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GS Paper: GS3

  • A dicey dollar could yet revive Keynes’s Bancor currency plan

    The direct question in the exam from this article is not expected. Nevertheless, it is important to get a general understanding of the important role dollar plays in the world economy and the reasons for any viable alternative to it.

    Context

    • The dollar fell in July to a two-year low against the euro.
    • When the covid-19 pandemic went global in March, the dollar strengthened on the back of safe-haven flows into US Treasury bonds.

    What the depreciation of dollar indicate?

    • The dollar’s subsequent depreciation reflects the changing prospects of the US and European economies.
    • Some observers point instead to the agreement by European leaders to issue €750 billion ($884 billion) of European Union (EU) bonds.
    • With the spread of covid-19 investors expect the Fed to keep interest rates low for longer.
    • In the eurozone, the virus is under better control, and data from purchasing managers’ surveys are surprising on the upside.
    • This improving outlook doesn’t mean that the European Central Bank (ECB) will start raising its policy rate in the near future.
    • Interest rates determine the exchange rates as per the “interest parity” theory.

    Factors responsible for holding currency

    • 1) Normally, investors hold a currency when the issuer’s policies are sound and stable.
    • 2) Banks and firms hold a currency when it is useful for invoicing and settling trade with the issuing country.
    • But President Donald Trump’s administration has done more than any in living memory to disrupt US trade.
    • 3) Governments, for their part, hold and use the currencies of their alliance partners.

    Resilience of dollar

    • The most striking takeaway from recent experience is the dollar’s resilience.
    •  US policy has been risky and erratic.
    •  But President Donald Trump’s administration has done more than any in living memory to disrupt US trade.
    • Under Trump, the US today is no longer the reliable alliance partner it once was.
    • Despite all this, countries continue to hold the dollar.
    • The currency’s international role has not diminished significantly.
    • It has declined only along select dimensions—its share in central banks’ foreign-exchange reserves, for example—and even there, only marginally.

    No alternative

    • The euro is not an alternative to the dollar.
    • The stock of safe euro assets remains segmented along national lines.
    • Nor is the renminbi a viable alternative.
    • Given heightened tensions with China, no Western government will encourage its residents to depend on the People’s Bank of China for liquidity.

    Conclusion

    The only solution to this conundrum is more resources for the International Monetary Fund, so that it can supply countries in a crisis with the dollars that a future Fed fails to provide. This, of course, is the solution that John Maynard Keynes offered in 1944, albeit by another name-Bancor.

  • Micro-plastic Pollution in Atlantic Ocean

    The Atlantic Ocean contains 12-21 million tonnes of microplastics — about 10 times higher than previously determined — according to new research published in Nature Communications.

    Highlights of the report

    • In the study, scientists studied pollution of the Atlantic Ocean caused by three types of plastics: polyethylene, polypropylene, and polystyrene, which were suspended in the top 200 metres of the ocean.
    • These three types of plastic are most commonly used for packaging.
    • Scientists say that pollution caused by microplastics has been “severely” underestimated in previous assessments.
    • They also estimate that based on plastic waste generation trends from 1950-2015 and considering that the Atlantic Ocean has received 0.3-0.8 per cent of the global plastic waste for 65 years.
    • To date, a key uncertainty has been the magnitude of contamination of the ocean and our findings demonstrate that this is much higher in terms of mass than has been estimated previously.

    Try this PYQ:

    Q. Why is there a great concern about the ‘microbeads’ that are released into the environment? (CSP 2019)

    (a) They are considered harmful to marine ecosystems.

    (b) They are considered to cause skin cancer in children.

    (c) They are small enough to be absorbed by crop plants in irrigated fields.

    (d) They are often found to be used as food adulterants.

    What are Microplastics?

    • Microplastics are plastic debris smaller than 5mm in length, or about the size of a sesame seed.
    • While they come from a variety of sources, one of them is when larger pieces of plastic degrade into smaller pieces, which are difficult to detect.

    How does plastic reach the oceans?

    • There are multiple pathways for them to reach the oceans.
    • For instance, riverine and atmospheric transport from coastal and inland areas, illegal dumping activities and direct-at-sea littering from shipping, fishing and aquaculture activities, scientists have said.
    • According to the IUCN, at least 8 million tonnes of plastic end up in the oceans every year and makes up about 80 per cent of all marine debris from surface waters to deep-sea sediments.

    Why is plastic pollution especially harmful?

    • Plastic can take hundreds to thousands of years to decompose depending on the type of plastic and where it has been dumped.
    • Some marine species such as zooplanktons show preferential ingestion of smaller particles, making them easier to enter the food chain and their conversion to fast-sinking faecal pellets.
    • Over the past few years, various news reports have shown that marine animals such as whales, seabirds and turtles unknowingly ingest plastic and often suffocate to death.
    • While all sorts of marine species are prone to get impacted by plastic pollution, typically, bigger marine species tend to get more attention because of the amounts of debris they can hold up.

    Impact on humans

    • For humans, too, marine plastic pollution is harmful if it reaches the food chain. For instance, microplastics have been found in tap water, beer and even salt.
    • One of the first studies to estimate plastic pollution in human ingestion that was published in June 2019 said that an average person eats at least 50,000 particles of microplastic each year.
    • Consumption of plastic by humans is harmful since several chemicals that are used to produce plastics can be carcinogenic.
    • Even so, since microplastics are an emerging field of study, its exact risks on the environment and human health are not clearly known.

  • Job Losses during Lockdown

    The data by the Centre for Monitoring Indian Economy (CMIE) briefs us about the job losses due to lockdown restrictions imposed because of the COVID pandemic.

    We can utilize this data as examples for answer writing.

    CMIE data on job losses

    • Salaried jobs: They suffered the biggest hit during the lockdown, with a total loss estimated to be at 18.9 million during April-July.
    • Informal and non-salaried jobs: They have shown improvement during the same period increasing to 325.6 million in July from 317.6 million last year, an increase of 2.5 per cent.
    • Small traders, hawkers and daily wage labourers: They were the worst hit by the lockdown in April, comprising 91.2 million of the jobs lost from the total loss of 121.5 million in that month.
    • Farm employment: A sharp rise was seen in June to 130 million, with good rains and the consequent sowing absorbing a lot of the labour that was lost in non-farm sectors.

    About CMIE

    • CMIE, or Centre for Monitoring Indian Economy, is a leading business information company.
    • It was established in 1976, primarily as an independent think tank.
    • CMIE produces economic and business databases and develops specialised analytical tools to deliver these to its customers for decision making and for research.
    • It analyses the data to decipher trends in the economy.

  • Digital Quality of Life Index, 2020

    India ranks among the lowest in the world in terms of Internet quality, according to the Digital Quality of Life Report.

    Note the following aspects:

    1)Organisation publishing the report

    2)India’s rank and its comparison with neighbors

    3)Rankers at the top

    Digital Quality of Life Index

    • It is global research released by online privacy solutions provider SurfShark.
    • It releases a report on the quality of digital wellbeing in 85 countries (81% of the global population), in terms of e-infrastructure.

    India’s ranking: Hits and Misses

    • India occupies 79th place, ranking below countries including Guatemala and Sri Lanka.
    • India makes it into the top 10 in terms of Internet affordability. With a ranking of nine, it outperforms countries such as the U.K., the U.S. and China.
    • Additionally, when it comes to e-government, India occupies the 15th place globally, just below countries like New Zealand and Italy.
    • However, at position 78, India’s Internet quality is one of the lowest across 85 countries analysed in the research.

    Global rankings

    • The report found that seven of the 10 countries with the highest digital quality of life are in Europe, with Denmark leading among 85 countries.
    • Canada stands out as a country with the highest digital quality of life in the Americas, while Japan takes the leading position in Asia.
    • Among the countries in Africa, people in South Africa enjoy the highest quality of digital lives whereas New Zealand leads in Oceania, outperforming Australia in various digital areas.

  • Dilemma the RBI faces

    Limitations and contradictions in the functioning of RBI

    • The Reserve Bank of India, along with the monetary policy committee, has undertaken measures to address the fallout of the COVID-19 pandemic.
    • Their actions are guided by multiple considerations — inflation and growth management, debt management and currency management.
    • These multiple considerations have inadvertently exposed the limitations of and the inherent contradictions in the central banking framework in India.

    Monetary policy functions

    • The MPC is guided by the goal of maintaining inflation at 4 plus/minus 2 per cent.
    • In its August policy, despite dire growth prospects, MPC chose to maintain the status quo.
    • This decision was driven by elevated inflation i.e. above 4 plus/minus 2 per cent. 
    • This raises the question: At the current juncture, should the MPC be driven by growth considerations or should short-term inflation concerns dominate?

    Understanding the nature of current inflation

    • The current rise in inflation is driven by supply-chain dislocations owing to the lockdowns.
    • This is evident from the growing disconnect between the wholesale and consumer price index.
    • Since April, while WPI has been in negative territory, CPI has been elevated.
    • The MPC’s mandate is to deliver stable inflation over long periods of time, not just a few months.
    • Yet, it would appear as if it is more concerned about elevated inflation in the short run.
    • Equally puzzling is the refusal of MPC to provide any firm projection of future inflation.

    Manager of government debt

    •  As manager of the government debt, the RBI is tasked with ensuring that the government’s borrowing programme sails through smoothly.
    • To this end, it has carried out several rounds of interventions popularly known as operation twist.
    • in operation twist government RBI intended pushing down long-term Gsec yields, and exerting upward pressure on short-term yields as a consequence.
    • In doing so, the RBI ended up doing exactly the opposite of what the MPC was trying to achieve by cutting short term rates, well before it reached the lower limit of its conventional policy response.

    3) RBI’s intervention in currency markets

    • The RBI’s interventions in the currency market have constrained its ability to carry out open market operations as these would have led to further liquidity injections into the system.
    • Put differently, its debt management functions have run up against its currency management functions.
    • Underlining the complexity of all this is the talk of sterilisation — the opposite of injecting liquidity in the system.

    Consider the question “RBI’s functions at the current juncture suffers from contradicting functions. Examine such contradictions in its role and suggest the ways to avoid such contradictions.”

    Conclusion

    The central bank must develop a clear strategy on what to do. At this juncture, there is a strong argument to look past the current spurt in inflation, and test the limits of both conventional and unconventional monetary policy. At the other end, while it may want to intervene to prevent the rupee’s appreciation, in doing so, it is constricting its debt management functions which will have its own set of consequences. There are no easy answers.

  • PM CARES Fund is a “public charitable trust”: SC

    The Supreme Court has endorsed the PM CARES Fund as a “public charitable trust” to which donors contribute voluntarily.

    Try this question:

    Q. The creation of PM CARES fund is violative of the provision of the Disaster Management Act, 2005. Analyse.

    What is the case?

    • The petition had argued that the PM-CARES Fund was not subject to CAG audit.
    • It was not under “public scrutiny”. Contributions to it were “100% tax-free”.
    • It was accused that there was statutory fund already in existence under the Disaster Management Act of 2005 to receive contributions to finance the fight against a calamity.

    About PM CARES Fund

    • The Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) were created on 28 March 2020 following the COVID-19 pandemic in India.
    • The fund will be used for combat, containment and relief efforts against the coronavirus outbreak and similar pandemic like situations in the future.
    • The PM is the chairman of the trust. Members will include the defence, home and finance ministers.
    • The fund will also enable micro-donations. The minimum donation accepted for the PM CARES Fund is ₹10 (14¢ US).
    • The donations will be tax-exempt and fall under corporate social responsibility.

    What did the Court rule?

    • There is “no occasion” for the Comptroller and Auditor General (CAG) to audit a public charitable trust independent of budgetary support or government money.
    • The court said that PM-CARES is “not open” for a PIL petitioner to question the “wisdom” that created the fund in an hour of need.
    • The court dismissed the idea that the PM CARES was constituted to “circumvent” the National Disaster Response Fund (NDRF).
    • The Bench also refused to direct the transfer of funds from the PM CARES Fund to the NDRF. It said they were two separate entities.

    Also read:

    PM-CARES Fund

  • Re-imagining and reinventing the Indian economy

    The COVID-19 pandemic has disrupted the global economy and India is no different.  Besides the stimulus package totalling ₹20 lakh crore, a lot more needs to be done, however, to resuscitate the country’s growth engine.

    Try this question:

    Q.Economic reconstruction needs a multi-pronged strategy apart from economic stimulus. Discuss.

    Need for a two-pronged strategy

    • At this critical juncture, India needs a two-pronged strategy to successfully navigate the current crisis and recover strongly thereafter.
    • First, minimise the damage caused by the COVID and clear a path to recovery and second, rebooting and re-imaging India by promptly exploiting new opportunities unleashed by evolving business scenarios.

    Identifying the four major economic drivers:

    1. Big Business Houses which are a major contributor to GDP and large employment generators
    2. MSMEs which are the lifeline of the country, generating wealth for the middle class
    3. Startups which bring innovation and transformation to our country’s economy
    4. Approaching Indian Diasporas for driving foreign investments

    Following suggestions by the author gives a way forward strategy to recover the economy:

    1. Tax incentivization

    • Big business houses should be supported by the government to reopen their operations by way of tax incentives or ease of procurement of raw materials or other goods and services on credit.
    • This will energize consumer demand and boost the functioning of the vendor or ancillary industry in the MSME sector (which has huge potential for job creation).

    1. Ensuring seamless credit flows considering NPAs

    • The RBI should consider Single One Time Window for restructuring business loans, as required, by all banks.
    • There is a high probability that non-performing assets are likely to rise once the prevailing moratorium is lifted by RBI.
    • The government and RBI also urgently need to assure banks, that their business decisions will not be questioned, to encourage credit flows.

    1. Calibrating Make in India

    • The ongoing distrust on Chinese manufacturing amid US-China spat can be very well garnered by India.
    • Making India a global trading hub – devise an incentive regime for companies setting up global trading operations from India.
    • The govt. should think of establishing self-contained “industrial cities” that earmark space for manufacturing, commercial, educational, residential and social infrastructure.
    • The Centre can prepare a five-year plan on getting at least 60 per cent of those companies, desiring to move manufacturing out of China to India.

    1. Encouraging sunrise sectors

    • It should also encourage sunrise sectors as part of re-imagining Indian economy such as battery manufacturing (storage systems)/ solar panel manufacturing.
    • The government can also consider giving impetus to “Deep Tech”-leveraged businesses — blockchain, robotics, AI, machine learning, augmented reality, big data analytics, cybersecurity, etc.

    1. Creating an ecosystem to boost startups

    • India is amongst the top start-up ecosystems globally. Several of them are in pre-Angel or Angel-Funding stages and are under significant pressure to stay afloat in view of a lack of adequate liquidity.
    • Start-ups not only help drive innovation but also create jobs, which will be very important going forward.
    • The government needs to provide significant support to the start-up ecosystem.

    1. Auto-sector reforms

    • The auto industry which contributes significantly to GDP (nearly 9%) deserves special treatment.
    • In addition to reducing GST rate, old vehicle scrap policy with tax incentives for creating a demand for new vehicles may be formulated.
    • There is a need to recognise the Auto Sales Industry channel partners as MSMEs.

    1. Plug-and-Play model for foreign investment

    • Maharashtra has created a turnkey ‘plug-and-play’ model for foreign investors.
    • Similarly, other States must get their act together, be it on land acquisition, labour laws and providing a social, environment and other infrastructure.
    • Land should be made available for projects with all necessary pre-clearances — at Centre’s level (including Environmental), State’s and Municipal dispensations.

    1. Labour law reforms

    • Reforms in labour laws do not only mean permission to hire and fire.
    • Leeway should be given to strictly enforce discipline within the factory premises and demand higher productivity.
    • The moves by U.P., M.P. and Gujarat are welcome signals.
    • The government should provide health insurance for migrant labourers as experimented by certain States.

    1. Encouraging Diaspora

    • Investments of NRIs and OCIs in India should be treated on par with those of Resident Indians as regards interest and dividend repatriation and management control of Indian companies.
    • It may be mentioned that the Chinese government had called on rich overseas Chinese to invest in China with minimum government control, and massive investments followed.
    • This has contributed to China’s prosperity and economic rise.
    • A similar investment boom can take place in India through NRIs and OCIs who have the resources and expertise in manufacturing and technology.

    1. Creating off-Shore investment centres

    • Off-Shore investment centres like Singapore can be opened in Mumbai where Indian domestic laws and taxation will not be applicable.
    • MNCs may route their investments into India through the Off-Shore Centre in Mumbai.
    • Foreign legal firms and banks along with domestic institutions can be invited to have a presence in the Off-Shore Centre.

  • Bioethanol Blending in Petrol

    The government has set targets of 10 per cent bioethanol blending of petrol by 2022 and to raise it to 20 per cent by 2030 to curb carbon emissions and reduce India’s dependence on imported crude oil.

    Try this PYQ:

    Q.Given below are the names of four energy crops. Which one of them can be cultivated for ethanol?(CSP 2010)

    (a) Jatropha

    (b) Maize

    (c) Pongamia

    (d) Sunflower

    What is Ethanol Blended Petrol (EBP) Program?

    • Ethanol Blended Petrol (EBP) programme was launched in January 2003 for the supply of 5% ethanol blended petrol.
    • The programme sought to promote the use of alternative and environment-friendly fuels and to reduce import dependency for energy requirements.
    • OMCs are advised to continue according to the priority of ethanol from 1) sugarcane juice/sugar/sugar syrup, 2) B-heavy molasses 3) C-heavy molasses and 4) damaged food grains/other sources.

    Bio-ethanol blend in India

    • 1G and 2G bioethanol plants are set to play a key role in making bio-ethanol available for blending but face challenges in attracting investments from the private sector.
    • 1G bioethanol plants utilise sugarcane juice and molasses, byproducts in the production of sugar, as raw material, while 2G plants utilise surplus biomass and agricultural waste to produce bioethanol.
    • Currently, domestic production of bioethanol is not sufficient to meet the demand for bio-ethanol for blending with petrol at Indian Oil Marketing Companies (OMCs).
    • Sugar mills, which are the key domestic suppliers of bio-ethanol to OMCs, were only able to supply 1.9 billion litres of bio-ethanol to OMCs equating to 57.6 per cent of the total demand of 3.3 billion litres.

    Hurdles in meeting the demand

    • Lack of infrastructure: Many sugar mills are best placed to produce bioethanol do not have the financial stability to invest in biofuel plants. There are also concerns among investors on the uncertainty over the price of bio-ethanol in the future.
    • Lack of raw materials: Presently there is no mechanism for depots where farmers could drop their agricultural waste. The central government should fix a price for agricultural waste to make investments in 2G bioethanol production an attractive proposition.
    • Rigid pricing mechanism: Sugars mills have to pay high prices for sugarcane set by the government even when there have been supplying gluts. The prices of both sugarcane and bio-ethanol are set by the central government.

    Way ahead

    • The government should provide greater visibility on the price of bioethanol that sugar mills can expect by announcing a mechanism by which the price of bio-ethanol would be decided.
    • 2G bioethanol not only provided a clean source of energy but also help provide greater income to farmers and prevent them from having to burn agricultural waste which can be a major source of air pollution.

  • Power sector reforms

    This article analyses the issue of affordability of electricity in the country and the factors making it expensive.

    How recent changes increased subsidy burden

    •  Recent policy measures like the the “Saubhagya” scheme have remarkably improved the first 3 ‘A’s, i.e., awareness, accessibility and availability.
    •  It has also increased the cost of supply due to an increase in LT distribution network length necessitating more conductors, meters, transformers, etc.
    • Most of the newly-added consumers are from rural areas of low-income states like UP and Bihar.
    • They belong to subsidised consumer categories, viz. agriculture, rural-domestic, etc.
    • Thus, the subsidy burden of respective state governments has increased.

    Affordability of subsidy by States

    • The state’s capacity to service power subsidy of its BPL consumers is dependent on its per capita income which varies from state to state.
    •  The central government provides no subsidy for this purpose.
    • Therefore, making electricity affordable for consumers becomes a priority for the power sector.
    •  Limiting focus only to reduction of the cross-subsidy burden of industries may not be fruitful.

    Policy steps to make electricity affordable

    1) Expedite overdue distribution reforms

    • While generation and transmission sectors have been unbundled, unbundling (segregation of carrier and content business) of distribution has been started yet.
    • Privatisation of, and governance reforms in, state-owned distribution companies are likely to unlock huge value and provide efficiency gains through loss reduction for making power affordable.

    2) Capping of stranded capacity charges

    • As of now, we have surplus installed capacity of around 370 GW against a peak demand of 183 GW.
    • So, any fresh capacity addition should be limited to projected load demand growth and replacement of retiring power plants.
    • This will reduce the stranded capacity charges the discoms are currently paying to gencos under their long-term power purchase agreements without taking any power from them under availability-based tariff regime.

    3) Scrap cost-plus regime

    • Now, when the country has sufficient installed capacity, it makes no sense to provide a risk-free 15.5% tax-free (or 22% after-tax) return on equity to the power companies.
    • No new project (except hydro and nuclear) should be allowed on cost-plus route or MoU route under section 62 of the Electricity Act.

    4) Restructure normative debt-equity financing to 80:20

    • At present, the regulatory norm used for tariff computation of projects is 70:30 debt: equity.
    • Debt servicing is limited only to the term of the loan, i.e., up to 12 years, but Return of Equity is allowed in perpetuity even after the plant has fully depreciated.
    • This needs to be limited to the useful life of the unit.

    5) No double-whammy for consumers:

    • National Clean Energy Fund was created as a non-lapsable fund in 2010 for promoting clean technology, and since then around Rs 1 lakh crore has been collected from coal cess.
    • However, most of it has been diverted and used for other purposes like funding to states for their GST losses, etc.
    • Asking gencos to install Fuel Gas Desulfurization and pass on the cost to the consumer amounts to a double whammy for the consumers who first paid the coal-cess and now will have to bear the FGD cost also.
    • We should stop using cess as a tax and NCEF should be used to fund the clean energy initiative and FGD installation etc.

    Consider the question “What are the factors responsible for making the electricity costly in India. Suggest the pathways to make it affordable to all.”

    Conclusion

    Making electricity affordable following these steps would be instrumental in the progress of the nation.

    Source: https://www.financialexpress.com/opinion/powering-reforms-bringing-power-psus-under-competitive-bidding-will-help-in-tariff-reduction/2057940/

    B2BASICS

    Electricty generation,transmission and Distribution

    Saubhagya scheme

  • Dwarf Planet Ceres

    The dwarf planet Ceres, which lies in the asteroid belt between Mars and Jupiter now, has the status of an “ocean world”.

    Note various dwarf planets and the criteria making a planet dwarf, as mentioned in the B2b section.

    Ceres exploration

    • The dwarf planet was first spotted by Giuseppe Piazzi in 1801, who assumed that Ceres was the missing planet between Mars and Jupiter.
    • It was classified as a dwarf planet in 2006 and is the first dwarf planet to be orbited by a spacecraft.
    • In 2015, NASA’s Dawn reached it to study its surface, composition and history.

    What does it mean to be an “ocean world”?

    • With a crust that mixes ice, salts, rock-forming minerals and other materials, Ceres looks to be a remnant “ocean world,” wearing the chemistry of its Old Ocean and records of the interaction on its surface.
    • The observations from Dawn suggest the presence of briny liquid (saltwater) water under Ceres’s surface.
    • Scientists have determined that Ceres has a brine reservoir located about 40 km deep and which is hundreds of miles wide, making the dwarf planet, “water-rich”.

    Why do researchers study Ceres?

    • Scientists are interested in this dwarf planet because it hosts the possibility of having water, something that many other planets do not have.
    • Therefore, scientists look for signs of life on Ceres, a possibility that has also maintained scientists’ interest in the planet Mars, whose atmosphere was once warm enough to allow water to flow through it.
    • Another reason why scientists are interested in that studying it can give insights about the formation of the Solar System since it is considered to be a fossil from that time.

    Back2Basics: Dwarf Planets

    • As of today, there are officially five dwarf planets in our Solar System.
    • The most famous is Pluto, downgraded from the status of a planet in 2006.
    • The other four, in order of size, are Eris, Makemake, Haumea and Ceres. The sixth claimant for a dwarf planet is Hygiea, which so far has been taken to be an asteroid.
    • These four criteria are – that the body orbits around the Sun, it is not a moon, has not cleared the neighbourhood around its orbit and has enough mass for its gravity to pull it into a roughly spherical shape.