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After months of waiting for the obvious, we can finally say that the Reserve Bank of India (RBI) has failed to meet its inflation mandate.

The release of the Consumer Price Index (CPI) data for September on October 12 confirmed average headline retail inflation has been out of the 2-6 percent tolerance range for three consecutive quarters – 6.3 percent in January-March, 7.3 percent in April-June, and 7 percent in July-September.

What happens next is clear: the RBI must submit a report to the central government detailing the reasons for failure, the remedial actions it proposes to take, and an estimate of the time period within which inflation will return to target.

To draft the report, the Monetary Policy Committee (MPC) must meet soon as the report has to be sent to the government within one month of the occurrence of failure, or by November 12. But what exactly will the report say?

Of the three aspects mentioned above, two are pretty clear – the reasons for failure and the time period within which the RBI hopes to return inflation to target.

"The reasons will be…you can't prevent the Russia-Ukraine war. It (the report) will talk of supply disruptions, the zero-COVID policy in China. The RBI will say this is why it failed," a person familiar with the developments had told Moneycontrol in May after it started becoming clear that the central bank would likely fail to meet its mandate.

It was in anticipation of an ugly April print that the MPC acted out of its meeting schedule and kick-started the rate hike cycle with a 40-basis-point increase in the repo rate on May 4.

The number did not disappoint, with CPI inflation surging to a 95-month high of 7.79 percent in April, data released on May 12 showed.

It is worth noting that Andrew Bailey, governor of the Bank of England, also mentioned the impact of the Russia-Ukraine war and supply shortages of certain key items such as semiconductors to explain why inflation had moved away from the 2 percent target in his March 17 letter to the then Chancellor of Exchequer, Rishi Sunak.

The second aspect of the report that is for all to see even now is the timeframe within which the RBI wants to bring inflation back to target. For some time now, RBI officials have mentioned how two years is an appropriate period of time for inflation to be lowered to 4 percent.

Even in the post-policy press conference on September 30, Governor Shaktikanta Das said the central bank expected inflation to "come down close to the target over a two-year cycle; that was our expectation earlier and even now."

There is little reason for the failure report to say anything different, especially with RBI's latest forecast pegging average CPI inflation for FY24 at 5.2 percent, a steep 150 basis points lower than the average of 6.7 percent for the current financial year.

What of the third aspect of the report?

Rising terminal rate?

The failure report must also detail the remedial actions the RBI proposes to take to bring inflation down to target. And here we are in the dark, for while the central bank has already taken some action – 190 basis points worth of it, to be precise – there is broad agreement among economists that more needs to be done.

One basis point is one-hundredth of a percentage point.

In fact, the slightly higher-than-expected September inflation figure of 7.41 percent, in combination with an aggressive US Federal Reserve, has perhaps pushed the terminal repo rate higher.

"With increased Fed rate hikes in 2022 and an adverse inflation forecast, RBI will have to walk a fine balance of rate hikes," Soumya Kanti Ghosh, State Bank of India's group chief economic adviser, noted on October 12.

"We are now looking at the terminal repo rate going higher than 6.5 percent," Ghosh added.

On the other hand, divisions within the MPC have become apparent thanks to the minutes of the September 28-30 meeting of the panel, released on October 14.

While it was already known that Ashima Goyal preferred a 35-basis-point increase in the repo rate on September 30 as opposed to the majority vote of 50 basis points, fellow external member Jayanth Varma explicitly said the MPC should now pause and wait for its actions to take effect.

The next four weeks or so are crucial then; not only must the RBI submit its report to the government by November 12, the October CPI inflation print will be released on November 14 and should influence what happens in the December 5-7 meeting of the MPC, with economists predicting a sharp drop-off to sub 6.5-percent levels.

Bengaluru, famed as the ‘Silicon Valley of India’, and the country’s leading information technology exporter, had large portions of the city underwater for two days (August 29 and 30). Unprecedented and relentless rains, said to be the third-heaviest ever recorded in Bengaluru, inundated the city. Bengaluru’s lakes were full; some breached their banks and the water, finding little egress, camped on the city’s streets, in parking lots, and houses. In some areas, residents had to be evacuated on tractors. Other concomitant failures were also visited upon the city. There were huge traffic disruptions, power outages, loss of productivity, and many normal activities had to be halted. The flooding of the pump houses hit the water supply to the city, and some areas had to depend on water from bore wells and tankers.

Some of the reasons behind the disaster were specific to the city. Bengaluru was long celebrated as the city of lakes. Unfortunately, its governance has been unkind to the elaborate ecosystem that had sustained the city in the past. Many of the lakes have been filled up; others have been curtailed through slow and stealthy encroachment and concretisation. Additionally, the interconnectivity between water bodies has been disrupted. The drainage system of the city has also been compromised due to large-scale encroachments. Other items of city infrastructure that have a bearing on floods have been equally mismanaged. The upkeep of stormwater drains in the city has been poor, and its solid waste management leaves a lot to be desired.

Bengaluru also has an extremely fractured governance system. The urban local body has truncated functions, and several parastatals have been created to manage separate services. Water and wastewater are managed by the Bangalore Water Supply and Sewerage Board; city transport is in the hands of the Bangalore Metropolitan Transport Corporation; and fire services are provided by the Karnataka Fire and Emergency Services. On the planning side, Bangalore Development Authority is the principal planning authority for the city, and the Bangalore Metropolitan Management Authority is responsible for the planning of the Bengaluru metropolitan region. It is apparent that co-ordination among these agencies during a crisis would pose enormous problems.

It must, however, be recognised that urban floods have now become a national phenomenon, affecting many mega and metropolitan cities in India almost annually. For example, in July, heavy rainfall inundated Ahmedabad. Many areas of the city were waterlogged, and the ground floors of many housing societies and bungalows disappeared underwater. In November 2021, Chennai came to a standstill as several areas were submerged on account of heavy rainfall. The city recorded 17 deaths; there were power outages and several Chennai localities were marooned. In October 2020, Hyderabad struggled with unprecedented levels of precipitation that left nearly 50 dead and destroyed property worth around Rs 5,000 crore. Delhi, Mumbai, Patna, Pune, and many other metros have also flooded at different points in time, bringing them to a halt for several days.

On the strength of these events and many more, it would be safe to conclude that this is on account of the forces of climate change that have accentuated the severity of rainfall in cities. These render the current urban drainage systems unable to cope with such bursts of rain, leading to flooding. India already ranks very high among countries in terms of disaster events, disaster victims, and economic losses. An additional disaster that has now been added to this list is urban floods, which is now proving to be a huge national challenge.

For quite some time, urban floods did not receive much attention as the National Disaster Management Authority (NDMA) focused on riverine floods that wreaked havoc in the rural areas.  The turning point in this regard was the deadly deluge in Mumbai in July 2005, when an unprecedented cloudburst caught the city unprepared to tackle a disaster of that magnitude. It was then that NDMA decided to address urban flooding as a separate disaster and delinked it from other floods.

A study of the reasons behind these floods reveals a commonality of causes that combine matters of urban planning and urban governance across India’s cities. The 10 most-significant reasons can be listed as: Absence of storm water drains in many localities; poor maintenance of existing storm water drains leading to their clogging with mud and material; filling up water bodies and nullahs; incapacitating drainage through encroachments or poor maintenance; truncating and concretising open space, depriving them of their permeability; uncontrolled built and demographic densification beyond the city’s infrastructural capacity; failure to prevent rampant unauthorised construction; allowing construction in low-lying areas without adequate mitigation measures; indiscriminate disposal of solid waste; illegal dumping of construction debris; and overlooking the maintenance and upkeep of the city’s overall infrastructure that impacts egress of water.

Several committees have gone into the reasons behind urban flooding and have suggested remedial measures. The first group of recommended action points includes the preparation of contour maps, augmentation of the storm water drainage network, cross-drainage works, and augmentation of pumping capacity. The second set of jobs includes removal of obstruction to storm water drains, removal of blockages caused by floating debris, restoration of the nalla system that stands constricted due to encroachments, effective garbage handling, desilting, and preservation of holding ponds. Regulatory measures include a ban on plastics and prevention of further encroachments.

Some of the above cited jobs need to be undertaken by the cities. There are some others that are in the state’s domain. Even if it is conceded that urban development is a state subject, the Union government cannot be a bystander watching city infrastructure failing to support the needed quality of life in large Indian cities. Such cities are national assets and growing contributors to the Indian economy. It cannot be denied that the national government has played a role in the financial emaciation of cities and has not taken steps to support their financial sustainability. Inaction on the government’s part can worsen the condition of Indian cities; the country’s economic growth can be seriously impacted, and the image of Indian cities can take a global battering.

At the same time, this new paradigm of disaster will have to be sufficiently imbibed by the states. First, the fractured governance architecture witnessed in Indian cities is not designed to cope with disaster situations. The multiplication of city parastatals needs to be eschewed, and a new structure ought to put urban local bodies in command. Second, the dovetailing of Climate Change and urban floods into disaster management by all vulnerable states will help rivet more attention to pre-disaster policies and planning, thereby, making Climate Change mitigation an essential component of disaster risk management. Cities themselves will have to consider urban floods as a recurring phenomenon, and complement the states in providing an equal emphasis on floods and mitigation strategies.

A day after insurance regulator Irdai's final approval, HDFC Life Insurance on Friday announced completion of Exide Life merger.

This marks the completion of the first-ever merger and acquisition (M&A) transaction in the Indian life insurance sector, HDFC Life said in a statement.

HDFC Life had completed the acquisition of Exide Life in January 2022.

The entire transaction from announcement of the deal in September 2021 followed by the acquisition in January 2022 and the eventual merger was completed in less than 14 months, it said.

"Pursuant to the merger, customers across both entities will have access to a wider bouquet of products and service touch points. Employees and distributors will benefit from a larger, stronger organisation that has complementary business models, wider geographical presence and strong ethos," it said.

This merger will accelerate the scale-up of HDFC Life's agency channel and enhance its geographical presence in tier II and tier III markets, it said.

In January this year, HDFC Life acquired 100 per cent stake in Exide Life Insurance Company from its parent firm Exide Industries for Rs 6,687 crore in order to increase its presence in the south India market.

With the transfer of its life insurance business to HDFC Life, Exide Industries acquired 4.12 per cent stake in HDFC Life.

Last month, the insurer had received approval from the Mumbai bench of the National Company Law Tribunal (NCLT) for merger of Exide Life into itself.

There are several trends which have helped India remain resilient amidst global turmoil. We will have to build on these to remain one of the fastest-growing economies over the next decade.

The world economy is going through a tumultuous phase. Aggressive tightening by major advanced economies’ central banks has led to a bleak outlook for global growth. Against this backdrop, the World Bank recently cut India's GDP forecast for FY23 to 6.5 percent (from 7.5 percent earlier). However, India will still remain one of the fastest-growing major economies in the world. This brings us to the question that what has worked in India’s favour for it to maintain decent growth amidst global gloom. We identify five reforms/policies which have helped India to grow faster and will continue to aid growth in the medium term.

India's low external debt

The first and the most important has been India’s low external debt which has insulated it from external volatility in times like these. In recent weeks there has been a lot of buzz around India's inclusion in the global bond indices. Historically, India has always been uncomfortable about foreign investors owning Indian debt, hence through capital controls, has kept foreign ownership at bay.

On the sovereign front, India's exposure to foreign ownership of government debt has historically ranged between 1 percent and 2 percent. India's debt exposure to foreign ownership is far lower than most of its peers. The only major economy that has a lower debt exposure is China. This has worked well in India's favour where most of its debt is domestically held and hence not prone to huge movements in currency in times of heightened uncertainty.

Shift within financial savings

The second trend has been the perceptible change in the composition of financial savings of households. Though overall household savings to GDP has been on a decline, the share of financial savings in overall household savings has increased lately. However, the shift in financial savings has been more interesting.

RBI's quarterly household financial savings data suggests, between Q4FY20 and Q4FY22, mutual funds owned by households grew by a whopping 34 percent per annum compared to currency held (14 percent growth) and bank deposits (10 percent growth).

Covid-related fears also led to growth in life insurance funds purchased by households; it grew by 17 percent per annum during the same period. The share of bank deposits within financial savings has been declining and that of other products increasing. This trend will eventually lead to a deepening of both debt and equity markets in the long run.

Low corporate debt

The third positive trend has been the improvement in corporate debt and profitability in recent years. India's investment sentiment since FY12 was plagued by what is called the twin balance sheet problem where corporates were overleveraged and banks were saddled with high non-performing assets (NPAs). These trends are looking much better now with corporate debt the lowest in the last 15 years and banks’ NPAs under control.

Also read - Rush for booking profit drives small-caps, mid-caps down over 2%

If the uncertainty in demand outlook were to subside, corporates' ability to drive capex and banks’ ability to fund it is much better than it was 5 years ago.

Success of DBT

The fourth transformation which has taken place in India is the revolution called the Direct Benefits Transfer (DBT). The amount disbursed under DBT has increased substantially over the years. In FY22, the Government transferred a total of Rs 6.3 trillion, or roughly 3 percent of GDP, through the DBT route (up from Rs 1.9 trillion in FY18).

Since the adoption of the scheme, more than 50 ministries have used DBT to transfer money in as many as 319 schemes. This has led to total savings of Rs 2.2 trillion. This also helped Government to expand the welfare state efficiently.

Undoubtedly, the DBT became a potent tool during the pandemic which helped the Government provide benefits to millions in need which cushioned consumption at the bottom of the pyramid.

Government's thrust on capex

Finally, the Central Government has pushed the pedal on capital expenditure (capex) in the last three years. Capex share in overall expenditure has increased from 12 percent in FY18 to 19 percent in FY23 (budgeted). Focusing on capex is a welcome move as it has a higher multiplier effect.

According to data from the National Institute of Public Finance and Policy (NIPFP), a rupee spent on capex can bring in output worth Rs 2.45 in the same year and by a cumulative Rs 4.8 in the next 7 years.

Although India will not remain insulated from the global turmoil in this inter-connected world (especially on the exports front and financial market volatility), these five trends will help maintain a decent growth rate in the coming years.

We will need to build on these to cement India’s position as the fastest growing major economy in the next decade.

As Uddhav Thackeray, the direct familial heir of the Shiv Sena founded by his late father Bal Thackeray in 1966, stood up to address party workers in Uran, near Mumbai, this week, he would have recalled an unpleasant political episode from 1985. “We will teach our detractors a lesson, a befitting lesson,” Thackeray exhorted his party workers, days after the party’s name and symbol had been dramatically changed. The new name, allotted by the election commission, is a mouthful: ‘Shiv Sena – Uddhav Balasaheb Thackeray’, and the party’s 38-year-old symbol of bow-and-arrow has been replaced with the flaming torch (mashaal).

The Shiv Sena was stripped of its identity in June when the late Thackeray’s loyalist Eknath Shinde stunned Uddhav by splitting its legislative wing. The split, a guerrilla operation, apparently had the blessings — logistical and otherwise — of the Bharatiya Janata Party (BJP). Within days, Shinde and BJP’s Devendra Fadnavis formed the Maharashtra government replacing the one led by Uddhav Thackeray.

However, Shinde did not function like the other turncoats in the Shiv Sena, who had walked out alone or with only a handful of loyalists which did not shake the very foundation of the party; Shinde’s rebellion was larger, and led to the party losing its name and symbol. A non-Thackeray, a local satrap, claimed to be the true heir of Bal Thackeray’s politics. To Uddhav Thackeray, Shinde’s blow would have hurt as much as when his cousin Raj Thackeray walked out of the party in 2005.

The Thackerays, Uddhav and son Aaditya, are staring at contesting elections — an assembly seat from suburban Mumbai in three weeks’ time and the all-important general body of the forthcoming Brihanmumbai Municipal Corporation elections — with a depleted organisation, and without its ubiquitous ‘bow-and-arrow’ symbol.

The flaming torch has appeared in various avatars in the party’s newspaper Saamna and other sundry material. It is not an unfamiliar symbol to Shiv Sainiks — of both the Thackeray and Shinde factions. The question is: Can Uddhav Thackeray make it resonate with the party cadre and local leaders who have chosen to side with him, and ensure that the party’s committed voters recognise it too? It will take all of Uddhav Thackeray’s smart moves — and more — to swing the assembly bypoll which will be bellwether for the BMC elections.

If one had walked into a toy store in India a few years ago, there would be an 80 percent chance they would be laying their hands on a ‘Made in China’ product. This is because the Indian market was flooded with imported toys, with eight out of 10 toys sold being predominantly imported from China. Even though the Indian toy industry boasts a rich heritage, Indian manufactured toys contributed to just 20 percent of the domestic market.

At Rs 328 crore and Rs 1,936 crore respectively, the import of toys was six times more than the export in 2014-15. The industry was languishing due to a lack of investment and technology, and competition from cheap im­ports. Traditional toys had long been forgotten, and local industry was fragmented.

Even though the industry had recorded double-digit growth in 2014-15, around 40 percent of Indian toy manufacturing units had closed down, and another 20 percent were on the verge of closure. The ones remaining were either static, or their productivity levels were declining.

Then in the last three years, something changed. From being a net importer, the Indian toy industry turned into a net foreign exchange earner. India’s import of toys fell by 70 percent from $371 million in 2018-19 to $110 million in 2021-22, while exports rose by 61.4 percent, from $202 million to $326 million in the same period. In the quarter ending April-August 2022, the country’s toy export registered a 636 percent growth, over the same period in 2013!

State Of Play

COVID-19-induced supply disruptions in 2020 would have sent an industry that was largely dependent on imports for its survival to its grave had it not been for two key interventions by the Government of India.

First, in February 2020, the government increased basic customs duty from 20 percent to 60 percent. A year later, in January 2021, the government issued the Toys (Quality Control) Order, making it mandatory for all toy manufacturers, from India and overseas, to get BIS (Bureau of Indian Standards) certification for selling toys in India.

Combined, the two measures helped deter both cheap and high-quality imports, while allowing local manufacturing to flourish. Sending the right signal to India’s major markets like the United Kingdom, Germany, and the Netherlands vis-a-vis maintenance of international standards, longstanding public health concerns around Chinese toys — 67 percent of which had been found to be highly-toxic were also alleviated. The new BIS rules encouraged many toy importers to get into manufacturing, and turn exporters to markets in Africa and West Asia.

At the same time, with an aim to boost traditional toy-making, and integrate the manufacturing and production ecosystem of toys, 19 toy clusters were approved.

Toying With New Ideas

India’s protectionist push for the toy industry may have come at a time when the country was witnessing intense skirmishes with China, yet, given India’s vast export potential, the size of its domestic market (above 300 million children), and the employment potential of the toy industry, the ‘aatmanirbhar’ is a welcome one.

The measures taken so far are however a very small beginning in self-reliance, and if India wants to become a global player in toy manufacturing, building its image as a trustworthy destination for quality manufacturing may be a better way to move ahead, than just curbing imports.

The scope is immense. Given the right impetus, the Indian toy market has the potential to grow to $2-3 billion by 2024 (from $1.7 billion in 2017), and for every $100 million investment in the sector, 20,000 direct jobs, and another 8,000 indirect jobs can be created.

The Challenges

The toy industry is still highly fragmented, dominated by local producers (60 percent of India’s 4,000 toy manufacturers are unorganised), and lack innovation, and resources to invest in equipment and technology. Supply chains in the country are still highly fragmented.

To encourage competitiveness, the Centre could support the industry in setting up more clusters, subsidies on exports, and production-linked incentives for their manufacture, as well as toys to be incorporated in India’s Free Trade Agreements (FTAs). The Centre’s support in the form of incentives, as well as inputs on technology upgrade, can go a long way in helping the domestic industry grow swiftly.

Re-skilling the 7 million artisans in the country to help them meet the evolving demands of the industry while framing labour laws and regulations that protect workers’ rights can also help reap dividends.

Toy manufacturing is an ideal sector to revive a slowing economy. Solving for quality, skilling, and supply chain issues, the projected growth of the Indian toy industry looks imminent.