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GS Paper: GS3

  • 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.

  • Mahendragiri Hills

    The Odisha government has proposed a second biosphere reserve in the southern part of the state at Mahendragiri, a hill ecosystem having a rich biodiversity.

    The 5,569-square kilometre Similipal Biosphere Reserve is Odisha’s first such reserve and was notified May 20, 1996.

    Mahendragiri Hills

    • Mahendragiri is a mountain in the Rayagada subdivision of the district of Gajapati, Odisha, India.
    • It is situated amongst the Eastern Ghats at an elevation of 1,501 metres.
    • The hill and its surrounding areas are recognized as a biodiversity hot spot due to numerous medicinal plants and other species that are found here.
    • Mahendragiri is inhabited by the Soura people, a particularly vulnerable tribal group as well as the Kandha tribe.

    Try this PYQ:

    Q.From the ecological point of view, which one of the following assumes importance in being a good link between the Eastern Ghats and the Western Ghats? (CSP 2018)

    (a) Sathyamangalam Tiger Reserve

    (b) Nallamala Forest

    (c) Nagarhole National Park

    (d) Seshachalam Biosphere Reserve

    Why designate it as a biosphere reserve?

    • The area of the proposed Mahendragiri Biosphere Reserve is around 470,955 hectares and is spread over Gajapati and Ganjam districts in the Eastern Ghats.
    • The hill ecosystem acts as a transitional zone between the flora and fauna of southern India and the Himalayas, making the region an ecological estuary of genetic diversities.
    • The rich flora in Mahendragiri represents 40 per cent of the reported flora of Odisha, with around 1,358 species of plants.

    Back2Basics:  Biosphere Reserves

    • A biosphere reserve is an area of land or water that is protected by law in order to support the conservation of ecosystems, as well as the sustainability of mankind’s impact on the environment.
    • Each reserve aims to help scientists and the environmental community figure out how to protect the world’s plant and animal species while dealing with a growing population and its resource needs.
    • To carry out the complementary activities of biodiversity conservation and sustainable use of natural resources, biosphere reserves are traditionally organized into 3 interrelated zones, known as:
      1. the core area
      2. the buffer zone and
      3. a transition zone or ‘area of cooperation

  • Xenobots: Robots developed from stem cells of frogs

    Researchers have developed robots from stem cells of frogs called Xenobots.

    Xenobots, the name itself suggests its peculiarity.

    Xenobots

    • Xenobots, named after the African clawed frog are synthetic organisms that are automatically designed by computers to perform some desired function and built by combining together different biological tissues.
    • They are less than a 1 millimeter (0.039 inches) wide and composed of just two things: skin cells and heart muscle cells, both of which are derived from stem cells harvested from early (blastula stage) frog embryos.
    • They can self-heal after damage, record memories and work together in groups.
    • These biological robots can record information about their surroundings and move using cilia – minute hair like particles present on their surface.

    Its applications

    • These soft-body living machines can have several applications in biomedicine and the environment.
    • They could be made from a human patient’s own cells, which would bypass the immune response challenges of other kinds of micro-robotic delivery systems.
    • Such xenobots could potentially be used to scrape plaque from arteries and with additional cell types and bioengineering, locate and treat disease.

  • [pib] What are Wolf–Rayet Stars?

    Indian astronomers have tracked a rare supernova explosion and traced it to one of the hottest kind of stars called Wolf–Rayet stars or WR stars.

    Space science-related terms these days are often focused on Gravitational waves, Black holes etc. But basic terminologies are very important and need to be taken care of. For example, a layman may hardly find any difference between Novae-Supernovae, Neutron star, Nebula etc. UPSC often tries to bust you with such basic differences.

    Wolf–Rayet Stars

    • Wolf-Rayet stars represent a final burst of activity before a huge star begins to die.
    • These stars, which are at least 20 times more massive than the Sun, “live fast and die hard”.
    • Wolf-Rayets stars are divided into 3 classes based on their spectra, the WN stars (nitrogen dominant, some carbon), WC stars (carbon dominant, no nitrogen) and WO where oxygen is in dominant quantities.
    • The average temperature of a Wolf-Rayet star is greater than 25,000 Kelvin, and they can have luminosities of up to a million times that of the Sun.

    What have Indian researchers studied?

    • Indian astronomers have conducted the optical monitoring of one such stripped-envelope supernova called SN 2015dj hosted in the galaxy NGC 7371 which was spotted in 2015.
    • They calculated the mass of the star that collapsed to form the supernovae as well as the geometry of its ejection.

    Their findings

    • The scientists found that the original star was a combination of two stars – one of them is a massive WR star and another is a star much less in mass than the Sun.
    • Supernovae (SNe) are highly energetic explosions in the Universe releasing an enormous amount of energy.
    • Long-term monitoring of these transients opens the door to understand the nature of the exploding star as well as the explosion properties.
    • It can also help enumerate the number of massive stars.

  • Understanding the issues with bond market in India

    What explains the Indian government borrowing at a higher interest rate than the interest rates for a home loan? The answer lies in the structural shortage in demand for government bonds. 

    How the government’s cost of borrowing matter

    • Interest on government debt is a transfer from taxpayers to savers who own government bonds.
    • As the government bondholders are primarily domestic, interest paid by the government is just a transfer from one hand to the other within the economy.
    • However, the government’s cost of borrowing does matter.
    • The large increase in interest costs limits the government’s ability to spend elsewhere.
    • But more importantly, this rate also affects the cost of borrowing for large parts of the economy.

    Understanding the term premium and credit spread

    • The RBI sets the repo rate, which is the short-term risk-free rate.
    • That is, the loan must be repaid in a few days and there is almost no risk of default.
    • The rate at which the government borrows is the long-term risk-free rate.
    • But the lender wants higher returns given the longer duration of the loan.
    • The difference between the repo rate and government’s borrowing cost, say on a 10-year loan, is called the term premium.
    • When a private firm takes a 10-year loan, it would have some credit risk too, which means a credit spread is added to the 10-year risk-free rate.

    Challenge posed by term premium

    • From an average rate of 73 basis points since 2011 (one basis point is one-hundredth of a per cent), and 120 basis points in 2018 and 2019, the 10-year term premium is currently 215 basis points.
    • In other words, the interest rate for a 10-year period borrowing is 2.15 per cent higher than the current repo rate.

    How this is related to dysfunction in bond market in India

    • Financial markets are forward-looking, and as the collective expression of the views of thousands of participants, efficient ones can occasionally “predict” what comes next.
    • But the Indian bond market is not one such: The view some hold, that the rise in term premium reflects future rate hikes by the monetary policy committee (MPC), is mistaken.
    • The Indian bond market is still too illiquid and not diverse enough to predict future trends.
    • Even though some pandemic-driven measures are being withdrawn, the MPC continues to be accommodative, and for several months at least, headline inflation is unlikely to force an abrupt change.
    • In any case, the spurt in yields after the budget points to the causality being fiscal instead of inflation-related.
    • But even the fiscal rationale seems weak.
    • The Centre’s tax collection for FY2020-21 has been substantially ahead of target, and state governments have also borrowed Rs 60,000 crore less than expected.
    •  Also, the14 states, accounting for three-fourths of all state deficits, have budgeted FY2021-22 deficits at 3.3 per cent, far lower than the 4 per cent average expected earlier.
    • Just these factors suggest that total bonds issued by the central and state governments should be lower than what the market had feared before the union budget was presented.
    • And yet, government borrowing costs have not returned to pre-budget levels.
    • This reflects dysfunction in the market.
    • Why else would a government be borrowing at a higher cost than a mortgage on a house?

    What is the reason for dysfunction in bond market

    • Dysfunction can be traced to residential mortgages being among the most competitive of loan categories.
    • On the other hand, there is a structural shortage in demand for government bonds.
    • In such a market where there is a structural shortage in demand the marginal buyer holds all the cards, and as any buyer would, demands higher returns.
    • Over 15 years,  the share of banks in the ownership of outstanding central government bonds has fallen from 53 per cent to 40 per cent now.
    • But no alternative buyer of size has emerged to fill the space vacated.
    • The RBI sometimes buys bonds to inject money into the economy, but of late this space has been used to buy dollars to save the rupee from appreciation.

    Solutions

    • The solution to the problem of bond market may lie in getting new types of buyers.
    • The RBI opening up direct purchases by retail investors is a step in this direction, though it may not become meaningful for a few years.
    • That leaves us with tapping foreign savings.
    • The limit on share of government bonds that foreign portfolio investors (FPIs) can buy has been raised steadily.
    • But without Indian bonds being included in global bond indices, these flows may not be meaningful, and would be volatile, as they have been over the past year.
    • To enable inclusion in bond indices, the RBI and the government have earmarked special-category bonds which are fully accessible (FAR) by foreign investors.
    • The FTSE putting India on a watch-list for “potential future inclusion” in the Emerging Markets Government Bonds Index is a step forward, and, one hopes, triggers similar actions by other index providers.

    Consider the question “How the lack of retailness in the bond market affects the cost of borrowing of the government as well as the private borrowers? Suggest the measures to deal with the issues.”

    Conclusion

    The issues with bond markets in India highlights the urgency to find new buyers for government bond as it has implications not just for the government’s own fiscal space, but also for the cost of borrowing in the economy.

  • What is the Pre-pack under Insolvency and Bankruptcy Code?

    The central government has promulgated an ordinance allowing the use of pre-packs as an insolvency resolution mechanism for MSMEs with defaults up to Rs 1 crore, under the Insolvency and Bankruptcy Code.

    Read till the end to know about the ‘Swiss Challenge’.

    What are Pre-packs?

    • A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
    • This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.
    • Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
    • The approval of a minimum of 66 percent of financial creditors that are unrelated to the corporate debtor would be required before a resolution plan is submitted to the NCLT.
    • Further NCLTs are also required to either accept or reject any application for a pre-pack insolvency proceeding before considering a petition for a CIRP.

    Benefits of pre-packs over the CIRP

    • One of the key criticisms of the Corporate Insolvency Resolution Process (CIRP) has been the time taken for resolution.
    • One of the key reasons behind delays in the CIRPs is prolonged litigations by erstwhile promoters and potential bidders.
    • The pre-pack in contrast is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT.
    • The existing management retains control in the case of pre-packs while a resolution professional takes control of the debtor as a representative of creditors in the case of CIRP.
    • This allows for minimal disruption of operations relative to a CIRP.

    What is the key motivation behind the introduction of the pre-pack?

    • Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate.
    • It provides adequate protections so that the system is not misused by firms to avoid making payments to creditors.
    • Pre-packs help corporate debtors to enter into consensual restructuring with lenders and address the entire liability side of the company.

    How are creditors protected?

    • The pre-pack also provides adequate protection to ensure the provisions were not misused by errant promoters.
    • The pre-pack mechanism allows for a swiss challenge for any resolution plans which proved less than full recovery of dues for operational creditors.
    • Under the swiss challenge mechanism, any third party would be permitted to submit a resolution plan for the distressed company and the original applicant would have to either match the improved resolution plan or forego the investment.
    • Creditors are also permitted to seek resolution plans from any third party if they are not satisfied with the resolution plan put forth by the promoter.

    Back2Basics: Swiss Challenge

    • A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project.
    • The government then puts the details of the project out in the public and invites proposals from others interested in executing it.
    • On the receipt of these bids, the original contractor gets an opportunity to match the best bid.
    • In 2009, the Supreme Court approved this method for the award of contracts.
    • This method can be applied to projects that are taken up on a PPP basis but can also be used to supplement PPP in sectors that are not covered under the PPP framework.

  • [pib] Sadabahar: A mango variety that bears fruits round the year

    A farmer from Kota, Rajasthan, has developed a round-the-year dwarf variety of mango called Sadabahar, which is resistant to most major diseases and common mango disorders.

    Try this PYQ:

    Q.With reference to the Genetically Modified mustard (GM mustard) developed in India, consider the following statements:

    1. GM mustard has the genes of a soil bacterium that give the plant the property of pest-resistance to a wide variety of pests.
    2. GM mustard has the genes that allow the plant cross-pollination and hybridization.
    3. GM mustard has been developed jointly by the IARI and Punjab Agricultural University.

    Which of the statements given above is/are correct? (CSP 2018)

    (a) 1 and 3 only

    (b) 2 only

    (c) 2 and 3 only

    (d) 1, 2 and 3

    Sadabahar

    • The fruit is sweeter in taste, comparable to langra and being a dwarf variety, is suitable for kitchen gardening, high-density plantation, and can be grown in pots for some years too.
    • Besides, the flesh of the fruits, which is bourn round the year, is deep orange with a sweet taste, and the pulp has very little fiber content which differentiates it from other varieties.
    • The bountiful nutrients packed in mango are immensely good for health.
    • This variety has been verified by the National Innovation Foundation (NIF), India, an autonomous institution of the Department of Science & Technology.