The new note on Mint Street

• Expectations are running high about the Reserve Bank of India (RBI) governor-designate, Raghuram Rajan — unusually for an RBI governor, his appointment was not just reported by but also commented on editorially in the foreign press. Living up to these expectations will be a huge challenge for Dr. Rajan.

Three issues

• Dr. Rajan needs to tread warily on three issues in particular. One, whether the RBI’s mandate should be confined to price stability or whether it needs to pursue other objectives as well, such as growth, currency stability and financial stability.
• Two, whether corporate houses should be granted bank licences and based on what criteria.
• Three, the role of the Financial Stability and Development Council (FSDC).
• Begin with the mandate of the central bank. In its report in 2008, the Committee on Financial Sector Reforms (CFSR), that Dr. Rajan chaired, made its position clear.
• “This Committee feels that monetary policy should be reoriented towards focusing on a single objective, and there are good reasons why this objective should be price stability (defined as low and stable inflation).
• An exchange rate objective would limit policy options for domestic macroeconomic management and is not compatible with an increasingly open capital account.”

Going by Reer

• How do we square monetary easing with the fall in the rupee? Many in the political class are apt to see the rupee as a symbol of a nation’s virility but this is not a view that sensible economists would share.
• In judging whether depreciation has been excessive or not, they would go by the real effective exchange rate (Reer). In the year ended June 2013, the depreciation in the Reer, weighted by trade with respect to 36 currencies, was just three per cent.
• Over a much longer period, 2005-13, the depreciation in the Reer has been only six per cent, no matter that the decline in nominal terms in the same period was nearly 22 per cent.
• Even if we were to factor in the fall in the rupee since June, the decline in the Reer would fall broadly within the RBI’s comfort zone of five per cent in a given year.
• Before the fall to around Rs.65 in recent days, there was thus a strong case for the rupee to decline in nominal terms.
• The case was particularly strong, given weak global demand for exports. This is one reason the panicky reaction to the decline in the rupee is overdone.
• Another reason is that it ignores the fact that currencies across a range of emerging economies have fallen sharply because of the sense that Fed is about to taper off Quantitative Easing, which had sent funds flooding into emerging markets.
• The contention that the rupee’s sharp fall is entirely or mainly because of some special brand of economic mismanagement on the part of New Delhi just does not wash.
• Granting the case for depreciation, however, the RBI cannot allow the rupee to go into a free fall.
• Foreign inflows into India must be reckoned in dollar terms because the dollar is the reserve currency.
• Too steep a decline in the rupee with respect to the dollar could result in an exodus of Foreign Institutional Investor funds, no matter that the trade-weighted real exchange remains relatively stable.
• There will always be a case to manage volatility in the rupee so as not to upset foreign investors.
• Bank stocks were hammered heavily in the days after the RBI tightened liquidity — and with good reason. Banks had taken positions on bonds in the expectation that yields were trending down and are now incurring losses on these.
• Private banks, which depend heavily on wholesale deposits, faced substantially higher funding costs.
• Most importantly, an increase in interest rates increases corporate distress, which impacts on banks’ quality of assets.

Banking and corporates

• Yes, there is the danger of a flight of funds, especially funds invested in debt.
• But funds invested in equity might well choose to stay, given the boost to corporate profits from lower interest rates.
• They will also be encouraged by ongoing projects proceeding towards completion. At the same time, we must prepare for the worst contingency — a significant flight of foreign funds — by arranging capital inflows in every conceivable way: non-resident Indian deposits, overseas borrowings by public sector undertakings, negotiations with the International Monetary Fund for a line of credit.
• Whatever the course of action, Dr. Rajan cannot hold fast to the CFSR’s position that monetary policy must focus on price stability alone.
• On the issue of bank licences, the RBI and the ministry are united in thinking that the time has come for the field to be opened to corporates.
• The CFSR, in contrast, had contended that it was “premature” to allow industrial houses to own banks. It cited the prohibition on the “banking and commerce” combine in the United States and said the same was necessary in India until “private governance and regulatory capacity improve.”

Regulatory body

• Finally, there is the role of the Financial Stability and Development Council.
• This body has its genesis in the CFSR report.
• The CFSR had suggested the creation of an apex regulatory agency that would have responsibility for monitoring systemic risks and ensuring coordination among the different regulators in the financial

The right to talk and write

• Journalists in India have no special rights. Unlike the United States, freedom of the press in the country does not flow from any special provision or amendment to the Constitution, but from the right to free speech and expression.
• Article 19(1) (a) of the Indian Constitution confers this right subject only to reasonable restrictions specified in Article 19(2).
• Therefore, to propose licences, qualifications and common entrance examinations for journalists, as Information and Broadcasting Minister Manish Tewari did a few days ago, is to try to circumscribe and limit the fundamental right to freedom of speech and expression.
• Dissemination of information might be the business of some news organisations, but it is also an essential part of the everyday activities of countless Indians who talk, post, upload or tweet what they see, hear, sense or think.
• What distinguishes journalists employed by a news organisation and private individuals taking advantage of social media and personal communication channels to disseminate information is not the nature of their work, but the public standing and credibility that they command.
• Any attempt to prescribe licences and qualifications for journalists will necessarily end up limiting what ordinary citizens can do.
• As in other democracies, newspapers in India do not require a licence to operate.
• In authoritarian or managed democracies, where press licensing is the norm, the threat of a cancelled licence is often enough to ensure the media toes the official line.
• If journalists are to be given licences, can newspaper licensing be far behind?
• All of this is not to say that news organisations need make no effort to improve the standards of their journalism.
• In the race to be the first to break the news, television channels, and sometimes newspapers too, often get their facts wrong and the context mixed-up.
• But, as the best journalism schools have already realised, practice, not theory, makes a good journalist.
• Indeed, his train of thought mirrors that of the Press Council of India Chairman Markandey Katju, who, some time ago, set up a committee to decide on minimum qualifications for a journalist.
• The Minister wants the minimum qualification to apply equally to subject experts contributing to a news organisation, reckoning that they would not resent the requirement.

India is now world’s third largest Internet user after U.S., China

• India has bypassed Japan to become the world’s third largest Internet user after China and the United States, and its users are significantly younger than those of other emerging economies, global digital measurement and analytics firm comScore has said in a report.
• India now has nearly 74 million Internet users, a 31 per cent increase over March 2012, the report says.
• The numbers are lower than other recent estimates, possibly reflecting comScore’s methodology that only factors in PC and laptop-based Internet usage.
• The Telecom Regulatory Authority of India (TRAI) pegged the number of Internet subscribers in India at 164.81 million as of March 31, 2013, with seven out of eight accessing the Internet from their mobile phones.
• The comScore report, on the other hand, puts mobile and tabled-based Internet traffic at just 14% of the total.
• “Mobile phone based Internet usage is a key component of Indian Internet usage, and I’d say the recent growth is being driven by mobile Internet usage,”
• Three-fourths of India’s online population is under 35 as against just over half worldwide, the comScore report, India Digital Future in Focus 2013, says, possibly reflecting India’s more recent improvements in literacy.
• Men under 35 and women between 35 and 44 are heavier users.
• But women account for less than 40 per cent of all Indian users, a far lower sex ratio than that of other countries.
• A quarter of time spent online is on social media, the comScore report says, and another 23 per cent on email.
• While Google sites have the most unique visitors, Net users spend the most time on Facebook, which is at second place as far as unique visitors are concerned.
• Yahoo, Microsoft and Wikimedia sites follow in unique visitor numbers.
• Among social media sites, Linkedin and Twitter are the next most popular, while Orkut is in decline. Google is by far the most popular search engine, accounting for 90 per cent of all searches in India.
• Online retail is on the rise, with domestic retail sites being the most popular, the report notes.
• For online travel websites too, domestic websites are the most popular, the Indian Railways’ website being by far the most popular destination. Yahoo is also the most popular site for news.
• The locus of online dominance has moved steadily towards Asia, which now accounts for 41% of all Internet users; from having 66% of all users in 1996, the United States now accounts for just 13%.
• China has the world’s biggest online presence; Its Internet users outnumber Indians by a ratio of 5: 1. Brazil’s Internet presence grew faster than India’s over the last year.

Sources: Various News Papers & PIB