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GS Paper: GS3

  • Euro Zone ‘Coronabonds’

    The coronavirus pandemic has revived the acrimonious debate between euro zone countries about jointly issuing debt through instruments called Coronabonds.

    Coronabonds

    • Coronabonds are proposed debt instruments amongst EU member states, with the aim of providing financial relief to Eurozone countries battered by the coronavirus.
    • They aim to meet healthcare needs and address the deep economic downturn that is set to follow.
    • The funds would be mutualised and supplied by the European Investment Bank, with the debt taken collectively by all member states of the European Union.
    • The euro zone jointly issues debt through its bailout fund, the European Stability Mechanism, which borrows on the market against the security of its paid-in and callable capital provided by euro zone governments.

    Back2Basics

    What is Eurozone?

    • The Eurozone officially called the euro area is a monetary union of 19 of the 27 European Union (EU) member states which have adopted the euro as their common currency and sole legal tender.
    • The monetary authority of the Eurozone is the Eurosystem.
    • It consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

  • A niggardliness that is economically unwarranted

    Context

    The Centre can afford to step up its COVID-19 assistance to a higher scale; fiscal deficit is no worry.

    Comparison with the US

    • Unemployment benefit in the US: In the United States, for instance, where the lockdown has raised the number of persons filing unemployment claims from 2.8 lakh to 6.6 million in a matter of days, those affected can fall back on unemployment benefit.
    • Comparison of packages: The US government has approved a package of ameliorative steps costing roughly 10% of that country’s GDP to cope with the crisis.
    • In India by contrast, the Finance Minister’s package comes to less than 1% of its GDP; and much of it is just a repackaging of already existing schemes.
    • New expenditure comes to just a little over half of the ₹1.7-lakh crore earmarked for the package.
    • Migrant workers are not the beneficiary: Besides, none of the steps will help the migrant workers; not even the larger foodgrain ration which in principle could, because most of them would have ration cards back home rather than in the places where they stay.

    What can be done?

    Consider the cash transfer

    • Many economists and civil society activists had suggested a cash transfer of ₹7,000 per month for a two-month period to the bottom 80% of households to tide over the crisis, in addition to enhanced rations of foodgrains and the inclusion of certain other essential commodities within the ration basket.
    • The cost of their proposed cash transfers alone would come to ₹3.66-lakh crore, which is more than 10 times the cash transfers provided in the Finance Minister’s package.
    • Providing assistance on the scale proposed by civil society organisations is necessary; it will no doubt pose logistical problems, but not financial problems.
    • Two possible effects of cash transfer: Even if all of it is financed through a fiscal deficit for the time being, the economic implications of such an enlarged deficit would not be forbidding.
    • These implications can manifest themselves in two ways: one is through inflation, and the other by precipitating a balance of payments problem. Let us consider each of these.

       Effect of cash transfer on inflation

    • As long as supplies of essential commodities are plentiful and these are made available through the Public Distribution System to the vast majority of the people so that they are insulated against the effects of inflation, any inflation per se should not be a matter of great concern. This is the case in India at present.
    • Foodgrain stocks with the FCI: The supply of the most essential of goods, food grains, is plentiful. Currently, there are 58 million tonnes of foodgrain stocks with the government, of which no more than about 21 million tonnes are required as buffer-cum-operational stocks.
    • This leaves a surplus of 37 million tonnes which can be used for distribution as enhanced ration, or for providing a cushion against inflation.
    • The rabi crop is supposed to be good; as long as it is safely harvested, this would further boost the government’s food stocks.
    • Rise in demand of other commodities: Likewise, the supplies of other essential commodities which consist of manufactured goods and where output has been demand-constrained all along will get boosted in response to higher demand; and in special cases, imports may have to be resorted to.
    • There is in short no reason to think that inflation of a worrisome magnitude will follow if the fiscal deficit is increased.
    • What about the multiplier effect? There is an additional factor here. The increase in total demand caused by an initial increase in demand, which is financed by a fiscal deficit, is a multiple of the latter.
    • Now in a situation like the present, when even if the lockdown is lifted social distancing and restrictions on social activities will continue, the value of the multiplier will be lower than usual.
    • People, in short, would hold on to purchasing power to a much greater extent than usual because of the continuing restrictions on demand, which would act as an automatic anti-inflationary factor.
    • Of course, there will be shortages of some less essential commodities and also hoarding on account of such shortages. But since these shortages will be expected to be temporary, a result of the pandemic unlikely to last long, there will be a damper on hoarding.

    Effect of cash transfer on deficit

    • The price rise of non-rationed commodities: If inflationary expectations are strong and persistent, then the prices of non-rationed commodities may rise sharply for speculative reasons.
    • How the government can prevent the price rise? But the government can prevent such expectations, by adopting measures such as bringing down petro-product prices, taking advantage of the collapse of world oil prices.
    • A larger fiscal deficit, therefore, need not cause disquiet on account of inflation.
    • Balance of payment issue: On the balance of payments front, the worry associated with a larger fiscal deficit is financial flight caused by frightened investors.
    • Some financial flight is already happening, with the rupee taking a fall.
    • Rush to dollar: This flight is not because of our fiscal deficit but because, whenever there is panic in financial markets, the tendency is to rush to dollars, even though the cause of the panic may lie in the United States itself.
    • Using foreign exchange reserves: India has close to half a trillion dollars of foreign exchange reserves. These can be used, up to a point, to check the flight from the rupee to the dollar.
    • Restriction on capital outflow: If the flight nonetheless persists, then India will have a legitimate reason for putting restrictions on capital outflows in the context of the pandemic.

    Way forward

    • The Centre must not worry about its fiscal deficit; and since the State governments will bear a substantial expenditure burden on account of the pandemic.
    • The Centre must make more resources available to the states.
    • The centre should raise their borrowing limits, perhaps double their current limits as a general rule, apart from negotiating the magnitude of fiscal transfers it should make towards them.

    Conclusion

    If the hardships of the people are not ameliorated through larger government expenditure, because of the fear that the larger fiscal deficit required for it would frighten finance into fleeing, then the privileging of finance over people would have reached its acme.

     

  • Oil in a post-Covid world

    Context

    In the post-COVID world, India will, once again, confront the challenge of oil and gas supply security. We should, therefore, ask: What will be the landscape of the petroleum sector, post-COVID? And what should India do now to prepare for an uncertain and contingent energy future?

    Oil war and the death knell of OPEC

    • The concept of MAD (Mutually Assured Destruction) deterred the nuclear powers during the Cold War. It has had no such effect on the oil powers.
    • Implications of the decision of Saudi Arabia and Russia: At a time when the virus had pushed the global economy into recession, Russia and Saudi Arabia took a set of decisions last month that knocked the economic props from under the oil market.
    • What were the reasons behind the decisions: The Saudis decided to flood the market to hold onto market share and the Russians accepted the consequent decline in prices to push the US shale industry to the wall.
    • Future of OPEC: Both may achieve their objectives but they have sounded the death knell of OPEC and possibly that of the oil industry as well.

    Two reasons for the decline in the oil prices

    • Today, the price of oil, at just above $30/bbl , is at its lowest in a decade, and volatile downwards. The average price in 2019 was $64/bbl.
    • The reason is two-fold.
    • One, the Saudis have ramped up production from 9.8mbd (before the March meeting) to in excess of 12 mbd today.
    • Two, there has been an unprecedented COVID-induced crash in demand. This is because of the lockdown of the two main drivers of oil consumption — transportation and industry.
    • It is estimated that oil consumption in the current quarter will fall by approximately 25 mbd.
    • This is almost as much as OPEC’s production.
    • The Saudis and Russia may still come to an understanding that rallies the price.
    • There will be three major implications for the oil-producing countries.

    1. Budgetary crisis

    • Every major oil-exporting country will face a budgetary crisis.
    • Qatar has the most robust balance sheet of all OPEC members. But it still needs an oil price of around $40/bbl to balance its books.
    • Algeria has the weakest. It needs an excess of $100/bbl.
    • Saudi Arabia is at the Algerian end of the spectrum requiring a price of around $80/bbl.
    • Abundant foreign reserves: This does not mean these countries are about to go financially belly up. Most of them, the Gulf producers, in particular, have abundant sovereign reserves.
    • But what it does mean is they will be hard-pressed to sustain their social and economic commitments.
    • They will have to cut back on subsidies, raise taxes and the citizens will be required to tighten their belts.
    • What India should do? India should build into its oil supply plans with the likelihood of civil strife in these countries.

    2. Reconfiguration of the oil industry will take place

    • Already, at current prices, a large number of companies are finding it difficult to cover their cash costs and have been forced to cut production and shutter operations.
    • At even lower prices, they will become bankrupt.
    • Whatever the final outcome, one fact is clear. Those that survive the carnage will have substantially slimmed balance sheets and reduced valuations.
    • Exxon’s market capitalisation has, for instance, halved over the past month.
    • Implication for India: Against this backdrop, we should drop the expectation of international interest in BPCL. Or for that matter ME investment into India.
    • Ratnagiri refinery: The $40-billion Ratnagiri refinery project by Saudi Aramco and UAE will certainly not see the light of day.
    • We should also expect a drop in the intensity of domestic exploration.

    3. Behavioural changes and uncertainties

    • The world, post-COVID will be different from the world pre-COVID. Behaviours will shift and these will deepen uncertainties.
    • “Social distancing” may change the dynamics of “shared mobility”.
    • Teleporting may reduce business travel.
    • Heightened awareness of the porosity of national boundaries may accelerate the push towards decarbonisation? These uncertainties will push the petroleum market deeper into no man’s land.

    Way forward for India

    • Whatever be the shape of the post- COVID international petroleum market, India will be dependent on it to secure its domestic energy requirement. The question should, therefore, be asked. What should the decision-makers do today to respond to such a contingent and uncertain future?
    • 1. Increase the strategic reserves: It should fill the oil caverns with strategic reserves. Prices may fall further but rather than bottom fish, it should leverage the availability of capacity to secure discounted supplies.
    • The world has run out of storage capacity and producers may pay premium dollar to find space for their unsold cargoes.
    • 2. Reduce the dependency and risk: India should increase its imports of gas (LNG ) from Australia, Africa and the US.
    • This will reduce the political risks of dependency on oil supplies from the Middle East.
    • Gas is also now economically competitive. The landed price of LNG is low enough to kick-start some of the stranded gas-based power plants.
    • 3. Increase operational efficiency of oil companies: It should unthread the “patchwork quilt of authority” exercised by bureaucrats, regulators and politicians, which today stifles management and operational efficiency of the petroleum companies.
    • 4. Integrated energy policy: India should create an institutional basis for an integrated energy policy. If there is one message we must internalise from COVID, it is the importance of collaboration and coordination.

  • Restarting the economy after lockdown

      (This newscard is the excerpt from an article published in the TOI, authored by former RBI governor Raghuram Rajan. It discusses a series of reformative measures to boost our economy once the lockdown restrictions are eased.)

    Context

    • Economically speaking, India is faced today with perhaps its greatest emergency since Independence.
    • The global financial crisis in 2008-09 was a massive demand shock but our financial system was largely sound, and our government finances were healthy.
    • None of this is true today as we fight the coronavirus pandemic.
    • With the right resolve and priorities, and drawing on India’s many sources of strength, it can beat this virus back and even set the stage for a much more hopeful tomorrow.

    To begin with: 21 day Lockdown

    • The immediate priority, of course, is to suppress the spread of the pandemic through widespread testing, rigorous quarantines, and social distancing.
    • The 21-day lockdown is a first step, which buys India time to improve its preparedness.
    • The government is drawing on our courageous medical personnel and looking to all possible resources – public, private, defence, retired – for the fight, but it has to ramp up the pace manifold.
    • It will have to test significantly more to reduce the fog of uncertainty on where the hotspots are, and it will have to keep some personnel and resources mobile so that they can be rushed to areas where shortages are acute.

    Restarting with caution

    • The 21 day lockdown is about a week ahead to get lifted. It is hard to lockdown the country entirely for much longer periods, so we should also be thinking of how we can restart certain activities.
    • Restarting requires better data on infection levels, as well as measures to protect those returning to work.
    • Healthy youth, lodged with appropriate distancing in hostels at the workplace, maybe ideal workers for restarting.

    Pacing up manufacturing

    • Since manufacturers need to activate their entire supply chain to produce, they should be encouraged to plan on how the entire chain will reopen.
    • The administrative structure to approve these plans and facilitate movement for those approved should be effective and quick – it needs to be thought through now.

    Most crucial: Ensuring workforce sustenance

    • In the meantime, policymakers need to ensure that the poor and non-salaried lower middle class who are prevented from working for longer periods can survive.
    • Direct transfers to households may reach most but not all, as a number of commentators have pointed out.
    • Furthermore, the quantum of transfers seems inadequate to see a household over a month.
    • The state and Centre have to come together to figure out quickly some combination of public and private participation and DBTs that will allow needy households to see through the next few months.
    • We have already seen one consequence of not doing so – the movement of migrant labour. Another will be people defying the lockdown to get back to work if they cannot survive otherwise.

    Gearing up for fiscal shocks

    • Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation.
    • This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year.
    • Unlike the US or Europe, which can spend 10% more of GDP without fear of a ratings downgrade, we already entered this crisis with a huge fiscal deficit, and will have to spend yet more.
    • A ratings downgrade coupled with a loss of investor confidence could lead to a plummeting exchange rate and a dramatic increase in long term rates in this environment, and substantial losses for our financial institutions.

    Channelizing expenditures

    • So we have to prioritise, cutting back or delaying less important expenditures, while refocusing on immediate needs.
    • At the same time, to reassure investors, the government could express its commitment to return to fiscal rectitude.
    • The govt. must back up its intent by accepting the setting up of an independent fiscal council and setting a medium term debt target, as suggested by the NK Singh committee.

    Boosting up Industries

    1) MSMEs

    • Many MSMEs already weakened over the last few years, may not have the resources to survive.
    • We need to think of innovative ways in which bigger viable ones, especially those that have considerable human and physical capital embedded in them, can be helped.
    • SIDBI can make the terms of its credit guarantee of bank loans to SMEs even more favourable, but banks are unlikely to want to take on much more credit risk at this point.
    • The government could accept responsibility for the first loss in incremental bank loans made to an SME, up to the quantum of income taxes paid by the SME in the past year.

    2) Large industries

    • Large firms can also be a way to channel funds to their smaller suppliers. They usually can raise money in bond markets and pass it on.
    • Banks, insurance companies, and bond mutual funds should be encouraged to buy new investment-grade bond issuances, and their way eased by the RBI.
    • The government should also require each of its agencies and PSUs, including at the state level, to pay their bills immediately, so that private firms get valuable liquidity.

    Looping in everyone’s participation

    • The government should call on people with proven expertise and capabilities, of whom there are so many in India, to help it manage its response.
    • It may even want to reach across the political aisle to draw in members of the opposition who have had experience in previous times of great stress like the global financial crisis.
    • If, however, the government insists on driving everything from the PMO, with the same overworked people, it will do too little, too late.

    Conclusion

    • Globally, it is said that India reforms only in crisis.
    • Hopefully, this otherwise unmitigated tragedy will help us see how weakened we have become as a society, and will focus our politics on the critical economic and healthcare reforms we sorely need.

  • Comparing current crisis with Great Depression, 1929

     

    With the novel coronavirus pandemic severely affecting the global economy, some experts have begun comparing the current crisis with the Great Depression — the devastating economic decline of the 1930s that went on to shape countless world events.

    Looming depression ahead

    • Experts have warned that unemployment levels in some countries could reach those from the 1930s era, when the unemployment rate was as high as around 25 per cent in the United States.
    • Currently, unemployment levels in the US are already estimated to be at 13 per cent, highest since the Great Depression.

    What was the Great Depression?

    • The Great Depression was a major economic crisis that began in the United States in 1929, and went to have a worldwide impact until 1939.
    • It began on October 24, 1929, a day that is referred to as “Black Thursday”, when a monumental crash occurred at the New York Stock Exchange as stock prices fell by 25 per cent.
    • Though the crash was triggered by minor events, the extent of the decline was due to more deep-rooted factors such as a fall in aggregate demand, misplaced monetary policies, and an unintended rise in inventory levels.
    • In the United States, prices and real output fell dramatically. Industrial production fell by 47 per cent, the wholesale price index by 33 per cent, and real GDP by 30 per cent.

    What caused Great Depression?

    The causes of the Great Depression are extremely complex and disputed to this day. The three main factors are:

    1. Financial instability and credit cycles: A period of stability encouraged more borrowing and lending than prudent, sowing the seeds for future instability.
    2. Monetary contraction, the gold standard, and bank runs: Monetary policy, driven in large part by the gold standard, tightened credit at the wrong time fueling bank-runs and economic slowdown.
    3. Debt deflation: Excess private debt created a dangerous condition where no one wanted to spend, causing deflation and economic weakening.

    Worldwide impact

    • The havoc caused in the US spread to other countries mainly due to the gold standard, which linked most of the world’s currencies by fixed exchange rates.
    • In almost every country of the world, there were massive job losses, deflation, and a drastic contraction in output.
    • Unemployment in the US increased from 3.2 per cent to 24.9 per cent between 1929 and 1933. In the UK, it rose from 7.2 per cent to 15.4 per cent between 1929 and 1932.

    Latent outcomes

    • The Depression caused extreme human suffering, and many political upheavals took place around the world.
    • In Europe, economic stagnation that the Depression caused is believed to be the principal reason behind the rise of fascism, and consequently the Second World War.
    • It had a profound impact on institutions and policymaking globally and led to the gold standard being abandoned.

    How did Great Depression impact India?

    • The Depression had an important impact on India’s freedom struggle.
    • Due to the global crisis, there was a drastic fall in agricultural prices, the mainstay of India’s economy, and a severe credit contraction occurred as colonial policymakers refused to devalue the rupee.
    • The effects of the Depression became visible around the harvest season in 1930, soon after Mahatma Gandhi had launched the Civil Disobedience movement in April the same year.

    1) Rural India mainstreamed into freedom struggle

    • The fallout made substantial sections of the peasantry rise in protest and this protest was articulated by members of the National Congress.
    • There were “No Rent” campaigns in many parts of the country, and radical Kisan Sabhas were started in Bihar and eastern UP.
    • Agrarian unrest provided a groundswell of support to the Congress, whose reach was yet to extend into rural India.

    2) INC gained momentum

    • The endorsement by farming classes is believed to be among the reasons that enabled the party to achieve its landslide victory in the 1936-37 provincial elections held under the Government of India Act, 1935.
    • This is marked as a significant event in the history of INC as it flourished the party’s political might for years to come.

    Back2Basics

    Slowdown vs recession vs depression

    •  Slowdown simply means that the pace of the GDP growth has decreased.  During slowdown, the GDP growth is still positive but the rate of growth has decreased.
    •  Recession refers to a phase of the downturn in the economic cycle when there is a fall in the country’s GDP for two quarters.   It is a period of decline in total output, income, employment and trade, usually lasting six months to a year.
    • Depression is a prolonged period of economic recession marked by a significant decline in income and employment.   It is a negative GDP growth of 10% of more, for more than 3 years.

  • Man versus microbe

    Context

    The present COVID-19 outbreak has brought to light the old struggle between humans and viruses.

    The constant struggle between humans and viruses

    • Hijacking the cell machinery of the host: Microbes, particularly viruses, have only one goal — to find a suitable host and multiply. Viruses, however, do not multiply by themselves. They need the cell machinery of the host for replication.
    • Around two-thirds of all infections in humans are caused by viruses.
    • The current COVID-19 outbreak caused by a coronavirus, SARS-CoV2, has brought this struggle to light once again.
    • Coronavirus has the upper hand now: The virus seems highly successful because it spreads rapidly from human to human and has a lower rate of mortality.
    • Humans have faced new viruses at regular intervals. These include the Ebola, Zika, HIV, the Flu virus H1N1, the Middle East Respiratory Syndrome (MERS), and Severe Acute Respiratory Syndrome (SARS) — the latter two are from the coronavirus family.
    • Animal to humans: These viruses have all appeared in the last few decades, having jumped from their animal reservoirs to humans.
    • Many of these viruses have a much higher mortality rate than the SARS-CoV2 that caused COVID-19.
    • Victory would be at huge costs: Like before, humans will come out of the present crisis as winners but that will happen at a huge cost, in every sense of the word.
    • The loss would include untimely loss of human lives, economic losses and a general loss of confidence in the human ability to deal with a tiny unknown enemy.

    Steps involved in dealing with the virus

    • It involves dealing with any new viral outbreak is to be able to accurately test, detect and track the spread of the virus, and isolate the infected persons to stop further spread.
    • Knowing the genetic makeup of virus matters: In order to implement the first step, it is important to obtain information on the genetic makeup of the virus, which forms the basis of developing highly specific diagnostic tests.
    • Three types of tests are being used which have different advantages associated with them and are based on different technologies. These are described below-

    1. What is the RT-PCR technique?

    • Currently, the most reliable and widely-used test is based on a technique called RT-PCR (Reverse Transcription Time Polymerase Chain Reaction).
    • This test aims to detect the viral RNA, the genetic material of SARS-CoV2.
    • The testing begins with the careful collection of swabs taken from the nose or the back of the throat of the patient and extraction of the viral RNA.
    • However, this extracted viral RNA from the swab is too tiny an amount for direct detection.
    • Amplification: The RT-PCR, through many different reactions that include the conversion of viral RNA to DNA — its amplification and detection — makes it possible to confirm the presence or absence of the virus.
    • The testing kits contain all chemicals and materials required for carrying out the RT-PCR based tests, which are performed by government-approved laboratories such as India’s National Institute of Virology.
    • However, many more testing centres, including those run by private players, have now been allowed to carry out the tests in many countries to bridge the huge demand and supply gap.
    • Why testing matters? It is now clear that countries which were able to scale up the testing of the virus in patients at an early stage were able to control the spread of the disease far better than those which did not.
    • Only viable control measure: Given that there is no cure or vaccine for the control of COVID-19, testing of infected patients much more quickly and tracking their contacts to isolate them till they clear off the virus is currently the only viable control measure.

    2. How CRISPR is proving helpful in scaling up the testing?

    • There is good news of a relatively new but powerful technology called CRISPR (Clustered Regularly Interspaced Short Palindromic Repeats).
    • CRISPR is highly specific in directly detecting viral RNA and confirming the presence or absence of the virus.
    • Interestingly, viruses also attack bacteria and the discovery of CRISPR itself was based on understanding how bacteria cut off the viruses.
    • What are the advantages of CRISPR-based test? The CRISPR-based test is quick and circumvents the need for both expert handling as well as PCR machines and can be done at multiple locations in about half an hour.
    • It can also fend off delays and other logistic problems in collection and transportation of test samples.
    • These tests are being validated and readied for approval.
    • Two companies, separately founded by the two scientists who discovered the CRISPR technique, have also announced that they are ready with their CRISPR-based test for validation and approval.
    • Test in 10 minutes: They have claimed that these tests can be performed within 10 minutes and can be conducted by using a paper strip format.
    • Test in 5 minutes: Another company, Abbott Laboratories, has recently announced the approval of their portable test for coronavirus, which the company claims can provide the results in five minutes.
    • Such a point of care test will not only greatly enhance the speed of large-scale testing but will also relieve the tremendous pressure faced by frontline healthcare providers.

    3. Serological tests to detect the realistic information on the spread of the virus

    • Why we need serological tests? The above described RT-PCR and the newly developed CRISPR based tests are needed for scaling up the testing.
    • But many individuals infected with the virus do not show symptoms of the disease and recover completely.
    • How to test these cases to gather realistic information on the spread of the virus?
    • Such information will be necessary for designing future control strategies.
    • How serological tests work? This is done with serological tests, which are carried out in blood samples collected from a large population and are based on the detection of antibodies that are produced in response to the viral infection.
    • Advantage of the serological tests: These tests are relatively easier to develop and use, less expensive, and also do not need much sophisticated infrastructure or highly trained manpower.
    • Serological tests for COVID-19 have already been developed by many groups and are already in use.
    • India also plans to carry out serological tests to examine the actual spread of the disease in different parts of the country.

    Conclusion

    Lockdowns are essential to control the disease but long-term strategies to deal with the disease would be based on the knowledge of its actual spread. The newly-developed point of care tests should be successfully able to bridge the existing gap in the testing of the virus. This will also assist in gearing up facilities to treat the severely sick as well as relieve and protect frontline health providers. Meanwhile, hopefully, efficient drugs therapies and efficacious vaccines against COVID-19 will also be discovered soon.

  • States at centre

    Context

    Concerned over the impact on their revenues, several state governments planned cuts in salaries of government employees.

    State finances showing the signs of stress

    • The fiscal crisis stemming from the disruption in economic activity due to the coronavirus is now beginning to show.
    • Concerned over the impact on their revenues, several state governments planned cuts in salaries of government employees.
    • The stress to state finances stems from multiple sources.
    • First, as economic growth falters, their own income streams, for instance, revenues from petroleum products, real estate transactions, will slow down further, as will GST collections, and the amount collected through the compensation cess will not be enough to meet budgeted expectations.
    • Second, as the Centre’s own revenues also slow down, transfers to states will take a hit. It is quite likely that tax devolution to states, which has been budgeted at Rs 7.8 lakh crore in 2020-21, will not materialise.
    • Collectively, state expenditure far outstrips that by the Centre, with revenues falling short, any cutbacks in their spending, at a time when there is a need for a bold fiscal expansion, will further aggravate the economic stress.
    • Need assurance of adequate resource: Thus, states, which are at the frontline of fighting the public health crisis, need to be assured of adequate resources.

    Increase in the WMA limit will not address the issue

    • Limit increased by 30%: The Reserve Bank of India decided to increase the ways and means advances (WMA) limit by 30 per cent for state governments.
    • What is WMA? The WMA is a temporary liquidity arrangement with the RBI which helps governments tide over their short-term liquidity woes.
    • A short term measure: While states have been averse to opting for this facility in the past, and the new WMA limits may need to be revised further if the mismatch rises, this is a short-term measure, and does not address the underlying issue of significant revenue slippages.
    • Contradictory impulse: Under the existing fiscal deficit constraint, the collapse in revenues will force states to cut back on spending, imparting a contractionary impulse to the economy.

    Way forward

    • The Centre must take several steps to ensure an adequate flow of resources to states.
    • First, it must immediately clear all its pending dues to state governments.
    • Second, while it is cheaper for the Centre to borrow and transfer to states, even though the spreads between state and central government bonds have now widened, making state borrowing more costly, states must be allowed to borrow more.
    • Third, as some state chief ministers have suggested, the fiscal deficit limits imposed on states must be relaxed.

  • Explained: 9 minutes light-out and its impact on grids

    In his address to the nation, our PM has urged people across to turn off the lights in their homes for 9 minutes on April 5, starting at 9 pm. In response to this appeal, grid managers across states have flagged some risks.

    Why is the 9-minute exercise a problem?

    • India is one of the largest synchronous interconnected grids in the world, with an installed capacity of about 370 GW (3,70,000 MW), and a normal baseload power demand of roughly 150 GW.
    • The big worry is that just before 9 pm there may be unprecedented load reduction, followed by a sudden increase in load post at 9.09 pm.
    • The concern is that grid frequency should not swing beyond permissible limits and that all generators across the country must give frequency response as per the Grid Code.
    • During this 9-minute lights out exercise, up to 10,000-15,000 MW of power demand could to drop suddenly and then come on stream a few minutes later.

    How does grid function normally?

    • Power System Operation Corporation Ltd (POSOCO), the national electricity grid operator, projects daily demand for power and regulates supply from power generators based on these projections.
    • Frequency reflects the load generation balance in the grid at a particular instant and is one of the most important parameters for assessment of the security of the country’s power system.
    • The nominal frequency is 50 hertz and POSOCO endeavours to maintain frequency within a permissible band (49.9- 50.5 hertz), primarily by balancing the demand-supply equation.

    Impacts of light-out

    • The frequency needs to be maintained within this range as all the electrical equipment and appliances at our homes are designed to perform safely and efficiently in a certain power supply band.
    • An increase in frequency results in an increase in the voltage and a decrease in frequency results in a decrease in voltage.
    • Exigency does occur during an outage at a power plant or the tripping of a transmission line or a sudden change in electrical demand.
    • The grid operator needs to ensure that there is an automatic corrective response manually by curtailing demand or ramping generation from another source within a really short period of time.
    • Handling imbalances are the most crucial function of the grid operator.

    What are the key areas of concern?

    While the possibility of the grid tripping on account of this is highly unlikely, operators expect a “jerk”. While the system is generally planned for an outage of the single largest unit outage, there are two riders:

    1) Lockdown has severed domestic consumption

    • One, the grid load is primarily on account of the domestic load now, especially since the lockdown implemented.
    • The normal baseload power demand of roughly 150 gigawatts has already dropped by 20 per cent since the lockdown announcement as most of the industry and commercial establishments are not operational.
    • With hotels and factories, malls, railway stations, airports closed, the domestic load is the predominant load.
    • So the lighting load as a percentage of total loads is much higher now and the impact of a sudden drop in lighting load could be more accentuated than during regular times.

    2) Fear of complete power-offs

    • The second concern is if housing clusters and societies switch off mains, or if overzealous discoms switch off street lighting or even feeders to show compliance.
    • During this part of the year, domestic load peaks at about 9 pm.
    • This load could then be impacted much more than what’s being anticipated in the normal course, a concern that grid operators are flagging.

    Why is this demand of significance in such a big grid?

    • The domestic load is about 30-32 per cent of total load during normal times.
    • Of India’s total electricity demand load pattern, industrial and agricultural consumption accounts for 40 per cent and 20 per cent load, while commercial electricity consumption accounts for 8 per cent of demand.
    • So, theoretically, if only lighting load goes off, it should not have a major impact on grid frequency during normal times.

  • Tropical Butterfly Conservatory

    The Tropical Butterfly Conservatory Tiruchirappalli (TBCT) has been developed in Tamil Nadu’s Tiruchirappalli to create awareness among the public about the importance of the butterfly and its ecology.

    Tropical Butterfly Conservatory

    • The TBC is located in the Upper Anaicut Reserve Forest, sandwiched between the Cauvery and Kollidam rivers in Tiruchirappalli.
    • It was inaugurated during November 2015 at Tiruchirappalli with the objective of propagating the importance of butterflies and conserving the biodiversity of the district through environmental education.
    • It  is spread over 27 acres and is considered to be Asia’s largest butterfly park.
    • The park has an outdoor as well as indoor conservatory, a ‘Nakshatra Vanam’ and a ‘Rasi Vanam’ in addition to a breeding lab for non-scheduled species.
    • So far, about 109 butterfly species have been observed here.

    Conservation measures

    • Eggs of non-scheduled butterfly species are collected and bred in captivity in the in-house incubation laboratory by keeping them in ventilated plastic containers with the leaves of host plants as feed.
    • After attaining the transformation of larva (caterpillar) and pupa (transition), the adult butterfly finally comes out with gorgeous colours and at this stage they are released into the natural habitat.
    • Non-scheduled butterfly species are bred and released by the park authorities into their natural surroundings.

    Significance of butterflies

    • Butterflies are known for their intrinsic, aesthetic, educational, scientific, ecological, health and economic values.
    • As butterflies form an important part of nature’s food web, it is very essential to protect the species for ecological balance.
    • They play a key role in the pollination of plant species, the global food chain depends on their well-being.

    Various threats

    • The major threats to butterfly diversity are destruction, degradation and fragmentation of their habitats, grazing, fires and application of pesticides and weedicides in agricultural and urban ecosystems.

  • Opportunity in the Covid-19 crisis

    Context

    Coronavirus pandemic offers a trigger to fundamentally strengthen the Indian economy, and protect the vulnerable. This requires cooperation between the Centre and states.

    Opportunity to do things good for the medium term

    • Minimising the impact on the vulnerable: The current crisis is so terrible in its toll of life and livelihoods that the need of the hour must be minimising the health, humanitarian and economic costs, especially for the most vulnerable.
    • Rising expenditure may force hard choices: Rising public expenditures to help tens of millions of workers and their families alongside plummeting resources will inevitably force hard choices.
    • Appropriately, much of the policy discussion and the government’s first response have focussed on addressing the immediate imperatives.

    This crisis is also an opportunity to do things that are not only good for now but for the medium term as well. Few are discussed below.

    1. Revamp macro-fiscal framework

    • Massive fiscal expenditure may require: If the pandemic follows the exponential trajectory seen in other countries, the crisis is going to entail massive fiscal expenditures, perhaps up to 4-5 per cent of GDP, much more than what the government has announced.
    • Macro-fiscal targets have to be exceeded: Consequently, the basic macro-fiscal framework — for example, the Centre’s FRBM target of 3.5 per cent of GDP, and the revenue and deficit estimates for 2020-21 — has been fundamentally overtaken by events.
    • Allow states to exceed deficit targets: The Centre should immediately announce that even the states will be allowed to exceed their fiscal responsibility legislation targets because they will be in the front line of taking action against the pandemic.
    • Opportunity to review the FRBM: The crisis is an opportunity to revisit the entire framework.
    • The focus on unattainable targets, the fact that the FRBM has been honoured only in the breach, and the consequences in terms of loss in budgetary integrity and transparency need serious review, even overhaul.
    • Once the crisis ebbs, India might be looking at overall deficits well in excess of 10 per cent and debt levels much greater than those today. If the starting point is going to be so different, the old goals and targets won’t retain meaning.

    2. Remake finance and adopt a data-driven lending model

    • Going into the crisis, India’s corporate and financial sector were under severe stress — the so-called Four Balance Sheet problem.
    • This crisis will, unfortunately, add consumers and small and medium enterprises to that This will be an extremely hard — but critical — problem to address.
    • A takeover of bad loans will be unavoidable: To allow banks to revert to normalcy, a largescale takeover of their bad loans will be unavoidable not least because the current bankruptcy process will be severely inadequate.
    • Opt for the tech. driven lending model: This crisis opens the door for the new lending model proposed by Nandan Nilekani i.e. technology-driven lending.
    • What is Technology-driven lending? It uses data rather than collateral, allowing the 10 million-odd businesses with deep digital footprints (for example, based on GST invoices), to get loans from the thriving ecosystem of new financial players.

    3. Complete JAM

    • One of the major achievements of the government was to create the plumbing — Jan Dhan, Aadhaar, and Mobile (JAM) — to augment weak state capacity.
    • How JAM is proving helpful in this crisis? The state could now make cash transfers swiftly, with reduced leakages, whether as income support, scholarships or pensions, and potentially eventually implementing a Universal Basic Income.
    • In the current crisis, it is proving to be an important part of the social safety net that is helping to cushion the most adversely affected groups.
    • JAM is not complete yet: But the JAM plumbing is still incomplete because there is a “last mile problem”.
    • Not all those with bank accounts can access money either because of difficult geography or because bank functionaries give incomplete or misleading information.
    • Opportunity to fix the shortcomings: This crisis is an opportunity not just to leverage JAM to enhance cash transfers, but to empower citizens. This will require the government to identify remaining weaknesses on a war footing and fix them.

    4. Re-shape Indian agriculture

    • Need to create one market for agriculture: The need to preserve supply chains in agriculture in times of crisis reinforces the need to create one market for agriculture across India.
    • This requires eliminating legislation like the Essential Commodities Act and the panoply of resulting restrictions.
    • Phase-out subsidies and opt for DBT: Second, the crisis has shown the possibilities created by JAM and direct transfers.
    • Phasing out in cycles: Building on PM-Kisan and various state-level schemes, pernicious subsidies, especially for fertilisers and power, could be phased out over 5-6 crop cycles.
    • This could be done through small but frequent increases in fertiliser prices (the technique used to eliminate fuel subsidies).

    5. Focus on Make in India

    • The critical source for almost all the essential Active Pharmaceutical Ingredients (API) used to manufacture drugs, the ability also to fight death, is largely made in China.
    • India was once a major producer of such APIs but lost ground to China.
    • Frame intelligent industrial policy: The crisis should be the opportunity to go on war footing to do intelligent industrial policy — incentives, regulatory help, trade policy — that would resurrect India’s manufacturing capability.
    • Previous Make in India attempts have shown lackadaisical results.
    • Focus on the pharmaceutical sector: The crisis creates the momentum to focus the effort on one sector, pharmaceuticals. As a result, the ability to save lives could be Made in India, again.

    6. Establish migrants as full citizens

    • Need to change the place-based benefits to person-based benefits: The plight of migrant workers reinforces the need to move from immobile place-based benefits to mobile person-based benefits, which is possible as the JAM infrastructure is strengthened.
    • Portability of benefits: This will require portability of benefits, including access to the PDS, Ujjwala and Ayushman Bharat.
    • The crisis has highlighted the travails of migrant labour and their second-class status.
    • The large gap between the organised and unorganised sector worker: It reflects a broader chasm between the few securely employed in the organised sector and the vast majority subject to the vicissitudes of the unorganised sector.
    • Differences not just in the levels of income but in their volatility as well as differential access to social insurance (healthcare, pensions) distinguish these two classes.

    7. Upgrade Health

    • Weakest state capacity in health and education: State capacity over 70 years in India has been weakest in the areas of education and health.
    • The COVID-19 pandemic must lead to a serious strengthening of the health infrastructure for dealing with pandemics.
    • Set up an apex institution on the lines of US’s CDC: To start with, India needs an apex institution like the US’ Centers for Disease Control with a network across all the states.
    • They should invest in disease surveillance systems, set up diagnostics labs, be able to gather real-time data and analyse them etc.
    • The Taiwan model, which has been so successful in this pandemic, could be studied.
    • More fundamentally, the crisis is a wake-up call to address India’s severe limitations in the provision of basic health.
    • Focus on basic public health: Creating tertiary health facilities must be subservient to strengthening basic public health and early childhood care.

    8. Build a National Solidarity Fund

    • The severe downturn in economic activity ahead will savagely hit the informal poor.
    • How would the Solidarity fund be set up? The government should consider a Solidarity Fund with a one-time annual contribution coming from the wealthy and the employees in the organised sector.
    • Contribution to the fund: This contribution can take the form of taxes or elimination of middle-class subsidies identified in the Economic Survey of 2016.
    • The wealthy could contribute via a wealth tax with thresholds set by property values say above Rs 5 crore.
    • Salaried employees in the public and private sectors could contribute via a small, progressive tax on salaries and pensions.
    • Middle-class subsidies that could be eliminated include interest and tax deductions for small savers, favourable taxation of gold and other luxuries.
    • Wealth taxes and elimination of subsidies for the rich should, in any event, be part of the long-run reform agenda to reduce growing inequality.

    Conclusion

    These examples illustrate how the crisis can be converted to an opportunity to fundamentally strengthen the Indian economy, and protect the vulnerable. A common thread to many of these actions — indeed prerequisites for their success — is cooperation between the Centre and states. Central direction combined with flexibility and nimbleness in the states and local bodies is India’s way through the crisis and beyond.