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GS Paper: GS3

  • Balancing the interest of lenders and borrowers

    The article suggests the 5 point strategy to balance the interest of borrowers and lenders. Banks hold the special significance for the country and so require special and stricter regulation.

    Context

    •  COVID creates deep pain but we must resist consistently choosing borrowers over lenders.
    • We should persist with our multi-year five-pillar strategy to sustainably raise our Credit to GDP ratio from 50 per cent to 100 per cent.

    Issue of lending

    • A modern economy grows by lending.
    •  But fiscal constraints or natural disasters often create temptations to disguise spending as lending.
    • The last 20 years have given three lessons:
    • 1) Giving loans is easier than getting them back.
    • Corporate credit growing from Rs 18 lakh crore in 2008 to Rs 54 lakh crore in 2014 created a Rs 12 lakh crore bad loan problem.
    • 2) Accounting fudging and restructuring would not help.
    • 3) Government banks need more than capital.
    • Government banks’ risk-weighted assets are lower than two years ago despite a Rs 2 lakh crore capital infusion.

    History recommends patiently balancing financial inclusion and stability by persisting with our five-pillar strategy.

    1) Bank competition

    • Raising credit availability and lowering its price needs competition-driven innovation.
    • Capital should be chasing Indian banking given its high net interest margins, high market cap to book value ratios, and massive addressable market.
    • Yet, the RBI’s on-tap licencing has few applications pending.
    • We need many more banks.

    2) Private bank governance

    • Private banks are only 30 per cent of deposits but 80 per cent of bank market capitalisation.
    • Private banks are a special species with 20 times leverage, but this makes privatised gains and socialised losses possible.
    • Recent failures suggest problems with public shareholder collective action and the attention, skill, and courage of board directors.
    • Private bank governance must move from a perpetual private fiefdom to trustees that hand over in better condition to the next generation.

    3) Government bank governance

    • Over 10 years, government companies have sunk from 30 per cent of India’s market capitalisation to 6 per cent.
    • Government banks mirror this decline — their 70 per cent bank deposit share translates to only 20 per cent bank market capitalisation share.
    • Many have irrational employee costs to market capitalisation ratios ex- Bank of India with 58 per cent.
    • We need only four government banks with strong governance and no tax access for capital.

    4) RBI’s regulation and supervision

    • Recent failures in financial institutions reinforce the importance of statutory auditors, ethical conduct, shareholder self-interest, and risk management.
    • They also suggest a first-principles review that raises the RBI’s regulation and supervision.
    • Zero failure is impossible, but the RBI should boldly re-imagine its current mandate, structure and technology.

    5) Non-bank regulatory space

    • Regulatory differences traditionally existed between banks and non-banks.
    • But progress in payments, MSME lending, and consumer credit suggest that non-banks are as important for financial inclusion.
    • They need more regulatory space and supervision.

    Conclusion

    We won’t test the RBI’s COVID worst-case scenario of 14.7 per cent bad loans but handling the inevitable COVID bank pain needs resisting short-termism. In the long run, we are not all dead.

    Original article: https://indianexpress.com/article/opinion/columns/rbi-bank-and-the-covid-pain-india-gdp-6543101/

  • Importance of the post academic research

    Post-academic research have a direct bearing on national development. India needs to focus on it along with academic research. This article explains this issue.

    Context

    • The Government of India is in the process of revisiting the Science, Technology and Innovation (STI) Policy.
    • At this stage we need to ponder the question: what kind of research should be funded?

    How to measure the maturity level of a particular technology?

    • Experts have come up with frameworks and terminology to provide a comprehensive picture and avoid any value judgement.
    • One approach was proposed by NASA in the form of Technology Readiness Levels (TRL).
    • TRL-1 corresponds to observation of basic principles. Its result is publications.
    • TRL-2 corresponds to formulation of technology at the level of concepts.
    • Then the TRL framework advances to proof of concept, validation in a laboratory environment, followed by a relevant environment, and then to prototype demonstration, and ending with actual deployment.
    • An alternative is to use the terminology ‘Academic Research (AR)’, and ‘Post-Academic Research (PAR)’.
    • To provide some granularity, one can divide PAR into early-stage PAR, and late-stage PAR.
    • Late-stage PAR has to be done by large laboratories (national or those supported by industry).
    • AR and early-stage PAR can be done at higher education institutions and large laboratories.

    Importance of Post-Academic Research(PAR)

    • From the perspective of national development, pursuit of AR alone, while necessary, is not sufficient.
    • AR and PAR, when pursued together and taken to their logical conclusion, will result in a product or a process,
    • Or it can also result in a better clinical practice, or a scientifically robust understanding of human health and disease, or provide inputs for a policy decision.

    Issues in comparing investment in research among countries

    • 1) We cannot compare data with other countries without having correspondence between India’s data and data reported by others.
    • Countries belonging to the Organisation for Economic Cooperation and Development (OECD) report research statistics according to the Frascati Manual.
    • 2) India has to decide where to increase investment: in AR or in PAR.

    Research and national development

    • Investment in research can translate into national development only through pursuit of PAR.
    • Our industry has not reached a stage where they can absorb research being done by higher education institutions.
    • This reveals that research being pursued is either not addressing national needs or is limited to AR.

    Way forward

    • Judging the growth of Science-and-Technology based only on publications (e.g. research papers) provides an incomplete picture.
    • We should increasing the technology intensity of industry, which was identified as one of the goals of the STI policy issued in 2013.
    • This needs reiteration and a mechanism should be devised to monitor progress with the objective of becoming an ‘Atmanirbhar Bharat’.
    • The STI policy should emphasise PAR to ensure that investment in research results in economic growth.
    • To motivate the research community to pursue at least early-stage PAR, the reward system needs significant reorientation.
    • Academics in higher education institutions pursuing AR should pursue early-stage PAR themselves, or team up with those who are keen to pursue PAR.

    Consider the question “Examine the factors that responsible for the lack of research and development in India? Also, elaborate on the importance of post-academic research in the country.”

    Conclusion

    These factors are sufficient to indicate that academic research is necessary, but not sufficient and we must focus on PAR adequately.

  • How are inflation rate and interest rate linked?

    The Monetary Policy Committee of the RBI has decided to keep the benchmark interest rates of the economy unchanged.

    Try this PYQ:

    Q.Which one of the following is not the most likely measures the Government/RBI takes to stop the slide of Indian rupee? (CSP 2019)

    (a) Curbing imports of non-essential goods and promoting exports

    (b) Encouraging Indian borrowers to issue rupee-denominated Masala Bonds

    (c) Easing conditions relating to external commercial borrowing

    (d) Following an expansionary monetary policy

    What is the link between growth, inflation and interest rates?

    • In a fast-growing economy, incomes go up quickly and more and more people have the money to buy the existing bunch of goods.
    • As more and more money chases the existing set of goods, prices of such goods rise.
    • In other words, inflation (which is nothing but the rate of increase in prices) spikes.

    How interest rates dominate?

    • To contain inflation, a country’s central bank typically increases the interest rates in the economy.
    • By doing so, it incentivizes people to spend less and save more because saving becomes more profitable as interest rates go up.
    • As more and more people choose to save, money is sucked out of the market and inflation rate moderates.

    What happens when growth rate decelerates or contracts?

    • When growth contracts or when its growth rate decelerates, people’s incomes also get hit.
    • As a result, less and less money is chasing the same quantity of goods.
    • These results in either the inflation rate decline.
    • In such situations, a central bank cuts down the interest rates so as to incentivise spending and by that route boost economic activity in the economy.
    • Lower interest rates imply that it is less profitable to keep one’s money in the bank or any similar saving instrument.
    • As a result, more and more money comes into the market, thus boosting growth and inflation.

    Why has RBI not raised interest rates this quarter?

    • RBI is facing an odd situation at present: GDP is contracting even as inflation is rising.
    • This is happening because the pandemic has reduced demand, on the one hand, and disrupted supply on the other.
    • As a result, both things are happening — falling growth and rising inflation.
    • It is true that for containing inflation, RBI should raise interest rates.
    • And under normal circumstances, it would have done just that. But raising interest rates at this stage would be catastrophic for India’s GDP growth.

    Risks of altering interest rates

    • If the RBI cuts the interest rate, it may be fuelling retail inflation further. It must be remembered that inflation hits the poor the hardest.
    • So, the RBI has chosen to do what many expected it to do: stay put and waits for another couple of months to figure out how growth and inflation are shaping up.

    Back2Basics: Monetary Policy Committee (MPC)

    • The RBI Act, 1934 (RBI Act) was amended by the Finance Act, 2016,  to provide for a statutory and institutionalized framework for an MPC, for maintaining price stability, while keeping in mind the objective of growth.
    • The MPC is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
    • The meetings of the MPC are held at least 4 times a year and it publishes its decisions after each such meeting.
    • As per the provisions of the RBI Act, out of the six members of the committee, three members are from the RBI and the other three Members of MPC are appointed by the Central Government.
    • Governor of the RBI is ex officio Chairman of the committee.

    Economics | Monetary Policy Explained with Examples

  • SN5 Starship by SpaceX

    SpaceX has successfully test-launched its “Mars ship”, a stainless steel test vehicle called SN5, and which is a part of the Starship spacecraft.

    Elon Musk’s aerospace company has been putting continuous wins on the board ever since it became the first privately funded group to put a payload in Earth orbit.

    What is Starship?

    • Designed by SpaceX, Starship is a spacecraft and super-heavy booster rocket meant to act as a reusable transportation system for crew and cargo to the Earth’s orbit, Moon and Mars.
    • SpaceX has described Starship as “the world’s most powerful launch vehicle” with an ability to carry over 100 metric tonnes to the Earth’s orbit.
    • Starship has been under development since 2012 and is a part of Space X’s central mission to make interplanetary travel accessible and affordable and to become the first private company to do so.

    So what all can Starship do?

    • SpaceX is planning its first cargo mission to the red planet by 2022 and by 2024, the company wants to fly four ships including two cargo and two crewed ones to Mars.
    • Once functional, the Starship spacecraft will enter Mars’ atmosphere at a speed of 7.5 km per second and will be designed to withstand multiple entries.
    • Starship is also expected to help carry large amounts of cargo to the Moon, for human spaceflight development and research.
    • Beyond the Moon, the spacecraft is being designed for carrying crew and cargo for interplanetary missions as well.

    A quest for reusability

    • Therefore, the company is working on building a fleet of reusable launch vehicles, capable of carrying humans to Mars and other destinations in the solar system.
    • Reusability is at the heart of making interplanetary travel accessible.

  • Drug pricing and dependence on China

    Whether or not the drug pricing system in India resulted in the growing dependence on China for APIs is analysed in this article. 

    Incentives for domestic production of APIs

    • The department of pharmaceuticals (DoP) has recently notified the Production-Linked Incentive (PLI) scheme.
    • The scheme aims to encourage domestic production of 41 active pharmaceutical ingredients (APIs), key starting materials (KSMs) and drug intermediaries (DIs).
    • A Drug Security Committee constituted by the DoP had identified 53 APIs with high dependence on China.

    Did drug price control policy increase dependence on China?

    • India was self-reliant on APIs until the mid-1990s.
    • Liberalisation in import restrictions led to a gradual influx of APIs from China.
    • India had a more stringent price control policy before the 1990s.
    • If price control system were the culprit, India would not have been self-sufficient in APIs until the mid-1990s.
    • A cost-based price control system that existed until 2013 regulated the prices of both APIs and formulations.
    • The approach to price control shifted from a cost-based to a market-based one since 2013.
    • The new price control policy does not regulate the price of APIs.
    • New price control policy regulates the prices of formulations of those APIs, which figure in the National List of Essential Medicines (NLEM).
    • There are many APIs which do not fall under DPCO but are still imported in a significant way from China.

    Understanding the growing dependence on China from the past perspective

    • Even though India now has a less stringent drug price control policy, the dependence on Chinese imports has been growing.
    • The share of China in India’s total import of APIs has increased from 61% in 2011 to 69% in 2019.
    • The experience in India was that firms would tend to rely on imported APIs if they have an option.
    • The Hathi Committee (1975), which had looked into why Indian firms were not engaging in the production of APIs, found that the capital invested to turnover ratio of APIs was much lower as compared to formulations.
    • This ratio was 1:1 for APIs at best and 1:2.6 for formulations on average, and in some cases, as high as 1:7.2.
    • Subsequently, various measures were adopted.
    • The ‘ratio parameter’ mandatorily required the producers of formulations to produce a certain quantity of APIs.
    • It was the government interventions to overcome the market failure that resulted in India attaining self-sufficiency in APIs.

    Consider the question “What are the APIs? Examine the implications of India’s dependence on imports for API and suggest the measures to reduce such dependence.”

    Conclusion

    An enquiry into the causes of dependence on China needs to go much beyond price control policy and look into whether the state continued to play a proactive role during the post-1991 period to maintain an ecosystem to enhance the competence of Indian API industry.

    Source-

    https://www.financialexpress.com/opinion/drug-pricing-is-certainly-not-the-issue-in-growing-dependence-on-china/2046086/

  • Issues with the nuclear deterrence

    On 6 August 1945 world witnessed the destructive potential of the nuclear weapons. Today’s nuclear weapons are several times more destructive than the one used there. This calls for the close scrutiny of the idea of the nuclear deterrence. This article dwells over the same issue.

    Context

    • While Hiroshima and Nagasaki have been the last two cities to be destroyed by nuclear weapons, we cannot be sure that they will be the last.
    • Since 1945, several countries have armed themselves with nuclear weapons that have much more destructive power in comparison to those that destroyed Hiroshima and Nagasaki.

    Vulnerability

    • Over 1,26,000 nuclear weapons have been built since the beginning of the atomic age.
    • There is no realistic way to protect ourselves against nuclear weapons.
    • The invention of ballistic missiles has made it impossible to intercept nuclear weapons once they are launched.
    • Neither fallout shelters nor ballistic missile defence systems have succeeded in negating this vulnerability.
    • Nuclear weapon states are targets of other nuclear-weapon states, but non-nuclear-weapon states are vulnerable as well.

    Idea of nuclear deterrence

    The idea of nuclear deterrence consists of following two proposition.

    • 1) That nuclear weapons are so destructive that no country would use them.
    • 2) Such use would invite retaliation in kind, and no political leader would be willing to risk the possible death of millions of their citizens.

    Issues with the idea of deterrence

    • 1) It is claimed that nuclear weapons do not just protect countries against use of nuclear weapons by others, but even prevent war and promote stability.
    • These claims do not hold up to evidence.
    • 2) The apparent efficacy of deterrence in some cases may have been due to the more credible prospect of retaliation with conventional weapons.
    • 3) Implicitly, however, all nuclear-weapon states have admitted to the possibility that deterrence could fail.
    • they have made plans for using nuclear weapons, in effect, preparing to fight nuclear war.
    • 4) The desire to believe in the perfect controllability and safety of nuclear weapons creates overconfidence, which is dangerous.
    • Overconfidence is more likely to lead to accidents and possibly to the use of nuclear weapons.

    So, what prevented the nuclear war if not deterrence?

    • While a comprehensive answer to this question will necessarily involve diverse and contingent factors, one essential element in key episodes is just plain luck.

    Consider the question “What are the problems involved in the idea of nuclear deterrence. Also, examine the factors responsible for the failure of nuclear disarmament.”

    Conclusion

    Humanity has luckily survived 75 years without experiencing nuclear war, can one expect luck to last indefinitely?

    Original articles:

    https://www.thehindu.com/opinion/op-ed/taking-nuclear-vulnerabilities-seriously/article32279584.ece

  • How to pay for the stimulus package

    The article addresses the issue of apprehensions over money financing. It also compares the option of borrowing from international institutions.

    Issues with public spending

    • Greater public spending will increase the fiscal deficit and this expansion has to be financed.
    • Theoretically, it can be financed by higher taxes.
    • But when the economy is in a recession, this option cannot be explored even though the balanced-budget multiplier is one.
    • When the multiplier is one, output expands by exactly the same amount as the increase in government spending.

    So, what are the options?

    There are two options

    1) Issuing debt to the public (Debt financing)

    2) Borrowing from the RBI (Money financing)

    Borrowing from World Bank and IMF?

    This borrowing has 4 issues with it-

    • 1) This borrowing will have to be paid back in hard currency.
    • This would involve India having to earn hard currency by stepping up exports.
    • If a stimulus of approximately 10% of the GDP is envisaged, with exports at 25% of the GDP, it would imply stepping up exports by close to 50%.
    • This would be a herculean task under present circumstances.
    • 2) There is the issue of conditionalities.
    •  It is not obvious what conditionalities will come along with the loan.
    • 3) The loan is bound to take some time to be negotiated, taxing the energies of a government that ought to be engaged in the day to day battle with COVID-19.
    • 4) The external debt is truly national which, arguably, government bonds held by the country’s private sector are not.

    Issues with money financing

    • The standard economic argument against money financing is that it is inflationary.
    • However, whether a fiscal expansion is inflationary or not is related more to the state of the economy than the medium of its financing.
    • When resources are unemployed, output may be expected to expand without inflation.

    Consider the question “Examine the issues with the money financing of the fiscal deficit.”

    Conclusion

    There is no reasoned case for denying ourselves the option of money financing to take us back to pre-COVID-19 levels of output and employment.

  • Ammonium Nitrate:  Behind the massive explosion in Beirut

    The catastrophic explosion at Beirut port, Lebanon caused by the blast of over 2,700 tonnes of ammonium nitrate, has rocked the world.

    Practice question:

    Q. Despite a robust policy framework governing the hazardous chemicals in India, the recent gas leakage incident in Vizag highlights India’s unaddressed vulnerability to chemical disasters. Critically comment.

    What is Ammonium Nitrate?

    • In its pure form, ammonium nitrate (NH4NO3) is a white, crystalline chemical which is soluble in water.
    • A common chemical ingredient of agricultural fertilizers, the nitrogen-rich compound is also the main component of the explosive composition known as ANFO — ammonium nitrate fuel oil.
    • It is the main ingredient in the manufacture of commercial explosives used in mining and construction.
    • Many Improvised Explosive Devices (IEDs) used by terrorists around the world have ANFO as the main explosive, triggered by primary explosives like RDX or TNT.
    • In the majority of terror attacks in India, ammonium nitrate has been used along with initiator explosives like RDX.

    Ammonium nitrate as an explosive

    • Pure ammonium nitrate is not an explosive on its own.
    • It is classified as an oxidiser (Grade 5.1) under the UN classification of dangerous goods.
    • If mixed with ingredients like fuel or some other contaminants, or because of some other external factors, it can be very explosive.

    Stored ammonium nitrate is a major fire hazard

    • Large quantities of stored ammonium nitrate are regarded as a major fire hazard, with multiple reported cases across the world.
    • The explosion of large storage can happen primarily in two ways.
    • One is by some type of detonation or initiation because the storage comes in contact with the explosive mixture.
    • Second, the blast can result due to a fire which starts in the ammonium nitrate store because of the heat generated due to the oxidation process at large scale.

    Regulations in India about ammonium nitrate

    • Because it is used as an ingredient for the production of explosives, anaesthetic gases, fertilizers, cold packs and has a possibility of misuse, it is highly regulated in India.
    • There exists the Ammonium Nitrate Rules, 2012, under The Explosives Act, 1884.
    • It defines ammonium nitrate as the compound with formula NH4NO3 including any mixture or compound having more than 45 per cent ammonium nitrate by weight.
    • The manufacture, conversion, bagging, import, export, transport, possession for sale or use of ammonium nitrate is covered under The Ammonium Nitrate Rules, 2012.
    • The rules also make storage of ammonium nitrate in large quantities in populated areas illegal in India.
    • For the manufacture of ammonium nitrate, an Industrial licence is required under the Industrial Development and Regulation Act, 1951.

  • In news: Pokkali Rice

    Farmers from West Bengal are betting on the Pokkali variety of rice from Kerala to tide over a crisis-like situation created by severe seawater incursion into paddy fields in vast areas of the Sundarbans after the cyclone Amphan.

    Try this MCQ:

    Q.Which of the following is the striking feature of the Pokkali Rice recently seen in the news?

    a) It is bio-fortified rice for treating malnutrition

    b) It is a saltwater resistant variety of rice

    c) It is healthy rice used to treat diabetes

    d) None of these

    Pokkali Rice

    • The Pokkali variety of rice is known for its saltwater resistance and flourishes in the rice paddies of coastal Alappuzha, Ernakulam and Thrissur districts.
    • The uniqueness of the rice has brought it the Geographical Indication (GI) tag and is the subject of continuing research.
    • It had been in the news because of its uniqueness and also because a group of people in Kerala have been trying to revive the cultivation of the rice variety in the State.

    Why introduce in Sunderbans?

    • About 80% of the rice paddies in the Sundarbans faced the problem of the saltwater incursion.
    • If the Pokkali experiment succeeds, it would be a good step to turn around the fortunes of the farmers.

  • Draft Defence Production and Export Promotion Policy 2020

    India is one of the largest importers of defence equipment. This should have naturally made India a manufacturing hub of the defence equipment. But this is not the case. This article deals with this issue. 

    Context

    Following China’s stance of open belligerence towards India, making war preparedness a top priority. It is against this backdrop, the Defence Production and Export Promotion Policy 2020 was unveiled.

    Key features

    • It aims for domestic output worth ₹1.75 trillion of aerospace and defence goods and services by 2025.
    • Of which exports is aimed at ₹35,000 crore.
    • It has various strategic initiatives that would aid the indigenous development of modern weaponry from hypersonic missiles and ace sensors to stealth submarines and fly-by-wire fighter jets.

    Why India lacks indigenous capacity

    • If India’s dependence on foreign suppliers of armaments was not for lack of trying.
    • Our Defence Research and Development Organisation (DRDO) exists for this very purpose.
    • DRDO scientists claim success in several projects, including the Tejas design.
    • But decisions on procurements for our armed forces are made through a complex process—involving service chiefs, technocrats and politicians—that ends up favouring foreign purchases.
    • This is this convenient, as off-the-shelf wares are readily available abroad.
    • The finer details of defence deals are usually confidential, after all, and the payments huge.
    • By one estimate, India was the world’s third largest military spender in 2019, with a bill of over $71 billion, after the US and China.

    Issues and Challenges in partnership with private players

    • So far, efforts to get our private sector into the act have not fared too well, despite all our schemes to attract them.
    • Long-drawn out acquisition processes may partly be to blame for this.
    • Companies are apprehensive of investment without an assurance of a ready market.
    • But by the time their prototypes are tested and approved for induction by our forces, they risk being outmoded by advances made abroad.
    • In the US, spin-offs from defence research have been behind many technological innovations of everyday utility.
    • So, the knowledge acquired in defence research has the potential to benefit the other sectors as well.

    Consider the question “Being one of the top importers of defence equipment India is well placed to enhance its domestic manufacturing capacity of defence equipment. Yet, India lacks it after repeated attempts to achieve it. Examine the reasons for this and suggest measures to overcome this anomaly.” 

    Conclusion

    If a big push for “made in India” defence systems calls an entire ecosystem of experiments, ideas and technical wizardry into being, it could help our economy leap ahead too.