- Are grain procurement shocks inflationary?
Bilateral & International Relations
- Myanmar calling
Defence & Security Issues
- Towards a global regime on drones
GS (M) Paper-3: “issues of buffer stocks and food security”
Are grain procurement shocks inflationary?
- Understanding monetary policy design in emerging markets is a growing area of research.
- One aspect missing in this literature is how distortions in the agriculture sector amplify the impact of a variety of shocks on output and inflation dynamics. Let us explore this:
India’s Agriculture dynamics
- In India, the combined agriculture sector (agriculture, forestry and fishing) comprises 17% of GDP, or GDP (at constant 2013-14 prices), with employment share of large 47% in 2013-14.
- The government periodically intervenes in the agricultural sector, especially in the foodgrain market, by directly procuring grain from farmers to create a buffer grain stock to smoothen price volatility and for redistribution.
- The blue line in chart 1 shows the net grain procured (procured-distributed) of rice and wheat in million tonnes by the government. The average amount of net grain procured per year was approximately 13 million tonnes during the 1992-2014 period (8% of total production), while gross procurement averaged 23.5% during the same period.
- The red line denotes inflation corresponding to the consumer price index for agricultural labourers (CPI-AL).
- Chart 2 shows the impulse response functions of a procurement shock on two variables, namely inflation (general-CPI), which is on the left, and the output gap on the right.
- Impulse response functions are a reaction of an endogenous variable to an exogenous change such as a shock. We use quarterly data from 2004 Q2 to 2016 Q1 for these variables.
- As shown in the chart, on impact, the procurement shock, which has a standard deviation of 0.66, increases generalized inflation, which increases and peaks at 6% in two quarters. Although inflation starts falling after two quarters, it still remains positive for about six-seven quarters after that.
- The effect of procurement on the output gap on impact is also positive, similar to what we show in the model. The output gap increases and peaks at 1.2% in the first quarter, after which it starts falling and remains negative for most of the period before converging back to zero.
Research and Analysis:
In project, titled “Terms Of Trade Shocks And Monetary Policy In India” (Ghate, Gupta and Mallick, 2016) Authors have analysed a three-sector (grain, vegetable, and manufacturing) closed economy NK-DSGE (New Keynesian Dynamic Stochastic General Equilibrium) model.
Key Findings and Analysis:
- When the government procures more grain, this increases the mark-up that grain producers charge over their marginal costs of production. This leads to higher prices in the open grain market, and inflation in the grain sector.
- At the same time, the increase in the price of grain reduces the real marginal costs of production in the grain sector, inducing farmers to produce more grain, and hire more labour in the grain sector.
- The higher demand for labour in the grain sector pushes up nominal wages as labour gets pulled out of the other two sectors in the economy (vegetables and manufacturing), leading to an increase in nominal wages in these sectors as well.
- Confronting higher nominal wages, vegetable producers and manufacturing firms revise their prices upwards, leading to inflation in these sectors as well. This is the mechanism through which a procurement shock gets transmitted to the other sectors in the economy and leads to generalized inflation.
- Because the costs of production (nominal wages) have risen in the vegetable and manufacturing sectors of the economy, procurement acts as a negative cost-push shock in these sectors, reducing output.
- We assume, however, that the manufacturing sector is characterized by sticky prices: only a fraction of firms can revise their prices. Due to price stickiness in the manufacturing sector, actual output falls by less than its natural level (the level of output if prices were completely flexible in the economy).
- This creates a positive output gap in the manufacturing sector on impact, as well as the economy-wide output gap.
- Because the central bank responds to this increase in inflation and the positive output gap by an increase in the nominal interest rate (via a Taylor Rule), adjusted for the one period increase in expected inflation, the real interest rate rises. This dampens economic activity, and brings the economy back to its long-run values over time.
- The analysis is general enough to inform monetary policy in other emerging market economies’ central banks that want to understand how distortions in the agriculture sector amplify the impact of a variety of shocks on output and inflation dynamics in the economy.
Bilateral & International Relations
GS (M) Paper-2: “Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests”
- The first official visit of Myanmar State Counsellor Aung San Suu Kyi has been hailed by PM Narendra Modi as an opportunity to give a further boost to the full range of India’s partnership with Myanmar.
- In the context of India’s much-touted ‘Look East’ and ‘Act East’ policies, it would be meaningful, at the very least, to examine this as a statement of intent to infuse a sense of urgency in our efforts.
India-Myanmar bilateral trade:
- Intent apart, the reality is that bilateral trade between India and Myanmar has been woefully below potential.
- While the government categorises the $1.57-billion trade between the two countries in 2014-15 as a reflection of India being the “fourth largest trade partner” with Myanmar, a rough comparison with China puts the picture in perspective.
Myanmar-China bilateral trade:
- The Myanmar-China trade hit a whopping $9.5 billion in the first ten months of 2015-16, in addition, China invested $15.418 billion in 115 projects, making it the biggest investor in Myanmar.
- While India is still pledging to enhance its engagement in the agriculture, power, renewable energy and power sectors, the Chinese are already financing new ports, highways and dams in Myanmar and has hit on the $3.6-billion Myitsone dam project.
- The Chinese investments in roads to access sea ports in the Bay of Bengal from Kunming have continued.
- The oil storage tanks in Kyauk Phyu island in the Bay of Bengal are designed to help China store oil from West Asia and transport it through a 720-kilometre pipeline to Yunan.
Lesson to be learnt for India:
- The Chinese control over the financial sector in Myanmar is only matched by capital investments in hydroelectric projects, oil and gas fields, and road construction.
- China came forward to help Myanmar when it was an international outcast under the military junta, India clearly has vast ground to cover, if it has to prove its relevance to a democratic regime that seems keen to strike a balance of power between its two giant neighbours.
- This is largely owing to subterranean fears in Myanmar of being sucked in as an area of Chinese influence given its economic influence, as also the worrying demographic change that has already taken place. An estimated 50 per cent of Mandalay’s population is today Chinese and learning Mandarin has become an essential job requirement for the young population.
- Against this backdrop, the expression of intent to strengthen partnership has to be backed by encouraging Indian businesses to invest in Myanmar, open hospitals and facilitate pharmaceutical exports further, besides improving transportation facilities.
- A lackadaisical and half-hearted approach, as seen in the three-year delay in the scheduled opening this year of the trilateral India-Myanmar-Thailand highway, does not help in recovering lost ground.
Defence & Security Issues
GS (M) Paper-3: “Challenges to internal security through communication networks”
GS (M) Paper-2: “Effect of policies and politics of developed and developing countries on India’s interests”
GS (M) Paper-3: “Indigenization of technology and developing new technology”
Towards a global regime on drones
- The US, along with 40 other states, issued a declaration a couple of weeks ago outlining the principles which in their view should govern the export and use of armed drones.
Declaration: Export and Subsequent Use of Armed or Strike-Enabled UAVs:
- The declaration, named the “Export and Subsequent Use of Armed or Strike-Enabled Unmanned Aerial Vehicles (UAVs)”, recognizes that misuse of armed or strike-enabled drones “could fuel conflict and instability and facilitate terrorism and organized crime”.
- “the international community must take appropriate transparency measures to ensure responsible export and subsequent use”.
- But it adds that such concerns shouldn’t be seen as undermining a state’s “legitimate interest” to produce, export or acquire such systems, thereby trying to strike a balance between global good and national interest.
- The declaration also underlines that international laws on armed conflict and human rights should apply to the use of armed drones, and exports should be consistent with existing multilateral export control and non-proliferation regimes.
- While many of the allies of the US, such as Britain, Germany and Australia, signed the declaration, other states, such as France, Russia, Brazil and China, did not.
Impact of this declaration:
- It is difficult to assess at this point, especially as two of the largest producers and exporters of drones, Israel and China, have not signed on to this declaration.
- The declaration comes at a time when it has been assessed that the drone market outside the US is likely to grow, annually, from $1.08 billion in 2015 to $1.98 billion by 2021.
- Critics have complained that while the intent behind the declaration might be laudable, it doesn’t go far enough as the standards in the joint declaration are lower than those that the US maintains for its own exports and there is little incentive for countries to strive for higher standards.
America’s Drone Policy:
- America’s drone programme is today central to the country’s war-fighting capability and its use is only likely to increase in the future.
- Last year, the US state department formulated an export control policy governing the commercial sale of armed drones.
- Yet, the US continues to use drones in a secretive manner and has been blamed for underestimating civilian deaths from their use.
- It has been gradually expanding the use of drones by regularly using them to attack the Islamic State group, Al-Qaeda and other militant groups in Syria, Iraq, Yemen, Pakistan, Afghanistan and other countries.
- There are also reports that the US military is planning to build a $100 million drone base in the south-western African state of Niger.
- Much like other global regimes, Washington has once again set the ball rolling in trying to define the parameters of the new frontier in drone technology.
The US is hoping to set the rules for using this technology and to influence the behaviour of other states. But these are still early days as important actors like China, Russia and India are yet to concede to these new rules.
India’s drone’s Policy:
- At a time when India is seriously looking at expanding the use of drones and its negotiations with the US to buy 22 Predator Guardian drones are at an advanced stage, serious thought needs to be given in New Delhi on what role it wants to play in the emerging regime to manage the use and export of drones.
- Though India too has not signed the US-led declaration, there is little thinking on how New Delhi wants to proceed with this technology at the global level.
- While Indian Armed Forces are currently operating Israeli-made Searcher Mark I, Searcher Mark II, Heron and Herop UAVs (unmanned aerial vehicles) and the Indian-made Nishant UAV, they are likely to procure more than 5,000 UAVs over the next 10 years for about $3 billion.
- The role of UAVs in providing critical intelligence will be a key enabler not only in fighting wars effectively but also in deterring cross-border terrorist attacks.
- New Delhi should be engaging with other like-minded countries to come up with its own principles to guide the emerging global order on drones and their use.
The debate has only just begun and India should be at the front and centre of this discussion so that its own interests do not get marginalized as a new regime on the use of drones is put in place.[Ref: LiveMint]