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GS Paper: GS3

  • How reverse repo rate became benchmark interest rate in the Indian economy?

    Context

    • The Indian economy’s slowdown during 2018 and 2019 is becoming much worse in 2020 with the spread of COVID-19 and the stalling of almost all economic activity.
    • Like most other central banks in the world, the RBI, too, has tried to cut interest rates to boost the economy.
    • However, unlike in the past, when the RBI used its repo rate as the main instrument to tweak the interest rates, today, it is the reverse repo rate that is effectively setting the benchmark.

    We can expect a straight forward question based on this newscard.  For example:  “Critically examine the efficacy of reverse repo rate as benchmark interest rate in the Indian economy. “

    What are repo and reverse repo rates?

    • The repo rate is the rate at which the RBI lends money to the banking system (or banks) for short durations.
    • The reverse repo rate is the rate at which banks can park their money with the RBI.
    • With both kinds of the repo, which is short for repurchase agreement, transactions happen via bonds — one party sells bonds to the other with the promise to buy them back (or repurchase them) at a later specified date.
    • In a growing economy, commercial banks need funds to lend to businesses.
    • One source of funds for such lending is the money they receive from common people who maintain savings deposits with the banks. Repo is another option.

    Repo as benchmark

    • Under normal circumstances, that is when the economy is growing; the repo rate is the benchmark interest rate in the economy.
    • This is because it is the lowest rate of interest at which funds can be borrowed and, as such, it forms the floor rate for all other interest rates in the economy.
    • For instance, the interest rate consumers would have to pay on a car loan or the interest rate they will earn from a fixed deposit etc.

    What has changed now?

    • Over the last couple of years, India’s economic growth has decelerated sharply.
    • This has happened for a variety of reasons and has essentially manifested in lower consumer demand.
    • In response, businesses held back from making fresh investments and, as such, do not ask for as many new loans.
    • Add to this, the pre-existing incidence of high non-performing assets (NPAs) within the banking system.
    • Thus, the banks’ demand for fresh funds from the RBI has also diminished. This whole cycle has acutely intensified with the ongoing lockdown.

    Consequences: Rise in Liquidity

    • As such, the banking system is now flush with liquidity for two broad reasons.
    • On the one hand, the RBI is cutting repo rates and other policy variables like the Cash Reserve Ratio to release additional and cheaper funds into the banking system so that banks could lend.
    • On the other, banks are not lending to businesses, partly because banks are too risk-averse to lend and partly because the overall demand from the businesses has also come down.

    So, how has reverse repo become the benchmark rate?

    • The excess liquidity in the banking system has meant that banks have been using only the reverse repo (to park funds with the RBI) instead of the repo (to borrow funds).
    • As of April 15, RBI had close to Rs 7 lakh crore of banks’ money parked with it.
    • In other words, the reverse repo rate has become the most influential rate in the economy.

    What has the RBI done?

    • Recognising this, the RBI has cut the reverse repo rate more than the repo (see graph) twice in the spate of the last three weeks.
    • The idea is to make it less attractive for banks to do nothing with their funds because their doing so hurts the economy and starves the businesses that genuinely need funds.

    Will the move to cut reverse repo, work?

    • It all depends on the revival of consumer demand in India.
    • If the disruptions induced by the outbreak of novel coronavirus continue for a long time, consumer demand, which was already quite weak, is likely to stay muted.
    • Businesses, in turn, would feel no need to borrow heavily to make fresh investments.
    • If consumer demand revives quickly, the demand for credit will build up as well.

    Concerns of lower reverse repo

    • From the banks’ perspective, it is also important for them to be confident about new loans not turning into NPAs, and adding to their already high levels of bad loans.
    • Until banks feel confident about the prospects of an economic turnaround, cuts in reverse repo rates may have little impact.

    Back2Basics: Long Term Repo Operations (LTRO)

    • The LTRO is a tool under which the RBI provides 1-3 year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
    • Funds through LTRO are provided at the repo rate.
    • But usually, loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
    • According to the RBI, the LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
    • The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo etc.

  • SDR general allocation by IMF

    • Finance Minister has said that India could not support a general allocation of new Special Drawing Rights (SDR) by the IMF because it might not be effective in easing coronavirus-driven financial pressures.
    • FM Nirmala Sitharaman has stated that such a global liquidity boost by the IMF could produce potentially costly side-effects if countries used the funds for “extraneous” purposes.

    Details of SDR mechanism:

    What is SDR?

    • The SDR is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.
    • To participate in this system, a country was required to have official reserves.
    • This consisted of a central bank or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency.
    • It is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi.
    • It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members.
    • The value of the SDR is not directly determined by supply and demand in the market but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket.

    Who can hold SDRs?

    • SDRs can be held and used by member countries, the IMF, and certain designated official entities called “prescribed holders”.
    • It cannot be held, for example, by private entities or individuals.
    • Its status as a reserve asset derives from the commitments of members to hold, accept, and honour obligations denominated in SDR.
    • The SDR also serves as the unit of account of the IMF and some other international organizations.

    General allocation of SDRs

    • An SDR allocation is a low-cost way of adding to members’ international reserves, allowing members to reduce their reliance on more expensive domestic or external debt for building reserves.
    • The IMF has the authority under its Articles of Agreement to create unconditional liquidity through “general allocations” of SDRs to participants in its SDR Department (currently, all members of the IMF) in proportion to their quotas in the IMF.

    The SDR Interest Rate

    • The interest rate on SDRs, or the SDRi, provides the basis for calculating the interest rate that is charged to member countries when they borrow from the IMF and paid to members for their remunerated creditor positions in the IMF.
    • It is also the interest paid to member countries on their own SDR holdings and charged on their SDR allocation.
    • The SDRi is determined weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of five basis points.

    How many SDRs have been allocated so far?

    The general SDR allocation of August 28, 2009 is by far the biggest allocation to date:

    • SDR 9.3 billion was allocated in yearly installments in 1970–72.
    • SDR 12.1 billion was allocated in yearly installments in 1979–81.
    • SDR 161.2 billion was allocated on August 28, 2009.

    What happens to the SDRs once they are allocated?

    • The IMF’s SDR Department keeps records of members’ SDR allocations and holdings; the SDR Department is also the channel through which all transactions and operations involving SDRs are conducted.
    • Once allocated, members can hold their SDRs as part of their international reserves or sell part or all of their SDR allocations.
    • Members can exchange SDRs for freely usable currencies among themselves and with prescribed holders; such exchange can take place under a voluntary arrangement or under designation by the Fund.
    • IMF members can also use SDRs in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for future quota increases.

    Issues with new allocations

    • New reserves are allocated according to members’ quotas — or shares in the IMF.
    • A great deal of the benefit in 2009 went to advanced economies that didn’t need help in accessing markets or financing fiscal deficits.
    • If the same system is being used now, only 40 per cent of the total would be given to the emerging economies. That is not good enough.

    Other reasons

    • The possible extraneous purposes FM could be referring to maybe misuse of resources for terror funding or some such purpose by neighbours.
    • This may seem far-fetched to some, but is par for the course for the government.
    • The other possibility is that India is merely trying to prove its loyalty to the Trump administration.
    • India has already requested to access the US Fed’s currency swaps.

  • [pib] What is Big Bang Nucleosynthesis (BBN)?

    Indian researchers have discovered hundreds of Li-rich giant stars produced during BBN indicating that Li is being produced in the stars and accounts for its abundance in the interstellar medium.

    Most of the space based theories and missions are focussed on the formation of our solar system. BBN is the most basic auxillary among them.

    What is Big Bang Nucleosynthesis (BBN)?

    • BBN is the production of nuclei other than those of the lightest isotope of hydrogen during the early phases of the Universe.
    • Primordial nucleosynthesis is believed by most cosmologists to have taken place in the interval from roughly 10 seconds to 20 minutes after the Big Bang.
    • It is calculated to be responsible for the formation of most of the universe’s helium in various isotopic forms.
    • Essentially all of the elements that are heavier than lithium were created much later, by stellar nucleosynthesis in evolving and exploding stars.

    Lithium in space

    • Lithium (Li), is one of the three primordial elements, apart from Hydrogen and Helium (He), produced in the Big Bang Nucleosynthesis (BBN).
    • However, the present measurement of Li in the interstellar medium and very young stars is about 4 times more than the primordial value.
    • Thus, identifying sources of Li enrichment in our Galaxy has been a great interest to researchers to validate BBN as well as a stellar mixing process.
    • In general, stars are considered as Li sinks. This means that the original Li, with which stars are born, only gets depleted over stars’ life-time as Li burns at relatively very low temperatures.

  • [pib] What are Blazars?

    Researchers from the Indian Institute of Astrophysics (IIA), Bangalore have conducted the first systematic study on the gamma-ray flux variability nature on different types of Blazars.

    Strange terminologies from space-based studies are very important from prelims point of view.  We can expect a statement based question seeking to identify the term which is being referred to in the paragraph.

    What are Blazars?

    • At the center of most galaxies, there’s a massive black hole that can have mass of millions or even billions of Suns that accrete gas, dust, and stellar debris around it.
    • As these material falls towards the black hole, their gravitational energy gets converted to light forming active galactic nuclei (AGN).
    • A minority of AGN (~15%) emit collimated charged particles called jets travelling at speeds close to the speed of light.
    • Blazars are AGN whose jets are aligned with the observer’s line of sight.
    • Some blazars are thought to host binary black holes in them and could be potential targets for future gravitational-wave searches.

    Studying blazars

    • Blazars are the most luminous and energetic objects in the known universe were found to be emitters of gamma-rays in the 1990s.
    • It is only with the capability of Fermi Gamma-ray space telescope (launched in 2008) to scan the entire sky once in three hours one is able to probe the flux variability characteristics of blazars on a range of time scales.
    • Gamma-ray band is one of the bands of the electromagnetic spectrum on which there is limited knowledge on the flux variability of blazars.
    • Major problem while studying them is to localize the site for the production of gamma-rays.

    Significance

    • The study of blazars could provide clues to the processes happening close to the black hole, not visible through direct imaging.
    • Exploring blazars will provide key inputs to constrain the high energy production site as well as the high energy emission processes.

  • Time for govt, RBI to rethink bank architecture

    To deal with the damage inflicted by the corona crisis on the economy, both the RBI and the government are planning various monetary and fiscal measures. In its latest measures, the RBI has further reduced the reverse repo rate. This article discusses the impact of these measures and explains why the first round of measures failed in achieving the desired result.

    What was announced in the second round of policy measures by the RBI?

    • RBI reduces the interest on money banks keep in the central bank (reverse repo down by 25 basis points).
    • RBI gives ₹50,000 crores to banks through targeted long-term repo operations or TLTRO 2.
    • And another ₹50,000 crores to Small Industries Development Bank of India (Sidbi) and National Bank for Agriculture and Rural Development (Nabard) to lend to microfinance institutions (MFIs) and non-banking financial companies (NBFCs).

    Banks not transmitting the money

    • Banks globally have a problem.
    • They are not transmitting the money that central banks are providing to businesses that need the money.
    • Imagine that the world has been put into a business coma as we wait for the pandemic to recede.
    • Money to pay rents, interest and salaries is needed by the business to stay alive during this period and banks are showing reluctance to step in.
    • Firms and tiny entrepreneurs need to borrow to stay afloat.
    • Banks typically lend to the larger part of the market and NBFCs and MFIs to the rest—they provide the last mile that banks do not.

    Measures by the RBI to increase the money supply in the market

    • The US Fed buying bonds directly: The US Federal Reserve has taken to buying corporate bonds directly rather than through banks.
    • RBI has not gone that far, but is using its firepower to nudge banks to lend to those who are credit-worthy and who desperately need the money.
    • It has done two things to facilitate this.

    What reduction in Reverse Repo rate by the RBI means?

    • What is reverse repo rate? This is the rate at which banks lend to the central bank—they keep their surplus money with the RBI and get some interest on it.
    • Banks borrow from RBI at the repo rate, which is 4.4% right now.
    • A few weeks ago, the central bank had reduced the reverse repo by a larger percentage than the repo to decrease the incentive to banks to keep money with RBI.
    • But that had a limited impact as on 15 April, banks still had almost ₹7 trillion with the RBI under this window.
    • In the second round, RBI has cut the reverse repo by another 25 basis points to 3.75% to increase the difference between the borrowing rate and the lending rate.
    • What would be the impact of the second reduction in the reverse repo? The RBI is hoping that this would make banks lend to firms, rather than keeping their money safe with RBI.
    • The difference between the rate of borrowing and lending is now 65 basis points.

    An issue of monetary policy transmission is a recurring one. The RBI always try to ensure the transmission but there are several factor that prevent it. Make note of these factors.

    Risk aversion of the banks

    • Banks are displaying deep risk aversion—the desire to keep their capital safe rather than risk investing in investment-worthy bonds.
    • The first round of money put into the system through TLTRO 1.0, brought ₹1 trillion.
    • TLTRO is long-term (one-to-three years) funding to banks at the repo rate or a short-term rate.
    • TLTRO money didn’t reach small and medium firms: Banks took the cheap loan and lent to high-rated public sector units (PSUs) and AA-plus firms—essentially entities who had enough liquidity.
    • The money did not find its way to smaller and medium firms, NBFCs and MFIs—entities that actually reach the last mile.
    • RBI has put another ₹50,000 crores as part of TLTRO 2.0.
    • Banks can only get this money if they lend to NBFCs and MFIs.
    • For A and A-minus (these are still investment-worthy) bonds issued by firms in these sectors, banks stand to get a return of between 10-14%.
    • Banks are borrowing at 4.4% and have the option to lend at a multiplier.
    • That is the incentive given by the RBI to get money down the pipeline.
    • Banks stand to lose 65 basis points if they seek the safety of money with the RBI or stand to gain almost 6-10 percentage points in interest if they lend.
    • It remains to be seen if banks take this nudge and begin lending to lower than the highest safety bonds.

    Refinance to three institutions

    • Another ₹50,000 crores is being provided as a refinance to three institutions-Sidbi, Nabard and National Housing Bank.
    • These banks reach the small-scale firms, rural sector, housing finance firms, NBFCs and MFIs.
    • Again, this should help money reach the last mile.
    • Clearly, there is too much competition at the top end of the market—everybody wants the safe paper and deals.

    The UPSC could ask a direct question with reference to the issue of policy transmission and how it is a serious challenge in crisis such as Covid -19. So, following are some suggestions to deal with this issue.

    Way forward

    • Rethink the bank architecture: With transmission, or the liquidity given by the central bank not going down the line, maybe this is a good time for the government and the RBI to rethink its bank architecture.
    • Develop bond a corporate bond market: There is very little action at the middle and lower end of the market. The development of a robust corporate bond market will help.
    • Early alarm system: The setting up of an early alarm system as proposed by the Financial Resolution and Deposit Insurance (FRDI) Bill to prevent a financial firm failure that takes the whole system down would be a step in the right direction.

    Back2Basics: What is the transmission of monetary policy?

    • Monetary transmission refers to the process by which a central bank’s monetary policy signals (like repo rate) are passed on, through the financial system to influence the businesses and households.
    • There are many monetary policy signals by the RBI; the most powerful one is the repo rate.
    • When repo rate is changed, it brings changes in the overall interest rate in the economy as well.
    • As a result of a decrease in repo rate, the interest rate on loans by banks also changes and this encourages consumption and investment activities of businesses and households.
    • In an economy, both consumption and investment are often financed by borrowings from banks.
    • As the repo rate brings changes in market interest rate, the repo rate channel is often referred to as interest rate channel of monetary transmission.

  • How the RBI is handling ‘The Great Lockdown’?

    To deal with the crippling effects of the pandemic on the economy the government has unveiled certain fiscal measures. After announcing the first round of monetary measures the RBI has unveiled the second round of policy announcements to align itself with the government in its efforts to review the economy. Following are the measures announced by the RBI in its second such announcement.

    • The IMF has called the ongoing economic crisis due to Covid-19 as “The Great Lockdown” and termed it to be the worst recession since the Great Depression.
    • The total estimated loss to global economic growth is pegged at $9 trillion — more than three times India’s GDP.
    • However, while the rest of the world is certain to contract, India is hoping to be one of the few countries that expand their overall GDP, regardless of how small that increase may be.
    • In this regard, both the Centre and state governments, as well as the RBI, have been coming out with policy announcements that mitigate economic distress.

    UPSC can frame the question based on the measures announced by the RBI like “What measures were announced by the RBI to deal with Covid-19 impact on the economy?”. Also, pay attention to various terms and their effect on the economy from the macroeconomic point of view. That understanding helps us to answer the question based on basic concepts.

    What are the announcements made by RBI?

    A) Cutting Reverse-Repo Rate

    • To begin with, the RBI has cut the reverse repo rate further by 25 basis points (100 basis points make up one full percentage point).
    • The reverse repo rate now stands at 3.75 per cent while the repo rate is 4.40 per cent.
    • The idea behind repeatedly cutting reverse repo more than the repo is to incentivise banks to borrow from it at low rates and lend it forward to customers.

    B) Targeted Long Term Repo Operations

    • RBI has announced another TLTRO of Rs 50,000 crore but this time it has mandated that 50 per cent of this amount borrowed by the banks must go to small and mid-sized NBFCs and Micro Finance Institutions (MFIs).
    • Again, the benefits of this move are two-fold. One, it provides more liquidity.
    • More importantly, it also provides it targeted to those institutions that are most hit by the economic slowdown and, as such, most in need of funds to survive themselves.

    C) Credit to NBFCs and MFIs

    • All India financial institutions (AIFIs) such as the NABARD, etc. will be provided special refinance facilities for a total amount of Rs 50,000 crore by the RBI.
    • This credit will help the end consumer, especially in the rural sector, small industries, and housing finance companies.

    D) Expanding Ways and Means Advances (WMAs)

    • On the issue of providing liquidity and fulfilling its role as “the lender of last resort”, the RBI also announced that it will provide more funding to state governments — under the WMA facility.
    • The WMA is essentially is a facility by which state governments borrow from the RBI to meet the shortfall between their revenues and their expenditure.
    • But the WMA is a short-term measure, only meant for exigencies.

    E) Easing NPA norms

    • Apart from easing liquidity in the system like in the past, the other focus has been to provide an easier regulatory regime.
    • The global lockdown has almost completely halted economic activity.
    • Under the circumstances, it is natural that business will struggle to pay back their loans and there will be a steady accretion of non-performing assets (NPAs) across the board.
    • Similarly, to ensure that loans given to real estate projects, that are getting delayed due to the crisis, do not turn into NPAs, the RBI provided an extension of another year before they are recognised as NPAs.

    F) Easing LCR norms

    • Lastly, given the stress on the system and the demand for cash, the RBI has allowed Scheduled Commercial Banks to reduce their Liquidity Coverage Ratio from 100 per cent to 80 per cent with immediate effect.
    • The LCR essentially mandates the amount of cash that a bank is required to keep with itself.
    • At 100 per cent LCR, a bank would have been required to keep 100 per cent of the net cash it expects to flow out of the bank over the next 30 days.
    • With this being reduced to 80 per cent, banks would have more cash to deal with.

    Though no direct question on monetary policy was asked in the recent past,  understanding the basic concepts stands us in good stead while writing the related answer in the exam. So, the terms mentioned above like-TLTRO, WMAs etc. are important from exam point of view.

  • OBICUS Survey by RBI

    The Reserve Bank of India has launched the latest round of quarterly order books, inventories and capacity utilization survey (OBICUS) of the manufacturing sector.

    OBICUS is something new than we often get to hear from RBI…. Most recent was Ways and Means Advances. We can expect prelims question like- “Order books, inventories and capacity utilization survey (OBICUS) of the manufacturing sector is held by” – with options like NSSO, Labour Bureau etc.

    OBICUS

    • OBICUS survey on the manufacturing sector is published quarterly by the RBI since March 2008.
    • It provides an insight into the demand conditions faced by the Indian manufacturing sector.
    • It covers over 2500 public and private limited companies in the manufacturing sector.
    • The company-level data collected during the survey are treated as confidential and never disclosed.

    Items included in OBICUS

    • The information collected in the survey includes quantitative data on new orders received during the reference quarter, backlog of orders, pending orders, total inventories with a breakup between work-in-progress (WiP) and finished goods (FG) inventories and item-wise production.

    Significance of OBICUS

    • The survey provides valuable input for monetary policy formulation.
    • It represents the movements in actual data on order books, inventory levels of raw materials and finished goods and capacity utilization.
    • These are considered as important indicators to measure economic activity, inflationary pressures and the overall business cycle.
    • The survey also gives out the ratio of total inventories to sales and ratio of raw material (RM) and finished goods (FG) inventories to sales in percentages.

  • [pib] Software Technology Parks of India (STPI)

    Government of India has given 4 months’ Rental Waiver to the IT Companies Operating from Software Technology Parks of India (STPI) Centers.

    STPI which witness multi-million transactions every day are the most promising workplaces for startups in India. They have gained popularity not among Indians, but also on an international platform for its state of the art infrastructure, world-class working conditions and amenities. We can expect a mains question like “Discuss the role of STPIs in making India a hub of ITeS exports”.

    Why this waiver?

    • The rental waiver will provide relief to the industry in this crisis situation emerged due to COVID19 pandemic.
    • Most of these units are either Tech MSMEs or startups.
    • This effort is also in the larger interest of around 3,000 IT/ ITeS employees who are directly supported by these units.

    What are STPI?

    • An STPI is a society established in 1991 by the Ministry of Electronics and Information Technology.
    • The objective of an STPI is to encourage, promote and boost the export of software from India.
    • STPI maintains internal engineering resources to provide consulting, training and implementation of IT-enabled services.

    STPI Scheme

    • The STP Scheme is a 100 per cent Export Oriented Scheme for the development and export of computer software, including export of professional services using communication links or physical media.
    • This scheme is unique in its nature as it focuses on one product/sector, i.e. computer software.
    • The scheme integrates the government concept of 100 per cent Export Oriented Units (EOU) and Export Processing Zones (EPZ) and the concept of Science Parks / Technology Parks, as operating elsewhere in the world.

    Who can get a floor on STPI?

    • An Indian company
    • A subsidiary of a foreign company
    • A branch office of a foreign company

    Features of the STPI

    • The STP Scheme provides various benefits to the registered units, including 100% foreign equity, tax incentives, duty-free import, duty-free indigenous procurement, CST reimbursement, DTA entitlement, and deemed exports.
    • STPI centres also provide a variety of services including high-speed data communication, incubation facilities, consultancy, network monitoring, data centres and data hosting.

  • [pib] “Kisan Rath” mobile app to facilitate transportation of farm produce

    The Union Ministry of Agriculture & Farmers’ Welfare has launched a mobile application to facilitate farmers & traders in searching for transport vehicles for movement of Agriculture & Horticulture produce.

    Initiatives as such are less likely to be asked in the prelims as the name and purpose create no different analogy. But for the sake of information and mains perspective, it is vital to remember ‘Kisan Rath’ while emphasizing on Agricultural marketing reforms.

    “Kisan Rath” mobile app

    • The app aims to facilitate Farmers and Traders in identifying the right mode of transportation for movement of farm produce ranging from foodgrains, fruits & vegetables, oilseeds, spices, fibre crops etc.
    • Primary transportation would include movement from Farm to Mandis, FPO Collection Centre and Warehouses etc.
    • Secondary Transportation would include movement from Mandis to Intra-state & Inter-state mandis, Processing units, Railway station, Warehouses and Wholesalers etc.
    • It also facilitates traders in transportation of perishable commodities by Reefer (Refrigerated) vehicles.

    Utility of the app

    • Transportation of Agri produce is a critical and indispensable component of the supply chain.
    • Kisan Rath will ensure smooth and seamless supply linkages between farmers and the market.

  • Virus outbreak can potentially spur the next quantum leap for computing

    The article suggests that the corona crisis would speed up research in the field of quantum computing. The tremendous speed offered by quantum computers will help us find a cure for diseases like Covid-19 in a much shorter duration. This article explains the limitations of classical computers, working of quantum technology, and how quantum computer overcomes these limitations.

    Use of supercomputer to find the cure of Covid-19

    • The whole world is pressurized into quickly discovering a vaccine and a cure for covid-19.
    • IBM’s Summit, the world’s fastest supercomputer, was used for running numerous simulations and computations.
    • These simulations and computations help scientists find promising molecules to fight the pandemic.
    • The latest update says the Summit has been able to identify 77 candidate molecules that researchers can use in trials.
    • This was achieved in just two days, while, traditionally, it has taken months to make such progress.

    Computing capacity as a limit on molecular discoveries

    • Today, faster molecular discoveries are limited by computing capacity.
    • Molecular discoveries are also limited by the need for scientists to write codes for harnessing the computing power.
    • It is no secret that classical computing power is plateauing (e. it is not growing anymore)
    • And till we have scalable artificial intelligence (AI) and machine learning (ML), scientists will have to write code for not only different scenarios but also for different computing platforms.
    • So, what we need today is more computing power.

    The following points explain the limits of classical computers. Pay attention to the Moore’s law, and how it explains the development of semiconductor technologies and in turn computers as a whole.

    What is the solution to the limits of classical computers?

    • Given that we have already neared the peak of classical computing, the solution probably is quantum computing.
    • Not just vaccines, quantum computing can accelerate many innovations, such as hyper-individualized medicines, 3-D printed organs, search engines for the physical world etc.
    • All innovations currently constrained by the size of transistors used in classical computing chips can be unleashed through quantum computing.
    • Moore’s law: In 1965, Gordon Moore had said the number of transistors that can be packed into a given unit of space will double about every two years.
    • Subsequently, in an interview in 2005, he himself admitted that this law can’t continue forever.
    • He had said: “It is the nature of exponential functions, they eventually hit a wall.”
    • Over the last 60 years, we reaped the benefits of Moore’s law in many ways.
    • For instance, compared to initial days of the Intel 4004, the modern 14nm processors deliver way bigger impact—3,500 times better performance and 90,000 times improved efficiency, at 1/60,000th the cost!
    • Yet, we are also seeing his 2005 statement coming true. All the experts agree that the ‘wall’ is very near.
    • So, what next? The answer again is probably the same—quantum computing.

    Quantum technology is one of the emerging and revolutionary technologies, you should be aware of the terms and general principle which lies at the heart of such technology. So, terms like superposition, qubit, binary etc are important if you want to answer a questions related to this technology.

    Quantum computing and its applications

    • It is no more a concept, there are working models available on the cloud.
    • How it works: Quantum computing uses the ability of sub-atomic particles to exist in multiple states simultaneously, until it is observed.
    • The concept of qubits: Unlike classical computers that can store information in just two values, that is 1 or 0, quantum computing uses qubits that can exist in any superposition of these values,
    • This superposition enables quantum computers to solve in seconds problems which a classical computer would take thousands of years to crack.
    • Applications: The application of this technology is enormous, and just to cite a few, it can help with the discovery of new molecules, optimize financial portfolios for different risk scenarios.
    • It can also crack RSA encryption keys, detect stealth aircraft, search massive databases in a split second and truly enable AI.

    Investment in the development of technology

    • In the Union budget this year, the Indian government announced investments of ₹8,000 crores for developing quantum technologies and applications.
    • Globally, too, countries and organizations are rushing to develop this technology and have already invested enormous capital towards its research.

    Conclusion

    Historically, unprecedented crises have always created more innovations than routine challenges or systematic investments. Coincidentally, current times pose similar opportunities in disguise for the development of quantum technologies.

    Back2Basics: Difference between bit and qubit

    • A binary digit, characterized as 0 and 1, is used to represent information in classical computers.
    • A binary digit can represent up to one bit of information, where a bit is the basic unit of information.
    • In classical computer technologies, a processed bit is implemented by one of two levels of low DC voltage.
    • And whilst switching from one of these two levels to the other, a so-called forbidden zone must be passed as fast as possible, as electrical voltage cannot change from one level to another instantaneously.
    • There are two possible outcomes for the measurement of a qubit—usually taken to have the value “0” and “1”, like a bit or binary digit.
    • However, whereas the state of a bit can only be either 0 or 1, the general state of a qubit according to quantum mechanics can be a coherent superposition of both.
    • Moreover, whereas a measurement of a classical bit would not disturb its state, a measurement of a qubit would destroy its coherence and irrevocably disturb the superposition state.
    • It is possible to fully encode one bit in one qubit.
    • However, a qubit can hold more information, e.g. up to two bits using superdense coding.
    • For a system of n components, a complete description of its state in classical physics requires only n bits, whereas in quantum physics it requires 2n−1 complex numbers.