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  • Where the “fiscal space” debate should focus?

    The article focuses on the “fiscal space” debate in India. So, what is this debate? This debate is focuses upon the size of the fiscal deficit this year in India, ways that could be used to finance it and upper limit of this deficit etc. But the author argues that we should focus on debt/GDP trajectory in the subsequent years. Besides this, he suggests what our policy intervention comprise.

    Monetary policy and fiscal policy: Efficacy Vs. Space debate

    • In response to the economic disruption caused by Covid-19, monetary policy has moved swiftly and aggressively in many economies.
    • But questions remain on its incremental efficacy.
    • With a high level of uncertainty around, risk-averseness is evident in the financial systems.
    • This risk-averse tendency reduces the efficacy of lower rates and higher liquidity.
    • So, while monetary policy may have space, how much efficacy will it have?
    • Fiscal policy i.e. spending by the governments can have much efficacy.
    • But how much space does it have? Therein lies the debate.

    Focus on Debt/GDP trajectory, not on level

    • The “fiscal space” debate in India has centred exclusively on this year’s deficit and how it will be financed.
    •  But a more holistic assessment of fiscal space should focus on two factors 1) the government’s inter-temporal budget constraint 2)  how India’s debt/GDP evolves in the coming years.
    • These two are the factors that rating agencies and foreign investors will eventually focus on.
    • Following are the question that debate should focus on.
    • How much will India’s debt/GDP jump up this year?
    • More importantly, what happens thereafter?
    • Will debt/GDP keep rising year after year? Or will it start declining?
    • As research has found, it’s typically the trajectory of debt/GDP — more than the level — that impacts future growth.

    Evolution of debt

    • The evolution of debt is essentially a function of three variables:
    • 1) The primary deficit.
    • 2) Nominal GDP growth
    • 3) The government’s cost of borrowing.
    • The higher is the difference between growth and cost of borrowing, the greater is the depreciation of the existing debt stock.
    • High growth allows countries to “grow out” of their debts.
    • In contrast, high primary deficits worsen the debt burden.

    Where does India stand?

    • India comes into COVID-19 with a debt/GDP of about 70 per cent.
    • A primary deficit across the Centre and states of about 2.5 per cent of GDP including the Centre’s extra-budgetary resources. — based on the Revised Estimates for 2019-20.
    • A weighted average sovereign borrowing cost of about 7.5 per cent (on the stock of debt) and an estimated pre-COVID nominal GDP growth of 7.5 per cent in 2019-20.
    • In other words, the favourable gap between growth and borrowing costs had closed.
    • With this backdrop, one can simulate what happens to debt/GDP in the coming years under different growth, fiscal and interest-rate scenarios.
    • What do we find?
    • Even under relatively benign scenarios –nominal GDP growth of 4 per cent and a fiscal expansion of 3 per cent of GDP this year- India’s debt/GDP will balloon towards 80 per cent by the end of the year.
    • But India will not be alone. Public debt is expected to balloon all over the world.
    • Instead, what will matter for sustainability is the trajectory of debt thereafter.
    • Does debt/GDP come down or keep going up in subsequent years?

     Fiscal space depends on potential growth in coming years

    • The subsequent trajectory of Debt/GDP depends overwhelmingly on medium-term growth.
    • Consider the following two scenarios and refer to the figure given below-
    • 1. Fiscal Deficit 6%
    • Consider that this year’s combined fiscal deficit widens by 6 per cent of GDP.
    • But the primary deficit is then consolidated back to 2 per cent of GDP in the next 3 years.
    • And as long as nominal GDP is 10 per cent in the medium term which corresponds to real GDP growth of 7 per cent.
    • Debt/GDP gets on to a constantly declining path after the third year.
    • This suggests a bigger fiscal intervention is sustainable but only if medium-term growth prospects are lifted in tandem.
    • 2. Fiscal Deficit 3%
    • Consider that this year’s deficit widens by “just” 3 per cent of GDP.
    •  But medium-term nominal GDP growth settles at 8 per cent that is, real GDP growth of 5 per cent.
    • Debt/GDP rises relentlessly for the next decade towards 90 per cent of GDP.

    Key takeaway: focus on medium-term growth

    • This suggests even a relatively-conservative fiscal response this year becomes unsustainable if medium-term growth prospects are diminished.
    • Small changes in medium-term growth have large implications for fiscal sustainability.
    •  How much fiscal space India has to respond in the crisis year will depend crucially on what potential growth is likely to be in the coming years.
    • The more that India’s policy response can preserve, protect and boost medium-term growth — both through the nature of the policy intervention this year and the accompanying reforms — the larger the fiscal response India can mount.
    • Put more starkly, the fiscal debate between “need” and “affordability” is endogenous.
    • The medium-term sustainability of any fiscal package this year will depend on the nature of growth-enhancing interventions and reforms that accompany it.

    So, what could the interventions comprise?

    1. Keep small business afloat

    • Policy must ensure that all viable enterprises can survive the pandemic.
    • If economically-viable but illiquid small and medium enterprises go under, the implications both for unemployment and India’s underlying production capacity could be severe.
    • The government’s credit-guarantee scheme is, therefore, very important and should hopefully induce banks to provide much-need working capital to keep small businesses afloat.

    2. Reforms in the finance sector

    • It is important to jump-start a risk-averse financial sector into funding an economic recovery, more broadly.
    • Last week’s bond market interventions which involved special liquidity and partial guarantee funds are important to ease conditions at the financial periphery.
    • Over time, however, liquidity must give way to capital and reform.
    • Following steps will be crucial to strengthening the financial sector-
    • 1)Pre-emptively recapitalising public sector banks for growth and resolution capital.
    • 2) Conducting an AQR for the NBFC sector after pandemic.
    • 3) Then converting well-run NBFCs into banks to avail of a stable deposit franchise.
    • 4) Modifying the incentives under which public sector banks operate.
    • Higher potential growth is only feasible if the financial sector is able to fund it.

    3. Reforms in the other sectors

    • Real reforms must accompany those in the financial sector.
    • The government’s announcement on unshackling agriculture — if carried through to its logical conclusion — is potentially game-changing for farmers and will be a landmark reform for the sector.
    • As COVID-19 hastens the reorganisation of supply-chains within Asia, India must seize the moment to integrate into the Asian supply chain.
    • Revisit a Special Export Zone (SEZ) model with the appropriate regulatory environment to avoid the pitfalls of the past.
    • Path dependence will be key. If the first one or two SEZs succeed, it would create a powerful demonstration effect both externally to help attract more firms into India.
    • And internally inducing different states to compete to create their own SEZs to drive jobs and investment.

    4. Social infrastructure and ways to pay for it

    • If the virus has taught the world anything, it’s the criticality of social infrastructure.
    • India will not be able to fundamentally alter its growth potential without crucial investments in health and education.
    • The government’s announcement to boost health spending is, therefore, very welcome.
    • But how will this be paid for? This is where policy must get creative.
    • Existing assets on the public sector balance sheet must be aggressively monetised to fund growth-enhancing investments in physical and social infrastructure.
    • This will simultaneously take the pressure off the fiscal and financial sectors, and deliver a productivity-enhancing swap on the public sector balance sheet.

    The article is helpful to consolidate the basic understanding of the macroeconomic parameters of economy. Consider the question asked by UPSC last year “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments”

    Conclusion

    Higher potential growth is the antidote to many pressures, from incomes to jobs to debt sustainability. To the extent this unprecedented crisis creates political space and capital to reform, the opportunity must be seized.

    Back2Basics: Nominal GDP

    • Nominal gross domestic product is gross domestic product (GDP) evaluated at current market prices. 
    • GDP is the monetary value of all the goods and services produced in a country.
    • Nominal differs from real GDP in that it includes changes in prices due to inflation, which reflects the rate of price increases in an economy.

    Primary Deficit

    • Primary deficit refers to the difference between the current year’s fiscal deficit and interest payment on previous borrowings.
    • It indicates the borrowing requirements of the government, excluding interest.
    • It also shows how much of the government’s expenses, other than interest payment, can be met through borrowings.

    Debt/GDP ratio

    • The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP).
    • By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.
    • Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

    AQR- Asset Quality Rating

    • An asset quality rating refers to the assessment of credit risk associated with a particular asset, such as a bond or stock portfolio.
    • The level of efficiency in which an investment manager controls and monitors credit risk heavily influences the rating bestowed.
    • And because asset quality is an important determinant of risk that profoundly impacts liquidity and costs, analysts go to great lengths to make sure they issue the most accurate evaluations possible.
    • After all, their pronouncements can greatly affect the overall condition of a business, bank, or portfolio for years to come.

  • Species in news: Pinanga Andamanensis

    A rare palm endemic to the South Andaman Island is finding a second home at Thiruvananthapuram-based Jawaharlal Nehru Tropical Botanic Garden and Research Institute (JNTBGRI).

    Last year one  species from our newscard : Species in news: Hump-backed Mahseer made it into the CSP 2019.  The ‘Abutilon ranadei’ flower in the newscard creates such a vibe yet again.

    A stand-alone species being mentioned in the news for the first time often find their way into the prelims. Make a special note here.

    Pinanga Andamanensis

    • Pinanga andamanensis is an IUCN critically endangered species and one of the least known among the endemic palms of the Andaman Islands.
    • The name is derived from ‘Penang’, the modern-day Malaysian state.
    • Its entire population of some 600 specimens naturally occurs only in a tiny, evergreen forest pocket in South Andaman’s Mount Harriet National Park.
    • It was originally described by the Italian botanist Odoardo Beccari in 1934.
    • His description was based on an old herbarium specimen collected by E.H. Man, a late-19th century assistant superintendent in the Andaman administration.
    • After that first identification, it was thought to be extinct till 1992.

  • [pib] Shekatkar Committee recommendations on Border Infrastructure

    Government has accepted and implemented three important recommendations of the Committee of Experts (CoE) under the chairmanship of Lt General D B Shekatkar (Retd.) relating to border Infrastructure.

    Practice question for mains:

    Q. India’s unique geo-strategic location needs an all-weather and efficient border infrastructure. Comment.

    About Shekatkar Committee

    • The military reforms committee – under Lt General (retd.) DB Shekatkar – was set up by then Raksha Mantri Manohar Parrikar in 2015.
    • The committee was established with a mandate for Enhancing Combat Capability and Rebalancing Defence Expenditure.
    • Shekatkar Committee had made recommendations on enhancing the combat potential of India’s three armed forces, rationalizing the defence budget etc.
    • The committee submitted its report on December 21, 2016. It had apparently exceeded its brief with some 200 recommendations.
    • A major recommendation is that the defence budget should be 2.5% to 3% of the GDP.

    Recommendations on border infrastructure

    • On the matter related to creating border infrastructure, the Government has implemented the recommendation of CoE to outsource road construction work beyond the optimal capacity of Border Roads Organisation (BRO).
    • These were related to speeding up road construction, leading to socio-economic development in the border areas.
    • The other recommendation relating to the introduction of modern construction plants, equipment and machinery has been implemented.

    Back2Basics: Border Roads Organisation (BRO)

    • The BRO develops and maintains road networks in India’s border areas and friendly neighboring countries and functions under the Ministry of Defence.
    • It is entrusted for construction of Roads, Bridges, Tunnels, Causeways, Helipads and Airfields along the borders.
    • Officers from the Border Roads Engineering Service (BRES) and personnel from the General Reserve Engineer Force (GREF) form the parent cadre of the Border Roads Organisation.
    • It is also staffed by officers and troops drawn from the Indian Army’s Corps of Engineers on extra regimental employment.
    • The BRO operates and maintains over 32,885 kilometers of roads and about 12,200 meters of permanent bridges in the country.

  • Atmanirbhar Abhiyan Package

    The article examines the various aspects of the recently announced Atmanirbhar Bharat Abhiyaan (ANBA). But before digging deeper into the ANBA the author ruminates over India’s growth (GDP) story. Reasons for India’s failure to deliver on the economic empowerment are also examined. In the end, the relation between the free economies and the welfare states is examined.

    The good and the bad of India’s GDP story

    • India crossed the UK two years ago, France last year, and will cross Germany and Japan in the next five years. (In terms of nominal GDP)
    • That will leave only America and China ahead of us.
    • But India’s per capita GDP story is on a different track.
    • We once equalled Korea (1960) and China (1997) but today there are 138 countries ahead of us.
    • The COVID-19 lockdown and the stories of pain inflicted on migrant workers exposes how per capita GDP is more important for our citizens than total GDP.

    A take on Economic empowerment

    • Ramchandra Guha, in his book- Gandhi: The Years that Changed India, suggests that while other patriots had used Swaraj to signify national independence, Gandhiji made India aware of its true or original meaning, Swa-Raj, or self rule- both political and economic.
    • Our collective political Swaraj hasn’t always translated into individual economic Swa-Raj because of inadequate formalisation, industrialisation, urbanisation, financialisation, and skilling.

    Atmanirbhar Bharat Abhiyaan(ANBA) – A step towards Swaraj

    • The Atmanirbhar Bharat Abhiyaan (ANBA) policy announcements are important moves in meeting Gandhiji’s vision of individual self-reliance and recognising poverty as the worst form of violence.
    • ANBA targets avoiding unemployment becoming hunger and illiquidity becoming insolvency.
    • The agriculture package of Rs 1.63 lakh crore included farm-gate and aggregation point infrastructure, fisheries, animal husbandries, and others like animal vaccination, micro food enterprises.
    • The non-bank liquidity package of Rs 5.94 lakh crore included MSMEs, NBFCs, MFIs, housing finance companies, power discoms, and others (PF, tax relief).
    • The migrant and farmer package of Rs 3.16 lakh crore included concessional credit via kisan credit card, farmer working capital, affordable housing, and others (food, street vendors, microloans).
    • The welfare and health package of Rs 1.85 lakh crore included women and pensioner benefits, MNREGA, emergency health response, and others like food, financial security.
    • RBI’s liquidity measures of Rs 5.24 lakh crore included two phases of targeted long-term repo operations, CRR cut, marginal standing facility limit increase, refinancing facilities, and mutual fund special liquidity facility.
    • The reform to the Essential Commodities Act, APMCs and contract farming directly impact prosperity as 45 per cent of our agricultural labour force generates only 14 per cent of GDP.

    How ANBA maintained fiscal health?

    • ANBA is also important for what it is not. It’s not fiscal profligacy-i.e. the government is spending with due care for fiscal deficit figures.
    • Total spending may be higher if the loans for which government has stated to stand as a guarantor turns NPAs (for ex. MSMEs loans).
    • But for now, it marginally raises our already difficult fiscal deficit.
    • It’s not an institutional assault — RBI’s role in ANBA keeps it away from the political minefield that the US Federal Reserve has entered.
    • The US Fed is buying the bonds sold by corporations (i.e. Fed is spending itself) while the RBI has only lent the money to banks.
    • There is a recognition that RBI has lending powers, not spending powers.
    • It’s not a mindless public sector expansion: The end of monopolies (public sector monopoly) and new public-private partnership opportunities signal pragmatism and efficiency targeting.
    • It’s not waiting for potential COVID upsides: it makes us worthy if risky global just-in-time supply chains get replaced by resilient just-in-case diversification.
    • It’s not shutting off India from the world i.e. Atmanirbhar is not isolationist policy.
    • It creates new openness to ideas, investment, and trade.

    What is on agenda for ANBA 2.0?

    • The unfinished agenda for ANBA 2.0 includes following-
    • Civil service reform-the steel frame has become a steel cage.
    • Government reform-Delhi doesn’t need 57 ministries and 250 people with Secretary rank.
    • Financial reform-sustainably raising credit to GDP ratio from 50 per cent to 100 per cent.
    • Urban reform-having 100 cities with more than a million people rather than 52.
    • Education reform-our current regulator confuses university buildings with building universities.
    • Skill reform-our apprentice regulations are holding back employers and universities.
    • Labour reform-our capital is handicapped without labour and labour is handicapped without capital.

    Welfare state and free economies

    • A modern state is a welfare state with formal private jobs.
    • The idealisation of Scandinavian social democracies forgets that their dense social security nets are underwritten by remarkably free economies.
    • The World Bank Ease of Doing Business scale ranks Denmark third, Norway seventh, and Sweden 12th of 190 countries.
    • Despite — or thanks to — America’s capitalism, its central government spends 37 per cent of GDP while India’s spends 14 per cent.
    • And its ferocious fiscal pandemic response involves $3 trillion government borrowing in the next three months.
    • People suggest the US can sustain its welfare state because it has the world’s reserve currency.
    • But America can afford its welfare state because of the productivity of its cities, companies and citizens. Consider the following-
    • New York’s GDP equals Russia with 6 per cent of the people and 0.00005 per cent of the land.
    • The $4.5 trillion revenue of its 25 largest companies is more than Germany’s GDP.
    • Its per capita income is $55,000.
    • India’s welfare state does not lack intentions but lacks resources.
    • No amount of CSR, philanthropy, or government borrowing can provide the resources for the care of our weak, vulnerable, and unlucky that will flow from more productive cities, firms, and citizens.
    • This is what ANBA hopes to achieve.

    Consider the question “Far from being an isolationist, Atmanirbhar Bharat Abhiyan seeks to make India a welfare state with more productive cities, firms and citizens. Comment.”

    Conclusion

    India missed the manufacturing export train that China boarded but another may be coming.  Policy reform is not the solving of a sum but the painting of a picture — 90 days after the lockdown ends, we need ANBA 2.0 to finish the job.

    Back2Basics: Just in time inventory

    • The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.
    • Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs.
    • This method requires producers to forecast demand accurately.

    Just in case inventory

    • Just in case (JIC) is an inventory strategy in which companies keep large inventories on hand.
    • This type of inventory management strategy aims to minimize the probability that a product will sell out of stock.
    • The company that utilizes this strategy likely has a hard time predicting consumer demand or experiences large surges in demand at unpredictable times.
    • A company practicing this strategy essentially incurs higher inventory holding costs in return for a reduction in the number of sales lost due to sold-out inventory.

  • Sovereign Gold Bonds: A substitute for physical gold

    Gold bond prices rise to near record highs after the second tranche of subscription were closed.

    Questions based on capital markets are quite frequent these years.  Consider this-

    Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly? (CSP 2019)

    (a) Certificate of Deposit

    (b) Commercial Paper

    (c) Promissory Note

    (d) Participatory Note

    What is a Sovereign Gold Bond (SGB)?

    • SGB is a substitute for holding physical gold.
    • The bonds are issued by the RBI on behalf of the government and are a bond denominated in gold.
    • The government issues such bonds in tranches at a fixed price that investors can buy through banks, post offices and also in the secondary markets through the stock exchange platform.

    What are the benefits of buying SGB?

    • These bonds are backed by a sovereign guarantee and can also be held in Demat form.
    • Further, they are priced as per the underlying spot gold prices.
    • Hence, investors who want to invest in gold can buy the bonds without worrying about the safekeeping of physical gold along with locker charges, making charges or purity issues.
    • Plus, these bonds offer interest at the rate of 2.5% per annum on the principal investment amount.
    • While the interests on the bonds are taxable, the capital gains at the time of redemption are exempt from tax.
    • These bonds can also be used as collateral for availing loans from banks and NBFCs.

    How are the bonds structured?

    • SGB has a fixed tenure of eight years, though early redemption is allowed after the fifth year from issuance.
    • Since the bonds are listed on the exchange, these can be transferred to other investors as well.
    • The bonds are priced in rupees based on the simple average of the closing price of gold of 999 purity which published by the India Bullion and Jewellers Association.
    • At the time of redemption, cash equivalent to the number of units multiplied by the then prevailing price would be credited to the bank account of the investor.

    Are there any risks in investing in SGB?

    • A capital loss is a risk since the bond prices would reflect any change in gold prices.
    • If gold prices fall, the principal investment would fall proportionately.

    Why need such bonds?

    • The gold demand rises in times of uncertainty or high inflation.
    • Gold demand is mostly met through imports
    • Years of high imports are ones of high current account deficits which, in turn, have weakened the rupee.
    • It is to reduce this huge import bill that, in November 2015, the government tried to introduce gold bonds.

  • [pib] National Migrant Information System (NMIS)

    The National Disaster Management Authority (NDMA) has developed an online Dashboard – National Migrant Information System (NMIS).

    Did you notice, the peculiarity of the NMIS? The portal is developed and maintained by the National Disaster Management Authority (NDMA) not Ministry of Labour & employment or Labour bureau.

    About NMIS

    • The NMIS aims to capture the information regarding the movement of migrants and facilitate the smooth movement of stranded persons across States.
    • The key data pertaining to the persons migrating has been standardized for uploading such as name, age, mobile no., originating and destination district, date of travel etc., which States are already collecting.
    • States will be able to visualize how many people are going out from where and how many are reaching destination States.
    • The mobile numbers of people can be used for contact tracing and movement monitoring during COVID-19.

    Benefits

    • The portal helps maintain a central repository on migrant workers and help in speedy inter-State communication/co-ordination to facilitate their smooth movement to native places.
    • It has additional advantages like contact tracing, which may be useful in overall COVID-19 response work.

  • International Day of Light and its significance

    The UN marks the International Day of Light (IDL) — an annual initiative held globally to raise awareness on the critical role played by light-based technologies in everyday life.

    The IDL as mentioned in the news creates no scope for a possible prelim question, but the purpose behind its celebration does.  i.e. LASER technology. LIDAR is the latest development in the LASER technology. UPSC may puzzle you here by asking the working principle of LIDAR.

    International Day of Light (IDL)

    • The IDL is administered from the International Basic Science Programme (IBSP) of UNESCO, and its Secretariat is located at the Abdus Salam International Centre of Theoretical Physics (ICTP) at Trieste, Italy.
    • The IDL highlights the contribution of such technologies in various avenues such as science, technology, art, and culture, thus helping achieve the UNESCO goals of education, equality, and peace.
    • The day selected, May 16, marks the anniversary of the first successful operation of the LASER in 1960 by physicist and engineer Theodore Maiman.
    • The LASER is a perfect example of how a scientific discovery can yield revolutionary benefits to society in communications, healthcare and many other fields.

    Why is the IDL celebrated?

    • In 2015, to raise global awareness of the achievements of light science and its applications, the UN observed the International Year of Light and Light-based Technologies 2015 (IYL 2015).
    • The event helped establish links and collaborations between decision-makers, industry leaders, scientists, artists, social businesses, NGOs, and the public at large.
    • Following the success of IYL 2015, Ghana, Mexico, New Zealand and Russia placed a resolution before the UNESCO Executive Board supporting the idea of an International Day of Light.
    • It was adopted on September 19, 2016, at the Board’s 200th session at the UNESCO HQ in Paris, France.
    • The Board decision was endorsed by the UNESCO General Conference at its 39th session on November 7, 2017, and the first IDL was held on May 16, 2018.

    Back2Basics: LASER

    • A laser is a device that emits light through a process of optical amplification based on the stimulated emission of electromagnetic radiation.
    • It is an acronym for “light amplification by the stimulated emission of radiation.
    • The laser stimulates atoms or molecules to emit light at particular wavelengths and amplifies that light, typically producing a very narrow beam of radiation.
    • The emission generally covers an extremely limited range of visible, infrared, or ultraviolet wavelengths.
    • Many different types of lasers have been developed, with highly varied characteristics.
    • A laser is widely used in industrial cutting, surgical removal of tissues etc.
    • LIDAR is the most famous application of LASERs.

    LiDAR (Light Detection And Ranging)

    • It is a remote sensing method that uses light in the form of a pulsed laser to measure ranges (variable distances) to the Earth.
    • It bounces pulsed laser light off the ground, revealing contours hidden by dense foliage.
    • These light pulses—combined with other data recorded by the airborne system— generate precise, three-dimensional information about the shape of the Earth and its surface characteristics.
    • LIDAR systems allow scientists and mapping professionals to examine both natural and manmade environments with accuracy, precision, and flexibility.
    • A LIDAR instrument principally consists of a laser, a scanner, and a specialized GPS receiver.
    • Airplanes and helicopters are the most commonly used platforms for acquiring LIDAR data over broad areas.

  • Mapping: Baltic Travel Bubble

    The Baltic countries of Estonia, Latvia and Lithuania have opened their borders to one another, creating a coronavirus “travel bubble” with an improvised idea to boost travel into their countries.

    Mark the following things on Map:

    1. Baltic Sea and its bordering nations

    2. Irben Strait

    3. Gulf of Riga

    4. Gulf of Finland

    Baltic Travel Bubble

    • The ‘Baltic travel bubble’ aims to facilitate the citizens of these three countries to travel within the region without hassles.
    • However, those who are coming from any other than these three countries would be required to follow self-isolation guidelines and stay in quarantine for exactly 14 days.
    • During the epidemic, Estonia and Lithuania closed their borders to non-citizens and all three nations placed mandatory quarantines for those entering for reasons related to non-work activities.
    • The region has been part of the European Union since 2004 and since 2007 has been a member of the European Schengen Free Travel Area.

    Significance of the travel ease

    • The Baltic nations have shown trust in each other’s healthcare system and have concluded that they have been able to tackle the coronavirus outbreak efficiently.
    • For Asian countries including India, these developments can provide interesting pointers when lockdown relaxations pertaining to travel and flights are being considered.

    Bonus: Try this question from CSP 2011

    Between India and East Asia, the navigation-time and distance can be greatly reduced by which of the following?

    1. Deepening the Malacca straits between Malaysia and Indonesia.

    2. Opening a new canal across the Kra isthmus between the Gulf of Siam and Andaman Sea.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

  • War and Peace: Analysis of BSF’s role

    The BSF came into being in the wake of the 1965 India-Pakistan war. So, its ‘innate’ tasks involves both wartime and peacetime roles. This article is written by a retired IPS officer who has been ADG of BSF.  Our aim is to provide you with on-ground experience of issues in this security force. Focus of the article is on the preparedness of the BSF for its wartime role. From the exam perspective, focus on issues and possible solutions.

    Role of BSF

    • Officially, its role is defined in expansive terms like ‘security of the border of India and matters connected therewith’.
    • The tasks of BSF are divided into peacetime and wartime.
    • 1) The peacetime tasks include preventing smuggling and any other illegal activity, and unauthorised entry into or exit from the territory of India, etc.
    • 2) The wartime tasks of the BSF include holding ground in less threatened sectors, etc.

    Unpreparedness in wartime role

    • The BSF, in terms of its defences, equipment, weaponry and training, is not at all prepared for its wartime role.
    • This means that in the eventuality of any military assault, our ‘first line of defence’ would simply crumble.
    • Falling back on army’s mobilizations for a counterattack may take up to several days.
    • Retreat and loss of territory in this period is a possible scenario.
    • The report titled ‘Border Security: Capacity Building and Institutions’ of the department-related Parliamentary Standing Committee on Home Affairs, submitted to the Rajya Sabha on April 11, 2017:
    • Does not talk about the wartime role of the BSF even once.
    • It talks only of its peacetime role including fencing, floodlights and roads along the borders, development of integrated check posts, and construction of strategic roads.

    The fallacy of infantry attack

    • The founders of the BSF, including the committee of secretaries, had a wrong presumption that the assault on the ‘first line of defence’ will be by the enemy’s ‘exposed’ infantry.
    • This assault, they imagined, would be repulsed by BSF soldiers wielding similar arms.
    • But that presumption is a folly.
    •  Now, as a rule of thumb, infantry assault, whether supported by armour or not, or even a purely armour assault on any position is preceded by as heavy and as accurate artillery bombardment as possible.
    • If the attacking nation could afford it, such as the US during the 1991 Gulf War the bombardment could be aerial also.

    Unprepared to withstand shelling

    • Our ‘first line of defence’ does not have any defensive structures or fortifications that could withstand artillery bombardment even for a minute.
    • According to photographs available in the public domain, most BSF observation posts on the international border are ramshackle structures of tin sheets and sandbags erected on small mounds of earth.
    • Adding to that, the mounds are in full view of the enemy and their locations are known to them to the last centimetre.

     Uninspiring weaponry

    • The photographs of the 105 mm Indian Field Gun and their staple, the 7.62 mm medium machine gun are available in public domain.
    • The 105 mm Indian Field Guns have been placed under the operational command of the army, and BSF would not be able to use them when the enemy makes first contact with them.
    • That leaves them with their 51 mm and 81 mm mortars.
    • The 51mm mortar, with just 109 grams of explosive per shell and a maximum range of  850 m is as good as useless in a war.
    • The 81 mm mortar bomb with an explosive charge of 750 grams has a maximum range of 6000 m.
    • The enemy artillery would in any case be firing from way beyond that range, thereby making effective retaliation through mortars impossible.
    • Even when enemy IFV/APC or armour would come closer and in range, the smooth-bore 81 mm mortar is inherently not accurate enough to hit a moving vehicle. (smoothness of bore reduces accuracy)
    • Even the NATO rifled 120 mm mortars have a CEP (circular error probable) of 136 m.
    • As for the 7.62 mm medium machinegun, it is an anti-personnel weapon with the armour penetration of the M80 bullet being just 3 mm at 500m.
    • That makes it useless against even lightly armoured vehicles.
    • This means that the BSF outposts will not be able to deliver any effective fire at all on an enemy assault.

    IPS leadership issue

    • Since the BSF’s inception, the force’s Indian Police Service (IPS) leadership has not focused on the wartime role of the BSF.
    • The IPS officers in top positions in the BSF lack knowledge of military science that could enable them to appreciate and address the wartime role.

    Way forward

    •  The only defence feasible against artillery bombardment is to go sub-surface—in the form of deep concrete dugouts and fire trenches.
    • Then we also need elaborate anti-tank ditches.
    • To deliver effective fire on enemy armoured and lightly armoured vehicles, and infantry operating under their protection, the BSF needs weapons which carry enough explosive payloads to tackle armour, both light and heavy.
    • Portability, manoeuvrability and accuracy are important considerations in the ‘first line of defence’ attacking armour.
    • A veritable battery of ATGMs and cheaper yet accurate options like the 80 mm Breda Folgore RCL are available.
    • Using them effectively would require defensive fighting positions interconnected by communication trenches.
    • Research needs to be done to mount weapons like the Shipunov 2A42 30 mm autocannon on platforms faster than the BMP-2.
    • Similarly, MMGs/GPMGs need mobile platforms like Humvees to increase their survivability as well as effectivity.

    Consider the question “The BSF, which is often hailed as India’s ‘first line of defence’ has tasked with wartime and peacetime roles. Though it is quite adept in peacetime role, its wartime preparedness needs an overhaul. Comment.”

    Conclusion

    These issues with the BSF could result in a  situation where there is every possibility of rout and retreat in the early days of the war. This issue needs to be urgently addressed by the government.

     

  • Tale of two crises: Global Financial Crisis (GFC) and Corona Financial Crisis (CFC)

    Not all financial crises are the same. And this is more so about the two crises that we have been witness to – the 2008 Global Financial Crisis (GFC) and the current Corona Financial Crisis (CFC). The author points out the four key difference in the two crises. These four difference also mean that the solution for 2008 GFC may not be the solution for the present CFC. But why is it so? Read to know more…

    1. Origin of the two crises

    • The GFC originated in the financial sector.
    • In GFC, banks and financial intermediaries got carried away by irrational exuberance and recklessly piled on risk.
    •  CDS, CDO, MBS, ABS and various other became the villains in the GFC drama as it unfolded in the rich countries.
    • As people lost their wealth and savings in the financial meltdown, demand collapsed and growth slumped.
    • The contagion, which originated in the financial sector, spread to the real economy.
    • In contrast, the CFC came from outside the economic system.
    • The first impact came by way of a supply shock as China-centred supply chains broke down.
    • And then as countries ordered lockdowns and economies shut down, demand slumped.
    • The ensuing distress in the real economy led to distress in the financial system.

    So, how origin of the crisis matter for its resolution?

    • Restoring the faith in the financial system was key to the resolution of GFC.
    • Which meant rescue and rehabilitation of banks and other financial institutions.
    • Once that task in the financial sector was accomplished, repair of the real economy fell in place.
    • The demand came back, supply resumed and growth picked up.
    • In contrast, the central challenge in the resolution of the CFC is to beat the pandemic, and that solution has to come from science.
    • Only when there is public confidence that the incidence of the pandemic has been brought down to a low-level equilibrium, will there be a resolution in both the real and financial economies.
    • We are seeing that even during this crisis, just like in 2008, governments are coming out with fiscal stimulus packages and central banks with monetary stimulus packages.
    • But these are not solutions to the pandemic; they are just holding operations till the central problem is resolved.

    2. No one country hold key to solution

    • The second difference between the two crises arises from the asymmetry of the solutions.
    • The GFC originated in the subprime mortgage sector of the US and then, rapidly engulfed the world.
    • The CFC originated in the Hubei province of China and rapidly engulfed the world.
    • But the similarity ends there.
    • For the resolution of the GFC, restoring financial stability in the US was necessary, and a sufficient condition for restoration of financial stability everywhere.
    • But the situation with the CFC is different.
    • Every country needs to control the pandemic within its borders.
    • But that is not sufficient because the virus can hit back from across the border.
    • No country is safe until every country is safe.

    3. Policy interventions involve a dilemma

    • How the policy interventions interact with one another makes for the third difference between the two crises.
    • During the resolution of the GFC, solutions in the financial sector and in the real economy reinforced each other.
    • For example, to mitigate the crisis, the RBI cut rates and intervened in the forex market, the government extended special concessions for housing and real estate sectors to provide stimulus in the real economy.
    • There was synergy in these actions.
    • In contrast, in managing the challenge of the CFC, what we are seeing is tension between the various sets of policy actions.
    • The effort to contain the pandemic is exacerbating the challenges in both the real economy and the financial sector.
    • The more stringent the lockdown to save lives, the more extensive the loss of livelihoods.
    • Managing this tension is by far the biggest dilemma for governments battling the crisis.

    4. No single large economy to keep the world afloat

    • The global financial crisis, although it was called “global” did not affect all countries equally.
    • China was less affected even as all rich countries were in a financial meltdown.
    • In fact, one of the less acknowledged facts of the 2008 crisis is that it was the stimulus provided by China that kept the global economy afloat.
    • In contrast, now all rich and big economies are weighed down by the virus, and there is not a single large economy to keep the rest of the world afloat.

    Consider the question “Analyse the key differences in the Global Financial Crisis of 2008 and the financial crisis caused by the Covid-19.”

    Conclusion

    If pandemics are going to be more frequent, as is now suspected, it is all the more important that there is a more enforceable global protocol on early warning and information sharing. For all their differences, the GFC and CFC are similar in one respect — they both teach us life-enhancing lessons. The GFC forcefully reminded us that greed and avarice will only bring tears in the end. The CFC is teaching us that the force of nature is bigger than the combined force of our science and technology.

    Back2Basics: Credit Default Swap (CDS)

    • A credit default swap (CDS) is a type of credit derivative that provides the buyer with protection against default and other risks.
    • The buyer of a CDS makes periodic payments to the seller until the credit maturity date.
    • In the agreement, the seller commits that, if the debt issuer defaults, the seller will pay the buyer all premiums and interest that would’ve been paid up to the date of maturity.

    Collateralised Debt Obligations (CDO), MBS and ABS

    • To create a CDO, investment banks gather cash flow-generating assets—such as mortgages, bonds, and other types of debt.
    • These assets are then repackaged into discrete classes or tranches based on the level of credit risk assumed by the investor.
    • These tranches of securities become the final investment products: bonds, whose names can reflect their specific underlying assets.
    • For example, mortgage-backed securities (MBS) are comprised of mortgage loans.
    • And asset-backed securities (ABS) contain corporate debt, auto loans, or credit card debt.
    • CDOs are called “collateralized” because the promised repayments of the underlying assets are the collateral that gives the CDOs their value.
    • Mortgage-backed securities played a central role in the financial crisis that began in 2007 and went on to wipe out trillions of dollars in wealth, bring down Lehman Brothers, and roil the world financial markets.
    • In retrospect, it seems inevitable that the rapid increase in home prices and the growing demand for MBS would encourage banks to lower their lending standards and drive consumers to jump into the market at any cost.