30 APRIL 2016
A misguided surrender
In a clear and misguided surrender to Patidar agitators demanding reservations in jobs and education, the Gujarat government has announced a 10 per cent quota for the economically backward among upper castes. Those with an annual family income of less than Rs.6 lakh will be eligible. This proposed quota is in addition to the existing 49 per cent reservations for the Other Backward Classes and SC/STs, and an ordinance is to be promulgated to this effect. The Patidars constitute a crucial vote base for the ruling Bharatiya Janata Party, and the quota signals the political failure of the various carrot-and-stick measures attempted by the State government to get on top of their long agitation. Last year, Rajasthan passed a Bill providing 14 per cent reservations to the economically backward, in a move to appease upper castes. Neither legislation is likely to pass judicial scrutiny. In Indra Sawhney v. Union of India, the Supreme Court had limited the total quota to 50 per cent, a figure both States intend to exceed. Tamil Nadu is an exception as a constitutional amendment was passed in 1994 to allow the State to continue to set the limit for reservation at 69 per cent. A series of judgments have established that economic criteria alone cannot be taken as determinants of backwardness.
Notably, the demand for reservations by the largely prosperous Patidars has little to do with their present socio-economic status. Their agitation, like the one waged by Jats, has been directed more at the reducing socio-economic “gap” between them and the OBCs. Communities that identified themselves with the upper strata of society are increasingly seeking “backward” status for a variety of reasons. There is a shift in the aspirations for traditionally landed and business communities, as their young seek better education and white-collar jobs. Besides, following the implementation of the Mandal Commission’s recommendations, OBC leaders have asserted themselves electorally and forged formidable political alliances. It is the change in the balance of socio-economic power that has lent popular support to agitations by the middle castes all over the country; new politicians on the block, such as Hardik Patel, who has resisted all attempts at being co-opted by the BJP, have emerged from this social churning. At one level, this adds some weight to the theory that the reservation policy has helped not only to uplift the socially underprivileged and the historically backward but also to reduce caste inequities. But by trying to buy peace on the street with an impulsive decision, the Gujarat government has exposed its weakness in the face of the Patidar agitation. If the policy of reservations must be revisited, then the way to do this is by calling for a review of the list of OBCs and restructuring the creamy layer of exclusion to benefit the really deserving.
Fed affords RBI wiggle room
The U.S. Federal Reserve has left interest rates unchanged for a third straight meeting, citing a moderation in economic growth in the world’s largest economy. The Federal Open Market Committee will next meet on June 14, and with Wednesday’s decision it has provided policymakers at the Reserve Bank of India with just a little more elbow room when they decide on monetary action at their June 7 sitting. The U.S. is the largest market for Indian exporters, and some of the economic indicators spotlighted by the Fed will help them gauge the strength of demand for their goods and services. These include a distinct softening of fixed investment by U.S. businesses, and slower growth in household spending despite strong job gains and ‘high’ consumer sentiment. With global trade sluggish and China’s economic reset still roiling sentiment in commodities worldwide, the data from the U.S. merit a close watch. Signs from corporate America in the form of earnings have also offered little cause for cheer in recent days, with a slew of technology majors, including Apple Inc., Google’s parent Alphabet Inc. and Microsoft Corp., reporting disappointing numbers. For its part, the FOMC asserted that it expects economic conditions to “evolve in a manner that will warrant only gradual increases” in the benchmark interest rate and reiterated that its policy stance remains accommodative. Interestingly, one of its 10 members cast a vote of dissent by recommending that the target range for the federal funds rate be raised by one quarter of a percentage point. But overall, just four months since the Fed initiated the process of normalising interest rates, triggering concerns about possible capital outflows from emerging markets including India, the tone and tenor of its policy communications suggest that interest rate increases are going to be fewer than expected before.
Meanwhile, the Bank of Japan has surprised Asian markets by not adding to its stimulus programme amid continuing signs that the world’s third largest economy is struggling to escape deflation. Prime Minister Shinzo Abe’s efforts to reinvigorate the Japanese economy through a combination of fiscal and monetary stimulus have had less than the desired impact, with the gross domestic product shrinking in the last quarter of 2015. The International Monetary Fund, which earlier this month pared its forecast for global growth, cited Japan as a key factor and cut its growth forecast for the country for 2016 and predicted a likely contraction for its economy in 2017. Clearly, from the perspective of striking a balance between supporting domestic growth and attracting adequate capital flows, RBI Governor Raghuram Rajan and his fellow policymakers still have their task cut out. While in its statement the Fed dropped for the first time this year a reference to “risks” in the context of the global economy, the RBI must use the next five weeks to gauge the strength of the headwinds and, if domestic factors too warrant, be ready to provide policy accommodation to help bolster India’s economic recovery.