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GS Paper: GS3

  • Armed Forces: their role during crisis, procedures for requisition

    As the Army moves in to take over the COVID-19 quarantine facility in Delhi, the procedure for calling the armed forces to help the civil administration is in the spotlight.

    Requisition the Army

    • The regulations permit civil authorities to requisition the Army for controlling law and order, maintaining essential services, assisting during natural calamities such as earthquakes, and any other type of help that may be needed by the civil authorities.
    • The procedure for requisitioning armed forces is governed under several guidelines including:
    1. ‘Aid to Civil Authorities’ under the guidelines laid in Instructions on Aid to the Civil Authorities by the Armed Forces, 1970;
    2. Regulations for the Army, Chapter VII, Paragraphs 301 to 327 and
    3. Manual of Indian Military Law, Chapter VII

    How is Army invited?

    • Civil administration requests the Local Military Authority for assistance, for the maintenance of law and order, maintenance of essential services, disaster relief and other types of assistance.
    • Armed forces can be asked to provide troops and equipment for a flag march, rescue and relief, evacuation, and immediate aid.
    • The current case of checking the spread of COVID-19 is different, as the medical aspect is predominant.
    • These resources are being controlled centrally and judiciously, because of the requirement of doctors, equipment and facilities.

    Why need Armed forces in such situations?

    • Besides the specialised medical resources, which are centrally controlled, the local units are prepared for maintenance of law and order, crowd control, curfew in sensitive areas etc.
    • Moreover provision of essential supply of electricity and water, restoration of essential services, emergency feeding and shelter, prevention of panic, prevention of theft and loot are other areas of concerns.
    • During such multi-faceted challenges, local authorities have shortfall to perform all such functions.

    In such situations, what happens to the armed forces’ primary role?

    • Providing aid to civil authorities, as and when called upon to do so, is a secondary task for the armed forces.
    • It cannot replace the primary role of ensuring external security and operational preparedness.

    Is there a ceiling on such deployment?

    • No, there is no such ceiling either of a duration of deployment or on the number of armed forces personnel that can be deployed to aid civil authority.
    • The National Crisis Management Committee (NCMC), headed by the cabinet secretary, is the final authority.

    Are there any templates or instances from the past that are applicable here?

    • The current situation is different from earlier cases such as tsunami or super-cyclone, which were natural disasters.
    • The major difference is that specialists are the key in the current situation, and their tasks cannot be performed by general duty soldiers.

    Who pays for the costs incurred?

    • The civil administration is responsible for the costs incurred by the armed forces in these roles.
    • The cost of assistance provided by the Armed Forces is recovered in accordance with the instructions contained in ‘Instructions on Aid to Civil Authorities by the Armed Forces 1970’.

    What is the role of the National Disaster Management Authority?

    • NDMA is involved in secondary follow-ups by the Home Ministry and is not very actively involved in the current case.
    • The roles of the Ministries of Health, Home, Civil Aviation and Defence are predominant in this case.
    • The armed forces are aligned with them at the apex level viz NCMC.
    • The directions are followed by execution-level coordination which is done by respective secretaries in the government.

  • TB diagnostic kit ‘Truenat’

    ‘Truenat’, a diagnostic machine used to test drug-resistant TB has now been approved by Indian Council of Medical Research (ICMR) for conducting Covid-19 tests.

    Truenat

    • The Truenat TB test is a new molecular test that can diagnosis TB in one hour as well as testing for resistance to the drug rifampicin.
    • This test for TB uses a sputum sample taken from each patient.
    • It is a small battery operated device which requires minimal training and is usable even in smaller settings such as the Primary Health Centre.
    • It uses a chip-based technology and takes just up to 60 minutes for a test, screening or confirmatory.

  • Financing the pandemic rescue package

    Context

    The priority for India is to ensure that it overcomes the COVID-19 pandemic and kick-starts GDP growth.

    Financing strategy for the 1.7 lakh crores package

    • Rather than fix the weaknesses in the macroeconomy: a high fiscal deficit of 7.49% and government indebtedness that was 69% of GDP in 2019, the government wants to overcome the pandemic.
    • When COVID-19 cases began to increase, the Government of India (GoI) swung into action by announcing a 21-day national lockdown and a ₹1.7-lakh crore (approximately $22.59 billion) rescue package.
    • Financing strategy: Available in the state disaster relief fund is ₹60,000 crore, comprising ₹30,000 crore of the outstanding balance and the Central government’s allocation of a similar amount for FY2021.
    • Hence, the GoI needs to raise an additional ₹1.1-lakh crore,e., 65% of the rescue package outlay.
    • Its financing strategy should be to raise long-term funds at cost-effective rates, with flexible repayment terms that allow it to take tactical advantage of market movements.
    • Following are some of the options that the government can explore to raise the required amount.

    1. GDP-linked bonds

    • The GoI may issue listed, Indian rupee-denominated, 25-year GDP-linked bonds that are callable from, say, the fifth year.
    • What GDP-linked means? The coupon (interest) on a GDP-linked bond is correlated to the GDP growth rate and is subject to a cap.
    • The issuer, the GoI, is liable to pay a lower coupon during years of slower growth and vice-versa.
    • The callable feature from the fifth year till maturity allows the GoI to effect partial repayments during high growth years and when it earns non-recurring revenues such as proceeds from disinvestment of public sector enterprises (PSEs).
    • The listing of bonds provides investors with an exit option.
    • Examples from the world: Costa Rica, Bulgaria and Bosnia-Herzegovina issued the first pure GDP-linked bonds in the 1990s.
    • Argentina and Greece issued warrant-like instruments similar to GDP-linked bonds in 2005 and 2012 respectively. India could learn from their experience.
    • Timely GDP data is a prerequisite: Publishing reliable and timely GDP data is a prerequisite for the successful issue of GDP-linked bonds, which the GoI may use to part-finance the COVID-19 rescue package and to diversify its borrowing sources.

    2. Streamlining PSEs

    • The 15 largest non-financial central PSEs (CPSEs) in the S&P BSE CPSE index contributed approximately 75% of the GoI’s ₹48,256.41 crore dividend income from PSEs in FY2020.
    • The Union Budget projected PSE dividends to increase by 25% to ₹65,746.96 crore in FY2021.
    • This milestone is unlikely to be achieved in the current environment.
    • The 15 CPSEs have accumulated sizeable non-core assets including financial investments, loans, cash and bank deposits in excess of their operating requirements, and real estate.
    • The return on these assets (excluding real estate) is around 200 basis points lower than the returns on their core businesses.
    • These CPSEs owe the government ₹25,904 crore as of end-March 2019.
    • These non-core assets must be monetised to repay statutory dues and upstream dividends to GoI.
    • Formation of HOLDCO: While loans and excess cash and bank deposits may be monetised within three months, streamlining investments and selling real estate is a time-consuming process.
    • It is imperative for the GoI to form a PSE and public sector bank holding company (‘Holdco’) along the lines of Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional Berhad.
    • The Holdco will enable PSEs to monetise their non-core assets at remunerative prices, maximise their enterprise value and focus on their core businesses.
    • The ₹30,168 crore loans that CPSEs have extended to employees, vendors and associates may be securitised or refinanced, with CPSEs guaranteeing loans extended to weak counterparties.
    • Excess liquidity with PSEs: It is essential that businesses maintain liquidity, especially during a downturn. However, the outstanding cash and bank deposits of the 15 CPSEs (₹64,253 crore) is in excess of their operating requirements.
    • CPSEs must determine the cash they require to meet, say, six months of operating expenses and use the excess cash to repay statutory dues and upstream dividends to the GoI.
    • Banks must extend to CPSEs committed lines of credit that the latter may draw down during exigencies.
    • Financial investments of PSEs be transferred to HOLDCO: The 15 CPSEs have accumulated ₹93,562 crore financial investments comprising listed and unlisted debt, equity and mutual fund units.
    • These exclude investments in associates and joint ventures.
    • The CPSEs ought to transfer these investments to Holdco, which can manage the portfolio and transfer the returns to the original investors.
    • Real estate holdings of PSEs: One important non-core asset, whose value is likely to exceed the combined value of other non-core assets, is the real estate holdings of PSEs.
    • In September 2018, the GoI identified properties of nine PSEs (Air India, Pawan Hans, Hindustan Fluorocarbons, Hindustan Newsprint, Bharat Pumps & Compressors, Scooters India, Bridge and Roof Co, Hindustan Prefab, and Projects & Development India) to be divested.
    • The GoI must mandate all PSEs and government departments to transfer their non-core properties to Holdco, which can opportunistically sell these properties and transfer the proceeds to the owners.

    Refrain from asking RBI to pay more dividend

    • The Reserve Bank of India (RBI) has allocated ₹1 lakh crore to carry out long-term repo operations in tranches and has reduced the repo rates by 75 basis points to 4.4% to help banks augment their liquidity in the wake of the pandemic.
    • Recognising the RBI’s liquidity requirements, the GoI must refrain from asking the RBI to pay more dividends that it can viably pay.
    • During the five years ending on June 30, 2019, the RBI paid the GoI 100% of its net disposable income, with its FY2019 dividends more than trebling to ₹1.76 lakh crore from ₹50,000 crore in FY2018.
    • The Bimal Jalan panel constituted in 2019 to review the RBI’s economic capital framework opined that the RBI may pay interim dividends only under exceptional circumstances and that unrealised gains in the valuation of RBI’s assets ought to be used as risk buffers against market risks and may not be paid as dividends.

    Conclusion

    The Bimal Jalan panel recommendation must be adhered to in letter and spirit. The GoI may finance the COVID-19 rescue package by issuing GDP-linked bonds, tapping PSEs’ excess liquidity and monetising non-core assets.

  • Is e-NAM portal capable of supporting farmers?

    Context

    • The union government has launched new features in electronic agriculture market platform (e-NAM), to decongest wholesale markets amid coronavirus threat.
    • Whether these features would solve the problems of farmers is a matter of question.

    What is e-NAM?

    • eNAM platform is an online trading platform for agricultural commodities in India.
    • It was launched on April 14, 2016 as a pan-India electronic trade portal linking agricultural produce market committees (APMCs) across all states.
    • It facilitates farmers, traders and buyers with online trading in commodities.
    • It helps in better price discovery and provides facilities for smooth marketing of their produce.

    Trading on e-NAM

    • Over 90 commodities including staple food grains, vegetables and fruits are currently listed in its list of commodities available for trade.
    • The farmer needs to upload details of his produce and a photo of the harvest on the platform.
    • It actually provided for evaluation and grading of produce.

    Why farmers don’t prefer e-NAM?

    • Lack of internet connectivity is another issue impeding progress.
    • Farmers feel more comfortable with physical trading rather than going online as they face issues with transportation for their produce.
    • Only 8.42 per cent of the total mandis are connected through the e-NAM platform.

    Issues with grading

    • There are no scientific sorting/grading facilities or quality testing machines.
    • The grading process makes farmers bring a sample of their produce that is evaluated and graded by agricultural assessors.
    • A report on the sample can be accessed by any buyer in any state before making the purchase, once graded by assessors.
    • The government realized the complexities allowed for gradation from a warehouse nearest to them and farmers need not commute to a mandi from remote areas.
    • It is, however, still not clear whether produce can be graded at the warehouse or not.

     

  • [pib] Chitra Acrylosorb Secretion Solidification System

    Scientists at Sree Chitra Tirunal Institute for Medical Sciences and Technology (SCTIMST) have designed and developed a highly efficient superabsorbent material for liquid respiratory and other body fluid solidification and disinfection for the safe management of infected respiratory secretions.

     Chitra Acrylosorb Secretion Solidification System

    • It is a highly efficient superabsorbent material for liquid respiratory and other body fluid solidification and disinfection.
    • AcryloSorb can absorb liquids at least 20 times more than its dry weight and also contains a decontaminant for in situ disinfection.
    • Containers filled with this material will immobilize the contaminated fluid by solidifying it (gel-like), thus avoiding spillage and will also disinfect it.
    • The canister containing the solidified waste canister can then be decomposed as all other biomedical waste by incineration.

    How it works?

    • In the developed system, suction canisters, disposable spit bags have been designed with “AcryloSorb” technology.
    • They are lined inside with the AcryloSorb material.
    • The AcryloSorb suction canisters will collect the liquid respiratory secretions from ICU patients or those with copious secretions treated in the wards.
    • The container will be spill-proof and can be sealed after use, making it safe and fit for disposal through the usual incineration system for biomedical wastes.

    Significance of Acrylosorb

    • Sealable and disposable spit bags can be provided for solidifying the sputum and saliva of ambulant patients with respiratory infections, which can then be incinerated.
    • Thus it reduces the risk for the hospital staff, the need for personnel for disinfecting and cleaning the bottles and canisters for reusing them and makes the disposal safer and easier.

  • A different economic approach

    Context

    The Covid-19 pandemic and subsequent 21-day lockdown by India has forced us to resolve the public health versus economic health trade-off.

    The debate over lockdown

    • No clear idea on number of lives saved: As it fights COVID-19 with its meagre healthcare resources, India has chosen to bring the economy to a near halt with no clear idea of how many lives can be saved in this manner.
    • What is going to be the cost of this decision? The 21-day lockdown will reduce the gross value added (GVA) during this period to near zero.
    • More than half the GVA is contributed by the unorganised sector.
    • A disproportionate burden of the economic cost has fallen on this large segment.
    • Debate: The suffering of the stranded migrant labourers has set off a debate: is the disruption and the economic pain justified?
    • Is it worth sacrificing the economy to save lives?
    • And at the core of such questions is a policy dilemma: should public health matter more than economic health?

    So, what should be the policy objectives?

    • In time, a vaccine will become available. But the economy cannot remain shut until that happens.
    • A prolonged lockdown will extract a huge economic cost.
    • Therefore, the policy objective must be to find ways of ensuring that the lockdown ends early without compromising on public health.
    • Following are the policies that could ensure the twin objective of not ending lockdown without compromising on public health.

    1 The policy of aggressive testing and isolation

    • The economic cost of combating COVID-19 can be reduced by combining aggressive testing and isolation, a strategy proposed by economist Paul Romer for the U.S.
    • For it to work, people must be tested in large numbers.
    • Those who test positive must be isolated. This will make it unnecessary for the rest of the population to stay home and it will allow the economy to restart.
    • After ending the lockdown too, testing of randomly selected people must go on in large numbers, so that those found infected can be isolated.
    • Eliminating the fear of isolation: The success of this will depend on eliminating the fears associated with isolation. Such fears can be reduced only if isolation facilities are good.

    2 Ramp up the manufacturing capacity

    • The second precondition is the substantial ramping up of manufacturing capacities for medical-grade masks, gloves, gowns, ventilators, testing labs, etc.
    • This ought to be on a scale large enough for domestic use and, if possible, for exports for costs to be low.
    • The strategy calls for fully operational hospitals to be constructed in every district of the country in a matter of weeks.
    • Problem-solving of an unprecedented order will be required.
    • Recently, garment manufacturers in Coimbatore were asked to explore the possibility of re-purposing production lines to make masks.
    • There’s been no progress on this front, as the special-grade fabric required is difficult to source.
    • What about the funding? In normal times, governments wrestle with dilemmas such as whether to allocate the limited available tax money to education, health, public transport or a sop that could change the outcome of the next election in their favour.
    • But during a public health crisis, all resources must be used to ramp up healthcare capacities.

    Way forward

    • Investment in healthcare can resolve trade-off: Since the state of the lockdown is not a normal condition, the usual policy levers become ineffective.
    • Loan moratoriums and cash transfers can fend off bankruptcy and defaults for a few months and buy time on non-performing assets in banks.
    • But they cannot make good the GDP lost due to the economic shutdown because liquidity and cash released by monetary and fiscal policies cannot get transmitted to the real sector during an economic shutdown unless they are funnelled into the sector that is still active, which is healthcare.
    • If the public health sector can be the economy’s main engine for six months, the public health versus economic health trade-off can be resolved. The spread of COVID-19 will slow down.
    • The economic pain of combating the virus will reduce.
    • There will be jobs, including for low-skilled construction labourers. If planned and executed smartly, the severe health infrastructure deficit will get addressed.
    • Remove the price controls: Sadly, India’s economic policies for fighting COVID-19 are the opposite of what’s needed.
    • In a crisis, the first instinct of policymakers is to slap controls. Just about everything from masks to kits has been placed under price controls.
    • This has removed the incentive for private labs to ramp up capacities.
    • The government should fully subsidise testing: At zero MRP, more people with symptoms will come forward to get tested. Private labs will quickly ramp up capacities if they don’t have to worry about losses. The number of suppliers will increase. Costs will reduce. Private enterprise and technological innovations will come up with cheaper tests that produce results quicker.

  • [pib] Biofortified Carrot ‘Madhuban Gajar’

     

    Madhuban Gajar

    • It is a biofortified carrot variety with high β-carotene and iron content developed by Shri Vallabhhai Vasrambhai Marvaniya, a farmer scientist from Junagadh district, Gujarat.
    • The variety is being cultivated in more than 1000 hectares of land in Gujarat, Maharashtra, Rajasthan, West Bengal, Uttar Pradesh during the last three years.
    • It is a highly nutritious carrot variety developed through the selection method with higher β-carotene content (277.75 mg/kg) and iron content (276.7 mg/kg) dry basis.
    • It is used for various value-added products like carrot chips, juices, and pickles.
    • This carrot variety possesses a significantly higher root yield (74.2 t/ha) and plant biomass (275 gm per plant) as compared to check variety.

  • Farmers are at their wits’ end

    Context

    As global trade falls and supply disruptions persist, a prolonged lockdown will adversely affect food security.

    Fears of food crisis and impact of COVID-19 on agriculture

    • The COVID-19 pandemic has led to global concerns on the state of agriculture and food security.
    • Warning of food crisis: On the one hand, the Food and Agriculture Organization (FAO) has warned of a “food crisis” if countries do not protect vulnerable people from hunger and malnourishment.
    • On the other, farmers face a stalemate as they are unable to work on their land, earn remunerative prices and gain access to markets.

    We can try to understand the impact of COVID-19 on agriculture with three questions.

    • One, does the world have enough food to feed its people?
    • Two, is food available at affordable prices?
    • Three, how are farmers coping with the lockdown?

    Food stocks and prices in the world

    • Cereal stock in the world: According to the FAO, as on April 2, 2020, the total stock of cereals in the world was about 861 million tonnes. This translates to a stocks-to-use ratio (SUR) — i.e., the proportion of consumption available as stocks — of 30.7%.
    • The FAO considers this “comfortable”. The SURs for wheat, rice and coarse grains were 35.3%, 35.1% and 26.9%, respectively.
    • Variation among nations: World stocks are different from national stocks. About 52% of the global wheat stocks is held by China, and about 20% of the global rice stocks is held by India.
    • Rice importers may suffer: If the major holders of global stocks decide to turn precautionary and stop exporting, and if the lockdown is prolonged, countries dependent on rice imports will suffer.
    • Restriction on wheat export: Kazakhstan, a major wheat exporter, has banned exports. Russia, the largest wheat exporter, is expected to restrict its exports.
    • Restriction on rice export: Vietnam, the third-largest rice exporter, has stopped its exports, which will reduce the global rice exports by 15%.
    • If India and Thailand too ban exports, the world supply of rice will sharply fall.
    • In March 2020, the Philippines and the European Union, major rice importers, had inventories of rice enough to feed their populations for about three months.
    • Others, however, had inventories to hold on for about one month only. If the lockdown continues beyond a month, these countries will face food shortages.

    Stocks with India and output projections

    • India’s foodgrain output is projected to be about 292 MMT in 2019-20.
    • Stock with FCI: On March 1, 2020, the total stock of wheat and rice with the Food Corporation of India (FCI) was 77.5 MT.
    • Buffer stock norms: The buffer norms for foodgrain stocks — i.e., operational stock plus strategic reserves — is 21.04 MT.
    • Similarly, for pulses, India had a stock of 2.25 MT in mid-March 2020.
    • In both cases, the rabi harvest is slated to arrive in April 2020, and the situation is expected to ease further.

    Price fluctuation of food in the world

    • Fall in demand and supply and price fluctuation: There is always an element of uncertainty on how prices will behave if both demand and supply fall together.
    • Prices in different markets fluctuate considerably given differences in the extent of production, stocks, arrivals and supply disruptions.
    • According to the FAO, the world food price index fell by 4.3% and world cereal price index fell by 1.9% between February and March 2020 due to the weakening demand for food and the sharp fall in maize prices owing to poor demand for biofuels.
    • Price rise in Western economies: Retail prices of rice and wheat have been rising in the Western economies in March 2020.
    • The major reasons identified are panic buying by households, export restrictions by countries and continuing supply chain disruptions.
    • Retail prices of beef and eggs have also been rising.

    Demand and price fluctuation in India

    • WPI and CPI for food in India were rising from mid-2019 onwards, reflecting a rise in vegetable prices, especially onion prices.
    • January and February 2020 saw a moderate fall in these indices, but vegetable prices have remained high.
    • If food prices rise due to the lockdown, it will be on top of an already rising price curve.
    • However, unlike in the West, food prices in India have not risen after the lockdown.
    • While supplies have declined, demand has fallen too. This is because there has been a sharp fall in the consumption of foodgrains and vegetables. Similarly, the consumption of milk has fallen by 10-12%.

    The crisis in the harvesting and marketing of the crops

    Harvesting and marketing of crops are in crisis across India, because of-

    • Disruptions in the procurement of foodgrains by government agencies.
    • Disruptions in the collection of harvests from the farms by traders.
    • Shortage of workers to harvest the rabi crops.
    • Shortage of truck drivers.
    • Blockades in the transport of commodities.
    • Limited operations of APMC mandis; and
    • Shutdowns in the retail markets.

    Conclusion

    The world and India have adequate food stocks. But as global trade shrinks and supply disruptions persist, a prolonged lockdown will adversely affect food security in many countries. Concurrently, farmers face acute labour shortages, falling farmgate prices and lack of access to input/output markets. It is unclear who is benefiting, but farmers, workers and the poor are at their wits’ end.

  • 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.