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GS Paper: GS3

  • What is Superconductivity?

    On a larger scale, electric grids, such as high power lines, lose over 5 per cent of their energy in the process of transmission.

    In India, we often get to hear about the transmission losses in DISCOMS. Such losses can be zeroed with the application of superconducting cables (which is practically impossible unless we find a normal working one). The phenomena, superconductivity, however is not new to us, UPSC may end up asking some tricky statements in the prelims regarding it.

    Heat losses

    Waste heat is all around you. On a small scale, if your phone or laptop feels warm, that’s because some of the energy powering the device is being transformed into unwanted heat.

    Where does this wasted heat come from?

    • These elementary particles of an atom move around and interact with other electrons and atoms.
    • Because they have an electric charge, as they move through a material — like metals, which can easily conduct electricity — they scatter off other atoms and generate heat.

    Understanding Superconductivity

    • A superconductor is a material, such as a pure metal like aluminium or lead, that when cooled to ultra-low temperatures allows electricity to move through it with absolutely zero resistance.
    • Kamerlingh Onnes was the first scientist who figured out exactly how superconductor works in 1911.
    • Simply put, superconductivity occurs when two electrons bind together at low temperatures.
    • They form the building block of superconductors, the Cooper pair.
    • This holds true even for a potential superconductor like lead when it is above a certain temperature.

    What are Superconductors?

    • Superconductors are materials that address this problem by allowing energy to flow efficiently through them without generating unwanted heat.
    • They have great potential and many cost-effective applications.
    • They operate magnetically levitated trains, generate magnetic fields for MRI machines and recently have been used to build quantum computers, though a fully operating one does not yet exist.

    Issues with superconductors

    • They have an essential problem when it comes to other practical applications: They operate at ultra-low temperatures.
    • There are no room-temperature superconductors. That “room-temperature” part is what scientists have been working on for more than a century.
    • The amount of energy needed to cool a material down to its superconducting state is too expensive for daily applications.

    Future scope

    • In a dramatic turn of events, a new kind of superconductor material was discovered in 1987 at IBM in Zurich, Switzerland.
    • The material was a kind of ceramic. These new ceramic superconductors were made of copper and oxygen mixed with other elements such as lanthanum, barium and bismuth.
    • They contradicted everything physicists thought they knew about making superconductors.
    • Since then, curiosity regarding the superconductors has been ever increasing.

  • Extreme weather events in India

    Nineteen extreme weather events in 2019 claimed 1,357 lives, with heavy rain and flood accounting for 63 per cent of these deaths, revealed Down To Earth’s State of India’s Environment 2020 report.

    Extreme weather events:

    • Extreme weather events are out of the ordinary, unexpected, unusual climatic events which wreak havoc and disrupt everyday life.
    • Over the years, the frequency of extreme weather events has increased due to global warming and climate change.
    • Extreme weather events include hailstorm, heatwaves, dust storm, cloud bursts etc.

    Try this question:

    Q. Extreme weather events have been the biggest catastrophe in India this year. Discuss.

    Data from this newscard can be used to substantiate your mains answer with relevant data.

    Loss of lives

    • The most lives were lost in Bihar, with people dying from floods and heavy rain (306), thunderstorms (71) and heatwave (292) between May and October.
    • In Maharashtra, 136 people died from floods and heavy rain, 51 died from lightning and 44 died from the heatwave between June and September.
    • There was a 69 per cent increase in the number of heatwave days between 2013 and 2019 as well, the report said.
    • Over 5,300 people died from heatwaves in the past seven years.
    • Cold waves increased by 69 per cent within a year, between 2017 and 2018, with the latter year reported having an extremely cold winter, with the most casualties (279) in the past seven years.

    Risks of Extreme weather events in India

    • Climate change related risks will increasingly affect the Indian subcontinent, including via sea level rise, cyclonic activity and changes in temperature and precipitation patterns.
    • Rising sea levels would submerge low-lying islands and coastal lands and contaminate coastal freshwater reserves.Climate change will increase the risks of death, injury and ill-health and disrupt livelihoods in low-lying coastal zones due to cyclones and coastal and inland flooding, storm surges and sea-level rise.
    • Melting Himalayan glaciers would reduce downstream water supply in many of India’s important rivers in the dry season, impacting millions
    • A warmer atmosphere will spread tropical diseases and pests to new areas.
    • Increased river, coastal and urban floods could cause considerable loss of life and widespread damage to property, infrastructure and settlements.
    • Erratic rainfall in parts of India could lower rice yields and lead to higher food prices and living costs, while increased drought related water and food shortages linked to rising and extreme temperatures may increase malnutrition and worsen rural poverty. Over 55% of Indian rural households depend on agriculture for a living and, with fisheries and forestry,

    Systems in place to tackle extreme weather events are as follows:

    1.Meteorological predictions

    2.Contingency fund

    3.Early warning to citizens

    4.NDMA has issued an action plan for Prevention and Management of Heat Waves.

    5.Remote sensing satellites.

    Problems with accurate meteorological predictions are as follows:

    1.Meteorological predictions are considered for broad geographical areas and timeframes. It is not yet possible to predict a thunderstorm or lightning at a village or a part of a city.

    2.The exact times these events will hit, too, cannot be predicted.

    3.Alerts and warnings are in the nature of a general advisory, telling the people to expect these events, and to take precautions

    Steps taken by the State government are as follows:

    1.Rajasthan:

    • storm has been included in the category of natural disasters for the first time in the State and funds to the tune of ₹2.55 crore have been sanctioned to the affected districts.
    • The next of kin of each deceased in Rajasthan will get financial assistance of ₹4 lakh from the Chief Minister’s Relief Fund.
    • Power discoms have launched action on a war-footing to restore electricity supply in the affected areas, while the administration has ordered a survey of damaged properties.
    • In Dholpur district, relief camps have been opened for the villagers whose houses were destroyed.

    2.Uttar Pradesh:

    • The Uttar Pradesh Chief Minister has announced a compensation of up to Rs 400,000 to the families of the deceased and Rs 50,000 for each of the injured in the heavy rainfall and storm across the state.
    • contingency funds have been released to the respective district administration.

  • SWADES (Skilled Workers Arrival Database for Employment Support) Initiative

    The Union Govt. has launched a new initiative SWADES (Skilled Workers Arrival Database for Employment Support) to conduct a skill mapping exercise of the returning citizens under the Vande Bharat Mission.

    In the first go, one may get reminded of the SWADESH Darshan Scheme… Please beware! This SWADES initiative has nothing to do with the tourism sector!

    SWADES Initiative

    • SWADES is a joint initiative of the Ministry of Skill Development & Entrepreneurship (MSDE), the Ministry of Civil Aviation and the Ministry of External Affairs.
    • MSDE’s implementation arm National Skill Development Corporation (NSDC) is supporting the implementation of the project.
    • It aims to create a database of qualified citizens based on their skillsets and experience to tap into and fulfil the demand of Indian and foreign companies.
    • The collected information will be shared with the companies for suitable placement opportunities in the country.
    • The returning citizens are required to fill up an online SWADES Skills Card.
    • The card will facilitate a strategic framework to provide the returning citizens with suitable employment opportunities through discussions with key stakeholders including.

    Data on the returnees

    • Amongst the data gathered so far, the top countries from where the citizens are returning are UAE, Oman, Qatar, Kuwait and Saudi Arabia.
    • As per the skill mapping, these citizens had been primarily employed in sectors such as oil & gas, construction, tourism & hospitality, Automotive and Aviation.
    • The data also suggests that the States which have shown highest returning labour are Kerala, Tamil Nadu, Maharashtra, Karnataka and Telangana.

  • Global Economic Prospects (GEP) 2020 report by World Bank

    The World Bank has released its Global Economic Prospects (GEP) 2020 report.

    Try this PYQ from CSP 2019

    Q.) The Global Competitiveness Report is published by the-

    (a) International Monetary Fund

    (b) United Nations Conference on Trade and Development

    (c) World Economic Forum

    (d) World Bank

    Global Economic Prospects (GEP)

    • GEP is a World Bank Group flagship report that examines global economic developments and prospects, with a special focus on emerging market and developing economies.
    • It is issued twice a year, in January and June.
    • The January edition includes in-depth analyses of topical policy challenges while the June edition contains shorter analytical pieces.

    Summary of the report

    In a nutshell, the outlook for the global economy for 2020 has darkened, amid slowing activity and heightened downside risks.

    1) On poverty

    • The scope and speed with which the COVID-19 pandemic and economic shutdowns have devastated the poor around the world are unprecedented in modern times.
    • Current estimates show that 60 million people could be pushed into extreme poverty in 2020.

    2) Policy choices

    • Policy choices made today — include greater debt transparency to invite new investment, foster advances in digital connectivity, and a major expansion of cash safety nets for the poor.
    • The financing and building of productive infrastructure are among the hardest-to-solve development challenges in the post-pandemic recovery.

    3) Emerging Market and Developing Economies (EMDEs)

    • EMDEs face health crises, restrictions and external shocks like falling trade, tourism and commodity prices, as well as capital outflows.
    • These countries are expected to have a 3-8% output loss in the short term, based on studies of previous pandemics, as per the analysis.
    • Growth is likely to slow more in commodity-exporting EMDEs than in commodity-importing ones.

  • The contours of economic recovery

    This article analyses the various aspects of the stimulus package announced by the government. It gives a broad idea about the borrowing and fiscal deficit of the government. Where the fiscal deficit should be spent? Which area the announced reforms should focus on? You’ll be able to answer these questions after reading the article.

    Contraction of the Indian economy

    •  Many analysts have recently predicted a contraction for the Indian economy.
    • Goldman Sachs/ICRA and Nomura, in their recent assessments, have forecasted India’s growth to contract by (-)5.0 per cent and (-)5.2 per cent, respectively.
    • Even the RBI assesses that growth in the current year may be in the negative zone although it has not given a specific number.
    • The World Bank has predicted growth in the range of 1.5 to 2.8 per cent.
    • In order to relate budgetary magnitudes to GDP, we also need an idea of the magnitude of nominal GDP growth.
    • In the current year, this is expected to be at least 4 per cent points less than the rate of growth at 10 per cent as assumed in the 2020-21 budget.

    Let’s clear the misunderstanding about the stimulus

    • One misunderstanding about the “stimulus” must also be cleared.
    • Any increase in government expenditure over and above the base level acts as stimulus.
    • This is the traditional Keynesian approach.
    • It made no distinction between different types of expenditures.
    • It is only later studies that made a distinction based on the size of fiscal multipliers.

    How much will be the gross borrowing and fiscal deficit?

    • The Centre has already announced an increase in gross borrowing for 2020-21 from INR 7.8 lakh crore to Rs. 12 lakh crore.
    • This may lead to a fiscal deficit of about 5.7 to 5.8 per cent of GDP.
    • This may only be enough to provide for the considerable shortfall in the budgeted tax and non-tax revenues and non-debt capital receipts, which is also being estimated by a number of analysts to be in the range of Rs 18 lakh crore, implying a shortfall of Rs 4.45 lakh crore.
    • This shortfall is 2.08 per cent of GDP.
    • The Centre’s fiscal deficit will have to be further increased to accommodate the additional burden on the 2020-21 budget arising on account of the stimulus package.

    Let’s divide stimulus package into budgetary and non-budgetary part

    • The series of measures announced by the FM are a mix of i) already budgeted expenditure,ii) additional expenditure, iii) extension of credit facility with government guarantee for certain select sectors and a host of reform measures.
    • Analytically, the overall stimulus package of Rs 20.97 lakh crore can be divided into a budgetary and a non-budgetary part.

    1) Non-budgetary part

    • The non-budgetary part, accounting for nearly 85 per cent of the overall package.
    • Non-budgetary part consists mainly of liquidity enhancing measures for banks and NBFCs which may facilitate the financial sector in playing a key role to kickstart the economy.
    • The credit guarantee provided by the government under the various schemes announced recently is of central importance in this context.
    • In fact, for certain schemes, the government has come forward to provide 100 per cent guarantee, which should quicken the pace of credit sanction and delivery by banks.
    • Production of goods and services is inter-related in an economic system.
    • Once production starts, different sectors will be mutually supporting since different industries and service providers are locked in an input-output system.

    2) Budgetary part and fiscal deficits

    • The budgetary part amounts only to about 15 per cent of the overall package.
    • This can be further divided into government expenditure which was already budgeted in the 2020-21 budget and expenditures constituting genuine additionality.
    • The genuine additionality component is only 10 per cent of the package equivalent to 1 per cent of GDP.
    • Adding this to the enhanced level of 5.7 per cent of GDP, the Centre’s fiscal deficit may be close to 6.7-7 per cent of GDP.
    • This will maintain the level of budgeted expenditure while providing for the additional cost of the announced fiscal stimulus.
    • In fact, the fiscal deficit will be even higher if the current year’s GDP is lower than that of the previous year.

    Composition of government expenditure matters

    • With this high fiscal deficit, the composition of government expenditure becomes critical.
    • Some of the establishment expenditures and subsidies, especially those linked to petroleum prices like fertiliser and petroleum subsidies, may be reduced.
    • While expenditure on health-related items may be increased.
    • The central government has announced freezing of increments of DA and dearness relief components in the case of salaries and pensions respectively.
    • In fact, the government should be doing much more to relieve the plight of migrant workers.

    What is budgetary contribution for infrastructure?

    • According to the National Infrastructure Pipeline, the Centre’s budgetary contribution to infrastructure is estimated at 1.25 per cent of GDP on an annual basis.
    • This is less than 18 per cent of the estimated fiscal deficit of the Centre in 2020-21, indicating a very poor quality of fiscal deficit.
    • One dimension of expenditure restructuring should be to frontload infrastructure spending, including that on health infrastructure
    • Which will be helpful in taking advantage of the higher multiplier effects associated with capital expenditures.
    • Investment augmentation is also demand supporting and employment and income generating.

    Support to demand

    • Support to demand will come not only from the Centre but also from the states and the public sector undertakings.
    • States have been allowed to borrow an additional 2 per cent of their respective GSDPs subject to certain conditions.
    • In fact, at the present juncture, these conditions are not required since the enhancement of the borrowing limit is for one time while the reforms linked to conditions are permanent in nature.
    • In any case, states should be encouraged to support demand by going up to the full extent of the enhanced limit.

    Why the monetisation of debt is unavoidable?

    •  The combined fiscal deficit of the Centre and states alone may amount to close to 12 per cent of GDP in 2020-21.
    • Besides, the total public sector borrowing also includes the borrowing by central and state public sector undertakings.
    • Thus, the total Public Sector Borrowing Requirement may well exceed available sources of financing consisting of i) the financial savings of the household sector, ii) savings of the public sector iii) net capital inflows.
    • In this context, monetising debt has become unavoidable.
    • The Centre must be forthcoming on these issues while recognising that extraordinary situations call for extraordinary solutions.

    Reforms should be sector-specific

    • In the case of reforms, we have reached a new stage.
    • General reforms cutting across industries and sectors have been critical in the early stages.
    • The earlier regime of controls and permits had to be brought to a close.
    • But now reforms have to focus on specific sectors.
    • Applying the general principles of liberalisation to sectors such as agriculture and, more particularly, agricultural marketing, power sector, and telecom have assumed importance.
    • Labour market reforms are needed across all the states.
    • But labour reforms are introduced better when the economy is in the upswing.
    • Consensus building is critical before introducing labour reforms.
    • Land markets need to be freed up consistent with the concerns of small and marginal farmers.

    Consider the question “The fiscal stimulus and the promise of reforms announced by the government would be instrumental in bringing the Indian economy devastated by the Covid-19 pandemic back on track. Comment.”

    Conclusion

    Fiscal deficit should be used to create infrastructure ensuring that the quality of fiscal deficit is not poor. At the same time, reforms announced should be sector-specific and consensus-based in case of labour laws.

    Back2Basics: AT&C losses

    • Distribution loss consists of two parts: a. Technical loss and b. Commercial loss.
    • It is also called AT&C loss.
    • AT&C loss is nothing but the sum total of technical and commercial losses and shortage due to non-realization of billed amount.
    • AT&C Loss = (Energy input – Energy billed) * 100 / Energy input.

  • The Sixth Mass Extinction

    Click here for high resolution of the image: National Geographic

    The ongoing sixth mass extinction may be one of the most serious environmental threats to the persistence of civilization, according to new research published in an American journal.

    Try this question from CSP 2018:

    The term “sixth mass extinction/sixth extinction” is often mentioned in the news in the context of the discussion of

    (a) Widespread monoculture Practices agriculture and large-scale commercial farming with indiscriminate use of chemicals in many parts of the world that may result in the loss of good native ecosystems.

    (b) Fears of a possible collision of a meteorite with the Earth in the near future in the manner it happened 65million years ago that caused the mass extinction of many species including those of dinosaurs.

    (c) Large scale cultivation of genetically modified crops in many parts of the world and promoting their cultivationin other Parts of the world which may cause the disappearance of good native crop plants and the loss offood biodiversity.

    (d) Mankind’s over-exploitation/misuse of natural resources, fragmentation/loss, natural habitats, destructionof ecosystems, pollution and global climate change.

    Highlights of the research

    • The study analysed 29,400 species of terrestrial vertebrates and determined which of these are on the brink of extinction because they have fewer than 1,000 individuals.
    • The disappearance of their component populations has been occurring since the 1800s.
    • Most of these 515 species are from South America (30 per cent), followed by Oceania (21 per cent), Asia (21 per cent) and Africa (16 per cent) among others.

    The Anthropocene Extinction

    • Mass extinction refers to a substantial increase in the degree of extinction or when the Earth loses more than three-quarters of its species in a geologically short period of time.
    • So far, during the entire history of the Earth, there have been five mass extinctions.
    • The sixth, which is ongoing, is referred to as the Anthropocene extinction.
    • The five mass extinctions that took place in the last 450 million years have led to the destruction of 70-95 per cent of the species of plants, animals and microorganisms that existed earlier.
    • These extinctions were caused by “catastrophic alterations” to the environment, such as massive volcanic eruptions, depletion of oceanic oxygen or collision with an asteroid.
    • After each of these extinctions, it took millions of years to regain species comparable to those that existed before the event.

    So what is the sixth mass extinction then?

    • Researchers have described it as the “most serious environmental problem” since the loss of species will be permanent.
    • Even though only an estimated 2% of all of the species that ever lived are alive today, the absolute number of species is greater now than ever before.
    • The research claims that this extinction is human-caused and is more immediate than climate destruction.

    Major drivers of mass extinction

    • Significantly, the study calls for a complete ban on wildlife trade as many of the species currently endangered or on the brink of extinction are being decimated by legal and illegal wildlife trade.
    • The current COVID-19 pandemic, while not fully understood, is also linked to the wildlife trade.
    • There is no doubt that there will be more pandemics if man continues destroying habitats and trading wildlife for own consumption as food and traditional medicines.

    What happens when species go extinct?

    • When species go extinct, the impact can be tangible such as in the form of a loss in crop pollination and water purification.
    • Further, if a species has a specific function in an ecosystem, the loss can lead to consequences for other species by impacting the food chain.
    • The effects of extinction will worsen in the coming decades as the resulting genetic and cultural variability will change entire ecosystems.
    • If the number of individuals in a population or species drops, their contributions to ecosystem services become unimportant.
    • Their genetic variability and resilience is reduced, and its contribution to human welfare may be lost.” the study says.

  • Moody’s downgrade India’s Ratings

    The Moody’s Investors Service downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to “Baa3” from “Baa2”. It stated that the outlook remained “negative”.

    Practice question for mains:

    Q. Why India’s GDP growth rate is being labelled an overestimate yet again by the global credit rating agencies? Discuss this in context to the latest downgrade of Indian Economy as highlighted by the Moody’s.

    Why this matters?

    • The Moody’s is historically the most optimistic rating agency about India.
    • This downgrade challenges India’s policymaking institutions.
    • They will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth.

    What is the reason for this downgrade?

    There are four main reasons why Moody’s has taken the decision:

    • Weak implementation of economic reforms since 2017
    • Relatively low economic growth over a sustained period
    • A significant deterioration in the fiscal position of governments (central and state)
    • And the rising stress in India’s financial sector

    What does “negative” outlook mean?

    • The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system.
    • These could lead to more severe and prolonged erosion in fiscal strength than Moody’s current projections.
    • The ratings have highlighted persistent structural challenges to fast economic growth such as “weak infrastructure, rigidities in labour, land and product markets, and rising financial sector risks”.
    • In other words, a “negative” implies India could be rated down further.

    Is the downgrade because of Covid-19 impact?

    No. The pandemic has amplified vulnerabilities in India’s credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year.

    Then why did the downgrade happen?

    • More than two years ago, in November 2017, Moody’s had upgraded India’s rating to “Baa2” with a “stable” outlook.
    • At that time, it expected that effective implementation of key reforms would strengthen the sovereign’s credit profile through gradual but persistent measures.
    • But those hopes were belied. Since that upgrade in 2017, implementation of reforms has been relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness.
    • Each year, the central government has failed to meet its fiscal deficit (essentially the total borrowings from the market) target.
    • This has led to a steady accretion of total government debt.

    What will be the implications of this downgrade?

    • Ratings are based on the overall health of the economy and the state of government finances.
    • When India’s sovereign rating is downgraded, it becomes costlier for the Indian government as well as all Indian companies to raise funds because now the world sees such debt as a riskier proposition.
    • A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before.
    • The weaker economic growth and worsening fiscal health undermine a government’s ability to pay back.
    • Lower risk is better because it allows governments and companies of that country to raise debts at a lower rate of interest.

  • Radio lights from Sun’s Corona

    A group of India scientists have recently discovered tiny flashes of radio light emanating from all over the Sun, which they say could help in explaining the long-pending coronal heating problem.

    Possible prelim question:

    The Murchison Widefield Array (MWA) Telescope recently seen in news is a landmark in observing: Gravitational Waves/Black Holes/Sun’s Corona/ etc..

    What is Sun’s Corona?

    • The corona is the outermost part of the Sun’s atmosphere. It is the aura of plasma that surrounds the Sun and other stars.
    • The Sun’s corona extends millions of kilometres into outer space and is most easily seen during a total solar eclipse, but it is also observable with a coronagraph.
    • Spectroscopy measurements indicate strong ionization in the corona and a plasma temperature in excess of 1000000 Kelvin much hotter than the surface of the Sun.

    Radio lights observed

    • These radio lights or signals result from beams of electrons accelerated in the aftermath of a magnetic explosion on the Sun.
    • While the magnetic explosions are not yet observable, these weak radio flashes are ‘smoking guns’ or the evidence for the same.
    • Hence it brought the researchers closer to explaining the coronal heating problem.

    Their significance

    • These observations are the strongest evidence till date that the tiny magnetic explosions originally referred to as ‘nanoflares’ by eminent American solar astrophysicist Eugene Parker.
    • It is the possible phenomena that could be heating up the corona (the aura of plasma that surrounds the sun and other stars).

    The Murchison Widefield Array (MWA)

    • The phenomenon of coronal heating has been known for the last 70 years, the availability of cutting edge data from the Murchison Widefield Array (MWA) radio telescope proved to be a game-changer.
    • The MWA is a low-frequency radio telescope, located at the Murchison Radio-astronomy Observatory (MRO) in Western Australia.
    • The MWA has been developed by an international collaboration, including partners from Australia, New Zealand, Japan, China, India, Canada and the United States.

    Solving the mystery

    • The strength of the magnetic fields varies a lot from one place on the surface of the Sun to another, by more than a factor of 1,000.
    • But the corona is hot everywhere. So, this heating process has to work all over the corona, even in regions of weak magnetic fields.
    • Until now, the process of how this magnetic energy is deposited in the corona had remained a mystery.

  • The Deccan Queen Express

    The historic Deccan Queen train between Mumbai and Pune completed 90 years on June 1.

    Take the opportunity to revise some of reformative measure in the Indian Railways taken through these years.  Click here to read more .

    The Deccan Queen

    • The Deccan Queen was introduced between Mumbai and Pune on June 1, 1930 by the Great Indian Peninsula Railway (GIPR), the forerunner of the Central Railway.
    • This was the first deluxe train introduced to serve the two important cities of the region, and was named after Pune – also known as the “Queen of Deccan”.
    • It is among the rare Indian trains that have never been hauled using steam traction and were always electric-powered; on rare instances running on diesel.
    • The GIPR in the 1940s would run Race Special trains for Mumbai’s horse racing enthusiasts who would come to Pune on weekends and race days.
    • This train holds many a record, including that of being India’s first superfast train, first long-distance electric-hauled train, first vestibuled train, the first train to have a ‘women-only’ car, and the first train to feature a dining car.

    Back2Basics: Railways in India

    • Indian Railways started its service 164 years ago on 16 April 1853.
    • The first railway proposals for India were made in Madras in 1832.
    • The first train was run over a stretch of 33 kilometres from Mumbai to Thane and was hauled by three steam locomotives named Sahib, Sindh and Sultan.
    • Indian Railway now has the 4th largest rail network in the world after the United States of America, China and Russia.

  • Problem of interest rate differential in India

    Do you remember Operation Twist by the RBI? what was being twisted there? It was the yield curve that was sought to be twisted. It had been aimed at reducing the gap between long term interest rates and short term policy rates. This article explains the impact such gap could have on the economy.

    Why long term loans come with a higher interest rate?

    • Long term loans equate to long repayment periods.
    • More uncertainty during these long periods can translate to higher risks.
    • And to compensate for the high risks involved, banks quote higher interest rates when corporates borrow from them to build and operate stuff.
    • However, when banks borrow from the RBI they are borrowing over short intervals.
    • And so they get charged lower interest rates.

    So, why banks are keeping interest rates high despite borrowing at low rates from the RBI?

    • Ever so often, the RBI cuts rates in the hopes of making loans more accessible to banks.
    • They are hoping banks will also extend this benevolence to their customers by cutting long term interest rates.
    • But right now, banks are scared.
    • They don’t think the corporates can pay back.
    • So they are keeping long term rates at elevated levels despite borrowing at consistently low rates from the RBI.

    What happens when gap between long-term and short term interest rates widen?

    •  Capital wasn’t cheap to begin with for corporate borrowers, and it’s getting more expensive.
    • This comes just as migrant rural workers have been driven out of urban production centers because of shuttered factories.
    • Even if this labor is safely put back on, say, road construction, concessionaires [think private road contractors] might still go bankrupt before completing any projects.
    • That’s because their annuity payments from the government are linked to falling short-term policy rates, whereas their long-term borrowing costs are both high and sticky

    To understand the issue of annuity payment and its relation with interest rates, let’s dig deeper into 3 types of models-

    1. Build-Operate-Transfer (BOT) Model

    • So, NHAI is the National Highways Authority of India and is largely responsible for building and maintaining roads.
    • Its preferred method to get the job done is to deploy what is called the BOT model.
    • The Build-Operate-Transfer (BOT) model, as the name suggests is a way for NHAI to offload its responsibilities of road building to private contractors.
    • Under BOT model, private contractors build the road, operate it, make money off of collecting toll, and after about 10–15 years, they hand over the road back to NHAI.
    • There aren’t enough private contractors willing to bid for such projects because — hey, maintaining and operating a road is a pain.
    • Why pain?  You have to wait 15 years to recoup all the money you had to pour in to build the damn thing. That’s the pain.

    2. Engineering, procurement and Construction (EPC) model

    • Under the EPC (Engineering, Procurement & Construction) model, NHAI pays private contractors first, so that they can help NHAI build the road.
    • The contractor does not operate or collect tolls here.
    • Instead, it can walk away scot-free with money in its coffers once it’s done building the road.
    • But it’s hard for the government to shore up all the resources required upfront.

    3. Hybrid Annuity Model (HAM)- The middle path

    •  It’s a nice little mix of both EPC and BOT.
    • Under it, NHAI pays some money upfront in fixed installments usually, 40% of the project cost.
    • And the private contractor does his bit by putting up the rest and finishing the project.
    • However, once the construction is complete, the contractor does not make money off of collecting toll.
    • Instead, he transfers the assets over to NHAI.
    • So its incumbent on the government to pay the rest of the money once the project takes off.
    • And the payments are dependent on the asset created, the performance of the developer, and a few other things.
    • However, since the payouts usually last 15–20 years we need to find a way to determine what kind of money the government pays the contractor every 6 months.
    • And here’s the best way to think about this — So when the government pays the 40% upfront, it’s promising to pay the 60% sometime in the future.
    • It’s money they owe the contractor.

    And, here is the crux of the matter

    • So when the repayments, are made, they’ll have to pay the principal and the interest.
    • The interest involves a fixed component (3%) and a variable component.
    • What is varible component? The variable component is effectively the short term policy rates.
    • So if the RBI keeps cutting these short term rates, private contractors get less money per instalment even if their roads are all nice and shiny.
    • And this can’t bode well for them because they probably put up the 60% back in the day by borrowing from another bank.
    • A bank that’s charging them long term interest rates that refuse to come down.

    Conclusion

    The widening gap between the short term policy rates and long term interest could easily spell the disaster for the entrepreneurs and in turn for the economy as a whole. The government should consider a special package for such entities given the unprecedented situations we found ourselves in.