💥Join UPSC 2027,2028 Mentorship (July Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

GS Paper: Indian Economy

  • Time for govt, RBI to rethink bank architecture

    To deal with the damage inflicted by the corona crisis on the economy, both the RBI and the government are planning various monetary and fiscal measures. In its latest measures, the RBI has further reduced the reverse repo rate. This article discusses the impact of these measures and explains why the first round of measures failed in achieving the desired result.

    What was announced in the second round of policy measures by the RBI?

    • RBI reduces the interest on money banks keep in the central bank (reverse repo down by 25 basis points).
    • RBI gives ₹50,000 crores to banks through targeted long-term repo operations or TLTRO 2.
    • And another ₹50,000 crores to Small Industries Development Bank of India (Sidbi) and National Bank for Agriculture and Rural Development (Nabard) to lend to microfinance institutions (MFIs) and non-banking financial companies (NBFCs).

    Banks not transmitting the money

    • Banks globally have a problem.
    • They are not transmitting the money that central banks are providing to businesses that need the money.
    • Imagine that the world has been put into a business coma as we wait for the pandemic to recede.
    • Money to pay rents, interest and salaries is needed by the business to stay alive during this period and banks are showing reluctance to step in.
    • Firms and tiny entrepreneurs need to borrow to stay afloat.
    • Banks typically lend to the larger part of the market and NBFCs and MFIs to the rest—they provide the last mile that banks do not.

    Measures by the RBI to increase the money supply in the market

    • The US Fed buying bonds directly: The US Federal Reserve has taken to buying corporate bonds directly rather than through banks.
    • RBI has not gone that far, but is using its firepower to nudge banks to lend to those who are credit-worthy and who desperately need the money.
    • It has done two things to facilitate this.

    What reduction in Reverse Repo rate by the RBI means?

    • What is reverse repo rate? This is the rate at which banks lend to the central bank—they keep their surplus money with the RBI and get some interest on it.
    • Banks borrow from RBI at the repo rate, which is 4.4% right now.
    • A few weeks ago, the central bank had reduced the reverse repo by a larger percentage than the repo to decrease the incentive to banks to keep money with RBI.
    • But that had a limited impact as on 15 April, banks still had almost ₹7 trillion with the RBI under this window.
    • In the second round, RBI has cut the reverse repo by another 25 basis points to 3.75% to increase the difference between the borrowing rate and the lending rate.
    • What would be the impact of the second reduction in the reverse repo? The RBI is hoping that this would make banks lend to firms, rather than keeping their money safe with RBI.
    • The difference between the rate of borrowing and lending is now 65 basis points.

    An issue of monetary policy transmission is a recurring one. The RBI always try to ensure the transmission but there are several factor that prevent it. Make note of these factors.

    Risk aversion of the banks

    • Banks are displaying deep risk aversion—the desire to keep their capital safe rather than risk investing in investment-worthy bonds.
    • The first round of money put into the system through TLTRO 1.0, brought ₹1 trillion.
    • TLTRO is long-term (one-to-three years) funding to banks at the repo rate or a short-term rate.
    • TLTRO money didn’t reach small and medium firms: Banks took the cheap loan and lent to high-rated public sector units (PSUs) and AA-plus firms—essentially entities who had enough liquidity.
    • The money did not find its way to smaller and medium firms, NBFCs and MFIs—entities that actually reach the last mile.
    • RBI has put another ₹50,000 crores as part of TLTRO 2.0.
    • Banks can only get this money if they lend to NBFCs and MFIs.
    • For A and A-minus (these are still investment-worthy) bonds issued by firms in these sectors, banks stand to get a return of between 10-14%.
    • Banks are borrowing at 4.4% and have the option to lend at a multiplier.
    • That is the incentive given by the RBI to get money down the pipeline.
    • Banks stand to lose 65 basis points if they seek the safety of money with the RBI or stand to gain almost 6-10 percentage points in interest if they lend.
    • It remains to be seen if banks take this nudge and begin lending to lower than the highest safety bonds.

    Refinance to three institutions

    • Another ₹50,000 crores is being provided as a refinance to three institutions-Sidbi, Nabard and National Housing Bank.
    • These banks reach the small-scale firms, rural sector, housing finance firms, NBFCs and MFIs.
    • Again, this should help money reach the last mile.
    • Clearly, there is too much competition at the top end of the market—everybody wants the safe paper and deals.

    The UPSC could ask a direct question with reference to the issue of policy transmission and how it is a serious challenge in crisis such as Covid -19. So, following are some suggestions to deal with this issue.

    Way forward

    • Rethink the bank architecture: With transmission, or the liquidity given by the central bank not going down the line, maybe this is a good time for the government and the RBI to rethink its bank architecture.
    • Develop bond a corporate bond market: There is very little action at the middle and lower end of the market. The development of a robust corporate bond market will help.
    • Early alarm system: The setting up of an early alarm system as proposed by the Financial Resolution and Deposit Insurance (FRDI) Bill to prevent a financial firm failure that takes the whole system down would be a step in the right direction.

    Back2Basics: What is the transmission of monetary policy?

    • Monetary transmission refers to the process by which a central bank’s monetary policy signals (like repo rate) are passed on, through the financial system to influence the businesses and households.
    • There are many monetary policy signals by the RBI; the most powerful one is the repo rate.
    • When repo rate is changed, it brings changes in the overall interest rate in the economy as well.
    • As a result of a decrease in repo rate, the interest rate on loans by banks also changes and this encourages consumption and investment activities of businesses and households.
    • In an economy, both consumption and investment are often financed by borrowings from banks.
    • As the repo rate brings changes in market interest rate, the repo rate channel is often referred to as interest rate channel of monetary transmission.

  • How the RBI is handling ‘The Great Lockdown’?

    To deal with the crippling effects of the pandemic on the economy the government has unveiled certain fiscal measures. After announcing the first round of monetary measures the RBI has unveiled the second round of policy announcements to align itself with the government in its efforts to review the economy. Following are the measures announced by the RBI in its second such announcement.

    • The IMF has called the ongoing economic crisis due to Covid-19 as “The Great Lockdown” and termed it to be the worst recession since the Great Depression.
    • The total estimated loss to global economic growth is pegged at $9 trillion — more than three times India’s GDP.
    • However, while the rest of the world is certain to contract, India is hoping to be one of the few countries that expand their overall GDP, regardless of how small that increase may be.
    • In this regard, both the Centre and state governments, as well as the RBI, have been coming out with policy announcements that mitigate economic distress.

    UPSC can frame the question based on the measures announced by the RBI like “What measures were announced by the RBI to deal with Covid-19 impact on the economy?”. Also, pay attention to various terms and their effect on the economy from the macroeconomic point of view. That understanding helps us to answer the question based on basic concepts.

    What are the announcements made by RBI?

    A) Cutting Reverse-Repo Rate

    • To begin with, the RBI has cut the reverse repo rate further by 25 basis points (100 basis points make up one full percentage point).
    • The reverse repo rate now stands at 3.75 per cent while the repo rate is 4.40 per cent.
    • The idea behind repeatedly cutting reverse repo more than the repo is to incentivise banks to borrow from it at low rates and lend it forward to customers.

    B) Targeted Long Term Repo Operations

    • RBI has announced another TLTRO of Rs 50,000 crore but this time it has mandated that 50 per cent of this amount borrowed by the banks must go to small and mid-sized NBFCs and Micro Finance Institutions (MFIs).
    • Again, the benefits of this move are two-fold. One, it provides more liquidity.
    • More importantly, it also provides it targeted to those institutions that are most hit by the economic slowdown and, as such, most in need of funds to survive themselves.

    C) Credit to NBFCs and MFIs

    • All India financial institutions (AIFIs) such as the NABARD, etc. will be provided special refinance facilities for a total amount of Rs 50,000 crore by the RBI.
    • This credit will help the end consumer, especially in the rural sector, small industries, and housing finance companies.

    D) Expanding Ways and Means Advances (WMAs)

    • On the issue of providing liquidity and fulfilling its role as “the lender of last resort”, the RBI also announced that it will provide more funding to state governments — under the WMA facility.
    • The WMA is essentially is a facility by which state governments borrow from the RBI to meet the shortfall between their revenues and their expenditure.
    • But the WMA is a short-term measure, only meant for exigencies.

    E) Easing NPA norms

    • Apart from easing liquidity in the system like in the past, the other focus has been to provide an easier regulatory regime.
    • The global lockdown has almost completely halted economic activity.
    • Under the circumstances, it is natural that business will struggle to pay back their loans and there will be a steady accretion of non-performing assets (NPAs) across the board.
    • Similarly, to ensure that loans given to real estate projects, that are getting delayed due to the crisis, do not turn into NPAs, the RBI provided an extension of another year before they are recognised as NPAs.

    F) Easing LCR norms

    • Lastly, given the stress on the system and the demand for cash, the RBI has allowed Scheduled Commercial Banks to reduce their Liquidity Coverage Ratio from 100 per cent to 80 per cent with immediate effect.
    • The LCR essentially mandates the amount of cash that a bank is required to keep with itself.
    • At 100 per cent LCR, a bank would have been required to keep 100 per cent of the net cash it expects to flow out of the bank over the next 30 days.
    • With this being reduced to 80 per cent, banks would have more cash to deal with.

    Though no direct question on monetary policy was asked in the recent past,  understanding the basic concepts stands us in good stead while writing the related answer in the exam. So, the terms mentioned above like-TLTRO, WMAs etc. are important from exam point of view.

  • OBICUS Survey by RBI

    The Reserve Bank of India has launched the latest round of quarterly order books, inventories and capacity utilization survey (OBICUS) of the manufacturing sector.

    OBICUS is something new than we often get to hear from RBI…. Most recent was Ways and Means Advances. We can expect prelims question like- “Order books, inventories and capacity utilization survey (OBICUS) of the manufacturing sector is held by” – with options like NSSO, Labour Bureau etc.

    OBICUS

    • OBICUS survey on the manufacturing sector is published quarterly by the RBI since March 2008.
    • It provides an insight into the demand conditions faced by the Indian manufacturing sector.
    • It covers over 2500 public and private limited companies in the manufacturing sector.
    • The company-level data collected during the survey are treated as confidential and never disclosed.

    Items included in OBICUS

    • The information collected in the survey includes quantitative data on new orders received during the reference quarter, backlog of orders, pending orders, total inventories with a breakup between work-in-progress (WiP) and finished goods (FG) inventories and item-wise production.

    Significance of OBICUS

    • The survey provides valuable input for monetary policy formulation.
    • It represents the movements in actual data on order books, inventory levels of raw materials and finished goods and capacity utilization.
    • These are considered as important indicators to measure economic activity, inflationary pressures and the overall business cycle.
    • The survey also gives out the ratio of total inventories to sales and ratio of raw material (RM) and finished goods (FG) inventories to sales in percentages.

  • Insolvency code should be suspended for six months to help companies recover

    This article argues the suspension of IBC for six months. The issues arising out of suspension like damage to the creditors are also dealt with here. Reading of this article will help us understand the finer details of IBC that are relevant from the UPSC point of view. We have also covered one article from livemint dealing with the same issue, but that article covered the issue in a broader sense.

    Who are operational and financial creditors?

    • After the lockdown is over, several companies are likely to default on their dues to both operational and financial creditors.
    • Who is a financial creditor? The financial creditors include banks and others who have given financial assistance to a company in the form of loans and debentures.
    • According to a 2018 amendment to the Insolvency and Bankruptcy Code (IBC) 2017, flat purchasers are also deemed as financial creditors.
    • An operational creditor is just about anyone who has to receive money from a company.
    • The IBC provides a fast-track mechanism to deal with companies which are unable to repay their creditors and have become financially unviable.
    • Section 22 of the Code mandates the appointment of a Resolution Professional (RP) who is expected to miraculously turn around the company in 330 days.
    • If this attempt fails, the company goes into liquidation.

    The two types of creditors were in the news, so pay attention to these terms.

    Increase in threshold limit to file an insolvency petition

    • The IBC’s provisions have been extensively used by various creditors whose dues were not paid.
    • What was the threshold limit? Initially, the threshold limit was just Rs 1 lakh and the IBC became an effective recovery mechanism for all operational creditors.
    • What is the limit now? Just before the lockdown, the finance minister raised the threshold for invoking the insolvency provisions to Rs 1 crore.
    • This limit was raised to prevent proceedings being initiated against small and medium enterprises.

    Possibility of the domino effect after the lockdown is over

    • After the lockdown, several enterprises, large, medium and small, might not be able to pay their dues, at least in the short-term.
    • The easiest way for a creditor to recover money is to initiate insolvency proceedings against the debtor company and threaten it with liquidation.
    • The shutdown of business after the lockdown could have a domino effect.
    • How would the domino effect come into play? If an auto-manufacturer has shut down its operations, the ancillary units will not get their dues.
    • This would then lead to non-payment to downstream vendors and service providers as well.
    • It might take at least three to four months for the situation to stabilise.

    Steps that should be taken to avoid the domino effect

    • Moratorium on the IBC: The most important, and immediate, step that needs to be taken is to have a six-month moratorium on the IBC.
    • It may be necessary to promulgate an ordinance suspending the prospective operation of Sections 7 and 9 of the IBC so that no fresh petition is filed against a company.
    • Impact on creditors: While this could hurt some of the creditors, the damage that could be done to the corporate sector by invoking the IBC is likely to be far greater.
    • A distressed creditor is not without a remedy as he can always approach the civil courts for relief, which will not be so severe on a defaulting company.
    • If an insolvency petition is filed and the RP appointed, it is difficult to stop the insolvency process.
    • The IBC requires a financially-stressed company to be taken over by a financially-sound
    • For example, Essar Steel was taken over by ArcelorMittal and Bhushan Steel was taken over by Tata Steel.
    • In the current scenario, it will be difficult, if not impossible, for an RP to find a suitable buyer and the only option would be to liquidate the company.
    • Using the insolvency process to recover dues is contrary to the IBC’s objectives.

    The objective of the IBC is not just insolvency but the reorganisation of companies, maximisation of value of assets and the need to balance the interests of all stakeholders. Pay attention to this point.

    How the suspension of the IBC will be beneficial?

    • Suspending the IBC for a short period would enable several companies to return to normalcy.
    • It will help them function without the constant threat of an insolvency application and its Board of Directors and management being taken over by the RP.
    • Moreover, the National Company Law Tribunal benches will simply be unable to take any additional workload.

    Conclusion

    Suspending the IBC for six months would be a much-needed step to prevent further damage to the economy. It would be in the larger public interest. Indeed, at this critical stage, permitting the legal remedy of insolvency could be the last nail in the coffin of many companies.

    Back2Basics: What is the Insolvency and Bankruptcy Code?

    • IBC provides for a time-bound process to resolve insolvency.
    • When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency.
    • Under IBC debtor and creditor both can start ‘recovery’ proceedings against each other.
    • Insolvency and Bankruptcy Code 2016 was implemented through an act of Parliament.
    • It got Presidential assent in May 2016.
    • The law was necessitated due to huge pile-up of non-performing loans of banks and delay in debt resolution.
    • Insolvency resolution in India took 4.3 years on an average against other countries such as United Kingdom (1 year) and United States of America (1.5 years), which is sought to be reduced besides facilitating the resolution of big-ticket loan accounts.

  • Can the insolvency code handle the aftermath of the corona crisis?

    The article is about the aftermath of Covid-19 for the Indian business. Though the government has announced the slew of relief packages, one expects a significant spike in the number of bankruptcies. Will India’s Insolvency and Bankruptcy Code be able to deal with this new normal? Some pressing issues that could arise and solutions are discussed here.

    Rise in the pending cases with NCLT

    • Since the commencement of the IBC and setting up of the National Company Law Tribunal (NCLT), 12,000 cases have been filed.
    • Around 4,500 cases have been settled before resolution, with a settlement amount of almost ₹2 trillion.
    • 1,500 cases have been admitted and 6,000 cases are waiting in the queue.
    • The covid-19 epidemic will only increase this traffic jam.
    • Increasing the capacity of NCLT: The pile-up of cases needs to be addressed by increasing capacity of the NCLT, and by ensuring that as many cases as possible are settled without going to the IBC.

    Every issue mentioned here is important from Mains point of view. IBC has been a significant step by the government to streamline the process of insolvency and bankruptcy.

    Need for a relook at section 29A(c) of IBC

    • What is section 29A(c) of IBC? This provision makes ineligible the defaulting person (promoter) from bidding for the asset (buying back) if it has been NPA for a year or more.
    • What was the purpose of section 29A(c): The intent of section 29A is to prevent persons who, by their misconduct or fraudulent motives contributed to the default of the corporate debtor, from “buying back” the corporate debtor from the creditors, potentially at steep discounts.
    • What’s the issue? While this is clearly a justifiable objective, the short window of one year has prevented even genuine promoters who faced major setbacks on account of unforeseen circumstances from being given a second chance.
    • Even though such promoters are often in good the best position to revive their businesses.
    • In view of the current force majeure, we recommend that the grace period of one year under section 29A(c) be extended to two years.
    • And further extensions should be made possible on the approval of a supermajority (i.e. 75%) of the Committee of Creditors.
    • Further, the newly introduced Section 12A allows the bank, which was the insolvency applicant, to exit the insolvency process.
    • Which brings the promoter back in control—provided 90% of the Committee of Creditors agrees and the public bidding process has not commenced.
    • The requirement for exit should be reduced to 75% of the committee.

    Extension of timelines

    • Recently, the Supreme Court did well by passing a suo-moto order on the extension of limitation generally.
    • Based on these SC orders, the National Company Law Appellate Tribunal has ordered that such extension also apply to the outer limit of 330 days for the resolution of corporate insolvency cases.
    • This could be further extended once the gravity of the situation becomes clear over the next few months.
    • The moratorium period on debt financing recently announced by RBI should also be extended to cover money market instruments.

    Need for providing more financing options to corporate debtors

    • While the IBC does provide for interim finance with a preferential position for a corporate debtor, there are known limitations and residual risks on the provision of such finance.
    • The government would do well to look at expanding the market by making changes.
    • The changes could include permitting interim funding by asset reconstruction companies even without being creditors.
    • And making provisions for a minimum return even in case of liquidation, and extending the enhanced priority standing given to interim financiers in the IBC phase to the pre-IBC phase.
    • Post the lockdown, incremental working capital support upto, say, 25% of existing working capital exposure could be allowed in deserving cases even if the account is in default or NPA.
    • This can be deemed to be priority lending to also protect bankers’ interests.
    • The provision could also be made for the extension of concessional finance within limits based on demonstrated export potential.
    • For example- order, short lead-time business, margin adjustments) in order to contribute to the recovery of exporting industries.

    Equitable treatment of operational creditor

    • In the Swiss Ribbons judgment, the Supreme Court urged equitable, though not equal, treatment of operational creditors.
    • The need to protect the interests of operational creditors in bankruptcy proceedings is all the more critical in difficult market conditions where credit would be hard to obtain.
    • Some broad guidelines appear to be desirable.
    • For instance, one could stipulate that in the absence of quality issues, two operational creditors belonging to the same sub-class in terms of the type of product or service sold, should be treated equally.
    • This should be irrespective of group relationships or continuity in the business of the resolved entity.

    Facilitating resolution outside the corporate insolvency resolution process

    • On the issue of closing a case before the onset of insolvency proceedings, there was a case for doing this even before the corona outbreak, and even without the paucity of processing capacity.
    • The labelling of a company as insolvent or bankrupt has a chilling effect on its already dim prospects.
    • Vendors, customers and employees start having second thoughts about associating with this company.
    • Certain rules get triggered—for instance, the rule barring an infrastructure company from accepting new orders.
    • The current outbreak amplifies the case for facilitating resolution outside the corporate insolvency resolution process.
    • At the same time, there is a need to streamline the process to ensure enhanced proceeds.

    Conclusion

    All institutions of the economy will need to fire together in order to maximize the prospects of recovery. A suitably modified bankruptcy framework has a crucial role to play.

    Back2Basics: Difference between financial and operational creditors

    • Financial and operational creditors are different in the sense that their liabilities arise from different origins.
    • Where a financial creditor is liable because of a contract such as a loan or debt and operational creditor is liable because of operational transactions.
    • The difference between a financial creditor and an operational creditor is that a financial creditor is an individual whose relationship with the entity is solely based on financial contracts, such as a loan or debt security.
    • Whereas, an operational creditor is an individual whose liabilities from the entity comes in the form of future payments in exchange for goods or services already delivered.

  • Government must fix an upper limit for fiscal deficit

    D. Subbarao in this article discusses how the government is facing the hard choice of choosing between saving lives and saving the economy. On the government’s response on economic front he argues that the government, unlike the rich countries should keep an upper limit on its spending because of the dangers involved in unrestricted spending.

    Why the dilemma is sharpest for India?

    • This dilemma is arguably the sharpest for India.
    • Because of our high population density and poor medical infrastructure, any laxity in prevention can result in a huge health disaster.
    • On the other hand, an extended lockdown will force millions into the margins of subsistence, push small and large firms alike into bankruptcy, seriously impair financial stability and land us in a humanitarian and economic disaster.

    Why is the relief package criticised as too little?

    • After the lockdown, the government announced a relief package amounting to 0.8 per cent of GDP, that’s been criticised as being too little.
    • From a study of a sample of countries, the latest issue of The Economist reports that India’s lockdown has been the most stringent while its fiscal relief package is the smallest in proportion to GDP.

    What could be the reasons for a cautious approach in the relief package?

    • A possible explanation for the government’s timid fiscal response may be the fear of spooking the market.
    • For years, every economist and analyst has been warning the government of the dire consequences of fiscal irresponsibility.
    • And that warning message must have been so hardwired into the government’s collective mind that it was unable to get over the mental overhang.

    We should be aware of the reasons from the macroeconomic point of view that force the government to limit its fiscal deficit. In this case, India government is exercising the caution owing to the same constraints.

    Uncertainties in the crisis

    • Uncertainty is a defining feature of every crisis.
    • During the global financial crisis, a big uncertainty around the world was about how much risk there was in the system, where it lay and who was bearing it.
    • The uncertainty of the corona crisis is much deeper.
    • There are far too many known unknowns not to speak of unknown unknowns.
    • Uncertainties in corona crisis: We just don’t know enough about the effectiveness of the lockdowns, the age and gender profile of susceptibility to the virus.
    • We also don’t know about the process of recovery, the tipping point if any for mass immunity, whether the virus will attack in waves.
    • And most importantly, when we might have a vaccine and a cure.
    • Governments are, for the large part, having to fly blind.

    Issues over relief and stimulus package

    • There are many issues to be decided and planned on the way forward.
    • A big issue will be an expenditure plan for relief during the crisis and stimulus after some normalcy is restored.
    • Borrow more spend more: Even the most ardent fiscal hawks are now agreed that the government needs to abandon its fiscal reticence, and borrow more and spend more.
    • Even the most extreme monetary purists are agreed that the RBI should fund the government borrowing by printing money.
    • Even the staunchest advocates of financial stability are agreed that more regulatory forbearance is necessary.
    • And virtually everyone is agreed on where additional spending should be directed.

    Debate on how much additionally the government should borrow

    • There is disagreement on how much additionally the government should borrow.
    • There are two opposing views in this regard, which are discussed below.
    • 1. Fiscal risk without preset fiscal deficit: One view is that the government should err on the side of taking a fiscal risk without any preset fiscal deficit number.
    • It should simply determine what needs to be done and borrow to that extent, acting as if there were no fiscal constraint at all.
    • In other words, act as per the diktat of the now famous three words — “whatever it takes”.
    • 2. Set a limit: An opposing view is “whatever it takes” is not an option for India.
    • Many analysts have estimated that just the loss of revenue due to the economic shutdown will take the combined fiscal deficit of the Centre and states beyond 10 per cent of GDP.
    • The borrow and spend programme will be in addition to the above loss.
    • Unlike rich countries, we can’t afford to ignore the risks of fiscal excess of that magnitude, no matter the compelling circumstances.
    • What are the risks involved? There will be a heavy price to pay down the road by way of inflation and exchange rate volatility.

    From the UPSC point of view you must pay attention to the both the arguments made here, question can be asked in UPSC based on the suggestions and their pros and cons. Both the arguments cited above have their merits and demerits.

    Way forward

    • It’s important to keep in mind that we have resources and capability in the near future should there be another wave of the virus later in the year.
    • It will be advisable for the government to fix an upper bound for fiscal deficit and operate within that. For now, the borrow and spend programme should be restricted to 2 per cent of GDP.

  • OPEC+ decides combine slashing of crude oil production

    India has made a case for affordable oil prices in the backdrop of the Organization of the Petroleum Exporting Countries-plus (OPEC+) combine slashing production amid the COVID-19 pandemic.

    Global crude oil pricing dynamics greatly impact  India and its import bill. Kindly refer to the article titled “Oil Prices and OPEC+” pinned below this newscard. Various aspects related to the issue are covered in the Burning Issue section . It seeks to answer all your doubts such as ; Impact on Fuel prices,  India’s forex reserves, Strategic petroleum reserves,  etc.

    Why a cause of worry?

    • OPEC accounts for around 40% of global production.
    • The OPEC accounts for 80% of India’s crude oil imports.
    • Any production cut by the OPEC plus arrangement impacts India’s energy security efforts in the short run.

    Impact on India

    • India, which is one of the major OPEC consumers, has always stood for a global consensus on responsible pricing.
    • Indian refiners have cut production as the lockdown has led to a sharp decline in demand for transportation fuels.
    • Demand for domestic cooking gas has, however, increased as more people stay indoors during the lockdown aimed at containing the spread of the coronavirus.

    About OPEC+

    • The non-OPEC countries which export crude oil along with the 14 OPECs are termed as OPEC plus countries.
    • OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan.
    • Saudi and Russia, both have been at the heart of a three-year alliance of oil producers known as OPEC Plus — which now includes 11 OPEC members and 10 non-OPEC nations — that aims to shore up oil prices with production cuts.

    Back2Basics:  OPEC

    • OPEC is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
    • It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
    • It is headquartered in Vienna, Austria.
    • OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
    • Today OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply.

    Also read:

    [Burning Issue] Oil Prices and OPEC+

  • How a dollar swap line with US Fed can help in uncertain times?

    India is working with the US to secure a dollar swap line that would help in better management of its external account and provide an extra cushion in the event of an abrupt outflow of funds.

    What are Currency Swaps?

    • A currency swap, also known as a cross-currency swap, is an off-balance sheet transaction in which two parties exchange principal and interest in different currencies.
    • The purpose of a currency swap is to lower exposure to exchange rate risk or reduce the cost of borrowing a foreign currency.

    Why do we need dollars?

    • According to RBI data, 63.7% of India’s foreign currency assets — or $256.17 billion — are held in overseas securities, mainly in the US treasury.
    • While FPIs investors looking for safer investments, the current global uncertainty over COVID outbreak have led to a shortfall in Indian stock markets.
    • This has pulled down India’s foreign exchange reserves.
    • This means that the government and the RBI cannot lower their guard on the management of the economy and the external account.

    How does a swap facility work?

    • In a swap arrangement, the US Fed provides dollars to a foreign central bank, which, at the same time, provides the equivalent funds in its currency to the Fed, based on the market exchange rate at the time of the transaction.
    • The parties agree to swap back these quantities of their two currencies at a specified date in the future, which could be the next day or even three months later, using the same exchange rate as in the first transaction.
    • These swap operations carry no exchange rate or other market risks, as transaction terms are set in advance.

    Benefits of currency swap

    • The absence of an exchange rate risk is the major benefit of such a facility.
    • This facility provides India with the flexibility to use these reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity.
    • currency swaps between governments also have supplementary objectives like promotion of bilateral trade, maintaining the value of foreign exchange reserves with the central bank and ensuring financial stability (protecting the health of the banking system).

    Recent examples

    • India already has a $75 billion bilateral currency swap line with Japan, which has the second-highest dollar reserves after China.
    • The RBI also offers similar swap lines to central banks in the SAARC region within a total corpus of $2 billion.

    Note: Relate all other terminologies related to USD-INR convertiblity viz. Current Account, BoP etc.

  • Coronavirus – Economic Issues

  • World trade fall mustn’t stoke export pessimism

    Context

    The WTO expects a sharp drop-off in global trade in the wake of Covid-19. But India must not withdraw inwards.

    Prospects of the exports

    • Impact on global trade: The World Trade Organization (WTO) predicts that global trade could fall by 13-32% this year on account of disruptions and all the turmoil.
    • At this point, we cannot even count on a quick recovery after this health emergency is past its peak.
    • A trade revival may have to wait till 2022 or later.
    • Indian exports have been in a slump for a large part of the past decade, and recent reports point to a rash of cancelled orders from abroad (except, notably, for drugs).
    • This, however, should not mean that we slip into export pessimism.
    • Opportunity in the crisis: Instead, a crisis such as this could serve as an opportunity to sharpen our competitive edge that has got blunt over the years.
    • Rupee and reform: This is best done through reforms, though a rupee on the decline vis-à-vis the US dollar should help too.

    Reasons for export orientations

    • The relation between growth and exports: No country is an island unto itself, and nations will continue to exchange goods and services so long as it makes economic sense.
    • Trade partners are usually better off producing what they’re best at, for all users, and buying from the rest what others turn out better—at a lower cost and higher quality.
    • Economies that participate in this game, as the historical record has shown, tend to grow faster.
    • There is another good reason for export orientation.
    • Foreign earnings: India needs foreign earnings, not just for oil imports and suchlike, but also for overall economic stability, given our reliance on foreign capital for growth.
    • In tough times such as these, when we may need to borrow money from abroad to bridge a hugely enlarged fiscal deficit, ensuring a stream of future dollar earnings becomes even more crucial.
    • To enable the issuance of dollar bonds and raise our chances of staging a less painful return to form, we need to get our export act together.

    Way forward to increase exports

    • Structural and policy changes: Export success goes by competitiveness, and for domestic businesses to achieve this, India would need to undertake several structural and policy changes.
    • We could begin with reversing the tariff barriers that have been raised in recent years.
    • Exposure to foreign competitors would force them to turn efficient and perform better.
    • Duties on inputs, especially, need to come down. So do other taxes that hold companies back. Other steps to raise productivity will help, too.
    • Good logistical backup is another big requirement.
    • The low value of rupee: The rupee’s slump is a plus for exporters, since their output is cheaper in dollar terms, but we may need to pursue a policy that does not let our currency’s value get over-inflated by inflows of foreign “hot money” (when they return).
    • Cost of capital: The cost of capital in India needs to be low, too, and this would depend on how well the government manages its finances.
    • India’s annual exports currently form less than 2% of the world’s. We should aim for 5%.