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GS Paper: GS3

  • NITI Aayog bats for Border Adjustment Tax (BAT)

    A notable NITI Aayog member has favoured imposing a Border Adjustment Tax (BAT) on imports to provide a level-playing field to domestic industries.

    Note how BAT is different from the Custom Duties on imports. Refer to our B2B section.

    What is the proposed Border Adjustment Tax?

    • BAT is a duty that is proposed to be imposed on imported goods in addition to the customs levy that gets charged at the port of entry.
    • It is proposed to be a non-creditable levy on imported goods. The idea is to bring similar goods in the imported and domestic baskets at par.

    Why need BAT?

    • Generally, BAT seeks to promote “equal conditions of the competition” for foreign and domestic companies supplying products or services within a taxing jurisdiction.
    • The Indian industry has been complaining to the government about domestic taxes like electricity duty, duties on fuel, clean energy cess, mandi tax, royalties, biodiversity fees that get charged on domestically produced goods as these duties get embedded into the product.
    • But many imported goods do not get loaded with such levies in their respective country of origin and this gives such products price advantage in the Indian market.

    Will it be WTO compatible?

    • Countries that are members of Geneva-based global watchdog WTO have locked the upper limits of customs levies for product lines that they trade-in.
    • Any additional duty that gets imposed by WTO members are scoffed upon and in many instances, extra customs duties led to countries being dragged to international arbitration under WTO.
    • Commerce Ministry believes that the proposed extra customs duty through the Border Adjustment Tax is compatible with global trade norms.
    • Officials maintain that Article II: 2(a) of GATT allows for import charge that is equal to the internal tax of the country with respect to a “Like Product” or an item from which the imported product is made. Legal opinion on the proposed levy has also been taken.

    Back2Basics: Customs Duty

    • It refers to the tax imposed on the goods when they are transported across international borders.
    • The objective behind levying customs duty is to safeguard each nation’s economy, jobs, environment, residents, etc., by regulating the movement of goods, especially prohibited and restrictive goods, in and out of any country.

    Customs duties are charged almost universally on every good which are imported into a country. Some of these are:

    •      Basic Customs Duty (BCD)
    •      Countervailing Duty (CVD)
    •      Protective Duty
    •      Anti-dumping Duty etc.

  • Nature Index, 2020

    India has ranked twelfth, globally in science research output as per the recently-released Nature Index table 2020. The top five positions have gone to the United States of America, China, Germany, United Kingdom and Japan.

    Note: This nature index has nothing to do with nature conservation. It has only mentioned the rankings of research institutes in natural and physical sciences.

    What is the Nature Index?

    • The Nature Index is a database of author affiliation information collated from research articles published in an independently selected group of 82 high-quality science journals.
    • It serves as an indicator of high-quality research in the Natural and Physical Sciences.
    • The database is compiled by Nature Research, a division of the international scientific publishing company Springer Nature that publishes academic journals.
    • The index provides a close to the real-time proxy of high-quality research output and collaboration at the institutional, national and regional level.

    India’s achievements

    • Globally the top-rated Indian institutions in this list are CSIR, a group of 39 institutions at the 160th position and IISc Bangalore at the 184th
    • Three of the autonomous institutions of the DST have found their place among the top 30 Indian Institutions.
    • Keeping out CSIR, which is a cluster of institutions, IACS Kolkata is among the top three institutions in quality Chemistry Research in India.
    • NCASR Banglore ranks 4th among academic institutions in life sciences, 10th in Chemistry and Physical Sciences, 10th among Indian academic institutions, and 469th in the global ranking.

  • Species in news: Indian Gaur

    The first population estimation exercise of the Indian gaur carried out in the Nilgiris Forest Division has revealed that more than an estimated 2,000 Indian gaurs inhabit the entire division.

    Try this question from CSP 2012:

    Q. Which one of the following groups of animals belongs to the category of endangered species?(2012)

    (a) Great Indian Bustard, Musk Deer, Red Panda and Asiatic Wild Ass

    (b) Kashmir Stag, Cheetal, Blue Bull and Great Indian Bustard

    (c) Snow Leopard, Swamp Deer, Rhesus Monkey and Saras (Crane)

    (d) Lion-tailed Macaque, Blue Bull, Hanuman Langur and Cheetal

    Indian Gaur

    • The Indian Gaur also called the Indian bison is one of the largest extant bovines found in India.
    • It is native to South and Southeast Asia and has been listed as Vulnerable on the IUCN Red List since 1986.
    • The global population has been estimated at maximum 21,000 mature individuals by 2016.
    • It declined by more than 70% during the last three generations, and is extinct in Sri Lanka and probably also in Bangladesh.
    • In Malaysia, it is called Seladang and Pyaung in Myanmar. The domesticated form of the gaur is called Gayal (Bos frontalis) or Mithun.
    • They are highly threatened by poaching for trade to supply international markets, but also by opportunistic hunting, and specific hunting for home consumption.

  • Faults in section inserted for the suspension of IBC amid pandemic

    Following the lockdown, the government announced the suspension of some provision of IBC to soften the blow of economic crisis. Section 10A was inserted to suspend the provision. But it giver rise to other questions. What are these questions? Read the article to know…

    What changes were made?

    • In mid-May, the Finance Minister announced that the government was planning to bring in an ordinance to suspend provisions enabling filing of fresh insolvency cases for a period of one year..
    • Finally, on June 5, the government promulgated an ordinance which inserted Section 10A in the IBC.
    • The government said the ordinance was promulgated because the lockdown has caused business disruptions which may lead to default on debts pushing such companies into insolvency.
    • Therefore, it felt that suspending Sections 7, 9 and 10 of the IBC would be the right course of action.

    What are the issues with section 10A?

    • Section 10A provides that “no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from this period, as may be notified in this behalf”.
    • This means that these provisions shall remain suspended from March 25 till September 25, unless extended for another six months, which would extend the suspension up till March 25, 2021.
    • However, the proviso to the section states that no application for insolvency resolution shall ever be filed against a corporate debtor for any default occurring during the suspension period.
    • While the main Section 10A suspends such applications for a limited period, the proviso enlarges the scope to provide complete amnesty under the IBC for any default occurring during such period.
    • The role of a proviso in a statute is to restrict the application of the main provision under exceptional circumstances.
    • However, the proviso here expands the substantive provision in the main section.
    • Further, if the main provision is unclear, a proviso may be given to explain its true meaning.
    • In this case the main provision appears clear, only to be obfuscated by the proviso.
    • The proviso therefore does not appear to be legally tenable.
    • As creditors can still approach courts, and as banks/FIs can still approach Debt Recovery Tribunals, the protection given by this proviso seems illusory.
    • But Section 10A also suspends provisions of Section 10 of the IBC which enables voluntary insolvency resolution.
    • This is difficult to understand as such voluntary insolvency resolution should have been made easier for companies facing distress.

    Painting all defaults with the same brush

    • The ordinance appears to consider every default occurring during the suspension period to be a consequence of the pandemic.
    • There could be cases where defaults were imminent due to other reasons, but which will now still enjoy this protection.
    • The ordinance should have protected only such defaults which may occur as a direct consequence of the pandemic or the lockdown and should have left this determination to the National Company Law Tribunal.
    • Also, a company defaulting on its payment obligations on March 24 (a day before the lockdown started) would not be provided any relief under the IBC as compared to a company defaulting on or immediately after March 25 due to similar reasons.
    • This makes the suspension, in the absence of definition of a COVID-19 default, prima facie arbitrary.

    Issue with increasing the default amount limit

    • Earlier, the government increased the minimum default amount to trigger corporate insolvency resolution from ₹1 lakh to ₹1 crore.
    • This was purportedly done to protect MSMEs from insolvency petitions.
    • However, this also operates against such MSMEs because they will now be forced to approach civil courts to recover undisputed debts below ₹1 crore.
    • The suspension of these provisions would now impact even claims above ₹1 crore for at least six months to a year.

    Conclusion

    The ordinance has opened itself up to a legal challenge on grounds of arbitrariness and untenability of the proviso due to the flaw in its drafting. It is unfathomable how these flaws arose despite the government having ample time to think this through.

    B2BASICS:

     Insolvency and Bankruptcy Code, 2015

    The code contains a clear speedy mechanism for early identification of financial distress and initiates revival/re-organisation of the company if it is viable.

    Timeline

    • The bill proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days for exceptional cases.

    Insolvency Resolution Plan

    • The insolvency resolution plan has to be approved by 75% of the creditors. If the plan is approved, then the adjudicating authority will give its sanction. In case of rejection of insolvency resolution plan, the adjudicating authority will pass an order for liquidation.

    Insolvency Professionals (IPs) & Insolvency Professional Agencies (IPAs)

    • The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.

    Information Utilities

    • Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.

    Bankruptcy and Insolvency Adjudicator

    • The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
    • The Debt Recovery Tribunal (DRT), which has jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).

    Insolvency regulators

    • The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

  • GM seeds: the debate, and a sowing agitation

    In the current Kharif season, farmers would undertake mass sowing of GM seeds for maize, soybean, mustard brinjal and herbicide-tolerant (Ht) cotton, although these are not approved. Farmers had carried out a similar movement last year, too.

    Practice question for mains:

    Q. Indian agriculture is in a way, a victim of its own past success – especially the green revolution. Critically comment.

    Genetically Modified (GM) seeds

    • Conventional plant breeding involves crossing species of the same genus to provide the offspring with the desired traits of both parents.
    • Genetic engineering aims to transcend the genus barrier by introducing an alien gene in the seeds to get the desired effects.
    • The alien gene could be from a plant, an animal or even a soil bacterium.

    What is the legal position of GM crops in India?

    • In India, the Genetic Engineering Appraisal Committee (GEAC) is the apex body that allows for the commercial release of GM crops.
    • In 2002, the GEAC had allowed the commercial release of Bt cotton.
    • More than 95 per cent of the country’s cotton area has since then come under Bt cotton.
    • Use of the unapproved GM variant can attract a jail term of 5 years and a fine of Rs 1 lakh under the Environmental Protection Act,1989.

    GM crops in India

    • Bt cotton, the only GM crop that is allowed in India, has two alien genes from the soil bacterium Bacillus Thuringiensis (Bt) that allows the crop to develop a protein toxic to the common pest pink bollworm.
    • Ht Bt, on the other, cotton is derived with the insertion of an additional gene, from another soil bacterium, which allows the plant to resist the common herbicide glyphosate.
    • In Bt brinjal, a gene allows the plant to resist attacks of fruit and shoot borer.

    Why are farmers rooting for GM crops?

    • In the case of cotton, farmers cite the high cost of weeding, which goes down considerably if they grow Ht Bt cotton and use glyphosate against weeds.
    • Brinjal growers in Haryana have rooted for Bt brinjal as it reduces the cost of production by cutting down on the use of pesticides.
    • Industry estimates say that of the 4-4.5 crore packets (each weighing 400 gm) of cotton sold in the country, 50 lakh are of the unapproved Ht Bt cotton.
    • Haryana has reported farmers growing Bt brinjal in pockets which had caused a major agitation there.

    Why furore over GM crops?

    • Environmentalists argue that the long-lasting effect of GM crops is yet to be studied and thus they should not be released commercially.
    • The genetic modification brings about changes that can be harmful to humans in the long run.

  • Species in news: Asiatic Lion

    Asiatic lions have now significantly risen in number at an estimated population of 674 in the Gir forest region of Gujarat. Unlike in previous years, this count was estimated not from a Census, but from a population “observation” exercise called Poonam Avlokan.

    Try this question from CSP 2017:

    Q. The term ‘M-STrIPES’ is sometimes seen in the news in the context of

    (a) Captive breeding of Wild Fauna

    (b) Maintenance of Tiger Reserves

    (c) Indigenous Satellite Navigation System

    (d) Security of National Highways

    Asiatic Lion

    • Indian Lion (Panthera Leo Persica) is listed as Endangered and exists as a single population in Gujarat.
    • It is one of five big cat species found in India and Gir National Park and Wildlife Sanctuary is the only habitat for Asiatic lions.
    • Historically, it inhabited much of Western Asia and the Middle East up to northern India.
    • On the IUCN Red List, it is listed under its former scientific name Panthera leo persica as Endangered because of its small population size and area of occupancy.
    • More than two dozen lions died last year in an outbreak of canine distemper virus (CDV) and Babesiosis.

    What is Poonam Avlokan?

    It includes two methods:

    • Block counting method — in which census enumerators remain stationed at water points in a given block and estimate abundance of lions in that block, based on the direct sighting of lions who need to drink water at least once in 24 hours during the summer.
    • Other teams keep moving in their respective territories and make their estimates based on inputs provided by lion trackers and on chance sightings.

    Back2Basics: Lion Census in India

    • The first Lion Census was conducted by the Nawab of Junagadh in 1936; since 1965, the Forest Department has been regularly conducting the Lion Census every five years.
    • The 6th, 8th and 11th Censuses were each delayed by a year, for various reasons.
    • This year it was postponed after the lockdown was announced.

  • Will leaders act on the climate crisis as they did Covid-19?

    In the context of climate change, the rising concentration of carbon dioxide and rising global temperature are inextricably linked with each other. This article elaborates on two interlinked and rising curves-CO2 and temperature. The article is concluded on the positive note that leaders would act on climate change with same urgency as Covid.

    The upward journey of two curves

    • Two interrelated curves began their upward trend two centuries ago with the advent of the industrial age.
    • The first curve was the atmospheric concentration of carbon dioxide or, more generally, all greenhouse gases, GHGs.
    • And the second was the average global temperature curve.

    CO2 concentration at 407 ppm: But did we get here?

    • Actually, the CO2 curve began its upward march about 18,000 years ago when it was a little under 200 parts per million (ppm).
    • And earth was much colder back then.
    • By the time it reached 270 ppm about 11,500 years ago, the warmer conditions accompanying this curve made it possible for the emergence of agriculture.
    • Over the past million years, CO2 levels never exceeded 280-300 ppm.
    • They always went back to 200 ppm before rising again in a cyclical fashion.
    • They remained steady at close to 280 ppm for 10,000 years until, beginning in the mid-19th century.
    • They began to rise again as humans burnt coal and oil to fuel the industrial revolution, and burnt forests to expand agriculture and settlements.
    • From a mere 0.2 billion tonnes of CO2 emissions in 1850, annual emissions increased to 36 billion tonnes by 2018.
    • If all this CO2 had accumulated in the atmosphere, we can say that human life would have been altered beyond recognition.
    • Nature has been rather kind to us so far — about one-half of all CO2 emissions have been sanitised from the atmosphere, equally by growing vegetation on land and by absorption in the oceans.
    • Thus, the levels of CO2 in the atmosphere reached 407 ppm in 2018, a level last experienced by earth some three million years ago.

    Global temperature up by 1 degree Celcius

    •  From 1850 onwards, for over a century, the global temperature showed a slight warming trend.
    • But there was nothing suggestive of anything serious.
    • From 1975 onwards, the temperature graph has shown a distinct, upward trend.
    • By 2015, the globe had heated by a full degree Celsius relative to a hundred years previously.
    • Climate modellers unequivocally project that under the current trends of emissions the globe will heat up by 4˚C by the end of the century.
    • he 2003 European heat wave killed over 70,000 people.
    • The years 2015-19 have globally been the warmest years on record.
    • Leave aside the Amazon fire of 2019, the bush fires of 2019-20 in Australia were unprecedented in their scale and devastation.
    • March 2020 has been the second warmest March on record.

    But climate change is not just about temperature rise

    • Climate change involves not just a change in temperature but every other component of weather, including rainfall, humidity and wind speed.
    • Indirect effects follow, such as a rise in sea levels from melting glaciers.
    • Globally there have been several extreme weather events such as hurricanes, heat waves or droughts.
    • While no single event can be directly attributed to climate change, the collective trends are consistent with climate change predictions.

    Warning for India

    • The Climate Impact Lab at the University of Chicago put out a warning for India last year.
    • It says that if global CO2 emissions continue to gallop at the present rate, average summer temperatures would rise by 4˚C in most States.
    • Extremely hot days (days above 35˚C), which were only five days in 2010, would increase to 15 days by 2050 and to 42 days by 2100 on average across all districts.
    • A more moderate emissions scenario, as a result of countries largely fulfilling their commitments under the Paris Agreement, would keep average global temperature rise below 2˚C compared to pre-industrial levels.

    Let’s look into the financial dimension of tackling climate change

    • The most common excuse is that the world cannot afford to curb GHG emissions for fear of wrecking the economy.
    • An article in Nature in 2019 highlighted the financial dimensions of tackling the looming climate crisis.
    • Apparently, the wealthy nations are spending over $500 billion each year internally on projects aimed at reducing emissions.
    • The Intergovernmental Panel on Climate Change, however, estimates that a sustained annual investment of $2.4 trillion in more efficient energy systems is needed until 2035 in order to keep warming below the more ambitious 1.5˚C relative to pre-industrial levels.
    • To put this in perspective, that is about 2.5% of the global GDP.

    What happened to the $100 billion per year aid to poor countries?

    • Some of the wrangling over money relates to the amounts that the wealthy nations, agreed to pay other countries to cope with climate change.
    • Underlying idea was that these countries have caused most of the GHGs resulting in global warming,
    • At the UN Climate Conference in 2009, the richest nations had pledged to provide $100 billion in aid each year by 2020 to the poorer countries for climate change mitigation and adaptation.
    • In 2017, for which data are available, only $71 billion had been provided.
    • And most of the money was spent on mitigation and less than 20% towards climate adaptation.
    • Such numbers had been challenged prior to the 2015 Paris Summit by many countries, including India.
    • It was challenged because much of the so-called aid provided did not come out of dedicated climate funds but, rather, development funds or simply loans which had to be repaid.
    • It thus seems unlikely that the rich countries will deliver $100 billion in tangible climate finance during 2020.

    Time to act

    • COVID-19 has unwittingly given humanity a brief respite from the climate change curve.
    • Commentators are already talking about a paradigm shift in the structure and functioning of societies once the pandemic subsides.
    • This is also a make-or-break moment for the climate trajectory which has to be flattened within a few years if we are to avoid dangerous climate change.
    • Nature’s kindness is not expected to last beyond a 2˚C rise in temperature as the carbon sequestered into vegetation will be thrown back into the atmosphere.
    • Also remember that earth has already warmed by 1˚C and we really have only another 1˚C as a safety margin or 0.5˚C if we are concerned about island nations.

    Consider the mains question asked by the UPSC in 2017-‘Climate change’ is a global problem. How India will be affected by climate change? How Himalayan and coastal states of India will be affected by climate change?

    Conclusion

    There is no substitute to reducing GHG emissions. Technologists, economists and social scientists must plan for a sustainable planet based on the principles of equity and climate justice within and across nations. It is the responsibility of leaders to alter their mindset and act on the looming climate crisis with the same alacrity they have shown on COVID-19.

  • Payments Infrastructure Development Fund (PIDF)

    The RBI has created a Payments Infrastructure Development Fund (PIDF) with an outlay of Rs. 500 Cr.

    Possible prelims question:
    Q. Which of the following is the major aim of Payments Infrastructure Development Fund (PIDF) recently created by the Reserve Bank of India (RBI)?
    a) Promotion of UPI payments

    b) Deploying Points of Sale (PoS) infrastructure

    c) Creation of digital wallets

    d)All of the above

    Payments Infrastructure Development Fund (PIDF)

    • PIDF aims to encourage acquirers to deploy Points of Sale (PoS) infrastructure — both physical and digital modes in tier-3 to tier-6 centres and north eastern states.
    • The setting of PIDF is in line with the measures proposed by the vision document on payment and settlement systems in India 2019-2021.
    • It is also in line with the RBI’s proposal to set up an Acceptance Development Fund which will be used to develop card acceptance infrastructure across small towns and cities.

    Its working

    • The PIDF will be governed through an Advisory Council and managed and administered by RBI.
    • It will also receive recurring contributions to cover operational expenses from card-issuing banks and card networks.
    • RBI will also contribute to its yearly shortfalls, if necessary.

    Why need PIDF?

    • Over the years, the payments ecosystem in the country has evolved with a wide range of options such as bank accounts, mobile phones, cards, etc.
    • To provide further fillip to digitization of payment systems, it is necessary to give impetus to acceptance infrastructure across the country, more so in under-served areas.

  • Crystalline Rubrene for Optoelectronic Devices

    Indian scientists have found a new process for synthesizing crystalline rubrene for the development of optoelectronic devices and also for preparation of Electronic Skin (E-Skin).

    Note the difference between the Pyro-electric/ Piezo-electric/ Pyro-photonic effects. UPSC may shuffle the meaning of such terms in statement based prelims question.

    What is crystalline rubrene?

    • Crystalline rubrene is a polycyclic aromatic hydrocarbon-based thin film.
    • It is a water-free, solvent-free, environmentally friendly one-step plasma process.
    • It demonstrated optoelectronic properties (which detect and control light).
    • A highly uniform pin-hole-free thin film can be deposited by this process, which is useful for the fabrication of high-end devices.

    Working principle

    • Devices made of pyro-electric materials (that generate electric charge when they are heated or cooled) and piezo-electric materials (that generate electric charge under the effect of mechanical pressure), can help detect change in temperature and pressure.
    • Pyro-electric materials also show pyro-phototronic effect where pyro-electricity is associated with the change in temperature of a material when it absorbs photons.
    • Pyro-electric infrared detectors are well known for application in infrared sensing for space research, defense, remote sensing, and household appliances.

    Principle application: Human Skin

    • These kinds of materials are available in biological systems such as – human skin, plant cellulose leading to their significance in the understanding of basic science of biological systems and also in their huge application prospect.
    • The rubrene crystal has a thin amorphous oxide layer formed over the crystalline film.
    • This induces surface layer polarization effect leading to pyro-phototronic effect.

    Significance of the research

    • Since last few years, scientists from around the world are working on the synthesis of organic materials for electronic applications.
    • The conventional process for synthesis of organic electronic materials based on chemical processes provides very good quality materials, but the stability of the materials is not very good, and it requires use of solvents.
    • Moreover, multiple steps are required for material synthesis and film deposition.

    Applications

    • This novel process developed by the Indian team is useful for developing advanced optoelectronic devices and preparation of Electronic Skin (E-Skin).
    • It may prove to be useful tool for laboratory simulation of different biological systems for probing the organization and dynamics of those systems.

  • Who is afraid of monetisation of deficit?

    Rating agencies influence the decisions of investors. So, when any economy is downgraded by them, it’s certainly a cause for concern. But to restart the economic engines, governments need to spend more by borrowing. This article suggests the way to achieve both: avoiding downgrade and increasing spending. How? Read to know…

    To worry or not to worry: Issue of downgrading by rating agencies

    • Some economists urged the government amid covid pandemic to go out and spend without worrying about the increase in public debt.
    • They said the rating agencies would understand that these are unusual times.
    • If they did not and chose to downgrade India, we should not worry too much about it.
    • Well, the decision of the rating agency, Moody’s, to downgrade India from Baa2 to Baa3 should come as a rude awakening.
    • The present rating is just one notch above the ‘junk’ category.
    • Moody’s has also retained its negative outlook on India, which suggests that a further downgrade is more likely than an upgrade.
    •  The downgrade, Moody’s says, has not factored in the economic impact of the pandemic.
    • Any further deterioration in the fundamentals from now on will push India into ‘junk’ status.

    Here is why we should be worried about a downgrade

    •  Whatever the failings of the agencies, in the imperfect world of global finance that we live in, their ratings do carry weight.
    • Institutional investors are largely bound by covenants that require them to exit an economy that falls below investment grade.
    • If India is downgraded to junk status, foreign institutional investors, or FIIs, will flee in droves.
    • The stock and bond markets will take a severe beating.
    • The rupee will depreciate hugely and the central bank will have its hands full trying to stave off a foreign exchange crisis.
    • That is the last thing we need at the moment.

    So, what is the way out? Try for an upgrade!

    • We have to put our best foot forward now to prevent a downgrade and bring about an upgrade instead.
    • To do so, we need to note the key concerns that Moody’s has cited in effecting the present downgrade to our rating: slowing growth, rising debt and financial sector weakness.
    • These concerns are legitimate.

    Bleak prospects

    • Many economists as also the Reserve Bank of India (RBI) expect India’s economy to shrink in FY 2020-21.
    • The combined fiscal deficit of the Centre and the States is expected to be in the region of 12% of GDP.
    • Moody’s expects India’s public debt to GDP ratio to rise from 72% of GDP to 84% of GDP in 2020-21.
    • The banking sector had non-performing assets of over 9% of advances before the onset of the pandemic.
    • Weak growth and rising bankruptcies will increase stress in the banking sector.

    Fiscal deficit and growth: two concerns of rating agencies

    • The government’s focus thus far has been on reassuring the financial markets that the fisc will not spin out of control.
    • It has kept the ‘discretionary fiscal stimulus’ down to 1% of GDP.
    • That 1%  figure is most modest in relation to that of many other economies, especially developed economies.
    • ‘Discretionary fiscal stimulus’ refers to an increase in the fiscal deficit caused by government policy as distinct from an increase caused by slowing growth, the latter being called an ‘automatic stabiliser’.
    • Keeping the fiscal deficit on a leash addresses the concerns of rating agencies about a rise in the public debt to GDP ratio.
    • But it does little to address their concerns about growth.
    • The debt to GDP ratio will worsen and financial stress will accentuate if growth fails to recover quickly enough.
    • The government’s stimulus package relies heavily on the banking system to shore up growth.
    • But there is only so much banks can do.
    • More government spending is required, especially for infrastructure.

    So, government need to increase fiscal stimulus without increasing public debt

    • We need to increase the discretionary fiscal stimulus without increasing public debt.
    • The answer is monetisation of the deficit, that is, the central bank providing funds to the government.
    • These fears are based on misconceptions about monetisation of the deficit and its effects.

    What monetisation of debt mean?

    • A common misconception is that it involves ‘printing notes’.
    • But that is not how central banks fund the government.
    • The central bank typically funds the government by buying Treasury bills.
    • As proponents of what is called Modern Monetary Theory point out, even that is not required.
    • The central bank could simply credit the Treasury’s account with itself through an electronic accounting entry.
    • What is base money? When the government spends the extra funds that have come into its account, there is an increase in ‘Base money’, that is, currency plus banks’ reserves.
    • So, yes, monetisation results in an expansion of money supply.
    • But that is not the same as printing currency notes.

    But expansion of money supply leads to inflation, what about that?

    • It could be that the expansion is inflationary.
    • This objection has little substance in a situation where aggregate demand has fallen sharply and there is an increase in unemployment.
    • In such a situation, monetisation of the deficit is more likely to raise actual output closer to potential output without any great increase in inflation.

    No difference in borrowing from banks or RBI directly:MMT

    • Exponents of the Modern Monetary Theory (MMT) make a more striking point.
    • They say there is nothing particularly virtuous about the government incurring expenditure and issuing bonds to banks instead of issuing these to the central bank.
    • The expansion in base money and hence in money supply is the same in either route.
    • The preference for private debt is voluntary.
    • MMT exponents say it has more to do with an ideological preference for limiting government expenditure.
    • Central banks worldwide have resorted to massive purchases of government bonds in the secondary market in recent years, with the RBI joining the party of late.
    • These are carried out under Open Market Operations (OMO).
    • The impact on money supply is the same whether the central bank acquires government bonds in the secondary market or directly from the Treasury.

    So why the shrill clamour against monetisation of public debt?

    • OMO is said to be a lesser evil than direct monetisation because the former is a ‘temporary’ expansion in the central bank’s balance sheet whereas the latter is ‘permanent’.
    • But we know that even so-called ‘temporary’ expansions can last for long periods with identical effects on inflation.
    • What matters, therefore, is not whether the central bank’s balance sheet expansion is temporary or permanent but how it impacts inflation.
    • As long as inflation is kept under control, it is hard to argue against monetisation of the deficit in a situation such as the one we are now confronted with.

    Way forward

    • We now have a way out of the constraints imposed by sovereign ratings.
    • The government must confine itself to the additional borrowing of ₹4.2 trillion which it has announced.
    • Further discretionary fiscal stimulus must happen through monetisation of the deficit.
    • That way, the debt to GDP ratio can be kept under control while also addressing concerns about growth.

    Consider the question “Examine the issues involved in the direct monetisation of the debt by the government to fund the spending in  the wake of covid pandemic.”

    Conclusion

    The rating agencies should be worrying not about monetisation per se but about its impact on inflation. As long as inflation is kept under control, they should not have concerns — and we need not lose sleep over a possible downgrade.

    Back2Basics: Automatic stabiliser

    • Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle.
    • Automatic stabilisers will influence the size of government borrowing.

    Discretionary fiscal policy

    • Keynesian Perspective: Keynes noted that in a recession, confidence falls and the private sector cut back on spending and investment.
    • Therefore, we see a rise in private savings and a fall in aggregate demand. This can worsen the recession.
    • This is why Keynes advocated government borrowing – to make use of these surplus savings.
    • Keynes argued that automatic stabilisers may not be enough, and the government should specifically find public sector projects to inject money into the circular flow.
    • This is known as discretionary fiscal policy.