6th January – Editorials/Opinions Analyses

Contents

1. Spotting an opportunity in changing fundamentals
2. Information about African Monetary Union
3. Lifting Growth: Containing inflation

SPOTTING OPPORTUNITY IN CHANGING FUNDAMENTALS

Why in News?

• The slowdown in the global economy is compounded by the U.S.­ – China trade war.
• Growing rivalry between US and china could spell a strategic moment for India.

Energy concerns

• Slack demand for energy and surplus production mainly by the U.S. had lowered oil prices, which was good news for India, given its huge imports.
• Lower energy prices may help India address its current account deficit

On trade

• According to a State Bank of India “Eco wrap” report of July 2019, India has scarcely benefited from U.S.­ – China trade war . Of the $35­billion dip in China’s exports to the U.S. market in the first half of 2019, about $21­billion (or 62%) was diverted to other countries

Chinese investment in India

The big three Chinese high­ tech companies, Baidu, Alibaba and Tencent, together poured in $5­billion in Indian startups in 2018.

India could use this opportunity to try and force China to pry open its market to India’s IT and other tech exports

Advantages for India

As U.S.­ China tensions drive supply chains out of China, India could emerge as an alternative destination with the right policies, as Vietnam has done .

AFRICAN MONETARY UNION

Why in News?

• Recently, we saw crucial development in monetary economics — the end of the CFA franc zone in select African countries and a shift to a common currency, the Eco.

• The ending of the CFA Franc Zone marks the end of France’s colonial hold over its erstwhile African colonies. France created a CFA Franc Zone for its African colonies.

Membership of CFA

• The CFA zone currently has 15 members.
• All 15 members except Guinea Bissau (Portugal) and Equatorial Guinea (Spain) were French colonies.
• Some countries quit the CFA Zone (Guinea and Mauritiana) and introduced their own currency.
• Mali left the zone and then rejoined.

Subgroups of CFA

There are three sub-groups within these 15 member:

• The first is the eight member West African Economic and Monetary Union (WAEMU— Benin, Burkina Faso, Ivory Coast, Mali, Niger, Senegal and Togo)
• 2nd being the Central African Economic and Monetary Union (CAEMU — Cameroon, Central African Republic, Chad, Congo, Gabon and Equatorial Guinea).
• Both have their own currencies (Central African CFA franc and the West African CFA franc, respectively), but these are interchangeable and follow the same rules and values.
• WAEMU’s headquarters is in Senegal and CAEMU’s is in Cameroon.
• The 15th member is the Comoros, which is not a member of either group.

The French central bank assists these countries by providing them with a secretariat to hold half-yearly meetings of the CFA franc zone, drafting the CFA franc zone’s annual and economic research reports, and even in printing CFA currency.

Currency: the Eco

• Within all this, WAEMU’s eight members and seven more African economies plan to launch a single currency, the Eco.
• The group of 15 economies is named ECOWAS (Economic Community of West African States) and is broadly based on European principles of monetary integration.
• The latest deadline for the single currency project is  January 2020

• To become a member of Eco, the countries are expected to meet a 10-point convergence criterion.
• The three main points of convergence are:
  • Annual inflation of less than 10 per cent,
  • A public debt/GDP ratio of 70 per cent
  • Budget deficit of 4 per cent of GDP.
• Most members except Ghana, have barely achieved these targets.

• On December 21, 2019, the presidents of Countries opt for a fixed exchange rate system to benefit from the lower inflation of the pegged currency, but France had an inflation problem for most of this period.
• Now they are moving to a single currency, the Eco, where the idea is to benefit from financial and monetary integration.

• However, the euro’s experience points to the need for several unions — fiscal, banking, capital markets — for a monetary union to work effectively.
• The Eco member-countries will need To work much harder to come anywhere close to the integration they are visualizing with the common currency project.

• The Eco project currently is about regaining national pride, as own currencies matter, and will have to find an economic basis soon.
• Whatever the outcome, the ending of the CFA Franc Zone in 2019 and the possible start of the Eco in 2020 is an important milestone that merits a place in world monetary history

LIFTING GROWTH: CONTAINING INFLATION

Why in News?

• With the GDP growth rate plummeting to 4.5 per cent and with the agriculture GDP (GDPA) growth at 2.1 per cent in the second quarter of this fiscal year, concerns are being raised.

• Main concern remains that can the economy bounce back to 7-8 percent growth rate and Agri-GDP grow at least at 4 percent.

Why Agri GDP growth is important for country?

• Agriculture still engages about 44 per cent of India’s workforce.
• If the people will not gain from the growth process, their incomes remain subdued, then the demand for manufactured goods, housing and other goods will remain low.
• Low demand in the economy is one of the main reasons behind India’s great slowdown today

To increase the investment, government can work to improve the GRAIN MANAGEMENT system under NFSA:

• The NFSA (National Food Security Act) gives certain quantities of wheat and rice to 67 per cent of the population at Rs 2/kg and Rs 3/kg respectively while the economic cost of these to the Food Corporation of India is Rs 25/kg and Rs 35/kg respectively
• FCI (Food Corporation of India) has pending bills of Rs 1.86 lakh crore that have not been cleared by the government.
• The grain stocks with the FCI are far more than double the buffer stock norms as on January 1, every year.
• The massive accumulation of grain stocks is the result of a deeply inefficient strategy for food management
  • The procurement for wheat and rice (paddy) remains open-ended, but the disbursal of those stocks remains largely restricted to the public distribution system (PDS)
  • The open market operations (OMO) are much less compared to what is needed to liquidate the excessive stocks

Bold moves are needed to reform the grain management system.

1. First, while the poor under the Antyodaya category should keep getting the maximum food subsidy, for others, the issue price should be fixed at, say, 50 per cent of the procurement price.
2. Second, limit subsidised grain distribution under NFSA to 40 per cent of the population rather than the current 67 per cent.
3. Third, limit the procurement of rice particularly in the north-western states of Punjab and Haryana where the groundwater table is depleting fast, and invite private sector participation in grain management.

• If the government can implement just these three points, it can save another Rs 50,000 crore annually. On top of this, it will help the government to reduce its fiscal deficit. And if it liquidates stocks fast, it can contain inflation too.