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Economy: Monetary Policy

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    Economy
  • Published
    25-Feb-2020

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Monetary Policy

  • Monetary Policy refers to the measures pertaining to policy undertaken by the Central Bank (RBI) to influence the availability; determine the size and rate of growth of the money supply in the economy.
  • In other words, monetary policy can be defined as a process of managing a nation’s money supply to contain/control the inflation, achieving higher growth rates and achieving full employment.
  • Generally, all across the globe, monetary policy is announced by the central banking body of the country, for example the RBI announces it in India. India entered into the era of economic planning in 1951.
  • The Monetary and Fiscal Policies had to be adjusted to the requirements of the planned development in the country and accordingly, the economic policy of the Reserve Bank was emphasized on two objectives:
    • To speed up the economic development of the nation and raise the national income and standard of living of the people.
    • Control and reduce the “Inflationary” pressure on the economy.

Monetary policy is of two kinds:

  • Expansionary Monetary Policy: It increases the supply of money in an economy by making credit supply easily available. Money produced through such a policy is called as cheap money. An expansionary monetary policy is required when an economy goes through a phase of recession accompanied by lower levels of growth/high levels of unemployment. But risk associated with EMP is inflation.
  • Contractionary Monetary Policy: It decreases the supply of money in the economy. Contractionary monetary is used to tackle the menace of inflation in the economy by raising the interest rates.

Objectives of Monetary Polity

  • In India, as defined by former RBI governor C. Rangarajan, broad objectives of monetary policy are:
    • To regulate monetary expansion so as to maintain a reasonable degree of price stability; and
    • To ensure adequate expansion in credit to assist economic growth
  • Further the objectives of Monetary Policy are:
    • It leads to economic growth: The monetary policy can influence economic growth by controlling real interest rates and its resultant impact on the investment. If the RBI opts for a cheap credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth.
    • Price Stability: Inflation and deflation both are not suitable for an economy. Price stability is defined as a low and stable order of inflation. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable.
    • Exchange Rate Stability: If exchange rate of an economy is stable it shows that economic condition of the country is stable. Monetary policy aims at maintaining the relative stability in the exchange rate. The RBI by altering the foreign exchange reserves tries to influence the demand for foreign exchange and tries to maintain the exchange rate stability.
    • It generates employment: Monetary policy can be used for generating employment. If the monetary policy is expansionary then credit supply can be encouraged. It would thus help in creating more jobs in different sector of the economy.
    • Equitable distribution of income: Earlier many economists used to justify the role of the fiscal policy in maintaining economic equality. However, in recent years economists have given the opinion that the monetary policy can play a supplementary role in attainting economic equality.

Methods for Regulation of Monetary Policy

The methodology can be classified into two categories:

  1. Quantitative Credit Control Methods:

These are the instruments of monetary policy that affect over all supply of money/credit in the economy. Some are as follows:

Statutory Liquidity Ratio: 

  • The Statutory Liquidity Ratio refers to that proportion of total deposits which the commercial banks are required to keep with themselves in a liquid form. The commercial banks generally make use of this money to purchase the government securities.
  • Thus, the Statutory Liquidity Ratio, on the one hand, is used to siphon off the excess liquidity of the banking system, and on the other, it is used to mobilize revenue for the government.
  • The Reserve Bank of India is empowered to raise this ratio up to 40 per cent of aggregate deposits of commercial banks. At present it is 18.5 per cent. It used to be as high as 38.5 percent at one point of time.

Cash Reserve Ratio: 

  • The Cash Reserve Ratio (CRR) is the ratio fixed by the RBI of the total deposits of a bank in India, which is kept with the RBI in cash form.
  • CRR deposits do not earn any interest for banks.
  • Initially, limits of 4% (lower) and 20% (upper) were set for CRR, but respective amendments removed the limits, therefore providing RBI with much needed operational flexibility. The more the CRR the less the money available for lending by the banks to players in the economy. RBI increases CRR to tighten many supple and lowers CRR to expand credit in the economy.
  • CRR as a tool of monetary policy is used when there is a relatively serious need to manage credit and inflation.
  • Otherwise, RBI relies on signaling its intent through the policy rates of repo and reverse repo. At present it is 4 percent.

Bank Rate: 

  • In basic terms, bank rate is the interest rate at which RBI provides long term credit facility to commercial banks. A change in bank rate affects the other market rates of interest. An increase in bank rate leads to an increase in other rates of interest, and conversely, a decrease in bank rate results in a fall in other rates of interest. Bank rate is also referred to as the discount rate. A deliberate manipulation of the bank rate by the Reserve Bank to influence the flow of credit created by the commercial banks is known as bank rate policy.
  • An increase in bank rate results in an increase in the cost of credit or cost of borrowing. This in turn leads to a contraction in demand for credit. A contraction in demand for credit restricts the total availability of money in the economy, and hence results as an anti-inflationary measure of control.
  • Likewise, a fall in the bank rate causes other rates of interest to come down. The cost of credit falls, i.e., borrowing becomes cheaper. Cheap credit may induce a higher demand both for investment and consumption purposes. More money through increased flow of credit comes into circulation. A fall in bank rate may, thus, prove an anti-deflationary instrument of control. Penal rates are linked with Bank Rates. For instance if a bank does not maintain the required levels of CRR and SLR, then RBI can impose penalty on such banks. Currently Bank Rate is 7%.
  • Nowadays, bank rate is not used as a tool to control money supply, rather Liquidity Adjustment Facility (LAF) (Repo Rate) is used to control the money supply in economy.

Repo Rate:

  • If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate.
  • Similarly, if RBI wants to make it cheaper for banks to borrow money, it reduces the repo rate. Repo rate stood at 5.75%.

Reverse Repo Rate:

  • Reverse Repo is the rate at which the Central Bank (RBI) borrows from the market. This is called as reverse repo as it the reverse of repo operation. Reverse repo rate at present is 50 basis points (or 0.5%) lower than the Repo Rate. Repo and Reverse
  • Repo Rates are also referred to as the Policy rates and are often used by the Central Bank (RBI) to send single to the financial system to adjust their lending and borrowing operations.
  • Repo rates and reverse repo rates form a part of the liquid adjustment facility.

Open Market Operations (OMOs): 

  • It refers to buying and selling of government securities in open market in order to expand or contract the amount of money in the banking system. This technique is superior to bank rate policy. Purchases inject money into the banking system while sale of securities do the opposite.
  • It is a common misconception that OMOs change the total stock of government securities, but in reality they only change the proportion of Government Securities held by the RBI, commercial and co-operative banks.
  • The Reserve Bank of India has frequently resorted to the sale of government securities to which the commercial banks have been generously contributing. Thus, open market operations in India have served, on the one hand as an instrument to make available more budgetary resources and on the other as an instrument to siphon off the excess liquidity in the system.

Marginal Standing Facility: 

  • Marginal Standing Facility is a liquidity support arrangement provided by RBI to commercial banks if the latter doesn’t have the required eligible securities above the SLR limit.
  • It is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely.
  • The MSF was introduced by the RBI in its monetary policy for 2011-12.
  • Under MSF, a bank can borrow one-day loans from the RBI, even if it doesn’t have any eligible securities excess of its SLR requirement (maintains only the SLR). This means that the bank can’t borrow under the repo facility.
  • In the case of MSF, the bank can borrow up to 1 % (can be changed by the RBI) below the SLR (means 1% of Net Demand and Time Liabilities or liabilities simply).
  • The working of MSF is thus related with SLR. For example, imagine that a bank has securities holding of just 19.5 % (of NDTL). This is equal to its mandatory SLR holding. The bank can’t borrow using the repo facility. But as per the MSF, the bank can borrow 1 % of its liabilities from the RBI. Sometimes the RBI increases the limit of borrowings to 2% of NDTL. As in the case of repo, the bank has to mortgage the securities with the RBI.
  • MSF rate and the Repo rate: The bank has to give higher interest rate to the RBI. The interest rate for MSF borrowing was originally set at one percent higher than the repo rate. As on November 2017, the RBI has lowered the difference between repo rate and MSF to 0.25%. The MSF rate and Bank rate are equal.
  1. Qualitative Credit Control Methods

These are those tools through which the Central Bank not only controls the value of loans but also the purpose for which these loans are assigned by the commercial banks. Some of these are:

Moral Suasion: 

  • Moral suasion means persuasion and request. To arrest inflationary situation Central Bank persuades and requests the commercial banks to refrain from giving loans for speculative and non-essential purposes. On the other hand, to counter defiation Central Bank persuades the commercial banks to extend credit for different purposes.
  • Under Moral Suasion, RBI issues periodical letters to bank to exercise control over credit in general or advances against particular commodities.
  • Periodic discussions are held with authorities of commercial banks in this respect.
  • In India, from 1949 onwards the Reserve Bank has been successful in using the method of moral suasion to bring the commercial banks to fall in line with its policies regarding credit.

Rationing of credit:  

  • Rationing of credit is a method by which the Reserve Bank seeks to limit the maximum amount of loans and advances, and also in certain cases fix ceiling for specific categories of loans and advances. RBI also makes credit flow to certain priority or weaker sectors by charging concessional rates of interest. This is at times also referred to as Priority Sector Lending.

Regulation of Consumer Credit:

  • Now-a-days, most of the consumer durables like Cars, Televisions, and Laptops, etc. are available on installment basis financed through bank credit. Such credit made available by commercial banks for the purchase of consumer durables is known as consumer credit.
  • If there is excess demand for certain consumer durables leading to their high prices, Central Bank can reduce consumer credit by (a) increasing down payment, and (b) reducing the number of installments of repayment of such credit.
  • On the other hand, if there is deficient demand for certain specific commodities causing deflationary situation, Central Bank can increase consumer credit by (a) reducing down payment and (b) increasing the number of installments of repayment of such credit.

Direct action:

  • This method is adopted when a commercial bank does not co-operate with the central bank in achieving its desirable objectives. Direct action may be as:
    • Central banks may charge a penal rate of interest over and above the bank rate upon the defaulting banks;
    • Central bank may refuse to rediscount the bills of those banks which are not following its directives;
    • Central bank may refuse to grant further accommodation to those banks whose borrowings are in excess of their capital and reserves.

Margin Requirements:

  • Generally, commercial banks give loan against ‘stocks or ‘securities’. While giving loans against stocks or securities they keep margin. Margin is the difference between the market value of a security and its maximum loan value. Let us assume, a commercial bank grants a loan of Rs. 8000 against a security worth Rs. 10,000. Here, margin is Rs. 2000 or 20%.
  • If central bank feels that prices of some goods are rising due to the speculative activities of businessmen and traders of such goods, it wants to discourage the flow of credit to such speculative activities. Therefore, it increases the margin requirement in case of borrowing for speculative business and thereby discourages borrowing. This leads to reduction is money supply for undertaking speculative activities and thus inflationary situation is arrested.

Limitations of Monetary Policy

The monetary policy of Reserve bank has played only a limited role in controlling the inflationary pressure. It has not succeeded in achieving the objective of growth with stability.

  • The existence of black money in the economy limits the working of the monetary policy. Black money is not recorded since the borrowers and lenders keep their transactions secret.
  • Informal money lenders on a large scale in countries like India but they are not under the control of the monetary authority. This factor limits the effectiveness of monetary policy in such countries.
  • An important limitation of monetary policy arises from its conflicting objectives. To achieve the objective of economic development, the monetary policy is to be expansionary but contrary to it is to achieve the objective of price stability and curb on inflation. It can be realized by contracting the money supply. The monetary policy generally fails to achieve a proper coordination between these two objectives.
  • Another limitation of monetary policy in India is underdeveloped money market. The weak money market limits the coverage, as also the effecient working of the monetary policy.

Monetary Policy Committee

  • The Monetary Policy Committee (MPC) is a committee of the Central Bank in India (Reserve Bank of India), headed by its Governor, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
  • The MPC replaces the current system where the RBI governor, with the aid and advice of his internal team and a technical advisory committee, has complete control over monetary policy decisions.
  • A Committee-based approach will add lot of value and transparency to monetary policy decisions.
  • Prior to MPC, the RBI governor, with the aid and advice of his internal team and a technical advisory committee, had complete control over monetary policy decisions. This lacked clear objective, accountability and transparency in decision making.
  • All the important committees of namely the Y. V. Reddy Committee (2002), Tarapore Committee (in 2006), Percy Mistry Committee (2007), Raghuram Rajan Committee (2009), Dr. Urjit R. Patel (URP) Committee (2013) (discussed below) recommended for a MPC to decide policy actions.
  • They all opinioned that “Heightened public interest and scrutiny of monetary policy decisions and outcomes has propelled a worldwide movement towards a committee based approach to decision making with a view to bringing in greater transparency and accountability in India.
  • Monetary Policy Committee (MPC) as a statutory committee of the Central Bank in India (Reserve Bank of India), headed by its Governor, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level. The MPC replaces the current system.
  • The MPC will have six members; - the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three members would represent the Government of India. These Government of India nominees are appointed by the Central Government based on the recommendations of a search cum selection committee
  • Government nominees of the MPC will hold office for a period of four years and will not be eligible for re-appointment. These three central government nominees in MPC are mandated to be persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy.
  • RBI Act prohibits appointing any Member of Parliament or Legislature or public servant, or any employee / Board / committee member of RBI or anyone with a conflict of interest with RBI or anybody above the age of 70 to the MPC.
  • Central government also retains powers to remove any of its nominated members from MPC subject to certain conditions and if the situation warrants the same.

Financial Stability and Development Council

  • Background: Since April 2009, India was a member of the international agency looking into the issue, namely, Financial Stability Board.
  • High Level Coordination Committee on Financial Markets (HLCCFM), was the agency facilitating regulatory coordination, informally
  • HLCCFM was the forum to deal with inter-regulatory issues arising in the financial and capital markets, as India follows a multi-regulatory regime for financial sector. It functioned under the Chairmanship of Governor (RBI), with Chairman (SEBI) Secretary (Economic Affairs, Ministry of Finance), Chairman (Insurance Regulatory and Development Authority) and Chairman (Pension Fund Regulatory Development Authority- PFRDA) as members.
  • However, it was an informal body and had its own limitations despite being a good mechanism. In the absence of formal instruments, clear specifications as to its functions/powers and an empowered secretariat to nominate and follow up on the decisions of the HLCCFM, its effectiveness has been limited.
  • The markets that are regulated by members of the HLCCFM have dramatically changed since 1992. Over time, markets have become more complex and converged and are becoming increasingly integrated. In such a scenario, if the regulators do not take an integrated and holistic view, it was felt that outcomes will be sub-optimal.
  • Various Governmental Committees, as given below, have also recommended such an approach to regulation:
    • RBI’s Advisory Group on Securities Market Regulation (RBI-AGSMR 2001);
    • High Level Expert Committee on Making Mumbai an International Financial Centre (MIFC 2007);
    • Committee on Financial Sector Reforms (CFSR 2008);
    • Committee on Financial Sector Assessment (CFSA 2009).
  • With a view to strengthen and institutionalize the mechanism for maintaining financial stability and enhancing inter-regulatory coordination, Indian Government setup an apex-level Financial Stability and Development Council (FSDC), in the Union Budget 2010–11.

Composition:

  • The Chairman of the FSDC is the Finance Minister of India and its members include the heads of the financial sector regulatory authorities (i.e, SEBI, IRDA, RBI, PFRDA and FMC) , Finance Secretary and/or Secretary, Department of Economic Affairs (Ministry of Finance), Secretary, (Department of Financial Services, Ministry of Finance) and the Chief Economic Adviser.
  • The commodities markets regulator, Forward Markets Commission (FMC) was added to the FSDC in December 2013 subsequent to shifting of administrative jurisdiction of commodities market regulation from Ministry of Consumer Affairs to Ministry of Finance.
  • Mandate: The Council would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates. It will address inter-regulatory coordination issues and thus spur financial sector development. It will also focus on financial literacy and financial inclusion. What distinguishes FSDC from other such similarly situated organizations across the globe is the additional mandate given for development of financial sector.

Thalinomics

Context

The Economic Survey 2020 coined a new term called ‘Thalinomics’ and the government pitched the term as “economics for the common man”.

About

  • The Economic Survey 2020 made a unique attempt to quantify the cost incurred in putting together one complete home-made meal — the healthy Indian thali.
  • Thali prices represent the total money spent on preparing dishes for a meal in a household.
    • Thalinomics captures the economics of a plate of food in India.
  • Rise in Affordability: Despite recent concerns about rising food prices, the Economic Survey has stated that for a worker, a vegetarian thali is 29% more affordable since 2006-07. And affordability of anon-vegetarian thali improved by 18 per cent.
    • It also looked at an industrial worker’s ability to pay for two thalis a day for his/her household of five individuals.
  • Conclusion: Basically the survey attempts to calculate the cost that an average worker incurs based on his actual plate of food in India.
    • And on calculating that cost, the survey concludes that works were able to save due to moderation in prices of items that form part of a regular Indian thali.

Calculations

  • The analysis is based on data on prices taken from the Consumer Price Index for Industrial Workers (CPI IW) for around 80 centres in 25 States/UTs from April 2006 to October 2019.
  • The survey took into account the prices of cereals (rice/ wheat), sabzi (vegetables, other ingredients), dal (pulses with other ingredients) as well as the cost of fuel.
  • In a non-vegetarian thali, pulses are replaced by 60 gm of non-vegetarian components keeping in mind prices of eggs, fresh fish and goat meat.
  • It also took into consideration prices of ingredients such as spices and condiments such as mustard oil, coconut oil and groundnut oil, turmeric and chillies.
  • For fuel, cooking gas prices as well as firewood prices were taken into consideration.

State-wise performance

  • Across the board gains: Both across India and the four regions– North, South, East and West – we find that the absolute prices of a vegetarian Thali have decreased since 2015-16 though it increased during 2019.
    • Exception: Gains are observed across regions, with the exception of the Northern Region and Eastern Region in 2016-17 in the case of vegetarian Thali.
  • Southern region with highest gains: The highest gain in any year was in the Southern region for a vegetarian Thali in 2018-19 of around 12 per cent of annual earnings of a worker.
  • Jharkhand thali the cheapest: Jharkhand emerged as the State with cheapest vegetarian thali during April-October 2019.
    • Two vegetarian thalis for a household of five in Jharkhand required about 25 per cent of a worker’s daily wage.

Results from Thalinomics

  • Gains: After 2015-16, an average household of five individuals that eats two vegetarian thalis a day gained around 10,887 on average per year, while a non-vegetarian household gained 11,787 on average per year.
    • Gains here are spends that households saved on due to moderation in the prices of commodities.
    • A worker who would have spent 70% of their daily wage on two vegetarian thalis a day for a household of five in 2006-07, would only have to spend 50% of their income for the meals in 2019-20.
  • Fall in prices: Survey said there was a shift in the dynamics of thali prices from 2015-16. Gains are due to significant moderation in prices of vegetables and dal from 2015-16 when compared to the previous trend of increasing prices.
  • Reasons for gains due to reform measures: Many reform measures were introduced during the period of analysis to enhance the productivity of the agricultural sector as well as efficiency and effectiveness of agricultural markets for better and more transparent price discovery:
    • PradhanMantriAnnadataAaySanraksHanAbhiyan (PM-AASHA).
    • PradhanMantriKrishiSinchayeeYojana (PMKSY) - Per DropMore Crop.
    • PradhanMantriFasalBimaYojana (PMFBY).
    • Soil Health Card.
    • E-National Agricultural Market (e-NAM).
    • National Food Security Mission (NFSM).
    • National Food Security Act (NFSA).
  • Recent trend is inflationary: Survey shows that accelerating food inflation over the last few months has broken the earlier trend.
    • Workers are now forced to use an increasing share of their wages on food.

Challenges

  • Small sample size: The calculations deal with workers engaged in the organised manufacturing sector, which form only 28% of the total manufacturing workforce.
    • It excludes workers from the unorganised sector, as well as rural and agricultural workers.
  • Fall in incomes: While it is true that there was a decline in food prices during most of the period since 2015-16, this is also a period of stagnant or declining rural wages and highest unemployment.
    • Low inflation is meaningless when real wages are falling in rural areas, as this means that the poor are not able to consume more as their incomes are falling.

Asset Monetisation Programmes

Context

In Budget 2020, government proposed to use tax sops to nudge overseas investors towards its upcoming asset monetization schemes.

About

  • Overseas investors for asset monetisation programmes: Government did not make major announcements for the infrastructure sector and, instead, proposed to use tax sops to push overseas investors towards its upcoming asset monetization programmes.
  • Lower allocation to key infra sectors: A reading of the expenditure budget shows that the government’s total allocation to four key infrastructure segments—roads, airports, railways and civil aviation—is nearly 4% lower for FY21 than the revised budget estimates of ?4,64,928 crore spent on these sectors in FY20.
  • Low allocation towards capital spending: According to ICRA the budgetary allocation towards capital spending for the ministry of road transportation and highways for FY21 was around 18% lower than what was required to fund the government’s flagship Bharatmala programme.
    • Even Internal and Extra Budgetary Resources (IEBR), which includes market borrowings and asset monetization, for National Highways Authority of India (NHAI)—the nodal agency that builds India’s roads— had a lower budget allocated for FY21, against in FY20.
  • Focus on capital conservation: The government seems to be in capital conservation mode and is focusing on implementing existing projects already announced before than taking up any new project.
    • There is thrust on asset monetization.
    • There are plans to privatize more roads and one major port.
  • Upcoming projects: Government will focus on development of 2,500km of access-control highways, 9,000km of economic corridors, 2,000km of coastal and land port roads, and 2,000km of strategic highways.
    • The Delhi-Mumbai expressway and two other packages will be completed by 2023 and the Chennai-Bengaluru Expressway will also be started.
    • Four station re-development projects.
    • 148km-long Bengaluru Suburban Transport project.
    • Expansion of National Gas Grid.

Asset Monetisation Programme

  • The Department of Investment and Public Asset Management (DIPAM) is working on restructuring and asset monetisation of public sector enterprises for better management and competitiveness in the present world.
  • Cabinet has approved procedure and mechanism for Asset Monetization of Central Public Sector Enterprises (CPSEs)/Public Sector Undertakings (PSUs)/other Government Organizations and Immovable Enemy Properties.
  • Objective: The objective of the asset monetization programme of the Government of India is to unlock the value of investment made in public assets which have not yielded appropriate or potential returns so far.
  • Procedure and Guidelines: Guidelines for asset monetisation programme include principles and mechanism for capital restructuring of CPSEs regarding payment of dividend, issue of bonus shares, and buyback of shares by CPSEs.
    • It shall apply to all corporate bodies where government of India has controlling interest.
    • The focus of these guidelines is on optimum utilization of funds by CPSEs to spur economic growth.
  • Asset Monetization is a way of getting more cash on the balance sheet and reducing the debt-to-capital ratios that are crucial to rating agencies.
    • Sale proceeds (for example, disinvestment proceeds) can be used to acquire additional operations, stabilize costs, or revitalize existing properties, retire existing debt to increase revenue production; there are no restrictions on the use of the funds.

Mechanism

  • Government is hoping to get fresh capital back into the system to develop Greenfield assets.
  • The government is offering tax breaks to overseas investors, particularly sovereign wealth funds and pension funds, to invest in domestic infrastructure.
  • Equity support to IIFC and NIIF: Allocation of 22,000 crore as equity support to India Infrastructure Finance Company Ltd (IIFC) and National Investment and Infrastructure Fund (NIIF) which can leverage this fund infusion 2-3 times to invest in public infrastructure.
  • Means of raising capital from the public market
    • Privatizing operating infrastructure assets.
    • Toll-operate-transfer agreements with private investors
    • Setting up infrastructure investment trusts (InvITs)
  • Incentives to foreign investors:
    • 100% tax exemption to the interest, dividend and capital gains income.
  • Criticism: However, experts say that this class of investors tends to buy operating assets, leaving under-construction and Greenfield projects devoid of any funding.

‘2636 EV Charging Stations sanctioned under FAME-II’

Context

In a bid to give a further push to clean mobility in Road Transport Sector, the government has sanctioned 2636 charging stations in 62 cities across 24 States/UTs under FAME India (Faster Adoption and Manufacturing of Electric Vehicles in India) scheme phase II.

About

What is FAME India Scheme?

  • The FAME India (Faster Adoption and Manufacture of (Hybrid and) Electric Vehicles) Scheme, launched in 2015, is an incentive scheme for the promotion of electric and hybrid vehicles in the country.
  • The scheme aims to promote electric mobility and the scheme gives financial incentives for enhancing electric vehicle production and creation of electric transportation infrastructure.
  • The incentives are provided in the form of subsidies to manufactures of electric vehicles and infrastructure providers of electric vehicles.
  • FAME India is a part of the National Electric Mobility Mission Plan. Main thrust of FAME is to encourage electric vehicles by providing subsidies. 

Phase-I of the Scheme:

  • The Phase-I of this Scheme was initially launched for a period of 2 years, commencing from 1stApril 2015, which was subsequently extended from time to time and the last extension was allowed up to 31st March 2019.
  • The 1stPhase of FAME India Scheme was implemented through four focus areas namely:
    • Demand Creation
    • Technology Platform
    • Pilot Project
    • Charging Infrastructure
  • Market creation through demand incentives was aimed at incentivizing all vehicle segments i.e. 2-Wheelers, 3-Wheelers Auto, Passenger 4-Wheeler vehicles, Light Commercial Vehicles and Buses.

What’s new in the second phase?

  • FAME II will cover buses with EV technology; electric, plug-in hybrid and strong hybrid four wheelers; electric three-wheelers including e-rickshaws and electric two-wheelers.
  • Under the second phase of the Faster Adoption and Manufacturing of Electric Vehicles in India (FAME-II) scheme, 10 lakh registered electric two-wheelers with a maximum ex-factory price will be eligible to avail incentive of Rs 20,000 each.
  • It will also support 5 lakh e-rickshaws having ex-factory price of up to Rs 5 lakh with an incentive of Rs 50,000 each.
  • FAME-II will offer an incentive of Rs 1.5 lakh each to 35,000 electric four-wheelers with an ex-factory price of up to Rs 15 lakh, and incentive of Rs 13,000 each to 20,000 strong hybrid four-wheelers with ex-factory price of up to Rs 15 lakh.
  • It will support 7,090 e-buses with an incentive of up to Rs 50 lakh each having an ex-factory price of up to Rs 2 crore

The current sanction:

  • As many as 317 EV charging stations have been allotted in Maharashtra, 266 in Andhra Pradesh, 256 in Tamil Nadu, 228 in Gujarat, 205 in Rajasthan, 207 in Uttar Pradesh, 172 in Karnataka, 159 in Madhya Pradesh, 141 in West Bengal, 138 in Telangana, 131 in Kerala, 72 in Delhi, 70 in Chandigarh, 50 in Haryana, 40 in Meghalaya, 37 in Bihar, 29 in Sikkim, 25 each in Jammu & Kashmir and Chhattisgarh, 20 in Assam, 18 in Odisha and 10 each in Uttarakhand, Puducherry and Himachal Pradesh. 

Benefits of using Electric Vehicles:

Though there are numerous benefits of using electric vehicles, the major are divided on the basis of environment and economy:

  • Environment: Using electric vehicles (EVs) can significantly contribute in achieving the target of “Paris climate agreement”. EVs are carbon dioxide neutral as there is no direct emission from the vehicle. 
  • Economy: EVs, more efficiently help in saving money of government, which can be utilized in other productive work. Effective adoption of electric and shared vehicles could help the economy save more than $60 billion in diesel and petrol along with cutting down as much as 1 gigatonne (GT) of carbon emissions, most probably by 2030.
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