22 Dec 2023 : The Indian Express

Editorial 1: IMF’s message

Introduction: Under Article IV of the International Monetary Fund’s articles of agreement, the Fund conducts annual bilateral discussions with members. On Tuesday, it released the annual Article IV country report for India.

What does the report contain?

• It details the views of the IMF staff on various macroeconomic issues and discussions with Indian officials on economic development and policies.
• In this year’s report, two areas warrant closer examination.
  • One, the views on India’s currency regime.
  • And two, the general government debt level.

Currency exchange rate and its type

A currency exchange rate regime refers to the system by which a country's monetary authority manages the value of its currency in relation to other currencies. It essentially determines how the price of one currency fluctuates against another in the foreign exchange market. There are two main types of regime:

1. Fixed (or pegging) regimes:

• In these regimes, the government or central bank actively maintains the exchange rate at a pre-determined level against another currency, a basket of currencies, or even something like gold. This means they intervene in the market by buying or selling their own currency to keep the price within a narrow band.
• Examples: Hong Kong pegging its Dollar to the US Dollar, China keeping the Yuan within a certain range against major currencies.

2. Floating (or flexible) regimes:

• Here, the exchange rate is determined by market forces of supply and demand. This means the price fluctuates freely based on factors like:
  • International trade and investment flows
  • Relative inflation rates between countries
  • Central bank interest rate decisions
  • Political and economic stability
• Example: The US Dollar and the Euro operate under a floating regime.

Additionally, there are hybrid regimes that combine aspects of both fixed and floating systems. They allow for some leeway in the exchange rate while still providing some stability. Examples include adjustable pegs and managed floats.

IMF’s comment on India’s currency exchange regime and RBI’s clarification

• On the issue of the currency, the IMF staff notes that from December 2022 to October 2023, the rupee-dollar rate “moved within a very narrow range”.
• During this period, the Indian rupee had fallen marginally.
• This relative stability, which implies heavy foreign exchange interventions by the Reserve Bank of India, has prompted it to reclassify India’s exchange rate regime from “floating” to “stabilised arrangement” for that period.
• The overall de jure classification, though, has remained “floating”.
• In its response, the RBI has stated that the data has been used selectively, that the IMF staff’s assessment was short-term in nature, and that taking a longer view would prove them wrong.
• The central bank maintained that the rupee is market-determined and that there was “no explicit/implicit target/band”.
• It also maintained that foreign exchange interventions are used only to curb excessive exchange rate volatility.
• Thus, the reclassification was “unjustified” in its view.

What is Debt-to-GDP ratio?

The debt-to-GDP ratio is a key economic indicator that measures a country's (or entity's) total debt as a percentage of its gross domestic product (GDP).

Debt-to-GDP ratio contains:

• Total debt: This includes the combined amount owed by the government, businesses, and households within the country. It can be public debt (owed to government entities) or private debt (owed to individuals or private institutions).
• Gross domestic product (GDP): This is the total market value of all final goods and services produced within a country's borders in a given year. It essentially represents the size of the economy.

Debt-to-GDP ratio tells us:

• How much debt a country has relative to the size of its economy. A higher ratio indicates a larger debt burden compared to the country's ability to generate income.
• The country's ability to manage and repay its debt. A lower ratio generally suggests a more manageable debt level, while a higher ratio could raise concerns about sustainability and potential default risks.
   

IMF’s comment on India’s Debt-to-GDP ratio and India’s response

• The IMF staff has also argued that an “ambitious” path of fiscal consolidation is needed to rebuild buffers and bring down government debt.
• As per its estimates, if shocks, similar to the ones that India has witnessed in the past, were to materialise, the baseline carries the risk that “debt would exceed 100 per cent of GDP in the medium term”.
• In its debt sustainability analysis it has also warned that “long-term risks are high because considerable investment is required to reach India’s climate change mitigation targets.”
• In response, the executive director for India has noted that the risks stemming from sovereign debt are low “as it is predominantly denominated in domestic currency”.
• And that despite several shocks, the general government level “has barely increased” — it was 81 per cent in 2005-06, 84 per cent in 2021-22, and 81 per cent in 2022-23.
   

Conclusion: While both central and state governments have brought down their debt and deficit levels from levels seen during the pandemic, they must continue on the path of consolidation. And on the exchange rate regime RBI’s intervention must not disturb the market equilibrium.

Editorial 2 : Time for caution, again

Introduction: Three COVID-related deaths have been reported from Kerala and two from Karnataka, though their connection with the JN.1 hasn’t yet been established. The government has rightly advised caution though it has also assured that the situation is by no means worrying.

Covid-19 disease

• Cause: Infectious disease caused by the SARS-CoV-2 virus.
• Symptoms: Most cases are mild or moderate, with fever, cough, fatigue, and respiratory issues. Severe cases can occur, especially in older adults and those with underlying health conditions.
• Prevention:
  • Maintain physical distancing (at least 1 meter).
  • Wear a properly fitted mask.
  • Wash hands frequently or use alcohol-based sanitizer.
  • Get vaccinated and follow local guidelines.
• Transmission: Spreads through respiratory droplets and aerosols from coughs, sneezes, talk, singing, or breathing.
• Additional measures: Practice respiratory etiquette (coughing into elbow) and self-isolate if unwell.

Why there are so many variants of Covid-19 virus?

• Viruses are strips of genetic material and some other molecules.
• Strictly speaking, they never die and even when they are benign, these microbes are at work, infecting people.
• That’s why experts have maintained that the Covid virus will never go away — new variants and sub-variants that escape the protection offered by vaccines will emerge.
• That’s what seems to be happening in India and some other parts of the world which have seen an uptick of Covid cases for about a week.
• The rise in infections has largely been driven by a new sub-variant of Omicron, JN.1.
• “The variant is currently under intense scientific scrutiny but not a cause of immediate concern.
• All JN.1 cases were found to be mild and all of them have recovered without any complications,” the Health Ministry has said.

The dangerous Omicron variant

• Omicron has been the dominant coronavirus variant for a little more than two years.
• So far, its sub-strains have displayed certain common characteristics — they replicate in the upper respiratory tract and tend to cause less severe disease compared to the Delta variety.
• Its ability to mutate fast helped Omicron find new ways to infect people.
• A section of researchers had feared that its slipperiness may offset Omicron’s reduced nastiness.
• That does not seem to have happened.
• So far there is very little evidence that JN.1 will behave very differently from other Omicron sub variants.

Precaution is the key to prevent the spread of virus

• The standard SARS-CoV-2-related caveats — Covid-appropriate behaviour — must be adhered to during the current spurt in infections.
• The immunity conferred by vaccinations or through infection could be waning amongst a large section of the country’s population.
• JN.1 has emerged during the festive season when markets and streets are likely to be crowded, allowing the virus to spread fast.
• The Karnataka government has mandated masks for senior citizens and people with comorbidities.
• Some other states might follow suit. There is good reason to believe that with precautions, the country will tide through the current spurt of infections.
• At the same time, the appearance of JN.1 has led to renewed conversations on a vaccine that works against all SARS-CoV-2 variants.
• In India, ICMR has handed over strains of all existing variants to Bharat Biotech.
• The jury is out on whether such a vaccine can eliminate infections. Once again, the work in laboratories and research institutes will be keenly watched.

Conclusion: New sub-variant of Omicron does not appear lethal. But during the festive season, people should not drop their guard.