There are two aspects to the news- knowing the headline and understanding the intricacies of it. We at The Connectere focus on both. While The First Forum edition gives a brief about the headlines, The Weekly Analysis Edition is meant to educate the reader on what do various news mean and what are their intricacies. This initiative is meant to educate the reader on how to understand the important news. In the Thirtieth Edition we are covering the following news:
- Kyrgyzstan’s Dance of Democracy
- Loan moratorium: Centre agrees to waive interest on interest on loans up to Rs 2 crore
- UP: Electricity Department Employees Protest Against Privatisation of Power Discom
- Why is a coordinated policy approach critical in the pandemic?
- Quad and the confusion about India’s alliances
Democracy has been made a game of all over the world it seems. Everyday there is one new nation, one new leader trying to rig the elections, trying to get absolute control and turning into a despot. The lust and avarice for power and control makes such leaders turn a blind towards the welfare of the most important stakeholders: the general public, the voting class. A similar incident took place in Kyrgyzstan.
Chaos broke in the nation when the public and members and groups of the opposition party took to the streets to express their grief over the rigging over the national elections. The opposition groups along with the protestors took control of the parliament and freed their members from the prison. Under pressure from the protestors the electoral board declared the elections invalid. Overnight, a small group of protesters broke away from the main body and tried to gain entry to the White House, the main government building that hosts the Parliament and the presidential administration. After police tried to disperse them, hundreds more joined in the assault and soon took control, according to photos and video footage from the scene. On Tuesday, the streets of Bishkek were littered with burned out cars and piles of stones. Inside the building, videos and photos showed broken glass and piles of debris, including government papers, with protesters wandering around the offices. In the city, residents began to form volunteer brigades to deter looters.
The end line is that this is not how democracies ought to function. The basic principle of a democracy is for the people, by the people and of the people. The public and not the leaders should be at the centre of the economy. the idea of a democracy fails the moment the leaders whether from the ruling party or the opposition start placing their own needs first. The contest of power should turn the nation into a madhouse, with one party stepping over the other. Similar instances can be seen in India too, where parties attempt and wait for the right moment to push their adversaries out of power.
If the ruling party goes out of control it is the opposition’s job to keep it in check, it is also the duty of the public to make a rational decision while choosing the representatives. But this does not however mean that the opposition oppose every decision taken by the government, it must support the right ones if it raises questions over the wrong ones.
The central government, in an affidavit filed in the Supreme Court, has supported waiving compound interest or ‘interest on interest’ for small ticket loans up to Rs 2 crore. The relief would be available to all borrowers, the government said in the affidavit but did not specify the manner in which relief would be provided to those who may not have availed the moratorium. The response came in the matter of Gajendra Sharma vs. Union of India being argued in the apex court. In its affidavit, the government said that it has decided to continue the tradition of “handholding” the small borrowers. “The government, therefore, has decided that the relief on waiver of compound interest during the six month moratorium period shall be limited to the most vulnerable category of borrowers.
This category of borrowers, in whose case, the compounding of interest will be waived, will be MSME loans and personal loans up to Rs 2 crore.”
The government, in its affidavit, does not make a distinction between borrowers who may have continued paying their dues and those who may have availed of the moratorium partially or fully. “The relief to all borrowers in respect of compounding of interest during the period of the moratorium would be admissible to the categories specified hereinafter irrespective of whether the borrower had availed of the moratorium or not,” it said. The government is proposing that interest on interest for loans in these categories be waived MSME loans up to Rs 2 crore, Education loans up to Rs 2 crore, Housing loans up to Rs 2 crore, Consumer durable loans up to Rs 2 crore, Credit card dues up to Rs 2 crore, Auto loans up to Rs 2 crore, Personal loans to professionals up to Rs 2 crore, Consumption loans up to Rs 2 crore.
In case the government wants to give the same relief to a borrower who has not availed the moratorium, a notional amount of compound interest for a six-month period can be reduced from the outstanding balance in the loan account.
Assuming not more than 30-40% of the overall loans of the banks and NBFCs will be eligible for relief, the cost to the government should not exceed Rs 5,000-7,000 crores. This is assuming all borrowers are given relief irrespective of they availing the moratorium or not, he said. The government, in its affidavit, specified that lenders would not be expected to bear this burden and the cost of the waiver would be borne by the government.
“It is submitted that it is impossible for banks to bear the burden resulting from waiver of compound interest without passing on the financial impact to the depositors or affecting their net worth adversely, which would not be in the larger national economic interest.”
The affidavit added that the only solution is for the government bear the burden resulting from waiver of compound interest. The government did not specify the exact cost it would incur on account of such a waiver. “Government will seek due authorisation from Parliament for making the appropriate grants in this regard,” the affidavit states.”
The government believes that help to small retail and SME borrowers is essential as they are a strong pillar of the economy. So while concerns around the eventual impact on customer behaviour are valid, the government would see this is as essential support to small borrowers,” said Pratip Chaudhuri, former chairman of State Bank of India. “The government also has to support banks in this situation because compounded interest is a part of their business. A bank can only pay compounded interest on deposits, if it receives compounded interest on loans. This is a balanced decision to help both segments.
The waiver of compound interest would provide relief to borrowers who were facing financial difficulties due to the Covid-19 pandemic, and at the same time protect banks’ balance sheet from any impact due to such small borrowers.
The Electricity Department employees in Uttar Pradesh continued their protest against the proposed privatisation of the Varanasi electricity discom – Purvanchal Vidyut Vitran Nigam Limited (PVVNL) on Tuesday, October 6. In response to the call given by the UP Vidyut Karmachari Sanyukt Sangharsh Samiti (VKSSS), the employees including power engineers, sub-divisional officers, executive engineers and superintendent engineers began their work boycott.
The talks between the UP Power Corporation Ltd (UPPCL) management and the VKSSS leaders failed after the management rejected the proposal to introduce reforms without privatising the energy sector, as per reports. The chairman of UPPCL refused to sign the agreement that had been reached between Power Minister Shrikant Sharma and the VKSS. Following this, the employees said their boycott of work will continue.
“After the UPPCL management turned down our reform proposal, we have asked all the power personnel to begin the full day work boycott as per the pre-declared plan,” All-India Power Engineers Federation (AIPEF) chairman and Sangharsh Samiti leader, Shailendra Dubey told media.
He further claim that the 15 lakh power employees across the nation will also boycott work in solidarity with the protesting workers. He has issued an appeal to the Chief Minister for his discussion in the matter as he accused the management of misleading the government. They also said that the essential services like hospitals have been exempted from the work boycott of the staff.
The state government reportedly has issued warning against the protesters, saying that they will face strict action if they continue with their boycott disrupting power supply.
As per the ground report, Atul Kumar, an executive engineer who is protesting against privatisation in state capital, Lucknow, said, “All electricity transmission and supply employees including senior officials are opposing the move for privatisation as the power sector has worked as a social redress field. Once privatised, the farmers and the poor will be most affected along with employees’ own welfare and services. Therefore, there has been an ongoing statewide protest of Vidyut Karmachari under VKSS.”
But on the contrary, the BJP-led government has already initiated privatisation bids for Purvanchal Vidyut Vitran Nigam Ltd that caters to divisions of Varanasi, Azamgarh, Ghazipur, Chandauli, Jaunpur, Sant Rabidas Nagar (Bhadohi), Mirzapur, Sonbhadra, Mau, Ballia, Deoria, Kushi Nagar, Gorakhpur etc.
The protest leaders also are ready to go on a state-wide strike if their employees are arrested for protesting.
From the global perspective, the central bank cares more for price stability and the government for growth therefore giving the central bank independence will deliver price stability, thus allowing the government to focus sustainable growth which has led to India’s rules-based macroeconomic framework. However certain features of the Indian economy make monetary-fiscal coordination necessary for which rules need to be interpreted flexibly. Since India’s economic structure is more demand oriented, monetary policy affects demand more, while fiscal policy affects supply-side costs and, therefore, inflation. It turns out that each is more effective in achieving the other’s objective so total independence leads to a situation of non-cooperative strategic interaction.
The monetary authority keeps interest rates high since it believes the fiscal authority wouldn’t give priority to reducing inflation but then growth and revenues fall and the costs of servicing debt rise so the fiscal authority cuts back on activities that could reduce inflation.
But there are some ways around this to change incentives, making rules more flexible. For instance, if there’s delegation to a more pro-growth monetary authority, the changed preferences reduce pay-offs making coordination the outcome. Since the monetary authority knows that the fiscal authority will act on the supply side, it can lower interest rates. However, from the Indian point of view, a simple rule won’t be effective. Especially in times of covid, the output shocks have changed preferences of central bankers worldwide to give more importance to growth. This change enforces coordination.
In India, the government’s strategy of channelling aid through the financial sector doesn’t impact the fiscal deficit and market borrowing. Caution in expanding deficits allowed the RBI to take multiple measures. Government credit warranties reduced risk aversion and coordination reversed an excessive tightening of financial conditions. Thus financial stability was improved.
In our present situation it’s difficult to induce private spending so monetary policy is considered ineffective and private investment and consumption has been depressed due to various reasons during this period, so there are calls for more government spending. But the lockdown has created serious supply chain so a fiscal demand stimulus would have been less effective. The Fiscal Responsibility and Budget Management Act allows for monetary financing under a growth collapse. The government has space and can create more by asset and expenditure restructuring. Keeping medical aid, preventing hunger and protecting livelihoods as priorities, a moderate expansion in fiscal expenditure coinciding with the festive season and recovering supply chains could build private sector confidence and trigger spending.
Surplus liquidity aids government borrowing and also reduces financial sector tensions. This coordinated equilibrium strategy can work in the pandemic because there are no dangers of high inflation and financial instability for a temporary output spike.
On 6th October, the external affairs minister said that New Delhi remains committed to “rules-based world order, respect for territorial integrity and sovereignty and peaceful resolution of disputes”.
There is still doubt regarding the Quad’s future in India’s international relations, sustaining which is the proposition that India is abandoning its “sacred” tradition of non-alignment in favor of a military alliance with the US in order to counter the Chinese threat. This comes at a time when India is set to begin a two-year stint as a non-permanent member of the UN Security Council next year. It must be noted that all four members of the Quad, India, Japan, Australia, and the US, have serious differences with China.
India’s objective remains to advance the security and economic interests of all countries having legitimate and vital interests in the region which makes the Quad a critical element not only for India’s foreign and security policy but also important in the evolution of post-War Asian economic and security architectures.
With regard to joining alliances, although the external affairs minister has affirmed that India will not join any alliance, there’s still confusion about India’s impending alliance.
Although alliances have a negative connotation in our foreign policy discourse, they are very much part of statecraft and as old as war and peace. Even the Mahabharata, the Panchatantra, and the Arthashastra depict alliances as strategic forces. Indian domestic politics is always about making and unmaking alliances but if it’s international politics then it’s considered taboo. Why? As the Western powers that joined Soviet Russia to defeat fascist Germany turned against Moscow after World War II, a newly-independent India did not want to be tied down by alliances, so there lies a part of the problem – we cannot delete that picture from our heads.
The next question we need to ask is that does India forge alliances? India has experimented with alliances of different kinds. For instance, during World War I, some nationalists aligned with Imperial Germany to set up the first Indian government-in-exile in Kabul, then when the three Himalayan Kingdoms — Bhutan, Nepal, and Sikkim — turned to Delhi for protection amidst Maoist China’s advance into Tibet during 1949-50, Nehru signed security treaties with them and Nehru, who actively opposed US alliances in Asia, turned to the US for military support to cope with the Chinese aggression in 1962 and obviously if one goes down the rabbit hole online they can find many more examples. So it is safe to say that India does do alliances depending on the “when under what conditions and on what terms”.
On one hand, the US Deputy Secretary of State recently mused about the Quad turning into some kind of an alliance in the future but that does not set it in stone. In fact, the current political scenario in the US is hostile to alliance-making. Behind all this talk, neither is the US offering an alliance nor is India asking for one but both countries are interested in building issue-based coalitions in pursuit of shared interests. But we know well that Agreements for security cooperation are made in a specific context and against a particular threat and when those circumstances change, treaties lose their meaning.
No country is more instrumental in alliances as China. Having gained immensely from the partnership with the US over the last four decades, China is trying to push America out of Asia and establish its own regional primacy. Unlike China, India can’t brutally negotiate about its external partnerships but could certainly learn from the former in not letting the theological debates about alliances cloud its judgments. An India that puts its interests above the doctrine will find coalitions like the Quad critical for its international prospects.