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  • Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

    Dealing with the macroeconomic uncertainties

    op-ed snap | Economics | Mains Paper 3: Indian Economy

    Context

    Macroeconomic uncertainties are mounting.

    Impact of US Fed’s decision

    • Against the backdrop of possible interest rate hikes by the U.S. Federal Reserve and the taper tantrum, there is pressure on the Reserve Bank of India (RBI) to increase its interest rates to prevent capital outflows.
    • The monetary policy corridor is still “accommodative” to support the growth recovery.
    • Globally, central banks have started increasing the interest rates.

    Macroeconomic uncertainties

    1] Inflationary pressure

    •  In India, the wholesale price index (WPI) inflation rose to a record high of 14.32% in November 2021 as per the data released by the Ministry of Commerce and Industry.
    • The consumer price index (CPI) inflation now is 5.03%, though that is still within the comfort zone of the inflation targeting framework envisaged in India’s new monetary framework.
    • The official nominal inflation anchor in India is 4%, with a band of variations of +/- 2. 

    2] Absorbing excess liquidity

    • The RBI Financial Stability Report, published on December 29, 2021, revealed a possible worsening of the gross non-performing asset (GNPA) ratio of scheduled commercial banks — from 6.9% in September 2021 to 9.5% by September 2022.
    • Absorbing the excess liquidity that was injected to stimulate growth as part of the pandemic response is crucial to reversing trends in non performing assets (NPAs).
    • Absorption of excess liquidity was attempted by increasing the cut-off yield rate of variable rate reverse repo (VRRR) to 3.99%, and curtailing the government securities acquisition programme.

    3] Interest rate structure and implications for government borrowing

    •  The call money market rates are below the repo rate.
    • The bond yields are increasing ahead of the Union Budget 2022-23.
    • The rise in bond yields will result in higher borrowing costs for the Government.

    Way forward for fiscal policy

    • Maintain accommodative policy stance: Given these macroeconomic uncertainties, maintaining an accommodative fiscal policy stance in the upcoming Union Budget for FY23 is crucial for a sustainable recovery.
    • Don’t focus on fiscal consolidation: Any attempt at fiscal consolidation at this juncture employing capital expenditure compression rather than a tax buoyancy path can adversely affect economic growth. 
    •  Public investment — infrastructure investment in particular — is a major growth driver through “crowding-in” of private corporate investment.
    • Strengthening investments in the health-care sector is crucial at this juncture as a prolonged lockdown can accentuate the current humanitarian crisis and deepen economic disruptions.
    • When credit-linked economic stimulus has an uneven impact on growth recovery, the significance of fiscal dominance cannot be undermined.
    • Address unemployment: Rising unemployment needs to be addressed through an urgent policy response that strengthens job guarantee programmes.

    Conclusion

    The upcoming Union Budget for 2022-23 should maintain an accommodative fiscal stance in order to support the sustainability of the economic growth process and also for financing human development.

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  • Foreign Policy Watch: India-Myanmar

    Places in the news: Sittwe Port

    op-ed snap | International Relations | Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India

    Context

    Notwithstanding the unfortunate developments since the Tatmadaw took over, a recalibration exercise for developing a robust relationship with Naypyidaw is the need of the hour.

    Need for proactive neighbourhood policy with Myanmar

    • Security and economic interests: India should implement an unbiased and proactive “Neighbourhood First” strategy that facilitates the Act East policy crucial for India’s long-term security and economic interests.
    • Myanmar — regardless of who governs its polity — is not only the decisive lynchpin for India’s Act East policy but critical for the economic development and security of India’s Northeast.
    • China factor: Such a policy should take into account the measures that China has taken to arm the Tatmadaw.

    How to support Myanmar?

    • Critical requirements: India should find ways to support Naypyidaw for its critical requirements of systems and platforms like UAVs, surveillance systems and communication equipment.
    • Economic engagement: There is a need for dynamic economic engagement with Myanmar, to expedite the completion of the earlier agreement on the operationalisation of the Sittwe port, the establishment of an oil refinery and joint vaccine production facilities at a cost of $6 billion.
    • People-to-people goodwill: India also needs to proactively employ the existing “people-to-people” goodwill and proximate ties between the two armies.
    • Engage with military leadership to stop highhandedness: India has the singular advantage of acceptability from both factions in Myanmar and it is, therefore, imperative that it takes the lead in engaging with the ruling military leadership, to stop the highhandedness.
    • The visit by India’s Foreign Secretary to Myanmar in the last week of December 2021 was significant.
    • It conveyed the message that India, notwithstanding its commitment to democracy, is amenable to conduct business with the country, regardless of who is in the seat of power.

    Conclusion

    It is of the utmost importance for India to positively engage Naypyidaw and stave off attempts to exploit Myanmar by countries inimical to India’s growth. Any ambiguity or delay in India’s constructive engagement with Myanmar would only serve the interests of anti-India forces.

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  • Foreign Policy Watch: India – EU

    India’s challenge in European geopolitics

    op-ed snap | International Relations | Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India

    Context

    For India, an important strategic priority today is to rebalance the Indo-Pacific. Delhi, however, recognises that this expansive challenge can’t be met by any one power, including the US. A larger European role in securing Asia therefore becomes critical.

    Importance of Russia in balancing China

    • Peace with Russia in Europe might be necessary for America to focus on Asia has been the key motivation behind President Joe Biden’s decision to intensify engagement with Vladimir Putin in the last few months.
    • On the question of Ukraine’s membership of NATO, the US and its European allies have suggested that membership is certainly not imminent; but they are unwilling to say Ukraine will “never” be admitted.

    Contradiction in Europe

    • 1] Europe remains geopolitically unstable: None of the three European settlements of the 20th century — in 1919 after the First World War, in 1945 after the Second World War, and in 1991 after the Cold War — has endured.
    • 2] The difficulty of integrating Russia into a European order: Russia was part of the great power system in Europe through the 18th and 19th centuries.
    • If the 1917 Bolshevik Revolution put Russia and the West at odds with each other, the collapse of the Soviet Union has not resolved the contradiction.
    • 3] Growing tension between the US and Europe: Since the Second World War, Europe has relied on the US for its security.
    • However, Europe has never stopped resenting the American dominance over its geopolitics.
    • The EU’s foreign policy chief, Josep Borrell, has repeatedly objected to the US and Russia deciding the future of Ukraine over European heads.
    • But Russia does not take the EU seriously and is betting on negotiations with the US.
    • 4] Europe still remains a weak security actor:  While the EU has become a powerful economic entity (with its $17 trillion GDP), it remains a weak security actor.
    • Whatever might be the outcome from the gathering conflict over Ukraine, these European contradictions are not going to disappear any time soon.

    Why Europe remains a weak security actor?

    • Dominance of the US and Russia: The ambition to construct a strong geopolitical personality for the EU is hobbled by divisions over the role of Russia and the US in the region.
    • Mutual suspicions: The historically rooted mutual suspicions among European states also plays role.
    • Reluctance to spend on defence: This is compounded by the reluctance to spend more on defence and the inability to develop collective defence arrangements outside of NATO led by the US.

    Suggestions for India

    • The contradictions in Europe demand that Delhi discard its tendency to view the region through the “East versus West” binary.
    • Delhi today could profitably take a leaf out of the book of the Indian national movement.
    • In the late 18th century, as European powers competed for influence in the subcontinent, many Indian princes sought to take advantage of the contradictions between Britain and France.
    • Imperial Germany supported the formation of a nationalist government of India in Kabul in 1915 headed by Raja Mahendra Pratap Singh.
    • Eager to accelerate Indian independence during the Second World War, Netaji turned to Germany and Japan, the world’s newest great power.
    • The sharpening struggle for Indian independence, and more broadly the liberation of Asia between the two World Wars, inevitably involved exploiting the contradictions between different imperial powers.
    •  This was complicated, however, by rapid realignment among the major powers —friends became adversaries and enemies became allies.
    • The Indian and Asian national movements were deeply divided in coping with the shifting great power dynamic.
    • The world enters a similar moment today that could rearrange relations between the US, UK, Europe, Russia, China and Japan.

    Consider the question “What are the contradictions in Europe today? How these contradiction can play role in India’s international relations with the European countries?”

    Conclusion

    Greater engagement with Europe and dealing with its multiple contradictions must necessarily be important elements of India’s international relations today.

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  • Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

    What is a K-shaped Economic Recovery?

    | Economics | Mains Paper 3: Indian Economy

    Former RBI Governor Raghuram Rajan has said that the government needed to do more to prevent a K-shaped recovery of the economy hit by the coronavirus pandemic.

    K-Shaped Recovery

    • A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
    • This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
    • A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
    • This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

    Try these PYQ:

     

    Q.Economic growth in country X will necessarily have to occur if-

     

    (a) There is technical progress in the world economy

    (b) There is population growth in X

    (c) There is capital formation in X

    (d) The volume of trade grows in the world economy

    Implications of a K-Shaped Recovery

    • Households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts; this will be a recurring drag on demand, if the labour market does not heal faster.
    • To the extent that Covid has triggered an effective income transfer from the poor to the rich, this will be demand-impeding because the poor tend to spend-instead of saving.
    • If Covid-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.

    Also read:

    Shapes of Economic Recovery

     

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  • Festivals, Dances, Theatre, Literature, Art in News

    What is Beating Retreat Ceremony?

    Prelims Only | History | Mains Paper 1: Arts & Culture

    There are 26 tunes that will be played at Beating Retreat this year on January 29 skipping the “Abide with Me” tune.

    What is the Beating Retreat function?

    • ‘Beating Retreat’ marks a centuries old military tradition, when the troops ceased fighting, sheathed their arms and withdrew from the battlefield and returned to the camps at sunset at the sounding of the Retreat.
    • The military tradition began in 17th century England, when King James II ordered his troops to beat drums, lower flags and organise a parade to announce the end of a day of combat.
    • The ceremony was then called ‘watch setting’ and took place at sunset after firing a single round from the evening gun.
    • The ceremony is currently held by Armed Forces in the UK, US, Canada, New Zealand, Australia, and India, among others.

    How did it begin in India?

    • Beating the Retreat’ has emerged as an event of national pride when the Colours and Standards are paraded.
    • The ceremony traces its origins to the early 1950s when Major Roberts of the Indian Army indigenously developed the unique ceremony of display by the massed bands.
    • Section D (Ceremonials) at the Ministry of Defence conducts the event.
    • The ceremony consists of musical performances by the bands, who each year play Indian and western tunes.

     

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  • Blockchain Technology: Prospects and Challenges

    What are Non-Fungible Tokens (NFTs)?

    Prelims Only | Economics | Mains Paper 3: S&T – Applications In Everyday Life

    A French luxury fashion brand is suing American digital artist who created a series of NFTs (Non-Fungible Tokens), a rapidly growing part of the cryptoworld.

    Non-Fungible Tokens

    • An NFT is a unique, irreplaceable token that can be used to prove ownership of digital assets such as music, artwork, even tweets and memes.
    • The term ‘non-fungible’ simply means that each token is different as opposed to a fungible currency such as money (a ten-rupee note can be exchanged for another and so on).
    • Cryptocurrencies such as Bitcoin and Ethereum are also fungible, which means that one Bitcoin can be exchanged for another.
    • But an NFT cannot be exchanged for another NFT because the two are different and therefore unique.
    • Each token has a different value, depending on which asset it represents.

    How does NFT transaction take place?

    • NFT transactions are recorded on blockchains, which is a digital public ledger, with most NFTs being a part of the Ethereum blockchain.
    • NFTs became popular in 2021, when they were beginning to be seen by artists as a convenient way to monetize their work.

    Why are they in high demand?

    • One of the other attractions is that NFTs are a part of a new kind of financial system called decentralized finance (DeFi), which does away with the involvement of institutions such as banks.
    • For this reason, decentralized finance is seen as a more democratic financial system because it makes access to capital easier for lay people by essentially eliminating the role of banks and other associated institutions.
    • Even so, because NFTs operate in a decentralized system, any person can sell a digital asset as one.
    • This can sometimes create problems. For instance, if you were to sell someone else’s artwork as an NFT, you could essentially be infringing on a copyright.

     

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  • Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

    [pib] One District One Product (ODOP) Initiative

    Schemes | Economics | Mains Paper 3: Effects Of Liberalization On The Economy, Changes In Industrial Policy and their effects on Industrial Growth

    As a major boost to Centre and State collaboration in promoting products under the ODOP Initiative – a State Conference was recently held by the Department for Promotion of Industry and Internal Trade (DPIIT).

    One District One Product (ODOP)

    • ODOP spearheaded by the Uttar Pradesh government in 2018, is an important initiative that is being adopted all over India to realize the true potential of each district.
    • ODOP is an initiative which is seen as a transformational step forward towards realizing the true potential of a district, fuel economic growth and generates employment and rural entrepreneurship.
    • It is operationally merged with ‘Districts as Export Hub’ initiative being implemented by DPIIT as a major stakeholder.
    • The main philosophy is to select, brand and promote one product from each district of India that has a specific characteristic feature to enable profitable trade in that product and generate employment.

    Why need this scheme?

    • India is home to several agricultural and non-agricultural (including manufacturing) products that are region-specific.
    • Every district has products that are unique and provide livelihoods and generate income.
    • This scheme is in tune with the PM’s call to transform every district into an export hub and realize the goal of Atmanirbhar Bharat.

    What needs to be done for its success?

    The important aspect that the policy initiatives in India should thus be mindful of are:

    • Ownership of the initiative should lie at the center of implementation.
    • The stakeholders irrespective of the sector along the value chain need to be identified and provided information and awareness.
    • It is important to streamline other initiatives such as registration of Geographical Indications (GI), formation and development of farmer producer organizations etc.

     

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  • Indian Army Updates

    [pib] Sela Pass Tunnel Project

    National Parks/WS | Economics | Mains Paper 3: Infrastructure: Energy, Ports, Roads, Airports, Railways Etc.

    The final blast for the 980-metre long Sela Tunnel was recently conducted by the Border Roads Organisation (BRO) amidst inclement weather and heavy snowfall.

    Sela Pass Tunnel Project

    • The tunnel covers a total distance of 12.04 kms which consist of two tunnels of 1790 metres and 475 meters.
    • It is being built at an estimated cost of ₹687 crores by the Border Roads Organisation.
    • It aims to provide all weather connectivity to Tawang in Arunachal Pradesh — an area claimed entirely by China — and other forward areas.
    • Once built it will cut travel time to Tawang by at least an hour for Indian troops stationed in adjoining Assam’s Tezpur town — the headquarters of the Indian army’s IV Corps.

    Strategic Importance

    • The lack of motorable roads and rail connections in India’s northeast and Arunachal Pradesh in particular were seen as distinct disadvantages for India vis a vis China in the region.
    • Analysts had been warning of China building infrastructure including access roads right up to the Indian border that would give it a strategic advantage in any conflict with India.
    • Once completed this would result in all weather connectivity to Tawang and forward areas and reduction in more than one hour of travelling time from Tezpur to Tawang.

     

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  • Higher Education – RUSA, NIRF, HEFA, etc.

    Budgeting for the education emergency

    op-ed snap | Governance | Mains Paper 2: Health & Education

    Context

    Faced with an unprecedented education emergency, this is the time to substantially ramp up public spending on education and make it more effective.

    Low allocation for education

    • UNESCO’s 2030 framework for action suggests public education spending levels of between 4% and 6% of GDP and 15%-20% of public expenditure.
    • A recent World Bank study notes that India spent 14.1 % of its budget on education, compared to 18.5% in Vietnam and 20.6% in Indonesia, countries with similar levels of GDP.
    • But since India has a higher share of population under the age of 19 years than these countries, it should actually be allocating a greater share of the budget than these countries.
    • Public spending on education in most States in India was below that of other middle-income countries even before the pandemic.
    • Most major States spent in the range of 2.5% to 3.1% of State income on education, according to the Ministry of Education’s Analysis of Budgeted Expenditure on Education.
    • This compares with the 4.3% of GDP that lower-middle-income countries spent, as a group, between 2010-11 and 2018-19.
    •  In the 2021-22 Budget, the Central government’s allocation for the Education Department was slashed compared to the previous year, even though the size of the overall budget increased.
    • Of the major States and Delhi, eight either reduced or just about maintained their budget allocation for education departments in 2021-22 compared to 2020-21.

    Way forward

    • The vast majority of the 260 million children enrolled in preschool and school, especially in government schools, did not have meaningful structured learning opportunities during the 20 months of school closures.
    • Infusion of resources: The education system now needs not only an infusion of resources for multiple years, but also a strengthened focus on the needs of the poor and disadvantaged children.
    • What it is spent on and how effectively resources are used are important.
    • It is clear what additional resources are required for.
    • The needs include: back-to-school campaigns and re-enrolment drives; expanded nutrition programmes; reorganisation of the curriculum to help children learn language and mathematics in particular, and support their socio-emotional development, especially in early grades; additional learning materials; teacher training and ongoing support; additional education programmes and collection and analysis of data.
    • Focus on teacher training:  How does expenditure on technology compare with the amounts spent on teacher training, which represents just 0.15% of total estimated expenditure on elementary education?
    • Teachers are central to the quality of education, so why does India spend so little on teacher training?

    The opacity of education finance data in India

    • The opacity of education finance data makes it difficult to comprehend this.
    • For instance, the combined Central and State government spending on education was estimated to be 2.8% of GDP in 2018-19, according to the Economic Survey of 2020-21.
    • This figure had remained at the same level since 2014-15.
    • On the other hand, data from the Ministry of Education indicates that public spending on education had reached 4.3% of GDP in the same year, rising from 3.8% of GDP in 2011-12.
    • The difference in the figures is due to the inclusion of expenditure on education by departments other than the Education Department.
    •  Including expenditure on education by, for example, the Ministry of Tribal Affairs, the Ministry of Social Justice and Empowerment (on Anganwadis, scholarships, etc.), the Ministry of Science and Technology (for higher education) is of course legitimate.
    • However, the composition of these expenditures is not readily available.

    Conclusion

    The questions for this Budget should be clear. How much additional funds are being allocated for different levels of education by the principal departments in 2021-22? Are the funds being spent on the specific measures required to address the education emergency facing the children?

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  • Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

    A chance to support growth, fiscal consolidation

    op-ed snap | Economics | Mains Paper 3: Indian Economy

    Context

    The adverse effect of the third wave of COVID-19, which is mainly affecting the last quarter of 2021-22, may call for a further downward adjustment in the growth rate to about 9%.

    Growth in FY 2021-22

    •  As per the NSO’s advance estimates, at the end of 2021-22, the magnitude of GDP in real terms is estimated at INR₹147.5-lakh crore that is only a shade higher than INR₹145.7-lakh crore in 2019-20.
    • Thus, due to the three waves of COVID-19 that India has experienced, two years of real growth in economic activities have been wiped out. 
    • As per the advance estimates, the gross fixed capital formation (GFCF) relative to GDP at current prices stands at 29.6% in 2021-22.
    • Capacity utilisation in India continues to have considerable slack.
    • Private final consumption expenditure (PFCE) also shows a low growth of 6.9% in 2021-22.
    • Any pick-up in demand would continue to be constrained by low-income growth in sectors characterised by a high marginal propensity to consume (MPC) such as the trade, transport, et al. sector and the Micro, Small and Medium Enterprise (MSME) sector more broadly.
    • It may thus be prudent to expect a real GDP growth in the range of 6%-7%.
    • Growth in 2022-23 would also continue to be constrained by supply-side bottlenecks and high prices of global crude and primary products.
    • Growth in 2022-23 would depend on the basic determinants such as the saving and investment rates in the economy.

    Suggestions

    • Extend GST compensation period: The GST compensation provision would also come to an end in June 2022.
    • This would cause a major revenue shock at least for some States such as Tamil Nadu, Kerala and Andhra Pradesh.
    • While this matter may be considered by the GST Council, the compensation arrangement should be extended by two years in some modified form.
    • With respect to non-tax receipts, the scope of the National Monetization Pipeline (NMP) may be extended to cover monetisation of government-owned land assets.
    • Disinvestment initiatives may have to be accelerated.
    • Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand.
    • Urban counterpart to MGNREGA: Since consumption demand remains weak, some fiscal support in the form of an urban counterpart to Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) may be considered.

    Focusing on fiscal consolidation

    • It would be appropriate now to consider a graduated return to fiscal consolidation while using fiscal policy to lay the base for faster growth in the years to come.
    • The Fifteenth Finance Commission had suggested a fiscal consolidation path where the Centre’s fiscal deficit was benchmarked at 5.5% of GDP for 2022-23.
    • In their pessimistic scenario, it was kept at 6% of GDP. 
    • It may be prudent to limit the reduction in fiscal deficit-GDP ratio to about 1% point of GDP in 2022-23.
    • This would imply a fiscal deficit in the range of 5.5%-6% of GDP.
    • From here on, a stepwise reduction of 0.5% points per year would enable a level of about 4% of GDP by 2025-26.
    • By this time, as suggested by the Fifteenth Finance Commission, a high-powered inter-governmental group should be constituted to re-examine the sustainability parameters of debt and fiscal deficit of the central and state governments.

    Conclusion

    Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand while aiming for the gradual return to the fiscal consolidation.

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