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GS Paper: GS3

  • India’s imports from China rose to a record in first half of 2022

    India’s imports from China reached a record $57.51 billion in the first half of the year, according to China’s trade figures.

    India-China Bilateral Trade

    • China is India’s largest trading partner.
    • Major commodities imported from China into India were: electronic equipment; machines, engines, pumps; organic chemicals; fertilizers; iron and steel; plastics; iron or steel products; gems, precious metals, coins; ships, boats; medical, and technical equipment.
    • Major commodities exported from India to China were: cotton; gems, precious metals, coins; copper; ores, slag, ash; organic chemicals; salt, sulfur, stone, cement; machines, engines, and pumps.

    Recent measures to curb imports from China

    • Blame it on the pandemic and the border dispute, but the result is the same: some Indian businesses are boycotting China.
    • The government is now asking Indian e-commerce companies like Flipkart and Amazon India to label country of origin for all products sold on its websites.
    • The govt banned many Chinese mobile applications, including top social media platforms such as TikTok, Helo and WeChat and games such as PUBG.

    Can we completely boycott Chinese products?

    • Trade deficits are not necessarily bad: Both Indian consumers and Chinese producers are gainers through trading.
    • Will hurt the Indian poor the most: This is because the poor are more price-sensitive.
    • Will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market.
    • Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 per cent.
    • Will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
    • Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years.
    • India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China.

    Way forward

    • In the long term, under the banner of self-reliance, India must develop its domestic capabilities and acquire a higher share of global trade by raising its competitiveness.
    • The government’s “Atmanirbhar” focus is expected to help ministries handhold industries where self-reliance needs to be built.
    • For the long run, a more effective strategy needs to be built to provide an ecosystem that addresses the cost disability of Indian manufacturing leading to such imports.

     

    We would love to see you attempting these questions. Post your answer snaps in the comment box.

     

    Q. India’s quest for self-reliance is still a distant dream. Critically comment in light of the popular sentiment against the Chinese imports in India.

     

    Q.“Curbing Chinese imports to India will do more harm than any good”. Analyse.

     

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  • India & FTA

    Context

    In recent months, India has signed trade agreements with Australia and UAE. n the last week of June, New Delhi began talks for a similar agreement with the EU.

    How FTA with EU could help India

    • India’s successful sectors like textiles, pharmaceuticals and leather could benefit from these deliberations, which would also be keenly watched by representatives of the services and renewable energy sectors.
    • A successful free trade agreement (FTA) with the EU could help India to expand its footfall in markets such as Poland, Portugal, Greece, the Czech Republic and Romania, where the country’s exports registered double-digit annual growth rates in the last decade.

    So, what are the factors India need to consider while signing FTA

    1] Impact of tariff on domestic industry:

    • It has been observed that when India is an importer, the preferential tariffs that accrue as a result of trade agreements are significantly lower than the rates charged from countries given Most Favoured Nation (MFN) status by India.
    • But when the partner country is the importer, preferential tariffs on Indian goods, in most cases, are closer to the MFN tariffs.
    • As a result, Indian exporters do not get the same returns as their counterparts in the partner countries.
    • India’s trade with South Korea is a case in point.
    • Before entering into a trade agreement care should, therefore, be taken to ensure that the domestic industry is not made to compete on unequal terms with the partner countries.

    2] Adherence to the rules of origin

    • The India-UAE Comprehensive Economic Partnership Agreement sets a good example.
    • It includes a strong clause on the rules of origin.
    • Forty per cent value addition or substantial processing of up to 40 per cent in the exporting country is required to qualify for lower tariffs.
    • Rules of origin have been a bone of contention in most Indian trade agreements.
    • (CAROTAR, 2020): In 2020, the country notified the Customs (Administration of Rules of Origin under Trade Agreements) Rules (CAROTAR, 2020), which require a basic level of due diligence from the importer.

    3] Including the offset clauses

    • “Offset clauses” — where the exporter is obliged to undertake activities that directly benefit the importing country’s economy — should be built into trade agreements, especially for technology intensive sectors.

    4] Emergency action plan

    •  In February 2020, the US made India ineligible for claims under GSP, America’s oldest preferential trade scheme.
    • The US Trade Representative’s Office deemed India as a developed country and suspended beneficial treatment under the GSP.
    • A contingency plan should be in place to tackle such situations.

    5] Inclusion of sunset clause

    • India should also take a cue from the US-Mexico-Canada Agreement, to incorporate a “sunset” clause in trade agreements.
    • The pact between the three North American nations provides for periodic reviews and the agreement is slated to end automatically in 16 years unless the countries renegotiate it.

    6] Parity between services and merchandise

    • India should negotiate for parity between services and merchandise.
    • Low trade in services: India’s trade in services is low, and its overall score in the OECD’s Services Trade Restrictiveness Index (STRI) exceeds the world average.
    • It is especially high in legal and accounting services due to the licencing requirements in both these segments.
    • Expansion in banking and financial services: There is also significant room for expansion of trade in the banking and financial services industry.

    Conclusion

    A well-crafted trade agreement could help India enhance its share in global trade and help attain the government’s target of making the country a $5-trillion economy.

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    Back2Basics: CAROTAR Rules

    • Importers will have to do their due diligence to ensure that imported goods meet the prescribed ‘rules of origin’ provisions.
    • This is the essential availing concessional rate of customs duty under free trade agreements (FTAs).
    • A list of minimum information, which the importer is required to possess, has also been provided in the rules along with general guidance.
    • Also, an importer would now have to enter certain origin related information in the Bill of Entry, as available in the Certificate of Origin.

    Why need CAROTAR?

    • CAROTAR 2020 supplements the existing operational certification procedures prescribed under different trade agreements.
    • India has inked FTAs with several countries, including Japan, South Korea and ASEAN members.
    • Under such agreements, two trading partners significantly reduce or eliminate import/customs duties on the maximum number of goods traded between them.
    • The new rules will assist customs authorities in the smooth clearance of legitimate imports under FTAs.

  • Bonn meet

    Context

    From June 6-16, representatives from more than 100 countries descended on Bonn to hold preliminary discussions on what could be the final communiqué at the conclusion of COP27, to be held at Sharm-el-Sheikh later this year.

    Key takeaways from the discussion

    • Centred on climate finance: Discussions were centred around climate finance and there was hardly any convergence of issues.
    • No convergence: The developed and developing countries or for that matter, big polluters and small polluters, were speaking from the ends of the spectrum with no meeting ground.
    • Focus on adaptation and mitigation: Much of the discussion was around “loss and damage”, which was being experienced by many of the smaller countries, especially with big coastlines, due to rising river levels, loss of agricultural productivity, loss of livelihoods, etc.
    • The idea to provide assistance for “loss and damage” was opposed by the US and the EU.
    • Need for alternative funding: The Green Climate Fund is considered too cumbersome and the process too lengthy.
    • Hence, the need for an alternate funding route was imperative.
    • It was argued that one needs to look into this issue right now and provide financial assistance to cope with it.
    • This brings into focus the debate between adaptation and mitigation.
    • The demand of the developing countries for a provision of climate finance at a scale much higher than $100 billion a year fell on deaf ears.
    • Incidentally, the figure of $100 billion was arrived at arbitrarily and that too way back in 2009.

    Mitigation Vs Adaptation debate

    • More funding directed toward mitigation: It is generally felt that whatever funding has come for climate change issues has mostly been directed towards mitigation.
    • This is primarily because mitigation projects have a cost-benefit analysis and, therefore, it is easy to lend money because you can get it back through interest payments.
    • Cost-benefit analysis: This is primarily because mitigation projects have a cost-benefit analysis and, therefore, it is easy to lend money because you can get it back through interest payments.
    • Mitigation would mean, for example, setting up solar generation units to avoid carbon footprint.
    • Cost-benefit analysis is difficult for adaptation projects, which would be in the form of grants.

    Actions needed to limit the temperature rise to 1.5 degree Celsius

    • 2.4°C by NDC: The Nationally Determined Contributions (NDCs), as on date, are good enough to limit temperature rise to 2.4 degrees centigrade, provided all the targets are met.
    • 1.8°C with net-zero commitment: In addition, if countries also meet their net-zero commitments by 2050, the temperature rise will still be around 1.8 degrees centigrade.
    • 1.5°C:  To limit the temperature rise to 1.5 degrees centigrade, emissions will have to be cut down by half by 2030.
    • The Alliance of Small Island States (AOSIS) expressed the view that to be more meaningful, the aim should be to reduce emissions by 20 per cent by 2025 itself.
    • The logic is that the next round of NDCs is due only in 2025 and by that time, it would be too late to formulate a plan that is achievable by 2030.

    Issue of using remaining carbon space

    • The use of the remaining carbon space available to limit temperature rise to 1.5 degrees centigrade, a highly contentious issue, was also discussed in Bonn.
    • The US resisted being labelled as a “big emitter” and was not willing to take responsibility for its historical emissions.
    • There is no single estimate of how much carbon space is really available as on date, but broad indications are that at the given emissions rate, it would be roughly 10 years.
    • The raging debate is how to distribute this available space equitably amongst countries, which would mean that someone has to take the burden of stiffer targets.
    • What the US wanted other big emitters like China and India take on greater responsibilities for cutting down emissions.
    • However, the like-minded group of developing countries (LMDCs) — which included China, India, Saudi Arabia and the Arab countries — were opposed to this.

    Conclusion

    If there was any hope that discussions at Bonn would provide an acceptable draft, which could be taken forward during COP27, it was misplaced.

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    Back2Basics: The Paris Agreement

    • The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016.
    • Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.
    • To achieve this long-term temperature goal, countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate-neutral world by mid-century.
    • It is a landmark process because, for the first time, a binding agreement brings all nations into a common cause to undertake ambitious efforts to combat climate change and adapt to its effects.
    • Implementation of the Paris Agreement requires economic and social transformation, based on the best available science.
    • The Agreement works on a 5- year cycle of increasingly ambitious climate action carried out by countries.
    • By 2020, countries submit their plans for climate action known as nationally determined contributions (NDCs).

    NDCs

    • In their NDCs, countries communicate actions they will take to reduce their Greenhouse Gas emissions in order to reach the goals of the Paris Agreement.
    • Countries also communicate in the NDCs actions they will take to build resilience to adapt to the impacts of rising temperatures.

  • James Webb Space Telescope

    NASA has unveiled images from the James Webb Space Telescope, the largest and most powerful orbital observatory ever launched.

    What is the image about?

    • NASA released a deep field photo of a distant galaxy cluster, SMACS 0723, revealing the most detailed glimpse of the early universe recorded to date.
    • The collection also included fresh images of another galaxy cluster known as Stephan’s Quintet, first discovered in 1877.

    James Webb Space Telescope

    • JWST is a joint NASA–ESA–CSA space telescope that is planned to succeed the Hubble Space Telescope as NASA’s flagship astrophysics mission
    • It is the most powerful space telescope ever built.
    • It will enable a broad range of investigations across the fields of astronomy and cosmology, including observing some of the most distant events and objects in the universe,
    • It would help understand events such as the formation of the first galaxies, and detailed atmospheric characterization of potentially habitable exoplanets.

    Its significance

    • Some have called JSWT the “telescope that ate astronomy.”
    • It is said to look back in time to the Dark Ages of the universe.

    What does the ‘Dark Ages’ of the universe mean?

    • Evidence shows that the universe started with an event called the Big Bang 13.8 billion years ago, which left it in an ultra-hot, ultra-dense state.
    • The universe immediately began expanding and cooling after the Big Bang.
    • One second after the Big Bang, the universe was a hundred trillion miles across with an average temperature of an incredible 18 billion F (10 billion C).
    • Around 400,000 years after the Big Bang, the universe was 10 million light-years across and the temperature had cooled to 5,500 F (3,000 C).
    • Throughout this time, space was filled with a smooth soup of high-energy particles, radiation, hydrogen and helium.
    • There was no structure. As the expanding universe became bigger and colder, the soup thinned out and everything faded to black.

    This was the start of what astronomers call the Dark Ages of the universe.

    How will JWST study this?

    Ans. Looking for the first light

    • The Dark Ages ended when gravity formed the first stars and galaxies that eventually began to emit the first light.
    • Astronomers aim to study this fascinating and important era of the universe, but detecting first light is incredibly challenging.
    • Compared to massive, bright galaxies of today, the first objects were very small and due to the constant expansion of the universe, they’re now tens of billions of light years away from Earth.
    • Also, the earliest stars were surrounded by gas left over from their formation and this gas acted like fog that absorbed most of the light.
    • It took several hundred million years for radiation to blast away the fog. This early light is very faint by the time it gets to Earth.

     

     

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  • Species in news: Kannimara Teak

    The legendary Kannimara teak of the Parambikulam Tiger Reserve is still growing in height and girth.

    What is the news?

    • Over the last five years, the centuries-old teak has grown by 1.85 metres in height and 9 cm in girth.
    • This might be one of the largest and oldest teak tree in the world.

    Kannimara teak

    • Worshipped by the tribes of Parambikulam, the Kannimara teak remains a flagship of the tiger reserve offering a spectacular view to visitors.
    • For the tribespeople of Parambikulam, it is still a ‘virgin tree’.
    • That was why they named it Kannimara (meaning virgin tree).
    • The tribal legend has it that the tree had bled when people tried to cut it.
    • So they protected it and started worshipping the tree by offering annual pujas.
    • The Kannimara tree had won the Union government’s Mahavriksha Puraskar in its first year of introduction in 1994.

     

     

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  • Bank frauds

    Context

    The biggest banking scam in India has come to the forefront; in this case, DHFL has hoodwinked a consortium of banks driven by the Union Bank of India to the tune of ₹35,000 crore through financial misrepresentation.

    How scams affect economy

    • The banking system of any country is the backbone of its economy.
    • Excessive losses to banks affect every person in the country because the amounts deposited in banks belong to the citizens of the country.
    • The NPAs that banks incur are mainly due to bad loans and scams.
    • The data by the RBI also show that one of the fundamental problems in the way of the development of banking in India is on account of rising bank scams and the costs consequently forced on the framework.
    • Strangely, as in a Global Banking Fraud survey (KPMG), the issue is not just for India alone; it is a worldwide issue.

    Reasons for scams

    •  Frauds in the banking industry can be grouped under four classifications: ‘Management’, ‘Outsider’, ‘Insider’ and ‘Insider and Outsider’ (jointly).
    • Operational failures: All scams, whether interior or outside, are results of operational failures.
    • Limited asset monitoring: Research by Deloitte has shown that limited asset monitoring after disbursement (38%) was the foremost reason behind stressed assets and insufficient due diligence before disbursement (21%) was among the major factors for these NPAs.
    • Poor bank corporate governance: A study by the Indian Institute of Management Bangalore has shown that poor bank corporate governance is the cause behind rising bank scams and NPAs.

    The problems of high NPA

    • In a Financial Stability Report released by the RBI in December 2021, there is a projection of the gross NPAs of banks rising from 6.9% in September 2021 to 8.1% of total assets by September 2022 (under a baseline scenario) and to 9.5% under a severe stress scenario.
    • A high NPA also reduces the net interest margin of banks besides increasing their operating cost; these banks meet this cost by increasing the convenience fee from their small customers on a day-to-day basis.

    Suggestions

    • Banks have to exercise due diligence and caution while offering funds.
    • Regulation and control of CAs: The regulation and the control of chartered accountants is a very important step to reduce non-performing assets of banks.
    • Banks should be cautious while lending to Indian companies that have taken huge loans abroad.
    • Tightening audit system: There is also an urgent need to tighten the internal and external audit systems of banks.
    • Fast rotation of employees: The fast rotation of employees of a bank’s loan department is very important.
    • Public sector banks should set up an internal rating agency for rigorous evaluation of large projects before sanctioning loans.
    • Effective MIS: Further, there is a need to implement an effective Management Information System (MIS) to monitor early warning signals about business projects.
    • CIBIL score of the borrower: The CIBIL score of the borrower (formerly the Credit Information Bureau (India) Limited) should be evaluated by the bank concerned and RBI officials.
    • Use of AI: Financial fraud can be reduced to a great extent by the use of artificial intelligence (AI) to monitor financial transactions.
    • Improve loan recovery process: Rather than having to continuously write off the bad loans of large corporates, India has to improve its loan recovery processes and establish an early warning system in the post-disbursement phase.
    • Risk assessment: Banks need to carry out fraud risk assessments every quarter.
    • Only establishment of National Asset Reconstruction Company Ltd. (NARCL) or the ‘bad bank’ is not a real solution.
    • These measures can help only after a loan is bad but not the process of a loan going bad.

    Conclusion

    While the Government of India and the RBI have taken several measures to try and resolve the issue of scams in the banking industry, the fact is that there is still a long way to go.

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  • India must prepare for 5G technology

    Context

    5G technology is going to make inroads into the country very soon.

    Making Digital India project successful

    • With over 117 crore telecom users and more than 82 crore internet subscribers, India is one of the fastest-growing markets for digital consumers.
    • A 2019 Mckinsey study rated India as the second-fastest digitising economy. 
    • Internet connectivity is critical for making the Digital India project inclusive, and widespread use of optical fibre in the remotest corners of the country is vital to ensure that no one is left behind in this endeavour.

    Digital infrastructure for 5G

    • Digital infrastructure, which seamlessly integrates with physical and traditional infrastructure, is critical to India’s growth story and the country’s thrust towards self-reliance.
    • Networking equipment that relies on optical fibre and other semiconductor-based device ecosystems are at the heart of building the infrastructure that will be needed when the country takes the next step in its digital journey.
    • The government has taken several measures to build the next generation of digital infrastructure.
    • A basic requirement of 5G will be data transmission networks.
    • Optical fibre is the backbone of the digital infrastructure required for this purpose — the data is transmitted by light pulses travelling through long strands of thin fibre.

    Optical fibre industry in India

    • In the last 10 years, domestic manufacturers invested more than Rs 5,000 crore in optical fibre industry, which has generated direct and indirect employment for around 4 lakh individuals.
    • Exports from India: India exported optical fibre worth $138 million to over 132 countries between April 2020 and November 2021.
    • India’s annual optic fibre manufacturing capacity is around 100 million fibre km (fkm) and the domestic consumption is around 46 million fkm. Indian optical fibre cable consumption is predicted to increase to 33 million fkm by 2026 from 17 million fkm in 2021.
    • A little more than 30 per cent of mobile towers have fibre connectivity; this needs to be scaled up to at least 80 per cent.

    Unfair competition from cheap imports

    • India’s optical fibre industry has also seen unfair competition from cheap imports from China, Indonesia and South Korea.
    • These countries have been dumping their products in India at rates lower than the market price.
    • What is dumping? The World Trade Organisation defines dumping as “an international price discrimination situation in which the price of a product offered in the importing country is less than the price of that product in the exporting country’s market”.
    • Way ahead: Imposing anti-dumping duties is one way of protecting the domestic industry.
    • The Directorate General of Trade Remedies has recently begun investigations against optical fibre imports.

    Suggestions

    • India needs to invest in R&D, offer production-linked incentive (PLI) schemes to support indigenous high-tech manufacturing and develop intellectual property in critical aspects of digital connectivity.

    Conclusion

    The need of the hour is to unlock the full potential of India’s optical fibre industry and enable India to emerge as a major manufacturing and technology hub while achieving atmanirbharta in its 5G journey.

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    Back2Basics: About optical fibre

    • Fiber optics, also spelled fibre optics, the science of transmitting data, voice, and images by the passage of light through thin, transparent fibers.
    • In telecommunications, fiber optic technology has virtually replaced copper wire in long-distance telephone lines, and it is used to link computers within local area networks.
    • Fibre optics is also the basis of the fiberscopes used in examining internal parts of the body (endoscopy) or inspecting the interiors of manufactured structural products.
    •  Through a process known as total internal reflection, light rays beamed into the fibre can propagate within the core for great distances with remarkably little attenuation or reduction in intensity.

  • States, freebies and the costs of fiscal profligacy

    Context

    Many states are pursuing the freebie culture, which raises several questions.

    About freebies

    • Why do governments give freebies? The obvious motivation for States in expanding freebies is to use the exchequer to build vote banks.
    • Electoral calculations tempt them to place short-term gains ahead of long-term sustainability.
    • Case in which it is necessary? A certain amount of spending on transfer payments to provide safety nets to the most vulnerable segments of the population is not only desirable but even necessary.
    • What is the problem? The problem arises when such transfer payments become the main plank of discretionary expenditure, the spending is financed by debt, and the debt is concealed to circumvent the FRBM targets.
    • Opportunity cost: The more States spend on transfer payments, the less they have for spending on physical infrastructure such as, for example, power and roads, and on social infrastructure such as education and health, which can potentially improve growth and generate jobs.

    Questioning the logic of freebie culture

    • Sustainability: Is borrowing and spending on freebies sustainable?
    • Best use: Is this the best possible use of public money?
    • Opportunity cost: What is their opportunity cost — what is it that the public are collectively giving up so that the government can fund these payments?
    • Checks and balances: Should not there be some checks on how much can be spent on them?

    Where should government spend the borrowed money?

    • Ideally, governments should use borrowed money to invest in physical and social infrastructure that will generate higher growth, and thereby higher revenues in the future so that the debt pays for itself.
    • On the other hand, if governments spend the loan money on populist giveaways that generate no additional revenue, the growing debt burden will eventually implode.

    But what is the problem with freebies if states are confirming to the FRBM targets?

    • Any analysis of State Budgets by the Reserve Bank of India shows that State finances are in good health and that all of them are conforming to the Fiscal Responsibility and Budget Management (FRBM) targets.
    • This is a misleading picture.
    • Off budget borrowing: Much of the borrowing that funds these freebies happens off budget, beyond the pale of FRBM tracking.
    • The typical modus operandi for States has been to borrow on the books of their public enterprises, in some cases by pledging future revenues of the State as guarantee.
    • Effectively, the burden of debt is on the State exchequer, albeit well concealed.
    • The Comptroller and Auditor General of India (CAG) had in fact pointed out that in respect of some States.
    • Huget cost: The costs of fiscal profligacy at the State level can be huge.
    • The amount States borrow collectively every year is comparable in size to the Centre’s borrowing which implies that their fiscal stance has as much impact on our macroeconomic stability as does that of the Centre.
    • The need, therefore, for instituting more effective checks that can make wayward States fall in line is compelling.

    What are the institutional checks and balances? What are the reasons of their failure?

    • 1] Legislature and opposition: In theory, the first line of defence has to be the legislature, in particular the Opposition, whose responsibility it is to keep the Government in line.
    • But the Opposition does not dare speak up for fear of forfeiting vote banks that are at the end of these freebies.
    • 2] Lag in CAG reports: Another constitutional check is the CAG audit which should enforce transparency and accountability.
    • In practice, it has lost its teeth since audit reports necessarily come with a lag, by when political interest has typically shifted to other hot button issues.
    • 3] The market: The market is another potential check.
    • It can signal the health or otherwise of State finances by pricing the loans floated by different State governments differently, reflecting their debt sustainability.
    • But in practice this too fails since the market perceives all State borrowing as implicitly guaranteed by the Centre, never mind that there is no such guarantee in reality.

    Suggestions

    • 1] Amend FRBM Act for complete disclosure: First, the FRBM Acts of the Centre as well as States need to be amended to enforce a more complete disclosure of the liabilities on their exchequers.
    • Even under the current FRBM provisions, governments are mandated to disclose their contingent liabilities, but that disclosure is restricted to liabilities for which they have extended an explicit guarantee.
    • The provision should be expanded to cover all liabilities whose servicing obligation falls on the Budget, or could potentially fall on the Budget, regardless of any guarantee.
    • 2] Centre should impose conditionalities: Under the Constitution, States are required to take the Centre’s permission when they borrow.
    • The Centre should not hesitate to impose conditionalities on wayward States when it accords such permission.
    • 3] Use of financial emergency provision: There is a provision in the Constitution of India which allows the President to declare a financial emergency in any State if s/he is satisfied that financial stability is threatened.
    • This provision has never been invoked so far for fear that this will turn into a political weapon.
    • But the provision is there in the Constitution for a reason.
    • After all, the root cause of fiscal irresponsibility is the lure of electoral nirvana. It will stop only if the political leadership fears punishment.
    • 4] Course correction by the Centre: The Centre itself has not been a beacon of virtue when it comes to fiscal responsibility and transparency.
    • To its credit, it has embarked on course correction over the last few years.
    • It should complete that task in order to command the moral authority to enforce good fiscal behaviour on the part of States.

    Conclusion

    The state governments, as well as the Central government, need to avoid the freebies that harm financial health and cause long-term harm. For that, there is a need to implement the suggestions mentioned above.

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    Back2Basics: FRBM Act

    • The FRBM is an act of the parliament that set targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence and reduce its fiscal deficits.
    • It was first introduced in the parliament of India in the year 2000 by Vajpayee Government for providing legal backing to the fiscal discipline to be institutionalized in the country.
    • Subsequently, the FRBM Act was passed in the year 2003.

  • RBI sets up system to settle International Trade in Rupees

    RBI has decided to put in place an additional arrangement of international trade for invoicing, payment, and settlement of exports / imports in INR.

    • Banks acting as authorised dealers for such transactions would have to take prior approval from the regulator to facilitate this.
    • All exports and imports under the invoicing arrangement may be denominated and invoiced in Rupee.
    • Exchange rate between the currencies of the two trading partner countries may be market determined.
    • Exporters and importers can now use a Special Vostro Account linked to the correspondent bank of the partner country for receipts and payments denominated in rupees.
    • These accounts can be used for payments for projects and investments, import or export advance flow management, and investment in Treasury Bills subject to Foreign Exchange Management Act, 1999 (FEMA).
    • Also, the bank guarantee, setting-off export receivables, advance against exports, use of surplus balance, approval process, documentation, etc., related aspects would be covered under FEMA rules.

    Nostro and Vostro Accounts

    • Nostro and vostro are terms used to describe the same bank account; the terms are used when one bank has another bank’s money on deposit.
    • They are used to differentiate between the two sets of accounting records kept by each bank.
    • Nostro comes from the Latin word for “ours,” as in “our money that is on deposit at your bank.”
    • Vostro means “yours,” as in “your money that is on deposit at our bank.”

    Why such move?

    • The rupee is at a historic low against the dollar.
    • The mechanism is meant to facilitate trade with countries under sanction.
    • Payments had become a pain point for exporters immediately after the Russia-Ukraine war broke out, especially after Russia was cut off from the SWIFT payment gateway.
    • As a result of the trade facilitation mechanism, we see easing of payment issues with Russia.
    • The move would also reduce the risk of forex fluctuation specially looking at the Euro-rupee parity.
    • We see this as a first step towards 100% convertibility of rupee.
    • It will also help stabilize rupee.

    What does the change mean for exports?

    • Several countries including Sri Lanka and some in Africa and Latin America are facing forex shortage.
    • As such, the new mechanism will help India promote its exports.
    • It will also help buy discounted crude oil from Russia, which now accounts for 10% of all imported crude.

    Will the move help narrow trade deficit?

    • The gap between India’s exports and imports widened to record highs.
    • This puts pressure on the current account deficit, which some economists estimate would nearly double to more than 3% of GDP in FY23.
    • RBI’s decision may not benefit the external account immediately, but over the medium term, demand for dollars may come down.
    • This is partly because opening of new vostro accounts between banks may take some time.

    Back2Basics: Currency Convertibility

    • Convertibility is the ease with which a country’s currency can be converted into gold or another currency through global exchanges.
    • It indicates the extent to which the regulations allow inflow and outflow of capital to and from the country.
    • Currencies that aren’t fully convertible, on the other hand, are generally difficult to convert into other currencies.
    • Having a convertible currency allows a government to pay for goods and services in a currency that may not be the buyer’s own.

    Convertibility of Rupee

    • In order to face the serious current account deficit in the balance of payments, the Government of India introduced the partial convertibility of rupee from March 1, 1992.
    • This was an inevitable move for the expeditious integration of Indian economy with that of the world.
    • Under this system, 60 per cent of the exchange earnings were convertible in rupees at market-determined exchange rate and the remaining 40 per cent were at the officially determined exchange rate.
    • Current account convertibility relates to the removal of restrictions on payments relating to the international exchange of goals, services and factor incomes.
    • Capital account convertibility refers to a similar liberalization of a country’s capital transactions such as loans and investment, both short term and long term.

     

    A bit difficult, but pls take an effort to try this PYQ from CSP 2020:

    If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India?

    1. Not depending on short-term foreign borrowings
    2. Opening up to more foreign banks
    3. Maintaining full capital account convertibility

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 1 and 2 only

    (c) 2 only

    (d) 1, 2 and 3

     

    [wpdiscuz-feedback id=”3pp3us2fwp” question=”Please leave a feedback on this” opened=”1″]Post your answers here. Detailed explanation will be provided.[/wpdiscuz-feedback]

     

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  • The West has a chance to wean India off Russian weaponry

    Context

    Perturbed by India’s reluctance to condemn the Russian invasion of Ukraine and keen to bind the country closer in confronting China, Western governments have launched a fresh push to wean India, the world’s biggest importer of arms, off its long dependence on Russian weaponry.

    India’s concerns after Ukraine war

    • India has grown increasingly alarmed about China, following deadly border clashes in 2020.
    • Since the war in Ukraine began, it has also worried about Russia’s reliability as an arms supplier and about the quality of some of its weapons.
    • Diversification away from Russia: India, though insistent that it has every right to choose its own suppliers, is already diversifying away from Russia. 
    • The share of weapons it imports from Russia has fallen sharply, to around 50% between 2016 and 2021, down from 70% during the previous five-year period.
    • Western help for diversification: It has welcomed Western help in fulfilling its ambition to make more of its own weapons.

    Joint arms production plan

    • As the West cannot compete with Russia on price and remain reluctant to share their most cutting-edge technology, they are counting on joint arms production.
    • Western leaders have been vocal about their willingness to help India arm itself.
    • At a ministerial meeting in Washington in April, American officials discussed helping India to make advanced weapons, including reconnaissance aircraft and a system for combating aerial drones.
    • On visits to Delhi that month, Boris Johnson, Britain’s prime minister, and Ursula von der Leyen, the European Commission’s president, also proposed joint arms ventures.
    • Despite avowed interest from both sides, such a shift faces many challenges.

    Challenges

    • Dominance of PSUs: India’s arms industry, technically open to private investment since 2001, has long been hampered by the dominance of a small number of state-owned giants such as Hindustan Aeronautics Limited (HAL).
    • Inefficiencies: State-owned arms-makers remain notoriously inefficient.
    • They also retain long-running tie-ups with Russia, making Western governments wary of accepting India’s demands for the transfer of more advanced technology.
    • Low presence of private sector: The share of defence production in the hands of the private sector, which is a more natural partner for big Western defence manufacturers, is about a fifth—scarcely higher than it was five years ago.
    • Lack of industrial capacity and skill: Both the state and private sector still lack the industrial capacity and skilled workers to produce highly specialised defence technology at scale—especially military aircraft.
    • Trust issue: While Western companies worry about inadvertent technology transfers to Russia, India worries about the reliability of its Western partners.
    • Past record: Many see America, which in the past has imposed sanctions on India for its nuclear-weapons programme, as a fickle supplier.
    • More recently America refused to sell India its Patriot missile system, prompting India to fall back on a Russian alternative and thereby put itself at risk of American sanctions once more.

    Way forward

    • Liberalisation of defence sector: As a step to liberalise the industry as part of his push towards self-reliance, in 2020 India raised the limit on foreign ownership of defence firms from 49% to 74%.
    • Ordinance Factory Board was dissolved into small units to corporatize the entity.
    • Lockheed Martin, a big American defence manufacturer, last year approved the manufacture of wings for the f-16 fighter jet by its joint venture with Tata.
    • The company has also pledged to produce a more advanced fighter, the f-21, in India, provided it wins a multi-billion-dollar contract to supply 114 fighter jets.
    • Big deals like those would provide incentives for foreign governments to approve more technology transfer and for Western manufacturers to make the investments needed to spur India’s indigenisation drive.

    Conclusion

    Russia’s war and China’s muscle-flexing have opened a door for India and the West to walk through, but crossing the threshold will require some resolve on both sides.

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