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  • Foreign Policy Watch: India-Pakistan

    India-Pak cooperation against Locusts Attack

    29 May 2020 | | International Relations
    Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India

    As another locust swarm comes from Pakistan, the spotlight is again on the India-Pakistan dynamic that has come into play.

    Do you know?

    The Food and Agricultural Organization (FAO) believes locusts have decimated close to 70,000 hectares of crops in Kenya, 30,000 hectares in Ethiopia and 42,000 hectares of crops in the state of Rajasthan.
    Just so you can perhaps assess the kind of damage we are talking about here. A large swarm can eat as much as about 35,000 people in one day 😀 !

    What are Locusts?

    • The desert locust (Schistocerca gregaria) is a short-horned grasshopper that is innocuous while it is in a “solitary phase” and moving about independently.
    • These winged insects differ from normal hoppers and become dangerous only when their populations build up rapidly and the close physical contact in crowded conditions triggers behavioural changes.
    • They, then, enter the “gregarious phase”, by grouping into bands and forming swarms that can travel great distances (up to 150 km daily), while eating up every bit of vegetation on the way.
    • If not controlled at the right time, these insect swarms can threaten the food security of countries.

    India reaches out to Pak

    • The Ministry of External Affairs said that it has reached out to Pakistan for cooperation, and is awaiting their response.
    • Despite the ups and downs in the bilateral relationship, cooperation on the locust warning system has survived the wars, terrorist attacks, and political turmoil.

    History of outbreaks in India

    • Records suggest that since the beginning of the 19th century, there have been at least eight “outbreaks” in India from 1812 to 1889, and a ninth in 1896-1897.
    • According to the history of the Locust Warning Office published by the UN Food and Agriculture Organization (FAO), there were “serious invasions” of locusts in India every few years during the 1900s.
    • A “five-year invasion” from 1926 to 1931 is estimated to have damaged crops worth Rs 2 crore (about $100 million at today’s prices).
    • The princely states and provinces had their own structures to deal with this, but there was no coordination.

    The Locust Warning Organization (LWO)

    • After the 1926-32 “invasion”, the British Indian government-sponsored a research scheme, starting in 1931, which led to the permanent Locust Warning Organization (LWO) in 1939.
    • It had its headquarters in New Delhi and a substation in Karachi.
    • In 1941, a conference of princely states in desert areas and provinces affected by locusts was held.
    • Its role was expanded in 1942, and in 1946 a bureaucratic structure was put in place.

    Beginning of cooperation

    • Iran too suffered locust attacks, in 1876, and in 1926-1932.
    • Apparently the first case of collaboration between countries in the region occurred in 1942 when a delegation from India helped with locust control work in southwest Persia.
    • Over the next two years, Indian help was also provided to Oman and Persia.
    • This was followed by the first conference within the region on Desert Locust, which was held in Tehran in 1945 and involved Iran, India, Saudi Arabia and Egypt.
    • A second conference took place in 1950 also in Tehran with Pakistan participating.

    Bringing in Pakistan

    • In the 1950s, India and Iran cooperated and Pakistan provided two aircraft for locust surveys in Saudi Arabia.
    • Following another attack during 1958-61, a decision was taken to group Iran, Afghanistan, Pakistan and India together and the FAO Desert Locust commission was formed in 1964.
    • The commission held annual sessions skipped in 1965 and 1999 but held in 1971.
    • Even in the last six years when the relationship between India and Pakistan has deteriorated, it has been held in 2014, 2016 and 2018.
    • The meetings are attended by locust control experts, with no diplomats.

    India and Pakistan

    • In 1977, the two countries began to meet on the border.
    • From 1991 to 2003, special border surveys took place during the summer, undertaken by locust control officers in their respective countries.
    • Joint border meetings have taken place every year since 2005 till 2019, except in 2011. This has been despite every diplomatic strain; including the 26/11 Mumbai attacks.
    • Arrangements are made in advance and protocols are followed for crossing the border.
    • While politics and diplomacy is kept out of the technical discussions, locust control authorities feel that one of the more difficult challenges faced by the commission is that of “insecurity and sensitivities” in the region.

    Also read:

    Risk of Early Locusts Attacks: A new concern

    Try this:

    Q. Time and again normal ocean cycles got more pronounced or disrupted, resulting in all kinds of unintended consequences, like an ever-increasing domino effect of locust attacks in Asia and the Indian Sub Continent. We need to understand these links if we are to plan effectively for climate change mitigation and adaptation. Discuss. (250W)

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  • Digital India Initiatives

    [pib] Instant PAN through Aadhaar based e-KYC

    29 May 2020 | | Governance
    Mains Paper 2: Governance, Transparency & Accountability, Citizens Charters

    The Union Finance Ministry has launched the facility for instant allotment of (Permanent Account Number) PAN.

    Try this question from CSP 2018:

    Q.) Consider the following gatemen.

    1. Aadhaar card can be used as a proof of citizenship or domicile.

    2. Once issued, the Aadhaar number cannot be deactivated or omitted by the Issuing Authority.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

    Can’t you expect a similar question based on PAN card? If not , go through this newscard.

    What is a Permanent Account Number?

    • A PAN is a ten-character alphanumeric identifier, issued in the form of a laminated “PAN card”, by the Income Tax Department.
    • It is issued to any “person” who applies for it or to whom the department allots the number without an application.
    • A PAN is a unique identifier issued to all judicial entities identifiable under the Indian Income Tax Act, 1961.
    • The income tax PAN and its linked card are issued under Section 139A of the Income Tax Act.
    • It is issued by the Indian Department under the supervision of the Central Board for Direct Taxes (CBDT) and it also serves as an important proof of identification.
    • It is also issued to foreign nationals (such as investors) subject to a valid visa, and hence a PAN card is not acceptable as proof of Indian citizenship.

    Uses of PAN

    • The primary purpose of the PAN is to bring a universal identification to all financial transactions and to prevent tax evasion by keeping track of monetary transactions.
    • The PAN is mandatory when filing income tax returns, tax deduction at source, or any other communication with the IT Department.
    • PAN is also steadily becoming a mandatory document for opening a new bank account, a new landline telephone connection / a mobile phone connection, purchase of foreign currency, bank deposits above ₹50,000, purchase and sale of immovable properties, vehicles etc.

    Why it is in the news?

    • A PAN is necessary for filing income tax returns.
    • This facility is now available for those PAN applicants who possess a valid Aadhaar number and have a mobile number registered with Aadhaar.
    • The allotment process is paperless and an electronic PAN (e-PAN) is issued to the applicants free of cost.

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  • International Space Agencies – Missions and Discoveries

    Starman Suits in Demo-2 Mission

    29 May 2020 | Prelims Only | Science and Technology
    Mains Paper 3: Awareness in various sc and tech fields

    NASA’s SpaceX Demo-2 test flight has now been rescheduled for May 31, due to weather conditions. Apart from the test flight itself, what’s getting attention are the spacesuits that the astronauts will wear while travelling in the SpaceX capsule, called Crew Dragon.

    Try this question from CSP 2014:

    Q. Which of the following pair is/are correctly matched?

    Spacecraft Purpose
    1. Cassini-Huygens Orbiting the Venus and transmitting data to the Earth
    2. Messenger Mapping and investigating the Mercury
    3. Voyager 1 and 2 Exploring the outer solar system

    Select the correct answer using the code given below.

    a) 1 only

    b) 2 and 3 only

    c) 1 and 3 only

    d) 1, 2 and 3

    The SpaceX spacesuit

    • The so-called “Starman suits” the astronauts will wear on the Demo-2 mission have been designed by a famous Hollywood costume designer.
    • The SpaceX spacesuits are different from other spacesuits typically worn by astronauts because of their sleek design and are being described as resembling a tuxedo.
    • These spacesuits are meant to be lighter and more flexible, are equipped with touchscreen gloves, have vents that allow astronauts to be cooler while maintaining pressure inside the suit, and have an incorporated helmet and visor.
    • The helmets of these suits are 3D printed with touchscreen-sensitive gloves and the suit is all in one piece, customised for the wearer.

    How are launch-and-entry spacesuits different from EMUs?

    • The SpaceX suits are only meant to be worn inside the space shuttle and are not suitable for carrying out spacewalks.
    • Spacesuits for spacewalks, called Extravehicular Mobility Units (EMUs), are heavier than launch-entry suits (LES) and are already present aboard the ISS.
    • While inside the spacecraft, the atmosphere can be controlled, to explore and work in space, humans require that they take their environment with them because there are atmospheric pressure and no oxygen to sustain life.
    • Such spacesuits – EMUs — are worn for spacewalks or extravehicular activities (EVA) conducted outside a space shuttle.
    • These provide astronauts with oxygen supply and protect them against extreme temperatures, radiation and space dust.

    Back2Basics

    Demo-2 Mission by SpaceX

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  • Innovations in Biotechnology and Medical Sciences

    Species in news: Super mushroom “Cordyceps militaris”

    29 May 2020 | Prelims OnlySpecies | Science and Technology
    Mains Paper 3: Awareness in various sc and tech fields

    A university in Assam has developed a fungal powder to help people boost their immunity to disease.

    Try this question from CSP 2019:

    Q.) Recently, there was a growing awareness in our country about the importance of Himalayan nettle (Girardinia diversifolia) because it is found to be a sustainable source of

    (a) anti-malarial drug

    (b) bio-diesel

    (c) pulp for paper industry

    (d) textile fibre

    A similar question related to Cordyceps militaris can be asked. UPSC may ask whether it is a Fungi, Algae, a Moss or a Lichen.

    Cordyceps militaris

    • The powder is from a parasitic but rare “super mushroom” called Cordyceps militaris.
    • The militaris underwent powdering through lyophilisation or freeze-drying at –80°C.
    • The earth has more than 400 species of Cordyceps, a fungus parasitic on insects as well as other fungi.
    • Often referred to as a super mushroom, Cordyceps known for its anti-ageing, anti-viral, energy and immunity-boosting effect.
    • Natural Cordyceps is hard to get and if dried, costs at least ₹8 lakh per kg.

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  • New Species of Plants and Animals Discovered

    Species in news: Asian Koel

    29 May 2020 | Prelims Only | Environment
    Mains Paper 3: Conservation, Environmental Pollution & Degradation, Eia

    Asian Koel, the state bird of Puducherry, is now breeding across Delhi-NCR.

    For such species, related question, always focus on their habitat, endemic area, IUCN/Wildlife Protection Acr status.

    Another caution: Imp birds in the news that are almost “Least Concerned” eg. Amur Falcon (Nagaland), Asian Koel

    Asian Koel

    IUCN status: Least Concerned

    • The Asian Koel (Eudynamys scolopaceus) is a member of the cuckoo order of birds, the Cuculiformes.
    • It is found in the Indian Subcontinent, China, and Southeast Asia.
    • It forms a superspecies with the closely related black-billed koels, Indian cuckoos, and Pacific koels which are sometimes treated as subspecies.
    • The Asian Koel like many of its related cuckoo kin is a brood parasite that lays its eggs in the nests of crows and other hosts, who raise its young.

    Key Features

    • Sexual dimorphism is evident, where males are a glossy black with a greenish sheen to their bodies and females are brown with white dots on their wings and heavy streaking on their head and throat.
    • Both sexes have strong long greenish bills and captivating ruby-red eyes.
    • In the bird world, the males are generally more pleasant looking than the females, considering they woo females.

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

    Understanding the monetisation of deficit

    28 May 2020 | | Economics
    Mains Paper 3: Indian Economy

    The RBI could finance the government debt by buying bonds from the secondary market. Or it could directly finance the debt. And both could stoke inflation. But, do they carry the same inflation risk. The answer is an unambiguous ‘No’. So, how monetisation of debt is different from Open Market Operation by the RBI? Read the article to know…

    What is Monetised deficit?

    • The Monetised Deficit is the extent to which the RBI helps the central government in its borrowing programme.
    • In other words, monetised deficit means the increase in the net RBI credit to the central government, such that the monetary needs of the government could be met easily.

    What monetisation of deficit mean (and doesn’t mean)

    • Monetisation of the deficit does not mean the government is getting free money from the RBI.
    • If one works through the combined balance sheet of the government and the RBI, it will turn out that the government does not get a free lunch.
    • But it does get a heavily subsidised lunch.
    • That subsidy is forced out of the banks.
    • And, as in the case of all invisible subsidies, they don’t even know.

    So, is the RBI monetising the debt?

    • It is not as if the RBI is not monetising the deficit now; it is doing so.
    • It is doing so indirectly by buying government bonds in the secondary market through what are called open market operations (OMOs).
    • Note that both monetisation and OMOs involve printing of money by the RBI.
    • But there are important differences between the two options that make shifting over to monetisation a non-trivial decision.

    Historical context of the monetisation of debt: An agreement

    • In the pre-reform era, the RBI used to directly monetise the government’s deficit almost automatically.
    • That practice ended in 1997 with a landmark agreement between the government and the RBI.
    • It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO route.
    • The implied understanding also was that the RBI would use the OMO route not so much to support government borrowing.
    • So, the RBI uses OMO as liquidity instrument to manage the balance between the policy objectives of supporting growth, checking inflation and preserving financial stability.

    So, what were the outcomes of the agreement?

    • The outcomes of that agreement were historic.
    • Since the government started borrowing in the open market, interest rates went up.
    • HIgh interest rates incentivised saving and thereby spurred investment and growth.
    • Also, the interest rate that the government commanded in the open market acted as a critical market signal of fiscal sustainability.
    • Importantly, the agreement shifted control over money supply, and hence over inflation, from the government’s fiscal policy to the RBI’s monetary policy.
    • The India growth story that unfolded in the years before the global financial crisis in 2008 when the economy clocked growth rates in the range of 9 per cent was at least in part a consequence of the high savings rate and low inflation which in turn were a consequence of this agreement.

    What is the reasoning for jeopardising the hard-won gains of agreement?

    • The Fiscal Responsibility and Budget Management Act as amended in 2017 contains an escape clause.
    • Escape clause permits monetisation of the deficit under special circumstances.
    • What is the case for invoking this escape clause?
    • The case is made on the grounds that there just aren’t enough savings in the economy to finance government borrowing of such a large size.
    • Bond yields would spike so high that financial stability will be threatened.
    • The RBI must therefore step in and finance the government directly to prevent this from happening.

    No, the situation is not so grim-Look at the bond yields

    • There is no reason to believe that we are anywhere close to the above-mentioned situation.
    • Through its OMOs, the RBI has injected such an extraordinary amount of systemic liquidity that bond yields are still relatively soft.
    • In fact the yield on the benchmark 10 year bond which was ruling at 8 per cent in September last year has since dropped to just around 6 per cent.
    • Even on the day the government announced its additional borrowing to the extent of 2.1 per cent of GDP, the yield settled at 6.17 per cent.
    • That should, if anything, be evidence that the market feels quite comfortable about financing the enhanced government borrowing.

    Why worry about monetisation if OMO also leads to inflation?

    The following four issues make clear the difference in OMO and monetisation

    1. Issue of RBI’s control over monetary policy

    • Both monetisation and OMOs involve expansion of money supply which can potentially stoke inflation.
    • If so, why should we be so wary of monetisation?
    • Because although they are both potentially inflationary, the inflation risk they carry is different.
    • OMOs are a monetary policy tool with the RBI in the driver’s seat, deciding on how much liquidity to inject and when.
    • In contrast, monetisation is, and is seen, as a way of financing the fiscal deficit with the quantum and timing of money supply determined by the government’s borrowing rather than the RBI’s monetary policy.
    • If RBI is seen as losing control over monetary policy, it will raise concerns about inflation.
    • That can be a more serious problem than it seems.

    2. Credibility of RBI on curbing inflation

    • India is inflation prone.
    • Note that after the global financial crisis when inflation “died” everywhere, we were hit with a high and stubborn bout of inflation.
    • In hindsight, it is clear that the RBI failed to tighten policy in good time.
    • Since then we have embraced a monetary policy framework and the RBI has earned credibility for delivering on inflation within the target.
    • Forsaking that credibility can be costly.

    3. Yield on bond could shoot up anyway

    • If, in spite of above problems, the government decides to cross the line, markets will fear that the constraints on fiscal policy are being abandoned.
    • Perception in the market will be that the government is planning to solve its fiscal problems by inflating away its debt.
    • If that occurs, yields on government bonds will shoot up, the opposite of what is sought to be achieved.

    4. Monetisation is not inevitable yet

    • What is the problem that monetisation is trying to solve?
    • There are cases when monetisation — despite its costs — is inevitable.
    • If the government cannot finance its deficit at reasonable rates, then it really doesn’t have much choice.
    • But right now, it is able to borrow at around the same rate as inflation, implying a real rate (at current inflation) of 0 per cent.
    • If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure.
    • We are not there yet.

    Consider the question asked in 2019, “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your argument.”

    Conclusion

    Though OMO and monetisation both leads to inflation, the issues with monetisation have far-reaching consequences. Also, the situation we are in doesn’t yet warrant monetisation which should be seen as a last resort.

    Back2Basics:  Open Market operation

    • OMOs are conducted by the RBI by way of sale and purchase of G-Secs to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
    • When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.
    • Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.

     

     

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

    Alleviating the farmers’ pain

    28 May 2020 | op-ed snap | Agriculture
    Mains Paper 3: Transport & Marketing Of Agricultural Produce

    The article discusses the recently announced reforms in the agri-marketing. The legal changes promised are expected to deal with problems farmer face in selling their products and a law dealing with contract farming. These legal reforms are expected to increase farmers’ income.

    Some of the issues faced by the farmers

    • If any class of economic agents of our country has been denied the constitutional right of freedom of trade, it is farmers.
    • They don’t have the freedom of selling their produce even in their neighbourhood.
    • Remunerative price is still a mirage for them.
    • Their farm incomes are at the mercy of markets, middlemen and money lenders.
    • For every rupee that a farmer makes, others in the supply chain get much more.
    • Both farmers and consumers are the sufferers of the exploitative procurement and marketing of farm produce.
    • The public investments in irrigation and other infrastructure has increased.
    • The institutional credit and minimum support price given over the years has been increasing.
    • Yet, farmers are shackled when it comes to selling their produce.

    Restriction on the farmers: Echoes from the past

    • This exploitation of farmers has its roots in the Bengal famine of 1943, World War II, and the droughts and food shortages of the 1960s.
    • The Essential Commodities Act, 1955, and the Agricultural Produce Market Committee (APMC) Acts of the States are the principle sources of violation of the rights of farmers to sell their produce at a price of their choice.
    • These two laws severely restrict the options of farmers to sell their produce.
    • Farmers continue to be the victims of a buyers’ market.
    • This is the principal cause of their exploitation.
    • Renowned farm scientist M.S. Swaminathan has for long argued for the right of farmers to sell their produce as they deem fit.

    Balancing the interest of consumers and the farmers

    • Given the economic disparities in the country, the interests of consumers need to be protected.
    • But that should not happen at the cost of the producers of the very commodities that the consumers need.
    • For various reasons, a balance in this regard could not be struck.
    • The restrictive trade and marketing policies being practised with respect to agricultural prices have substantially eroded the incomes of farmers.

    Let’s have a look at a study on agricultural policies in India

    • A study on agricultural policies in India by the Indian Council for Research on International Economic Relations-Organisation for Economic Co-operation and Development (2018), co-authored by the renowned farm economist Ashok Gulati, was published with startling revelations.
    • It concluded that the restrictions on agricultural marketing amounted to ‘implicit taxation’ on farmers to the tune of ₹45 lakh crore from 2000-01 to 2016-17.
    • This comes to ₹2.56 lakh crore per year.
    • No other country does this.

    Reforms to remove the hurdles in farmer getting remunerative price

    • Recently announced package has approximately ₹4 lakh crore support for farming and allied sectors, aimed at improving infrastructure and enhancing credit support.
    • But the most welcome feature of this package is the firm commitment to rewriting the Essential Commodities Act and the APMC laws.
    • The revision of these restrictive laws is long overdue and will remove the hurdles that farmers face in getting a remunerative price for their produce by giving them more options to sell.
    • This long-awaited revision needs to be undertaken with care and responsibility so that no space or scope is left for farmers to be exploited yet again.
    • While allowing several buyers to directly access the produce from the farmers, a strong and effective network of Farm Producers’ Organisations should be created to enhance the bargaining power of farmers.
    • This will ensure that individual farmers are not exploited.
    • An effective law on contract farming is also the need of the hour.
    • Law on contract farming will secure incomes of farmers besides enabling private investments.
    • Yet another unique feature of this package has been its comprehensiveness towards improving the incomes of farmers through a range of activities.
    • A study by the National Institute of Agricultural Extension Management has revealed that of the 3,500 farmers’ suicides examined, there was no farmer who had supplementary incomes from dairy or poultry.
    • The huge support to animal husbandry and fisheries in the stimulus package underlines the need for diversifying the income sources of farmers.

    Consider the question “The APMC Acts of the has been blamed for poor price realisation by the farmers. Recently announced reforms promise to do away with such issues in the APMC Act. In light of this, examine the issues with APMC Acts and how the promised reforms are expected to resolve such issues.”

    Conclusion

    It is time to allow our farmers to sell their produce anywhere for their benefit. All stakeholders should be taken on board while revising restrictive agri-marketing laws.

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  • Coronavirus – Economic Issues

    How effective is the stimulus package to revive the supply chains?

    28 May 2020 | op-ed snap | Economics
    Mains Paper 3: Indian Economy

    Disruption of the supply chains lies at the heart of the decline in the output amid lockdown. And the government has announced the fiscal stimulus to revive the economy. How effective will be the fiscal stimulus to streamline the supply chains? The focus of this article is on tackling this question.

    Disruption in supply chains and decline in output

    • Much of the decline in output is due to supply chain disruptions generated by the lockdown.
    • Government spending can do little to alleviate this.
    • Putting money in the hands of people can increase the demand for goods but cannot increase the supply of goods and services.
    • In modern economies, the production of goods happens through complex supply chains that traverse geographical boundaries.

    Let’s understand how supply chains work

    •  Upstream sectors like ‘mining’ produce metals that are in turn used to produce machines.
    • These machines are used to sow seeds, harvest crops, and transport fuel.
    • Finally, the harvested crops are used by downstream sectors to produce flour and bread.
    • At each step, machines and labour combine to produce goods which are the inputs for sectors further downstream.

    So, how lockdown affected the supply chains?

    • Under the lockdown, numerous inputs have not moved from their producers to their users.
    • These disruptions may not at first generate a reduction in consumer goods like bread.
    • However, the availability of consumer goods will begin to decline as bakers run out of flour, and mills exhaust their stocks of wheat.
    • And there is no way to guarantee the flow of essential goods while suspending the production of non-essential goods.
    • Automotive spare parts may be non-essential in the short run, but become essential as food-carrying trucks begin to break down.(i.e. in the long run)
    • How far is the long run? This is difficult to say; there may be some variation across goods.

    Impact of labour shortage on supply chains

    • The supply chain disruptions are going to be amplified by labour shortage as workers remain at home.
    • Countries like India are likely to experience a greater reduction in output on this count than, say, Europe or the U.S.
    • This is because of the higher labour intensity of production in India.
    • To understand this, think of the difference in unloading of goods in the port at Rotterdam and the port at Kochi.
    • Is it viable to substitute labour with capital? Poorer countries are less likely to be able to substitute locked down labour with capital because of the dearth of capital in these nations.

    Adapting and Adjusting to the new reality

    • As economies emerge out of the lockdown, entrepreneurs, workers, and consumers must adjust to the new reality.
    • The world supply chain must adapt.
    • Firms may choose to source inputs from suppliers in their geographical proximity to minimise the risk of future disruptions.
    • But this involves building productive capacity at new locations, all of which requires investments fuelled by savings.
    • Furthermore, the investments must be guided by price signals.
    • Within a market economy, the movement of prices provides the incentive and information needed to adapt and grow.
    • As economist Ronald Coase put it, prices are bundles of information wrapped in an incentive.
    • As the prices of some inputs rise, the buyers of these inputs look for alternate suppliers, and firms which did not hitherto produce the good have an incentive to do so.
    • The key to economic recovery lies in millions of such adjustments.
    • Through such adjustments, firms locate new providers of inputs, new buyers of their output, and build factories at new locations.

    How fiscal stimulus would disrupt the recovery of supply chains?

    • Market adjustment processes are likely to be disrupted by government stimulus packages.
    • Governments spend by printing money, raising debt, or increasing taxes.
    • Irrespective of the way in which the expenditure in funded, resources are transferred from private entrepreneurs to government bureaucrats.
    • When governments print money, they draw resources through inflation.
    • Bureaucrats tend to be less efficient than profit-motivated firms in allocating scarce resources.
    • Bureaucrats have little incentive or information to bring about the granular supply chain adjustments necessary to revive growth.
    • As the stimulus package kicks in, economic efficiency is likely to decline and so are the chances of a timely recovery of output.

    A lesson from West Germany after WW II

    • The experience of West Germany after World War II has a useful lesson for India.
    • Beginning mid-1944, Allied bombing disrupted the German supply chain by targeting bottleneck sectors like electric power generation.
    • This destruction of the supply chain devastated the German economy.
    • Per person food production fell to about half of its pre-war level.
    • Two years later, this changed after Chancellor Ludwig Erhard lifted price controls and cut taxes.
    • West German entrepreneurs re-established a thriving supply chain through which goods went from upstream sectors to final consumers.
    • By 1950, per capita income in West Germany had reached its pre-war level.

    Consider the question “Supply chain disruption has been at the core of economic consequences of the corona pandemic. New adjustment in the supply chains would be the norm in the aftermath of the pandemic. What these readjustments would entail? Suggest the measures to help the supply chains recover.”

    Conclusion

    The recent supply chain disruptions are likely to last long. The path to recovery lies in cutting government expenditure, removing price controls, and opening up trade.

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  • Foreign Policy Watch: India-South Korea

    What is the Korean Armistice Agreement?

    28 May 2020 | | International Relations
    Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India

    A United Nations investigation into a recent exchange of gunfire between North Korea and South Korea inside the Demilitarized Zone (DMZ) has determined that both countries violated the armistice that ended the 1950-53 Korean War.

    Practice question for mains:

    Q. What is the Korean Armstice Agreement? Discuss the concept of the Demilitarized Zone (DMZ)?

    The Korean Armstice Agreement

    • The Korean Armstice Agreement signed on 27 July 1953 is the armistice that brought about a complete cessation of hostilities of the Korean War.
    • It was not the end of a war, but only a cessation of hostilities in an attempt to negotiate a lasting peace.
    • Military commanders from China and North Korea signed the agreement on one side, with the US-led United Nations Command signing on behalf of the international community.

    What is the Demilitarized Zone (DMZ)?

    • The DMZ marks where the 1950-53 Korean War — when China and North Korea battled UN forces led by the United States — ended with an armistice, not a treaty.
    • It is a 2 km-wide buffer, stretching coast to coast across the peninsula, lined by both sides with razor wire, heavy armaments and tank traps.
    • It is 60 km from Seoul and 210 km from the North Korean capital of Pyongyang. Inside the DMZ is a Joint Security Area (JSA).
    • The so-called ‘peace village’ of Panmunjom, where the armistice that halted the Korean War was signed in 1953, is located in the 800-metre-wide and 400-metre-long JSA zone.
    • A Military Demarcation Line (MDL) marks the boundary between the two Koreas.

    Why it is significant?

    • Vast stretches of the DMZ have been no man’s land for more than 60 years, where wildlife has flourished undisturbed.
    • Last year, US President Donald Trump met with North Korean leader Kim Jong Un at the demilitarized zone separating the two Koreas, in Panmunjom.

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  • NPA Crisis

    What is the doctrine of Force Majeure?

    28 May 2020 | | Governance
    Mains Paper 2: Governance, Transparency & Accountability, Citizens Charters

    The recent spread of the Coronavirus has triggered a global slowdown and has rendered ongoing business operations of several organisations to almost a standstill. This has resorted them to invoking the ‘force majeure’ clause to seek some relief.

    Practice question for mains:

    Q) What is the doctrine of Force Majeure and Frustration of a Contract? Discuss how it can worsen the NPA crisis in India.

    What is Force Majeure?

    • Force majeure is purely a contractual remedy available to an affected party under a contract and for seeking relief, the reference would be to the express terms of the contract.
    • It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.
    • While force majeure has neither been defined nor specifically dealt with, in Indian statutes, some reference can be found in Section 32 of the Indian Contract Act, 1872 (the “Contract Act”).
    • It envisages that if a contract is contingent on the happening of an event which event becomes impossible, then the contract becomes void.

    Where are such clauses found?

    • Force majeure clauses can usually be found in various contracts such as power purchase agreements, supply contracts, manufacturing contracts, distribution agreements, project finance agreements, agreements between real estate developers and home buyers, etc.

    Circumstances qualified for force majeure

    • A force majeure clause typically spells out specific circumstances or events, which would qualify as force majeure events, conditions which would have be fulfilled for such clause to apply.
    • As such, for a force majeure clause to become applicable the occurrence of such events should be beyond the control of the parties.
    • The parties will be required to demonstrate that they have made attempts to mitigate the impact of such force majeure event.
    • If an event or circumstance qualifies, the consequence would be that parties would be relieved from performing their respective obligations to be undertaken by them under the contract.

    Why it is in news, now?

    • Due to the lockdown restrictions placed by the government, the parties’ ability to perform and fulfil their contractual obligations is affected.
    • Where the contract does not specifically cover the current situation is a matter of debate.
    • The Indian Contract Act, 1872 is more than a century old and does not have any specific provisions relating to suspension of contracts or termination of contracts in cases of a pandemic.
    • The Act clearly provides that an agreement to do an act impossible in itself is void (Section 56).
    • After a contract is made, if any act becomes impossible or unlawful by reason of some event, such a contract becomes void.

    What is the difference between force majeure and frustration of a contract?

    • Under the doctrine of frustration, the impossibility of a party to perform its obligations under a contract is linked to the occurrence of an event/circumstance subsequent to the execution of a contract and which was not contemplated at the time of execution of the contract.
    • However, under in case of a force majeure, parties typically identify, prior to the execution of a contract, an exhaustive list of events, which would attract the applicability of the force majeure clause.
    • The doctrine of Frustration renders the contract void and consequently, all contractual obligations of the parties cease to exist.

    What did the Supreme Court say?

    • Recently, the Supreme Court observed that the doctrine of frustration as enumerated in the Act would apply only where the parties have not specified the consequences of an event which renders the performance of the contract impossible.
    • Termination of a frustrated contract would be possible only in cases where the contract becomes impossible to perform which means the damage to the contract should be of permanent nature and not something which can be performed with the passage of time.
    • Hence a temporary inability or force majeure event would not qualify under the doctrine.

    What lies ahead?

    • The force majeure clause in contracts should not be misconstrued as an event of frustration covered under the Act.
    • Force majeure is purely a contractual remedy available to an affected party under a contract and for seeking relief; the reference would be to the express terms of the contract.
    • However, a party claiming frustration of contract and seeking to escape liability or other obligation under a contract will necessarily have to approach an appropriate judicial forum.
    • It is likely that ‘force majeure’ clauses in contracts need to be more heavily negotiated to include references to epidemics or pandemics, in addition to other situations.

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