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GS Paper: GS3

  • IMO Sulphur regulations for Shipping

    The International Maritime Organization (IMO), the shipping agency of the United Nations issued new rules aiming to reduce sulphur emissions, due to which ships are opting for newer blends of fuels.

    What do the new IMO rules say?

    • The IMO has banned ships from using fuels with sulphur content above 0.5 per cent, compared with 3.5 per cent previously.
    • Sulphur oxides (SOx), which are formed after combustion in engines, are known to cause respiratory symptoms and lung disease, while also leading to acid rain.
    • The new regulations, called IMO 2020, have been regarded as the biggest shake up for the oil and shipping industries in decades. It affects more than 50,000 merchant ships worldwide.
    • The new limits are monitored and enforced by national authorities of countries that are members of the International Convention for the Prevention of Pollution from Ships (MARPOL) Annex VI.

    Cleaner options

    • Under the new policy, only ships fitted with sulphur-cleaning devices, known as scrubbers, are allowed to continue burning high-sulphur fuel.
    • Alternatively, Ships can opt for cleaner fuels, such as marine gasoil (MGO) and very low-sulfur fuel oil (VLSFO).
    • Of the two cleaner fuels, ship-owners were expected to opt for MGO, which is made exclusively from distillates, and has low sulphur content.
    • However, many are reportedly choosing VLSFO, which has better calorific properties and other technical advantages.

    Issues with the rule

    • There are complaints against VLSFO as well, as testing companies have claimed that high sediment formation due to the fuel’s use could damage vessel engines.
    • VLSFO, with 0.5 per cent sulphur content, can contain a large percentage of aromatic compounds, thus having a direct impact on black carbon emissions.
    • Black carbon, which is produced due to the incomplete combustion of carbon-based fuels, contributes to climate change.

  • Plantation Corporation of India

    The Union government is likely to announce the setting up of a Plantation Corporation of India in the upcoming budget.

    Plantation Corporation of India

    • The PCI will subsume all afforestation-related schemes currently underway in India including the Green India Mission, National Afforestation Programme and compensatory afforestation.
    • The corporation will use Compensatory Afforestation Fund (CAF) money to undertake the plantations and investment will also come from the global pension fund.
    • CAF is a huge corpus of money collected from projects proponents for diverting forest land to be used for non-forestry activity.

    Issues with PCI

    • Critics have raised concerns over the move’s impact on the federal structure of forest governance in the country.
    • While forests are a concurrent subject, land-related issues are the responsibility of the states.

  • [pib] Exercise SAMPRITI-IX

    As part of the ongoing Indo-Bangladesh defence cooperation, a joint military training exercise SAMPRITI-IX is being conducted in Meghalaya.

    Exercise SAMPRITI

    • It is an important bilateral defence cooperation endeavour between India and Bangladesh and will be the ninth edition of the exercise which is hosted alternately by both countries.
    • During the joint military exercise SAMPRITI-IX, a Command Post Exercise (CPX) and a Field Training Exercise (FTX) will be conducted.
    • For both the CPX and FTX, a scenario where both nations are working together in a Counter-Terrorism environment will be simulated under the UN Charter.
    • The FTX curriculum is progressively planned where the participants will initially get familiar with each other’s organizational structure and tactical drills.
    • The training will culminate with a final validation exercise in which troops of both armies will jointly practice a Counter Terrorist Operation in a controlled and simulated environment.

  • India’s first ‘fruit train’

     

    A ‘fruit train’, said to be the first of its kind in India, was flagged off from Tadipatri Railway Station in Anantapur district of Andhra.

    About the fruit train

    • This is the first time in India that an entire train is being sent to the gateway port (JNPT) for export.
    • This helps save both time and fuel as 150 trucks would have been required to send a consignment of this size by road to JNPT, which is over 900 km away, before the temperature-controlled containers are loaded on ships.
    • The bananas are being exported under the brand name ‘Happy Bananas’.
    • Farmers from Putlur region in Anantapur and Pulivendula in Kadapa district are exporting ‘Green Cavendish’ bananas to many international markets.

  •  [op-ed snap] Don’t be deterred by the ‘crowding out’ effect of the fisc

    Context

    Market borrowings of the government do not always squeeze credit for the private sector in India.

    What is ‘crowding out’ effect?

    • Increased government spending and borrowing: It refers to how increased government spending, for which it borrows more money, tends to reduce private spending.
      • Why does private spending reduce? This happens because when the government takes up the lion’s share of funds available in the banking system, less of it is left for private borrowers.
      • Relationship with interest rate: Higher borrowing by the government and subsequent crowding out also impacts interest rates in the economy.

    How the Government borrowing works and the role of RBI

    • Local borrowing local spending: Typically, the government funds its fiscal deficit by borrowing from the domestic bond market.
      • Its expenditure is also local in nature.
    • Overdraft from RBI: The Reserve Bank of India (RBI) is the official banker to the government-which spends money by first taking an overdraft from the central bank.
      • This overdraft gets repaid through bond market borrowings.
    • Why overdraft? The understanding is that any such government spending should ideally not affect the availability of funds to other borrowers in the market.
    • Excessive borrowing and effects on the interest rate: Excessive government borrowing from the bond market, many cautions, could lead to a rise in interest rates for the government itself and consequently for everyone else in the economy.

    Analysis of the effects of borrowing on other variables

    • Analysis of the data reveals the following trends.
    • No impact on other variables: Local borrowing and spending by the Indian government does not impact any other macroeconomic variables like-
      • The availability and cost of funds for other participants in the economy.
      • Inflation.
      • Deposit growth, at the current deficit level—that is, with the state and central combined figure above 6% of GDP.
    • What impacts the interest rate the most?
      • The two most important variables that impacted interest rates were inflation and the repo rate. Which tend to move together.
      • What does it indicate? This clearly indicates that RBI is extremely proactive in the way it manages interest rates.
    • Effects of funds on inflation: Such borrowings that are funded by the central bank could lead to inflation, the same is true for large external inflows to domestic money markets.
      • The foreign borrowings finally get reflected in the country’s foreign exchange reserves, which have a very strong relationship with inflation.
      • Effects on interest rates: Technically, any large inflow of a foreign currency sterilized by RBI does have the potential to move the inflation needle up, thus placing upward pressure on interest rates.
    • Relationship between borrowing and growth: It is clear that government borrowing and spending actually drives GDP growth.
      • Government borrowing should not impact bank lending to companies, as the sums borrowed return to the market almost immediately.
    • How RBI controls bond yield?
      • RBI ensures that bond yields don’t shoot up because of the excessive borrowing, by taking bonds onto its books to be released back into the market in good times.

    The uniqueness of the Indian money market

    • Why is it unique? India market is a unique money market, different from the rest of the world, for the following reasons-
      • We have investors who are explicitly required to invest in government debt.
      • Banks, non-banking financial companies, insurers, provident funds, and pension funds are all forced to invest in government debt as a condition for their licence to operate in India.
      • We also find that RBI works towards aiding the government borrowing programme rather effectively, ensuring that interest rates do not change too adversely.

    Conclusion

    The government should not be excessively worried about the government living beyond its means at this juncture. Government spending being the main driver for the country’s GDP growth, it could be a good way to put the economy on a higher growth trajectory. Perhaps it is time to revisit the entire FRBM framework.

     

     

  • [op-ed snap] A road map for robust trade ties

    Context

    The challenge for India and Australia is to transform people-to-people ties into a trade relationship.

    People-to-people the two countries

    • Soft power: Soft power rather than hard economics has traditionally been the driving force behind India-Australia relations.
      • Cricket is a dominant theme that connects the two countries.
      • The Indian diaspora in Australia is a vibrant community that plays a robust role in connecting their country of adoption with their country of origin.

    Trade relationship scenario

    • $31 bn bilateral trade: The trade between the two countries has been at a modest $31 billion, largely composed of resources like coal and other minerals.
    • No progress on FTA: Negotiations on a Free Trade Agreement, which began in 2011, have not moved forward significantly.
    • No progress on coal mining projects in Australia: The problems faced by the Adani Group to begin work on a coal mining project in Queensland did not go down too well with investors from India.
    • India Economic Strategy 2035 by Australia: One of the most widely commended initiatives has been the Australian government’s release of an India Economic Strategy 2035 Report.
      • It observes that no single market over the next 20 years will offer more growth opportunities for Australia than India.
      • It lays down a comprehensive road map for strengthening Australia’s trade engagement with India.

    Development in digital technology and the role of youth

    • Development of new architecture: Meanwhile India-Australia trade has been steadily evolving into a new architecture underpinned by developments in digital technology.
      • There is a rise of a younger generation of entrepreneurs and a noticeable shift in the trade basket from resources to services.
      • Technology and young entrepreneurship make a formidable combination and should set the agenda for the future of bilateral trade relations.
      • About 80% of the Australian small and medium-sized enterprises are managed by young professionals.
      • The young can see issues like immigration and outsourcing with far more equanimity than the older generation.
      • An important role of young Australians: Young Australians are thus emerging as great champions of India-Australia trade relations.

    Scope for engagement in innovation and trade relations

    • Tech. expertise of  Australia: There is also recognition that Australia is a laboratory of ideas, innovation, technology-led growth and university-industry partnerships.
    • Scope for India in innovation and trade: India is a large and demographically young market with a love for innovation and an appetite for new products and services.
      • These synergies should add momentum to a growing engagement in trade relations.

    India’s weakness and Way forward

    • Weakest link and way forward: The weakest link in India’s exports to Australia is in merchandise. India needs to look at three broad areas.
    • First-Focus on Market Research:  Despite globalisation, markets are country-specific and culturally sensitive.
      • Indian companies will need to invest a little more in market research on Australian consumer expectations and lifestyles.
    • Second-Brand creation: Australia is a brand-conscious market while India has not created a single consumer brand of international acceptance.
      • Only when products are visible across the world’s shopping malls and supermarkets displaying their own brands that India will be recognised as a major player in the global markets.
    • Third-Innovation: Innovation is emerging as the single-most-important factor for sustained success in every sphere. Global trade cannot be different.

     

     

  • No-fly List

    Four airlines in India have banned a stand-up comedian from taking flights after he allegedly heckled television news anchor on-flight.

    No-Fly List

    • In 2017, the government issued rules for preventing disruptive behaviour by air travellers and laid down guidelines for a no-fly list.
    • As per the rules, a complaint of unruly behaviour needs to be filed by the pilot-in-command, and this is to be probed by an internal committee to be set up by the airline.
    • During the period of pendency of the inquiry, the rules empower the concerned airline to impose a ban on the passenger.
    • The committee is to decide the matter within 30 days, and also specify the ban duration.
    • Any aggrieved person, upon receipt of communication of a ban from the airline, may appeal within 60 days from the date of issue of the order, to an Appellate Committee constituted by the Ministry of Civil Aviation.

    Three categories of unruly behaviour:

    • Level 1 refers to behaviour that is verbally unruly, and calls for debarment up to three months;
    • Level 2 indicates physical unruliness and can lead to the passenger being debarred from flying for up to six months;
    • Level 3 indicates life-threatening behaviour for which the debarment would be for a minimum of two years.

     

  •  [op-ed snap] How to protect trade in a tug of war between nations

    Context

    Developing countries have argued for decades that the rules governing international trade are profoundly unfair. But similar complaints are now emanating from the developed countries that established most of those rules.

    Why are developed countries complaining now?

    • Competition: A simple but inadequate explanation is “competition.”
      • Turning tide: In the 1960s and 1970s, industrialized countries focused on opening foreign markets for their goods and set the rules accordingly.
      • Since then, the tide has turned.
    • Left behind communities in developed countries
      • Cheap labour-an advantage: One reason why emerging-market producers are competitive is that they pay workers less.
      • Job creation in services by developed countries: To replace lost manufacturing jobs, developed economies have been creating jobs in services.
      • Not everyone has moved to the service sector job: Unfortunately, not everyone in developed countries has been able to move to good service jobs.
      • Efforts by the left-behind bring back the manufacturing job: The left-behind former manufacturing communities have a voice in the capital city now, and it wants to bring back manufacturing.
      • Yet this explanation, too, is incomplete. The ongoing US-China trade war is not about manufacturing, it is about services.
    • Services a reason behind US-China dispute: Much of the US dispute with China is not about manufacturing. It is about services.
    • Emerging market competition increasing in services: Although eight of the top ten service exporters are developed countries, emerging-market competition is increasing.
      • New services related rules: This increased competition from emerging markets is prompting a major push by advanced-economy firms to enact new service-related trade rules.
      • An opportunity to protect the developed country producers: The new rules will ensure continued open borders for services. But it will also be an opportunity to protect the advantages of dominant developed-country producers.

    Trade disputes- The combined effects of the two factors

    • There are no easy trade deals anymore.
      • Two conflicting factors: In sum, two factors have increased the uneasiness over international trade and investment arrangements.
      • First-Left behind community: Ordinary people in left-behind communities in developed countries are no longer willing to accept existing arrangements.
      • They want to be heard, and they want their interests protected
      • Second-emerging economy demanding access to service sector: At the same time, emerging-economy elites want a share of the global market for services and are no longer willing to cede ground there. So, there is no easy trade deal anymore.
    • Trade disputes-exercise in power politics
      • High tariffs and ram tactics: Threats of sky-high tariffs to close off markets, for example, and battering-ram tactics to force “fairer” rules on the weaker party.
      • The important difference from the past: One important difference is that the public in emerging markets is more democratically engaged than in the past.
      • Short timed victory: Any success that rich countries have in setting onerous rules for others today could prove pyrrhic.
      • No consensus on the rules: For one thing, it is unclear that there is a consensus on those rules even within developed countries. For example- rules to regulate social media.

    Way forward

    How should developed countries respond to domestic pressures to make trade fairer?

    • Demand lower tariffs from developed countries: For starters, it is reasonable to demand that developing countries lower tariffs steadily to an internationally acceptable norm.
    • Challenge the discriminatory barriers: Discriminatory non-tariff barriers or subsidies that favour their producers excessively should be challenged at the World Trade Organization.
    • Go for less intrusive treaties: To go much beyond these measures—to attempt to impose one’s preferences on unions, regulation of online platforms, and duration of patents on other countries—will further undermine the consensus for trade.
      • Less intrusive trade agreements today may do more for the trade tomorrow

  • [op-ed snap] Examining the slowdown

    Context

    Setting aside the gloomy projections based on short-term economic trends, the long-term and comparative evidence reveal interesting trends about the health of the Indian economy.

    Performance of the Indian economy after 1991

    • Higher growth plateau reached after 1991: After the 1991 economic reforms, the Indian economy reached a higher growth plateau of 7% compared to a prior rate of 3. 85%.
      • The high growth rate during 2003-2011: India witnessed a high growth momentum during 2003-04 and 2010-11 with a period average of 8.45% (GDP with base 2004-05) or 7% (base 2011-12).
      • Ups and downs after 2012: The momentum lost steam in 2011-12 and 2012-13, gradually picked up again gradually to reach the 8% mark in 2015-16, and then started falling consistently to reach 6.63% in 2018-19.
      • Structural dimension? This trend suggests that India’s current growth challenge has a structural dimension as it began in 2011-12.
    • Comparison with China and the world
      • Average at 7.07% after 2011-12: Despite these fluctuations from 2011-12, on average, India clocked a growth rate of  7.07% from 2011 to 2019, a decent figure compared to China’s and the world’s economic growth rates.
      • Whereas like India, the growth of the world economy was fluctuating since 2011, China’s growth declined consistently from 10.64% in 2010 to 6.60% in 2018.

    Why couldn’t India’s growth momentum be sustained after 2010-11?

    • Analysis of five variables: To answer the above question, an in-depth analysis of trends in five key macroeconomic variables was done for two different periods: 2003-04 to 2010-11 and 2011-12 to 2018-19.
      • Consumption.
      • Investment.
      • Savings.
      • Exports.
      • Net foreign direct investment (NFDI) inflows.
    • What emerged from the analysis: The results reveal that compared to 2003-2011, investment and savings rates and exports-GDP ratio declined in the 2011-2019 period.
      • How much the investment declined? The investment rate declined from 34.31% of GDP in 2011-12 to 29.30% in 2018-19.
      • Household vs. corporate sector decline: The investment decline was caused mainly by the household sector and to some extent by the public sector, but not the corporate sector.
      • The decline in investment compensated by NFDI: The slump in the domestic investment rate in the 2011-2019 period was compensated by increased NFDI inflows.
      • On average, NFDI inflow was 1.31% of GDP during 2011-2019 compared to 0.89% during 2003-2011.

    Why tax-cut not help the economy

    • The justified policy of reviving the housing sector: The decline in household sector investment justifies the package of measures introduced by the Central government to revive the housing sector.
    • Why corporate tax cut won’t help much? The questionable policy, however, is the steep cut in the corporate income tax rate from 30% to 22%, aimed at boosting private investment.
      • Given that the corporate investment rate has not eroded severely during 2011-2019, the tax cut would help economic revival.
      • Lost opportunity to spur rural consumption: A part of the largesse offered to Corporate India could have been used to spur rural consumption.

    What the decline in saving rate mean?

    • Importance of savings: The savings rate declined almost consistently from 27% of GDP to 30.51% between 2011 and 2018.
      • This was also caused by a significant fall in the savings of the household sector in financial assets. Corporate savings did not fall.
      • Why the fall in household financial savings needs to be increased? The fall in household financial savings is alarming and needs to be arrested.
      • Savings are required to meet the requirements of those who want to borrow for their investment needs.
      • Saving-investment relation: Lower household savings imply lesser funds available in the domestic market for investment spending.
    • Economic growth powered by consumption: The decline in household savings has pushed up private final consumption expenditure consistently
      • Private final consumption rose from 56.21% of GDP in 2011-12 to 59.39% in 2018-19.
      • Consumption driven economic growth in 2011-19: The increase in private consumption suggests that economic growth during 2011-2019 was powered by consumption, not investment.
      • Investment driven growth during 2003-2011: In contrast, during 2003-2011, growth was powered by investments.
    • So, declining saving rate means a slowdown in the economy may not be due to structural issues.
      • Re-examination of popular view: Thus, the popular view that economic slowdown was caused due to a slowdown in consumption demand needs to be re-examined.
      • There is no concrete evidence to suggest that the economy is facing a structural consumption slowdown.

    Export-GDP ratio decline and what it means

    • Export-GDP decline from 24.54% to 19.74%: India’s exports-GDP ratio declined from 24.54% to 19.74% during 2011-2019.
    • A trend similar to the rest of the world: The decline started from 2014-15, coinciding with a similar trend in the world export-GDP ratio.
      • However, the drop in India’s exports was significantly larger than the world, a cause for concern.
      • The exports- and NFDI-GDP ratio has deteriorated sharply and consistently in China after 2006.
    • Indian economy doing better than China: Sharp decline in China’s export-GDP and NFDI-GDP, together with the consistent fall in China’s GDP growth after 2010, proves that the Indian economy is doing better than China.

    Conclusion

    The popular view that the slowdown in the Indian economy is due to the structural problems needs a re-examination in the view of the decline in investment in tandem with the world.

     

  • Explained: Fiscal Marksmanship

    Over the past few years, many have questioned the government’s fiscal marksmanship.

    What is fiscal marksmanship?

    • Fiscal marksmanship essentially refers to the accuracy of the government’s forecast of fiscal parameters such as revenues, expenditures and deficits etc.
    • In other words, if the difference between what the government projected as the likely tax revenues in the Budget and the actual figures a year later is large then it reflects poor fiscal marksmanship.
    • In the Indian context, this term gained popularity after Raghuram Rajan, then India’s Chief Economic Advisor stressed on fiscal marksmanship in the Economic Survey for the year 2012-13.
    • He had defined fiscal marksmanship as “the difference between actual outcomes and budgetary estimates as a proportion of GDP”.

    Why does fiscal marksmanship matter?

    • The salience of Budget numbers lies in their credibility.
    • The central purpose of publicly disclosing the Budget or the annual financial statement in a democracy and seeking approval from the legislature is to make the policymaking and governance transparent and participatory.
    • Everyone knows that Budget numbers are forecasts and estimates, and as such, unlikely to tally exactly with the actual numbers a year later.
    • But there is an underlying belief among people that when the government states, say, that its revenues will grow by 12% or that its fiscal deficit will remain within the FRBM Act’s mandate as it is based on genuine calculations.
    • However, if these fiscal forecasts turn out to be way off the mark repeatedly, it will undermine the credibility of the Budget numbers and indeed the Budget presentation itself.

    Why is India’s fiscal marksmanship being questioned?

    Typically, the fiscal marksmanship tends to get dented every time the economy faces a bump during the financial year.

    • For instance, as a result of the extent of the Global Financial Crisis in 2008, budget forecasts in the ensuing years did take a hit.
    • The latest trigger has been the wide discrepancy between what the last couple of budgets — first the interim budget for 2019-20 (presented in February 2019) and then the full budget for 2019-20 (presented in July 2019).
    • It expected the nominal GDP growth to be in 2019-20 and what the First Advance Estimates (FAE), released by the Ministry of Statistics and Programme Implementation in January 2020.
    • For instance, the July 2019 Budget expected nominal GDP to grow by 12% in 2019-20 but the FAE expect the nominal GDP to grow by just 7.5% (which by the way is a 42-year low).
    • Since all budget calculations are based on the nominal GDP, it is expected that this wide variance in nominal GDP will reflect across the board in the coming Budget.

    Impact on revenue

    • The government’s revenues are unlikely to grow anywhere close to the last Budget’s expectation.
    • Indeed, the revenue shortfall is expected to be anywhere between Rs 2 lakh crore to Rs 5 lakh crore.
    • As a result, either the fiscal deficit will overshoot from the budgeted number or the expenditure numbers will be much lower than promised.

    Why has fiscal marksmanship worsened?

    • As mentioned earlier, when an economy’s growth slows down (or picks up) sharply within a year, it is possible that the fiscal forecasts for that year go down (or up) substantially.
    • However, such changes do not happen too often.
    • In the recent past, however, there is one structural change that appears to be contributing to poor fiscal forecasts by the government.
    • This structural change was the government’s decision in January 2017 to advance the presentation of the Union Budget by a whole month.
    • Accordingly, the Union Budget for 2017-18 was presented on February 1 instead of the last working day of February (28th or 29th), as was the norm till then.
    • It meant that the First Advance Estimates, which used to come by January end (after taking into account the economic activity of the first three quarters of the financial year), had to be brought out by the start of January.
    • This, in turn, essentially meant that the estimate of the key nominal GDP data for the current year — on the base of which next year’s nominal GDP and other estimates were to be made — had to be made using the first two quarters of the current fiscal year.

    Why didn’t the government course-correct and project slower economic growth in July 2019 when it presented the full Budget for 2019-20?

    • It is unclear why this was not done. But could be two or three possible reasons.
    • One, the FM may have favoured continuity over the Interim Budget estimates instead of providing a starkly different set of estimates.
    • Two, and a related reason, could be that the government did not have enough time to make the adjustment because it may have required redoing the whole Budget afresh.
    • Or third, because perhaps the government did not recognise the severity of the economic slowdown that has been underway.