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GS Paper: GS3

  • Give small savers what is due to them

    The article highlights the issues with linking small savings interest rates with the yield on G-sec and its resetting on a quarterly basis.

    Issue of small savings interest rate

    • For decades, small savings have constituted an important source of household savings, funded development programmes of state governments and offered a safe and secure source of income to senior citizens.
    • Recently, a notification on reducing the interest rates on small savings schemes quickly made headlines and was rescinded after 12 hours.
    • For small savers, the pandemic turned into a triple whammy: Battling job losses, higher food prices and a sharp devaluation in the value of their savings and earnings thereof. 
    • Interest on the Senior Citizens’ Saving Scheme was cut to 7.4 per cent, effective from April 2020, from 8.7 per cent before,
    • This was done despite the Gopinath Committee had recommended the rates should never be revised more than 100 basis points in a single year.

    Linking small savings rate to G-sec yields

    • The suggestion to link small savings rates to G-Sec yields was first made in 2001 by Y V Reddy, then deputy governor of RBI.
    • Reddy committee suggested small savings rates should be reset once a year, allowing for a spread of up to 50 basis points.
    • Reddy’s recommendations were reiterated by his successor Rakesh Mohan.
    • The Gopinath Committee,  set up in 2009 gave its report in June 2011 and annual revisions in small savings rates linked to G-sec yields got underway effective April 2012.
    • In 2016, however, the government decided to reset them on a quarterly basis. 

    Why link small savings rate to G-sec yields

    • Such linking is premised on the argument that the money collected through these schemes is invested in central and state government securities. 
    • While the yield on the government securities progressively declined over time, small savings rates remained downwardly rigid.
    • This resulted in an asset-liability mismatch that threatened the viability of the NSSF.
    • It is also argued that people’s dependence on small savings schemes had significantly declined since formal banking had rapidly expanded.
    • Moreover, for those who used small savings as safety nets there were other alternatives such as old-age pension and other similar schemes.

    Issues with resetting rates on quarterly basis

    • All expert committees that examined the issue had strongly argued against resetting the rates on a quarterly basis.
    • The fear was it could result in unfair rewards for small savers in the event the G-sec yields remain artificially low for a certain period of time.
    • It did happen in the pandemic year when small savings rates faced the steepest cut in five years.
    • The changed policy on small savings is also premised on the belief that markets offer fair outcomes.
    • More often than not, that is not true.
    • The experience of the past year bears it out.
    • While retail inflation spiked, the RBI used every trick in its bag to hold G-sec yields down.

    Way forward

    • The government could go back to resetting the rates annually, keeping the revision under 100 basis points and allowing small savings rates a spread of at least 50 basis points, not up to 50 basis points, over and above the G-sec yields.
    • Also, it may revisit the suggestion made by the Rakesh Mohan Committee to use a weighted average of G-sec yields over preceding two years — two-thirds weight for the later year, one-third for the earlier year.

    Consider the question “What was the rationale for linking the interest rates on small savings to yield on G-sec? What are the issues with it?

    Conclusion

    Adopting the changes suggested here may require setting aside a few thousand crores to fill the resultant gap in the NSSF. But it is worth doing.

  • Production of Poppy Straw

    The Central government has decided to rope in the private sector to commence production of concentrated poppy straw from India’s opium crop.

    What is the move?

    • The move aims to boost the yield of alkaloids, used for medical purposes and exported to several countries.
    • Among the few countries permitted to cultivate the opium poppy crop for export and extraction of alkaloids, India currently only extracts alkaloids from opium gum at facilities controlled by the Revenue Department.
    • This entails farmers extracting gum by manually lancing the opium pods and selling the gum to government factories.
    • The Ministry has now decided to switch to new technologies after trial cultivation reports submitted last year by two private firms showed higher extraction of alkaloids using the concentrated poppy straw (CPS).

    Opium Poppy

    • The milky fluid that seeps from cuts in the unripe poppy seed pod has, since ancient times, been scraped off and air-dried to produce what is known as opium.
    • The seedpod is first incised with a multi-bladed tool.
    • This lets the opium “gum” ooze out.
    • The semi-dried “gum” is harvested with a curved spatula and then dried in open wooden boxes.
    • The dried opium resin is placed in bags or rolled into balls for sale.

    Why such a move?

    • India’s opium crop acreage has been steadily declining over the years.
    • The CPS extraction method is expected to help cut the occasional dependence on imports of products like codeine (extracted from opium) for medical uses.

    Amendments to NDPS Act

    • Uttar Pradesh, Rajasthan and Madhya Pradesh are the three traditionally opium-growing States, where poppy crop cultivation is allowed based on licences issued annually by the Central Bureau of Narcotics.
    • While roping in private players in producing CPS and extracting alkaloids from it is likely to require amendments to the Narcotic Drugs and Psychotropic Substances (NDPS) Act, 1985.
    • The Revenue Department has decided to appoint a consultant to help frame the bidding parameters and concession agreements for the same.

  • [pib] NanoSniffer: A Microsensor based Explosive Trace Detector

    A Union Minister has launched NanoSniffer, the world’s first Microsensor based Explosive Trace Detector (ETD) developed by NanoSniff Technologies, an IIT Bombay incubated startup.

    Can you name some explosives?

    NanoSniffer

    • NanoSniffer is a 100% Made in India product in terms of research, development & manufacturing.
    • It can detect explosives in less than 10 seconds and it also identifies and categorizes explosives into different classes. It detects all classes of military, conventional and homemade explosives.
    • It gives visible & audible alerts with a sunlight-readable colour display.
    • NanoSniffer provides trace detection of the nano-gram quantity of explosives & delivers result in seconds.
    • It can accurately detect a wide range of military, commercial and homemade explosives threats.
    • Further analysis of the algorithms also helps in the categorization of explosives into the appropriate class.

  • Maoist Attack in Sukma

    The article deals with the counterinsurgency strategies to deal with the issues of left wing extremism in India

    Threat of left-wing extremism

    • The killing of 22 security personnel by Maoists serves as a grim reminder that left-wing insurgency continues to be one of the biggest internal security threats for the country.
    • In the past few years, Maoist violence seemed to have been on a downward spiral.
    • The figures associated with the key indicators of violence like the number of incidents also support the contention that “insurgency is on the downward spiral”.
    • But the attack should thus serve as a wake-up call to those who had begun to get complacent about the Maoist threat.

    Approach in counterinsurgency strategy

    • One school believes that given the Maoist insurgency posturing itself as a “people’s war”, the mandate is for a people-centric approach of “winning hearts and minds”.
    • Others argues that an enemy-centric approach predicated on kinetic operations is best suited for the Maoist insurgency, where the fear of the population seceding from India is remote.
    • The success of the erstwhile state of Andhra Pradesh in curbing the Maoist problem is often attributed to this enemy-centric approach.
    • However, there is robust scholarly work available that shows that the Andhra government based its counterintelligence strategy on a judicious mix of the enemy-centric and population-centric approaches.
    •  Andhra Pradesh had successfully implemented short-gestation-period developmental works in the Maoist-affected rural areas.
    • Moreover, the erstwhile state is also the first state to have a comprehensive surrender-cum-rehabilitation policy.
    • After the 2014 guidelines of the central government were brought out, many states have crafted attractive surrender and rehabilitation policies.
    • Another important question is whether the government should keep the option of talking to Maoists open.
    • The willingness to talk to rebel groups seems to incentivise insurgents and may demonstrate that violence pays.
    • But bringing an end to civil war invariably involves negotiating with the enemy.

    Way forward

    • Indian counterinsurgency has to work with a dual objective of defeating the insurgents militarily and fully quell the insurgent impulses.
    • This will need institutional overhauls.
    • In the last decade or so, insurgency-affected states have started to raise special forces on the lines of Greyhounds.
    • These forces are being given rigorous training in “counter-guerrilla” tactics and jungle warfare.
    •  Besides, the jungles around the interstate borders have always been the preferred hiding spaces for the Maoists.
    •  States must do more to synergise their efforts by launching coordinated operations, thereby denying Maoists any space for manoeuvrability.
    • These efforts need to be supplemented by well-crafted development schemes.
    • It is also important to segregate the population from the insurgents both operationally and ideologically.
    • The conflict over the distribution of resources can be mended with economic development.
    • But the bigger challenge would be to create a system where the tribal population feels that the government is representative, not repressive.
    • Opening negotiation channels and policies like surrender and rehabilitation can give such a representative sense to the rebels.

    Consider the question “Discuss the causes of left wing extremism in India. Suggest the way forward to deal with the issue.”

    Conclusion

    The government needs to follow these policies to end the challenge of left wing extremism from India.

  • Muon G–2 Experiment

    The results from the Muon g-2 experiment show that fundamental particles called muons behave in a way that is not predicted by the Standard Model of particle physics.

    After genetics, AI and the blockchain, Particle Physics is making several headlines these days. This is something intuitive.

    What is Muon?

    • Fermilab, the American particle accelerator, has released first results from its “muon g-2” experiment.
    • These results spotlight the anomalous behaviour of the elementary particle called the muon.
    • The muon is a heavier cousin of the electron and is expected to have a value of 2 for its magnetic moment, labelled “g”.
    • Now, the muon is not alone in the universe.
    • It is embedded in a sea where particles are popping out and vanishing every instant due to quantum effects.
    • So, its g value is altered by its interactions with these short-lived excitations.

    Main characteristic: Anomalous magnetic moment

    • The Standard Model of particle physics calculates this correction, called the anomalous magnetic moment, very accurately.
    • The muon g-2 experiment measured the extent of the anomaly and announced that “g” deviated from the amount predicted by the Standard Model.
    • That is, while the calculated value in the Standard Model is 2.00233183620 approximately, the experimental results show a value of 2.00233184122.
    • They have measured “g” to an accuracy of about 4.2 sigma when the results are combined with those from a 20-year-old experiment.
    • This makes physicists sit up and take note, but it is not yet significant enough to constitute a discovery – for which they need a significance of 5 sigma.

    The g factor

    • The muon is also known as the fat electron.
    • It is produced copiously in the Fermilab experiments and occurs naturally in cosmic ray showers.
    • Like the electron, the muon has a magnetic moment because of which, when placed in a magnetic field, it spins and processes, or wobbles, slightly, like the axis of a spinning top.
    • Its internal magnetic moment, the g factor, determines the extent of this wobble.
    • As the muon spins, it also interacts with the surrounding environment, which consists of short-lived particles popping in and out of a vacuum.

  • Deconstructing declarations of carbon-neutrality

    Against the global clamour for the declaration of carbon neutrality, India must consider several factors and their implications. The article highlights these factors.

    Countries declaring carbon-neutral
    targets

    • At the latest count by the non-profit Energy and Climate Intelligence Unit (ECIU), at the beginning of April, 32 countries had declared, in some documented form.
    • The impetus for such declarations arises from Article 4.1 of the Paris Agreement.
    • It is evident that the balance of emissions and removal of greenhouse gases is not sought on a country-wise basis but for the world as a whole.
    • Both developed country governments and civil society outfits commonly state this as an individual commitment by all countries.
    • The text of the Paris Agreement clearly indicates, based on considerations of equity and differentiation, that this is a global goal.

    2 critical and related issues

    • The first is the compatibility of the intent of Article 4.1 and Article 2.
    • 1) Is the achievement of carbon neutrality compatible with achieving the 1.5°C or 2°C goals?
    • And whether the mid-century carbon neutrality goals of developed countries are compatible with Article 2.2 of the Paris Agreement which focuses on equity and the principle of common but differentiated responsibilities.

    The current pledges fall short of achieving the targets

    • Three-way compatibility between temperature goals, carbon neutrality, and equity is not only not guaranteed, but cannot be achieved for the 1.5°C temperature goal at all.
    • Even for the 2°C goal, the current pledges are highly inadequate.
    • This conclusion is based on the global carbon budget.
    • According to the Intergovernmental Panel on Climate Change Special Report to restrict temperature rise less than 1.5° with 50% world can emit total 480 Giga-tonnes (billion tonnes) of carbon dioxide equivalent (GtCO2eq) from 2018 onwards.
    • At the current rate of emissions of about 42 GtCO2eq per year, this budget would be consumed in 12 years.
    • To keep within the 480 Gt budget, at a steady linear rate of decline, global carbon neutrality must be reached by 2039.
    • For a 50% probability of restricting temperature rise to below 2°C, the world can emit 1,400 GtCO2eq, that provides considerably greater room for manoeuvre.

    Emission of the U.S. and Europe

    • Emissions in the U.S. peaked in 2005 and have declined at an average rate of 1.1% from then till 2017.
    • Even if it did reach net-zero by 2050 at a steady linear rate of reduction, which is unprecedented, its cumulative emissions between 2018 and 2050 would be 106 GtCO2, which is 22% of the total remaining carbon budget for the whole world. [480 GtCO2 total]
    • This is so high that unless others reduced emissions at even faster rates, the world would most certainly cross 1.5°C warming.
    • Similarly, the European Union, to keep to its fair share of the remaining carbon budget would have to reach net-zero by 2033, with a constant annual reduction in emissions.
    • If the EU reaches net-zero only by 2050 it would consume at least 71 GtCO2, well above its fair share.
    • Regrettably, a section of the climate policy modelling literature has promoted the illusion that this three-way compatibility is feasible through speculative “negative emissions”
    • They have also been promoting the other illusion that not resorting to any serious emissions increase at all is the means to guarantee the successful development of the Third World.

    Why India should avoid net neutrality target

    • For one, India has to stay focused on development — both as its immediate need as well as its aspirational goal.
    • While sustainability is desirable, the question of how low India’s future low-carbon development can be is highly uncertain.
    • India’s current low carbon footprint is a consequence of the utter poverty and deprivation of a majority of its population, and not by virtue of sustainability.
    • Second, India does not owe a carbon debt to the world for excessive use in the past.
    • India’s emissions (not considering land use and land use change and forest-related emissions) are no more than 3.5% of global cumulative emissions prior to 1990 and about 5% since till 2018.
    • Any self-sacrificial declaration of carbon neutrality today in the current international scenario would be a wasted gesture reducing the burden of the developed world and transferring it to the backs of the Indian people.

    Consider the question “What are the factor India needs to consider about joining the global chorus on carbon neutrality targets.”

    Conclusion

    India’s approach to eventual net-zero emissions is contingent on deep first world emissions reductions and an adequate and unambiguous global carbon budget. Meanwhile, India must reject any attempt to restrict its options and be led into a low-development trap, based on pseudo-scientific narratives.

  • Government Securities Acquisition Programme (G-SAP)

    What is the first phase of operation?

    • The RBI has officially notified that it would conduct the first phase of G-SAP 1.0 operations on April 15, 2021.
    • It will begin with the purchase of five dated securities for an amount aggregating to Rs 25,000 crore.
    • The first phase of G-SAP purchase will happen using the multiple price method under which the bidders pay at the respective rate they had bid.
    • The RBI has notified four securities for the G-Sec purchase in different maturities.
    • In addition to the G-SAP plan, the RBI will also continue to deploy regular operations.
    • This would be under the LAF, longer-term repo/reverse repo auctions, forex operations and open market operations including special OMOs.
    • This is to ensure that the liquidity conditions evolve in consonance with the stance of monetary policy.

    What are the concerns?

    • Interest rates – For the Government, the RBI keeping the yield down is a good news because the overall borrowing costs go down.
    • But, the RBI artificially keeping the interest rates lower in the financial system has caused concerns.
    • In healthy economic system, the interest rates pricing should be driven by demand-supply.
    • It shouldn’t be artificially suppressed by the central bank; this might lead to distortions and have other consequences.
    • Savers – Cheaper rates will be good news to big, top rated companies who can issue bonds to raise money and to the government.
    • But low interest rates coupled with high inflation is a systemic worry for savers.
    • Already, savers are getting negative returns on their deposits if one takes into account the inflation adjusted rates or real rates.
    • Rupee – Government resorting to massive bond purchase to keep the rates low is not good news for the local currency.
    • The Indian Rupee, notably, came under pressure after the RBI announced the massive Rs 1 lakh crore bond purchase programme.
    • The fear of investors pulling capital out of India in a low interest environment is hurting the local currency.

     

  • ‘Seechewal Model’ of wastewater management

    A new wastewater treatment plant opened recently in a village in Punjab’s Patiala district uses a unique method devised to treat, recycle and reuse wastewater.

    Seechewal Model

    • The plant in the village of Patiala aims to achieve the following objective using the ‘Seechewal Model’ of wastewater management:
    1. Recycling and reusing the treated wastewater for irrigation
    2. Preventing further contamination of groundwater
    • The model is a pipe-and-pump formula used to remove heavy solid particles, oil and other material from water.
    • It was introduced by Sant Balbir Singh Seechewal and was first used in Seechewal, Punjab.
    • The project aims to implement a combination of processes through four-well systems of wastewater treatment for reuse apart from human consumption.
    • The water wells need to be cleaned regularly; otherwise, they produce extremely poor effluents with high suspended solids, which can be detrimental to the constructed wetland and cause clogging of beds.
    • To ensure continuous and effective operation, the accumulated material must be emptied periodically.

    Benefits  offered

    • The project will reduce the usage of freshwater by providing an option of treated water to farmers. It will aim at water sustainability with appropriate technologies of water recycle-reuse-recharge.”
    • The project has engaged, empowered and evolved community sustained processes for water management and strengthened community collectives.

  • A holistic review of internal security challenge and response to them is needed

    The article highlights the issues facing India’s internal security architecture and suggests the restructuring of roles and capacity building to address the challenge.

    Recent setback to internal security (IS) capability

    • The COMBING OPERATION by local and central police forces in the Tekulguda region of Bastar went terribly wrong and resulted in the death of 22 security personnel.
    • This tragic incident is a major and embarrassing setback to the IS (internal security) capability of India at many levels and highlights the challenge that LWE (left-wing extremism) continues to pose. 

    Strategic inadequacies

    • India has been dealing with three variants of the internal security challenge for decades.
    • These three are: 1) a proxy war and terrorism in Kashmir 2) sub-national separatist movements in the Northeast. 3) the Naxal-Maoist insurgency ( LWE) in the Red Corridor.
    • And these challenges have warranted different responses.
    • The first two strands have been reasonably contained.
    • LWE and the current Maoist movement has its genesis in poor governance, lack of development in the tribal belt and an oppressive/exploitative hierarchy of the state and society.
    •  In November 2005, then PM Manmohan Singh described the LWE challenge as the most serious security threat to India and exhorted the professionals to evolve appropriate responses.

    Need for restructuring

    • One of the recommendations of the Kargil Review Committee (KRC) report was the restructuring of the role and the tasks of the para-military forces particularly with reference to command and control and leadership functions.
    • This critical component of restructuring the leadership of the central police forces (in this case the CRPF and BSF) has not been addressed, much less redressed.
    • By training, the police officer is expected to be a competent Superintendent and to maintain law and order.
    • This is not the skill-set that is relevant when an officer has to “command” and lead his men into insurgency operations.
    • In the current scenario, barring a few exceptions, many of the senior police officers (IPS cadre) who are introduced into the central police forces at senior ranks have little or no platoon/battalion experience. 

    Consider the question “What are the factors making Left Wing Extremism such a persistent internal security problem for India? Suggest the measure to improve the internal security architecture in India.”

    Conclusion

    The political leadership of the country needs to act and complete the task of restructuring and capacity building to address India’s internal security challenge.

  • A post-Covid fiscal framework for India

    The article highlights the failure of FRBM Act to contain India’s rising debt and suggests an alternative framework.

    Issues with the FRBM Act

    • Economic disruption caused by the COVID has prompted calls for a relook atthe Fiscal Responsibility and Budget Management Act (FRBM).
    • The introduction of the FRBM in 2003 reflected the belief that setting strict limits on fiscal deficits, both for the centre and the states, was the solution.
    • But this framework didn’t work.
    • Apart from the initial period, when growth was booming, the deficit targets were largely honoured in the breach, leaving the primary balance [Revenue-Non-intrest expenditure] essentially unchanged (Figure 2, phase 2).

    Debt has increased to record levels

    • India’s general government debt has soared.
    • It is now close to 90 per cent of GDP — the highest independent India has ever seen.
    • The debt ratio will come down naturally as GDP normalises.
    • Even so, on current policies, it is likely to exceed 80 per cent for the foreseeable future.

    Would such a high level of debt be sustainable?

    • Briefly, sustainability depends on two key factors:
    • 1) The primary balance (PB), revenue less non-interest expenditures.
    • 2) The difference between the cost of borrowing and the nominal growth rate (r-g).[interest-growth differential]
    • Debt does not explode when the primary balance is greater than the interest-growth differential.
    • In India’s case, PB has been negative as the government has run primary deficits.
    • But this has been counterbalanced over the past decade by favourable differentials, as interest rates have been lower than growth.
    • Hence, the broadly stable debt ratio.
    • This equilibrium has now been upset by the sudden increase in debt.
    • If the interest-growth differential consequently turns unfavourable, as occurred during the previous period of high debt in the early 2000s (Figure 2, phase 1), then debt sustainability could only be preserved by shifting the primary balance into surplus.
    • And this would not be easy.

    Why shifting primary balance intro surplus is not easy

    • Primary deficit of the Centre and states combined is typically about 3 per cent of GDP. [say PB is -3% of GDP]
    • So, shifting the primary balance into a modest surplus [i.e. turning PB from -ve to +ve] would require an adjustment of 4 percentage points of GDP.
    • But non-interest expenditure is only roughly 20 per cent of GDP.
    • If tax increases were ruled out, then a sudden adjustment would require non-interest spending to be cut by no less than 20 per cent (4 divided by 20 times 100).[20% of 20 is 4]
    • Clearly, this would be politically impossible.
    • But this would render India susceptible to panic and possibly even crises.
    • The government needs to eliminate the tension, undertaking a pre-emptive consolidation to prevent the need for a sudden adjustment.

    Strategy based on 4 principles

    • The government should start by defining a clear objective, based not on arbitrary targets but on sound first principles: It should aim to ensure debt sustainability.
    • To this end, the government could adopt a strategy based on four principles.

    1) Abandon multiple fiscal criteria

    • The current FRBM sets targets for the overall deficit, the revenue deficit and debt.
    • Such multiple criteria impede the objective of ensuring sustainability since the targets can conflict with each other,
    • This creates confusion about which one to follow and thereby obfuscating accountability.

    2) Don’t get fixated on specific number

    • Around the world, countries are realising that deficit targets of 3 per cent of GDP and debt targets of 60 per cent of GDP lack proper economic grounding.
    • In India’s case, they take no account of the country’s own fiscal arithmetic or its strong political will to repay its debt.
    • Any specific target, no matter how well-grounded, encouraging governments to transfer spending off-budget such as with the “oil bonds” in the mid-2000s and subsidies more recently.

    3) Focus on one measure for guiding fiscal policy

    • In this regard, Arvind Subramanian and Josh Felmanwe propose targeting the primary balance.
    • This concept is new to India and will take time for the public to absorb and accept.
    • But it is inherently simple and has the eminent virtue that it is closely linked to meeting the overall objective of ensuring debt sustainability.

    4) Don’t set yearly target for the primary balance

    • The Centre should not set out yearly targets for the primary balance.
    • Instead, it should announce a plan to improve the primary balance gradually, by say half a percentage point of GDP per year on average.
    • Doing so will make it clear that it will accelerate consolidation when times are good, moderate it when times are less buoyant, and end it when a small surplus has been achieved.
    • This strategy is simple and easy to communicate; it is gradual and hence feasible.

    Consider the question “Despite the FRBM framework India’s debt level have touched a historic high. In light of this, examine the reasons for the failure of FRBM in controlling the debt level and suggest the way forward to make India’s debt level sustainable.”

    Conclusion

    COVID has upended India’s public finances. It is time to learn from past experience and adapt. Adopting a simple new fiscal framework based on the primary balance could be the way forward.