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GS Paper: GS3

  •  India’s imports of palm oil — dynamics of the trade with Malaysia

     

    India has cut import duty on crude palm oil (CPO) and refined, bleached and deodorized (RBD) palm oil, and also moved RBD oil from the “free” to the “restricted” list of imports.

    A move against outspoken Malaysia

    • Curbing palm oil imports has been construed as retaliation against Malaysia’s PM Mahathir Mohamad, who has criticised India’s internal policy decisions such as the revocation of the special status for J&K and CAA.
    • Malaysia has also been sheltering since 2017 the Islamic preacher Zakir Naik who is wanted by India on charges of money laundering, hate speech, and links to terror.

    Has India banned import of Malaysian palm oil because of political reasons?

    • Not really. The import of RBD palm oil has been restricted, not banned — and this is from all countries, not just Malaysia. Also, CPO can still be imported freely.
    • Under the trade classification system that India follows, except for goods that can be imported only by state trading enterprises all goods whose import is not restricted or prohibited are traded freely.
    • Normally, a special licence is required to import a restricted good. The government has neither specified what the restrictions entail nor issued any licences.
    • However, it has been reported that vessels carrying RBD palm oil are stuck at several ports because buyers have been asked to shun the product.

    How much palm oil does India import?

    • India imported 64.15 lakh metric tonnes (MT) of CPO and 23.9 lakh MT of RBD in 2018-19, the bulk of which was from Indonesia.
    • India imported $10 billion worth of vegetable oil in 2019-20, making it the country’s fifth most valuable import after mineral oil ($141 bn), gold ($32 bn), coal ($26 bn), and telecom instruments such as cell phones ($17 bn).

    Why does India need so much palm oil?

    • It is the cheapest edible oil available naturally.
    • Its inert taste makes it suitable for use in foods ranging from baked goods to fried snacks.
    • It stays relatively stable at high temperatures, and is therefore suitable for reuse and deep frying. It is the main ingredient in vanaspati (hydrogenated vegetable oil).
    • However, palm oil is not used in Indian homes.
    • That, and the fact that CPO continues to be imported, makes it unlikely that the decision to restrict refined palm oil imports will impact food inflation immediately.

    Who will be impacted by the decision?

    • Indonesia and Malaysia together produce 85% of the world’s palm oil, and India is among the biggest buyers.
    • Both Indonesia and Malaysia produce refined palm oil; however, Malaysia’s refining capacity equals its production capacity — this is why Malaysia is keen on exporting refined oil.
    • Indonesia, on the other hand, can supply CPO, which would allow India to utilise its full refining capacity.

    Why import Crude Palm Oil?

    • The CPO that India imports contains fatty acids, gums and wax-like substances. Refining neutralises the acids and filters out the other substances.
    • The filtrate is bleached so that the oil does not change colour after repeated use. Substances that may cause the oil to smell are removed physically or chemically.
    • This entire process increases the value of a barrel of crude oil by about 4%.
    • Additionally, there are costs to transporting the crude, which makes it more cost-effective to import the refined oil.
    • But the refining industry has been demanding that the import duty on refined oil be increased, which would make importing crude oil cheaper than importing refined oil.
    • The decision to restrict imports of refined oil will benefit refiners, which include big-ticket names like the Adani Wilmar group.

    Will restricting imports of RBD palm oil help farmers?

    • Restricting refined oil imports will not help farmers directly, as they are not involved in the process of refining.
    • However, the restrictions have caused refined palm oil prices to increase. If prices continue to hold, farmers will get a better realization for their crop.
    • But the timeframe over which the changes in import policy will have an effect on domestic crop realization is fairly long, given that palm trees take over four years to provide a yield.
    • Also, if the demand is met entirely by importing and refining CPO, farmers will be left out of the picture.

    How will Malaysia be affected?

    • Malaysia has said that it cannot retaliate against India because it is “too small”.
    • With imports to its largest market restricted (India bought over 23% of all CPO produced by Malaysia in 2019), Malaysian palm oil futures fell by almost 10% in January, although it has recovered since then.
    • India and Malaysia signed a free trade agreement — Malaysia-India Comprehensive Economic Cooperation Agreement — in February 2011.
    • In 2018, Malaysia exported 25.8% of its palm oil to India.
    • If India does not issue licenses for importing refined oil, Malaysia will have to find new buyers for its product.

  • Spitzer Space Telescope

     

    NASA’s Spitzer Mission, which studied the universe in infrared light for more than 16 years, will come to an end since it is low on fuel and has been drifting away from Earth for a few years now.

    Spitzer Space Telescope

    • The Spitzer Space Telescope is a space-borne observatory, one of the elements of NASA’s Great Observatories that include the Hubble Space Telescope and the Chandra X-Ray.
    • Using different infrared wavelengths, Spitzer was able to see and reveal features of the universe including objects that were too cold to emit visible light.
    • Apart from enabling researchers to see distant cold objects, Spitzer could also see through large amounts of gas using infrared wavelengths to find objects that may otherwise have been invisible to human beings.
    • These included exoplanets, brown dwarfs and cold matter found in the space between stars.
    • Spitzer was originally built to last for a minimum of 2.5 years, but it lasted in the “cold” phase for over 5.5 years. On May 15, 2009 the coolant was finally depleted and the “warm mission” began.

    Major discoveries

    • Spitzer also studied some of the most distant galaxies ever detected.
    • The light from these galaxies reached us after traveling for billions of years, enabling scientists “to see those objects as they were long, long ago”.
    • Hubble and Spitzer in 2016 identified and studied the most distant galaxy ever observed.
    • Using these two telescopes, scientists were able to see a bright infant galaxy as it was over 13.4 billion years ago, roughly 400 million years after the Big Bang, when the universe was less than 5% of its current age.
    • It assisted in the discovery of planets beyond our solar system, including the detection of seven Earth-size exo-planets orbiting the star TRAPPIST-1.
    • Three of its seven planets were located in the “habitable zone,” where the temperature might be right for liquid water to exist on the planets’ surfaces.

    Other landmarks

    • Spitzer has logged over 106,000 hours of observation time.
    • Thousands of scientists around the world have utilized Spitzer data in their studies, and Spitzer data is cited in more than 8,000 published papers.
    • Spitzer’s primary mission ended up lasting 5.5 years, during which time the spacecraft operated in a “cold phase,” with a supply of liquid helium cooling three onboard instruments to just above absolute zero.
    • The cooling system reduced excess heat from the instruments themselves that could contaminate their observations.
    • This gave Spitzer very high sensitivity for “cold” objects.
    • In July 2009, after Spitzer’s helium supply ran out, the spacecraft entered a so-called “warm phase.”
    • Spitzer’s main instrument, called the Infrared Array Camera (IRAC), has four cameras, two of which continue to operate in the warm phase with the same sensitivity they maintained during the cold phase.

  • [pib] Operation Vanilla

    Indian navy will perform HADR operations in Madagascar under ‘Operation Vanilla’.

    Operation Vanilla

    • Indian Navy Ship Airavat whilst mission deployed in the Southern Indian Ocean has been diverted to Antsiranana based on request recieved from Madagascar.
    • The ship will undertake Humanitarian Assistance and Disaster Relief (HADR) mission as part of ‘Operation Vanilla’.
    • It has been launched to provide assistance to the affected population of Madagascar post devastation caused by Cyclone Diane.

  • [op-ed of the day] Strategic disinvestment does not deserve the criticism it gets

    Context

    Air India is on the block.

    Why disinvestment is not such a bad idea?

    • Wisdom lies in the use of resources to meet the emergent needs: True wisdom lies in the use of resources, including the so-called “family silver”.
      • To meet emergent needs.
      • As also for better returns.
      • Even individuals and private sector organizations committed to meeting their obligations or optimizing wealth creation take such initiatives routinely.
    • The weakening of Indian economy
      • This fiscal year’s second quarter growth in the gross domestic product (GDP) slipped to 4.5% and the portents of a slowdown have been quite apparent.
      • Private sector investment is sagging. Gross capital formation has dipped.
      • Aggregate demand has contracted.
      • Public sector expenditure is the single engine that’s driving economic growth.
    • Clamour for the government to open its purse and limited fiscal room.
      • Shrunk revenue growth: There is a clamour for the government to open its purse and help out. However, its revenue growth has shrunk.
      • Low direct tax collection: Direct tax collections registered a growth of only a little more than 6%.
      • The cautious approach by the RBI: The Reserve Bank of India has taken a rate cut pause, inter alia, to watch the government’s approach to the fisc.
      • Commitment to low inflation: The political executive seems determined to honour its commitment to low inflation and macroeconomic stability.
      • India facing Hobson’s Choice: India is thus faced with a Hobson’s choice—either to significantly revise its fiscal deficit target or monetize state assets.
    • The liberalized markets and optimizing wealth.
      • Perception in the capital market: Capital markets operate on perceptions. Valuations of public sector enterprises tend to be much lower than those of private sector companies even if their profit numbers are the same.
      • Why should India suffer suboptimal wealth creation?: The liberalized market philosophy that the country has pursued aims at optimizing wealth creation. In case a change in ownership structure can deliver higher wealth, why should Indian society retain the current ownership frame and suffer suboptimal wealth creation?
      • Need to make policies aimed at value creation: Given the limits on India’s resources, it is all the more important to see that policies are geared to ensure that value is created.
      • Stake sales can achieve value creation: For validation of this surmise, look at the rapid rise in the enterprise value of Bharat Petroleum, as indicated by its share price, since the announcement of its strategic disinvestment.
    • Not all private sector companies perform well: In those cases, the losses are not funded by innocent taxpayers.

    Twin angles to welcome strategic disinvestment

    • One: The need for India to invest in fresh asset creation.
    • The fresh asset can be created by way of roads, ports and airports that would result in a cascade effect for the economy’s growth.
    • Two: The optimization of wealth generation from the country’s assets.
      • This, incidentally, will benefit individual shareholders, including employees with shares, who have invested in the equity of listed public-sector companies such as Bharat Petroleum.
      • Energy security of the country not harmed: As there are other state-owned petroleum companies undertaking exactly the same activities, such as refining and marketing crude oil, the sale of one company does not tamper with the energy security of the country.

    Way forward

    • Caution against undervaluation: The government, however, must ensure that it is not taken for a ride. It must make a good judgment of the value of the company it decides to disinvest from and if the market conditions are not favourable for the move it must wait for the opportune moment.
    • Asset creation from the proceeds: Instead of using the proceeds from the disinvestment to fund revenue deficit the proceeds must be utilized strictly for new asset creation.

     

     

  • [op-ed snap] The stress in state finances

    Context

    Lower tax devolution, delays in GST compensation are potential risks to the states.

    Trends in the finances of the state

    • The unaudited fiscal data of 21 states:
      • These states account for around 90 per cent of India’s GDP in 2017-18. The data reveal some trends.
    • First Trend: Revenue receipt sliding down
      • From 15.6 to 4.6 %: At the aggregate level, revenue receipts of these 21 states have grown by a mere 4.6 per cent, sliding down from 15.3 per cent over the same period last year.
      • Decrease in Central tax devolution: The analysis shows that the states’ share in Central tax devolution has slowed the most, contracting by 2.3 per cent during this period, after having grown by 12.1 per cent over the same period last year.
    • Second trend: The Centre’s gross tax revenues are expected to fall short of the budgeted target by a considerable Rs 3- 3.5 trillion this fiscal year.
      • The aggregate tax devolution to all states may be as much as Rs 1.7 – 2.2 trillion lower in the current fiscal year than what was budgeted.
      • This is a key revenue risk staring at the state governments this year.
    • Third trend: States own tax and non-tax revenue contracting.
      • The states’ own non-tax revenues have contracted by 5 per cent during the first eight months of this fiscal year, after an expansion of 15.3 per cent over the same period last year.
      • Decreasing tax revenue: Growth of states’ own tax revenues, the largest source of their revenue receipts, eased to a tepid 2.2 per cent during this period from a healthy 16 per cent over the same period last year.
      • This is in part by the modest rise in collections of the State Goods and Services Tax (SGST).
    • Fourth trend: Increase in the grants from the Centre
      • The primary factor boosting the GST compensation seems to be the low growth in states’ GST revenues relative to the mandated 14 per cent annual growth for the five-year transition period.

    Delay in receipt of the GST collection and the risk

    • Some state has voiced concerns over the delays in receipt of the compensation amount in recent months.
      • The delay has complicated their fiscal position and cash flow management.
      • Risk for the states: The timing of receipt of the compensation is the second major revenue risk facing state governments.
      • If compensation gets delayed to the next fiscal year, we may well find some traditionally revenue surplus states staring at a revenue deficit
      • Case of no GST compensation: But it seems states will have to start gearing up for life without the GST compensation.

    The Rise in State Development Loans or Market borrowing by states

    • SDL rising in first three quarters: According to ICRA’s estimates, net SDL issuance of all states and UTs rose by 15.5 per cent to Rs 2,806 billion in the first three quarters of this fiscal year, up from Rs 2,429 billion last year.
      • The combined gross SDL issuance has expanded by a significant 34.9 per cent to Rs 3,874 billion this fiscal year (April-December), up from Rs 2,872 billion last year.
      • The calendar for state government market borrowings for the fourth quarter indicates tentative gross SDL issuances of Rs 2,086 billion in the quarter, implying a moderate 9.1 per cent growth.
      • But, this conceals a large dip in redemptions.
      • Net SDL issuances will expand by a staggering 55.7 per cent to Rs 1,766 billion in Q4FY20, up from Rs 1,134 billion last year, underlining the stress in state government finances this year.
    • About 25 % rise in borrowing this fiscal: If market borrowings in the fourth quarter are in line with the amounts indicated, total gross borrowing this fiscal year would rise by 24.6 per cent to nearly Rs 6 trillion, up from Rs 4.8 trillion last year.
    • Net borrowing by states as large as Central govt. borrowing: Net borrowings by states would rise by an even sharper 28.3 per cent to Rs 4.6 trillion this year, becoming nearly as large as the Central government’s net market borrowings of Rs 4.7 trillion that have been announced so far for this year.

    Conclusion

    The figure and the trends indicated the financial risk the states are staring at. The government must take measure to revive the economy in order to address the problems faced by the states and ensure that the states are not left in lurch while SGT compensation receipts get delayed.

     

     

  • [op-ed snap] Here’s looking at you

    Context

    Face recognition technology calls for a more comprehensive domestic framework that promotes the use of new technologies for the public good as well as imposes necessary constraints against their abuse.

    Debate on finding the balance between regulation and promotion

    • Google calls for partial ban: TheGoogle CEO’s recent support for a temporary ban on facial recognition technologies seems uncharacteristic.
      • It is not often that companies developing a technology call for its ban.
      • Their interest is in promoting the use of technology, not proscribing it.
      • Not every one of the leading tech companies agrees with Google on facial recognition.
    • Microsoft against the ban: Microsoft has questioned the idea of a ban. Calling facial recognition a “young technology”, it said “it will get better.
      • To get better the technology has to be used: The only way to make it better is actually to continue developing it.
      • And the only way to continue developing it actually is to have more people using it.
    • IBM’s precision regulation: IBM has taken a step forward in developing the policies for the use of technology by setting up a “lab”.
      • The lab will generate actionable ideas for policymakers to manage the emergence of new technologies like facial recognition that are shaping our digital future.
      • Precision regulation vs. complete ban: The idea is to develop “precision regulation” rather than enforce “blunt” instruments like the ban.
    • The EU’s plans for temporary ban: The debate on finding the right balance between regulation and promotion of emerging technologies comes in the wake of leaked plans of the EU to issue a temporary ban.
      • The ban could be up to five years.
      • Ban on use in public places only: The proposed ban is not a comprehensive one and will be applicable to the use of facial recognition in public spaces.
    • India’s own plans for law enforcement agencies: The intensifying global debate also coincides with India’s own plans to roll out a massive project on deploying facial recognition technologies, essentially for law enforcement.
      • The international discourse provides the context for developing a broad and effective Indian policy framework for the use of facial recognition.

    Background of the backlash against the tech companies

    • Techlash: Well before the EU had begun to discuss a temporary ban on facial recognition, there has been a “techlash” against the companies.
      • The companies faced backlash because they have so dramatically altered our lives in the last few years.
    • The idea of “digital is different”: For nearly two decades, the idea that “digital is different” and does not need public oversight had triumphed in most capitals of the world.
    • Problems with regulations: The main argument was that regulation constrains technological innovation and retards progress.
    • AI and Big data:  The urge to regulate has triggered widespread concerns about the dangers of digitalisation, especially the use of big data and AI by private companies as well as governments.

    Major concerns against facial recognition

    • Surveillance capitalism and surveillance state: The companies were seen as monetising the data generated by the widespread use of digital platforms like Google and Facebook.
      • Surveillance state:  China became the prime example of states using data and information to exercise ever more control over its citizens.
    • Accuracy: At the other end are concerns that facial recognition is not entirely accurate and could lead to punitive actions against innocent people.
    • Racial bias misogyny: There is also a concern in the US that the algorithms behind facial recognition carry the baggage of racism and misogyny.
    • Concerns in India: It also remains a fact that the Indian state has always been tempted to empower itself against its citizens in the name of collective security.
      • It has also tended to weaponise information against political opponents and dissidents.

    Potential Advantages

    • In the control of crime.
    • Better border controls and countering terrorism.
    • Aid the Police: In India, a severely under-policed nation, facial recognition surely offers many benefits.

    Conclusion

    The foreign office must reclaim India’s place in the international discourse on AI and facial recognition and develop a productive alignment between India’s national interests and the development of new digital norms.

     

  • Air India Disinvestment

    The government has kicked off the complete disinvestment process of Air India for the second time after it failed to receive a single bid in the first attempt back in 2018.

    100% stake sale

    • Most significantly, the government will offload 100% of its stake in Air India, compared with 76% put on the block last time.
    • The government holding even a minor stake in the airline post disinvestment was seen as a huge negative for any potential buyers.
    • The buyer will have to take on Rs 23,286 crore of debt out of a total Rs 60,074 crore.
    • Compared with this, in the last attempt, a potential buyer would have to take on Rs 33,392 crore of debt and current liabilities.
    • The amount of debt being bundled with the airline in this attempt is towards the aircraft that are being sold off along with the carrier as part of the transaction.
    • The working capital and other non-aircraft debt will be retained by the government.

    Air India’s assets

    • The new owner will be taking on a fleet of 121 aircraft in Air India’s fleet and 25 planes in Air India Express’ fleet.
    • These exclude the four Boeing 747-400 jumbojet aircraft that the airline plans to transfer to its subsidiary Alliance Air, which is not a part of the current transaction.
    • However, like the last attempt, the properties currently in use by Air India, including the Nariman Point building and the company’s headquarters near Connaught Place in New Delhi will be retained by the government.

    Will the new terms attract investors?

    • Air India has a 50.64% market share in international traffic among Indian carriers.
    • The government is hopeful of attracting investors with the new sale criteria, coupled with the main benefits of the airline, which are prime slots in capacity-constrained airports across the world.
    • However, any potential investor is also expected to look at the size of the airline’s operations with reference to what those operations generate.
    • For example, both Air India and Singapore Airlines operate with a fleet of 121 aircraft, but in 2018-19 Air India posted a net loss of Rs 8,556 crore, whereas Singapore Airlines reported a net profit of Singapore $ 779.1 million (approx Rs 4,100 crore).

    What will the new investor get?

    • The most attractive proposition in acquiring Air India is the slots and landing rights that it holds at airports such at Delhi, Mumbai, London, New York, Chicago, Paris, etc.
    • These could be helpful both to airlines looking to expand into long-haul international operations, and to entities looking to set up global operations from scratch.
    • Air India currently operates to 56 Indian cities and 42 international destinations.
    • The new investor also gets hold of the ground-handling firm AI-SATS, which offers end-to-end ground handling services such as passenger and baggage handling, ramp handling, aircraft interior cleaning etc. at Bengaluru, Delhi, Hyderabad, Mangaluru and Thiruvananthapuram airports.
    • This would provide the investor with an ancillary services firm with captive use.

    Loss makers in AI

    • Several of Air India’s international and domestic routes are profit-generating, while a number of them are loss-making or witness low load factors.
    • This is a legacy problem that the airline comes with for the new promoter.
    • Additionally, while the airline comes with 121 aircraft primed as domestic and international workhorses, 18 of them are grounded for lack of funds to make them airworthy.

    How will consumers and employees be impacted?

    Consumers

    • If and when Air India is taken over by a private entity or consortium, experts believe the first move could be pruning of operations to ensure the airline inches closer to profitability.
    • This could cause Air India to cease operations on certain loss-making domestic and international routes — leading to a rise in fares.
    • It is believed that Air India’s continuous loss-making operations have skewed the market, wherein private companies have to play ball even when fares are artificially low.
    • Cutting certain routes could also impact consumers in terms of the unique offerings by Air India, such as higher baggage allowance, etc.

    Employees of AI

    • Air India’s bloated staff strength was flagged by potential investors in the last disinvestment attempt.
    • The airline has 17,984 employees, of which 9,617 are permanent staff.
    • Whether the employees will be retained by the new investor is unclear.
    • The government is expected to provide more clarity on conditions for retaining staff in the request-for-proposal stage, which will come after expressions of interest are received.

  • Why China has emerged as the epicentre of global outbreaks of disease?

    Several deadly new viruses in recent years have emerged in China — Severe Acute Respiratory Syndrome (SARS), bird flu, and now the novel Coronavirus (nCOV).

    Zoonotic infections

    • Closely packed stalls in busy marketplaces, the Chinese taste for exotic meats, and the high population density of cities create the conditions for the spread of zoonotic infections.
    • The reason could lie in the busy food markets dotting cities across the country — where fruits, vegetables, hairy crabs and butchered meat are often sold next to bamboo rats, snakes, turtles, and palm civets.
    • The relationship between zoonotic pathogens and global pandemics are not new.
    • The WHO estimates that globally, about a billion cases of illness and millions of deaths occur every year from zoonoses, i.e, diseases and infections naturally transmitted between people and vertebrate animals.
    • Some 60% of emerging infectious diseases globally are zoonoses. Of the over 30 new human pathogens detected over the last three decades, 75% originated in animals.

    Major cause: Animal markets

    • In animal markets, there are greater chances of transmission of a virus from animals to humans, and its mutation to adapt to the human body.
    • It has happened wherever in the world there is unregulated mixing of humans and animals, either wild or domesticated.
    • The official referred to the Ebola outbreak in Africa there it was wild chimpanzees who had the disease. It came into humans after these were killed and consumed.

  • Polycrack Technology

     

    Indian Railways has put in place the country’s first Waste to Energy plant in Mancheswar Carriage Repair Workshop which falls under East Coast Railway. It uses a patented technology called POLYCRACK, is first-of-its-kind in Indian Railways and fourth in India.

    Polycrack Technology

    • It is world’s first patented heterogeneous catalytic process which converts multiple feed stocks into hydrocarbon liquid fuels, gas, carbon and water.
    • The process is a closed-loop system and does not emit any hazardous pollutants into the atmosphere.

    Feeders

    • Polycrack Plant can be fed with all types of plastic, petroleum sludge, un-segregated MSW (Municipal Solid Waste) with moisture up to 50%, e–waste, automobile fluff, organic waste including bamboo, garden waste etc., and Jatropha fruit and palm bunch.

    How it works?

    • The process is a closed-loop system and does not emit any hazardous pollutants into the atmosphere.
    • The combustible, non-condensed gases are re-used for providing energy to the entire system and thus, the only emission comes from the combustion of gaseous fuels.
    • The emissions from the combustion are found to be much less than prescribed environmental norms.
    • This process will produce energy in the form of Light Diesel Oil which is used to light furnaces.

    Advantages of Polycrack

    Polycrack has the following advantages over the conventional approach of treating solid waste:

    • Pre-segregation of waste is not required to reform the waste. Waste as collected can be directly fed into Polycrack.
    • It has high tolerance to moisture hence drying of waste is not required.
    • Waste is processed and reformed within 24 hours.
    • It is an enclosed unit hence the working environment is dust free.
    • Excellent air quality surrounding the plant.
    • Biological decomposition is not allowed as the Waste is treated as it is received.
    • The foot print of the plant is small hence the area required for installing the plant is less when compared with conventional method of processing.
    • All constituents are converted into valuable energy thereby making it Zero Discharge Process.
    • Gas generated in the process is re-used to provide energy to the system thereby making it self-reliant and also bring down the operating cost.
    • There is no atmospheric emission during the process unlike other conventional methods except for combustion gases which have pollutants less than the prescribed norms the world over.
    • Operates around 450 degrees, making it a low temperature process when compared with other options.
    • Safe and efficient system with built-in safety features enables even an unskilled user to operate the machine with ease.
    • Low capital cost and low operating cost.
    • Fully automated system requires minimum man power.

  •  [op-ed of the day] The convergence of rich nations with the rest has gone off track

    Context

    Sound policies are needed to put emerging economies back on a higher growth path and ameliorate regional inequalities.

    The theory of convergence

    • The theory of convergence is one of the most powerful and noblest ideas in economics.
      • What is it? It is the concept that other things being equal, poorer economies should catch up with richer ones so that inequality between the rich and the poor attenuates, and conceivably even disappears over time.
    • Capital is more productive in poor economies: The premise driving convergence is that capital (whether physical or human) is more productive in poor economies than rich ones due to what economists call “diminishing marginal productivity”.
      • In layman’s terms, a small amount of investment yields a greater increase in output where there is less capital than where there is more.
      • Lesser the development more the development: Even more simply, the rate of return on investment is inversely related to the level of economic development.
    • Experience of Japan and Germany after WW 2: The experience of advanced economies gave economists reason to be optimistic that convergence occurs according to the script.
      • Thus, the devastated economies of Europe, along with Japan, quickly caught up with the advanced economies that had not been ravaged by World War II, most notably, the US.
      • Germany and Japan closing the gap: At the end of the war, with their capital stocks destroyed, Germany and Japan were much poorer than the US; by the 1960s, they had closed the gap.

    Globalisation and the unfulfilled hopes of convergence

    • Replication of the rise of Japan and Germany? At one time, it appeared that the same play was at work between emerging economies and advanced economies.
      • Rise of India and China: Economies such as China and India, as well as others, were far outstripping the growth rates of the US and other rich economies,
      • Hope of closing gap: India and China gave hope that at least the more rapidly growing of the emerging economies would close the gap with the rich world within decades rather than centuries.
    • Adoption of technology at low cost: There was presumed to be an additional powerful force working toward convergence.
      • Poorer economies are, almost by definition, far away from the technological frontier at which the richest economies operate.
      • There is thus ample room to absorb newer technologies at relatively low cost and in a relatively short span of time, without encountering slowing growth like the rich economies,
      • In simpler terms, it is difficult and costly to innovate the latest Apple iPhone, but relatively easy to reverse engineers at least some of Apple’s technology.

    Reality: Convergence is faltering

    • Recent evidence suggests that convergence is faltering.
    • World Bank report of retarding convergence: A recent World Bank report documents a worrying slowdown in productivity growth in emerging economies, significantly retarding convergence.
      • Lower productivity: The report’s calculations suggest that emerging economies have 14% lower productivity than they would have had if previous trends of high productivity growth were maintained.
      • Lower commodity exports: For commodity exporters, this is a whopping 19%.
    • The silver lining for faltering economies: According to the World Bank, the main driver of falling productivity are-
      • Insufficient investment in physical and human capital.
      • Insufficient mobility of machines and workers from less productive to more productive sectors of the economy.
    • India’s case: The Indian case clearly bears this out, with languishing investment and unfinished productivity-enhancing reforms, especially in the country’s labour market, being the key culprits behind the sharp slowdown in growth.

    Way forward

    • Repair financial systems: Governments, including India’s, need to do the heavy lifting of repairing damaged financial systems overladen with bad debt.
    • Restore fiscal rectitude.
    • Inflation focused monetary policy: Ensure that monetary policy remains focused on stable inflation rather than being excessively loose as a risky substitute for structural reforms.
    • Reforms: Press ahead with unfinished reforms to capital, land and labour markets.
    • Address the regional disparities: There is a further critical dimension in the case of large multi-region economies such as India.
      • Not only has convergence been faltering between nations, but it has also been faltering between the richer and poorer regions of large nations such as India.

    Conclusion

    The data does not present an epistle of despair, but of hope. The pursuit of sensible and conventional sound economic policies ought to put emerging economies as a group back on a higher growth trajectory. Convergence may yet end up being a parable of promise rather than a fable of folly.