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GS Paper: GS3

  • Rohtang Pass and its location

    The Border Roads Organisation (BRO) has opened the Rohtang Pass, three weeks in advance, for transporting essential supplies and relief materials to Lahaul and Spiti districts of Himachal Pradesh.

     Rohtang Pass

    • It is a high mountain pass (elevation 3,980 m) on the eastern Pir Panjal Range of the Himalayas around 51 km from Manali.
    • It connects the Kullu Valley with the Lahaul and Spiti Valleys of Himachal Pradesh, India.
    • The pass lies on the watershed between the Chenab and Beas basins.
    • On the southern side of this pass, the Beas River emerges from underground and flows southward and on its northern side, the Chandra River, a source stream of the river Chenab, flows westward.

    Another pass in new:

    https://www.civilsdaily.com/news/sela-pass-tunnel-project/

  • Exercise Pitch Black 2020

    Australia has informed India that their premier multilateral air combat training exercise Pitch Black 2020 scheduled in July has been cancelled due to the COVID-19 situation.

    All-time generic question seeking ‘match the pairs’ can be asked from the news as such.  Click here for more exercises.

     Ex Pitch Black 2020

    • Exercise Pitch Black is a biennial warfare exercise hosted by the Royal Australian Air Force (RAAF).
    • The aim of the exercise is to practice Offensive Counter Air (OCA) and Defensive Counter Air (DCA) combat, in a simulated war environment.
    • In the last edition of Pitch Black in 2018, the IAF for the first time participated with its Su-30MKI fighters, one C-130 and one C-17 transport aircraft.
    • It provided a unique opportunity for an exchange of knowledge and experience with these nations in a dynamic warfare environment.
    • The next edition of Pitch Black is scheduled in 2022.

    India’s defence relation with Australia

    • The defence and strategic engagement with Australia have steadily gone up in recent years especially on the bilateral front with naval cooperation at the forefront.
    • The bilateral naval exercise AUSINDEX early last year saw the participation of the largest Australian contingent ever to India with over 1,000 personnel.
    • The Mutual Logistics Support Agreement (MLSA) has been long pending and is expected to be concluded soon as well as a broader maritime cooperation agreement including the Maritime Domain Awareness (MDA) to elevate the existing strategic partnership.
    • Australia recently made a pitch for trilateral cooperation among India, Australia and Indonesia to identify new ways that our three countries can collaborate to be the best possible custodians of the Indian Ocean.

  • Lockdown with a human face: Immediate focus should be on alleviating hardships of poor, vulnerable groups

    The article deals with the policy response to the crisis. Reducing the pain inflicted on the poor and vulnerable section should be the priority. The size and nature of the stimulus package is also discussed in the article.

    The dilemma of lives Vs. livelihood

    • As the coronavirus spreads, severe dilemmas haunt policymakers.
    • Testing of lockdown? Even the scientific community is confused and does not seem to know whether the South Korean model of more intensive testing is preferable to the European model of a complete lockdown.
    • The economic crisis that we are facing today is very different from any crisis that we have encountered recently.
    • This is the first economic crisis in recent memory to have been triggered by a non-economic factor — a pandemic.
    • A lockdown essentially amounts to limited economic activity and this results in throwing temporary workers and daily wage earners out of employment.
    • Migrant labour falls in this category.
    • According to the 2011 census, the number of migrant workers under the category, “migrants for work/employment” was 41.42 million.
    • This number must have grown substantially by now.
    • The impact of the lockdown has fallen very heavily on the poor and vulnerable groups.
    • We need to bear this in mind while evolving the strategy to combat the virus.

    Expenditure during the pandemic

    • First, medical and healthcare expenditure, which includes the money spent on extension of hospital facilities, employment of additional medical and healthcare workers, costs of testing on a much wider scale and the purchase of accessories like personal protection equipment, ventilators and testing kits.
    • The expenditure under this category is a “must” and there can be no compromise on it.
    • The length of the battle will decide the cost.
    • Second, the expenditure involved in taking care of the people thrown out of employment, and other vulnerable sections of the population.
    • Third, stimulation expenditure aimed at restarting the economy. Here, the financial system presided over by the RBI will play an important role. But the government also has a role.

    Two issues to consider while deciding on the lockdown

    • The “life” versus “livelihood” dilemma pertains to the lockdown policy.
    • A tight lockdown over an extended period may save lives by curtailing the progress of the virus.
    • But at the same time, it places several segments of society under severe hardship.
    • With the lack of economic activity, many will go hungry.
    • In this context, the government must look at two issues.
    • First, it must consider to the extent to which the lockdown can be relaxed while keeping in mind the priority of restricting the spread of the virus.
    • The government has recently announced some relaxations.
    • This is a welcome step. However, it must keep this concern under continuous consideration. It must explore other options on the medical front as well.
    • For example, will more testing make it possible to reduce restrictions?
    • Second, if the lockdown is a “compulsion”, we need to pay adequate attention to the plight of people who have been affected adversely.
    • The government had earlier announced certain measures to help some segments of society.
    • With the lockdown being extended, it is necessary to raise the levels of relief, and also cover segments of society not covered earlier — migrant labour, for example.

    The following points about the stimulus package are appearing repeatedly in most of the article on economic damage to the economy. They are also relevant from the UPSC perspective. A question based on it,  like “What steps were taken by the government to revive the Indian economy in the aftermath of the corona crisis?” can be asked.

    What should be the nature of the stimulus package?

    • There is much talk about a “stimulation package” to revive the economy.
    • The financial system will have to lead the charge.
    • Additional expenditure: Expectations regarding additional expenditures by the government vary from 2 per cent of the GDP to 5 per cent of the GDP.
    • Normal sources of financing will not be adequate to meet this order of expenditure.
    • Many analysts felt that the figure of 3.5 per cent of the GDP as the fiscal deficit, indicated in the budget for 2020-21, would be exceeded.
    • The pandemic will necessitate an increase in expenditure.
    • Moreover, with the decline in economic activity, revenues will also go down.
    • The revenue projections were made on the assumption that the nominal income growth would be 10 per cent.
    • But this is unlikely to be achieved. The nominal income growth is likely to be 7 per cent, at best.
    • Given the increase in expenditures and the slowdown in revenue collection, the borrowing programme will exceed significantly over what was indicated in the budget.
    • The monetisation of debt is inevitable and it will have its own consequences.
    • Provisions for states: The brunt of the expenditures will be borne by the state governments and therefore, the Centre must allocate additional resources to them.
    • They may also be allowed additional borrowing above 3 per cent of the state domestic product.

    What will be the overall growth rate for India?

    • In the first quarter of 2020-21, the GDP growth rate will be negative.
    • Agricultural performance during the year could be the same as in 2019-20 as the rainfall is expected to be normal.
    • The developed world may go through a recession over the year.
    • Thus the external sector may not be of much help.
    • It is quite possible for the economy to have a V-type recovery from the second quarter of 2020-21.
    • On that assumption, the overall growth rate for the year can be 3 per cent. This is an optimistic estimate.

    Conclusion

    To return to the present, the focus of the government has to be two-fold. It must act vigorously to contain the virus, explore the possible alternatives to complete lockdown. Second, it must take all actions to provide adequate help to the poor and the needy including the migrant workers. Lockdown, as necessary, must be with a human face.

     

  • What is “Direct” Monetization of Deficit?

    With the economy stalled, there isn’t enough money in the market for the government to borrow. Can it ask the RBI to print more money? How does this process work, and what are the arguments against it? Let us see:

    Discuss the scope and feasiblity of “Direct” Monetization by the government for Deficit Financing as an option of the last resort.

    For more help, Click here

    What is “direct” monetisation of the deficit?

    • Imagine a scenario where the government deals with the RBI directly — bypassing the financial system — and asks it to print new currency in return for new bonds that the government gives to the RBI.
    • Now, the government would have the cash to spend and alleviate the stress in the economy — via DBT to the poor or starting social and capital expenditure etc.
    • In lieu of printing this cash, which is a liability for the RBI (recall that every currency note has the RBI Governor promising to pay the bearer the designated sum of rupees), it gets government bonds.
    • Such bonds are an asset for the RBI since such bonds carry the government’s promise to pay back the designated sum at a specified date.
    • And since the government is not expected to default, the RBI is sorted on its balance sheet even as the government can carry on rebooting the economy.

    What triggers a demand for direct monetization?

    1) Decline of Demand

    • With a nationwide lockdown, incomes have fallen and so have consumption levels.
    • In other words, the demand for consumer goods and services (say a haircut) in the economy has gone down.
    • What can be done to boost demand? People need to have money. But, of course, who will give them money.
    • From the highest-ranking CEOs to stranded workers, incomes have taken a huge hit, if not completely dried up.

    2) Moving ahead for a fiscal deficit

    • For its part, the RBI has been trying to boost the liquidity in the financial system. It has bought government bonds from the financial system and left it with money.
    • Most banks, however, are unwilling to extend new loans as they are risk-averse. Moreover, this process could take time.
    • The government’s finances were already overextended going into this crisis, with its fiscal deficit way over the permissible limit.
    • On top of that, if the government was to provide some kind of a bailout or relief package, it would have to borrow a huge amount. The fiscal deficit will go through the roof.

    3) No money in the market

    • There isn’t enough money in the market for the government to borrow.
    • Moreover, as the government borrows more from the market, it pushes up the interest rate.
    • Hence, the govt. is left with the only solution — the “direct” monetisation of government deficit.

    How is DM different form OMOs?

    • Direct monetization is different from the “indirect” monetizing that RBI does when it conducts the so-called Open Market Operations (OMOs) and/ or purchases bonds in the secondary market.

    Global examples

    • Other countries are doing it to counter the economic crisis related to COVID-19.
    • In the UK on April 9, the Bank of England extended direct monetisation facility to the UK government even though the Governor of the Bank opposed the move till the last moment.

    Has India ever done this in the past?

    • Yes, until 1997, the RBI “automatically” monetized the government’s deficit.
    • In 1994, Manmohan Singh (former RBI Governor and then Finance Minister) and C Rangarajan, then RBI Governor, decided to end this facility by 1997.
    • Now, though, even Rangarajan believes that India would have to resort to monetising the deficit.

    Issues with Direct monetisation

    • Direct monetisation of the deficit is a highly contested issue.
    • Another former RBI Governor D Subbarao has said that there is no question that India must borrow and spend more in this crisis.
    • He regarded this as a moral and a political imperative.

    Issues: Inflationary practice

    • Ideally, this tool provides an opportunity for the government to boost overall demand at the time when private demand has fallen — like it has today.
    • But if governments do not exit soon enough, this tool also sows the seeds for another crisis. Here’s how:
    • Government expenditure using this new money boosts incomes and raises private demand in the economy. Thus, it fuels inflation.
    • A little increase in inflation is healthy as it encourages business activity. But if the government doesn’t stop in time, more and more money floods the market and creates high inflation.

    To what level should government debt be ideally limited?

    • While no ideal level of debt is set in stone, most economists believe developing economies like India should not have debt higher than 80%-90% of the GDP. At present, it is around 70% of GDP in India.
    • It should commit to a pre-determined amount of additional borrowing and to reversing the action once the crisis is over.
    • Only such explicitly affirmed fiscal restraint can retain market confidence in an emerging economy.
    • The other argument against direct monetizing is that governments are considered inefficient and corrupt in their spending choices — for example, whom to bail out and to what extent.

  • Unified Geologic Map of the Moon

    The first-ever digital, unified, global, geological map of the moon was released virtually by the  United States Geological Survey (USGS), NASA and the Lunar Planetary Institute.

    Unified Geologic Map of the Moon

    • The UGM will serve as a blueprint for future human missions and a source of research and analysis for the educators and the general public interested in lunar geology.
    • The map is a ‘seamless, globally consistent, 1:5,000,000-scale geologic map’.
    • The mapped surface features of the moon included crater rim crests, buried crater rim crests, fissures, grabens, scarps, mare wrinkle ridges, faults, troughs, rilles, and lineaments.

    How it was prepared?

    • The researchers built on the original digital renovation of the six maps comprising of the near, central far, east, west, north and south sides that was released in 2013.
    • The final map consists of 43 geologic units across the entire lunar surface, broken down into groups based on characteristics like materials of craters, basins, terra, plains and volcanic units.
    • Data from NASA’s Apollo Missions were used to come up with the map.

    Its’ significance

    • The moon’s South Pole is especially interesting because the area is much larger than the North Pole and there could be a possibility of the presence of water in these permanently shadowed areas.
    • Further, the South Pole region also contains the fossil record of the early Solar System.
    • These present and future moon missions’ success can be further helped by the digital map of the moon.
    • The Chandrayaan 2, an active mission also targets the Lunar South Pole for exploration.

  • Reverse Vaccinology and its benefits

    The Tamil Nadu Dr. MGR Medical University has developed a vaccine candidate against SARS-CoV-2 through ‘reverse vaccinology’.

    A definition based prelims question can be expected on Reverse Vaccinology. Ex. Which of the following statements best describes ‘Reverse Vaccinology’?

    Reverse Vaccinology

    • Reverse vaccinology is an improvement on vaccinology that employs applied bioinformatics.
    • The basic idea behind it is that an entire pathogenic genome can be screened using bioinformatics approaches to find genes.
    • Some traits that the genes are monitored for may indicate antigenicity.
    • Those genes are filtered for desirable attributes that would make good vaccine targets such as outer membrane proteins.
    • Once the candidates are identified, they are produced synthetically and are screened in animal models of the infection.
    • Since then, it has been used on several other bacterial vaccines.

    Benefits

    • Earlier researchers had to do a viral culture in the laboratory to develop a vaccine, and this was time-consuming.
    • The major advantage for reverse vaccinology is finding vaccine targets quickly and efficiently.
    • Traditional methods took decades to unravel pathogens and antigens, diseases and immunity
    • With ‘reverse vaccinology’ scientists know what molecules make the genomic sequence.

  •  Indian Debt market, that never was

    India’s bond market suffers from several issues. This article discusses such issues, and also highlights the recent positive trends seen in the debt market owing to several steps taken by the government.

    The Indian debt market, primarily of the fixed-income variety, can be broadly classified into:

    • 1. Money Market
    • Where the borrowing is for a tenor of less than a year.
    • Different types of money market instruments: Inter-Bank Term Money, repo transactions, Certificate of Deposits, Commercial Papers, T-Bills, etc. are some of the money market instruments.
    • Through these instruments, short term requirement of funds is met by banks, institutions and the state and central governments.
    • 2. Bank and Corporate Deposits
    • Bank fixed deposits (FDs) have been popular and widely subscribed to, as the feeling of no-default-risk.
    • Corporate deposits are FDs issued by a company (non-bank).
    • 3. Government Securities
    • G-Secs are sovereign-rated debt papers, issued by the government with a face value of a fixed denomination.
    • 4. Corporate & PSU Bond Market
    • Corporate bonds are issued by public sector undertakings (PSUs) and private firms.
    • These bonds are issued for a wide tenor between 1 year – 15 years.
    • These bonds carry a different risk profile and hence will have associated rating.

    Debt market plays a significant role in the economy of a country. But India’s debt market suffers from shallowness. Some of the steps taken by the government to improve the situation have been showing positive trends. In the light of this development, the UPSC can frame a direct question, for ex. “What are the factors responsible for the shallowness of the debt market in India? Suggest ways to increase the depth of the debt market in India.”

    What are the problems of India’s debt market?

    • Wholesale market: The Indian debt market is largely a wholesale market.
    • It is a wholesale market in a sense that a majority of institutional investors comprises of mainly banks, financial institutions, mutual funds, EPFO, insurance companies and corporates.
    • The concentration of these large players has resulted in the debt markets being fairly skewed, evolving into a wholesale & bilaterally-priced trades.
    • Lack of retail sell and transparency: It also lacks the retailness and the contractual transparency that the Indian capital markets have been able to build in the past 2 decades.
    • Skewed towards G-secs: Structurally, the debt market remains firmly skewed towards government securities (G-secs).
    • Also, the largest investor group in the G-secs market are the banks, due to their regulatory requirement to invest in SLR.
    • Low and unstable trading in the corporate bond market: The Indian corporate bond market has low & unstable trading volumes.
    • Sadly, the corporate bond market remains largely about top-rated financial and public sector issuances.
    • The domestic debt managers have forgotten that the logic of the business of finance is “to price the risk”.

    Regulation and comparison with other countries

    • RBI regulates money markets & G-secs.
    • SEBI regulates the Corporate debt market & bond markets.
    • The domestic debt market in India amounts to about 67% of GDP.
    • The size of India’s corporate bond market is a mere 16% of GDP — compared with 46% in Malaysia, and 73% in South Korea.

    The recent positive trend in the debt market

    • In the past few years, the domestic corporate bond market had seen increasing volumes, largely due to financial investments going into it, including retail participation.
    • Also, the banks had ceded space to NBFCs over past many years.
    • This is because banks found it easier to buy securitisation pools to achieve their PSL targets rather than develop competencies that NBFCs had built-in serving affinity groups, in smaller cities & towns.
    • And post the ILFS crisis, the markets have started shunning non-banks again.
    • Policy initiative by the government: The various policy initiatives undertaken in the last few years would take time to fructify and to stabilise.
    • These include the IBC, SEBI’s bond market policies, RBI’s large borrower framework for enhancing credit supply.
    • Some of these have already seen changes/addendums to the original draft, with the intent being to course-correct, for the stability of the markets.

    Roll over of debt papers in India

    • We have seen liquidity problems in our markets every few years.
    • The concept of “roll-over” of debt paper was usual as our markets did not build long term papers.
    • With the ILFS slowdown, it was easy for name-calling on “ALM mismatch” concept.
    • Not much had been anyways done before and later to address the availability of debt to reduce the Asset-to-Liability mismatches.
    • Also, we have played it safe so far by even lending for large infra projects with shorter paper and hoped to roll it over at the end of the debt term.

    Conclusion

    This is the time that our regulators need to work along with the various governments, especially the states, for smoother ironing of fiscal hiccups and use this to redress any structural glitches. It’s time that there is actual intent to deepen the domestic debt market and to listen to the industry about their requirements.

    Back2Basics: What is ASM?

    • Banks’ primary source of funds is deposits, which typically have short- to medium-term maturities.
    • They need to be paid back to the investor in 3-5 years.
    • In contrast, banks usually provide loans for a longer period to borrowers.
    • Home loans, for instance, can have a tenure of up to 20 years.
    • Providing such loans from much shorter maturity funds is called an asset-liability mismatch.
    • It creates risks for banks that need to be managed.
    • The most serious consequences of asset-liability mismatch are interest rate risk and liquidity risk.
    • Because deposits are of shorter maturity they are repriced faster than loans.
    • Every time a deposit matures and is rebooked if the interest rates have moved up the bank will have to pay a higher rate on them.
    • But the loans cannot be repriced that easily. Because of this faster adjusting of deposits to interest rates asset-liability mismatch affects net interest margin or the spread banks earn.

    Priority Sector Lending (PSL)

    • Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low-income groups and weaker sections etc.

    Roll over of debt

    • When debt becomes due there is a need to either repay the principal or alternatively, to enter into a new agreement.
    • Structurally, funds from the second debt are used to repay the first debt.
    • Then you repay the second debt as required. Quite often these new terms will be agreed with the initial lender.
    • In essence, you’re ‘rolling’ the repayment obligation from one period into the next.
    • This all leads to rollover risk, which is the risk you that you won’t be able to find anyone willing to lend the value of the outstanding debt and/or offer a comparable rate as the first principle repayment obligation approaches.
    • This may be due to either movement in the borrowers perceived credit status and/or changes to the broader credit environment.
    • This was a key theme during the financial crisis of 2007 – 2008.
    • The reasons for refinancing may include the above, but also other themes such as debt consolidation (which doesn’t directly imply a change to the debt term).

  • The deal raises several concerns for privacy, net-neutrality and consumer welfare

    Facebook’s decision to acquire a 9.99 per cent stake in the parent company of Reliance Jio could have several implications. It could impact retail stores which we are trying hard to protect by restricting FDI in retail. Second, it could have implications for net neutrality. Third, it would have implications for data privacy.

    Implications for the country’s retail landscape

    • Recently, Reliance Industries and Facebook announced that the California-based social media giant will acquire a 9.99 per cent stake in Jio Platforms limited, the holding company of Reliance Jio, for $5.7 billion (Rs 43,574 crore).
    • At its core, the idea is to create an ecosystem around JioMart, enabling customers to access the local Kirana stores using WhatsApp, combining both offline and online retail.
    • This ability to connect millions of local businesses with end consumers, and provide them a seamless online transaction experience could radically alter the country’s retail landscape.
    • Both firms have stressed on the new opportunities for businesses of all sizes, and especially for the millions of small businesses across the country.
    • With the ongoing lockdown in the country only reaffirming the importance of the local Kirana store — major online delivery channels have struggled to reach consumers during this period — integration is bound to be an enticing proposition.

    Opportunities for cross-selling

    • A scaling up of this model will also provide opportunities for cross-selling — significantly increasing the upside for firms and increasing the valuation of its retail arms.
    • At present, though, the reach of WhatsApp Pay is limited — just over a million Indians are reported to currently have access to the pay feature.
    • But this sort of model is popular in other Asian economies such as China, Korea and Japan where apps like WeChat have a wide range of product offerings, which induces consumer stickiness.
    • This arrangement also allows Jio to greatly expand its product offering to its more than 370 million-odd subscriber base.
    • The deal may also open up the entire WhatsApp consumer base of around 400 million — to Reliance, including those on other telecom platforms such as Airtel and Vodafone.

    The following concern could arise from the deal and the UPSC can frame a question based on these concern, like ” Recently a global IT giant acquired a significant stake in an Indian telecom giant. Discuss the various issues which could arise from coming together of such dominant players.”

    What are the concerns in such deals?

    • Implications for consumer welfare: Given the dominant market position of the players, concerns over the market structure and its implications for consumer welfare are bound to arise.
    • Questions over net neutrality: The tie-up also raises questions on net neutrality with the possibility of preferential treatment being granted.
    • Data privacy issue: Third, given the data privacy issues highlighted in the past by the Cambridge Analytica episode, for instance, there are apprehensions over the enormous amounts of data that will be collected by these entities.
    • This concern gains significance especially when India still does not have a personal data protection law.

    Conclusion

    Whenever two dominant players of respective fields come together, it gives rise to concern. The government must keep watch on the implications and how such a deal plays out in the future. If the concerns raised turn out to come true, maybe India should come out with the antitrust law of its own.

     

  • Don’t waste the oil crisis

    This article discusses the factors that contributed to oil prices falling below zero, and where the prices are headed in the near future. There are suggestions for India to make the most of this oil crisis. In the last week, we covered the same topic but its focus was on increasing the storage capacity. This article also covers the geopolitical implications of oil prices remaining low for long.

    What negative price of the benchmark US crude WTI mean?

    • The collapse in the price of WTI reflected a technical peculiarity of futures trading.
    • Paper traders would normally have had two options- 1) To let their contract expire and take physical delivery 2) To pass on the contract to someone else.
    • The US was running out of crude oil storage capacity and traders knew they could not “risk” taking delivery.
    • There was no physical space to hold the product.
    • So their only option was to sell the contract.
    • On the last day before the contracts expired, the traders in desperation “paid” to offload their risk.
    • There was no physical transaction of oil.
    • The current future price is back in positive territory.

    The world running out of oil storage capacity

    • The world and not just the US was fast running out of storage capacity.
    • Production in excess of demand: This was because oil production was way in excess of demand.
    • The latter had crashed by almost 30 million barrels a day or mbd (the equivalent of OPEC’s entire production) because of the COVID-induced lockdown of transportation and industry.
    • The price of the other crude benchmarks had also dropped but not the same extent — the North Sea Brent fell, for instance, to $15/bbl, a level not seen since 1999.
    • The reason was that unlike the WTI, which is traded in the US and therefore dependent on US inland storage capacity, the other crudes have access to seaborne storage (oil tankers).
    • This latter capacity is, however, fast filling up and the price of these crudes may also hit historic lows.

    So, where the oil prices are headed?

    • Oil prices will be volatile downwards until demand picks up and/or supply is further cut.
    • Demand will depend on the curve of post-COVID economic recovery.
    • Supply will rest on the outcome of further discussions amongst OPEC, Russia and, ironically, the US.
    • OPEC and Russia had earlier this month agreed to cut production by 10 mbd.
    • But clearly, this is not enough and further cutbacks have to be agreed on.
    • Whatever the scenario for economic recovery or supply constraints, there is a slim likelihood of crude oil prices reaching the average price levels of 2019 ($64) over the next 12 months or so.
    • More likely, they will be volatile downwards with $50 as the ceiling and with no floor.
    • This “low for longer” price outlook raises two issues for India’s policy-makers.

    As India depends on imports for over 80% of its oil requirements, oil prices have wide implications for the financial health of India. Safe oil supply lines are essential for its energy security. Both these points are important from the UPSC point of view. Following two points deal with these two factors.

    Two issues that India’s policy-makers need to consider-

    1. Disruption of oil supply lines and problems of diaspora

    • Every oil producer with no exception will face a budgetary crisis.
    • Some, like Saudi Arabia, the UAE and Kuwait will finance their social and economic commitments by cutting costs, increasing debt and drawing down on their sovereign reserves.
    • Others like Iran, Iraq, Nigeria and Venezuela, who have no such cushion and whose credit ratings are junk, will confront deepening political and social crises.
    • Economic plan: India should build into its economic plans the possibility that its traditional oil supply routes could get disrupted.
    • And that its diaspora, whose remittances are of significance, could face disproportionate hardship as these economies retrench.

    India has the largest diaspora in the world and sends as much as $80 billion back home as remittances. So, any impact on diaspora in oil economies has implication for India from this perspective as well.

    2. Empower the oil traders and remove bureaucratic control

    • On the day prices hit negative territory, it is unclear whether the trading experts in our oil PSUs had the flexibility to even contemplate “buying” the WTI futures contract for June, taking delivery, shipping it to India and storing it someplace.
    • It is also not clear whether they had the authority to lock in low prices through forward contracts.
    • Storage capacity and WTI quality mismatch: There is a shortage of storage capacity in India and a mismatch between the quality of WTI and the requirements of our refineries.
    • India cannot leverage the current market conditions of low and volatile oil prices to our national advantage unless we empower the traders and leave them unencumbered from bureaucratic control.
    • Most importantly, protect them from the three Cs ( CVC, CBI and CAG) in case their trade goes awry.

    Conclusion

    This oil market crisis could be made to work to our advantage. We must not waste this opportunity. There is a need to remove the bureaucratic hurdles in our PSUs, increasing storage capacity and sound financial planning by the government to make the most of this oil crisis.

    Back2Basics: What is WTI  and Brent crude benchmark?

    • West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.
    • This grade is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.

    Brent Crude

    • Brent Crude is a trading classification of sweet light crude oil that serves as one of the two main benchmark prices for purchases of oil worldwide.
    • This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.

    Futures contract

    • In finance, a futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other.
    • The asset transacted is usually a commodity or financial instrument.

  • What is Operation Twist?

    The Reserve Bank of India (RBI) has announced simultaneous purchase and sale of government bonds in a bid to soften long-term yields under its Operation Twist.

    Operation Twist

    • Operation Twist is a move taken by U.S. Federal Reserve in 2011-12 to make long-term borrowing cheaper.
    • It first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
    • It is the name given to a Federal Reserve monetary policy operation that involves the purchase and sale of bonds.
    • The operation describes a form of monetary policy where the bank buys and sells short-term and long-term bonds depending on their objective.

    Its genesis

    • The name “Operation Twist” was given by the mainstream media due to the visual effect that the monetary policy action was expected to have on the shape of the yield curve.
    • If we visualize a linear upward sloping yield curve, this monetary action effectively “twists” the ends of the yield curve, hence, the name Operation Twist.
    • To put another way, the yield curve twists when short-term yields go up and long-term interest rates drop at the same time.

     Back2Basics: Open Market Operations

    • Open market operations are the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
    • The objective of OMO is to regulate the money supply in the economy.
    • When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
    • OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.