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The Hindu Editorial


1. Exposing India’s financial markets to the vultures

Topic: GS3 – Indian Economy – Effects of liberalization on the economy.
Crucial for UPSC as it covers global financial integration, India’s economic reforms, and the impact on national autonomy and stability.
  • This article discusses the internationalization of Indian government bonds, examining moves by J.P. Morgan and Bloomberg, potential benefits and risks associated with global market integration, and cautionary perspectives on currency internationalization.
 J.P. Morgan’s Plan for Indian Local Currency Government Bonds (LCGBs):
  • P. Morgan announced its plan to include Indian LCGBs in the Government Bond Index-Emerging Markets (GBI-EM) Global index suite in September 2023.
  • The inclusion is set to be effective from June 2024, prompting anticipation from other index providers like Bloomberg-Barclays and FTSE Russell.
Bloomberg’s Follow-Up Move:
  • On January 8, 2024, Bloomberg Index Services proposed the addition of India’s “fully accessible route (FAR)” bonds to the Bloomberg Emerging Market Local Currency Index.
  • This addition is scheduled to take effect in September 2024, aligning with the global trend toward incorporating Indian bonds in benchmark indices.
FTSE Russell’s Watchlist and the Call for Reforms:
  • FTSE Russell declared India’s retention on its watchlist for a potential upgrade, emphasizing the need for reforms in the government bond market as anticipated by global investors.
  • The move by J.P. Morgan has triggered a chain reaction among prominent index providers, reflecting a growing interest in Indian bonds on the global stage.
India’s Initiative for Global Bond Market Integration:
  • India initiated the process of incorporating its government bonds into global indices in 2019, officially allowing foreign investors access to a segment of government bonds by 2020 through the introduction of the FAR.
  • Despite delays related to capital gains taxes and local settlement, the fundamental policy remained unchanged.
Benefits and Risks Outlined in RBI Report:
  • A report by the Inter-Departmental Group (IDG) of the Reserve Bank of India (RBI) in October 2022 detailed efforts to internationalize the rupee, emphasizing benefits such as diminishing dependence on domestic institutions and greater stability of funds tracking indices.
  • The report acknowledges potential risks but asserts that the perceived benefits outweigh them.
Potential Benefits of Opening Local Bond Markets:
  • Opening local bond markets to foreign investors could facilitate financing of current account and fiscal deficits by engaging institutional investors with long-term investment horizons.
  • It is anticipated that the influx of funds into LCGBs would lower domestic interest rates, reducing the cost of public borrowing.
Concerns and Risks Associated with Bond Market Internationalization:
  • The “original sin” problem is addressed by borrowing in local currency, shifting exchange rate risk onto international lenders.
  • However, internationalization entails a significant loss of autonomy for emerging economies in controlling long-term rates and exposes them to greater interest rate risks.
Volatility and Risks in Foreign Portfolio Inflows:
  • Foreign portfolio inflows into local currency bond markets (LCBM) are perceived as stable, but they can be volatile due to exchange rate risk borne by investors.
  • Experiences in Malaysia and Türkiye highlight the potential for sudden stops and exits, leading to reserve losses and currency declines.
Risks Associated with Offshore Markets and Currency Internationalization:
  • Malaysia’s experience during the 1997 Asian crisis demonstrates the challenges posed by offshore currency markets, leading to speculative activities and financial distress.
  • Türkiye’s recent experience in 2022, with the offshore lira market in London, also indicates the potential for speculation against the domestic currency.
Y.V. Reddy’s Perspective and Caution:
  • V. Reddy, former Governor of the RBI, emphasizes that currency internationalization requires a long evolutionary process and sustained development of the financial system.
  • The Indian rupee is yet to be regarded as an international currency, and its internalization is likely to be an outcome of continued financial system development and improved economic performance.
Overall Assessment and Caution:
  • The internationalisation of bond markets and currencies in emerging economies is often presented as a solution, but the risks involved are underestimated.
  • Increased exchange rate instability and boom-bust cycles in capital flows may be likely outcomes, posing challenges to managing financial integration effectively.
  • In conclusion, while the global integration of Indian bonds presents opportunities, potential risks and challenges, including exchange rate instability and volatility in capital flows, underscore the need for cautious and well-considered financial strategies.
PYQ: Has the Indian governmental system responded adequately to the demands of liberalisation, privatisation and globalisation started in 1991? What can the government do to be responsive to this important change?  (UPSC CSE (M) GS-2 2016) (200 words/12.5m)
Practice Question:  Examine the implications of India’s inclusion in global bond indices on economic autonomy and stability, considering the risks and benefits. (150 words/10 m)

2. A rising tide lifts all boats

Topic: GS3 – Indian Economy – Government Budgeting
Critical for UPSC as it covers India’s economic evolution, healthcare strategies, innovation, and private sector dynamics in the national budget.
  • This article discusses India’s decade of economic transformation, highlighted in the Interim Budget.
  • It emphasizes preventive health measures, innovation, and the growing role of the private sector, envisioning a limitless future for the nation.
India’s Economic Transformation:
  • India has undergone a decade of remarkable transformation, evolving from an under-developed to the world’s fastest-growing economy, consistently growing at 7% amidst a global average of 2.5%.
Budget’s Reflection of Economic Aspirations:
  • The Interim Budget reflects the buoyancy of India’s metrics and spirit, showcasing the immense opportunities ahead and the aspirations of a new India.
Importance of Preventive Health Measures:
  • The Budget emphasizes the significance of preventive health measures, particularly seen in the initiative to promote HPV vaccination to prevent cervical cancer.
  • Suggestion to incentivize individuals for preventive health checks to reduce the overall disease burden in the country.
Advancements in Health Indicators:
  • India has made significant strides in health indicators, with a drop in infant and maternal mortality rates.
  • The Budget focuses on maternal and child health care to enhance women’s workforce participation.
Potential for Innovation Revolution:
  • The Budget highlights ‘innovation’ as a key pillar, allocating ₹1 lakh crore for interest-free loans over 50 years to facilitate private sector investment in research and technology.
  • Emphasizes the potential impact of technology integration, especially in healthcare, to enhance accessibility and reduce costs.
Medical Value Travel and Tourism:
  • Acknowledges the impact of tourism, both religious and medical, with ‘medical value travel’ gaining prominence as a tangible reason for travel.
  • India’s superior talent and global standards in healthcare make it an attractive destination; the Budget focuses on connectivity improvements for easier access to quality healthcare.
Private Sector’s Role and Economic Growth:
  • Hidden figures in the Budget reveal a rise in private expenditure and consumption, underscoring the private sector’s significant role in the economy and people’s lives.
Overall Economic Collaboration and Future Outlook:
  • The Budget suggests a collaborative effort, highlighting the private sector’s meaningful role, and envisions a limitless future for India through continued collaboration and growth.
  • In conclusion, the Interim Budget reflects India’s transformative journey, emphasizing preventive health measures, innovation, and the pivotal role of the private sector. With a focus on growth and collaboration, India envisions a limitless future.
PYQ: One of the intended objectives of Union Budget 2017-18 is to ‘transform, energise and clean India’.  Analyse the measures proposed in the Budget 2017-18 to achieve the objectives. (UPSC CSE (M) GS-3 2017) (250 words/15m)
Practice Question:  Discuss the role of preventive health measures, innovation, and the private sector in India’s economic transformation, as reflected in the recent Interim Budget. (150 words/10 m)

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