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  • Coronavirus – Health and Governance Issues

    No to vaccine nationalism, yes to global cooperation

    India has been supplying vaccines to other countries even as its first phase of vaccination covers the health care workers. At the same time, the selfishness of the advanced countries has been on full display by amassing the approved vaccines. The article deals with the issue of vaccine nationalism.

    What is vaccine nationalism

    • When a country manages to secure doses of vaccines for its own citizens or residents and prioritises its own domestic markets before they are made available in other countries it is known as ‘vaccine nationalism’.
    • This is done through pre-purchase agreements between a government and a vaccine manufacturer.
    • The advance purchase contracts made by some advanced countries for potential vaccines would vaccinate their population many times: the European Union, two times, the United States and the United Kingdom, four times, and Canada, six times.

    Impact on the SDGs

    • The reversal of progress on many Sustainable Development Goals, or SDGs, such as SDG 3 (“Ensure healthy lives and promote well-being for all at all ages) could affect the health of the world population, and global growth itself.
    • Even before COVID-19, projections have shown that 6% of the global population would be in extreme poverty, which has gone up by 71 million, thereby causing enormous challenges to SDG 1 (“End poverty in all its forms everywhere”).
    • According to estimates by the International Monetary Fund, over 50% of emerging markets and developing economies that were converging toward advanced economies per capita income over the last decade are expected to diverge over the 2020-22 period.

    India’s important role

    • While advanced countries have turned their back on the need of poor countries, India has taken a position that a significant percentage of the approved doses will be permitted for exports.
    • While its exports to neighbouring counties will be under grant mode, initial shipment of vaccines to least developed countries will be free of cost.
    • Brazil has received 2 million doses of vaccine from India (as of January 23).
    • While India is in its first phase of vaccination to cover health-care workers, exports from India are helping other countries also in initiating phase one of their vaccination programme — a gesture well-appreciated globally.
    • The ability to produce large volumes of vaccine at an affordable cost underlines India’s importance to developing countries when it comes to drug access.

    Need for coordinated global efforts

    • Due to the vaccine nationalism, the arguments of public good and global cooperation have been widely neglected.
    • Nevertheless, India’s approach only reinforces the need of having coordinated global efforts in bringing COVID-19 under control.
    • This response manifests India’s unstinted commitment to global development and has consolidated its name as the world’s pharmacy.

    COVAX Project: Unique case of global cooperation

    • The COVAX project is a global risk-sharing mechanism for pooled procurement and fair distribution of COVID-19 vaccines.
    • It is based on funding from high and middle-income countries.
    • Since high and middle-income countries are buying up large amounts of the vaccine directly from suppliers, the promise by COVAX to deliver 2 billion doses by the end of 2021 seems to face new challenges.
    • Since most of the vaccines are purchased from the global south [specifically, India and China] for developing nations, the COVAX project can draw new pathways for global development.
    • Most of these vaccines are cost-effective and affordable to the global south.

    Consider the question “What is vaccine nationalism? Examine the role played by India against the backdrop of vaccine nationalism.” 

    Conclusion

    The development of vaccines is a classic story of global cooperation between the North and the South. Unfortunately, the increasing nationalist tendencies of the democratic World during the pandemic have challenged the positive narrative on global cooperation.

  • Government Budgets

    Government set for fiscal push, RBI needs to do more

    The article analyses the key features of the Union Budget, including the increase in overall expenditure and jump in capital expenditure in FY22.

    Explaining the Rs 4.1 lakh crore jump in expenditure in FY21

    • The budget has moved clearly from off-balance-sheet funding [borrowing by FCI and arrears of fertiliser subsidy] to headline-deficit funding.
    • That possibly explains the surge in fiscal deficit in the current fiscal at 9.5 per cent of GDP.
    • However, by excluding such off-balance-sheet funding, the headline-fiscal deficit declines to 8.6 per cent of GDP. 
    • A closer look at the food subsidy, juxtaposed with outstanding FCI liabilities shows that Rs 1.2 lakh crore (0.6 per cent of the GDP) is a pure accounting shift, while the rest Rs 1.9 lakh crore is new spending this fiscal.
    • Hence, the incremental spending in FY21 comes to around Rs 2.9 lakh crore (net of Rs 1.2 lakh crore/ 1.5 per cent of the GDP).
    • Interestingly, the government has also spent an additional Rs 62,638 crore on fertiliser subsidy, the entire amount of which has been front-loaded.

    Focus on capital expenditure in FY22

    • Increase in the expenditure in FY22 is noticeable as the pie has decisively shifted towards capital expenditure.
    • The budgeted raise in FY22 is 4.6 times larger than the trend increase in the last two decades. 
    • The proposed capital expenditure amounts to 3.4 per cent of the GDP if we also include allocation for capital expenditure for autonomous bodies.
    • Assuming an Incremental Capital Output Ratio (ICOR) of 4.5, one can expect a GDP growth contribution of 0.8 per cent on account of the capital expenditure.
    • The other number in the budget that deserves admiration is the significant decline in extra budgetary resources of the government and PSUs. All this augurs well even for rating agencies if we go by purely fiscal transparency as a rule.

    Steps to clean up NPAs in the banking sector

    • The most notable development in the financial system is announcement of setting up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
    • The approach is to set up an AMC, which in partnership with an ARC, takes over large stressed assets ( approximately Rs 3.5 lakh crore) spread across multiple banks that have a clear potential for turnaround.
    • An operational turnaround of the asset creates value for the overall system.
    • The AMC/AIF-led approach could enable a move towards true price discovery, consolidating debt into one single entity ensuring faster decision-making, freeing up blocked capital/funds and an operational turnaround of assets.
    • A better price discovery could be ensured by having an independent investment committee comprising of senior management professionals.

    Increase in FDI limit in insurance sector

    • The Union budget also has a proposal to increase the FDI limit in insurance companies to 74 per cent from the present 49 per cent, with Indian management control.
    • It is expected that fresh capital will bring a new wave in technical know-how, innovation, and new products to the advantage of consumers, pushing up insurance penetration in the country.
    • However, we must ensure that foreign investors become interested in the Indian insurance sector as the current FDI used limit is at 33.8 per cent in private insurers.

    Role of RBI

    • With the government set for a fiscal push, the baton has passed to the RBI.
    • Overall, monetary and fiscal policies need ideal co-ordination for macroeconomic management.
    • If the central bank pursues its monetary objectives by not accommodating debt financing in its strategy, the macroeconomic outcome may be worse for both the fiscal and monetary authorities, as well as for the economy.
    • Fortunately, the RBI and government have worked in perfect harmony during the pandemic.
    • As it continues, we can have a stable interest rate regime which will be rewarding for all, particularly the government.

    Conclusion

    The Union Budget for FY22 is a budget to consolidate (C), spend (S) and revive (R) and shows that the government is set for fiscal push. Now, the baton has passed to the RBI.


    Back2Basics: What Is the Incremental Capital Output Ratio (ICOR)?

    • The incremental capital output ratio (ICOR) is a frequently used tool that explains the relationship between the level of investment made in the economy and the consequent increase in the gross domestic product (GDP).
    • ICOR indicates the additional unit of capital or investment needed to produce an additional unit of output.
  • Iran’s Nuclear Program & Western Sanctions

    Iran rules out changes to Nuclear Deal

    Iranian President Hassan Rouhani ruled out changes to Iran’s nuclear accord with world powers and dismissed calls to broaden the terms of the deal and include regional countries.

    Do you know how the enmity between Iran and the US came into reality?  We hope you have watched the Argo (2012) movie for sure!

    What is the news?

    • The election of Joe Biden, who supports a US return to the agreement, has spurred some expectations of renewed diplomacy.
    • But Rouhani’s refusal puts this possibility at the end.

    The United States since 1979 has applied various economic, trades, scientific and military sanctions against Iran. U.S. economic sanctions are administered by the Office of Foreign Assets Control.

    Iranian Nuclear Agreement

    • The Iran nuclear agreement, formally known as the Joint Comprehensive Plan of Action (JCPOA), is a landmark accord reached between Iran and several world powers, including the US, in July 2015.
    • Under its terms, Iran agreed to dismantle much of its nuclear program and open its facilities to more extensive international inspections in exchange for billions of dollars’ worth of sanctions relief.

    What were the goals of JCPOA?

    • The P5+1 wanted to unwind Iran’s nuclear program to the point that if Tehran decided to pursue a nuclear weapon, it would take at least one year, giving world powers time to respond.
    • Heading into the JCPOA negotiations, U.S. intelligence officials estimated that, in the absence of an agreement, Iran could produce enough nuclear material for a weapon in a few months.

    Who are the participants?

    • The JCPOA, which went into effect in January 2016, imposes restrictions on Iran’s civilian nuclear enrichment program.
    • At the heart of negotiations with Iran were the five permanent members of the UN Security Council (China, France, Russia, the UK, and the US) and Germany—collectively known as the P5+1.
    • The European Union also took part.
    • Prior to the JCPOA, the P5+1 had been negotiating with Iran for years, offering its government various incentives to halt uranium enrichment.

    Disruptions after trump

    • The deal has been in jeopardy since President Donald J. Trump withdrew the US from it in 2018.
    • In response to the U.S. departure, as well as to deadly attacks on prominent Iranians in 2020, including one by the United States, Iran has resumed some of its nuclear activities.

    Why isn’t the deal yet enforced?

    • In April 2020, the United States announced its intention to keep back sanctions.
    • The other P5 members objected to the move, saying the US could not unilaterally implement the mechanism because it left the nuclear deal in 2018.
    • Meanwhile, the wide range of U.S. sanctions unrelated to the nuclear program has added to the damage.

     Iran’s current nuclear activity

    • Iran since Trump’s decisions started exceeding agreed-upon limits to its stockpile of low-enriched uranium.
    • It began enriching uranium to higher concentrations (though still far short of the purity required for weapons).
    • It also began developing new centrifuges to accelerate uranium enrichment; resuming heavy water production at its Arak facility.

    Did you know?

     

    Mined uranium has less than 1 percent of the uranium-235 isotope used in fission reactions, and centrifuges increase that isotope’s concentration. Uranium enriched to 5 percent is used in nuclear power plants, and at 20 percent it can be used in research reactors or for medical purposes. High-enriched uranium, at some 90 percent, is used in nuclear weapons.

  • Indian Army Updates

    ‘Smart walls’ for Indian Borders

    The new US President has stopped the construction of the much-publicized “border wall” between the U.S. and Mexico.

    Q.Smart fencing along with physical fencing can protect major infiltration areas of Indian borders. Analyse its feasibility for India.

    What is the news?

    • The Mexico–US barrier also known as the border wall is a series of vertical barriers along the border intended to reduce illegal immigration to the US.
    • Biden’s decision was confirmed, however, that an alternative has been offered — a ‘smart’ wall that replaces the physical and armed patrolling with advanced surveillance tech is the proposed future of border security now.

    What is the Smart Wall?

    • The ‘smart wall’ technology could solve border security issues without the need for a physical barrier.
    • The wall would use sensors, radars, and surveillance technology to detect and track border break-ins, and technology capable of performing the most difficult tasks dedicated to border security.
    • The complete system of a virtual wall would consist of a radar satellite, computer-equipped border-control vehicles, control sensors and underground sensors.
    • Along with surveillance towers and cameras, thermal imaging would be used, which would help in the detection of objects.
    • The system would even be capable of distinguishing between animals, humans, and vehicles, and then sending updates to handheld mobile devices of the patrol agents.

    Not a new concept

    • The concept is not new and the novelty of it cannot be directly associated with Biden.
    • Interestingly, the U.S.-Mexico border wall proposed by Donald Trump envisaged this concept.
    • A technology firm was sought to be hired by the Trump administration, and it was indicated that artificial intelligence shall be used at a novel scale to complement the steel barrier (border wall).

    Feasibility for India

    • A question that now arises is whether such a project can be undertaken to secure Indian borders.
    • India has been struggling with the problem of terrorists and smugglers infiltrating into the country and efforts are ongoing to secure our borders and curb cross-border infiltration.
    • Therefore, it is proposed that it is high time we start envisaging the use of technology to help India secure its borders.

    Various challenges

    • A critical factor that must be considered to enable the usage of such a system along Indian borders is that the terrain in the region is rugged, and, furthermore, not even clearly defined.
    • Hence, erecting fences, walls or any physical structures is extremely difficult.
    • A “smart” wall, however, makes use of systems that would be designed in such a way that they can operate even in rugged areas.
    • Imperatively, in the US various other benefits, such as cost-effectiveness, less damage to the environment, fewer land seizures, and speedier deployment are being noted.
    • This gives the concept an edge over traditional borders.

    Benefits that Indian can reap

    • Notably, such a system, even if not feasible for our long boundaries, may still be deployed to enhance critical security establishments of the country and complement the already-existing physical fencing and walls.
    • This can no doubt secure the major infiltration areas.

    Way forward

    • The attack on the Pathankot Airbase highlighted that often, it may become difficult to secure establishments due to their vast size.
    • Further, it is imperative for Indian armed forces to be well-equipped and simultaneously have the latest technological advantage over its enemies.
    • Experts must explore this idea to effectively counter the problem of cross-border infiltration.
    • Is it unfathomable to deploy a security system that clubs technology with traditional set-ups due to terrain and other problematic factors? This is a question for Digital India to answer.
  • Blockchain Technology: Prospects and Challenges

    Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

    With the likely scenario of India’s government banning private cryptocurrencies, the Reserve Bank of India (RBI) is planning to introduce an official digital currency for the country.

    What is the news?

    • An earlier government bill on cryptocurrency in 2019 reportedly sought to ban cryptocurrency and criminalise its possession in India. However, it was not introduced in Parliament.
    • The detailed text of the bill has not been released in the public domain so far.
    • The bill also says that there will be a regulation to help RBI create its own CBDC (central bank digital currency).

    What are Cryptocurrencies?

    • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
    • It uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
    • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
    • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

    Hues over the Bill

    • The past year has seen a surge in the number of cryptocurrency investors in India and in trading volumes.
    • Cryptocurrency exchanges such as CoinDCX and Coinswitch Kuber have also raised early-stage funding for their operations.
    • The bill may spark an end to the nascent cryptocurrency industry in the country.

    What were the provisions of 2019 Bill?

    Definition of cryptocurrencies:

    • The 2019 Bill defined cryptocurrency as any information, code, number or token, generated through cryptographic means or otherwise, which has a digital representation of value and has utility in business activity, or acts as a store of value or a unit of account.

    Ban:

    • The 2019 Bill bans the use of cryptocurrency as legal tender or currency.
    • It also prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency.
    • Mining is an activity aimed at creating a cryptocurrency and/or validating cryptocurrency transactions between a buyer and a seller.

    In particular, the use of cryptocurrency was prohibited for:

    1. use as a medium of exchange, store of value or unit of account,
    2. use as a payment system,
    3. providing services such as registering, trading, selling or clearing of cryptocurrency to individuals,
    4. trading it with other currencies,
    5. issuing financial products related to it,
    6. using it as a basis of credit,
    7. issuing it as a means of raising funds, and
    8. issuing it as a means for investment.

    Why the govt wants to ban cryptocurrencies?

    Sovereign guarantee

    • Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.

    Market volatility

    • Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.

    Risk in security

    • A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).

    Malware threats

    • In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.

    Money laundering

    • Cryptocurrencies are more vulnerable to criminal activity and money laundering.  They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.

    Regulatory bypass

    • A central bank cannot regulate the supply of cryptocurrencies in the economy.  This could pose a risk to the financial stability of the country if their use becomes widespread.

    Power consumption

    • Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland).

  • Electoral Reforms In India

    Maharashtra to introduce ballot papers along with EVMs

    Maharashtra Assembly Speaker has directed the State Law and Justice Department to prepare the draft of a Bill which provides an option to voters to exercise their franchise on ballot papers along with electronic voting machines (EVMs).

    Manner of holding elections

    • Article 328 of the Indian Constitution and number 37 of the State List of the seventh schedule of the Constitution provide rights to the State legislature to formulate a law on the manner of holding elections within the State.
    • The state cannot abolish the EVMs completely.
    • They are just demanding an additional provision of ballot paper as well for whoever wants to use that.
    • Directions have been given to check the constitutional validity of the argument and prepare the draft of a Bill.

    Background

    • The Election Commission has been conducting all elections through EVMs since 2001.
    • The Indian EVM is a direct recording device, which is a stand-alone machine.
    • The Election Commission has clarified several times that Indian EVMs don’t talk to any machine outside its own system – be it through a wired network, internet, satellite, and WiFi or Bluetooth.
    • The EVM is not connected to the server, so cyber hacking of Indian EVMs is not possible unless an authorised person acts with malafide intention.
    • In 2014, a whopping 55.38 crore people cast their votes in EVMs in the parliamentary elections.

    Considerations behind such a move

    • On EVMs, a voter can never be 100% sure about whom he or she has voted and whether that particular candidate has received the vote.
    • It is a right of every voter to be 100% sure about it and also essential for the democratic process.”
    • Over the past few years, serious concerns and doubts had been raised over the EVMs and whether those could be manipulated.
    • The option of ballot voting would boost people’s confidence in the electoral process which would ultimately lead to an increase in voting percentage.

    Q.The EC’s role in ensuring the people’s faith in democracy is paramount. The loss of public faith in democracy and its protector institutions spells nothing but disaster. Discuss.

  • Indian Army Updates

    Exercise Yudh Abhyas 2021

    The 16th edition of Indo-U.S. joint military exercise ‘Yudh Abhyas’ is set to be held in Rajasthan between February 8 and 21.

    Yudh Abhyas

    • The exercise near the India-Pakistan border aims at enhancing cooperation and interoperability between the two armies and will focus on counter-terrorism operations under the UN mandate.
    • The drill comes days after the air forces of India and France held a five-day joint exercise in Rajasthan in January.
    • Exercise with U.S. Army is significant in terms of security challenges faced by both the nations in the backdrop of global terrorism.
    • The joint military exercise will enhance the level of defence cooperation between both armies which will also foster the bilateral relations between both nations.
    • It reiterates India’s key role as a key partner in the Indo-Pacific region.
  • Government Budgets

    Economy needs much more than what Budget 2021 offers

    The article highlights the areas of economy for which the allocation in the Budget has either been kept unchanged or reduced, signaling the missed opportunity to revive the economy.

    Including the off-budget items

    • An important feature of the Budget is the transparency on including the off-budget items.
    • The step will result in cleaning up of the balance-sheet of the Food Corporation of India (FCI).
    • The FCI was saddled with a debt of Rs 3.75 lakh crore by the end of December 2020, a significant part of which is now paid by the government.
    • So is the case of the fertiliser subsidy for which the pending Rs 65,000 crore was cleared.

    What was the increase in expenditure due to pandemic

    • The total expenditure of the government in 2020-21 hardly increased compared to the pre-pandemic budget estimates (BE).
    • The total increase in revised estimates (RE) for 2020-21 is only Rs 33,000 crore, around 1 per cent more than what was budgeted.
    • The government did raise the expenditure on food subsidy, direct benefit transfer to Jan Dhan accounts (Rs 33,000 crore) and the increase in the Mahatma Gandhi National Rural Employment Guarantee (MGNREGA) (Rs 50,000 crore) and so on.
    • But it did so not by generating resources and expanding the fiscal deficit but by cutting down essential expenditure such as agriculture (Rs 18,000 crore), education (Rs 14,000 crore) and social welfare (Rs 14,000 crore).

    No increase in health budget

    • The Budget announced increase in the health budget to Rs 2.23 lakh crore.
    • This number was achieved by adding one-time expenditures on the vaccine, Finance Commission grants and inclusion of expenditure on drinking water, sanitation and nutrition.
    • However, the budget of the health ministry for 2021-21 is lower at Rs 74,602 crore compared to the revised estimates of Rs 82,445 crore for the current year.

    No increase in agriculture budget

    • Like in many other essential ministries, the agriculture ministry also witnessed a cut with estimates of 2021-22 lower by Rs 11,000 crore than last year.
    • Real investment in agriculture has been lower than 2013-14 for every year of this government.

    Lack of attention on employment generation in rural area

    • The lifeline provided by expenditure in rural areas on infrastructure creation and employment generation has either seen a decline in budgeted expenditure or remained stagnant.
    • The budget for the ministry of rural development is lower by Rs 66,000 crore compared to the RE of last year.
    • The MGNREGA budget of Rs 73,000 crore is barely enough to cover the increase in wages by 11 per cent announced in March.
    • It is only 1.8 per cent higher than the actual expenditure of 2019-20, but 52 per cent lower than the RE of last year.
    • Similarly, for the Pradhan Mantri Gram Sadak Yojna (PMGSY), the budget for 2021-22 has been cut by Rs 4,500 crore, not even enough to cover inflation between the two years.

    Consider the question “The Budget 2021-22 has been hailed for bringing in more transparency to the budgeting exerciese? Examine the context for this, how it will benefit the country?”

    Conclusion

    Estimates for next year point to missed opportunities to use fiscal measures to revive the ailing economy. Unlike the pandemic, where the arrival of vaccines has given hope, the ailing economy needs much more than this budget.

  • Government Budgets

    The Budget bids goodbye to fiscal orthodoxy

    A whopping fiscal deficit at 9.5% of GDP for FY21 highlights departure of India’s fiscal policy from the path of fiscal consolidation. The article highlights the issues related to such departure.

    Important departure

    • With its fiscal deficit at 9.5% of GDP for FY21 and 6.8% in FY22 Budget for 2021-22 seems to signal “spend like there is no tomorrow”.
    • For well over a decade-and-a-half, we have tried attaining deficit targets set out in the Fiscal Responsibility and Budget Management (FRBM) Act (2003).
    • In this Budget, target of FRBM Act has not been adhered to.
    • The Budget thus marks an important departure from one of the key tenets of the Washington Consensus that was based on macroeconomic stability.
    • In previous years, Medium Term Fiscal Policy cum Fiscal Strategy Statement would give the indicators for the past two years as well as the projections for the next two years.
    • In this year’s Budget, the yearly projections are missing.
    • The Finance Minister has promised to introduce an amendment to the FRBM Act to formalise the new targets.

    The theoretical basis for departure

    • The Economic Survey laid the groundwork for a departure from rigid adherence to fiscal consolidation. 
    • It has a quote from economist Olivier Blanchard, “If the interest rate paid by the government is less than the growth rate (IRGD), then the intertemporal budget constraint facing the government no longer binds.”
    • The “intertemporal budget constraint” means that any debt outstanding today must be offset by future primary surpluses.
    • The Survey argues that in India, the growth rate is higher than the interest rate most of the time. 
    • The Survey says that, in the current situation, expansionary fiscal policy will boost growth and cause debt to GDP ratios to be lower, not higher.

    Key concerns

    • An important factor for adhering to the fiscal constraint in the past was the fear that the rating agencies would downgrade India if total public debt crossed, say, 10%-11% of GDP.
    • That is a risk that cannot be wished away unless the rating agencies have decided to toe the IMF-World Bank line on fiscal deficits.
    • Another concern is that a large fiscal deficit can fuel a rise in inflation.
    • A third concern is that, with the tax to GDP ratio not rising as expected, the sale of public assets has become crucial to reduction in fiscal deficits in the years ahead. This is a high-risk strategy.
    • A large-scale privatisation almost always involves substantial FDI.
    • In South East Asia and Eastern Europe, privatisation of banks meant a large rise in foreign presence in the domestic economies.

    Consider the question “The Budget 2021-22 is characterised by its departure from the path of fiscal consolidation. Examine the theoretical basis for such departure. What are the key concerns?”

    Conclusion

    If the nation’s political economy came in the way of our meeting the FRBM targets, it is also likely to pose an obstacle to large-scale privatisation. A departure from fiscal orthodoxy is welcome. But the government needs to think of ways to make it more sustainable.


    Back2Basics: Interest Rate Growth Differential

      • A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate.
      • When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs.
      • In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over.

     

  • Foreign Policy Watch: India-Sri Lanka

    Sri Lanka pushes India out of Colombo Terminal Project

    After the strong opposition from within, the Sri Lankan government was forced to revoke a 2019 agreement with India and Japan to develop the strategic East Container Terminal (ECT) at the Colombo Port.

    Map Reading: Note all these major ports and try recalling their sequences in the clockwise and counter-clockwise direction.

    What is the news?

    • PM Mahinda Rajapaksa made a statement that the operation of the east terminal would be done by Sri Lanka Ports Authority on its own.
    • Its cabinet has approved a proposal to develop the West Terminal at the Colombo Port as a PPP with India and Japan, which is seen as a bid to compensate India.
    • It is unclear whether India would accept the latest proposal.

    What is the Project?

    • The tripartite agreement, signed by India, Sri Lanka and Japan, proposes to develop the ECT, which is located at the newly expanded southern part of the Colombo Port.
    • The ECT is located 3 km away from the China-backed international financial city, known as Port City, currently being built in Colombo.
    • A Chinese company was behind the controversial 2018 Hambantota port project, signed its first contract in the Port City last month.
    • It is also on the map of China’s Belt and Road Initiative (BRI).

    India’s reaction

    • A few weeks ago EAM S. Jaishankar visited Sri Lanka where he discussed the development of the stalled project.
    • India’s first response was that the island nation should not be taking a decision in a unilateral manner on an existing tripartite agreement.

    Compensatory offer to India

    • After the decision on revoking the 2019 agreement, SL has approved another proposal to develop the west terminal of the Colombo port with Japan and India.
    • Commercially, the west terminal offer is better for India as it gives 85% stake for developers of the West Terminal against the 49% in ECT.

    Sri Lanka expects India to rethink. Why?

    • Indian response to this compensatory offer is unclear since there was no formal communication by SL authorities.
    • Geo-politically, west terminal is almost the same India considers the security aspect and the necessity to have a port terminal in Sri Lanka.
    • There is no difference between East and West Terminals except for the fact that development of the ECT is partially completed while the development of the West Terminal has to start from scratch.

    SL version of the revocation

    • Incumbent PM Mahinda Rajapaksa said the pressure was immense on the President Gotabaya Rajapaksa to cancel the 2019 agreement.
    • The pressure was brewing so much that he was becoming so unpopular among the people.
    • As per the agreement signed by the former Maithripala Sirisena-Ranil Wickremesinghe administration, India and Japan together were to hold 49% stake in ECT.
    • What had finally made the government surrender before trade unions were the increasing support of many more sections in the society for the protests against privatization.

    The inevitable factor: China

    • This move can be easily interpreted as a reaction to Chinese communication to Sri Lanka.
    • China has reportedly instigated trade unions and civil societies against this project.

    Q.The threat of Chinese presence in South Asia can be tackled more effectively if India changes course in its dealings with its neighbours and becomes more sensitive to their concerns. Critically analyse.

    Outcome: Souring of the ties

    • For India, the strategic ECT project was important. Even the EAM has visited Colombo in January in this regard.
    • Critics of the Sri Lankan government anticipate many national and international impacts surrounding the latest decision on ECT.
    • Meantime, internationally an offended India can make life tough for Sri Lanka, isolating the tiny island nation, geo-politically and on the economic front.
    • The economic isolation will not help Sri Lanka at a time when the country is taking steps to revive the economy amid a pandemic.

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