Rupee Depreciation – Cause and Effects

What is Happening ?

• Indian Equity Markets are crashing as FIIs are pulling out money from emerging market economies
• China is devaluing its currency
• Global Commodity Markets are slumping
• Oil Markets are crashing because of over supply due to Iran and weak demand due to slow economic progress as both the World (especially China, a big engine of world growth, is slowing down )
• Rupee is depreciating

Gold Schemes and Issues associated with them

What are the gold schemes launched by the Govt?

The govt of India has recently launched three gold schemes as

Gold monetization Schemes

Meaning

1. It aim is to suck out gold from Indian households and use it for productive purposes. Under this scheme, Individual have to put their gold in authorised bank and then will receive interest on Gold deposit. It works likes a fixed deposits. The minimum limit is raw gold (bars, coins, jewellery) equivalent of 30 grams of gold of 995 fineness. There is no maximum limit on it.  The user can deposit their gold for short-term (1-3 years), Medium (5-7 years) and long (12-15 years) terms. All scheduled commercial banks will be eligible for keeping gold deposits. Premature withdrawals can be with some minimum lock-in period and penalty. It will replace the previous Gold scheme launched in 1999

Issues associated with it

1. Cultural Issues: Indian loves their jewellery and pass it on to their future generation as family heritage. They would not like to deposit their  family heritage  to earn interest income. Moreover the when the time to redeem comes, the Gold will be returned to them in standardised bold bars, if they choose to accept payments in terms of Gold rather than money.
2. Interest on Gold: If banks offers sufficiently high interest rate on Gold to attract Gold deposit, People may import Gold and keep it in banks to earn interest income. Unlikely but it can jeopardise the whole gold schemes
3. Liquidity Issues:  Bank in this scheme are allowed to lend Gold to Gold borrowers. But it would be little more difficult for banks to match gold depositors with gold borrowers, so may lead to liquidity issues as Bank may not be able to pay interest accruing on Gold deposits.

Special drawing Rights and Yuan inclusion in IMF SDR basket

What are Special Drawing Rights?

• It is interest-bearing international reserve asset created by the IMF in 1969 to supplement official reserves of member countries
• SDR is allocated to member countries of IMF based on the level of their standing in the IMF which depends on their share in the world economy.
• SDR is neither a currency and nor it can be claimed from the IMF in the form of reserve currency (such as US dollars, Yen, British Pound and Euro). There are no coins or note denominated in SDRs. Instead member countries can exchange SDR among themselves against reserve currency. E.g. If suppose 1 SDR = 2$ then, Country A can give 100 SDRs to Country B and then receive $200 from Country B. SDRs can’t be used to directly purchase goods and services.
• Through this mutual exchange of SDRs, a country can have its holdings of SDRs equal, above or below its allocated amount. It is holding is above its allocation it get interest on the surplus. If it’s holding is below the allocated amount, it pays interest on the shortfall.
• It is unit of account at IMP and is restricted to its members only. Private parties cannot hold SDR.
• IMF lends to any nation to meet its balance of payments on SDRs.
• Till 2009, the amount of SDR was limited to 21.4 billion but due to financial crisis of 2009, its amount was increased upto 204.1 billion to inject more money supply (liquidity) in the global economic system and supplement member countries offical reserve.
• Currently SDR value is determined by the basket of four major currencies. Presently 1 SDR = INR 91.5.
• SDR interest rate is determined by the weighted average of interest rate on the short-term financial instrument in the markets of currencies in the SDR basket.

Seventh Pay Commission Report and Its effect on Indian Economy

What are Central Pay commission do? And what they do?

• Central Pay Commission are constituted once in every 10 years to revise the pay, allowance and pension given to Central govt employees. The present pay commission is the seventh pay commission which has given its report to govt for implementation
• Recommendation of Central Pay Commission are not binding upon the Central Govt. Central Govt may accept or deviate from these recommendations.
• State Govt following on the lines of Central Govt. implements the recommendation of pay commission in their state with some modifications

Present State of Indian Bureaucracy

Entity	Number
Central Govt Employees	47 Lakhs
Central Govt Employees ( including Railways but excluding the armed forces	38.9 Lakhs
Security- related entities ( police and defence civilians)	13.8 Lakhs
Commercial Departhments (Railways and Post)	15 Lakhs
Total Central Employment (excluding security and commercial functions) – CORE OF GOVT.	4.18 lakhs
Central Govt Pensioners	52 Lakhs

• The main reason that govt. is not able to provide with basic services such as health, Sanitation, education, police is due to insufficient manpower. As a comparison with US shows that non-postal Civilian workforce in US was 21.3 lakhs in 2012 while in India, its is 17.96 lakhs in 2014. More stark comparison is reflected in the fact that in India, number of non-postal civilian workforce is was only 139 in 2014 compared to 668 per lakh in US.