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GS Paper: GS3

  • The cost of misrepresenting inflation

    Context

    Globally, inflation is now the prime concern of governments, even as there is a speculation that a recession may not be far behind.

    Is inflation in India driven by the global factors?

    • The Governor of the Reserve Bank of India (RBI) has been reported as saying that there was a “need to recognise global factors in inflation”.
    • However, the current inflation in India is, even largely, due to global factors is wrong, and harmful.
    • While the price of edible oils and the world price of crude may have risen following the Ukraine war, the impact of this development on overall inflation in India, measured by the rise in the consumer price index, would depend upon their share in the consumption basket of households, which is relatively low.
    • For the commodity groups ‘fuel and light’ and ‘fats and oils’, chosen as proxies for the price of imported fuel and edible oils, respectively, inflation has actually been lower in the first five months of 2022 than in the last five months of 2021.
    • On the other hand, for the commodity group ‘food and beverages’, it was exactly the reverse, i.e., inflation has been much higher in the more recent period.
    • Contribution of domestic factors: The estimated direct contribution of this group to the current inflation dwarfs that of all other groups, establishing conclusively that the inflation is driven by domestic factors.

    Inadequacy of monetary policy to address the food-price driven inflation

    • Issues with the monetary policy: Starting in May, the repo rate has been raised.
    • Raising the interest rate in an attempt to control inflation, implicitly assumes that it reflects economy-wide excess demand.
    • Such a diagnosis of the current inflation is belied by the fact that the price of food is rising faster than that of other goods i.e., its relative price has risen.
    • So, the excess demand is in the market for foodstuff, and it is this that needs to be eliminated.
    • The inadequacy of monetary policy to address food-price-driven inflation has been flagged by economists internationally.
    • at the World Economic Forum’s annual meet held at Davos, Switzerland in June, Nobel Laureate Joseph Stiglitz observed that raising interest rates is not going to solve the problem of inflation. It is not going to create more food.
    • Jerome Powell is reported stating that even though the Fed’s resolve to fight inflation is unconditional, “a big part of inflation won’t be affected by our tools”.
    • This is an acknowledgement that there is only so much a central bank can do when battling inflation driven by the rise in energy and food prices.

    Way forward

    • Need for supply side interventions:  To hold on to the view that inflation in India is due to excess aggregate demand curable by raising interest rates ensures that attention is not paid to the necessary supply-side interventions.

    Conclusion

    India is suffering from undercurrent of a food price inflation, which, by exacerbating poverty, stands in the way of a more rapid expansion of the economy.

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  • India’s Tenfold Path to manage Exchange Rate Volatility

    The RBI is prepared to sell a sixth of its foreign exchange reserves to defend the rupee against a rapid depreciation after it plumbed record lows in recent weeks.

    Must read:

    [Burning Issue] Global Trade in Rupees

    Is there a forex crisis underway?

    • And the way in which India has tackled foreign exchange crises over the years has been quite profound.
    • A forex crisis can be loosely defined as one where the rupee starts depreciating rapidly or when forex reserves slide precipitously.
    • Ever since India’s reforms of 1991-92, the external sector has been liberalized, with even full capital account convertibility being considered at one point.

    In the rupee’s context, let’s look at options that have been used in the last three decades or so:

    (1) Selling dollars

    • The first course of action has been selling dollars in the spot forex market.
    • This is fairly straightforward, but has limits as all crises are associated with declining reserves.
    • While this money is meant for a rainy day, they may just be less than adequate.
    • The idea of RBI selling dollars works well in the currency market, which is kept guessing how much the central bank is willing to sell at any point of time.

    (2) NRI deposits

    • The second tool used is aimed at garnering non-resident Indian (NRI) deposits.
    • It was done in 1998 and 2000 through Resurgent India bonds and India Millennium Deposits, when banks reached out asking NRIs to put in money with attractive interest rates.
    • The forex risk was borne by Indian banks.
    • This is always a useful way for the country to mobilize a good sum of forex, though the challenge is when the debt has to be redeemed.
    • At the time of deposits, the rates tend to be attractive, but once the crisis ends, the same rate cannot be offered on deposit renewals.
    • Therefore, the idea has limitations.

    (3) Let oil importers buy dollars themselves

    • The third option exercised often involves getting oil importing companies to buy dollars directly through a facility extended by a public sector bank.
    • Its advantage is that these deals are not in the open and so the market does not witness a large demand for dollars on this account.
    • It is more of a sentiment cooling exercise.

    (4) Let exporters trade in dollars

    • Another tool involves a directive issued for all exporters to mandatorily bring in their dollars on receipt that are needed for future imports.
    • This acts against an artificial dollar supply reduction due to exporter hold-backs for profit.

    (5) Liberalized Exchange Rate

    • The other weapon, once used earlier, is to curb the amount of dollars one can take under the Liberalized Exchange Rate Management System.
    • This can be for current account purposes like travel, education, healthcare, etc.
    • The amounts are not large, but it sends out a strong signal.

    (6) Forward-trade marketing

    • Another route used by RBI is to deal in the forward-trade market.
    • Its advantage is that a strong signal is sent while controlling volatility, as RBI conducts transactions where only the net amount gets transacted finally.
    • It has the same power as spot transactions, but without any significant withdrawal of forex from the system.

    (7) Currency swaps

    • The other tool in India’s armoury is the concept of swaps.
    • This became popular post 2013, when banks collected foreign currency non-resident deposits with a simultaneous swap with RBI, which in effect took on the foreign exchange risk.
    • Hence, it was different from earlier bond and deposit schemes.

    Most preferred options by the RBI

    • Above discussed instruments have been largely direct in nature, with the underlying factors behind demand-supply being managed by the central bank.
    • Of late, RBI has gone in for more policy-oriented approaches and the last three measures announced are in this realm.

    (8) Allowing banks to work in the NDF market

    • First was allowing banks to work in the non-deliverable forwards (NDF) market.
    • This is a largely overseas speculative market that has a high potential to influence domestic sentiment on our currency.
    • Here, forward transactions take place without real inflows or outflows, with only price differences settled in dollars.
    • This was a major pain point in the past, as banks did not have access to this segment.
    • By permitting Indian banks to operate here, the rates in this market and in domestic markets have gotten equalized.

    (9) Capital account for NRI deposits

    • More recently, RBI opened up the capital account on NRI deposits (interest rates than can be offered), external commercial borrowings (amounts that can be raised) and foreign portfolio investments (allowed in lower tenure securities), which has the potential to draw in forex over time.
    • Interest in these expanded contours may be limited, but the idea is compelling.

    (10) Settlement in Rupees

    • RBI’s permission for foreign trade deals to be settled in rupees is quite novel; as India is a net importer, gains can be made if we pay in rupees for imports.
    • The conditions placed on the use of surpluses could be a dampener for potential transactions.
    • But the idea is innovative and could also be a step towards taking the rupee international in such a delicate situation.
    • Clearly, RBI has constantly been exploring ways to address our forex troubles and even newer measures shouldn’t surprise us.

     

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  • Cheetahs likely to arrive in Kuno before August 15

     

    India came one step closer to bringing back the world’s fastest animal, the Cheetah to the country with an agreement signed in New Delhi with Namibia.

    Asiatic Cheetah

    • Cheetah, the world’s fastest land animal was declared extinct in India in 1952.
    • The Asiatic cheetah is classified as a “critically endangered” species by the IUCN Red List, and is believed to survive only in Iran.
    • It was expected to be re-introduced into the country after the Supreme Court lifted curbs for its re-introduction.

    Distribution of cheetahs in India

    • Historically, Asiatic cheetahs had a very wide distribution in India.
    • There are authentic reports of their occurrence from as far north as Punjab to Tirunelveli district in southern Tamil Nadu, from Gujarat and Rajasthan in the west to Bengal in the east.
    • Most of the records are from a belt extending from Gujarat passing through Maharashtra, Madhya Pradesh, Uttar Pradesh, Chhattisgarh, Jharkhand and Odisha.
    • There is also a cluster of reports from southern Maharashtra extending to parts of Karnataka, Telangana, Kerala and Tamil Nadu.
    • The distribution range of the cheetah was wide and spread all over the subcontinent. They occurred in substantial numbers.
    • The cheetah’s habitat was also diverse, favouring the more open habitats: scrub forests, dry grasslands, savannahs and other arid and semi-arid open habitats.

    What caused the extinction of cheetahs in India?

    • The major reasons for the extinction of the Asiatic cheetah in India:
    1. Reduced fecundity and high infant mortality in the wild
    2. Inability to breed in captivity
    3. Sport hunting and
    4. Bounty killings
    • It is reported that the Mughal Emperor Akbar had kept 1,000 cheetahs in his menagerie and collected as many as 9,000 cats during his half-century reign from 1556 to 1605.
    • The cheetah numbers were fast depleting by the end of the 18th century even though their prey base and habitat survived till much later.
    • It is recorded that the last cheetahs were shot in India in 1947, but there are credible reports of sightings of the cat till about 1967.

    Conservation objectives for their re-introduction

    • Based on the available evidence it is difficult to conclude that the decision to introduce the African cheetah in India is based on science.
    • Science is being used as a legitimising tool for what seems to be a politically influenced conservation goal.
    • This also in turn sidelines conservation priorities, an order of the Supreme Court, socio-economic constraints and academic rigour.
    • The issue calls for an open and informed debate.

    Issues in re-introduction

    • Experts find it difficult whether the African cheetahs would find the sanctuary a favorable climate as far as the abundance of prey is concerned.
    • The habitat of cheetahs is needed to support a genetically viable population.

     

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  • What are Tetrapods?

    In Mumbai, the unusual vibrations (like earthquakes), coinciding with high-tide times, were the result of the relocation of tetrapods as part of the ongoing Coastal Road Project (MCRP).

    What are tetrapods?

    • Tetra pod in Greek means four-legged.
    • These are four-legged concrete structures that are placed along coastlines to prevent erosion and water damage.
    • Tetrapods were first used in France in the late 1940s to protect the shore from the sea.
    • They are typically placed together to form an interlocking but porous barrier that dissipates the power of waves and currents.
    • These are large structures, sometimes weighing up to 10 tonnes, and interlocked tetra pods act as a barrier that remains stable against the rocks when buffeted by waves.
    • Tetrapods, each weighing about 2 tonnes, were placed along Marine Drive in the late 1990s to break and dissipate waves and maintain the reclaimed shoreline in South Mumbai.

    How do we know that the removal of the tetrapods was responsible?

    • The BMC has provided vibration monitoring instruments at the site to study the impact of the phenomenon.
    • While the corporation has not officially stated that the removal of the tetrapods caused the vibrations, it has agreed to re-install the structures.
    • They would be put back over the next two-three days during low tide.

     

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  • Why there is no reason to panic over the rupee

    Context

    Rupee hits the all-time low of 80 against US dollar recently. The enormity of the challenges can be gauged by these numbers: Since the beginning of war, foreign exchange reserves have declined by $51-billion, total portfolio outflows have been $23 billion, and the current account deficit is now certain to breach $100 billion.

    Is depreciation of rupee sign of weak domestic fundamentals?

    • In case of strong domestic fundamentals: In an ideal world, if domestic economic fundamentals are strong, the depreciation of the rupee should be accompanied by an appreciation of the Dollar Index (DXY) along similar lines.
    • In case of weak fundamentals: Between January 2008 and February 2012 and October 2012 and May 2014, on a cumulative basis, the rupee had lost a whopping 48.7 per cent against the USD, even as the DXY had appreciated by a modest 5.2 per cent.
    • This indicates that much of the decline in rupee value then was purely because of weak domestic macro fundamentals.
    • Current scenario:  The rupee has depreciated by a modest 5.6 per cent since the Russian invasion of Ukraine, though the DXY has appreciated by 11.3 per cent.
    •  Thus, the recent decline in the rupee has been more because of the strengthening of the dollar and not because of weak fundamentals at home.

    Reasons for the dominance of dollar

    • In principle, Bretton Woods ensured that the dollar would be a “trust” currency.
    • The US sits at the centre of an international financial system where its assets have been in high demand.
    • For instance, frantically growing Asian economies whose penchant for US government securities have also made them susceptible to sudden changes in expectations and economic sentiments sweeping the globe.
    • The recent disturbances in the global supply chain and volatile commodity prices have only made the job more difficult.

    What explains the recent strengthening of dollar

    • High interest rates in the US: The recent gains in the dollar have come along expectations of aggressive monetary policy by the US Fed compared to other major jurisdictions, particularly, the Eurozone and Japan.
    • Markets expect the Fed to continue on its path of interest rate normalisation with multiple rate hikes.
    • Low interest rates in the Eurozone: The European Central Bank (ECB) appears behind the curve, its communication with markets is as uncertain as the political and climatic hot winds criss-crossing the Eurozone.
    • Low interest rates in Japan: The Bank of Japan has taken a completely divergent path, continuing its accommodative monetary policy despite the hammering of the yen.
    • This has augured well for the dollar, obscuring the question of how the Fed failed to anticipate the surge in inflation.

    Measures by the RBI and the government

    • As currencies reel under the weight of an unrelenting dollar, questions on the rupee’s performance and future are a natural corollary, more so in the wake of hitting the psychological mark of Rs 80/dollar.
    • In 2013, when the rupee was in a free fall, stability was finally restored but it came at a cost — a debt buildup of $34.5 FCNR(B).
    • This time, the RBI and government have taken a long-term view of bolstering dollar inflows, which is perfectly justified.
    • The RBI, in close tandem with the government, has been supportive of the rupee, and is also now embarking on an unprecedented journey to internationalise the currency. 

    Conclusion

    A direct casualty of the Ukraine war is that the Indian rupee has now depreciated by 5.6 per cent against the dollar. In terms of relative performance, however, the rupee has done quite well compared to most of its counterparts.

    Back2Basics: US Dollar Index

    • The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies.
    • The USDX was established by the U.S. Federal Reserve in 1973 after the dissolution of the Bretton Woods Agreement.
    • It is now maintained by ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE).
    • The six currencies included in the USDX are often referred to as America’s most significant trading partners, but the index has only been updated once: in 1999 when the euro replaced the German mark, French franc, Italian lira, Dutch guilder, and Belgian franc.
    • Consequently, the index does not accurately reflect present-day U.S. trade.

    Bretton Woods Agreement and Systems

    • The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire.
    • Thus, the name “Bretton Woods Agreement.
    • Under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value.
    • The Bretton Woods System effectively came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.

    FCNR(B)

    • An FCNR ( Foreign Currency Non-resident) account is a type of term deposit that NRIs can hold in India in a foreign currency.
    • FCNR (A) was introduced in 1975 to encourage NRI deposits.
    • The Reserve Bank of India (RBI) guaranteed the exchange rate prevalent at the time of a deposit to eliminate risk to depositors.
    • In 1993, the apex bank introduced FCNR (B), without exchange rate guarantee, to replace FCNR (A).

  • A five-point plan to boost renewable energy

    Context

    As the fallout of Russia’s invasion of Ukraine ripples across the globe, the response of some nations to the growing energy crisis has been to double down on fossil fuels, pouring billions more dollars into the coal, oil and gas that are deepening the climate emergency.

    Need for transition to renewable energy

    • Fossil fuels are the cause of the climate crisis.
    • Renewable energy can limit climate disruption and boost energy security. Renewables are the peace plan of the 21st century.
    • But the battle for a rapid and just energy transition is not being fought on a level field.
    • Investors are still backing fossil fuels, and governments still hand out billions in subsidies for coal, oil and gas — about $11 million every minute.
    • The only true path to energy security, stable power prices, prosperity and a livable planet lies in abandoning polluting fossil fuels and accelerating the renewables-based energy transition.
    • We must reduce emissions by 45 per cent by 2030 and reach net-zero emissions by mid-century.
    • But current national commitments will lead to an increase of almost 14 per cent this decade.
    • Reducing cost:  The cost of solar energy and batteries has plummeted 85 per cent over the past decade.
    • The cost of wind power fell by 55 per cent. And investment in renewables creates three times more jobs than fossil fuels.
    • Nature-based solutions: Of course, renewables are not the only answer to the climate crisis.
    • Nature-based solutions, such as reversing deforestation and land degradation, are essential.
    • So too are efforts to promote energy efficiency.
    • But a rapid renewable energy transition must be our ambition.

    Five point plan to boost renewable

    • 1] Renewable energy technology as global good: We must make renewable energy technology a global public good, including removing intellectual property barriers to technology transfer.
    • 2] Improve global access: We must improve global access to supply chains for renewable energy technologies, components and raw materials.
    • In 2020, the world installed five gigawatts of battery storage.
    • We need 600 gigawatts of storage capacity by 2030.
    • Shipping bottlenecks and supply-chain constraints, as well as higher costs for lithium and other battery metals, are hurting the deployment of such technologies and materials.
    • 3] Fast-tracking : We must cut the red tape that holds up solar and wind projects.
    • We need fast-track approvals and more effort to modernise electricity grids.
    • 4] Shifting energy subsidies: The world must shift energy subsidies from fossil fuels to protect vulnerable people from energy shocks and invest in a just transition to a sustainable future.
    • Increase investment in renewables: We need to triple investments in renewables.
    • This includes multilateral development banks and development finance institutions, as well as commercial banks.

    Conclusion

    When energy prices rise, so do the costs of food and all the goods we rely on. So, let us all agree that a rapid renewables revolution is necessary and stop fiddling while our future burns.

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  • What Rs 80 to a dollar means

    The Indian rupee breached the psychologically significant exchange rate level of 80 to a US dollar in early trade.

    Free fall of Indian Rupee

    • Since the war in Ukraine began, and crude oil prices started going up, the rupee has steadily lost value against the dollar.
    • There are growing concerns about how a weaker rupee affects the broader economy.
    • Certainly it presents challenges to policymakers, especially since India is already grappling with high inflation and weak growth.

    What is the rupee exchange rate?

    • The rupee’s exchange rate vis-à-vis the dollar is essentially the number of rupees one needs to buy $1.
    • This is an important metric to buy not just US goods but also other goods and services (say crude oil) trade in which happens in US dollars.

    Benefits of Rupees fall

    • Broadly speaking, when the rupee depreciates, importing goods and service becomes costlier.
    • But if one is trying to export goods and services to other countries, especially to the US, India’s products become more competitive.
    • Depreciation makes these products cheaper for foreign buyers.

    How bad is it for the rupee?

    • If the rupee depreciates at a rate faster than the long-term average, it goes above the dotted line, and vice versa.
    • In the last couple of years, the rupee has been more resilient than the long-term trend.
    • The current fall has brought about a correction.

    Rupee’s exchange rate against the dollar

    • Another thing to note is that, at least as of now, the rupee is still more resilient (against the dollar) than it was in some of the previous crises such as the Global Financial Crisis of 2008 and the Taper Tantrum of 2013.
    • Moreover, the US dollar is just one of the currencies Indians need to trade.
    • If one looks at a whole basket of currencies, then data suggests the rupee has become stronger (or appreciated against that basket).
    • In other words, while the US dollar has become stronger against all other major currencies including the rupee, the rupee, in turn, has become stronger than many other currencies such as the euro.

    Is it a cause of worry?

    • It is important to remember that it is more of a story of the dollar strengthening than the rupee weakening.
    • This suggests that as things stand, India is still not facing an external crisis.
    • Take for instance the issue of external debt.
    • Long-term data shows that India is in a relatively comfortable position.

    Can we be comfortable with this free-fall?

    • While India is fine as of now, trends suggest things are getting worse.
    • For instance, forex reserves have fallen by over $50 billion between September 2021 and now.
    • In these 10 months, the rupee’s exchange rate with the dollar has fallen 8.7%, from 73.6 to 80. For context, historically the rupee depreciates by about 3% to 3.5% in a year.
    • What’s worse, many experts expect the rupee to weaken further in the coming 3-4 months and fall to as low as 82 to a dollar.

    Why are the rupee-dollar exchange rate and forex reserves falling?

    • To understand movements on these variables, one must understand India’s Balance of Payment (BoP)
    • The BoP is essentially a ledger of all monetary transactions between Indians and foreigners. Here it is shown in US dollar terms.
    • If a transaction leads to dollars coming into India, it is shown with a positive sign; if a transaction means dollars leaving India, it is shown with a minus sign.

    How did BoP come to the picture?

    • The BoP has two broad subheads (also called “accounts”) — current and capital — to slot different types of transactions.
    • The current account is further divided into the trade account (for export and import of goods) and the invisibles account (for export and import of services).
    • So if an Indian buys an American car, dollars will flow out of BoP, and it will be accounted for in the trade account within the current account.
    • If an American invests in Indian stock markets, dollars will come into the BoP table and it will be accounted for under FPI within the capital account.
    • The important thing about the BoP is that it always “balances”.

    India’s vulnerability on the external debt front

    • In 2021-22, India had a trade deficit of $189.5 billion.
    • That is, the country imported more goods (such as crude oil) than it exported, and the net effect was negative.
    • At the end of the year, the BoP was at a surplus of $47.5 billion — that is, the net effect of all transactions on current and capital accounts was that $47.5 billion came into India.

    What may happen ahead?

    Now, two things can happen from here:

    (1) Huge BoP surplus would lead to the rupee appreciating

    • This will bring about a change in people’s buying and investing preferences.
    • For instance, India’s exports will become costlier and import cheaper. Over time, the trade deficit will alter (will reduce or turn into a surplus) to “balance” the BoP.

    (2) RBI swoops in and removes all the surplus dollars

    • RBI purchases dollars to increase its forex reserves.
    • In 2021-22, for instance, India’s forex reserves went up by $47.5 billion.
    • The RBI keeps monitoring the BoP every week and keeps intervening in such a manner which ensures that the rupee’s exchange rate does not fluctuate too much.

    What will be the effect on the economy?

    • Since a large proportion of India’s imports are dollar-denominated, these imports will get costlier.
    • A good example is the crude oil import bill.
    • Costlier imports, in turn, will widen the trade deficit as well as the current account deficit, which, in turn, will put pressure on the exchange rate.
    • On the exports front, however, it is less straightforward.
    • For one, in bilateral trade, the rupee has become stronger than many currencies.

    Should policymakers prevent the fall?

    • It is neither wise nor possible for the RBI to prevent the rupee from falling indefinitely.
    • Defending the rupee will simply result in India exhausting its forex reserves over time because global investors have much bigger financial clout.
    • Most analysts believe that the better strategy is to let the rupee depreciate and act as a natural shock absorber to the adverse terms of trade.

    What should policymakers do?

    • The RBI (which is in charge of monetary policy) should focus on containing inflation, as it is legally mandated to do.
    • The government (which is in charge of the fiscal policy) should contain its borrowings.
    • Higher borrowings (fiscal deficit) by the government eat up domestic savings and force the rest of the economic agents to borrow from abroad.
    • Policymakers (both in the government and the RBI) have to choose what their priority is: containing inflation or being hung up on exchange rate and forex levels.
    • If they choose to contain inflation (that is, by raising interest rates) then it will require sacrificing economic growth. So be prepared for that.

    Conclusion

    • We can conclude that the rupee’s exchange rate and forex reserves levels are two sides of the same coin.

    Back2Basics: Taper Tantrum

    • After the 2007-2009 global financial crisis and recession, the US Federal Reserve started a bond-buying program (known as quantitative easing) to infuse liquidity.
    • With these funds, the investors started investing in global bonds and stocks. 
    • In 2013, the US Federal Reserve decided to reduce (taper) its quantum of a bond-buying program which led to a sudden sell-off in global bonds and stocks. 
    • As a result, many emerging market economies, that received large capital inflows, suffered currency depreciation and outflows of capital.
    • This was called globally a ‘taper tantrum‘.

     

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  • EU’s Markets in Crypto-Assets (MiCA) Law

    The Markets in Crypto-Assets (MiCA) law of European Parliament is the first comprehensive regulation for cryptos, and some expect it to become a trendsetter for crypto regulation globally.

    What is MiCA Legislation?

    • The MiCA law seeks to address concerns like money-laundering, protection of consumers and investors, accountability of crypto firms, stablecoins and the environmental footprint of crypto mining.
    • It would regulate the “wild west” of crypto assets and provide legal certainty for those issuing crypto assets, while ensuring high standards for investors and consumers.
    • It also excludes non-fungible tokens, but the EU may make a horizontal legislation for NFTs in 18 months, after a separate assessment.

    How will MiCA regulate stablecoins?

    • The efficacy of stablecoins, which claim to be less volatile that other cryptos, came into question after the crash of some crypto-currencies.
    • The MiCA would mandate that stablecoin issuers maintain minimum liquidity to provide for sudden large withdrawals by users, and the reserves must also be protected from insolvency.
    • The European Banking Authority (EBA) has been brought in to supervise stablecoins, and the law asks stablecoin issuers to provide claims to investors free of charge.
    • In addition, large coins which are used as a means of payment will be capped at €200 million worth of transactions per day.

    How will the new law regulate money laundering?

    • MiCA requires the EBA to maintain a public register of non-compliant crypto asset service providers (CASPs).
    • Additional checks will be required, in line with the EU Anti-Money-Laundering (AML) framework.

    How does it address green concerns?

    • Under MiCA, crypto companies will be required to declare their environmental and climate footprint.
    • The European Securities and Markets Authority will develop regulatory technical standards on methodologies, content and presentation of such information.
    • The EC will also have to provide a report on the impact of crypto assets on environment.
    • It would introduce mandatory minimum sustainability standards for mining mechanisms, especially the proof-of-work system which raises overall computing power.

    Will it affect Indian regulations?

    • India’s crypto regulations seem to have taken a back seat at the moment.
    • Industry executives and experts say the government and industry are more concerned about taxation.
    • India levied a 30% tax on income from transfer of cryptos from April, and added a 1% tax deduction at source from 1 July.
    • This, along with the overall bear market, has depressed trading volumes, and revenues of crypto exchanges.
    • Indian regulators are also expected to consider rules being developed in the US before taking concrete decisions.

    Back2Basics: Stablecoins

    • Stablecoins are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals).
    • Advantages of asset-backed cryptocurrencies are that coins are stabilized by assets that fluctuate outside of the cryptocurrency space, that is, the underlying asset is not correlated, reducing financial risk.
    • Bitcoin and altcoins are highly correlated, so that cryptocurrency holders cannot escape widespread price falls without exiting the market or taking refuge in asset backed stablecoins.
    • Furthermore, such coins, assuming they are managed in good faith, and have a mechanism for redeeming the asset(s) backing them, are unlikely to drop below the value of the underlying physical asset, due to arbitrage.

     

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  • India’s climate Vulnerability

    Context

    In the absence of COVID-19, climate change-induced disasters would have been India’s biggest red alert in recent years.

    India’s vulnerabilities

    • Temperatures over the Indian Ocean have risen by over 1°C since the 1950s, increasing extreme weather events.
    • India is the fourth worst-hit in climate migration.
    • Heat waves in India have claimed an estimated 17,000 lives since the 1970s.
    • Labour losses from rising heat, by one estimate, could reach ₹1.6 lakh crore annually if global warming exceeds 2°C, with India among the hardest hit.
    • Extreme heat waves hit swathes of India. Heatwaves are aggravated by deforestation and land degradation, which also exacerbate fires.
    • Agriculture, being water-intensive, does not do well in heat wave-prone areas.

    Way forward

    • Two part approach: India needs a two-part approach:
    • Adaptation: one, to adapt to climate impacts by building resilience against weather extremes, and
    • Mitigation: to mitigate environmental destruction to prevent climate change from becoming more lethal.
    • Climate resistant agriculture: Agricultural practices which are not water-intensive and to support afforestation that has a salutary effect on warming.
    • Financial transfers can be targeted to help farmers plant trees and buy equipment — for example, for drip irrigation that reduces heavy water usage.
    • Crop diversification: Climate-resilient agriculture calls for diversification — for example, the cultivation of multiple crops on the same farm.
    • Climate-resilient agriculture calls for diversification — for example, the cultivation of multiple crops on the same farm
    • Managing vulnerable regions in coastal zones: Floods and storms are worsened by vast sea ingress and coastline erosion in the low-lying areas in the south.
    • It is vital to map flood-risk zones to manage vulnerable regions.
    • Environment Impact Assessments must be mandatory for commercial projects.
    • Design changes: Communities can build round-shaped houses, considering optimum aerodynamic orientation to reduce the strength of the winds.
    • Roofs with multiple slopes can stand well in strong winds, and central shafts reduce wind pressure on the roof by sucking in air from outside.
    • Moving away from fossil fuels: Adaptation alone will not slow climate damages if the warming of the sea level temperatures is not confronted.
    • Leading emitters, including India, must move away from fossil fuels.
    • Expanding and protecting forest cover: a big part of climate action lies in protecting and expanding forest coverage.
    • India gains from being part of the Glasgow declaration on forest protection that 141 countries signed in 2021.
    • Management of dams: Nearly 295 dams in India are more than 100 years old and need repairs.
    • In stemming landslides in Uttarakhand, regulations must stop the building of dams on steep slopes and eco-fragile areas, as well as the dynamiting of hills, sand mining, and quarrying.
    • Climate financing: India’s share in disaster management should be raised to 2.5% of GDP.
    • Climate finance is most suited for large-scale global funding from the World Bank, the International Monetary Fund, and the Asian Development Bank.
    • But smaller-scale financing can also be vital.

    Conclusion

    For public pressure to drive climate action, we need to consider climate catastrophes as largely man-made.

     

  • Forest restoration in India

    Context

    This month is time for Van Mahotsav, which literally means “celebrate the forest”.

    Why tree planting matters

    • According to the International Union for Conservation of Nature (IUCN), deforestation and forest degradation contribute around 12% of global greenhouse gas emissions.
    • The total area occupied by primary forests in India has decreased by 3.6%.
    • Tree planting comes with varied environmental and ecological benefits.
    • Forests are integral in regulating ecosystems, influencing the carbon cycle and mitigating the effects of climate change.
    • Annually, forests absorb roughly 2.6 billion tonnes of carbon dioxide.
    • This absorption includes nearly 33% of the carbon dioxide released from burning fossil fuels.
    • Livelihood: Forests are a boon for local communities and their livelihoods by functioning as a resource base for goods and services.
    • Enrich soil fertility: According to academics from the World Resources Institute, forest ecosystems enrich soil fertility and water availability, enhancing agricultural productivity, and in turn the rural economy.
    • Prevents erosion and flooding: Tree planting prevents erosion and stems flooding.
    • Sustainable forest crops reduce food insecurity and empower women, allowing them to gain access to more nutritional diets and new income streams.
    • Agroforestry lessens rural-to-urban migration and contributes to an increase in resources and household income.
    • Planting trees is deeply linked to the ‘wholistic’ well-being of all individuals, the community, and the planet.

    Afforestation through forest landscape restoration

    • Typically, governments have relied on afforestation and reforestation as a means of establishing trees on non-treed land. These strategies have now evolved.
    • Focus on forest landscape restoration: The focus is now on forest landscape restoration — the process of regaining ecological functionality and improving human welfare across deforested or degraded forest landscapes.
    • Community participation: Forest landscape restoration seeks to involve communities in the process of designing and executing mutually advantageous interventions for the upgradation of landscapes.
    • Nearly two billion hectares of degraded land in the world (and 140 million hectares in India) have scope for potential restoration as forest land.
    • Ensuring diversity of species: A crucial aspect of this process is to ensure the diversity of the species while planting trees.
    •  Natural forests with diverse native tree species are more efficient in sequestering carbon than monoculture tree plantations.
    • Planting diverse species is also healthier for local communities and their livelihoods.
    • An international study published earlier this year in the journal, Science, found that diversifying species in forest plantations has a positive impact on the quality of the forests.

    Programs and initiative for forest restoration

    • The span 2021-2030 is the UN Decade on Ecosystem Restoration, emphasising efforts to restore degraded terrestrial ecosystems including forests.
    • Bonn Challenge: In 2011, the Bonn Challenge was launched with a global goal to restore 150 million hectares of degraded and deforested landscapes by 2020 and 350 million hectares by 2030.
    • India joined the Bonn Challenge in 2015, pledging to restore 26 million hectares of degraded and deforested land by 2030.
    • An additional carbon sink of 2.5 billion-3 billion tonnes of carbon dioxide equivalent through forest and tree cover is to be created by 2030.
    • There are a myriad government programmes such as Compensatory Afforestation, the National Afforestation Programme, the National Mission for a Green India (Green India Mission), the Nagar Van scheme and the Forest Fire Prevention and Management Scheme to name a few.
    • The Green Skill Development Programme is for the youth who aspire to attain employment in the environment and forest sectors.

    Challenges

    • Forest restoration in India faces hurdles in terms of the identification of areas for restoration, a lack of importance accorded to research and scientific strategies in tree planting, stakeholders’ conflicts of interest, and financing.

    Way forward

    • To be successful, forest landscape restoration must be implemented proactively, bolstering landscapes and forest ecosystems to be durable and adjustable in the face of future challenges and societal needs.
    • Involvement of stakeholders: It also needs the involvement and the alignment of a host of stakeholders including the community, champions, government and landowners.
    • Participatory governance: The restoration of natural forest ecosystems can be strengthened through participatory governance by engaging stakeholders.
    • Taking into account socio-economic context: Vulnerable forest-dependent communities should be factored in, and any effort should be tailored to the local socio-economic context and landscape history of a region.

    Conclusion

    In today’s world, forests need to be celebrated more than ever before. Simultaneously, more forests need to be created and restored.

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