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  • Agricultural Sector and Marketing Reforms – eNAM, Model APMC Act, Eco Survey Reco, etc.

    [pib] Bhartiya Prakritik Krishi Padhati (BPKP)

    23 July 2021 | PIBSchemes | Agriculture
    Mains GS3: Agriculture and related issues

    The Union Minister of Agriculture has provided useful information regarding the Bhartiya Prakritik Krishi Padhati (BPKP).

    Bhartiya Prakritik Krishi Padhati (BPKP)

    • Natural farming is promoted as BPKP under a centrally sponsored scheme- Paramparagat Krishi Vikas Yojana (PKVY).
    • The scheme mainly emphasizes the exclusion of all synthetic chemical inputs and promotes on-farm biomass recycling.
    • It stresses biomass mulching; use of cow dung-urine formulations; plant-based preparations and time to time working of soil for aeration.
    • Under BPKP, financial assistance of Rs 12200/ha for 3 years is provided for cluster formation, capacity building, and continuous handholding by trained personnel, certification, and residue analysis.

    About Paramparagat Krishi Vikas Yojana

    • “PKVY” is an elaborated component of Soil Health Management (SHM) of the major project National Mission of Sustainable Agriculture (NMSA).
    • Under PKVY Organic farming is promoted through the adoption of the organic village by cluster approach and PGS certification.

    The Scheme envisages:

    • Promotion of commercial organic production through certified organic farming.
    • It will raise farmer’s income and create a potential market for traders.

    Program implementation

    • Fifty or more farmers will form a cluster having 50 acres of land to take up the organic farming under the scheme.
    • In this way, during three years 10,000 clusters will be formed covering a 5.0 lakh acre area under organic farming.
    • There will be no liability on the farmers for expenditure on certification.
    • Every farmer will be provided Rs. 20,000 per acre in three years for the seed to harvesting crops and to transport produce to the market.
    • Organic farming will be promoted by using traditional resources and organic products will be linked with the market.
    • It will increase domestic production and certification of organic produce by involving farmers.

    Answer this PYQ in the comment box:

    Q.With reference to organic farming in India, consider the following statements:

    1. ‘The National Programme for Organic Production (NPOP) is operated under the guidelines and directions of the Union Ministry of Rural Development.
    2. ‘The Agricultural and Processed Food Products Export Development Authority (APEDA) functions as the Secretariat for the implementation of NPOP.
    3. Sikkim has become India’s first fully organic State.

    Which of the above statements is/are correct? (CSP 2018)

    (a) 1 and 2 only

    (b) 2 and 3 only

    (c) 3 only

    (d) 1, 2 and 3

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  • e-Commerce: The New Boom

    Open Network for Digital Commerce could disrupt India’s e-commerce space

    23 July 2021 | op-ed snap | Economics
    Mains GS3: Indian Economy

    Context

    The Department for Promotion of Industry and Internal Trade (DPIIT) recently issued orders appointing an advisory committee for its Open Network for Digital Commerce (ONDC) project.

    About ONDC project

    • The Open Network for Digital Commerce (ONDC) project aims to make e-commerce processes open-source.
    • In simple terms, it aims at creating a platform that can be utilised by all online retailers.
    • This is another effort by the government to facilitate the creation of shared digital infrastructure, as it has previously done for identity (Aadhaar) and payments (Unified Payments Interface).
    • It will digitise e-commerce value chains, standardise operations, promote inclusion of suppliers, and derive efficiencies in logistics.

    What are its advantages?

    • Level playing field: When done well, this approach can level the playing field and create value for users. 
    • Curb monopoly: The market is dominated by a few players who are facing investigations for unfair trade practices in many countries.
    • Prevent market failure: The sector is characterised by many small players who individually do not have the muscle to have an equitable bargain with e-commerce companies.
    • Economists call this a “market failure”, and it presents a legitimate case for intervention.

    The three layers of an open digital ecosystem and their conceptual framework for adoption and safeguards

    1) Tech layer

    • The “tech layer” should be designed for minimalism and decentralisation.
    • The government should restrict its role to facilitating standards and protocols that provide open access, and in getting them adopted organically.
    • Building an entire tech platform should happen only if a standards-based approach doesn’t suffice.
    • If built, the platform should be built on “privacy by design” principles.
    • It should collect minimal amounts of data (especially personal data) and store it in a decentralised manner.
    • Tools like blockchain could be used to build technical safeguards that cannot be overridden without active consent.

    2) Governance layer

    • Avoid excessive government intervention: The “governance layer” around this should allay business fears of excessive state intervention in e-commerce.
    • Legal provision: Any deployment of standards or tech should be accompanied by law or regulation that lays out the scope of the project.
    • Independent regulator for personal data: If collection of any personal data is required, passing the data protection bill and creating an independent regulator should be a precondition.
    • Handling by independent society: To assure the industry of fairness, the government could hand over the stewardship of the standards or platform to an independent society or non-profit.

    3) Community layer

    • A community layer can foster a truly inclusive and participatory process.
    • This may be achieved by making civil society and the public active contributors and seeking wide feedback on drafts of the proposal.
    • Once the framework is implemented, ensuring quick and time-bound redressal of grievances will help build trust in the system.

    Concerns with government creating shared digital infrastructure

    • This approach also comes with risks and we should tread with caution.
    • In general, governments should intervene in markets only when there is a clearly identifiable market failure or massive societal benefits from creating shared infrastructure.

    Way forward

    • The government’s championing of open-source technology for digital commerce is commendable.
    • It should also push the envelope on the other principles of the open-source movement — transparency, collaboration, release early and often, inclusive meritocracy, and community.
    • Even if we do all things right, an infrastructure-led approach may not be sufficient.
    • Therefore, we need to supplement infrastructure with tightly-tailored regulation.
    • We need to explore the concept of interoperability, that is, mandating that private digital platforms like e-commerce firms enable their users and suppliers to solicit business on other platforms.
    • To drive the adoption of an open e-commerce platform in a sector with entrenched incumbents we need to create “reference applications”, and financial or non-financial incentives.
    • Useful learnings can be drawn from the adoption of UPI: The government supported the rollout of BHIM as a reference app, and offered incentives.

    Consider the question “How the Open Network for Digital Commerce project can help deal with the issues with the e-commerce sector? Suggest the approach the project should adopt to make it a success.”

    Conclusion

    It is timely that India is exploring innovative ways to bridge the gaps in e-commerce markets. But the boldness of this vision must be matched by the thoughtfulness of the approach.

    Back2Basics: What is ‘Privacy by Design?

    • Privacy by design is a concept that integrates privacy into the creation and operation of new devices, IT systems, networked infrastructure, and even corporate policies.
    • Developing and integrating privacy solutions in the early phases of a project identifies any potential problems at an early stage to prevent them in the long run.

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  • Health Sector – UHC, National Health Policy, Family Planning, Health Insurance, etc.

    A cardinal omission in the COVID-19 package

    22 July 2021 | op-ed snap | Governance
    Mains GS2: GS2-13.Issues relating to development and management of Social Sector/Services relating to Health, Education, Human Resources.

    Context

    On July 8, 2021, the Union government announced the “India COVID-19 Emergency Response and Health Systems Preparedness Package: Phase II”. But it lacks provision for the medical workforce.

    Objectives of the package

    • The stated purpose of the package is to boost health infrastructure and prepare for a possible third wave of COVID-19.
    • There is plan to increase COVID-19 beds, improve the oxygen availability and supply, create buffer stocks of essential medicines; purchase equipment and strengthen paediatric beds.

    What is lacking in the package?

    • Workforce shortage: The package barely has any attention on improving the availability of health human resources.
    • As reported in rural health statistics and the national health profile there are vacancies for staff in government health facilities, which range from 30% to 80% depending upon the sub-group of medical officers, specialist doctors to nurses, laboratory technicians, pharmacists and radiographers, amongst others.
    • Interstate variation: In addition, there are wide inter-State variations, with States that have poor health indicators with the highest vacancies.

    Way forward

    • Package for filling the existing vacancies: The COVID-19 package II needs to be urgently supplemented by another plan and a similar financial package (with shared Union and State government funding) to fill the existing vacancies of health staff at all levels. 
    • An objective approach to assess the mid-term health human resource needs could be the Indian Public Health Standards (IPHS).
    • IPHS prescribes the human resources and infrastructure needed to make various types of government health facilities functional.
    • The pandemic should be used as an opportunity to prepare India’s health system for the future.
    • Scrutiny of the progress on policy decision: The progress on key policy decisions, for the last few years, to strengthen India’s health system, including those in India’s national health policy of 2017, need to be objectively scrutinised.
    • These two sets of policy decisions should be reviewed and progress monitored, through a meeting of the Central Council of Health and Family Welfare, of which the Health Ministers of the States are members.

    Conclusion

    India’s health system will not benefit from ad hoc and a patchwork of one or other small packages. It essentially needs some transformational changes.

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  • OPEC Reaches Compromise With U.A.E. Over Oil Production

    22 July 2021 | | International Relations
    Mains GS2: GS2-18.Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

    Context

    The end to the UAE’s weeks-long impasse with Saudi Arabia and Russia, a non-OPEC state, was brought about by Sunday’s deal.

    What was the deal about?

    • United Arab Emirates (UAE), said to hold the world’s largest untapped crude reserves, had demanded an increase in its oil output quotas.
    • The end to the UAE’s weeks-long impasse with Saudi Arabia, one of the world’s biggest crude exporters, and Russia, a non-OPEC state, was brought about by Sunday’s deal.
    • Under its terms, the UAE’s demand for an increase in its oil output quotas, in recognition of its higher production capacity, has been conceded.
    • The baselines have also been raised for Saudi Arabia, Russia, Iraq, and Kuwait.
    • The bloc will now step up crude production by 400,000 barrels a day starting in August.
    • The output boost is in response to rising oil prices in the wake of the rebound in economic activity.
    • The cartel had cut oil production by 9.7 million barrels a day (mbd) as oil demand fell from 100 mbd to 91.1 mbd and prices plummeted from $70 in January 2020 to around $20 in April.

    Strain in Saudi Arabia-UAE relations

    • The UAE has played hardball during the bloc’s attempts to deal with the pandemic-induced price volatility.
    • Thus, while the internal rift has been resolved for now, the danger cannot be ruled out of an increasingly economically and politically assertive UAE flexing its muscle.
    • Bilateral relations between the traditional allies, Saudi Arabia and the UAE, have been especially strained since the UAE established diplomatic ties with Israel last year and withdrew troops from the Saudi-spearheaded war in Yemen the year before.
    • A more recent arena of tension is the tariffs Riyadh has imposed on imports from the six-nation Gulf Cooperation Council.
    • Saudi Arabia will now exclude from the GCC tariff agreement goods made by companies with a workforce of less than 25% of locals and industrial products with less than 40% of the added value after their transformation process.
    • Home to a predominantly migrant population, the move could hit the UAE especially hard.

    OPEC’s concerns

    • The OPEC, forecast in 2016 that a strict implementation of the Paris climate accord could see the demand for oil peak by 2030.
    • There is an eagerness to maximise the returns on their substantial hydrocarbon resources, amid growing speculation of a peak in oil demand within sight.
    • The International Energy Agency (IEA), which in 2016 forecast a continued rise in oil consumption until the 2040s, has more recently hinted at about a 5% rise or fall relative to the demand before the pandemic within a decade.
    • OPEC’s other concerns are the stabilization of world oil prices without jeopardizing national expenditure programs, and the diversification of economies in anticipation of the unfolding global energy transition.

    Conclusion

    The latest OPEC compromise echoes growing recognition of the delicate balance between competing domestic and global priorities.

    B2BASICS

    OPEC

    • The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental organization, created at the Baghdad Conference in 1960, by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.
    • It aims to manage the supply of oil in an effort to set the price of oil in the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.
    • It is headquartered in Vienna, Austria.
    • OPEC membership is open to any country that is a substantial exporter of oil and which shares the ideals of the organization.
    • Gabon terminated its membership in January 1995. However, it rejoined the Organization in July 2016.
    • As of 2019, OPEC has a total of 14 Member Countries viz. Iran, Iraq, Kuwait, United Arab Emirates(UAE), Saudi Arabia, Algeria, Libya, Nigeria, Gabon, Equatorial Guinea, Republic of Congo, Angola, Ecuador, and Venezuela are members of OPEC.

     

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  • Foreign Policy Watch: India-Afghanistan

    ‘Open talks’ with the Taliban is India’s strategic necessity

    22 July 2021 | op-ed snap | International Relations
    Mains GS2: India & Its Neighborhood – Relations

    Context

    With over a third of Afghanistan’s more than 400 districts under Taliban control, the talk-to-the-Taliban option is indeed the best of the many less than perfect options available to India.

    India need a reset in its Afghanistan policy

    • India has ‘temporarily’ closed its consulate in Kandahar.
    • This follows the decision to suspend operations in the Indian consulates in Jalalabad and Herat.
    • India’s decision to partially “withdraw” from Afghanistan shows that betting only on the government in Kabul was a big mistake,
    • It also shows that India realises the threat the Taliban poses to Indian assets and presence in Afghanistan.
    • To safeguard its civilian assets there as well as to stay relevant in the unfolding ‘great game’ in and around Afghanistan, India must fundamentally reset its Afghanistan policy.
    • India must, in its own national interest, begin ‘open talks’ with the Taliban before it is too late.
    • Open dialogue with the Taliban should no longer be a taboo; it is a strategic necessity.

    Reason for avoiding open talks with Taliban

    • There are at least five possible reasons why India appears to want to keep the Taliban engagement slow and behind closed doors.
    • First, if India chooses to engage the Taliban directly, it could make Afghanistan President Ashraf Ghani, to look towards China and the Shanghai Cooperation Organisation (SCO) for national security and personal political survival.
    • Second, India is also faced with the dilemma of who to talk to within the Taliban given that it is hardly a monolith.
    • Third, given the global opprobrium that Taliban faced in its earlier avatar and the lack of evidence about whether the outfit is a changed lot today, New Delhi might not want to court the Taliban so soon.
    • Fourth, there is little clarity about what the Taliban’s real intentions are going forward and what they would do after ascending to power in Kabul.
    • Fifth, it would not be totally unreasonable to consider the possibility of Pakistan acting out against India in Kashmir if India were to establish deeper links with the Taliban.

    Reasons India should engage with the Taliban openly

    • Wide international recognition: Whether we like it or not, the Taliban, is going to be part of the political scheme of things in Afghanistan, and unlike in 1996, a large number of players in the international community are going to recognise/negotiate/do business with the Taliban.
    • Countering Pakistan: The Taliban today is looking for regional and global partners for recognition and legitimacy especially in the neighbourhood.
    • So the less proactive the Indian engagement with the Taliban, the stronger Pakistan-Taliban relations would become.
    • A worldly-wise and internationally-exposed Taliban 2.0 would develop its own agency and sovereign claims including perhaps calling into question the legitimacy of the Durand Line separating Pakistan and Afghanistan, something Pakistan was always concerned about. T
    • The Taliban would want to hedge their bets on how far to listen to Pakistan.
    • That is precisely when New Delhi should engage the Taliban.
    • Security of civilian assets: India needs to court all parties in Afghanistan, including the Taliban if it wants to ensure its security of its civilian assets there.
    • It makes neither strategic nor economic sense to withdraw from Afghanistan after spending over $3 billion, something the Government seems to be prepared to do
    • Being a part of Afghanistan’s future course: If India is not proactive in Afghanistan at least now, late as it is, Russia, Iran, Pakistan and China will emerge as the shapers of Afghanistan’s political and geopolitical destiny, which for sure will be detrimental to Indian interests there.
    • Continental grand strategy:  Backchannel talks with Pakistan and a consequent ceasefire on the Line of Control, political dialogue with the mainstream Kashmiri leadership, secret parleys with Taliban all indicate that India is opening up its congested north-western frontier.
    •  Except for the strategic foray into the Indo-Pacific, India today is strategically boxed in the region and it must break out of it. Afghanistan could provide, if not immediately, India with such a way out.

    Consider the question ” India’s Afghan policy is at a major crossroads; to safeguard its civilian assets there as well as to stay relevant in the unfolding ‘great game’ in and around Afghanistan, New Delhi must fundamentally reset its Afghanistan policy. Comment.” 

    Conclusion

    In the end, India’s engagement with the Taliban may or may not achieve much, but non-engagement will definitely hurt Indian interests.

    Back2Basics: Durand Line

    • Durand Line, boundary established in the Hindu Kush in 1893 running through the tribal lands between Afghanistan and British India, marking their respective spheres of influence.
    • In modern times it has marked the border between Afghanistan and Pakistan.
    • The acceptance of this line—which was named for Sir Mortimer Durand, who induced ʿAbdor Raḥmān Khān, amir of Afghanistan, to agree to a boundary—may be said to have settled the Indo-Afghan frontier problem for the rest of the British period.

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  • Important Judgements In News

    Speedy trial a fundamental right: HC

    22 July 2021 | | Governance
    Mains GS2: Executive & Judiciary, Governance, Transparency & Accountability, Citizens Charters

    The Bombay High Court has said that speedy trial is a fundamental right highlighting the issue of people languishing in prisons waiting for the trial to begin.

    Background

    • The HC was hearing a petition seeking a judicial probe into the death of a tribal rights activist.
    • The petitioner told the court that he was not looking for the cause of the death, but an inquiry into what happened in jail that ultimately led to his death.

    Right to speedy trial

    • It is a right under which it is asserted that a government prosecutor may not delay the trial of a criminal suspect arbitrarily and indefinitely.
    • Otherwise, the power to impose such delays would effectively allow prosecutors to send anyone to jail for an arbitrary length of time without trial.
    • Right to speedy trial is a concept gaining recognition and importance day by day.

    Its constitutional status

    • The right to speedy trial is guaranteed under Article 21 of the Constitution of India.
    • In the case Kartar Singh v. State of Punjab (1961) it was declared that right to speedy trial is an essential part of fundamental right to life and liberty.
    • Article 21 declares that “no person shall be deprived of his life or personal liberty except according to the procedure laid by law.”

    What causes delay?

    • Delay in disposition of cases due to huge pendency
    • Provision for adjournment
    • Vacation of the court
    • Investigative agencies generally delay

    Why speedy trial is necessary?

    The right to a speedy trial serves several important purposes:

    • First, requiring a speedy trial helps to ensure that a defendant does not have to spend an unreasonable amount of time in jail.
    • It also helps to respect and protect the mental health of the defendant by making sure that the defendant is not kept in suspense or anxiety over pending criminal charges for months or years at a time.
    • The right to a speedy trial protects a defendant’s ability to gather evidence for his or her own defense.
    • Over time, physical evidence can become harder and harder to locate, and witnesses may move, lose their memories of an event, or even pass away.

    Alternative solutions

    • The Law Commission of India and the Malimath Committee recommended that the system of plea bargaining should be introduced in Indian criminal justice system.
    • Plea bargaining refers to a person charged with a criminal offence negotiating with the prosecution for a lesser punishment than what is provided in law by pleading guilty to a less serious offence.
    • This will facilitate the speedy disposal of criminal cases and reduces the burden on the courts at least for some minor trials and not serious criminal offences.

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  • [pib] SMILE Scheme for persons engaged in the act of begging

    22 July 2021 | PIB | Governance
    Mains GS2: Schemes For Vulnerable Sections

    The Ministry of Social Justice and Empowerment has formulated a scheme “SMILE – Support for Marginalized Individuals for Livelihood and Enterprise”.

    SMILE Scheme

    • This scheme is sub-scheme under the ‘Central Sector Scheme for Comprehensive Rehabilitation of persons engaged in the act of Begging’.
    • It covers several comprehensive measures including welfare measures for persons who are engaged in the act of begging.
    • The focus of the scheme is extensively on rehabilitation, provision of medical facilities, counselling, basic documentation, education, skill development, economic linkages and so on.
    • The scheme would be implemented with the support of State/UT Governments/Local Urban Bodies, Voluntary Organizations, Community Based Organizations (CBOs), institutions and others.
    • Scheme provides for the use of the existing shelter homes available with the State/UT Governments and Urban local bodies for rehabilitation of the persons engaged in the act of Begging.
    • In case of non-availability of existing shelter homes, new dedicated shelter homes are to be set up by the implementing agencies.

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

    Festival in news: Harela Festival

    22 July 2021 | Prelims Only | History
    Mains GS1: GS1-01.Indian Culture- Salient aspects of Art Forms, Literature and Architecture from ancient to modern times.

    Villagers across Uttarakhand celebrated Harela, a festival of greenery, peace, prosperity and environmental conservation.

    Harela Festival

    • Harela means ‘day of green’ and is celebrated in the month of Shravan (the fifth month of the Hindu lunar calendar) to worship Lord Shiva and Goddess Parvati.
    • People across Uttarakhand, especially the Kumaun region, associate greenery with prosperity.
    • The seeds of five to seven types of crops —  maize, til (sesame), urad (black gram), mustard, oats —  are sown in donas (bowl made of leaves) or ringalare (hill bamboo baskets) nine days before the festival.
    • They are harvested on the ninth day and distributed to neighbours, friends and relatives.
    • The flourish of the crops symbolizes prosperity in the year ahead.
    • People make clay statues of Lord Shiva and Goddess Parvati, known as Dikare, and worship them a day before the festival.
    • Harela is also linked to the Barahnaza system (12 types of crops), a crop diversification technique followed in the region.

    Answer this PYQ in the comment box:

    Q.Consider the following pairs:
    Tradition: State
    1. Chapchar Kut: festival Mizoram
    2. Khongjom Parba ballad: Manipur
    3. Thang Ta dance: Sikkim
    Which of the pairs given above is/are correct?

    (a) 1 only
    (b) 1 and 2
    (c) 3 only
    (d) 2 and 3

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  • FDI in Indian economy

    For Cairns dispute, international arbitration is not the way forward

    21 July 2021 | op-ed snap | Economics
    Mains GS3: Indian Economy

    Context

    The recent move by Cairn to seize India’s sovereign assets in order to enforce its arbitration award has brought into focus the dispute and the related issues.

    Utility of Bilateral Investment Treaties (BIT)

    • After the World Wars, as more countries gained sovereignty, they tended to look at foreign investments as a form of neo-colonialism.
    • Bilateral investment treaties became the primary tool to forge relationships between developed and developing countries.
    • The BITs help to adopt standards for prompt, adequate and effective compensation in case of expropriation.
    • With the advent of globalisation, BITs became the means for foreign investment in developing countries.
    • Although the impact of investment agreements on foreign investments remains highly contextualised and inconclusive, these came to govern international investment relations.
    • The BITs retained the old-world construct that allowed international arbitration.
    • However, many developing countries view arbitration of tax matters as a breach of their sovereign right to tax.

    The Cairn Energy case

    • In 2012, explanations were added to the Income Tax Act 1961 — these provisions were deemed as having a retrospective effect.
    • This was more in response to the Supreme Court’s decision in the Vodafone case which denied the income tax department’s assertion of tax claims arising from the offshore transfer of interest that substantially derived their value from India.
    • The 2012 explanations to the IT Act indeed sought to fix tax avoidance. 
    • Looking into the details of the Cairn case, one can see the series of reorganisations that tip-toed around tax laws of multiple jurisdictions, resulting in the non-payment of tax. 
    • Taxing offshore indirect transfers — a structuring device to gain tax advantage from the indirect sale of assets — is not unique to India (336 tax treaties contain such an article).
    • It is also possible to see that the underlying assets of the subsidiaries were immovable assets in India.
    • The UK-India tax treaty allowed for taxation of capital gains as per Indian law.
    • India challenged the admissibility of the case before the arbitration tribunal.
    • However, the case rests on a distinction between tax and tax-related investment.
    • Surely, all investments have tax implications and the acceptance of such a distinction could create problems even where tax is explicitly carved out from the bilateral investment treaties.
    • The option of arbitration upon an unsuccessful Mutual Agreement Procedure (MAP) resolution is not available in India.
    •  For this reason, over the years, there has been a rising trend in tax disputes involving BITs.
    • The Cairn case is one such instance where arbitration was invoked especially since MAP was not an option.

    Way forward

    • The case raises many questions that administrators must address through reform.
    • India’s model BIT introduced in 2016 rectifies the issue of the distinction between tax dispute and investment-related taxation dispute through the specific exclusion of taxation.
    •  The recognition of a tax-related investment dispute, distinct from a tax dispute, should not undermine such a carve-out.

    Conclusion

    It is also important to note even if the award is enforced, the matter of tax avoidance stands pending before the High Court. Given the complexity, the only reasonable solution would be a negotiated settlement. Even if there’s a resolution in the Cairns case, questions of law would remain.

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  • Capital Markets: Challenges and Developments

    India’s equity market bubble

    21 July 2021 | op-ed snap | Economics
    Mains GS3: Indian Economy

    Context

    Even as the real economy returns to the doldrums after being hit by the second wave of COVID-19 infections, the continuing bull run in India’s equity market in the April-June quarter has baffled many observers.

    V-shaped recovery of equity market

    • The benchmark BSE Sensex had nosedived to below 28,000 in March-April 2020, following the nationwide lockdown.
    • The equity market posted a sharp V-shaped recovery in 2020-21.
    • The Sensex surged beyond 50,000 in February 2021 and is currently closing on the 53,000 level.

    Factors suggesting bubble in equity market

    • There was an 81%-plus growth in the Sensex between April 2020 and March 2021 in the backdrop of real GDP growth plummeting to -7.3% during the same period.
    • While output contraction had reversed from the third quarter of 2020-21, the inflation rate also rose and remained way ahead of the real GDP growth rate in the last two quarters (Chart 1).
    • It is difficult to find any rationality behind the skyrocketing BSE Sensex in the context of such stagflation in the real economy.
    • Just like the fall in the equity prices was driven by the exit of foreign portfolio investors (FPI), the return of massive FPI inflows has driven the Indian equity bubble since then (Chart 2).
    • Net FPI inflows clocked an unprecedented ₹2.74 lakh crore in 2020-21, the previous high being ₹1.4 lakh crore in 2012-13.
    • The Reserve Bank of India (RBI)’s annual report (2020-21) to state stated that: “This order of asset price inflation in the context of the estimated 8 per cent contraction in GDP in 2020-21 poses the risk of a bubble.”

    Global factors

    • The global liquidity glut, following the expansionary, easy money policies adopted by the fiscal and monetary authorities of the OECD and G20 countries, has led to equity price inflation in several markets driven by FPIs, especially in Asia.
    • Following cues from the U.S. and the U.K., Asian equity markets in Singapore, India, Thailand, Malaysia and Hong Kong are currently witnessing price-earnings (P/E) ratios significantly above their historic means.
    • The BSE Sensex’s P/E ratio of 32 in end-June 2021 is way above its historic mean of around 20.

    What could burst the bubble?

    • Change in monetary policy: With COVID-19 vaccination and economic recovery proceeding apace in the U.S., the U.K. and Europe, fiscal and monetary policy stances will change soon.
    • Exit of FPIs: Once the U.S. Federal Reserve and other central banks start raising interest rates, the direction of FPI flows will invariably change bringing about corrections in equity markets across Asia.
    • India remains particularly vulnerable to a major correction in the equity market because of two reasons.
    • Low pace of vaccination: The pace of COVID-19 vaccination in India, given the vast population, lags behind most large countries.
    • In the absence of a substantial increase in the vaccination budget and procurement, large segments of the Indian population will remain vulnerable to a potential third wave of COVID-19, with its attendant deleterious impact on the real economy.
    • Weak fiscal stimulus: India’s economic recovery from the recession will remain constrained by the weak fiscal stimulus that has been delivered by the Central government.
    • Data from the IMF clearly show that while the total global stimulus consisted of additional public spending or revenue foregone measures amounting to 7.4% of global GDP, India’s fiscal measures amounted to 3.3% of GDP only.

    Consider the question “What are the factors driving equity market boom globally? What are the factors that could threaten such boom with a major correction?” 

    Conclusion

    With all agencies, including the RBI, downsizing India’s growth projections for 2021-22, it remains to be seen how long India’s equity bubble lasts.

    Back2Basics: P/E ratio

    • The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS).
    • The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
    • To determine the P/E value, one simply must divide the current stock price by the earnings per share (EPS).

    P/E Ratio=Earnings per share / Market value per share

     

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