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  • Government Budgets

    What is “Direct” Monetization of Deficit?

    | Economics | Mains Paper 3: Indian Economy

    With the economy stalled, there isn’t enough money in the market for the government to borrow. Can it ask the RBI to print more money? How does this process work, and what are the arguments against it? Let us see:

    Discuss the scope and feasiblity of “Direct” Monetization by the government for Deficit Financing as an option of the last resort.

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    What is “direct” monetisation of the deficit?

    • Imagine a scenario where the government deals with the RBI directly — bypassing the financial system — and asks it to print new currency in return for new bonds that the government gives to the RBI.
    • Now, the government would have the cash to spend and alleviate the stress in the economy — via DBT to the poor or starting social and capital expenditure etc.
    • In lieu of printing this cash, which is a liability for the RBI (recall that every currency note has the RBI Governor promising to pay the bearer the designated sum of rupees), it gets government bonds.
    • Such bonds are an asset for the RBI since such bonds carry the government’s promise to pay back the designated sum at a specified date.
    • And since the government is not expected to default, the RBI is sorted on its balance sheet even as the government can carry on rebooting the economy.

    What triggers a demand for direct monetization?

    1) Decline of Demand

    • With a nationwide lockdown, incomes have fallen and so have consumption levels.
    • In other words, the demand for consumer goods and services (say a haircut) in the economy has gone down.
    • What can be done to boost demand? People need to have money. But, of course, who will give them money.
    • From the highest-ranking CEOs to stranded workers, incomes have taken a huge hit, if not completely dried up.

    2) Moving ahead for a fiscal deficit

    • For its part, the RBI has been trying to boost the liquidity in the financial system. It has bought government bonds from the financial system and left it with money.
    • Most banks, however, are unwilling to extend new loans as they are risk-averse. Moreover, this process could take time.
    • The government’s finances were already overextended going into this crisis, with its fiscal deficit way over the permissible limit.
    • On top of that, if the government was to provide some kind of a bailout or relief package, it would have to borrow a huge amount. The fiscal deficit will go through the roof.

    3) No money in the market

    • There isn’t enough money in the market for the government to borrow.
    • Moreover, as the government borrows more from the market, it pushes up the interest rate.
    • Hence, the govt. is left with the only solution — the “direct” monetisation of government deficit.

    How is DM different form OMOs?

    • Direct monetization is different from the “indirect” monetizing that RBI does when it conducts the so-called Open Market Operations (OMOs) and/ or purchases bonds in the secondary market.

    Global examples

    • Other countries are doing it to counter the economic crisis related to COVID-19.
    • In the UK on April 9, the Bank of England extended direct monetisation facility to the UK government even though the Governor of the Bank opposed the move till the last moment.

    Has India ever done this in the past?

    • Yes, until 1997, the RBI “automatically” monetized the government’s deficit.
    • In 1994, Manmohan Singh (former RBI Governor and then Finance Minister) and C Rangarajan, then RBI Governor, decided to end this facility by 1997.
    • Now, though, even Rangarajan believes that India would have to resort to monetising the deficit.

    Issues with Direct monetisation

    • Direct monetisation of the deficit is a highly contested issue.
    • Another former RBI Governor D Subbarao has said that there is no question that India must borrow and spend more in this crisis.
    • He regarded this as a moral and a political imperative.

    Issues: Inflationary practice

    • Ideally, this tool provides an opportunity for the government to boost overall demand at the time when private demand has fallen — like it has today.
    • But if governments do not exit soon enough, this tool also sows the seeds for another crisis. Here’s how:
    • Government expenditure using this new money boosts incomes and raises private demand in the economy. Thus, it fuels inflation.
    • A little increase in inflation is healthy as it encourages business activity. But if the government doesn’t stop in time, more and more money floods the market and creates high inflation.

    To what level should government debt be ideally limited?

    • While no ideal level of debt is set in stone, most economists believe developing economies like India should not have debt higher than 80%-90% of the GDP. At present, it is around 70% of GDP in India.
    • It should commit to a pre-determined amount of additional borrowing and to reversing the action once the crisis is over.
    • Only such explicitly affirmed fiscal restraint can retain market confidence in an emerging economy.
    • The other argument against direct monetizing is that governments are considered inefficient and corrupt in their spending choices — for example, whom to bail out and to what extent.

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  • President’s Rule

    Issues with nominated CM’s election

    | Polity | Mains Paper 2: Parliament & State Legislatures

    • Maharashtra CM is yet to be nominated to one of the seats reserved for the Governor’s nominee in the state Legislative Council.
    • His current term in office approaches its end with a looming constitutional crisis.

    The discretionary powers of the governor have been subjected to various debates this year. Be it Karnataka, Maharashtra, MP or erstwhile J&K (under Lt. Governor) or the UT of Delhi.

    CM without Election

    • Maha CM took oath in accordance with Article 164(4).
    • The article states that a Minister who for any period of six consecutive months is not a member of the Legislature of the State shall at the expiration of that period cease to be a Minister.
    • It follows that the Chief Minister must become part of the legislature before the said expiration of 6 months.

    Governors dilemma

    • A situation in which an individual who is not a member of the legislature becomes chief executive of the government is in itself fairly common.
    • But with the pandemic raging, a by-election cannot be held.
    • The only way to fulfil the requirement, therefore, is for a person to be nominated to the Upper House by the Governor.
    • If that does not happen, the Governor is obligated to make way for someone else to lead the coalition govt.
    • CM Uddhav Thackeray is likely to have had no problems becoming a member of the legislature had the pandemic not hit.

    What does the Judiciary have to say?

    • In S R Chaudhuri vs State of Punjab and Ors (2001), the Supreme Court had ruled that it would be subverting the Constitution to permit an individual, who is not a member of the Legislature.
    • Such a person should not be appointed a Minister repeatedly for a term of ‘six consecutive months’, without him getting himself elected in the meanwhile.
    • The practice would be clearly derogatory to the constitutional scheme, improper, undemocratic and invalid.

    Testing the nomination route

    • The nomination route for non-member Ministers is less common — but not unconstitutional.
    • In 1952, C Rajagopalachari was nominated as CM of Madras by Governor Sri Prakasa.
    • Under Article 171(5), the Governor can nominate “persons having special knowledge or practical experience in respect of. literature, science, art, co-operative movement and social service”.
    • Last month, the President nominated former Chief Justice of India Ranjan Gogoi to Rajya Sabha even though there were doubts about him meeting these prescribed qualifications.
    • Thackeray can be said to have a stronger claim in this regard — he is an ace wildlife photographer.
    • Moreover, as per the Allahabad High Court in Har Sharan Varma vs Chandra Bhan Gupta And Ors (February 15, 1961), even politics can be seen as ‘social service’.

    The role of the Governor

    • It has been argued that Section 151A of The Representation of the People Act, 1951, prohibits the filling of a vacancy if “the remainder of the term of a member in relation to a vacancy is less than one year”.
    • However, this cannot be a reason for the Governor to refuse nomination — because the bar is in respect of by-election to fill a vacancy, not nomination.
    • Of course, the Governor could argue that he is not obligated under the Constitution to act swiftly on the advice of the Council of Ministers; also, why should he nominate Thackeray only to save his chief ministership.

    A new issue for debate

    • It is important to note the extraordinary context — India is currently battling a health emergency of the kind not seen in the history of the republic.
    • Political uncertainty is the last thing that Maharashtra, which has the highest coronavirus caseload and death toll by far in the country, needs at this moment.

    The question of discretion

    • What are the limits to the Governor’s discretion in nominations is the matter of discussion now.
    • In Biman Chandra Bose vs Dr H C Mukherjee (1952) the Calcutta HC rejected the plea that none of the nine nominated members to the legislature fulfilled the required criteria and held that the Governor cannot use his discretion in nominating members to the Council.
    • He has to go by the aid and advice of the Council of Ministers.
    • Article 163(1) of the Constitution makes it clear that the Governor must follow the recommendations of the Council of Ministers in all situations “except in so far as he is by or under this Constitution required to exercise his functions or any of them in his discretion”.

    Case in Maharashtra

    • It can be argued that government is bound by the advice of the CoM only in executive matters as defined in Article 162 and since the nomination of members is not an executive power, he can act in his discretion.
    • However, it must be noted that under Article 169, while Parliament has the power to abolish or create a Legislative Council, it can pass such a law only after the state Assembly has passed a resolution to that effect.
    • Thus, the legislative power of the Assembly can be inferred from this provision.

    Also read:

    https://www.civilsdaily.com/news/role-of-governor-in-state-govt-formation/

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  • Minority Issues – SC, ST, Dalits, OBC, Reservations, etc.

    No 100% quota for Scheduled Areas

    SC Judgements | Polity | Mains Paper 2: Indian Constitution – historical underpinnings, evolution, features, amendments, significant provisions and basic structure

    • A Constitution Bench of the Supreme Court held it unconstitutional to provide 100% reservation for tribal teachers in schools located in Scheduled Areas across the country.
    • The Bench was answering a reference made to it in 2016 on whether 100% reservation is permissible under the Constitution.

    Reservation in India is a system of affirmative action by the State that provides representation for historically and currently disadvantaged groups in Indian society in education, employment and politics. The 10% EWS quota this year has raised the inevitability for a possible mains question.

    No 100% quota

    • The apex court held that it is an obnoxious idea that tribals only should teach the tribals.
    • Merit cannot be denied in toto by providing reservation observed the judgement.
    • Citizens have equal rights, and the total exclusion of others by creating an opportunity for one class is not contemplated by the founding fathers of the Constitution of India.

    Invoking Indira Sawhney judgment

    • The court referred to the famous Indira Sawhney judgment (Mandal case- Indra Sawhney v. Union of India 1992), which caps reservation at 50%.
    • The court held that 100% reservation is discriminatory and impermissible.
    • The opportunity of public employment is not the prerogative of few.
    • A 100% reservation to the Scheduled Tribes has deprived SCs and OBCs also of their due representation.

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  • Land Reforms

    SWAMITVA Scheme to map rural inhabited lands

    Schemes | Governance | Mains Paper 2: Government Scheme/Policies

    The Prime Minister has launched the Swamitva Scheme and e-Gramswaraj Portal & mobile app as a portal to prepare and plan Gram Panchayat Development Plans.

    Swamitva Scheme

    • SWAMITVA stands for Survey of Villages and Mapping with Improvised Technology in Village Areas.
    • Under the scheme, the latest surveying technology such as drones will be used for measuring the inhabited land in villages and rural areas.
    • The mapping and survey will be conducted in collaboration with the Survey of India, State Revenue Department and State Panchayati Raj Department under the Ministry of Panchayati Raj.
    • The drones will draw the digital map of every property falling in the geographical limit of each Indian village.
    • Property Cards will be prepared and given to the respective owners.

    Benefits

    • The scheme will create records of land ownership in villages and these records will further facilitate tax collection, new building plan and issuance of permits.
    • It will enable the government to effectively plan for the infrastructural programs in villages.
    • It would help in reducing the disputes over property.

    What is e-Gramswaraj Portal?

    • E Gram Swaraj portal is the official portal of central govt for the implementation of Swamitva scheme.
    • By visiting this portal people can check their Panchayat profile easily. It will also contain the details of ongoing development works and the fund allocated for them.
    • Any citizen can create his or her account on the portal and can know about the developmental works of villages.
    • The user of E Gram Swaraj portal can also access all work of the Ministry of Panchayati Raj.
    • This single interface will help speed-up the implementation of projects in rural areas from planning to completion.

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  • Modern Indian History-Events and Personalities

    Qissa Khwani Bazaar massacre and the Khudai Khidmatgars

    | | Mains Paper 1: Modern Indian History

    • Qissa Khwani Bazaar is a renowned market place in the city of Peshawar.
    • Before the Partition, the marketplace was also the site of a massacre perpetrated by British soldiers against non-violent protesters of the Khudai Khidmatgar movement on April 23, 1930.

    We can expect a possible mains question inspired from this newscard. The question could be like- “Discuss the role of Abdul Ghaffar Khan and his Khudai Khidmatgar in infusing the Gandhian principle of non-violence in the Frontiers of India “.

    The Red Shirts:  Khudai Khidmatgars

    • The Khudai Khidmatgar was a non-violent movement against the British occupation of the Indian subcontinent led by Abdul Ghaffar Khan, a Pashtuns freedom fighter, in the North-West Frontier Province.
    • Over time, the movement acquired a more political colour, leading to the British taking notice of its growing prominence in the region.
    • Following the arrest of Khan and other leaders in 1929, the movement formally joined the Indian National Congress after they failed to receive support from the All-India Muslim League.
    • Members of the Khudai Khidmatgar were organised and the men stood out because of the bright red shirts they wore as uniforms, while the women wore black garments.

    Why did the massacre happen?

    • Abdul Ghaffar Khan and other leaders of the Khudai Khidmatgar were arrested on April 23, 1930 by British police after he gave a speech at a gathering in the town of Utmanzai in the North-West Frontier Province.
    • A respected leader well-known for his non-violent ways, Khan’s arrest spurred protests in neighbouring towns, including Peshawar.
    • Protests spilled into the Qissa Khwani Bazaar in Peshawar on the day of Khan’s arrest. British soldiers entered the market area to disperse crowds that had refused to leave.
    • In response, British army vehicles drove into the crowds, killing several protesters and bystanders. British soldiers then opened fire on unarmed protestors, killing even more people.
    • Historical records suggest the British attempted to deploy the Garhwal Regiment against the civilians in the marketplace, but two platoons of this respected regiment refused to shoot at unarmed protesters.
    • In retaliation, British officials court-martialled the platoon members with upto eight years of imprisonment.

    Aftermath of the massacre

    • The British ramped up the crackdown on Khudai Khidmatgar leaders and members following the Qissa Khwani Bazaar massacre.
    • In response, the movement began involving young women in its struggle against the British, a decision in line with tactics adopted by revolutionaries across undivided India.
    • Women were able to move undetected with more ease than men.
    • According to accounts by Khudai Khidmatgar activists, the British subjected members of the movement to harassment, abuse and coercive tactics adopted elsewhere in the subcontinent.
    • This included physical violence and religious persecution. Following the recruitment of women in the movement, the British also engaged in violence, brutality and abuse of women members.

    Khudai Khidmatgars  gets wasted into history

    • British adopted their tactic of sowing divisions on religious grounds in the North-West Frontier Province as well, in an attempt to weaken the Khudai Khidmatgar.
    • In a move that surprised the British government, in August 1931, the Khudai Khidmatgar aligned themselves with the Congress party, forcing the British to reduce the violence they were perpetrated on the movement.
    • The Khudai Khidtmatgar opposed Partition, a stance that many interpreted as the movement not being in favour of the creation of the independent nation of Pakistan.
    • Post 1947, the Khudai Khidmatgar slowly found their political influence decreasing to such an extent that the movement and the massacre 90 years ago in the Bazaar has been wiped out from collective memory (of Pakistan).

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  • International Space Agencies – Missions and Discoveries

    Unified Geologic Map of the Moon

    Prelims Only | Science Tech | Mains Paper 3: Awareness in various sc and tech fields

    The first-ever digital, unified, global, geological map of the moon was released virtually by the  United States Geological Survey (USGS), NASA and the Lunar Planetary Institute.

    Unified Geologic Map of the Moon

    • The UGM will serve as a blueprint for future human missions and a source of research and analysis for the educators and the general public interested in lunar geology.
    • The map is a ‘seamless, globally consistent, 1:5,000,000-scale geologic map’.
    • The mapped surface features of the moon included crater rim crests, buried crater rim crests, fissures, grabens, scarps, mare wrinkle ridges, faults, troughs, rilles, and lineaments.

    How it was prepared?

    • The researchers built on the original digital renovation of the six maps comprising of the near, central far, east, west, north and south sides that was released in 2013.
    • The final map consists of 43 geologic units across the entire lunar surface, broken down into groups based on characteristics like materials of craters, basins, terra, plains and volcanic units.
    • Data from NASA’s Apollo Missions were used to come up with the map.

    Its’ significance

    • The moon’s South Pole is especially interesting because the area is much larger than the North Pole and there could be a possibility of the presence of water in these permanently shadowed areas.
    • Further, the South Pole region also contains the fossil record of the early Solar System.
    • These present and future moon missions’ success can be further helped by the digital map of the moon.
    • The Chandrayaan 2, an active mission also targets the Lunar South Pole for exploration.

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  • Innovations in Biotechnology and Medical Sciences

    Reverse Vaccinology and its benefits

    Prelims Only | Science Tech | Mains Paper 3: Awareness in various sc and tech fields

    The Tamil Nadu Dr. MGR Medical University has developed a vaccine candidate against SARS-CoV-2 through ‘reverse vaccinology’.

    A definition based prelims question can be expected on Reverse Vaccinology. Ex. Which of the following statements best describes ‘Reverse Vaccinology’?

    Reverse Vaccinology

    • Reverse vaccinology is an improvement on vaccinology that employs applied bioinformatics.
    • The basic idea behind it is that an entire pathogenic genome can be screened using bioinformatics approaches to find genes.
    • Some traits that the genes are monitored for may indicate antigenicity.
    • Those genes are filtered for desirable attributes that would make good vaccine targets such as outer membrane proteins.
    • Once the candidates are identified, they are produced synthetically and are screened in animal models of the infection.
    • Since then, it has been used on several other bacterial vaccines.

    Benefits

    • Earlier researchers had to do a viral culture in the laboratory to develop a vaccine, and this was time-consuming.
    • The major advantage for reverse vaccinology is finding vaccine targets quickly and efficiently.
    • Traditional methods took decades to unravel pathogens and antigens, diseases and immunity
    • With ‘reverse vaccinology’ scientists know what molecules make the genomic sequence.

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  • Capital Markets: Challenges and Developments

     Indian Debt market, that never was

    | Economics | Mains Paper 3: Indian Economy

    India’s bond market suffers from several issues. This article discusses such issues, and also highlights the recent positive trends seen in the debt market owing to several steps taken by the government.

    The Indian debt market, primarily of the fixed-income variety, can be broadly classified into:

    • 1. Money Market
    • Where the borrowing is for a tenor of less than a year.
    • Different types of money market instruments: Inter-Bank Term Money, repo transactions, Certificate of Deposits, Commercial Papers, T-Bills, etc. are some of the money market instruments.
    • Through these instruments, short term requirement of funds is met by banks, institutions and the state and central governments.
    • 2. Bank and Corporate Deposits
    • Bank fixed deposits (FDs) have been popular and widely subscribed to, as the feeling of no-default-risk.
    • Corporate deposits are FDs issued by a company (non-bank).
    • 3. Government Securities
    • G-Secs are sovereign-rated debt papers, issued by the government with a face value of a fixed denomination.
    • 4. Corporate & PSU Bond Market
    • Corporate bonds are issued by public sector undertakings (PSUs) and private firms.
    • These bonds are issued for a wide tenor between 1 year – 15 years.
    • These bonds carry a different risk profile and hence will have associated rating.

    Debt market plays a significant role in the economy of a country. But India’s debt market suffers from shallowness. Some of the steps taken by the government to improve the situation have been showing positive trends. In the light of this development, the UPSC can frame a direct question, for ex. “What are the factors responsible for the shallowness of the debt market in India? Suggest ways to increase the depth of the debt market in India.”

    What are the problems of India’s debt market?

    • Wholesale market: The Indian debt market is largely a wholesale market.
    • It is a wholesale market in a sense that a majority of institutional investors comprises of mainly banks, financial institutions, mutual funds, EPFO, insurance companies and corporates.
    • The concentration of these large players has resulted in the debt markets being fairly skewed, evolving into a wholesale & bilaterally-priced trades.
    • Lack of retail sell and transparency: It also lacks the retailness and the contractual transparency that the Indian capital markets have been able to build in the past 2 decades.
    • Skewed towards G-secs: Structurally, the debt market remains firmly skewed towards government securities (G-secs).
    • Also, the largest investor group in the G-secs market are the banks, due to their regulatory requirement to invest in SLR.
    • Low and unstable trading in the corporate bond market: The Indian corporate bond market has low & unstable trading volumes.
    • Sadly, the corporate bond market remains largely about top-rated financial and public sector issuances.
    • The domestic debt managers have forgotten that the logic of the business of finance is “to price the risk”.

    Regulation and comparison with other countries

    • RBI regulates money markets & G-secs.
    • SEBI regulates the Corporate debt market & bond markets.
    • The domestic debt market in India amounts to about 67% of GDP.
    • The size of India’s corporate bond market is a mere 16% of GDP — compared with 46% in Malaysia, and 73% in South Korea.

    The recent positive trend in the debt market

    • In the past few years, the domestic corporate bond market had seen increasing volumes, largely due to financial investments going into it, including retail participation.
    • Also, the banks had ceded space to NBFCs over past many years.
    • This is because banks found it easier to buy securitisation pools to achieve their PSL targets rather than develop competencies that NBFCs had built-in serving affinity groups, in smaller cities & towns.
    • And post the ILFS crisis, the markets have started shunning non-banks again.
    • Policy initiative by the government: The various policy initiatives undertaken in the last few years would take time to fructify and to stabilise.
    • These include the IBC, SEBI’s bond market policies, RBI’s large borrower framework for enhancing credit supply.
    • Some of these have already seen changes/addendums to the original draft, with the intent being to course-correct, for the stability of the markets.

    Roll over of debt papers in India

    • We have seen liquidity problems in our markets every few years.
    • The concept of “roll-over” of debt paper was usual as our markets did not build long term papers.
    • With the ILFS slowdown, it was easy for name-calling on “ALM mismatch” concept.
    • Not much had been anyways done before and later to address the availability of debt to reduce the Asset-to-Liability mismatches.
    • Also, we have played it safe so far by even lending for large infra projects with shorter paper and hoped to roll it over at the end of the debt term.

    Conclusion

    This is the time that our regulators need to work along with the various governments, especially the states, for smoother ironing of fiscal hiccups and use this to redress any structural glitches. It’s time that there is actual intent to deepen the domestic debt market and to listen to the industry about their requirements.

    Back2Basics: What is ASM?

    • Banks’ primary source of funds is deposits, which typically have short- to medium-term maturities.
    • They need to be paid back to the investor in 3-5 years.
    • In contrast, banks usually provide loans for a longer period to borrowers.
    • Home loans, for instance, can have a tenure of up to 20 years.
    • Providing such loans from much shorter maturity funds is called an asset-liability mismatch.
    • It creates risks for banks that need to be managed.
    • The most serious consequences of asset-liability mismatch are interest rate risk and liquidity risk.
    • Because deposits are of shorter maturity they are repriced faster than loans.
    • Every time a deposit matures and is rebooked if the interest rates have moved up the bank will have to pay a higher rate on them.
    • But the loans cannot be repriced that easily. Because of this faster adjusting of deposits to interest rates asset-liability mismatch affects net interest margin or the spread banks earn.

    Priority Sector Lending (PSL)

    • Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low-income groups and weaker sections etc.

    Roll over of debt

    • When debt becomes due there is a need to either repay the principal or alternatively, to enter into a new agreement.
    • Structurally, funds from the second debt are used to repay the first debt.
    • Then you repay the second debt as required. Quite often these new terms will be agreed with the initial lender.
    • In essence, you’re ‘rolling’ the repayment obligation from one period into the next.
    • This all leads to rollover risk, which is the risk you that you won’t be able to find anyone willing to lend the value of the outstanding debt and/or offer a comparable rate as the first principle repayment obligation approaches.
    • This may be due to either movement in the borrowers perceived credit status and/or changes to the broader credit environment.
    • This was a key theme during the financial crisis of 2007 – 2008.
    • The reasons for refinancing may include the above, but also other themes such as debt consolidation (which doesn’t directly imply a change to the debt term).

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  • FDI in Indian economy

    The deal raises several concerns for privacy, net-neutrality and consumer welfare

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

    Facebook’s decision to acquire a 9.99 per cent stake in the parent company of Reliance Jio could have several implications. It could impact retail stores which we are trying hard to protect by restricting FDI in retail. Second, it could have implications for net neutrality. Third, it would have implications for data privacy.

    Implications for the country’s retail landscape

    • Recently, Reliance Industries and Facebook announced that the California-based social media giant will acquire a 9.99 per cent stake in Jio Platforms limited, the holding company of Reliance Jio, for $5.7 billion (Rs 43,574 crore).
    • At its core, the idea is to create an ecosystem around JioMart, enabling customers to access the local Kirana stores using WhatsApp, combining both offline and online retail.
    • This ability to connect millions of local businesses with end consumers, and provide them a seamless online transaction experience could radically alter the country’s retail landscape.
    • Both firms have stressed on the new opportunities for businesses of all sizes, and especially for the millions of small businesses across the country.
    • With the ongoing lockdown in the country only reaffirming the importance of the local Kirana store — major online delivery channels have struggled to reach consumers during this period — integration is bound to be an enticing proposition.

    Opportunities for cross-selling

    • A scaling up of this model will also provide opportunities for cross-selling — significantly increasing the upside for firms and increasing the valuation of its retail arms.
    • At present, though, the reach of WhatsApp Pay is limited — just over a million Indians are reported to currently have access to the pay feature.
    • But this sort of model is popular in other Asian economies such as China, Korea and Japan where apps like WeChat have a wide range of product offerings, which induces consumer stickiness.
    • This arrangement also allows Jio to greatly expand its product offering to its more than 370 million-odd subscriber base.
    • The deal may also open up the entire WhatsApp consumer base of around 400 million — to Reliance, including those on other telecom platforms such as Airtel and Vodafone.

    The following concern could arise from the deal and the UPSC can frame a question based on these concern, like ” Recently a global IT giant acquired a significant stake in an Indian telecom giant. Discuss the various issues which could arise from coming together of such dominant players.”

    What are the concerns in such deals?

    • Implications for consumer welfare: Given the dominant market position of the players, concerns over the market structure and its implications for consumer welfare are bound to arise.
    • Questions over net neutrality: The tie-up also raises questions on net neutrality with the possibility of preferential treatment being granted.
    • Data privacy issue: Third, given the data privacy issues highlighted in the past by the Cambridge Analytica episode, for instance, there are apprehensions over the enormous amounts of data that will be collected by these entities.
    • This concern gains significance especially when India still does not have a personal data protection law.

    Conclusion

    Whenever two dominant players of respective fields come together, it gives rise to concern. The government must keep watch on the implications and how such a deal plays out in the future. If the concerns raised turn out to come true, maybe India should come out with the antitrust law of its own.

     

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  • Oil and Gas Sector – HELP, Open Acreage Policy, etc.

    Don’t waste the oil crisis

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

    This article discusses the factors that contributed to oil prices falling below zero, and where the prices are headed in the near future. There are suggestions for India to make the most of this oil crisis. In the last week, we covered the same topic but its focus was on increasing the storage capacity. This article also covers the geopolitical implications of oil prices remaining low for long.

    What negative price of the benchmark US crude WTI mean?

    • The collapse in the price of WTI reflected a technical peculiarity of futures trading.
    • Paper traders would normally have had two options- 1) To let their contract expire and take physical delivery 2) To pass on the contract to someone else.
    • The US was running out of crude oil storage capacity and traders knew they could not “risk” taking delivery.
    • There was no physical space to hold the product.
    • So their only option was to sell the contract.
    • On the last day before the contracts expired, the traders in desperation “paid” to offload their risk.
    • There was no physical transaction of oil.
    • The current future price is back in positive territory.

    The world running out of oil storage capacity

    • The world and not just the US was fast running out of storage capacity.
    • Production in excess of demand: This was because oil production was way in excess of demand.
    • The latter had crashed by almost 30 million barrels a day or mbd (the equivalent of OPEC’s entire production) because of the COVID-induced lockdown of transportation and industry.
    • The price of the other crude benchmarks had also dropped but not the same extent — the North Sea Brent fell, for instance, to $15/bbl, a level not seen since 1999.
    • The reason was that unlike the WTI, which is traded in the US and therefore dependent on US inland storage capacity, the other crudes have access to seaborne storage (oil tankers).
    • This latter capacity is, however, fast filling up and the price of these crudes may also hit historic lows.

    So, where the oil prices are headed?

    • Oil prices will be volatile downwards until demand picks up and/or supply is further cut.
    • Demand will depend on the curve of post-COVID economic recovery.
    • Supply will rest on the outcome of further discussions amongst OPEC, Russia and, ironically, the US.
    • OPEC and Russia had earlier this month agreed to cut production by 10 mbd.
    • But clearly, this is not enough and further cutbacks have to be agreed on.
    • Whatever the scenario for economic recovery or supply constraints, there is a slim likelihood of crude oil prices reaching the average price levels of 2019 ($64) over the next 12 months or so.
    • More likely, they will be volatile downwards with $50 as the ceiling and with no floor.
    • This “low for longer” price outlook raises two issues for India’s policy-makers.

    As India depends on imports for over 80% of its oil requirements, oil prices have wide implications for the financial health of India. Safe oil supply lines are essential for its energy security. Both these points are important from the UPSC point of view. Following two points deal with these two factors.

    Two issues that India’s policy-makers need to consider-

    1. Disruption of oil supply lines and problems of diaspora

    • Every oil producer with no exception will face a budgetary crisis.
    • Some, like Saudi Arabia, the UAE and Kuwait will finance their social and economic commitments by cutting costs, increasing debt and drawing down on their sovereign reserves.
    • Others like Iran, Iraq, Nigeria and Venezuela, who have no such cushion and whose credit ratings are junk, will confront deepening political and social crises.
    • Economic plan: India should build into its economic plans the possibility that its traditional oil supply routes could get disrupted.
    • And that its diaspora, whose remittances are of significance, could face disproportionate hardship as these economies retrench.

    India has the largest diaspora in the world and sends as much as $80 billion back home as remittances. So, any impact on diaspora in oil economies has implication for India from this perspective as well.

    2. Empower the oil traders and remove bureaucratic control

    • On the day prices hit negative territory, it is unclear whether the trading experts in our oil PSUs had the flexibility to even contemplate “buying” the WTI futures contract for June, taking delivery, shipping it to India and storing it someplace.
    • It is also not clear whether they had the authority to lock in low prices through forward contracts.
    • Storage capacity and WTI quality mismatch: There is a shortage of storage capacity in India and a mismatch between the quality of WTI and the requirements of our refineries.
    • India cannot leverage the current market conditions of low and volatile oil prices to our national advantage unless we empower the traders and leave them unencumbered from bureaucratic control.
    • Most importantly, protect them from the three Cs ( CVC, CBI and CAG) in case their trade goes awry.

    Conclusion

    This oil market crisis could be made to work to our advantage. We must not waste this opportunity. There is a need to remove the bureaucratic hurdles in our PSUs, increasing storage capacity and sound financial planning by the government to make the most of this oil crisis.

    Back2Basics: What is WTI  and Brent crude benchmark?

    • West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.
    • This grade is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.

    Brent Crude

    • Brent Crude is a trading classification of sweet light crude oil that serves as one of the two main benchmark prices for purchases of oil worldwide.
    • This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.

    Futures contract

    • In finance, a futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other.
    • The asset transacted is usually a commodity or financial instrument.

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