Cyclone Hudhud - The Devastation and its Aftermath

Cyclone Hudhud unleashed its full fury with

devastating effect on Visakhapatnam on 12th October, making landfall at noon and hurling

through neighboring areas, ripping apart coastal cities and towns and leaving a trail of

destruction. 

According to the state government, about 2.5 lakh people in 320 villages of 44 mandals

(blocks) in the districts of Visakhapatnam, Vizianagaram, Srikakulam and East Godavari

are affected by the cyclonic devastation. The cyclone claimed 21 lives, damaged as many

as 6,836 houses while the number of boats missing or damaged has been put at 181.

Eastern Power Distribution Company of Andhra Pradesh Limited alone is estimated to

have suffered a loss of Rs 40,000 crore.

About 16,000 electric poles were knocked down by cyclone fury that also left around 6,000

transformers damaged. Damages to Rashtriya Ispat Nigam Limited (Vizag steel plant)

were estimated at Rs 1,000 crore, Indian Navy Rs 2,000 crore, Andhra University Rs 300

crore and Vizag airport Rs 500 crore, Naidu said. 

Relief Operations:

More than 1.35 lakh people have been rehabilitated at 223 medical teams equipped relief

camps, where 5.62 lakh persons are being provided food.

Prime Minister Narendra Modi inspected the cyclone-hit areas to assess the situation and

announced Rs 1000 crore-aid as an interim relief for the cyclone affected areas by the

Centre.

As many as 24 National Disaster Response Force (NDRF) teams, two Army columns, 56

boats/launches and six helicopters were deployed for relief measures. 

Andhra Pradesh Chief Minister Chandrababu Naidu asked the Centre to declare the very

severe cyclone storm ‘Hudhud’ that hit the state’s coast as a national calamity and also

sought an ad hoc relief package of Rs 2,000 crore.

How Cyclone Hudhud got its name?

The name Hudhud in Arabic refers to

the Hoopoe bird. 

The Hudhud, or hoopoe bird, the national bird of Israel is an exotic creature noticed for its

distinctive crown of feathers and is widespread in Europe, Asia and North Africa.

The WMO/ESCAP Panel on Tropical Cyclones at its twenty-seventh Session held in 2000

in Muscat, Sultanate of Oman agreed in principal to assign names to the tropical cyclones

in the Bay of Bengal and Arabian Sea. The eight countries - India, Pakistan, Bangladesh,

Maldives, Myanmar, Oman, Sri Lanka and Thailand - took part and came up with a list of

64 names - eight names from each country - for upcoming cyclones in the spirit of co-

operation and consensus.

The last cyclone in the region was Nanauk in June, 2014 a name contributed by Myanmar.

The next cyclone in the northern Indian Ocean region will be named Nilofar by Pakistan

followed by Priya (Sri Lanka) and Komen (Thailand).

What is a Cyclone?

The word cyclone has been derived from Greek word ‘cyclos’ which means ‘coiling of a

snake’. The word cyclone was coined by Heary Piddington who worked as a Rapporteur in

Kolkata during British rule. The terms “hurricane” and “typhoon” are region specific names

for a strong “tropical cyclone”. Tropical cyclones are called “Hurricanes” over the Atlantic

Ocean and “Typhoons” over the Pacific Ocean. 

A tropical cyclone is a rotational low pressure system in tropics when the central pressure

falls by 5 to 6 hPa from the surrounding and maximum sustained wind speed reaches 34

knots (about 62 kmph). It is a vast violent whirl of 150 to 800 km, spiraling around a centre

and progressing along the surface of the sea at a rate of 300 to 500 km a day.

Cyclone Prone Areas in India

India has a coastline of about 7,516 km

of which 5,400 km is along the mainland. The entire coast is affected by cyclones with

varying frequency and intensity. Although the North Indian Ocean (the Bay of Bengal and

Arabian Sea) generates only about 7% of the world's cyclones (5 to 6 Tropical Cyclones

per year) their impact is comparatively high and devastating, especially when they strike

the coasts bordering the North Bay of Bengal.

Thirteen coastal states and Union Territories (UTs) in the country are affected by tropical

cyclones. Four states (Tamil Nadu, Andhra Pradesh, Orissa and West Bengal) and one

UT (Puducherry) on the east coast and one state (Gujarat) on the west coast are more

vulnerable to cyclone hazards.

The India Meteorological Department (IMD) is the nodal government agency that provides

weather services related to cyclones in India.

Classification of Cyclones in India: 

The criteria followed by Meteorological Department of India (IMD) to classify the low

pressure systems in the Bay of Bengal and in the Arabian Sea as adopted by World

Meteorological Organisation (WMO) are as under: Type of Disturbances Associated Wind Speed in the CirculationLow pressure Area Less than17 knots (<31 kmph)Depression 17 to 27 knots (31 to 49 kmph)Deep Depression 28 to 33 knots (50 to 61 kmph)Cyclonic Storm 34 to 47 knots (62 to 88 kmph)Severe Cyclonic Storm 48 to 63 knots (89 to 118 kmph)Very Severe Cyclonic Storm 64 to 119 knots (119 to 221 kmph)Super Cyclonic Storm 120 knots and above (222 kmph and above)

Recent Cyclones of Andhra PradeshName of the Cyclone Year of OccurrenceHudhud 12 October 2014Lehar 25 November 2013Helen 21 November 2013Nilam October 2012Laila May 2010Khai-Muk November 2008Yemyin June 2007

The recent deadly cyclones that hit Indian coast

Cyclone Phailin (2013) – The Cyclone Phailin is a category 5 storm that struck the

Odisha and Andhra coast on 11 October 2013 causing massive destruction in the region-

affecting 12 million people. Phailin is a Thai word which means Sapphire. This cyclone

prompted India's biggest evacuation in 23 years with more than 5,50,000 people being

moved from the coastline in Odisha and Andhra Pradesh to safer shelters. Phailin brought

very heavy rain of over 600 mm at many stations of Odisha. It also damaged crops worth

Rs 2,400 crore and claimed over 40 lives. Loses due to Cyclone Phailin were estimated to

be around rupees 420 crore.

Cyclone Nilam (2012) - Cyclonic Storm Nilam was the deadliest tropical cyclone to

directly affect south India that made landfall near Mahabalipuram on October 31 as a

strong cyclonic storm with peak winds of 85 kmph. Nilam caused economic losses of

around Rs 100 crore because of torrential rain. 

Cyclone Thane (2011) - Thane was the strongest tropical cyclone of 2011 that became a

very severe cyclonic storm on December 28, as it approached the Indian states of Tamil

Nadu and Andhra Pradesh and made landfall at north Tamil Nadu coast between

Cuddalore and Puducherry on December 30. Thane left at least 46 people dead in Tamil

Nadu and Puducherry. Cuddalore and Puducherry were the worst affected areas. 

Cyclone Laila (2010) - Severe cyclonic storm Laila made a landfall in Andhra Pradesh on

the 20 May 2010 and caused major flooding and damage along its path. Ongole in Andhra

Pradesh recorded heavy rainfall of about 460 mm in just two days. Another town Addanki

received the highest rainfall of 522 mm. The state government faced a loss of over Rs 500

crore due to Cyclone Laila.

Cyclone Jal (2010) - Cyclone Jal killed at least 54 people in India alone. About 300

thousand hectares of cropland was devastated by the cyclone. The remnants of Jal

continued to move northwest, brought light to moderate spells of rain in India's warmest

state of Rajasthan and also in Gujarat.

Cyclone Phyan (2009) - Cyclonic Storm Phyan developed as a tropical disturbance in the

Arabian Sea to the southwest of Colombo in Sri Lanka on November 4, 2009 and made

landfall in south India on November 7. Massive damage to property was reported in

coastal districts of Maharashtra, such as Ratnagiri, Raigad, Sindhudurg, Thane and

Palghar.

Cyclone Nisha (2008) - Over 180 people were killed in Tamil Nadu alone due to heavy

rain and floods caused by the cyclone. Orathanadu, in Thanjavur District in Tamil Nadu

received over 990 mm of rain within 24 hours. The total amount of rainfall received from

Nisha was about 1280 mm. The damage caused by the cyclone was estimated to be

about 3789 crores.

The 30 Deadliest Tropical Cyclones in World HistoryRank Name / Areas of Largest Loss Year Ocean Area Deaths1. Great Bhola Cyclone, Bangladesh 1970 Bay of Bengal 500,0002. Hooghly River Cyclone, India and Bangladesh 1737 Bay of Bengal 300,0003. Haiphong Typhoon, Vietnam 1881 West Pacific 300,0003. Coringa, India 1839 Bay of Bengal 300,0005. Backerganj Cyclone, Bangladesh 1584 Bay of Bengal 200,0006. Great Backerganj Cyclone, Bangladesh 1876 Bay of Bengal 200,0007. Chittagong, Bangladesh 1897 Bay of Bengal 175,0008. Super Typhoon Nina, China 1975 West Pacific 171,0009. Cyclone 02B, Bangladesh 1991 Bay of Bengal 140,0009. Cyclone Nargis, Myanmar 2008 Bay of Bengal 140,00011. Great Bombay Cyclone, India 1882 Arabian Sea 100,00012. Hakata Bay Typhoon, Japan 1281 West Pacific 65,00013. Calcutta, India 1864 Bay of Bengal 60,00014. Swatlow, China 1922 West Pacific 60,000

15. Barisal, Bangladesh 1822 Bay of Bengal 50,00015. Sunderbans coast, Bangladesh 1699 Bay of Bengal 50,00015. India 1833 Bay of Bengal 50,00015. India 1854 Bay of Bengal 50,00019. Bengal Cyclone, Calcutta, India 1942 Bay of Bengal 40,00019. Bangladesh 1912 Bay of Bengal 40,00019. Bangladesh 1919 Bay of Bengal 40,00022. Canton, China 1862 West Pacific 37,00023. Backerganj (Barisal), Bangladesh 1767 Bay of Bengal 30,00024. Barisal, Bangladesh 1831 Bay of Bengal 22,00025. Great Hurricane, Lesser Antilles Islands 1780 Atlantic 22,00026. Devi Taluk, SE India 1977 Bay of Bengal 20,00026. Great Coringa Cyclone, India 1789 Bay of Bengal 20,00028. Bangladesh 1965 (11 May) Bay of Bengal 19,27929. Nagasaki Typhoon, Japan 1828 Western Pacific 15,00030. Bangladesh 1965 (31 May) Bay of Bengal 12,000

Clean India Campaign and Sanitation Fact file

Prime Minister Narendra Modi on 2nd October

launched clean India campaign, in the name of Swachchh Bharat, the programme

launched at Rajpath by taking a broom himself and sweeping the road. Modi also

announced starting a campaign on cleanliness through social media, using his website

MyGov.in and other such platforms, including a new website dedicated to the clean India

campaign.

Modi highlighted the cleanliness thrust of the Father of the Nation and said India must

realise his unfulfilled dream of a clean country, by 2019, the year of Gandhi's 150th birth

anniversary.

Keep Singapore Clean in 1968

The PM's campaign is strong reminiscent of a similar campaign for cleanliness launched

by Singapore in 1968. Started by former Prime Minister Lee Kuan Yew, the Keep

Singapore Clean Campaign was one of the first campaigns launched by the government.

The objective was to make Singapore the cleanest city in the region, in order to boost

tourism and the attraction of foreign investment.

Half of India's population still practice open defecation

Less than a third of India's 1.2 billion people have access to sanitation and more than

186,000 children under five die every year from diarrhoeal diseases caused by unsafe

water and poor sanitation, according to the charity WaterAid.

A United Nations report in May said half of India's population still practice open defecation

- putting them at risk of cholera, diarrhea, dysentery, hepatitis A and typhoid. The resulting

diseases and deaths cause major economic losses, and a World Bank report in 2006

estimated that India was losing 6.4 percent of GDP annually because of poor access to

sanitation.

According to Water Aid research, about 16 million Indians a year gain access to a basic

toilet. This will need to increase to more than 100 million a year if the whole population is

to have a toilet by 2019.

Every household will have a toilet by 2019

Narendra Modi government has made building toilets a priority and he has pledged that

every household will have a toilet by 2019.

Industry chamber CII has announced it would mobilise its members to build 10,000 toilets

across the country by 2015-16.

Earlier a number of companies including Tata Consultancy Services and Bharti

Foundation, an arm of Bharti Enterprises had pledged a total of Rs 300 crore each to build

toilets in schools. Vedanta, which has oil and gas wells, mines and power stations, said it

was already constructing 30,000 toilets in rural Rajasthan and had plans to build 10,000

more.

The government has also set up a Swachchh Bharat Kosh, encouraging companies to

donate funds from their CSR budget to improve sanitation facilities in the country.

Aid workers said that while increased investment in infrastructure was important, there

must also be a change in attitudes.

Sanitation in India, fact file

Sanitation 

It is estimated that 

Only 31 per cent of India's population use improved sanitation

In rural India 21 per cent use improved sanitation facilities

One Hundred Forty Five million people in rural India gained access to improved

sanitation between 1990-2008

Two hundred and Eleven Million people gained access to improved sanitation in whole

of India between 1990-2008

India is home to 594 million people defecating in the open; over 50 per cent of the

population.

In Bangladesh and Brazil, only seven per cent of the population defecate in the open.

In China, only four per cent of the population defecate in the open.

Water 

88 per cent of the population of 1.2 billion has access to drinking water from improved

sources in 2008, as compared to 68 per cent in 1990.

Only a quarter the total population in India has drinking water on their premise.

Women, who have to collect the drinking water, are vulnerable to a number of unsafe

practices. Only 13 per cent of adult males collect water.

Sixty seven per cent of Indian households do not treat their drinking water, even

though it could be chemically or bacterially contaminated.

Hygiene

Only 53 per cent of the population wash hands with soap after defecation, 38 per cent

wash hands with soap before eating and only 30 per cent wash hands with soap

before preparing food.

Only 11 per cent of the Indian rural families dispose child stools safely. 80 per cent

children's stools are left in the open or thrown into the garbage.

Only 6 per cent of rural children less than five years of age use toilets.

Ebola Virus Disease

Ebola virus disease (EVD), formerly known as Ebola

hemorrhagic fever, is a severe, often fatal illness in humans. EVD outbreaks have a case

fatality rate of up to 90%. EVD outbreaks occur primarily in remote villages in Central and

West Africa, near tropical rainforests. The virus is transmitted to people from wild animals

and spreads in the human population through human-to-human transmission. Fruit bats of

the Pteropodidae family are considered to be the natural host of the Ebola virus.

There are five subspecies of the Ebola virus: Zaire ebolavirus (EBOV), Bundibugyo

ebolavirus (BDBV), Sudan ebolavirus (SUDV), Taï Forest ebolavirus (TAFV) and Reston

ebolavirus (RESTV).

Ebola first appeared in 1976 in two simultaneous outbreaks, in Nzara, Sudan, and in

Yambuku, Democratic Republic of Congo. The latter was in a village situated near the

Ebola River, from which the disease takes its name. Although non-human primates have

been a source of infection for humans, they are not thought to be the reservoir but rather

an accidental host like human beings.

Transmission

Ebola is introduced into the human population through close contact with the blood,

secretions, organs or other bodily fluids of infected animals. In Africa, infection has been

noticed among those handling infected chimpanzees, gorillas, fruit bats, monkeys, forest

antelope found ill or dead or in the rainforest. Ebola then spreads in the community

through human-to-human transmission, with infection resulting from direct contact

(through broken skin or mucous membranes) with the blood, secretions, organs or other

bodily fluids of infected people, and indirect contact with environments contaminated with

such fluids. Men who have recovered from the disease can still transmit the virus through

their semen for up to 7 weeks after recovery from illness.

Health-care workers have frequently been infected while treating patients with suspected

or confirmed EVD when infection control precautions are not strictly practiced.

Signs and symptoms

EVD is a severe acute viral illness often characterized by the sudden onset of fever,

intense weakness, muscle pain, headache and sore throat. This is followed by vomiting,

diarrhoea, rash, impaired kidney and liver function, and in some cases, both internal and

external bleeding. The incubation period, that is, the time interval from infection with the

virus to onset of symptoms is 2 to 21 days.

Diagnosis

Before a patient is diagnosed as infected with EVD, one should rule out malaria, typhoid

fever, shigellosis, cholera, leptospirosis, plague, rickettsiosis, meningitis, hepatitis and

other viral hemorrhagic fevers like dengue, yellow fever and kyasanur forest disease etc.

Vaccine and treatment

There is no specific treatment nor is any licensed vaccine for EVD available. Several

vaccines are being tested, but none are available for clinical use. Severely ill patients

require intensive supportive care. Patients are frequently dehydrated and require oral

rehydration with solutions containing electrolytes or intravenous fluids.

Prevention and control

No animal vaccine against this is available. Routine cleaning and disinfection of pig or

monkey farms (with sodium hypochlorite or other detergents) should be effective in

inactivating the virus.

If an outbreak is suspected, the premises should be quarantined immediately. Culling of

infected animals, with close supervision of burial or incineration of carcasses, may be

necessary to reduce the risk of animal-to-human transmission. Restricting or banning the

movement of animals from infected farms to other areas can reduce the spread of the

disease.

As this viral outbreak in pigs and monkeys have preceded human infections, the

establishment of an active animal health surveillance system to detect new cases is

essential in providing early warning for veterinary and human public health authorities.

In the absence of effective treatment and a human vaccine, raising awareness of the risk

factors for Ebola infection and the protective measures individuals can take is the only

way to reduce human infection and death.

India and EBOLA

There is a risk the deadly virus could be imported into the country if the large population of

Indians working in the four affected West African nations returns. There are nearly 45,000

Indian nationals living and working in Guinea, Liberia, Sierra Leone and Nigeria - where

an outbreak of the disease has killed 932 people. While the risk of Ebola virus cases in

India is low, preparedness measures are in place to deal with any case of the virus

imported to India. Government has advised against all non-essential travel to the four

countries, and authorities will screen travelers who originate from or transit through

affected nations, and track them after their arrival in India.

The government will also set up facilities at airports and ports to manage travelers

showing symptoms of the disease. State authorities have been instructed to designate

hospitals with isolation wards for response to possible cases and to stock personal

protective equipment.

MARS Mission Successful

India has created a history on 24th September

by successfully inserting Mangalyaan into the Mars orbit. This achievement on its first

attempt and at a cost less than what it takes to make a Hollywood movie brought

accolades to the Indian Space Research Organisation.

The country’s space agency successfully completed the Mars Orbit Insertion (MOI)

manoeuvre and with this, it joins the elite set of the US, Europe and Russia in successfully

sending probes to orbit or land on Mars.

India becomes the first Asian country to go to the Red Planet, beating even China. The

first sign of success on the very last leg came when ISRO announced that at the end of

four hours, the burning of engines on India’s Mars orbiter had been confirmed.

For the next six months, the MOM will move in an elliptical path around the planet

studying the Mars surface and scanning its atmosphere for methane. It will not land on

Mars.

The spacecraft, launched on November 5, 2013 through a PSLV-XL rocket from

Sriharikota in Andhra Pradesh, has travelled 666 million km (414 million miles) since.

The Mars Orbiter Mission (MOM) of the Indian Space Research Organisation (ISRO) is

100 per cent designed and developed in India.

Private partnerships

At least six ISRO labs collaborated with many private sector companies in the country to

design and develop scientific equipment to deliver this sterling performance.

ISRO’s satellite, which has five scientific payloads, has travelled nearly 214 million km

calculated under radio distance. Measured in heliocentric (solar) path, MOM has travelled

nearly 660 million km. in transmission of satellite date to the earth ISRO took help of the

US, Spain and Australia 

Only Rs 450 crore spent

“Union State Relations” Governor’s Special Powers in Hyderabad, Its Constitutional Basis

By, Krishna Pradeep, Director, 21st Century IAS, Hyderabad.

There has been a controversy regarding the Governor’s special powers in Hyderabad, as

provided under the Andhra Pradesh Bifurcation Act 2014. Though the act under section 8

(1), (2), (3) and (4) provides for the special powers, it is opposed by the Telangana

government when a directive is issued by the Union Home Ministry. 

What is Section 8 of the Andhra Pradesh Bifurcation Act 2014 act?

8. (1) On and from the appointed day, for the purposes of administration of the common

capital area, the Governor shall have special responsibility for the security of life, liberty

and property of all those who reside in such area.

(2) In particular, the responsibility of the Governor shall extend to matters such as law and

order, internal security and security of vital installations, and management and allocation

of Government buildings in the common capital area.

(3) In discharge of the functions, the Governor shall, after consulting the Council of

Ministers of the State of Telangana, exercise his individual judgment as to the action to be

taken:

Provided that if any question arises whether any matter is or is not a matter as respects

which the Governor is under this sub-section required to act in the exercise of his

individual judgment, the decision of the Governor in his discretion shall be final, and the

validity of anything done by the Governor shall not be called in question on the ground that

he ought or ought not to have acted in the exercise of his individual judgment.

(4) The Governor shall be assisted by two advisors to be appointed by the Central

Government.

What is the implication from this?

The following implications can be derived from the interpretation of this provision – 

1. Governor shall be responsible to the matters like law and order.

2. Governor will act in accordance with the advice of the council of Ministers of the

Telangana state.

3. But he is free to use his discretion i.e. the governor can over ride the advice of the

council of ministers.

4. The decision of the governor is final.

5. Governor is assisted by two advisors.

6. The advisors are appointed by the central government.

Home Ministry’s Directive:

The Home Ministry, in a detailed letter to Chief Secretary of Telangana Rajiv Sharma, has

said that on all matters falling under law and order, internal security and security of vital

installations, as well as the two police commissionerates of Hyderabad and Cyberabad,

and for the district of Ranga Reddy, the Home Secretary of Telangana shall brief the

Governor and “the Governor’s advice shall prevail”. The Governor, who will be assisted by

two advisers appointed by the Central government, will also be the last word on handling

threat perception.

The governor has been given powers to ask the state government to requisition additional

forces for deployment. In case the State government takes a divergent view, the

Governor’s decision will be final. The governor can also call for a report or assessment

from the Telangana government “on any acts of omission and commission by any official

and direct the government to conduct an enquiry and take appropriate action as per law.”

The governor will also have powers to issue necessary directions to the officials of the

Telangana government for the protection of the property rights of the people residing in

the common capital of Hyderabad.

In its letter, the ministry has listed 11 critical powers vested in the governor which include

power to call for any record or information or decision of the Council of Ministers or any

authority relating to law and order, internal security and security of vital installations, and

management and allocation of government buildings in the common capital of Hyderabad.

What is the argument of Telangana State Government?

The government of Telangana is making the following arguments against the Home

Ministry’s directives - 

1. Entrusting the Governor with special powers is against the spirit of the Constitution of

India.

2. The Telangana government is functioning in accordance with the provisions of the

Constitution and the Governor too should act as per the decisions of the State Council

of Ministers.

3. Such a directive is an infringement of the rights of the States by the Union.

4. Such sweeping powers to the governor will amounts to Governor’s rule in the State.

5. Centre’s missive is an attempt to usurp powers of a democratically elected

government.

Constitutional Provisions on Law and Order 

According to the constitution, law and order is a State subject. However Union can also

make the laws and issue directions to the states in performing this task. Therefore state

list is often called as the second concurrent list.

Are there any other similar provisions in the constitution?

There indeed are such provisions which exist in the constitution. Certain states are given

special status in the constitution. Accordingly Governors are given special power to

maintain law and order in that state. They are as follows – 

Article 371 (A) (b): The Governor of Nagaland shall have special responsibility with

respect to law and order in the State of Nagaland for so long as in his opinion internal

disturbances occurring in the Naga Hills-Tuensang Area immediately before the formation

of that State continue therein or in any part thereof and in the discharge of his functions in

relation thereto the Governor shall, after consulting the Council of Ministers, exercise his

individual judgment as to the action to be taken. 

Article 371 (F) (g): The Governor of Sikkim shall have special responsibility for peace and

for an equitable arrangement for ensuring the social and economic advancement of

different sections of the population of Sikkim and in the discharge of his special

responsibility under this clause, the Governor of Sikkim shall, subject to such directions as

the President may, from time to time, deem fit to issue, act in his discretion;

Article 371 (H) (a) : The Governor of Arunachal Pradesh shall have special responsibility

with respect to law and order in the State of Arunachal Pradesh and in the discharge of his

functions in relation thereto, the Governor shall, after consulting the Council of Ministers,

exercise his individual judgment as to the action to be taken.

Note: The wording under Article 371 (A) (b) with reference to state of Nagaland

and Article 371 (H) (a)with reference to state of Arunachal Pradesh are more or less

similar to section 8 of the AP Reorganization act 2014.

What will happen if Union directions are ignored by the State?

According to Article 256, the executive power of every State shall be so exercised as to

ensure compliance with the laws made by parliament and any existing laws which apply in

that state, and the executive power of the union shall extend to the giving of such direction

to a state as may appear to the government of India to be necessary for that purpose.

According to Article 365, if any State has failed to comply with, or to give effect to, any

directions given in the exercise of the executive power of the Union under any of the

provisions of this Constitution, it shall be lawful for the President to hold that a situation

has arisen in which the Government of the State cannot be carried on in accordance with

the provisions of this Constitution.

It implies that, if a State does not follow the directions of the Union government that will be

treated as the failure of constitutional machinery in the state, which means possibility of

imposing President’s rule in the state. This is intended to protect the national unity and

integrity.

Even the Inter State Council meeting in 2003, has agreed with this provision under article

365. Earlier the Sarkaria Commission on Union State relations (1983-88) and Second

Commission on Union State relations under the chairmanship of MM Punchi Commission

(2007-10) have also did not disagree with this stand under article 365. The Supreme Court

in the SR Bommai Case (1994) has not rejected this view. 

Dr. Ambedkar said, article 356 should be used only as a matter of last resort. It should first

be ensured that the Union had done all that it could in discharge of its duty under article

355, that it had issued the necessary directions under articles 256-257 and that the State

had failed to comply with or give effect to the directions.

Final Observation:

Two aspects are visible from the above discussion – 

1. Union has not encroached in to the federal spirit by issuing guidelines to the state

because the guidelines are in accordance with 2014 Andhra Pradesh reorganization

act.

2. The new born state of Telangana has its own apprehensions regarding Union

domination over the law and order is a clear vision of violating the spirit of federalism.

FDI

What is FDI?

Foreign Direct Investment is the investment which is done in productive assets and

participation in the management of the company as the stake holders by a company which

is based in one country, into a company based in another country. Recently the cabinet

said OK for 51% FDI in multi-brand retail sector & 100% FDI in single brand. Foreign

Investment in India is governed by the FDI policy announced by the Government of India

and the provision of the Foreign Exchange Management Act (FEMA) 1999. RBI also

issues notifications which contains the Foreign Exchange Management (Transfer or issue

of security by a person resident outside India) Regulations, 2000 and had been amended

many times. The Ministry of Commerce and Industry, Government of India is the nodal

agency for motoring and reviewing the FDI policy on continued basis.

Ways of investment?

The investing company may make its overseas investment in a number of ways - Joint

Ventures, merger, Franchising, Sourcing of Supplies from small-scale sector, Cash and

Carry whole sale trading, Non-Store Formats, Strategic Licensing Agreements, either by

setting up a subsidiary or associate company in the foreign country, by acquiring shares of

an overseas company.

The foreign retail chains will need to make very expensive real estate investments which

may or may not be feasible in the long run.

Who are the target group for FDI?

The people who prefer going to shopping malls instead of kirana shops constitute not a

sizable percentage and who belong to affluent, upper middle and middle class. As such

there is no immediate threat to the kirana shops or small venders, as they have their own

share of customers with whom they share a special relationship.

Why only India?

India has a population of nearly 1.2 billion, and many countries feel it as most alluring and

thriving retail destination. Liberalization of trade policy and loosening of barriers and

restrictions to the foreign investment in the retail sector of India, have made the FDI in

retail sector quite easy and smooth. India being a signatory to World Trade Organisation’s

General Agreement on Trade in Services, which include wholesale and retailing services,

had to open up the retail trade sector to foreign investment. In 1997, FDI in cash and carry

(wholesale) with 100 percent ownership was allowed under the Government approval

route. It was brought under the automatic route in 2006. 51 percent investment in a single

brand retail outlet was also permitted in 2006. India being an open economy with skilled

workforces and good growth prospects tend to attract larger amounts of foreign direct

investment among other growing and emerging markets. 

Advantages of FDI:

1. There would be increase in revenue to the state exchequer in the form of taxes

2. Counties which have shortage of funds for developmental activities would find it

beneficial if they go for FDI thereby improving the country's "shunned sectors" --

infrastructure and logistics. So in order to grow faster and compete with the other

countries foreign investment would turn out to be very fruitful.

3. There would be increase in employment opportunities

4. All multi brand products are available under one roof and there would be greater range

and variety of products for sale and increased consumer choice

5. Competitive spirit and good managerial skills would be introduced in the country

6. Festival discounts would be available to the people

7. Many under developed and developing countries will be benefited with the introduction

of FDI.

8. Best corporate and management practices would be introduced in the country

9. Better usage and utilization of natural resources

10. Helps in bridging infrastructural gaps (especially rural infrastructure) and

technological hiccups.

11. Services at large would be benefited to people belonging to urban and semi urban

areas

12. There would be improvement in the quality standards

13. Acceptance of credit, debit and Sodexo cards also encourage the purchases in big

shopping malls

14. Permitting foreign investment in food-based retailing is likely to increase the capital

flow into the country.

15. Usage of latest technologies in the farming sector can improve farmer’s income (by

reducing wastage of agricultural produce, enabling them to get better prices) &

agricultural growth thereby lowering consumer prices inflation.

16. By selling their goods directly to the foreign players would help the farmers in getting

remunerative prices by their produce therefore reducing the long chain of

intermediaries or middlemen.

Disadvantages to FDI:

1. Multi national companies require high investment, infrastructure facilities, packaging

costs, advanced security system, high maintenance costs and very high variable cost

of operation. And may be in the long run incurring huge losses.

2. Many fear that a time would come when these MNC’s making direct investments start

dictating terms over the company into which the investment is made may influence the

political system in the country. And many politicians felt allowing FDI in retail will push

the country towards economic slavery

3. Small vendors and hawkers feel that these big giants would badly affect the domestic

industry, thereby affecting their livelihood.

4. The items which these Multinational companies introduce in the market are beyond

the competitive capacity of the small venders.

5. Multi National Companies (MNC)s could generate meager employment opportunities

that is to for selected professional people. Farmers would be affected due to

monopolization of the MNCs, competition, loss of entrepreneurial opportunities and

self employed indigenous retailers who provide employment to many will be forced to

close down their shops as they unable to face the highly unhealthy competition from

the MNCs

6. Due to increase in multi brand products and increased purchasing power people are

introduced to a new kind of lifestyle which they are not used to may force to change

their lifestyle which may affect their future economically.

7. Unlike in America where the shopping malls are in the outskirts of the city and the

family shops for a month and it is considered as a family activity. Whereas in India

food items are purchased in small quantities as many do not have adequate money to

buy for a month nor do they have massive storage facilities at home. Unlike

Americans, Indians do not drive miles and do bulk purchasing.

In what way FDI is beneficial to farmers?

The Indian Farmer and Industrial Alliance (IFIA), a joint venture of the Consortium of

Indian Farmers Associations (CIFA), recognized the potential benefits of eliminating

middlemen and has expressed its support for opening the retail sector to foreign

investment. 

Views against the FDI :

1. Small traders feel they will not be able to withstand the competition. self employed

indigenous retailers who provide employment to many will be forced to close down

their shops, unable to face the highly unhealthy competition from the MNCs

2. Some felt that the government should impose a blanket ban on foreign retailers from

entering into retail trade

FDI in Retail Sector

What is Retail sector?

In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in

contrast to a sale for further sale or processing (i.e. wholesale). The Retail Industry is the

sector of economy which is consisted of individuals, stores, commercial complexes,

agencies, companies, and organizations, etc., involved in the business of selling or

merchandizing diverse finished products or goods to the end-user consumers directly and

indirectly. A retailer is involved in the act of selling goods to the individual consumer at a

margin of profit. Thus, retailing can be said to be the interface between the producer and

the individual consumer buying for personal consumption. 

According to the Investment Commission of India, the retail sector is expected to grow

almost three times its current levels of $250 billion to $660 billion by 2015. The Indian

Retail Industry is the 5th largest retail destination and the second most attractive market

for investment in the globe after Vietnam as reported by AT Kearney‘s seventh annual

Globe Retail Development Index (GRDI), in 2008 Retail sector contributes to maximum

percentage of employment after agriculture. In spite of the recent developments retail

sector is assumed to possess huge growth potential. The retail industry is mainly divided

into:- 

1) Organised and

2) Unorganised Retailing

Organised retailing- refers to trading activities undertaken by licensed retailers, that is,

those who are registered for sales tax, income tax, etc. These include the corporate-

backed hypermarkets and retail chains, and also the privately owned large retail

businesses. In India 97% of the business is done by organized sector. 

Unorganised retailing - refers to the traditional formats of low-cost retailing, for example,

the local kirana shops, owner manned general stores, paan/beedi shops, convenience

stores, hand cart and pavement vendors, etc.

What is FDI in Multiple brand retail?

Multiple brand retail means selling the same product under different brand names. FDI in

multi-brand retailing should be carefully monitored as there are chances that if left alone it

can directly impact a large percentage of population and would ultimately deepen the gap

between the rich and the poor. So in order to ensure development, it can be stipulated that

a percentage of FDI should be spent towards building up of back end infrastructure,

logistics or agro processing units, and reconstituting the poverty stricken and stagnating

rural structure with at least 50% of the jobs in the retail outlet should be reserved for rural

youth.

What is FDI in Single brand retail?

FDI in ‘Single brand’ retail means that a retail store with foreign investment can only sell

one brand. i.e. if a foreign brand want to sell its product in India then it has to sell its

product with the same name rather using a new name. The main motive to introduce such

a policy was to enable Indians to spend the money on the same goods in India which they

spend on shopping abroad.

Allowing 100%FDI in single brand retail would be of twin benefit to both the forging player

and the Indian businessman as the foreign investor would develop knowledge and

understanding of the Indian market. Whereas the Indian businessman would get to know

about the global best management practices, designs and technological knowledge.

Advantages of Mom-and-Pop Retail outlets:

1. Small kirana stores all available at almost every street in villages and cities and both

seller and buyers share a special bondage because of proximity in living in same area

which is absent in the big shopping malls.

2. Kiranas are patronized by the local folks due to personalized human touch which is not

available in the malls as they possess more of business oriented approach.

3. Items can be purchased in small quantities

4. Due to acquaintance with the people in locality the kirana shops allow credit for certain

periods of time.

5. These outlets are a place of discussions for many people

6. Large Bargaining Power is available whereas in malls there is no scope for bargain.

7. Not much of an investment is needed and can be established every where. Even in

the front yard of the house a shop can be established whereas malls cannot be

established every where as they need big space.

8. Less manpower is required, less infrastructure and shops are generally established at

a walk able distance.

9. These are generally run by people of low income groups and it is a good source of self

employment and an avenue for employment generation.

10. There would be long operating hours, strong customer relations, convenience and

hygiene.

Disadvantages of Mom-and-Pop Retail outlets:

1. Not much of range and variety of goods are available resulting in less choice

2. Generally kirana stores are small and there is no scope for a good ambience

Andhra Pradesh SC, ST Sub Plan

The Legislative Council of Andhra Pradesh on 2 December 2012 had passed the historic

Andhra Pradesh Scheduled Castes Sub-Plan and Tribal Sub-Plan (Planning, Allocation

and Utilization of Financial Resources) Act, 2012. Through the passage of this bill Andhra

Pradesh had become the first state to make such legislation, of all the states in the

country by giving statutory status to the scheduled castes and scheduled tribe sub-plans

by ensuring allocation of funds to these sections in proportion to their population. The

legislation would be helpful in ensuring the right to equality for SC and ST community

apart from being effective in ensuring social security and a comprehensive development of

the people of the community.

Historical background of the sub plan: The demand for according legal status to the

Sub-Plans was made on states for a long time by the Planning Commission of India and

National Development Council (NDC). The ST sub-plan was introduced by Indira Gandhi

during 1975-76 and the SC sub-plan during 1979-80. In Andhra Pradesh after Sustained

struggle waged by the “Kulavivaksha Vyatireka Porata Sangham (Struggle Committee

against Caste Discrimination)” and the CPI (M) has resulted in the enactment of a

legislation to ensure proper implementation of SC/ST Sub-Plans.

Why do we need such legislation?

The need for separate legislation was felt as funds allocated for SC, ST sub-plan were not

utilized fully and efficiently, and have been used for other purposes including

infrastructural development by almost all the parties that were in power in spite of

Planning Commission’s guidelines on fund utilization. The state government recognized

the need for legislation in place of guidelines, as funds were used even for Necklace Road

works and cleaning of Hussain Sagar. As per the population, the government should

allocate 16.23 pc funds in the budget for SCs and 6.6 pc for STs, but spending remained

mostly on paper as the funds meant for them are diverted for other programmes. And in

order to prevent diversion of sub-plan funds of SC and ST population for other activities

and not to allow them unspent, the AP government has passed this historic bill. There is

also a mandatory provision for allocation of almost a fourth of the State’s annual plan of

the budget for SC, ST. The legislation will also ensure total utilization of funds allocated to

these sections in the planned budget. A state council headed by the chief minister will

release the funds and review the progress of utilization of funds. The council will meet at

least twice in a year. State-level and district-level SC and ST sub-plans will also be

prepared. Last year the state spent only 12.24 per cent for SCs and 5.98 per cent for STs.

In the plan budget for 2012-13, as against the state allocation of Rs 8,657 crore under SC

sub-plan and Rs 4,060 crore under ST sub-plan. The law would facilitate comprehensive

development of SCs and STs and provide them protection and equality on par with other

sections of society.

Why do we need a separate plan for SC/ST?

It is since ages that there are worst forms of social oppression, economic exploitation and

discrimination towards Dalits and Tribals in India. Even after 67 yrs after independence

and after several attempts by the government, it is unable to curb the menace of

discrimination and uplift the social, economic and status of SC/ST. Recently even the PM

Man Mohan Singh accepted that SC/ST are subjected to discrimination and harassment in

many parts of the country. And the money which is sanctioned towards the upliftment of

the SC/ST is spent for other purposes or left unspent since ages. Thus depriving the

legitimate rights for the upliftment of the SC/ST. In order to make better use of the

resources and for the overall development of SC/ST a separate sub plan funds was

considered as the need of the hour and the government was successful in passing the

legislation. This legislation can be considered as first of its kind in the country.

What are these Sub-Plan funds?

Sub-Plan funds are those that must be allocated to the SC/ST Nodal Agencies at the time

of preparing the budget itself with a mandate to spend them exclusively for the welfare of

Dalits and Tribals.

What is Special Component Plan and Tribal Sub-Plan?

As general development programmes could not specially cater to their socio-economic

upliftment and bring them on par with other sections of society, Special Component Plan

(which was later renamed as Scheduled Caste Sub Plan) and Tribal Sub-Plan (TSP) were

formulated. The SCSP is an important intervention through the planning process for

social, economic and educational development of Scheduled Castes and also for the

improvement in their working and living conditions. It was started from the Sixth Five Year

Plan period.

In accordance with the government policy all PSU’s under the administrative control of the

Ministry makes allocation for various activities related to the welfare of the economic

development of the SC/ST and people of the weaker sections in the neighbourhood of

project locations through Special Component Plan and Tribal Sub-Plan which are as

follows:

Objectives:

1. Construction of community latrines on the lines of Sulabh Shauchalay’s etc in villages

inhabited mainly by SC/ST and weaker sections communities

2. Construction of schools/collage buildings, scholarships, adult education, distribution of

teaching materials and other aids to SC/ST students, etc

3. Financial assistance for establishing libraries in villages inhabited by SC/ST

communities

4. Construction of open air stage cum training halls

5. Provision of community health facilities, free medical services, medicines through

medical camp and family planning camps, etc

6. Provision of drinking water facility to nearby villages through ring wells/tube wells, etc

7. Provision of agriculture and irrigation facilities etc in surrounding villages of project

locations

8. Financial assistance to SC/ST women through co-operative societies for providing

facilities for handlooms, weaving, etc so as to enable them for self –employment

9. Financial assistance to physically handicapped persons belonging to SC/ST

communities for their rehabilitation.

10. Vocational training guidance to enable the SC/ST persons become self reliant under

the scheme “Earn while you learn”. Training are arranged in various trades, like basket

weaving, coir-rope making, sewing, poultry training, fishing, tailoring, typing, motor

driving as well as supply of necessary tools, machines, etc

11. Economic development /self employment by organising entrepreneurship

development training programme

12. Welfare programmes such as distribution of seeds and fertilizers free of cost to

needy SC/ST farmers and distribution of smoke less chulas and solar cookers to

SC/ST women and also construction of approach roads and adoption of villages.

13. Social forestry schemes like distribution of fruit bearing seeds, sapling and other

plants etc

Issues raised before and after the passage of the bill:

The opposition sought an amendment that the allocation of the funds should be based on

ABCD groups within the SCs based on their populations and socio-economic conditions.

The chief minister pointed out that in 2004 Supreme Court had struck down the

classification of SCs into sub-groups as unconstitutional and said no fresh law could be

passed in any form on the issue. 

APCC president said that he would raise the issue of separate sub-plans for Backward

Classes and the Minorities in the Assembly. He said that the BCs and the minorities

should get their fair share in budget. His support for the separate budgetary allocation is

similar to the demand by the MIM asking for sub-plan for the minorities.

India and the Global Financial Crisis… What Have We Learnt?

K.R. Narayanan Oration by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at the South Asia Research Centre of the Australian National University, Canberra on June 23, 2011

By all accounts the 2008/09 crisis has been the deepest financial crisis of our times. It has

taken a devastating toll on global output and welfare. Arguably, the fundamental causes of

all financial crises are the same - global imbalances, loose monetary policy and high

levels of leverage driven by ‘irrational exuberance’. In that respect, this crisis has been no

different. 

5. Where this crisis has been different, however, is in its manifestation. Most recent crises

had occurred in individual emerging economies or regions, and they were, at their core,

traditional retail banking or currency crises. The countries in trouble could be rescued by

multilateral interventions; besides, the advanced countries provided a buffer for trade and

financial support. In contrast, this crisis originated in the most advanced economy, the

United States, and hit at the very core of the global financial system. With virtually no

buffers to fall back on, the crisis rapidly engulfed the whole world. Much to their dismay,

emerging market economies too were soon pulled into the whirlpool. 

How was India hit by the Crisis? 

India was no exception. We too were affected by the crisis. Output growth that averaged

9.5 per cent per annum during the three year period 2005/08 dropped to 6.8 per cent in

the crisis year of 2008/09. Exports that grew at 25 per cent during 2005/08 decelerated to

12.2 per cent in the crisis year (2008/09) and declined by 2.2 per cent in 2009/10. In the

pre-crisis years, we had capital flows far in excess of our current account deficit. In

contrast, during the crisis year, net capital flows were significantly short of the current

account deficit and this put downward pressure on the rupee. The exchange rate

depreciated from ` 39.37 per dollar in January 2008 to ` 51.23 per dollar in March 2009. 

Notwithstanding our sound banking system and relatively robust financial markets, India

felt the tremors of the tectonic shocks in the global financial system. The first round effects

came through the finance channel by way of sudden stop and then reversal of capital

flows consequent upon the global deleveraging process. This jolted our foreign exchange

markets as well as our equity markets. Almost simultaneously, our credit markets came

under pressure as corporates, finding that their external sources of funding had dried up,

turned to domestic bank and non-bank sources for credit.

By far the most contagious route for crisis transmission was the confidence channel. For

weeks after the Lehman collapse in mid-September 2008, everyday there was news of yet

another storied institution crashing. In this global scenario of uncertainty, the lack of

confidence in advanced country markets transmitted as hiccups to our markets too. The

net result was that all our financial markets - equity, debt, money and foreign exchange

markets - came under varying degrees of pressure. Finally, the transmission of the crisis

through the real channel was quite straightforward as the global recession that followed

the financial crash resulted in a sharp decline in export demand for our goods and

services.

Why was India hit by the Crisis? 

There was dismay in India that we too were affected by the crisis, and this dismay arose

mainly on two counts. First, the exposure of our banks to toxic sub-prime assets was

marginal and their off balance sheet activities were limited, and so, the argument went, we

should not have been affected by a financial sector crisis that originated from these

causes. Second, India’s growth is driven by domestic demand and a drop in external

demand, it was contended, should have caused no more than a small dent in output

growth. Yet the crisis hit us, and did so more ferociously than we thought possible. The

reason for this is globalization: India is more integrated into the global system than we

tend to acknowledge. Let me illustrate that point with some broadbrush numbers. 

India’s two way trade (merchandize exports plus imports), as a proportion of GDP, more

than doubled over the past decade: from 19.6 per cent in 1998/99, the year of the Asian

crisis, to 40.7 per cent in 2008/09. Note that global trade declined by 11 per cent in 2009

as a result of the crisis in contrast to a robust average growth of 8.6 per cent during the

previous few years 2004/07. Such a sharp collapse in world trade had an impact on our

export demand demonstrating that our trade integration was quite deep. 

If our trade integration was deep, our financial integration was even deeper. A measure of

financial integration is the ratio of total external transactions (gross current account flows

plus gross capital account flows) to GDP. This ratio had more than doubled from 44 per

cent in 1998/99 to 112 per cent in 2008/09 evidencing the depth of India’s financial

integration. In sum, the reason India was affected by the crisis, despite mitigating factors,

is its deepened trade and financial integration with the world. 

Managing Globalization 

What the experience of the crisis demonstrated clearly was the power of globalization.

Globalization is a double edged sword; it opens up incredible opportunities but also poses

immense challenges. India surely benefitted from opening up to the world but had also

incurred costs on that count. The challenge for India, and indeed for all Emerging Market

Economies (EMEs), is really to minimize the costs and maximize the benefits of

globalization. 

Lessons of Crisis 

A lot is being written about how this crisis has been too important to waste, how we should

learn the lessons of the crisis and apply them in a Schumpeterian creative destruction

mode. Some people have, however, questioned the wisdom of drawing lessons even

before the crisis is fully behind us. When Zhou Enlai, former Chinese Prime Minister, was

asked what he thought of the French Revolution, he said it was too early to say. Historians

who take a long view may agree with Zhou Enlai but practical policy makers do not enjoy

that luxury. So, let me use the opportunity of this platform to draw out eight big picture

lessons of the crisis. 

Lesson 1: In a globalizing world, decoupling does not work 

The crisis challenged many of our beliefs, and among the casualties is the decoupling

hypothesis. The decoupling hypothesis, which was intellectually fashionable before the

crisis, held that even if advanced economies went into a downturn, EMEs would not be

affected because of their improved macroeconomic management, robust external

reserves and healthy banking sectors. Yet the crisis affected all EMEs, admittedly to

different extents, bringing into question the validity of the decoupling hypothesis. 

15. Some analysts argue against such an outright dismissal of the decoupling hypothesis

and suggest a more nuanced evaluation. Recent IMF research2 in fact illustrates that the

transmission of distress from advanced economies to EMEs took place in three distinct

phases. The first phase runs from the time early signs of the crisis appeared in mid-2007

till the Lehman collapse in September 2008. During this period, the growth performance of

EMEs outshone that of advanced economies indicating decoupling. The second phase,

starting with the Lehman collapse till the first quarter of 2009 was one of ‘recoupling’ when

advanced economies pulled EMEs too into the downturn. The third phase started in the

second quarter of 2009 when EMEs started recovering from the crisis ahead of advanced

economies suggesting a shift once again to decoupling. 

So, have EMEs decoupled from the advanced economies? The answer has necessarily to

be nuanced. A useful way to visualize decoupling in the wake of the crisis is to distinguish

between ‘trend’ and ‘cycle’ decoupling. ‘Trend’ decoupling is reflected by the widening gap

between the trend rates of growth of EMEs and of advanced economies. This is evidently

owing to the growing weight of domestic factors, mainly consumption, in the EMEs’ growth

process. However, given that there is still significant integration between the two groups of

countries, cycles are still coupled. From a ‘lessons’ perspective, what this means is that

EMEs should focus on strengthening domestic drivers of demand and instituting automatic

stabilizers to buffer themselves against cyclical shocks from advanced economies.

Lesson 2: Global imbalances need to be redressed for the sake of global stability 

No crisis as complex as this has a simple or a single cause. In popular perception, the

collapse of Lehman Brothers in mid-September 2008 will remain marked as the trigger of

the crisis. At one level that may well be true. Indeed, I can visualize future text books in

finance dividing the world into ‘before Lehman’ and ‘after Lehman’. But if we probe

deeper, we will learn that at the heart of the crisis were two root causes - the build up of

global imbalances and developments in the financial markets over the last two decades.

And received wisdom today is that these two root causes are interconnected, and that

financial market developments were in a sense driven by the global imbalances. Global

macro imbalances got built up because of the large savings and current account surpluses

in China and much of Asia in wake of the East Asian Crisis a decade ago. These were

mirrored by large increases in leveraged consumption and current account deficits in the

US. In short, Asia produced and America consumed. Between the US consumption boom

and the Asian savings glut, there is a raging debate on what was the cause and what was

the effect. Regardless, the bottom line is that one was simply the mirror of the other and

the two share a symbiotic relationship. 

And how did these imbalances build up? The answer lies in globalization - globalization of

trade, of labour and of finance. The world witnessed a phenomenal expansion in global

trade over the last three decades; global trade as a proportion of global GDP increased

from 34 per cent in 1980 to 51 per cent in 2007, just before the crisis hit us.3 Globalization

of finance was even more prolific, especially over the last decade. For the world taken

together, the ratio of foreign assets and foreign liabilities to GDP rose from 133 per cent in

1994 to over 300 per cent in 2008.4 The impact of globalization of labour was by far more

striking. Emerging Asia added nearly three billion to the world’s pool of labour as it

integrated with the rest of the world over the last two decades thus hugely improving its

comparative advantage. Together, the three dimensions of globalization - trade, finance

and labour - helped emerging Asia multiply by a factor its exports to the advanced

economies. The result was large and persistent current account surpluses in the Asian

economies and corresponding current account deficits in the importing advanced

economies.

The chain of causation from these imbalances to the financial crisis is interesting although

not obvious. As Asia accumulated savings and simultaneously maintained competitive

exchange rates, the savings turned into central bank reserves. Central banks, in turn,

invested these savings not in any large, diversified portfolio but in government bonds of

the advanced economies. This in turn drove down risk free real interest rates to historically

low levels triggering phenomenal credit expansion and dropping of the guard on credit

standards, erosion of credit quality and search for yield, all of which combined to brew the

crisis to its explosive dimensions. 

It is argued that if the US Fed had refused to supply the incipient demand for liquidity in

the late 1990s and early 2000s, higher interest rates could have prevented the borrowing

boom and the follow on widespread deterioration of financial standards and the

subsequent melt down. But this also would have meant lower growth in the US and the

rest of the world. The short point is that even as macroeconomic imbalances should not

be allowed to proliferate, it is necessary to balance the need for global economic growth

against the disruptions which follow the unwinding of such imbalances. 

So, where do we go from here? The G-20 is now actively engaged in the challenging task

of redressing structural imbalances in the global economy. At their Pittsburgh Summit in

September 2009, the G-20 leaders agreed on a ‘Framework for Strong, Sustainable and

Balanced Growth’ and committed to a ‘Mutual Assessment Process’ (MAP) which is a

peer review of each country’s progress towards meeting the shared objectives underlying

the framework. Recognizing that global imbalances which had narrowed during the crisis

started widening again in the exit phase, driven mainly by the uneven recovery around the

world, the G-20 resolved that promoting external sustainability should be the focus of the

next stage of the MAP and entrusted this task to a Framework Working Group (FWG).

India is privileged in co-chairing, together with Canada, the FWG for managing the task of

developing the indicative guidelines for assessing and addressing persistent global

imbalances. The FWG has adopted a two-stage approach: a limited number of indicators

will guide the initial assessment process, while a broader set - including qualitative ones -

will be used in the second stage to inform an in-depth external sustainability assessment.

The success of this initiative is critical for redressing the problem of global imbalances. 

Lesson 3: Global problems require global coordination 

The crisis demonstrated the interconnectedness of the world through trade, finance and

confidence channels. What originated as a bubble in the US housing sector soon

snowballed into a crisis and radiated in two different ways - first, in a geographical sense,

from the US to other advanced economies and then to the rest of the world; and second,

in a sectoral sense, from housing to all productive sectors. Even as each country started

dousing the fires on its own, it was soon realized that the effort was in vain and that global

coordination is a necessary condition for managing a global crisis. 

From that perspective, the London G-20 Summit in April 2009 will go down in history as a

clear turning point when the leaders of the world showed extraordinary determination and

unity. Sure, there were differences, but they were debated and discussed and

compromises were made without eroding the end goal - that is to end the crisis. This

resulted in an agreed package of measures having both domestic and international

components but all of them to be implemented in coordination, and indeed in

synchronization where necessary. The entire range of crisis response measures -

accommodative monetary stance, fiscal stimulus, debt and deposit guarantees, capital

injection, asset purchases, currency swaps - all derived in varying degrees from the G-20

package. 

Now, as we exit from the crisis, there are concerns and apprehensions that the vaunted

unity that the G-20 had shown during the crisis is dissipating. But might it also be a tad

unrealistic to expect the degree of unity shown in managing the crisis to also be shown in

addressing ‘peace time’ issues? The focus of G-20 now is to flesh out the agenda for

economic and financial restructuring at national and international levels so that the world

can prevent, or at any rate minimize the probability of, another crisis of the type we have

gone through. Differences of opinion, when the agenda is so broad, are not only to be

expected, but may in fact have a positive influence in determining what is collectively

optimal. 

The common thread running through the entire G-20 agenda is the need for global

cooperation in solving our most pressing problems of today. The crisis has taught us that

no country can be an island and that economic and financial disruptions anywhere can

cause ripples, if not waves, everywhere. The crisis also taught us that given the

deepening integration of countries into the global economic and financial system,

uncoordinated responses would lead to worse outcomes for everyone.

The global problems we are facing today are complex and not amenable to easy

solutions. Many of them require significant and often painful adjustments at the national

level. Because short-term national interests conflict with globally optimal solutions, it is

quite understandable that there are differences of views within the G-20. We must

remember though that in a world divided by nation-states, there is no natural constituency

for the global economy. At the same time, the global crisis has shown that the global

economy as an entity is more important than ever and that global coordination to solve

global problems is critical.

Lesson 4: Price stability and macroeconomic stability do not guarantee financial

stability 

The years before the crisis were characterized by steady growth and low and stable

inflation in advanced economies and rapid growth and development in EMEs. The so

called ‘Great Moderation’ prompted a growing consensus around the view that the best

practice in monetary policy framework is the pursuit of a single target (price stability) by

means of a single instrument (short term policy interest rate). The success of the Great

Moderation fortified the argument that price stability is a necessary and (a nearly)

sufficient condition for economic growth and for financial stability. Central bankers

believed they had discovered the holy grail. 

That sense of triumph was deflated by the unravelling of the crisis. As the global financial

sector came to the brink of a collapse even in the midst of a period of extraordinary price

stability, it became clear that price stability does not necessarily guarantee financial

stability. 

Indeed the experience of the crisis has prompted an even stronger assertion - that there is

a trade off between price stability and financial stability, and that the more successful a

central bank is with price stability, the more likely it is to imperil financial stability. The

argument goes as follows. The extended period of steady growth and low and stable

inflation during the Great Moderation lulled central banks into complacency. Only with the

benefit of hindsight is it now clear that the prolonged period of price stability blindsided

policy makers to the cancer of financial instability growing in the underbelly. 

A dominant issue in the wake of the crisis has been the role of central banks in preventing

asset price bubbles. The monetary stance of studied indifference to asset price inflation

stemmed from the famous Greenspan orthodoxy which can be summarized as follows.

First, asset price bubbles are hard to identify on a real time basis, and the fundamental

factors that drive asset prices are not directly observable. A central bank should not

therefore second guess the market. Second, monetary policy is too blunt an instrument to

counteract asset price booms. And third, central banks can ‘clean up the mess’ after the

bubble bursts. The surmise therefore was that the cost-benefit calculus of a more activist

monetary stance of “leaning against the wind” was clearly negative. 

The crisis has dented the credibility of the Greenspan orthodoxy. The emerging view post-

crisis is that preventing an asset price build up should be within the remit of a central

bank. Opinion is divided, however, on whether central banks should prevent asset bubbles

through monetary policy action or through regulatory action. On one side, there is a purist

view questioning the efficacy of resorting to monetary tightening to check speculative

bubbles. Opposed to this is the argument that a necessary condition for speculative

excesses is abundant liquidity, and that controlling liquidity which is within the remit of

monetary policy should be the first line of defence against ‘irrational exuberance’. No

matter how this debate settles, a clear, if also disquieting lesson of the crisis is that price

stability and macroeconomic stability do not guarantee financial stability.

Lesson 5: Micro prudential regulation and supervision need to be supplemented by macro

prudential oversight The crisis has clearly demonstrated that a collection of healthy

financial institutions does not necessarily make a healthy financial sector. This is because

there are complex interconnections in the financial sector across banks, other financial

institutions, markets, and geographies and a problem in any part of the system can rapidly

transmit through the system, cascade across layers and develop into a crisis. Systemic

safety can also be jeopardized by procyclicality. As the crisis demonstrated, there is a

strong collective tendency among financial entities to overexpose themselves to the same

type of risk during an upturn and become overly risk averse during a downturn.

Importantly, individual institutions, and indeed microprudential oversight too, fail to take

into account the spillover impact of the actions of the rest of the financial system on them.

This raises the paradox of the fallacy of composition. What is good from an individual

institution’s point of view can become disruptive, and even destructive, if all institutions act

in a similar way. 

That a bubble that started in the US housing sector snowballed into a major crisis is a

vivid illustration of the risks arising from the interconnectedness of the global financial

system and the risks of procyclicality. The lesson clearly is that as much as

microprudential supervision is necessary, it needs to be supplemented by macroprudential

oversight to prevent systemic risk building up. 

Macroprudential oversight requires both analytical sophistication and good judgement.

Regulators need to be able to analyze the nature and extent of risk and be able to make

informed judgement on when and what type of countercyclical buffers they must impose.

Both type I and type II errors - imposing buffers too early out of excessive caution or

delaying imposition of buffers till it is too late to avert an implosion - can be costly in

macroeconomic terms.

Lesson 6: Capital controls are not only unavoidable, but advisable in certain

circumstances

As EMEs started recovering from the crisis earlier than advanced economies, they also

began exiting from the crisis driven accommodative monetary stance ahead of the

advanced economies. This multi-speed recovery and the consequent differential exit have

triggered speculative capital flows into EMEs resulting in currency appreciation unrelated

to economic fundamentals. This poses complex policy management challenges. Currency

appreciation erodes export competitiveness. Intervention in the forex market to prevent

appreciation entails costs. If the resultant liquidity is left unsterilized, it could potentially

fuel inflationary pressures. If the resultant liquidity is sterilized, it puts upward pressure on

interest rates which not only hurts competitiveness, but also, in a curious variation of the

Dutch disease, encourages further flows. 

Capital inflows far in excess of a country’s absorptive capacity could pose problems other

than currency appreciation. Speculative flows on the look out for quick returns can

potentially lead to asset price build up. Also, in the current juncture, one of the driving

forces behind hardening commodity prices in recent months is the excess liquidity in the

global system which has possibly triggered financialization of commodities. 

Quite unsurprisingly, the old debate about whether capital controls are a legitimate policy

option has resurfaced again. This debate has traditionally frowned on moderation. Critics

maintain that capital controls are distortionary, largely ineffective, difficult to implement,

easy to evade and that they entail negative externalities. On the other hand, supporters of

capital controls argue that controls preserve monetary policy autonomy, save sterilization

costs and tilt the composition of foreign liabilities toward long-term maturities and ensure

macroeconomic and financial stability.

The debate on capital controls resurfaced after the Asian crisis of the mid-1990s,

especially as one of the root causes of the crisis was the open capital accounts of the East

Asian economies. However, as the Asian economies recovered in quick order, regained

their export competitiveness and started building up external reserves for self-insurance,

the debate was not pursued to its logical conclusion, and the orthodoxy that capital

controls are undesirable persisted.

The recent crisis has, however, been a clear turning point in the worldview on capital

controls. Notably, the IMF put out a policy note in February 2010 that reversed its long

held orthodoxy that capital controls are inadvisable always and everywhere. The note has

referred to certain ‘circumstances in which capital controls can be a legitimate component

of the policy response to surges in capital flows’. The World Bank and the Asian

Development Bank Outlook - 2010 too echoed these views. 

A useful way of assessing the capital account management of an EME is to draw a

distinction between ‘strategic’ and ‘tactical’ controls. Strategic controls would involve

defining a long term policy indicating the inter se preference, or the hierarchy of

preferences as it were, across different types of capital flows and the controls that will be

deployed to operationalize that policy. Strategic controls give stakeholders a clear and

predictable framework of rules to make informed choices and to manage risks, and they

give policy makers sufficient levers to calibrate the flows; in essence they define the

boundaries of the playing field. Tactical controls, on the other hand, introduce barriers into

the playing field itself. They are deployed opportunistically to stem a surge in inflows or

outflows. By their very nature, tactical controls introduce a new element of uncertainty into

the calculations of both domestic and foreign stakeholders. India’s approach to capital

account management is typically strategic. For example, we have an explicitly expressed

preference for long term over short term flows and equity over debt flows, and we have

used both price based and quantity based controls to operationalize this policy. We have,

of course, periodically recalibrated elements of the strategy in pursuit of capital account

liberalization. An important lesson from India’s experience is that even with relatively large

swings in capital flows during the crisis, the pressure to use tactical controls did not build

up because the strategic controls provided automatic buffers. 

Even as we debate what EMEs should or should not do to manage excess capital flows,

we should remember that to the extent that lumpy and volatile flows are a spillover from

policy choices of advanced economies, managing capital flows should not be treated as

an exclusive problem of emerging market economies. How this burden is to be shared

raises both intellectual and practical challenges. The intellectual challenge is to build a

better understanding of the forces driving capital flows, what type of policy instruments,

including capital controls, work and in what situations. The practical challenge is the need

to reach a shared understanding on a framework for cross border spillovers of domestic

policies in capital-originating countries, and the gamut of policy responses by capital

receiving countries. 

Lesson 7: Economics is not physics 

A few months into the crisis, the Queen happened to be at the London School of

Economics and asked a perfectly sensible question: ‘how come none of the economists

saw the crisis coming’. The Queen’s question resonated with people around the world who

felt that they had been let down by economics and economists. As economists saw their

profession discredited and their reputations dented, the economic crisis soon turned into a

crisis in economics.

What went wrong with economics? It now seems that by far the most egregious fault of

economics, one that led it astray, has been to project it like an exact science. The charge

is that economists suffered from ‘physics envy’ which led them to formulate elegant

theories and models - using sophisticated mathematics with impressive quantitative

finesse - deluding themselves and the world at large that their models have more

exactitude than they actually did. Admittedly, in a limited sense there may be some

parallels between economics and physics. But similarity in a few laws does not mean

similarity in the basic nature of the academic discipline. The fundamental difference

between physics and economics is that physics deals with the physical universe which is

governed by immutable laws, beyond the pale of human behaviour. Economics, in

contrast, is a social science whose laws are influenced by human behaviour. Simply put, I

cannot change the mass of an electron no matter how I behave but I can change the price

of a derivative by my behaviour. 

The laws of physics are universal in space and time. The laws of economics are very

much a function of the context. Going back to the earlier example, the mass of an electron

does not change whether we are in the world of Newton or of Einstein. But in the world of

economics, how firms, households and governments behave is altered by the reigning

economic ideology of the time. To give another example, there is nothing absolute, for

example, about savings being equal to investment or supply equalling demand as

maintained by classical economics but there is something absolute about energy lost

being equal to energy gained as enunciated by classical physics. 

In natural sciences, progress is a two way street. It can run from empirical findings to

theory or the other way round. The famous Michelson-Morley experiment that found that

the velocity of light is constant led to the theory of relativity - an example of progression

from practice to theory. In the reverse direction, the ferocious search now under way for

the Higgs Boson - the God particle - which has been predicted by quantum theory is an

example of traversing from theory to practice. In economics, on the other hand, where the

human dimension is paramount, the progression has necessarily to be one way, from

empirical finding to theory. There is a joke that if something works in practice, economists

run to see if it works in theory. Actually, I don’t see the joke; that is indeed the way it

should be.

Karl Popper, by far the most influential philosopher of science of the twentieth century,

propounded that a good theory is one that gives rise to falsifiable hypotheses. By this

measure, Einstein’s General Theory was a good theory as it led to the hypothesis about

the curvature of space under the force of gravity which indeed was verified by scientists

from observations made during a solar eclipse from the West African islands of Sao Tome

and Principe. Economics on the other hand cannot stand the scrutiny of the falsifiable

hypothesis test since empirical results in economics are a function of the context. 

The short point is that economics cannot lay claim to the immutability, universality,

precision and exactitude of physics. Take the recent financial crisis. It is not as if no one

saw the pressures building up. There were a respectable number of economists who

warned of the perilous consequences of the build-up of global imbalances, said that this

was simply unsustainable and predicted a currency collapse. In the event, we did have the

system imploding but not as a currency collapse but as a melt down of the financial

system. 

We will be better able to safeguard financial stability both at global and national levels if

we remember that economics is a social science and real world outcomes are influenced

at a fundamental level by human behaviour. 

Lesson 8: 

Having a sense of economic history is important to prevent and resolve financial crises Let

me finish with the last lesson that is on a larger canvas - that having a sense of economic

history is important to prevent and to resolve financial crises. In their painstakingly

researched book, This Time is Different: Eight Centuries of Financial Folly, Kenneth

Rogoff and Carmen Reinhart argue that every time a crisis occurs and experts are

confronted with the question of why they could not, based on past experience, see it

coming, they would argue that past experience was no guide as circumstances had

changed. Yet this ‘this time is different’ argument does not hold. Reinhart and Rogoff put

forward impressive evidence showing that over eight hundred years, all financial crises

can be traced to the same fundamental causes as if we learnt nothing from one crisis to

another. If only teaching in economics had included a study of economic history, perhaps

we can avoid repeating history, never mind as a farce or a tragedy. 

Changing Inflation Dynamics in India

Speech by Deepak Mohanty, Executive Director, Reserve Bank of India, delivered at the Motilal Nehru National Institute of Technology (MNNIT), Allahabad on 13th August 2011

The headline wholesale price index (WPI) inflation averaged 9.6 per cent in 2010-11 as

compared with 5.3 per cent per annum in the previous decade. Similarly, the average

consumer price inflation, measured by the consumer price index for industrial workers

(CPI-IW), was even higher at 10.5 per cent in 2010-11 as compared with 5.9 per cent per

annum in the previous decade. Moreover, this elevated level of inflation also persisted

through the first quarter of 2011-12. In response to inflationary pressures, the Reserve

Bank has raised the policy repo rate 11 times bringing it up from a low of 4.75 per cent in

March 2010 to 8.00 per cent by July 2011. It is expected that inflation should come down

towards the later part of this year. 

Why has inflation been so high and persisted for so long? This is the theme of my talk

today. In my presentation, I propose to address the following questions: Is India an outlier

among major countries in terms of recent inflation performance? Has the inflation process

changed? What are the causal factors – global and domestic as well as supply and

demand? I will conclude with some thoughts on managing the inflation dynamics on the

way forward.

Is India an outlier in the inflation performance among major countries? 

It is important to appreciate the global backdrop in which we are experiencing a

resurgence of inflation now. In the last decade, inflation was low, both in advanced

countries as well as in emerging and developing economies till the global financial crisis

unfolded. Consequently, global economy got into a recession and global output declined

by 0.5 per cent in 2009. However, global output growth rebounded to 5.0 per cent in 2010.

As the global economy recovered from the worst effect of the global financial crisis,

inflation picked up in emerging and developing economies. This was because the global

recovery was largely driven by emerging market economies (EMEs) what was termed as a

two-speed recovery – a faster growth in EMEs accompanied by a slower growth in

advanced economies. As output gaps closed, there was increasing inflationary pressure in

EMEs, particularly in Asia. According to the International Monetary Fund (IMF), consumer

price inflation in developing Asia almost doubled from 3.1 per cent in 2009 to 6.0 per cent

in 2010 and is projected to be around the same level in 2011. Latest data suggest that

inflation in rapidly growing BRICS remains elevated.

 

Global factors 

With recovery, global commodity prices rebounded given the higher level of commodity

intensity of growth in EMEs. 

There was also an element of financialisation of commodities given the global excess

liquidity. Crop loss due to adverse weather conditions in many parts in the world coupled

with increased diversion of foodgrains towards biofuel exerted added pressure on global

food prices. Thus, global commodity prices including food prices rose sharply. For

example, the IMF Commodities Index rose by 24 per cent in 2010 on top of an increase of

43 per cent in 2009. It further rose by 20 per cent in December 2010–April 2011, before

moderating by about 2 per cent during June–July 2011. Notwithstanding some softening in

the last few months, it is important to recognize that the current level of commodity prices

is almost double of that two and half years ago. 

 

The increase in commodity prices has affected different countries differently depending on

whether they are net importers or exporters of commodities. India being a net importer of

commodities, the adverse impact on domestic inflation has been stronger. Inflation

increased in developing and emerging economies with a combination of closing of output

gaps and sharp increase in commodity prices. In this regard, India is not an exception. But

the level of inflation in India has been high compared to those in many EMEs. This

suggests that apart from global factors, domestic factors have had a significant influence

on the inflation trajectory in India. 

Has the inflation process changed? 

In India, we have multiple price indices – 6 consumer price indices and a wholesale price

index (WPI). While the Reserve Bank examines all the price indices both at aggregate and

disaggregated levels, changes in the WPI is taken as the headline inflation for policy

articulation. Within the WPI, non-food manufactured products inflation is considered the

core inflation3. 

Going by any measure of inflation, India comes out as a moderate inflation country,

though occasionally inflation crossed the double digit mark. The historical average long-

term inflation rate was around 7.5 per cent. But significantly, there was substantial

moderation in inflation in the 2000s. The annual average inflation rate was around 5.5 per

cent irrespective of the inflation indices taken, whether WPI or CPI. This raises the

question: did the inflation dynamics change in the 2000s? Monthly WPI inflation data

suggest that there was a structural break around the mid-2000s with the inflation rate

during the latter half being higher. 

Average WPI inflation increased from 5.2 per cent in the first half of 2000s to 5.5 per cent

in the second half. This was largely contributed by primary food inflation. In fact, the core

non-food manufactured products inflation moderated from 4.2 per cent to 3.9 per cent.

What did cause the structural break in the mid-2000s? A disaggregated assessment

suggests that protein items largely contributed to this change in trend. 

Not only did the average food prices rise during the second half of 2000s but they were

more volatile.

Structural food inflation 

Food prices being subject to supply shocks tend to be volatile. For example, the

performance of monsoon has a significant bearing on the trend of domestic foodgrain

prices. Spikes in food prices normally subside as they are transitory. However, empirical

analysis suggests that inflation in protein items has become persistent. This suggests that

protein inflation has assumed a structural character and is partly driven by demand

factors. Within the protein group, persistence was lower for pulses as well as ‘egg, meat

and fish’, but it was markedly higher for milk. Thus, the persistence of protein inflation has

changed the inflation dynamics in the latter half of the 2000s. Increase in demand for

protein appears to be an inevitable consequence of rising affluence (Gokarn, 2010). This

process was further accentuated by renewed global food price shock during 2010-11.

Among the processed food items, the persistence of inflation for edible oils was high. 

International price pass-through 

While the persistence of inflation on protein items has increased, it still has a relatively

smaller share in overall WPI inflation. What matters more for the overall inflation trajectory

is the non-food manufactured products inflation which has a higher weight of 55.0 per cent

in the WPI. It averaged 4.0 per cent in the 2000s with a moderation in the second half.

Subsequently, there has been a sharp increase in 2010-11 and 2011-12 so far. The non-

food manufactured products inflation shows a major structural break towards the middle of

2009-10 around the time the global commodity prices rebounded. This has also raised the

question: is the non-food manufactured products inflation an imported inflation? 

Further, analysis suggests that industrial raw material prices also showed a structural

break in early 2009 and the average price increase has been high and volatile. Moreover,

the pass-through from non-food international commodity prices to domestic raw material

prices has increased particularly in the recent years reflecting growing interconnectedness

of domestic and global commodity markets.

This trend is also corroborated by corporate finance data which show that the share of raw

material costs as a percentage of both expenditure and sales has been rising.

Demand factors 

Price pressures can emanate from the supply side but it will be difficult to sustain it without

rising demand. In this context, important information on recent trend in expenditure pattern

and wages is available from the 66th round of NSSO consumption survey and Labour

Bureau. The average annual monthly per capita expenditure has increased at a faster

pace in the second half of 2000s as compared with the first half, both in nominal and real

terms.

While the share of per-capita expenditure in food has gone down, as could be expected

from rise in income levels, both in rural and urban centers, the dietary pattern has shifted

in favour of protein items whose share has gone up markedly in the second half of 2000s.

The sharp increase in rural consumption of protein seems to have been sustained by

increase in wage rates of the unskilled rural labourers both in nominal and real terms.

In the formal sector, company finance data suggest that the wage bill has risen at a faster

rate since the middle of 2009-10 .

As per the NSSO surveys (61st round and 66th round), nominal wage rates of skilled

workers in both rural and urban areas increased much faster in the second half of the

2000s than in the first half. While the real wage rates declined in the first half, it increased

significantly in the second half of 2000s.

There has also been added stimulus from the crisis driven fiscal expansion as the fiscal

consolidation process was reversed in 2008-09 and continued through 2009-10.

These evidences taken together suggest that sustained rise in real wages both in the

formal and informal sectors in the recent years contributed to increase in demand.

Conclusions 

The recent surge in inflation has become more generalised. Food inflation, prone to

supply shocks, is also assuming a structural character given the change in the dietary

habits and high demand, in absence of adequate supply response. Sharp increase in non-

food manufactured product inflation suggests that producers are able to pass on the cost

increases, given higher demand. While the persistence in non-food manufactured

products inflation is high, the persistence of food inflation has increased making the

overall inflation rate sticky. The current inflation process, therefore, is an amalgam of both

supply constraints and demand pressures. 

Prolonged high inflation even if originating from supply side would give rise to increased

inflation expectations and cause general prices to rise. Poorly anchored inflation

expectations make long-term financial planning more complex with potential adverse

effects on investment and growth. Moreover, high inflation is the most regressive form of

taxation, particularly on the poor. It is, therefore, important to contain inflation and keep

inflation expectations anchored so that consumers do not mark up their long-run inflation

expectations by reacting to a short period of higher-than-expected inflation. 

Keeping in view the costs of inflation and the fact that high inflation is inimical to sustained

growth, the medium-term objective of the Reserve Bank is to bring down inflation to 3.0

per cent consistent with India’s broader integration with the global economy. In this

direction, monetary policy aims to contain perceptions of inflation in the range of 4.0 – 4.5

per cent with a particular focus on the behaviour of the non-food manufacturing

component, which is considered as core inflation given its high degree of persistence.

Going forward, both global and domestic factors will shape the inflation outlook. With

increasing global integration, global commodity prices are having an increasingly

significant influence on domestic prices. It is expected that global commodity prices will

peak in 2011 which should provide some relief to domestic inflation scenario. 

The Reserve Bank signaled the reversal from its crisis driven expansionary monetary

policy stance in October 2009. Since then, the cash reserve ratio (CRR) has been raised

by 100 basis points. The policy repo rate has been raised by a cumulative 325 basis

points. As the liquidity in the system transited from surplus to deficit, the effective

tightening has been of the order of 475 basis points. Thus, the cumulative monetary policy

action would have the desired impact on inflation.

While inflation is expected to moderate towards the later part of the year reflecting

monetary tightening and likely softening of global commodity prices, fiscal policy needs to

be supportive in containing aggregate demand. In addition, there is an urgent need to

address the issue of structural supply constraints, particularly in agriculture, so that these

do not become binding constraints in the long-run hampering the task of inflation

management.

Global Energy Security

I. Introduction:

OPEC :

A.Origin : 

The Organisation of Petroleum Exporting Countries (OPEC) is a permanent

intergovernmental organisation which was formed at the Baghdad Conference of

September 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. 

B.Members : 

Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, United Arab

Emirates, Algeria and Nigeria. Saudi Arabia is the biggest producer of oil and the

dominant partner in the cartel.

C.40% Share in Global Oil Supplies :

The OPEC supplies over 40 per cent of the world|s oil need. Between them the OPEC

members have around three-fourths of the World|s proven oil reserves. Excluding Iraq

OPEC has a total production capacity of 28.7 million barrels per day (Mb/d). The global

demand for oil is around 80 Mb/d.

D.OPEC's Control of Global Oil Prices : 

Controlling Oil Prices by Restricting Production: Analysts point out that OPEC tries to

control global oil prices by restricting the production. When the cartel feels that the oil

prices are low, the Oil Ministers of OPEC nations impose production ceilings. Lower

supplies send oil prices up. In 1973, OPEC|s squeeze on supply of oil quadrupled oil

prices almost overnight.

E.OPEC's Price Band Mechanism : 

The OPEC introduced a price band mechanism that targeted a price range of $22-28 per

barrel for the OPEC basket, with automatic adjustments to quotas if the range was

breached. Over the last one year, the OPEC basket price has remained well above its

stated price limits.

F.OPEC a Divided House : 

OPEC has been a divided house with a big gap between advocates of production cuts and

higher prices and moderates advocating high production and low prices.

G.Limitations of OPEC|s Control Exposed : 

The spurt in global oil prices exposed the limitations of the OPEC. Several members of the

OPEC could barely manage their quotas, let alone increase production to stabilise the

spurt in the oil prices.

2. Non-OPEC Oil suppliers :

 

A.Countries with Substantial Reserves : 

Russia, Mexico, Angola, Oman, Norway and Britain.

B.Russia the Largest Non-OPEC Oil Producer : 

Since 1997, when Russian crude production began to pick up and its exports into global markets began

picking up, non-OPEC producers have made inroads into OPEC|s global market share. Russia is one of the

largest producers of oil outside OPEC in the world.

3. Spurt in International Oil Prices :

A.Large Increase in International Crude Oil Prices : 

There has been a sharp increase in the prices of crude oil in the last few years. Annual average crude oil

prices have increased from $21.74 in 2002 to around $ 72 in 2007. Currently the price of crude oil is

hovering around $120 per barrel.

B.Reasons for Increase in the Oil Prices :

a.Increase in Demand from the US and China : 

The major factors behind the increase in global demand for oil was the increase in consumption levels in

the US and China. The booming economy of China was the key factor for increased consumption of oil by

China. 

b.Weak Dollar : 

Analysts point out that oil prices are benchmarked in US dollars which has been depreciating. The fall in

the value of dollar robbed it of its purchasing power which encouraged the OPEC to take a relaxed view

about the situation as the cartel|s revenues are pegged to the dollar. 

c.OPEC|s Refusal to Increase Production : 

One of the reasons for increase of crude oil prices in 2007 was the refusal by OPEC to increase production

to meet the rising demand.

d.Speculation : 

Analysts point out that speculators made big bets on the future delivery of oil which was one of the causes

of the sharp increase in global oil prices.

e.Investment Flows into Oil : 

Analysts point out that the flow of investments from pension and hedge funds into commodities including

oil have increased leading to the surge in crude oil prices.

f.Concern over Supply Disruptions from Iran : 

Oil consumers are concerned about the supply disruptions from Iran which is locked in a confrontation with

the West over its nuclear programme.

g.Poor Supply from Iraq : 

The oil industry in Iraq is still struggling to reach peak production after decades of war, sanctions and

under investment.

h.Cut in Supply from Nigeria :

Crude oil production has been cut in Nigeria since February 2006 due to militant attacks on the country|s

oil industry.

4. Global Economic Impact of the Rise in Oil Prices :

A.Increase in Inflationary Pressures : 

According to analysts the increase in global oil prices added to the inflationary pressures in various

countries.

B.Increase in Interest Rates : 

Economists point out that a mismatch between global oil price and domestic selling price can push up the

subsidy from the government and public debt which in turn can put pressure on interest rates and reduce

the capital available to more productive borrowers.

C.Slowdown in Economic Growth : 

Increase in oil prices coupled with inflationary pressures will slowdown the economic growth in these

countries. The World Bank has already revised the economic growth projections in these countries by

reducing one percentage point.

D.Not a Full-fledged Oil Crisis : 

Analysts point out that the current rise in oil prices is not a full-fledged oil crisis on the lines of the 1970s

and 1980s. The reasons being the developed countries are now less dependent on oil than they were in

1979. Adjusted for inflation the crude oil prices are still below the $101.70 peak reached in 1980, a year

after the Iranian revolution.

5. OPEC to Keep the Crude Output at Current Levels:

Despite pressure from the US and other countries to increase production, the OPEC special meeting in

Vienna in February 2008 decided to keep the crude oil production at the current levels of around 30 million

barrels a day.

6. Conclusion :

A.Equilibrium between Demand and Supply Key to Price Stabilisation : 

Analysts point out that global oil prices are affected by long-term factors one of which is the equilibrium

between supply and demand. Analysts point out that the oil demand has not been responsive to prices.

B.Stabilising the Oil Prices is in the Interest of OPEC :

Finally, analysts point out that it is in the interest of the OPEC countries to keep the global oil prices at

manageable levels as higher prices will push the consuming countries into recession, leading to reduced

demand for oil and a price crash.

Disaster Management

I. Introduction: 

1. India's Vulnerability to Natural Disasters: 

A.Unique Geo-Climatic Conditions: 

Experts point out that the unique geo-climatic conditions have made the Indian sub-continent most

vulnerable to natural disasters. Droughts, floods, cyclones, landslides and earthquakes have been

recurrent phenomena.

B.Major Part of India|s Landmass Vulnerable to Natural Disasters: 

About 54 per cent of India|s landmass was vulnerable to earthquakes, 40 million hectares to floods, 8,000

km of the country|s coastline to cyclones and 68 per cent of its geographic area was vulnerable to drought.

C.Highest Recorded Rainfall in Mumbai and other Cities: 

In July/August 2005, Mumbai received the highest recorded rainfall in 95 years. The deluge led to the total

collapse of almost all essential services. Much of the damage was due to the failure of the drainage system

and the flooding of areas. Similarly, unprecedented heavy rainfall was recorded in the southern parts of

India in Andhra Pradesh, Karnataka and Tamil Nadu, cities like Bangalore and Chennai also came to a

standstill.

D.Indiscriminate Construction of Buildings Cause for Flooding of Cities:

Experts feel that the main reason behind the flooding of cities is due to the indiscriminate construction of

buildings blocking the water channels.

E.Each Year 2 Per Cent of the GDP is Lost in Disaster Management: 

India|s Defence Minister Pranab Mukherjee pointed out that each year the Government is losing 2 per cent

of the GDP (Gross Domestic Product) in disaster management in the form of relief and rehabilitation

package. In order to overcome this loss, the new Disaster Management and Mitigation Policy of the

Government will lay stress on how the future disasters can be prevented from happening through proper

warning systems.

2. Natural Disasters Responsible for Displacing More People Than Wars: 

According to a study conducted by the Institute of Environment and Human Security, natural disasters

displace more people than wars. More than 10 million people are displaced each year by natural disasters.

Victims of natural disasters migrate to other parts of the same country or to other countries. It is estimated

that by the year 2015, the world could have up to 50 million environmental refugees.

3. Disaster Management:

Experts point out that disaster management is like a military operation where speed, accuracy,

technological sophistication, communication and motivation of the people involved are very important.

Therefore combat preparedness has to be there.

4. Requirements for Coping with Disasters: 

A.Commitment by Administrative Members at All Levels:

Human and functional commitments by administration members at all levels to meet public requirements.

B.Advance Warning Systems: 

Competent and technically effective advance warning systems.

C.Permanent Institutions to Deal with Disaster Management: 

Permanent institutions and mechanisms to deal with disaster management.

D.Comprehensive Operational Procedures: 

Comprehensive procedures and operational steps to deal with natural disasters similar to the operational

procedures to deal with war, conflict or insurgency situations.

5. Armed Forces are Central to Disaster Management: 

A.Prime Agency for Disaster Relief: 

Analysts point out that the Armed Forces are central to any disaster management organisation. The Armed

Forces serve as the primary agency for disaster relief in the form of men, material and specialist

equipment. Apart from a cadre of disciplined personnel, the Army has the organisation, the geographical

spread and the equipment to handle natural disasters.

B.Assistance by the Armed Forces Should be Requisitioned Only for Special Purposes: 

Military analysts, however, point out that assistance by the Armed Forces should be requisitioned only

when it becomes absolutely necessary, and even then only for such special purposes which cannot be

handled by the State Government.

6. Need for a Disaster Management System: 

A.Basics of Disaster Management: 

a. prevention b. damage limitation c. relief and rehabilitation.

B.Well Structured Disaster Management Organisation:

There is need to tackle the natural disasters on a long term as well as short term basis, according to

experts. In order to make disaster management effective the Centre and the States have to coordinate

meaningfully. A well structured Disaster Management Organisation with clearly defined responsibilities is

needed.

II. National Disaster Management Bill 2005: 

1. Bill Passed by the Parliament: 

On December 12, 2005, the Disaster Management Bill was approved by the Parliament with the Lok Sabha

unanimously passing the legislation that has been prepared after the tsunami struck peninsular India on

December 26, 2004.

2. Salient Features of the Bill: 

A. Aim: 

Swiftly tackling natural calamities and man-made disasters. The Bill envisages institutions at Central, State

and local levels, a national institute for disaster management and a national disaster response force.

B. Setting up the National Disaster Management Authority (NDMA): 

Seven-Member Body to Provide Institutional Mechanism to Deal with Natural Disasters: 

In July 2005, Centre constituted the seven-member NDMA under the Chairmanship of the Prime Minister to

provide requisite institutional mechanism to deal with natural as well as man-made calamities, including

chemical, biological or nuclear disasters. Gen. N.C. Vij, the former Chief of the Indian Army was appointed

as the Vice-Chairman of the NDMA.

C.Mandated to Lay Down Plans and Policies for Disaster Management: 

The NDMA has been mandated to lay down plans and policies for disaster management. It will formulate

guidelines to be followed by various central ministries and departments and the states.

D. State and District-Level Disaster Management Agencies: 

The Bill seeks to establish state disaster authorities under the chairmanship of Chief Ministers and district

disaster authorities under the chairmanship of District Magistrates. The zila parishad chairman will be the

co-chairman of the district disaster management authority along with the district Collector.

E. National Disaster Response Force: 

A National Disaster Response Force will be set up to tackle situations arising from different types of

disasters with the state-of-the-art gadgets. The Centre had earmarked eight battalions from the Central

paramilitary forces for this purpose. The States have been asked to make provision for battalions from

their forces.

F. Involving 30 Lakh Representatives from Local Bodies: 

The Union Home Minister Shivraj Patil pointed out that the responsibility for implementing the disaster

management plan would involve 30 lakh representatives from local bodies.

G. Gives Legal Framework for Disaster Management:

Analysts point out that the Bill will change the way disaster management is handled in the country by

giving the exercise a legal framework. So far, disaster management was done through an executive order.

As the National Disaster Management Bill comes into effect, the various agencies do not have to wait for

an executive order to act since they will have a legally laid down procedure to follow.

H. Proposes to Create two Separate Corpuses: 

The Bill proposes to create two separate corpuses with two components. While one part will immediately

disburse funds for relief without waiting for sanction, the second will be used to work on long-term disaster

mitigation projects.

I. Provides Legal immunity to Government Officials: 

The Bill provides legal immunity to government officials involved in the disaster management.