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GS Paper: GS3

  • Unlocking recovery

    Context

    Many developed countries are poised for strong growth. This will compel their respective central banks to begin normalizing the extremely loose monetary policies. This will require a reorientation of India’s stimulus strategy.

    Global growth momentum

    • On the global front, the growth momentum has been strong, particularly in the US and China, although recent data suggest this has peaked or is even stalling.
    • Post the perceived hawkishness of the last US Federal Reserve policy meeting, the traded interest rate of the benchmark US 10-year treasury bond fell to below 1.3 percent.
    • The falling rate reflects disquiet about the durability of the recovery once the fiscal stimulus starts waning.
    • China recently announced a 0.5 percent cut in the required reserves ratio for banks.
    • Europe’s recovery had begun to inch up, but members of the European Central Bank have begun to push back on market expectations of early tapering.
    • However, some smaller global central banks have started normalizing their respective Quantitative Easing programs.

    Growth momentum in India

    • The encouraging aspect of the recovery is the resilience of many mid-and large-turnover companies in the face of the debilitating public health crisis
    • In India, there are signs that the recovery momentum began to strengthen from mid-June, and of demand accelerating, despite capacity utilization in many industries below thresholds needed for the next round of private investments.
    • In line with the market consensus, we think that 2021-22 growth is likely to be in the 9-10 percent range.
    • Tax collections, another indicator of activity, even if a bit skewed, support this view.
    • A revival of retail consumer demand is critical for sustaining the recovery. Reports from industry associations suggest a somewhat mixed picture.
    • Demand emanating from rural geographies is important for sustaining recovery.
    • Demand for work under MGNREGA suggests continuing stress.
    • Monsoons will be a big contributor.
    • The sowing of Kharif crops stalled in late June but is predicted to pick up again in mid-July.
    • Renewed government intervention is required.

    Factors deciding the trajectory of recovery

    • Inflation: Rising inflation could force a monetary policy normalization faster than presently anticipated.
    • Global recovery: Effects global central banks’ policy tightening will only add to the difficulty of balancing a policy-induced increase in interest rates, moderating financial markets volatility, and maintaining growth incentives.
    • Access to credit: Access to credit remains a crucial input in the recovery matrix, particularly for small and micro-enterprises.
    • The Union government’s Emergency Credit Line Guarantee Scheme (ECLGS) has reportedly been very effective in stabilizing the solvency (and cash flows) of micro and small businesses.

    Way forward

    • Expansion of subvention scheme: The expansion of subvention (ECLGS) is probably the most effective template to incentivize credit flows, leveraging on the government’s balance sheet to take on the first loss risks.
    • At the same time, capex proposals of the Centre and states should gradually draw in private sector capex.
    • Policy intervention to create a level field: Corporate health has improved, with lower debt on balance sheets.
    • Adoption of technology is widespread; this will boost productivity and competitiveness.
    • But these factors reinforce trends in consolidation and market power.
    • It will require policy interventions to create a more level playing field for smaller companies, which is crucial for job creation.

    Conclusion

    Policy support will thus need to adapt from the “revive” to the “thrive” phase, to place India on a sustained 7 percent-plus growth path.

  • Theatre Command under Chief of Defence Staff is not a good idea

    Context

    The government is reportedly planning to re-organise the military into a theatre command under the chief of defence staff (CDS) in which the assets of the Air Force will be split into four and distributed among four operational theatres.

    Background of the creation of CDS

    • In 2012, the Naresh Chandra Committee suggested the creation of a CDS, which would take on overall functions of the chairman, chiefs of committee as well as the responsibilities pertaining to centralised planning, induction, training, intelligence and logistics. 
    • Operations, according to the committee’s suggestion, would continue to be managed by the respective chiefs of staff.
    • However, sometime in 2016-17, this idea was modified to organise the operational assets of the three services into four theatre commands, all of which are now proposed to be brought under the CDS.

    Issues with creating theatre command by dividing Air Force

    • Professional leadership is critical in support elements: The Air Chief’s professional leadership of the Air Force is crucial to orchestrate a variety of support elements like aerial tankers, AWACS (Airborne Warning And Control Systems), AEW, Heliborne support and UAVs in an “offensive operation”.
    • Lack of in-dept understanding: A land theatre command, if given power over the air elements, may not have the confidence to launch such a mission because of the lack of in-depth understanding of the organisational complexity and the risks involved.
    • Dilution of assets may harm effectiveness: Dilution of the combat assets of the Air Force, a 30-squadron force consisting of five or six types of aircraft, might severely affect mission-effectiveness.
    • Role of CDS: It is extremely doubtful if the CDS can cope with the enhanced responsibilities that include operations, albeit through the theatre commanders.
    • That would leave only training, maintenance, and support under the chiefs of staff — a gross under-utilisation of the operational leadership built over 40 years.
    • Resource limitations: Forming a separate air defence command for the air defence of the entire nation seems an impractical idea considering our resource limitations.
    • Current arrangement functioned effortlessly: The current arrangement of a decentralised air defence organisation managed by Air Force geographical commands has functioned faultlessly.
    •  Flexibility: The existing structures afford better flexibility.
    • There will be significant expenditure to construct the operational infrastructure of the theatre commands.
    • Timing: We are trying to effect changes at a time the military is deployed actively.
    • The Chinese have dug in hard, and we do not yet know their strategy.
    • To divide the Air Force into four units at this moment is inadvisable.

    Way forward

    • White paper: There is no white paper on the advantages of the theatre commands or one listing the merits of the CDS donning the mantle of the operational head of the entire military operation.
    • So, a white paper on these aspects could clear the air over the utilities of such moves.
    • Joint planning is a must, but operations are best undertaken by individual services who know what other services are doing and when.

    Conclusion

    Splitting the asset of the Air Force would result in dilution of its power and is not advisable at the current juncture.

  • Electricity (Amendment) Bill, 2021

    The Electricity (Amendment) Bill, 2021 will be introduced and is likely to be pushed for passage in the ongoing monsoon session of Parliament.

    Need for this bill

    • Electricity distribution is at the cutting edge of the power sector.
    • Despite the last 25 years of power sector reforms, the electricity distribution companies are unable to pay the generation and transmission companies as well as banks / financial institutions due to poor financial health.
    • In this situation, patchwork may not turn around the power sector and a holistic approach is the need of the hour.
    • The provisions of the proposed amendment bill have to be seen in this context.

    Key features of Electricity (Amendment) Bill, 2021

    De-licensing: Electricity distribution is delicensed, at least in the letter, giving consumers a choice to choose a distribution company in their area.

    Universal service obligation: There is the provision of a universal service obligation fund, which shall be managed by a government company.  This fund shall be utilized to meet any deficits in cross-subsidy. In case of supply through pre-paid meters, security deposit will not be required.

    Appellate Tribunal for Electricity (APTEL): It is being strengthened by an increasing number of members. The domains from where the chairperson and members of Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERC) will come have been described.

    Renewable Power Obligation: Keeping in view the national climate change goals, the responsibility of fixing renewable power obligations (RPO) is shifted from state commissions to the central government.

    Penalty: Penalty for contravention of the provisions of the Act has been increased up to Rs 1 crore. Non-fulfillment of RPO will attract stringent penalties as per the proposed amendments.

    Important issues not addressed

    • Recovery of dues: Discoms collect revenue from the consumers and feed the supply chain upstream. They are, however, unable to recover their costs, out of which nearly 75-80 percent are power purchase costs.
    • Tariff: A broad guideline to reduce tariffs could have been part of the proposed amendment bill. Recently, the Forum of Regulators came out with a report on cost elements of tariff and suggested measures to reduce the same.
    • AT&C losses: The Aggregate Technical & Commercial (AT&C) losses of 12 states were more than 25 percent and of six states between 15 and 25 percent, according to a report released by the distribution utility forum based on Uday dashboard in 2020.

    Some provisions may backfire

    • Power distribution is proposed to be delicensed. However, the eligibility criteria shall be prescribed by the central government and the conditions for registration by the SERC.
    • There is a provision for amendment and cancellation of registration as well. In case these provisions are implemented similar to a license, the purpose shall be defeated.
    • The newly registered companies are given the facility to use the power allocation as well as the network of existing discom, which may be dilapidated in many cases due to paucity of funds.
    • With such a network, the quality of supply to the electricity consumers will be seriously affected.
    • Financial penalty on discom may not fully compensate and satisfy the consumers in such cased.

    Some of the issues that may be considered for holistic power sector reforms:

    • The provision of coal and railway freight regulators
    • Linkage of AT&C losses as key performance indicator for release of central funds to states by any ministry
    • Provision of a risk management committee and corporate governance within discoms, irrespective of being listed company

    Way forward

    • Fourteen years after the last amendment to the Electricity Act, currently, the focus of the amendment is on competition and compliance.
    • Electricity regulatory commissions hold the key to take this forward.
    • The commissions should be built as strong institutions and their autonomy should be respected and maintained.
    • After providing a robust framework for fair competition, the government should minimize its frequent interventions in the sector.
    • The government interventions often distort the market and maybe resorted to only in case of market failure.

  • Revival of Construction sector

    Context

    The latest estimates of the fourth quarter of financial year 2020-21 (January-March) brought some relief, for policymakers.

    Interpreting the construction sector GVA increase

    • The construction sector showed a 15 per cent increase in gross value added (GVA) in the last quarter, which is nearly double the growth experienced by the sector in the previous year (7.7 per cent).
    • Sign of better times: The buoyant growth of this sector has been hailed by policymakers not just as a sign of better times to come,
    • Addressing distress: Growth in the construction sector is also considered as the capacity of the economy to address the distress that households have faced in the past year.
    • Addressing needs of workforce: The Chief Economic Advisor pointed to the high growth rates in construction possibly to indicate that growth would address the needs of the beleaguered workforce.
    • The Union budget 2021 has also allocated a considerable sum towards infrastructure and construction in the hopes of the sector playing a catalysing role.

    Issues with relying on the growth of high-employment sector

    • No strong correlation: While GVA and/or GDP are considered as indicators of economic health, it has been argued in detail how it may not be prudent to rely on these alone as measures of economic welfare.
    • In particular, mere growth in a sector may not necessarily translate into benefits for its workers.
    • In the last quarter of 2019-2020, when construction GVA grew at nearly 8 per cent, employment in the same sector grew by 3 per cent based on our estimates from CMIE-CPHS.
    • Fallback employment option: The fact that employment grew in this sector even during a crisis year is largely because of the fact that the construction sector emerged as a fallback employment option for many displaced workers.
    • During “normal” times, the sector typically employs only about 10-15 per cent of India’s total workforce.
    • Even if this sector were to expand in line with its GVA growth, it will not be able to provide employment beyond a certain level.
    • Employment alone is not enough: Moreover, employment alone is not enough.
    • Earnings for an average daily wage worker in the sector have actually declined this year.
    • Again, the overall economic growth in GVA in the sector has not been passed on to the workers.

    Way forward

    • Any relief effort that relies solely on economic growth as a means to uplift workers will be sorely inadequate as we see from the experience of workers in construction.
    • The need of the hour is to go beyond relying on sectoral growth as a means of delivering relief to workers.
    • Direct transfers of cash and food are also needed, as is livelihood support through employment guarantee programmes.

    Conclusion

    While boosting growth of high-employment sectors is one strategy to adopt, this has its limitations. The capacity of a sector is limited in terms of the number of workers that it can absorb, and the extent to which growth can benefit workers.

    Back2Basics: What is GVA?

    • Gross value added (GVA) is an economic productivity metric that measures the contribution of a corporate subsidiary, company, or municipality to an economy, producer, sector, or region.
    • GVA is essentially a measure of the “net” value of output — deducting the cost of any input that went into its production from its total value.
    • GVA thus adjusts gross domestic product (GDP) by the impact of subsidies and taxes (tariffs) on products.

  • Russia’s Nauka Module for ISS

    Pirs, a Russian module on the International Space Station (ISS) used as a docking port for spacecraft and as a door for cosmonauts to go out on spacewalks. In its place, Russia’s space agency Roscosmos will be attaching a significantly larger module called Nauka.

    What does Russia’s new Nauka module do?

    • Nauka, which is 42 feet long and weighs 20 tonnes, was supposed to be launched as early as 2007, as per the ISS’s original plan.
    • Nauka — meaning “science” in Russian — is the biggest space laboratory Russia has launched to date, and will primarily serve as a research facility.
    • It is also bringing to the ISS another oxygen generator, a spare bed, another toilet, and a robotic cargo crane built by the European Space Agency (ESA).
    • The new module was sent into orbit using a Proton rocket — the most powerful in Russia’s space inventory — on July 21 and will take eight days to reach the ISS.

    What kind of research goes on at the International Space Station?

    • A space station is essentially a large spacecraft that remains in low-earth orbit for extended periods of time.
    • It is like a large laboratory in space and allows astronauts to come aboard and stay for weeks or months to carry out experiments in microgravity.
    • For over 20 years since its launch, humans have continuously lived and carried out scientific investigations on the $150 billion ISS under microgravity conditions, being able to make breakthroughs in research not possible on Earth.

    Back2Basics: International Space Station (ISS)

    • The International Space Station, which launched its first piece in 1998, is a large spacecraft that orbits around the Earth and is home to the astronauts.
    • The ISS is currently the only active space station in the earth’s orbit.
    • The first crew on the space station arrived on November 2, 2000.
    • The space station is home to a minimum of six astronauts, with two bathrooms, a gymnasium, and a big bay window.
    • It is a joint project between five participating space agencies -NASA (USA), Roscosmos (Russia), JAXA (Japan), ESA (Europe), and CSA (Canada).

  • Thane Creek Flamingo Sanctuary proposed as Ramsar Site

    The Mumbai Metropolitan Region is likely to get its first Ramsar site at the Thane Creek Flamingo Sanctuary.

    Thane Creek Flamingo Sanctuary

    • The Maharashtra Government has declared the area along the western bank of Thane Creek as the “Thane Creek Flamingo Sanctuary” since 2015.
    • It is Maharashtra’s second marine sanctuary after the Malvan sanctuary.
    • It is recognized as an “Important Bird Area” by the Bombay Natural History Society.

    About Ramsar Convention

    • The Convention on Wetlands of International Importance (better known as the Ramsar Convention) is an international agreement promoting the conservation and wise use of wetlands.
    • It is the only global treaty to focus on a single ecosystem.
    • The convention was adopted in the Iranian city of Ramsar in 1971 and came into force in 1975.
    • Traditionally viewed as a wasteland or breeding ground of disease, wetlands actually provide fresh water and food and serve as nature’s shock absorber.
    • Wetlands, critical for biodiversity, are disappearing rapidly, with recent estimates showing that 64% or more of the world’s wetlands have vanished since 1900.
    • Major changes in land use for agriculture and grazing, water diversion for dams and canals, and infrastructure development are considered to be some of the main causes of loss and degradation of wetlands.

    What does one mean by Ramsar Site?

    • A Ramsar Site is a wetland area designated to be of international importance under the Ramsar Convention.
    • It provides the framework for national action and international cooperation for the conservation and wise use of wetlands and their resources.

  • [pib] Exercise Cutlass Express 2021

    Indian Naval Ship Talwar is participating in Exercise Cutlass Express 2021, being conducted along the East Coast of Africa.

    Exercise Cutlass Express

    • The exercise is an annual maritime exercise conducted to promote national and regional maritime security in East Africa and the Western Indian Ocean.
    • Indian Navy is participating in the exercise in a ‘trainer role’.

    The 2021 edition of the exercise involves the participation of:

    • 12 Eastern African countries, US, UK, India
    • Various international organizations like International Maritime Organization (IMO), United Nations Office on Drugs and Crime (UNODC), Interpol, European Union Naval Force (EUNAVFOR), Critical Maritime Routes Indian Ocean (CRIMARIO), and EUCAP Somalia

    Focus of the exercise

    • The exercise focuses on East Africa’s coastal regions.
    • It is designed to assess and improve combined maritime law enforcement capacity, promote national and regional security and increase interoperability between the regional navies.
    • As part of the exercise, the Indian Navy, together with other partners, shall undertake the training of contingents from various participating countries in various fields across the spectrum of maritime security operations.

    Must read:

    [Prelims Spotlight] Defence Exercises

  • Getting India’s military jointness formula right

    Context

    The Chief of Defence Staff General Bipin Rawat’s recent description of the Indian Air Force (IAF) as a supporting arm and the IAF chief Air Chief Marshal R.K.S. Bhadauria’s rebuttal highlights turbulent journey marking the reorganisation process of the armed forces.

    Issues before IAF

    • The IAF is warning against splitting it into packets.
    • Reports suggest that counting even ageing aircraft, the IAF is 25% short on fighter squadrons.
    • A pan service shortage of about 400 pilots, almost 10% of their authorised strength, further aggravates this.
    • Therefore, the IAF has a point when it warns against splitting assets, for, there may be nothing much to split.

    Way forward

    • Confidence building: A common understanding of the nuances of military airpower is the key.
    • With the experience of operating almost every kind of aircraft the IAF operates, the naval leadership understands air power.
    • This applies to the Indian Army too, in its own way.
    • Confidence needs to be developed that rightly staffed apex joint organisations can draw up professional operational plans for air power.
    • Enhancing military education: Confidence building will need some effort in the short term towards enhancing professional military education though, at the staff level.
    • Analysis before implementation: Major reorganisations must strictly follow the sequence of written concepts, their refinement through consultation, simulation or table top war gaming, field evaluation and final analysis before implementation.
    • This would help address command and control, asset adequacy, individual service roles, operational planning under new circumstances and the adequacy of joint structures.
    • Who gets to lead what also matters.
    • The Western Command between the Indian Army and the IAF, the Northern Command with the Indian Army, Maritime Command with the Indian Navy and the Air Defence Command with the IAF may be an acceptable formula.

    Why jointness?

    • With dwindling budgets, a steadily deteriorating security situation and the march of technology, the armed forces understand the need to synergise.

    Challenges

    • Challenges in co-existence: Different services do not co-exist well where they are colocated.
    • Bitter fights over land, buildings, facilities, etc. harms optimal operational synergising.
    • Allocation challenge: Then there is the issue of giving each other the best, or of wanting to be with each other.
    • Lack of operational charter: The Andaman and Nicobar Command suffered from the lack of a substantial operational charter, and the services not positioning appropriate personnel or resources there.
    • Lack of interest in joint tenure: As a joint tenure did not benefit career, no one strove for it.
    • The U.S., when faced with the same problem, made joint tenures mandatory for promotions.

    Steps to be taken

    • Security strategy: We need a comprehensive National Security Strategy to guide the services develop capacities required in their respective domains.
    • Professional education: We need to transform professional education and inter-service employment to nurture genuine respect for others.
    • Mutual resolution of difference: The armed forces must resolve their differences among themselves, as the politicians or bureaucrats cannot do it.
    • Quality staff: Good quality staff, in adequate numbers, at apex joint organisations, will help to reassure individual services and those in the field that they are in safe hands.
    • Tailored approach: There is need for the acceptance of the fact that what works for other countries need not work for us.

    Conclusion

    We may need tailor-made solutions which may need more genuine thinking. For genuine military jointness, a genuine convergence of minds is critical.

  • Implications of EU’s new GHG emissions law for Indian industry

    Context

    On July 14, the European Union introduced new legislation, Fit for 55, to cut its GHG emissions by 55 per cent by 2030 and to net-zero by 2050.

    Implications of Fit for 55

    • Legal backing: It turns the EU’s announcement into law, protecting it from the winds of political change.
    • Opportunity for India: It opens new markets for Indian industry, for example for electric vehicles.
    • CBAM: However, it also introduces a potentially adverse policy called the carbon border adjustment mechanism (CBAM).
    • CBAM is meant to discourage consumers from buying carbon-intensive products and encourage producers to invest in cleaner technologies.

    What is CBAM?

    • The EU has had a carbon emission trading system since 2005.
    • With Fit for 55, the EU’s carbon price is likely to go up.
    • High carbon price will make the EU’s domestic products more expensive than imports from countries that do not have such rules.
    • The new CBAM is meant to level the playing field between domestic and imported products.
    • CBAM will require foreign producers to pay for the carbon emitted while manufacturing their products.
    • The adjustment will be applied to energy-intensive products that are widely traded by the EU, such as iron and steel, aluminium, cement, fertiliser, and electricity.

    Why CBAM is a cause for concern for India?

    • India is Europe’s third-largest trading partner, and it does not have its own carbon tax or cap.
    • So, CBAM should be a cause for concern for it.
    • A UNCTAD study predicts that India will lose $1-1.7 billion in exports of energy-intensive products such as steel and aluminium.
    • India’s goods trade with the EU was $74 billion in 2020.

    Way forward for Indian Industry

    • Clean technology partnerships: Indian Industry should enter clean technology partnerships with European industry.
    • Invest in renewables:  Indian companies should invest in more renewable electricity and energy efficiency.
    • Incentivise low-carbon choices: They can adopt science-based targets for emission reduction and internal carbon pricing to incentivise low-carbon choices.
    • Schemes and Government financing: The government can extend the perform-achieve-trade scheme to more industries and provide finance to MSMEs to upgrade to clean technologies.
    • WRI India’s analysis shows that carbon dioxide emissions from the iron and steel industry can be reduced from 900 million tonnes to 500 million tonnes in 2035 through greater electrification, green hydrogen, energy efficiency, and material efficiency.
    • Diversify export: India can try to diversify its exports to other markets and products.

    Consider the question “What is carbon border adjustment mechanism (CBAM) introduced by the EU? What are its implications for Indian industry?” 

    Conclusion

    At present, the CBAM may seem obstructionist. But over the long-term, it can provide regulatory certainty to industry by harmonising carbon prices, and Indian industry can position itself as a strong player in the trade landscape of the future.

    Back2Basics: UNCTAD

    • UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964.
    • Its headquarters are located in Geneva, Switzerland, and have offices in New York and Addis Ababa.
    • UNCTAD is part of the UN Secretariat.
    • IT report to the UN General Assembly and the Economic and Social Council but have own membership, leadership, and budget.
    • It is also part of the United Nations Development Group.

  • Essential Defence Services Bill, 2021

    The Minister of State for Defence has introduced the Essential Defence Services Bill in the Lok Sabha.

    Essential Defence Services Bill

    • Essentially, the bill is aimed at preventing the staff of the government-owned ordnance factories from going on strike.
    • Around 70,000 people work with the 41 ordnance factories around the country.
    • It is aimed to provide for the maintenance of essential defence services so as to secure the security of the nation and the life and property of the public at large and for matters connected therewith or incidental thereto.

    Why need such a bill?

    • Indian Ordnance Factories is the oldest and largest industrial setup that functions under the Department of Defence Production of the Ministry of Defence.
    • The ordnance factories form an integrated base for indigenous production of defence hardware and equipment, with the primary objective of self-reliance in equipping the armed forces with state-of-the-art battlefield equipment.
    • It is essential that an uninterrupted supply of ordnance items to the armed forces be maintained for the defence preparedness of the country and the ordnance factories continue to function without any disruptions.

    What does it allow the government to do?

    • The Bill empowers the government to declare services mentioned in it as essential defence services the cessation of work of which would prejudicially affect the production of defence equipment or goods.
    • It also prohibits strikes and lockouts in “any industrial establishment or unit engaged in essential defence services”.

    Why does the government feel its need?

    • In June the government announced the corporatization of the Ordnance Factory Board.
    • The OFB was directly under the Department of Defence Production and worked as an arm of the government.
    • The government has claimed that the move is aimed at improving the efficiency and accountability of these factories.
    • The Bill mentioned that there is a threat, though, that the employees of these factories can go on a strike against the decision.

    Also read:

    Ordinance Factory Board corporatization gets Cabinet approval