THE HINDU – CURRENT NOTE 14 March
Curbs on withdrawal of cash lifted
•Restrictions on cash withdrawals, which came into effect from November 9, 2016, following the ban on high-value currency notes, were lifted on Monday. The RBI announced the easing of curbs during its bimonthly monetary policy review on February 8.
•While the limits on current accounts were lifted earlier, restrictions on savings account deposits were lifted from Monday. Though there will be no limit on cash withdrawals, currency in circulation is still far below the pre-November 8, 2016, levels.
•Following the decision to withdraw the legal tender status of Rs. 500 and Rs. 1000 notes, 86.9% of the currency in circulation was rendered invalid, amounting Rs. 5.4 lakh crore.
•According to Reserve Bank of India data, the currency in circulation till the week ended March 3 was Rs. 11,984.1 billion which is 67% of the currency in circulation, pre-demonetisation. The decision to withdraw high value notes was aimed at eliminating corruption, black money, counterfeit currency and terror funding. According to a recent study by the RBI staff in the monetary policy department, about 78% of all consumer payments in India are effected in cash.
•“It was, therefore, obvious that currency squeeze during the demonetisation period would have had some adverse impact on economic activity, although such impact was expected to be transient,” the study observed.
For a bold foreign policy
•The strategic choices before us today are similar to the ones U.S. President Donald Trump and Chinese President Xi Jinping are facing: in a fast-changing world, national interest is not served by avoiding problems left over by a previous order. Prime Minister Narendra Modi needs to challenge long-established convictions on whether the elements of power in the next world order will revolve around diplomacy, force, or trade as the primary tool.
Moving to a multipolar world
•In the last 20 years, incomes of 80% of the population in the West stagnated while per capita income in China quadrupled, and India’s more than doubled. Society is ageing; technology is disrupting labour markets and business models. The digital economy is expected to provide one-quarter of global productivity by 2025 and will have the U.S., China and India reinforcing the multipolar order.
•The functioning of the global economy has affected the economic and political relationship between the large and small economies, reducing and increasing the leverage exercised by the U.S. and China, respectively. The China-led Asian Infrastructure Investment Bank, which former U.S. President Barack Obama failed to weaken, and the New Development Bank of the BRICS could provide the required $8-15 trillion, marginalising the World Bank. China is projecting the One Belt, One Road (OBOR) initiative as a replacement for the U.S.-led post-1950 multilateral institutions.
•Mr. Trump is understandably questioning the relevance of the United Nations for the U.S., favouring bilateral deals and forcing others to rethink the nature and role of international cooperation. He is resetting priorities away from peacekeeping, environment and human rights to trade.
•His ‘America First’ strategy has broad support within the U.S. Other rich countries like Japan and the U.K. are likely to adopt this new template doing away with concessions to others. There will be consequences for the World Trade Organisation, in particular if the WTO dispute resolution panels rule against the U.S., leading to a questioning of the rule-based system itself.
•Mr. Trump recognises that he cannot stop global trends and the diminishing returns from a reliance on diplomacy and force, exemplified by the failure of the U.S. ‘pivot’ in containing China. Mr. Obama’s response to the entry of three billion Asians into the global economy was to attempt setting new trade rules outside the WTO. Mr. Trump has rejected this approach, favouring an employment-oriented deal around specific sectors much like the Obama-Xi understanding on climate change. The difference is that Mr. Trump is prepared to limit imports and boost exports even at the cost of upsetting long-standing agreements and allies.
•Mr. Trump is “willing to find new friends and to forge new partnerships where shared interests align”, rejecting the Cold War logic of containment, reliance on foreign bases and alliances. He sees China as the greatest threat, as the combination of military and economic strength creates a strategic situation where, like in the Cold War, the U.S. will need to seek a “constructive relationship” in Asia rather than dominance and may join the OBOR.
Asian connectivity and India
•Mr. Trump is moving for a political deal with Russia and a trade deal with China. Chinese exports to the U.S. are already declining, the shift to a consumption-driven economy will open markets for U.S. goods, and the RMB is now a global reserve currency. India is more vulnerable with two-thirds of the exports of the $150-billion IT industry to the U.S. and the ‘Make in India’ strategy colliding with Mr. Trump’s priorities, requiring India to make strategic choices.
•As the multilateral order fragments into spheres of influence, we first need a bold vision on Kashmir and must not just seek to isolate Pakistan. We should join the OBOR, while maintaining our reservations on its branch passing through Kashmir, and become part of the growing Asian market.
•The nature of conflict is changing from direct clashes to disruption of critical infrastructure through remote attacks. With world-class cyber-space-biotech capability, we should reconsider large-scale purchases from abroad for massive investment in cybersecurity and the related digital economy that will make the ‘Digital India’ initiative into ‘Digital Asia’. India expects nothing less from Mr. Modi.
Non-life premia set to increase
•In view of the consistent losses arising from large claim settlements and other negatives like falling interest rates that will crimp their investment income, non-life insurers are planning to increase premium rates by 10-15% in certain segments to protect their bottomline.
•In fact, the insurance regulator, IRDAI, has also hinted at a premium hike especially in third-party motor premium and group health insurance from April 1 when most of the renewals take place in the domestic general insurance market.
•“I won’t be surprised if the premia go up as the pricing has already reached rock bottom,” IRDAI member (non-life insurance) P.J. Joseph told PTI.
•Insurers have zeroed in on over 10 such segments including pharma, power and cement under property and even group health insurance where they are planning to increase the premia going forward. Premia may go up in the range of 10-15% in these segments next financial year.
•“The market is so competitive that it gives us very little scope for increasing premia. Still, we are working very closely with GIC Re to increase the pricing of over 10 large loss-making portfolios,” National Insurance chairman and managing director Sanath Kumar said.
•“The floor price of over 10 segments are on our scanner for premium hike, which include pharma, power and cement. We may also see some price revision in group health insurance,” he said, adding, “however, increase will take place in the next financial year only, that too 10-15%.”
•The largest non-life insurer New India is also set to hike premium in certain segments.
•“At New India Assurance, the premium hike may happen under segments like fire and group health in the new fiscal,” New India Assurance chairman and managing director G.Srinivasan said.
•“Premium rates have fallen much below the required rates and hence the rates will have to be readjusted,” he added.
New strategy
•Private sector non-life insurer SBI General is working on a three-pronged strategy.
•“The challenge today is that you have to maintain profitability at a time when investment yields are coming down,” SBI General managing director and chief executive Pushan Mahapatra said.
•“So, in our bid to maintain profitability, we are working on a three-pronged strategy — better efficiency, better expense control and better selection — and pricing of risk being underwritten,” he added.
•As of end December, the company had an investment income of ₹251 crore, which rose from ₹192 crore a year earlier. But in a falling interest rate regime it is not certain whether the bottom line can be protected.
•However, SBI General’s chief financial officer Rikhil K. Shah said, “we do not see a fall in investment income this fiscal year from the previous one as we have locked in some of the gains during the year. However, we might see an impact on our yield next fiscal.”
‘Substantial pricing’
•Bajaj Allianz said it had always looked at sustainable pricing.
•“We have always looked at sustainable pricing. The portfolios and policies underwritten have always been at a price that is commensurate with the risk,” Tapan Singhel, MD and CEO, Bajaj Allianz General Insurance, said.
•“The company has never contested on pricing and will continue with its business model of prudent underwriting, efficient claims servicing, and risk based pricing,” he added.
Rewriting the U.P. equation
•We’d be lying if we said we saw this coming. The Bharatiya Janata Party (BJP) and its allies won 325 out of 403 seats in the 2017 U.P. Assembly election, a strike rate of 81%. This is the largest number of seats won by any party/coalition in U.P. since the Janata Party in 1977. In retrospect, the analysis of this extraordinary feat is remarkably straightforward. It is almost a repeat of the national election in 2014, when U.P. was in the grip of the ‘Modi wave’.
•The aggregate vote share of BJP and its allies was 41.4% in this election, a hair less than the 43.6% it received in 2014. Even their performance over the seven phases of this election closely mirrors their performance in 2014. They had a strike rate of 90% in phase 1 (93% in 2014), 75% in phase 2 (73%), 80% in phase 3 (75%), 83% in phase 4 (77%), 85% in phase 5 (85%), 67% in phase 6 (88%), and 80% in phase 7 (100%). Curiously, the BJP and its allies only slipped, in comparison to their gaudy 2014 performance, in the final two phases of the election where Yogi Adityanath and Prime Minister Narendra Modi himself were expected to deliver sweeps for their party.
•Of course, the BJP’s Hindutva strategy and the Prime Minister’s popularity are a large part of the story here. But Mr. Modi’s popularity was present in Bihar and Delhi as well, even though the BJP got routed in those elections. The real question is: why was the BJP so successful in U.P. as opposed to, say, Bihar?
The winning narrative
•It goes without saying that the electorate was most convinced by what the BJP had to offer. As a young man from the Rajbhar community outside Babina told us, “We need someone like Narendra Modi, who is with all castes.” The popular view of BJP in our travels was that of a caste-blind party, unlike the Bahujan Samaj Party (BSP) or the Samajwadi Party (SP), which are each broadly associated with one caste group (Jatavs or Yadavs). The form of particularistic politics associated with the BSP and SP left a large swathe of the population disaffected and without a (political) home. The newest avatar of the BJP, in which it has sought to distance itself from purely upper-caste politics, was able to consolidate and mobilise these groups against both the BSP and the SP.
•In the three previous State elections since 2000, the aggregate vote share of the four major parties — BJP, SP, BSP, and Congress — along with their allies, never rose above 84%. This means that in the State election, a significant proportion of voters (almost one in six) felt so unattached to the major players that they voted for independent candidates or small parties. In this election, 91.6% of all voters voted for one of the four major parties and their allies, most of this new vote likely going to the BJP (much like 2014 where the aggregate vote share was 93.2%). In short, the BJP effectively cannibalised the vote of the independent candidates and unaligned parties that were drawing voters who felt unattached to any of the major players. Five years ago, a 29.1% vote share was enough to give the SP a majority (224 out of 403) of seats; this time, the 28% vote share of the SP-Congress alliance was only good enough for 54 seats. The BJP has raised the bar; the particularistic politics of the past — and the
vote shares associated with it — is unlikely to suffice in the future.
•Critics point to the role of religious polarisation in increasing vote share for the BJP and its allies; this is something that can be checked empirically. If results are driven by religious polarisation, the strike rate and the vote share of the BJP and its allies should be particularly large when the Muslim population is large (but not a majority), as Hindus rally against the Muslim community. In the 38 Assembly constituencies in districts that had at least 40% Muslim population, but not a majority, the strike rate for BJP and its allies dropped to 69% from 81% across U.P. Similarly, their average vote share in these constituencies dropped to 37.8% from 41.3% across U.P. Note further that the average Muslim population here is greater than the BJP’s vote share. Either the Muslim community is not as strategic as it is purported to be in keeping the BJP out of power, or some proportion of Muslims voted for the BJP this time. In short, while religious polarisation is certainly part of the BJP’s appeal, simplistic notions of polarisation or strategic voting by Muslims do not explain the results in the election. Rather, this election should be understood in terms of caste consolidation against particularistic politics.
A new politics in U.P.
•Unlike Bihar, where Nitish Kumar was seen as more than just a leader of the Kurmi community, Akhilesh Yadav could never distance himself from the burden of local Yadav domination across U.P. Thus, the BJP’s caste consolidation largely failed in Bihar while producing a sweep in U.P. The SP’s alliance with the Congress never worked well either. There were 22 “friendly fights” in which both parties put up candidates in the same constituency. While the SP had a poor strike rate of 15% on an average vote share of 28.4% in seats contested, even these votes didn’t transfer to the Congress. The Congress’ strike rate was just 6% on an average vote share of 22.6% in seats contested. Mayawati’s BSP had a strike rate of just 5% and an average vote share of 22.2% in seats contested. No doubt each of these parties will have to reinvent itself and move beyond the particularistic politics with which it is associated if it wants to survive.
•Given the scale of this victory for the BJP, this is almost certainly the beginning of a new chapter in the storied history of the politics of Uttar Pradesh.
•Neelanjan Sircar, Bhanu Joshi and Ashish Ranjan are affiliated with the Centre for Policy Research in Delhi
Market will find its way
•In the recent battle between cab aggregators and their drivers, the consumer seems to have been forgotten. Should the government intervene? But before we ask that, does it make sense to ban cab aggregators?
•Uber and Ola, the top players in India, have about 32,000 cabs plying in Chennai, according to a union member who participated in the recent drivers’ strike. Assuming a low average of six trips a day, as not all cabs ply daily, the city’s commuters make close to 2 lakh trips a day with them. Given the kind of presence cab operators have across the country — Uber has about 2.4 lakh drivers at any point — it may not be a great idea to ban such services.
•Should the government then regulate prices so that drivers earn better? Protesting driver unions in Chennai have demanded that the government fix a minimum of Rs. 100 for the first 4 km in a standard ride.
•However, if two competing ride services help bring prices down for the commuter, why meddle with that model? Yes, for drivers who have spent savings or taken loans to buy a new car hoping that earnings will remain high, it is a let-down.
‘This is business’
•One argument in favour of the drivers is that they may not be informed enough that the terms of business constantly change. Signing up with cab aggregators means entering a business partnership. The drivers bought, and continue to buy, new vehicles even as the terms of engagement have been changing over the last few months. For drivers across operators, the terms have changed from a minimum number of trips per day to a minimum fare amount per day and now operators have fixed a certain number of trips a week for drivers to enjoy incentives or ‘boosts’. One Uber driver said: “This is business. No one is forcing me to drive. If I don’t, someone else will.”
•In an ideal world, the cab aggregator would ensure that everyone got a good deal. But if that does not happen, the government has no business intervening as long as players act within the limits of law.
•After all, regulators don’t prevent a player from reducing prices just to protect revenues of other players. However, when service providers collude to fix prices above competitive levels, thus harming the consumer, the government should step in to break the cartel.
•Otherwise, let the market decide. If Ola does not change its terms of engagement with drivers, Uber may lure drivers away with better terms. If Uber refuses to drop its commission for every trip, as drivers now demand of it, its drivers may leave.
•On the flip side, even if commuter prices in a competitive environment charged by cab operators go up to astronomical levels, the government should not enter the picture. The market will find its way.
