Background:
- The impossible trinity, or the trilemma, refers to the idea that an economy cannot pursue independent monetary policy, maintain a fixed exchange rate, and allow the free flow of capital across its borders at the same time.
- According to economists, any economy can choose to pursue only two out of the three policy options noted above simultaneously in the long-run.
- The idea was proposed independently by Canadian economist Robert Mundell and British economist Marcus Fleming in the early 1960s.
A difficult choice
- Practically speaking, in today’s world in which capital is largely free to move across borders with ease, the choice before policymakers is between maintaining a fixed exchange rate and pursuing independent monetary policy.
- If policymakers choose to peg or maintain the value of their currency at a certain level against a foreign currency, this decision will limit the kind of monetary policy they can adopt in the long-run.
- This is because the decision to peg the exchange value of the currency can tie down the hands of central bankers when it comes to their domestic monetary policy stance.
- For example, if a country’s policymakers want their currency to appreciate, or become stronger, against foreign currencies, they cannot achieve this goal and maintain the external strength of the currency over a considerable period of time without adopting a tight domestic monetary policy stance which will weaken domestic demand.
- This is because loose monetary policy will put pressure on the country’s currency to depreciate in value. Thus, policymakers will have to choose between maintaining the strength of their currency and upholding nominal demand in the domestic economy which is heavily influenced by monetary policy.
- On the other hand, if policymakers of a country choose to pursue independent monetary policy, they may not be able to maintain the foreign exchange value of their currency at a desired peg.
- This is because the kind of monetary policy adopted by an economy’s central bank invariably influences the exchange value of its currency against foreign currencies.
- For example, if a country’s central bank adopts easy monetary policy with the aim of boosting domestic demand, this will naturally cause the value of its currency to depreciate against foreign currencies if foreign central banks adopt tighter monetary policy.
- If so, it would be difficult to maintain the foreign exchange value of the currency unless the central bank holds sufficient foreign exchange reserves to prop up the currency’s value.
- In fact, over the long-run, it may be impossible for the country’s central bank to defend the foreign exchange value of its currency as it may soon run out of the foreign exchange reserves necessary to prop up the value of its currency.
Restricting movement
- It should be noted that only a few decades ago, when strict capital controls were used to regulate the flow of capital across borders, economies could choose to pursue independent monetary policy and still hope to maintain a certain exchange value against foreign currencies.
- Whenever monetary policy exerted an undesirable effect on the currency’s exchange rate, policymakers could impose controls on the flow of capital to maintain the foreign exchange value of their currency.
- For example, if a country’s central bank decides that it wants to adopt easy monetary policy that could weaken the exchange value of its currency, it could impose capital controls to stop the depreciation of its currency. It should be noted, however, that capital controls come at a price. They hinder the free flow of capital and adversely affect economic growth by preventing the efficient allocation of scarce resources across the globe.
Current trilemma
- The trilemma has come under focus recently as the U.S. Federal Reserve has been raising interest rates to fight rising prices.
- In a world where capital is largely free to move across borders, this has led many investors to pull money out of the rest of the world and rush to the U.S. in search of higher yields, thus putting pressure on many currencies such as the Indian rupee.
- In fact, even developed markets like Japan and the Eurozone have seen their currencies depreciate significantly against the U.S. dollar.
- Notably Japan, in contrast to other national central banks, has been unwilling to tighten its monetary policy in response to rising interest rates in the U.S.
- This has caused the Japanese currency, the Yen, to depreciate about 25% against the U.S. dollar so far this year.
- In essence, the Bank of Japan has allowed its currency to fall, preferring to maintain control over its domestic monetary policy.
- The Reserve Bank of India may also face the dilemma of choosing between maintaining the value of the rupee and holding on to its monetary policy independence.
- As the U.S. Federal Reserve has raised interest rates, there has been increasing pressure on the rupee, which has depreciated almost 10% against the U.S. dollar this year.
- For now, the RBI seems to be fairly happy tightening its monetary policy stance to defend the rupee as it also helps to rein in price rise which has been a concern even in India.
- But if the U.S. Federal Reserve continues to tighten its policy stance even after price rise in India is reined in by the RBI, then the Indian central bank may have to choose between defending the rupee and upholding domestic demand.
Recent Posts
Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.
Globally, around 80% of wastewater flows back into the ecosystem without being treated or reused, according to the United Nations.
This can pose a significant environmental and health threat.
In the absence of cost-effective, sustainable, disruptive water management solutions, about 70% of sewage is discharged untreated into India’s water bodies.
A staggering 21% of diseases are caused by contaminated water in India, according to the World Bank, and one in five children die before their fifth birthday because of poor sanitation and hygiene conditions, according to Startup India.
As we confront these public health challenges emerging out of environmental concerns, expanding the scope of public health/environmental engineering science becomes pivotal.
For India to achieve its sustainable development goals of clean water and sanitation and to address the growing demands for water consumption and preservation of both surface water bodies and groundwater resources, it is essential to find and implement innovative ways of treating wastewater.
It is in this context why the specialised cadre of public health engineers, also known as sanitation engineers or environmental engineers, is best suited to provide the growing urban and rural water supply and to manage solid waste and wastewater.
Traditionally, engineering and public health have been understood as different fields.
Currently in India, civil engineering incorporates a course or two on environmental engineering for students to learn about wastewater management as a part of their pre-service and in-service training.
Most often, civil engineers do not have adequate skills to address public health problems. And public health professionals do not have adequate engineering skills.
India aims to supply 55 litres of water per person per day by 2024 under its Jal Jeevan Mission to install functional household tap connections.
The goal of reaching every rural household with functional tap water can be achieved in a sustainable and resilient manner only if the cadre of public health engineers is expanded and strengthened.
In India, public health engineering is executed by the Public Works Department or by health officials.
This differs from international trends. To manage a wastewater treatment plant in Europe, for example, a candidate must specialise in wastewater engineering.
Furthermore, public health engineering should be developed as an interdisciplinary field. Engineers can significantly contribute to public health in defining what is possible, identifying limitations, and shaping workable solutions with a problem-solving approach.
Similarly, public health professionals can contribute to engineering through well-researched understanding of health issues, measured risks and how course correction can be initiated.
Once both meet, a public health engineer can identify a health risk, work on developing concrete solutions such as new health and safety practices or specialised equipment, in order to correct the safety concern..
There is no doubt that the majority of diseases are water-related, transmitted through consumption of contaminated water, vectors breeding in stagnated water, or lack of adequate quantity of good quality water for proper personal hygiene.
Diseases cannot be contained unless we provide good quality and adequate quantity of water. Most of the world’s diseases can be prevented by considering this.
Training our young minds towards creating sustainable water management systems would be the first step.
Currently, institutions like the Indian Institute of Technology, Madras (IIT-M) are considering initiating public health engineering as a separate discipline.
To leverage this opportunity even further, India needs to scale up in the same direction.