had not quite recovered from [the shock]… [The speech] came as an enormous morale booster for [Congress] party cadres, even as it took the wind out of Mr. Modi’s sails – if only temporarily.”

The Indian Express acknowledged the resolve shown by Rahul Gandhi in the Parliament, but also highlighted the difficulties before him in holding together a coalition of political parties. “After playing with the spotlight for a long time, after making erratic interventions and being seen to consistently lose political moments and opportunities, Rahul seemed to be making a statement in Parliament which was not just about the BJP, but also, and more, about himself. The directness of his attack on the Prime Minister, his strongest yet, announced that he is no longer shirking the mantle, or shifting under its weight… But the task [before the Congress Party] of stitching alliances, and maintaining them, will involve give and take, more give than take. This will not come easy to a Congress that is still to fully acknowledge that the days of its dominance are long over… Rahul Gandhi must engage and negotiate with [regional parties breaking ranks] if his performance in Parliament is to have any meaning outside it.”

The Wire, a leading online publication, took a more balanced view of the motion, and highlighted gains and losses for both Rahul Gandhi and Prime Minister Modi. “Rahul Gandhi had much more to lose than Modi, and the Congress president did not fall flat on his face. He owed himself and his party a good show and what he turned in was exceptional parliamentary performance… And, then, he overdid it. Unbelievably, Rahul Gandhi went over to the treasury side, and tried to hug the prime minister. It was awkward, bizarre, unnatural, and most un-parliamentary… [later] the prime minister took him apart, with ease and skill… Modi did the BJP no favour by showing himself to be a prisoner of the Old India, its animosities and bitterness. The pointed references to 1979, 1990, 1997 were intended to re-kindle old fashioned anti-Congressism. But by placing himself in the category of presumed anti-Nehru rebels… Modi ended up refreshing a meta-narrative about the Congress, thereby reaffirming the Congress’s historical relevance and role. Modi was not without his characteristic demagogic flourish, especially his penchant for positioning himself as the embodiment of the aspirations of one billion Indians and their [pride]. But he was disappointingly pedestrian as he gave an accountant’s rendering of his government’s achievements… If Rahul Gandhi failed to spell out adequately what he had to offer to the nation, Prime Minister Modi was also content to offer only more of the same.”


Depreciation in the Value of the Rupee

This month, the Rupee collapsed to a record low of 69 against the US Dollar.  Various media publications and experts analyzed the underlying drivers of the Rupee’s fall and the difficult task before India’s policymakers.

The Hindu attributed the rupee’s depreciation in large part, to the tightening of US monetary policy, a rise in crude oil prices and a widening current account deficit. “The rise in international crude oil prices is one of the reasons behind the rupee’s decline as importers have had to shell out more dollars to fund their purchases. India’s current account deficit, which jumped to 1.9% of GDP in the fourth quarter of 2017-18 from just 0.6% a year earlier, is now expected to widen to 2.5% in FY 2019. This could spell even more trouble for the rupee as the demand for dollars could turn out to be overwhelming… The rise in global trade tensions amidst the ongoing trade war could be another factor behind the rout in emerging market currencies, but its impact on the rupee remains unclear as of now. But by far the most important reason behind the fall in the rupee and other emerging market currencies is the tightening of U.S. monetary policy… The government, as well as the Reserve Bank of India, which recently raised domestic interest rates in response to rising external economic risks, may need to think out of the box to avoid a crisis similar to the taper tantrum of 2013.”

The Indian Express also pointed towards India’s widening current account deficit as a key factor for the Rupee’s depreciation and advocated fiscal prudence in the volatile environment. “The rupee has come under renewed pressure, falling to an all-time-low of 69.09 to the dollar… Two of the reasons for it [are] rising crude prices, resulting in a widening of India’s current account deficit, and unwinding of easy money policies by major central banks causing global interest rates to go up and also triggering capital outflows from emerging market economies… The right policy response in today’s volatile environment for global capital flows is not to do anything silly. That would mean not succumbing to election-time pressures… The lessons of May-August 2013 shouldn’t be forgotten. The run on the rupee witnessed then was a result of global investor worries over India’s “twin deficits”. A sell-off on that scale, forcing the RBI to increase interest rates just when the economy is in recovery mode, would be truly disastrous — both economically and politically.”

An article in Livemint quoted India’s outgoing chief economic advisor as he advocated the need to allow the Rupee to depreciate to minimize exposure to economic shocks. “The Indian rupee should be allowed to depreciate in sync with currencies of the rest of the world as trade wars may quickly turn into currency wars… the country can withstand external shocks from high oil prices and a strong dollar… Given that unilateral tariff hikes on steel and aluminium by the Donald Trump administration has forced many countries, including India, to retaliate, and the US is showing no signs of backing down, it could soon turn into full-blown trade wars… India should opt for a gradual non-disruptive rupee depreciation to tide over the crisis as a strong dollar could lead to capital outflows from emerging markets… The government has shown courage by sticking to price deregulation of fuels and not doing anything unduly populist…”



Increased Subsidies for Farmers

In a move to placate distressed farmers, the government announced an increase in the minimum prices (MSPs) for crops. The price hike was the biggest increase in the present government’s tenure and is expected to increase government expenses by INR15,000cr. Media houses unanimously criticized the inefficacy of the move and advocated the need for alternative measures for farmer welfare.

An article in the Indian Express by the Chairman of the Punjab Farmers’ Commission highlighted the counter-productiveness of the existing price-hike policy. “Farmers feel betrayed as [the price hike] does not fully factor in the over 20 per cent higher input costs on account of GST and last year’s hike in prices of diesel and fertilisers… The main grouse for the majority of farmers is that prices of the crops for which there is no support price (potatoes, tomatoes, onions, garlic) have touched rock bottom in the past one year, and only around 10 per cent farmers will benefit from such procurement… Programmes framed by a class of people who are better at explaining than understanding have left the government with huge stockpiles. These are now being offloaded in local markets and the ensuing glut is extending the period of depressed farmgate prices. At the same time, the government has also suffered considerable loss… Most government programmes for farmer welfare have not given the desired results. Rather than opt for big ticket reforms, the government needs to look at marginal improvements. These, if consistently implemented over time, will deliver the required change.”

Livemint also criticized the move as a palliative and spoke about the need for alternative policy initiatives for farmer welfare. “Indian farmers have been squeezed by low prices and need urgent help. The government’s minimum support price (MSP) hike last week, however, forgets past lessons. Countering low farm-gate prices through hefty MSP increases has failed time and again due to the limited reach of the government’s procurement mechanism and the lack of adequate and timely budget support. Meanwhile, MSPs fixed without reference to global prices have led to the twin problems of unbalanced cropping patterns and wide divergence of Indian prices from international prices. There is a pressing need to move away from this distortionary MSP regime… We need to look at three medium- and long-term solutions. First, there is a need to augment net farm household incomes with non-farm incomes… Second, there is a need for large-scale initiatives for information dissemination among farmers to enable them to make rational cropping decisions… Third, there is a need to exploit India’s export potential and boost farmer incomes through exports… These three sustainable measures, as well as income transfers, need to be taken up on a priority basis. The loan waiver and MSP mechanisms are just not sustainable.”

The Hindu Business Line similarly advocated the need for structural reforms rather than an artificial boost in prices. “MSP acts as a benchmark for the market. A higher benchmark price for essential food crops such as paddy, oilseeds and pulses has the potential to fan inflation… Worse, we have seen in the case of pulses, farm-gate prices in 2016-17 and 2017-18 were far lower than the specified MSP. Growers are indeed upset as a result… Adopting the following six mantras should help transform the moribund agriculture sector: strengthen the input delivery system; rapidly expand irrigation facilities; infuse multiple technologies in agriculture; invest in rural infrastructure; exploit the country’s prowess in [information and communication technology]; and build capacity among growers to withstand market volatility. Unfortunately, there is no one-step solution to solve the farm issues. We need to move in several different directions simultaneously. Policy-makers have to demonstrate political will to ensure sustained and sustainable growth while balancing the interests of growers and consumers alike.”



Greater Pacific Capital Copyright 2018