7 Dec | Daily Current Affairs : Amid high inflation, RBI keeps repo rate at 6.5% And More

Edition: International Table of Contents

Page 01 Syllabus : GS 3 : Indian Economy	Amid high inflation, RBI keeps repo rate at 6.5%
Page 05 Syllabus : Prelims Fact	Centre To Develop Four New Tourist Destinations In J&K With Help From World Bank
Page 11 Syllabus : GS 3 : Indian Economy	No plans for de-dollarisation: Das
In News Syllabus : Prelims Fact	PM e-VIDYA
In News	Union Cabinet Approves ₹8,231 Crore Plan for Largest Expansion of Central Schools
Page 06 : Editorial Analysis: Syllabus : GS 3 : Indian Economy	Building on the Revival of the Manufacturing Sector

Page 01: GS 3 : Indian Economy

Recently the RBI’s Monetary Policy Committee (MPC) maintained the repo rate at 6.50% for the 11th consecutive review, reflecting a cautious stance amid slowing growth and elevated inflation.

Policy Repo Rate

• The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept the policy repo rate unchanged at 6.50% for the 11th consecutive bi-monthly review.

Cash Reserve Ratio (CRR)

• The RBI reduced the Cash Reserve Ratio (CRR) by 50 basis points (bps) to 4% after a gap of four years.
• This measure, aimed at addressing persistent tight liquidity, will be implemented in two tranches of 25 bps each starting December 14 and December 28, 2024.
• The CRR cut will release ₹1.16 lakh crore of primary liquidity into the banking system to support growth.

Growth Projections

• The MPC observed a slowdown in growth momentum, leading to a downward revision of GDP growth forecasts for 2024-25 from 7.2% to 6.6%.
• Real GDP growth in the July-September 2024 quarter dropped to 5.4%, the lowest in seven quarters, against the RBI’s earlier projection of 7%.

Inflation Outlook

• Retail inflation rose to 6.2% in October 2024, driven by unexpected increases in food prices.
• The RBI revised its inflation forecast for 2024-25 upward to 4.8% (from 4.5% projected earlier).
• Food inflation pressures are expected to ease from Q4 of 2024-25, aided by seasonal corrections in vegetable prices, arrivals of the kharif harvest, a strong rabi crop outlook, and adequate cereal buffer stocks.

Risks to Inflation Stability

• Inflation risks remain due to adverse weather events, geopolitical uncertainties, and financial market volatility.

Monetary Policy Stance

• The MPC maintained a neutral stance, balancing between controlling inflation and supporting economic growth.
• The committee emphasized the need for durable price stability to establish a foundation for sustainable growth.

Liquidity Measures

• To ease potential liquidity stress from tax outflows (direct taxes and GST), the CRR cut was aligned with the RBI’s neutral policy stance.

Foreign Currency Deposits (FCNR-B)

• To attract capital inflows, the RBI raised the interest rate ceiling on FCNR(B) deposits:
  • Deposits with maturities of 1 to less than 3 years: Increased from the Alternative Reference Rate (ARR) + 250 bps to ARR + 400 bps.
  • Deposits with maturities of 3 to 5 years: Increased from ARR + 350 bps to ARR + 500 bps. This relaxation will be effective until March 31, 2025.

Key Observations by the Governor

• RBI Governor Shaktikanta Das highlighted that persistently high inflation is eroding disposable incomes and denting private consumption, adversely affecting real GDP growth.
• While growth outlook remains resilient, the situation warrants close monitoring.
• The RBI has adopted a prudent and cautious approach, awaiting better visibility on inflation and growth trends before making further policy adjustments.
• Conclusion The MPC reiterated its commitment to maintaining the balance between inflation control and growth promotion in the overall interest of the economy.

Page 05 : Prelims Fact

The article discusses the Jammu and Kashmir government’s plan to develop four new tourist destinations with financial and technical support from the World Bank.

• This initiative aims to enhance tourism infrastructure while focusing on ecological sustainability and promoting local handicrafts.
• Increase in Tourism in J&K: Jammu and Kashmir has witnessed a rise in tourist footfall, with 1.2 million tourists visiting in the first half of 2024.
• Development of New Tourist Destinations: Four new destinations—Kokernag (Anantnag), Baradari (Reasi), Bhadarwah (Doda), and Doodhpathri (Budgam)—have been chosen for development into world-class tourist spots.
• Partnership for Development: The projects are a joint venture between the World Bank, the Jammu and Kashmir Government, and the Central Government.

Role of the World Bank:

• Acts as a knowledge partner for development.
• Supports promotion of the handicrafts industry.
• Focuses on ecological sustainability in development plans.
• Selection Process: The destinations were finalized following a visit by a World Bank delegation in September 2024.
• Existing Popular Spots: Gulmarg, Pahalgam, and Katra Vaishno Devi are already well-known tourist destinations in the region.

World Bank

• Purpose: Provides loans and grants to low and middle-income countries to reduce poverty and support economic development.
• Key Institutions: Comprises five institutions, with IBRD and IDA being the main funding arms.
• Focus Areas: Supports infrastructure, education, healthcare, and environmental projects.
• Global Impact: Aims to improve living standards and promote sustainable growth.
• Funding Mechanism: Offers financial resources, policy advice, and technical support.
• Headquarters: Based in Washington, D.C., USA.

Page 11 : GS 3 : Indian Economy

The article discusses the Reserve Bank of India’s (RBI) approach to balancing inflation and economic growth amidst recent disruptions.

• It highlights revised GDP growth projections, liquidity challenges, and the impact of inflation on manufacturing and investments.
• The RBI emphasizes using policy tools strategically to stabilize the economy while addressing global and domestic uncertainties.

Monetary Policy and Inflation-Growth Balance

• The Monetary Policy Committee (MPC) is focused on restoring the balance between inflation and growth, which has been disrupted in recent months.
• The Reserve Bank of India (RBI) will utilize its range of policy instruments to create conditions conducive to achieving this balance.
• The credibility of the flexible inflation-targeting framework must be preserved to ensure long-term economic stability.
• Inflation needs to be reduced to sustainable levels to support balanced and sustained economic growth.
• The RBI emphasizes prudence, practicality, and timing in its policy decisions, underscoring that the timing of actions is crucial to their effectiveness.

FY25 Growth Projections Reduced from 7.2% to 6.6%

• The GDP growth rate slowdown in Q2 is attributed to temporary, specific factors rather than a structural trend.
• The earlier 8% growth rate was not a trend but an average derived from 2021-22 to 2023-24, incorporating the pandemic rebound effect.
• Global growth projections for 2024-25 and 2025-26 are similarly adjusted for cyclical corrections post-pandemic, not reflecting long-term trends.
• H2 projections show a recovery with growth rates between 6.9% and 7.3%, signaling a gradual return to higher growth levels by FY25-26.

Liquidity Concerns

• Tight liquidity conditions are anticipated in the coming months due to several factors:
  • Tax-related outflows, including direct taxes in December and Goods and Services Tax (GST) collections.
  • Increased currency in circulation driven by the busy agricultural credit season and cash requirements for the harvest season.
  • Significant capital outflows in October and November as Foreign Portfolio Investors (FPIs) exited the market.
  • The recent increase in the Cash Reserve Ratio (CRR) was a temporary measure that has served its purpose and has now been normalized.

Growth and Inflation Dynamics

• The balance between growth and inflation has been disrupted:
• Growth momentum has slowed, with Q2 GDP growth moderating.
• Inflation surged due to steep increases in food prices, driven by weather-related factors.
• September and October inflation rates were higher than expected, particularly in food inflation, which exceeded estimates.
• The RBI’s immediate goal is to reduce inflation closer to its target to stabilize the growth-inflation dynamic.

Differences Between RBI’s GDP Estimate and Q2 Data

• On the demand side, the primary challenge is reduced investment activity.
• On the supply side, manufacturing is facing a downturn due to weak sales growth and inflation’s impact on urban consumer demand.
• Businesses are hesitant to invest in new assets, as moderate demand can be met with existing capacity, further suppressing investment growth.

Secured Overnight Rupee Rate (SORR)

• A new benchmark index developed by Financial Benchmarks India Ltd. (FBIL) will now include all secured transactions, addressing gaps in the existing MIBOR (unsecured transactions) and MROR (market repo) indices.
• This new index will also integrate TREPS (Treasury Bill Repos), which accounts for 60% of market activity, creating a more comprehensive and accurate benchmark.

Potential Tariff War Implications

• A hypothetical tariff war, if triggered, could result in retaliatory measures from affected countries, such as China devaluing its currency or imposing retaliatory tariffs.
• Such events are difficult to predict in isolation, as they would likely be accompanied by broader economic repercussions, making their unilateral impact uncertain.

In News :  Prelims Fact

Union Minister of Education Dharmendra Pradhan inaugurated PM e-VIDYA Channel 31, a DTH channel dedicated to Indian Sign Language, marking a significant step toward inclusivity in education for children with special needs.

Analysis of News:  

• Focus on Inclusivity Under NEP 2020
  • The launch aligns with the National Education Policy 2020, which emphasizes inclusive education and the welfare of children with special needs.
  • Pradhan highlighted that the education system is increasingly prioritizing accessibility and inclusivity for differently-abled individuals.

• Sign Language and Cultural Integration

  • Pradhan emphasized the cultural relevance of sign language, evident in forms like dance and drama, and stressed its potential to unlock the talents of differently-abled individuals.
  • Noting examples from history, such as Soordas and Stephen Hawking, he underscored the untapped potential within the Divyang community.

• Broader Impact and Vision

  • The channel is a step toward creating a more inclusive and progressive society.
  • Indian Sign Language can not only aid education but also generate job opportunities and set international benchmarks.
  • Stakeholders are urged to popularize the channel and ensure its reach across the nation

In News : Union Cabinet Approves ₹8,231 Crore Plan for Largest Expansion of Central Schools

The Union Cabinet has approved an ₹8,231 crore plan for the largest expansion of Kendriya Vidyalayas (KVs) and Jawahar Navodaya Vidyalayas (JNVs) in the last decade.

• The initiative includes the establishment of 85 new KVs and 28 new JNVs, with Jammu & Kashmir and Arunachal Pradesh receiving the highest allocations.

Analysis of News:  

KVs and JNVs: Purpose and Reach

• Kendriya Vidyalayas (KVs):
  • Aimed at children of central government and defence personnel, 85 new KVs will cater to urban demand, prioritizing areas with a significant presence of central employees.
• Jawahar Navodaya Vidyalayas (JNVs):
  • Residential schools targeting rural talent, 28 new JNVs will focus on border and underserved regions, especially in the Northeast.
  • Currently, India has 1,256 functional KVs and 653 operational JNVs.

Timeline and Capacity Expansion

• KVs: To be established over eight years starting in 2025-26.
• JNVs: Scheduled over five years (2024-25 to 2028-29).
• Impact: These schools will create an additional enrollment capacity for nearly one lakh students and approximately 6,600 new job opportunities.
• Regional Prioritization
  • Jammu & Kashmir: Largest allocation of 13 KVs, catering to families of CRPF personnel.
  • Northeast: 17 JNVs for Arunachal Pradesh (8), Assam (6), and Manipur (3) reflect a strategic focus on border regions.
  • Other Key States: Madhya Pradesh (11 KVs), Rajasthan (9 KVs), Andhra Pradesh (8 KVs), and Odisha (8 KVs).

Challenges and Lessons from Past Expansions

• Previous Approvals: Similar large-scale expansions in 2014 (54 KVs) and 2019 (50 KVs). While operational, many still function from temporary premises.
• Implementation Challenges: Ensuring timely construction of permanent buildings and necessary facilities will be critical to achieving the full impact of this expansion.

Conclusion

• This ambitious expansion underscores the government’s commitment to strengthening school education infrastructure, particularly for underserved and border regions.
• Effective execution will be key to maximizing the benefits for students and communities nationwide.

Page : 06 Editorial Analysis

Context :

• India is strategically positioning itself as a global manufacturing hub, leveraging policy measures like the Production Linked Incentive (PLI) scheme. The manufacturing sector, integral to economic growth and job creation, has shown substantial recovery post-pandemic.
• However, to fully realize its potential, challenges such as high input costs, regional disparities, and insufficient support for small enterprises and women need to be addressed.

Impact of the PLI Scheme:

• The PLI scheme has been pivotal in transforming India’s manufacturing landscape by boosting production, exports, and employment across key sectors, including electronics, pharmaceuticals, automobiles, and textiles.
• The Annual Survey of Industries (ASI) for 2022-23 reports a 21.5% growth in manufacturing output and a 7.3% increase in gross value added (GVA), indicating a positive correlation between the scheme and sectoral performance.

Sectoral Growth Trends:

• Specific sectors benefiting from the PLI scheme, such as basic metals, petroleum products, food products, chemicals, and motor vehicles, collectively contributed 58% to total manufacturing output.
• These sectors recorded an impressive 24.5% growth in output, demonstrating the scheme’s effectiveness in catalyzing manufacturing expansion.

Post-Pandemic Recovery:

• Despite a high base from 2021-22, the manufacturing sector exhibited a robust recovery, achieving double-digit growth (21.5%) in 2022-23.
• This recovery underscores the sector’s resilience and its potential to contribute significantly to India’s ambitions of becoming a global manufacturing powerhouse.

Expanding the Scope of PLI:

• To unlock new growth frontiers, PLI incentives should be extended to labor-intensive industries like apparel, leather, and furniture, and emerging sectors like aerospace and space technology.
• Reducing import dependency in sectors like capital goods by fostering domestic manufacturing capabilities can enhance resilience against global supply chain disruptions.
• Promoting green manufacturing and investing in advanced technologies will improve long-term competitiveness and sustainability.

Challenges in Input Costs and Value Addition:

• The divergence between output growth (21.5%) and GVA growth (7.3%) is attributed to a 24.4% rise in input costs during 2022-23.
• A streamlined import regime with lower tariffs (0-2.5% for raw materials, 2.5-5% for intermediates, and 5-7.5% for finished goods) could reduce production costs and improve India’s integration into global value chains.

Addressing Regional Disparities:

• Over 54% of manufacturing GVA and 55% of employment are concentrated in five states: Maharashtra, Gujarat, Tamil Nadu, Karnataka, and Uttar Pradesh.
• To ensure equitable growth, states need to implement key reforms in land, labor, and power markets, along with infrastructure development and investment promotion.

Focus on MSMEs:

• MSMEs contribute 45% of India’s manufacturing GDP and employ 60 million people. Tailored PLI incentives, such as lower capital investment thresholds and reduced production targets, can empower MSMEs to scale up, innovate, and integrate into value chains.

Enhancing Women’s Workforce Participation:

• Increasing female workforce participation in manufacturing could boost output by 9%, according to the World Bank.
• Developing supportive infrastructure like hostels, dormitories, and childcare facilities near factories can encourage greater participation, driving inclusive growth.

Future Goals:

• Sustained efforts could raise manufacturing’s share in India’s GVA from 17% to over 25% by 2030-31 and 27% by 2047-48.
• Improving ease of doing business, reducing operational costs, and leveraging policy measures will be crucial to achieving these targets.

Conclusion

• India’s manufacturing sector is on the cusp of transformation, driven by robust policy support and impressive post-pandemic recovery.
• While the PLI scheme has laid a strong foundation, addressing challenges like high input costs, regional imbalances, and the underutilization of MSMEs and female workforce potential is critical.
• With sustained reforms and focused strategies, India can unlock its manufacturing potential, driving economic growth and achieving its vision of becoming a developed economy by 2047.