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  • Foreign Policy Watch: India-Afghanistan

    Fail-safe exit for America, but a worry for India

    op-ed snap | International Relations | Mains Paper 2: Effect Of Policies & Politics Of World On India’S Interests

    Context

    The recently negotiated peace deal between the United States and the Taliban is unlikely to bring peace to Afghanistan, is geopolitically disadvantageous for India, and has serious implications for our national security.

    Power dynamics of the US-Taliban deal

    • An honourable exit for India: The terms of the deal, the manner in which it was negotiated as well as the geopolitical context in which it was stitched up indicate that it was more about providing an honourable exit route for the U.S.
    • Violence after concluding the deal: Within 24 hours of the much-publicised deal, violence and major disagreements about the deal began erupting in Afghanistan.
    • Why there are the prospects of instability in Afghanistan: Given that the Taliban negotiated from a position of strength, the Trump administration from weakness and little political will, and that the Ashraf Ghani administration in Afghanistan was by and large a clueless bystander in all of this, means that the country is perhaps on the verge of yet another long-drawn-out and internecine battle.

    The changed Taliban

    • Taliban of the 1990s: When the Taliban came to power in the mid-1990s in Kabul, it had few backers in the world.
      • Nor was it seen as a useful commodity by the great powers or the states in the region, except for Pakistan, Saudi Arabia, and the United Arab Emirates.
    • United pushback from the rest of the world: The international community was almost united in offering a normative pushback against the violent outfit.
      • As a result, the Taliban was at best reluctantly tolerated until it messed up towards the end of its regime in Kabul.
    • The pressure of Northern Alliance: The Northern Alliance, supported by countries such as Russia and India, kept up its military pressure against the Taliban while it was in power.
    • How today’s Taliban is different from the past: The situation today, at least for the moment, is perhaps the exact opposite of what was the case then.
      • Lessons learned to deal with the international system: The Taliban today is also more worldly-wise and might have learned, during its exile, to deal with the international system and play the game of balance of power.
      • Not necessarily the puppet: More so, it may not necessarily be a puppet of the Pakistani deep state once it returns to power.

    International acceptance of the Taliban

    • Lending the legitimacy to Taliban: Given the war fatigue and the geopolitical stakes in Afghanistan, most of the key players in the region and otherwise have been in negotiations with the Taliban one way or another, and for one reason or another, lending the terror group certain legitimacy in the process.
    • Why countries want good relations with the Taliban: Anyone desirous of a stake in Afghanistan or does not want its domestic turmoil to spill over into their country would want to keep the Taliban in good humour.
      • Suitable withdrawal of the US: There is another reason why the Taliban has many suitors — because of the U.S. withdrawal by and large suits everyone, be it China, Pakistan, Iran, or Russia.
      • The US bigger challenge: Suddenly, the Taliban appears to have been forgiven for its sordid past and unforgivable sins because for most of these countries, the U.S. is the bigger challenge than the Taliban.

    Why India’s strategy is diplomatically flawed?

    • Only state at losing end: The only state that seems to be on the losing end, unfortunately, of this unfolding game of chess and patience in Afghanistan is India.
      • Why the earlier Taliban was anti-India? The earlier Taliban regime was anti-India, it was also because India had militarily supported the Northern Alliance that kept up the military pressure against the Taliban.
      • Today’s Taliban does not share the same animus for India.
    • Need for Change in India’s approach: India, could have rejigged its approach to the Taliban this time around. However, it put all its eggs in the Ashraf Ghani basket, even on the eve of the signing of the peace deal in Doha.
    • Not a diplomatic strategy by India: India also, for most intents and objectives, adopted a puritanical approach to the Taliban.
      • There are 2 reason India is neither reaching out to the Taliban nor exploiting the fissures within it-
      • Because it did not want to irk the elected government in Kabul and-
      • It adopts a moralistic approach to dealing with extremist groups in general — not a smart diplomatic strategy.
    • Self-defeating position: This moralistic attitude, also a diplomatically lazy one, I would say, that be it Pakistan or Afghanistan, India would only talk to the legitimate government in that country, is a self-defeating position.
      • The world is not that perfect, nor state all that uniform, created in the shape and image of the Westphalian forefather.
      • Smart statecraft, therefore, is dealing with what you have and making the best of it.

    What would be the result of India’s strategy?

    • Impact on relations with Afghanistan: India’s relations with Afghanistan will take a hit in the immediate aftermath of the deal.
      • Limited ability to influence the outcomes: With China, India’s strategic adversary, deeply involved in the geopolitics and geo-economics of the region, including in Afghanistan, India’s traditional ability to influence the region’s political and security outcomes will be severely limited.
      • This will be further exacerbated by the withdrawal of the U.S., India’s closest friend, from the region.
      • India’s relation with the other players in the region: Other regional actors in Afghanistan are also less friendly towards India than ever before: Iran feels let down by India given how the latter has behaved towards it at the behest of the Americans.
      • Relation with Russia: For Russia, India is only one of the many friends in the region — the exclusivity of Russia-India relations is a thing of the past — and Pakistan would consider targeting India a fair game.
    • Counter Strategy: Unless New Delhi carefully envisages a counter-strategy, these factors will increasingly push India into a geopolitical tough spot in the region.
      • Need to focus on the region: India should worry us that our political class is focused on domestic politics while the region is becoming ever more uncertain and evidently unfavourable to us.

    Taliban and Kashmir Angle of the deal

    • Negligible physical impact but the possibility of psychological impact: While the direct physical impact of the Taliban’s return to power in Afghanistan on Kashmir will be negligible, this will not be without serious implications for the unfolding situation in Kashmir’s restive regions.
      • Psychological impact: The most important impact is going to be psychological.
      • Interpretation of the event: Disenchanted Kashmiri youngsters, and there are a lot of them, will interpret the events in Afghanistan as follows: “If the mighty superpower USA could be defeated by the Taliban in Afghanistan with help from the Pakistan army, defeating Indian forces in Kashmir won’t be impossible after all.”
      • This enthusiasm is completely misplaced, but that is not the point.
      • That the Kashmiri youth might pick up guns drawing inspiration from the situation in Afghanistan is indeed the point.
    • Increase in Pakistan’s utility: The U.S.-Taliban deal cannot survive without Pakistan’s assistance towards ensuring its success, and the U.S. and its allies recognise that. Such recognition of Pakistan’s utility provides the country with ability, as and when it wishes to, to up the ante in Kashmir.
    • The geopolitical significance of Pok and Aksai Chin claim: India’s official statement which describes Afghanistan as a “contiguous neighbour” — meaning that India considers Pakistan-occupied Kashmir (PoK) a part of its sovereign territory — will make Pakistan and China sit up and take notice.
      • Claim making reconciliation more difficult: India also made a similar claim about Aksai Chin in the wake of its August decision on Kashmir. Erstwhile rhetorical claims on PoK and Aksai Chin have suddenly assumed a lot more geopolitical significance today making conciliatory approaches to conflict resolution ever more difficult.

    Conclusion

    Given that a new Taliban-led dispensation in Afghanistan will be far more accepted by the international community than the last time around also means increased acceptability for such regimes in general, either out of necessity or as a function of geopolitical calculations. That the Taliban mass-murdered its opponents into statehood in the 21st century and that this might provide potential inspiration to other outfits in the region and outside should indeed worry us.

     

     

     

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  • Coronavirus – Economic Issues

    Corona, crude and credit

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

    Context

    Amid the gathering global crisis, its time India minds its own house.

    Panic and dislocation in Global markets

    • Panic at the level of the 2008 crisis: Global markets haven’t witnessed such panic and dislocation since the global financial crisis of 2008.
      • Global equity markets have collapsed, the US’s 10-year bond is at its lowest level ever, and crude prices underwent their largest single-day fall in 30 years.
    • Interaction of three global shocks: The market mayhem is the upshot of three global shocks interacting with each other.

    What are the three global shocks?

    • Negative demand shock due to Coronavirus: A negative demand shock around the world. As the coronavirus proliferates globally, households and businesses are understandably becoming risk-averse, and the consequent “social distancing” is expected to exert significant demand destruction around the world.
    • Negative supply shock emanating from China: The widespread industrial closures in China on the back of the COVID-19 outbreak will impact imports and supply chains in other countries, and thereby constitute an adverse supply shock for the rest of the world.
      • The magnitude of the shock: The 20-point drop in manufacturing output in the February PMI and the 17 per cent contraction in Chinese exports across January and February, suggests that the shock was large and immediate.
      • Supply shock likely to fade: That said, with the virus, gradually being contained in China, this supply shock is likely to fade even as the demand shock in the rest of the world widens and deepens.
    • Positive oil supply shock: The failure of oil producers to agree on production cuts has led to a price war with production increases on the anvil.
      • Cumulatively, crude pieces are down almost 50 per cent — about $30/barrel — since January.
      • A positive supply shock, which even adjusting for the concentrated stress in the oil sector, is growth-additive for the world and particularly for India.
    • India specific shock: There is a fourth India-specific force at play. The resolution and reconstruction of YES Bank was inevitable, but, at least temporarily, it is likely to result in a “flight to quality” in India’s financial sector, with resources moving from the financial periphery to the core.
      • Banks and NBFC may face difficulty in mobilising resources: To the extent that the periphery — smaller private banks and non-bank financial companies — will find it harder to mobilise resources, financial sector risk aversion could rise again.

    Implications for India’s macroeconomic stability

    • Significant negative impact due to export: India is a much more open economy than is widely believed with exports constituting almost 20 per cent of GDP. Therefore, the impact of the demand destruction around the world will not be trivial.
      • 40 bps decrease in the growth: If global growth is marked down by 100 basis points in 2020, which increasingly appears to be the case, we estimate that this would shave off about 40 bps from India’s growth through the export channel alone.
      • The cumulative drag to growth from exports and tourism would be a meaningful 60-70 bps.
    • Positive impact due to oil price shock: The near $30/barrel decline since January constitutes a large positive terms of trade shock for India — equivalent to about 1.3 per cent of GDP even accounting for reduced remittances from the Middle East.
      • Meaningful mitigant: If oil prices remain at this level for long, it would constitute a meaningful mitigant to India’s macro headwinds, boosting activity, dampening prices, creating fiscal space and reducing external imbalances.
    • Offsetting the negative impact of trade and tourism: Every $10 reduction in crude prices, boosts growths by about 20-25 bps.
      • Therefore, the $30 decline in crude, if it holds, should boost growth by about 60-70 bps, thereby largely offsetting the negative hit to growth from external trade and tourism.
    • Space for monetary easing: Furthermore, crude at $35-40, along with the global demand destruction is expected to generate large disinflationary forces, opening up space for monetary easing.
    • CAD would disappear: Finally, India’s current account deficit would virtually disappear, for the first time since 2003-04.

    The growth offset conditioned on coronavirus spread

    • The assumption in the offset: The above-mentioned growth offset, however, assumes that the coronavirus does not spread within India.
      • If India witnessed a rapid domestic proliferation, heightened risk aversion by economic agents could meaningfully hurt domestic demand.
    • A thought experiment on the impact on the economy: Discretionary services constitute about 35 per cent of GDP and have been growing at 8 per cent a year.
      • If that growth rate were to halve, that alone would deduct 140 bps from growth, and swamp any growth tailwinds from lower oil prices.
      • Furthermore, a “sudden stop” of demand to certain sectors may necessitate fiscal/liquidity support to ensure these don’t magnify into more disruptive credit events for the financial sector.
    • The best antidote to prolonged growth hit: The best antidote would be to aggressively contain the virus domestically, as authorities appear to be doing.
      • The experience from other countries suggests aggressive containment early in the process (isolation, quarantines, contract tracings, cancelled gatherings) reduces the growth rate of the virus from exponential to linear.
    • Macroeconomic outlook: The key to India’s macro outlook is whether the crude price decline can sustain and whether India can avoid a sharp domestic proliferation of COVID-19.

    Way forward

    • Pass the oil windfall to the public: Given current fiscal pressures, it’s tempting to advocate that the public sector appropriate much of the windfall. But with consumption under such pressure, there’s a strong case to pass this on to households.
      • A sharp cut in domestic fuel prices will boost household purchasing power and aggregate demand thereby creating contemporaneous counter-cyclical pressures.
    • Stick to the asset sale plan: While the turbulence in equity markets could understandably delay the government’s asset sale programme, it should not be allowed to derail it, given the criticality of asset sales to this year’s fiscal math.
      • Absorbing all the oil windfall through higher taxes as a substitute for asset sales would be a suboptimal mix.
    • Continue with the reforms: The salutary effects of falling crude prices — which would boost India’s macros relative to other emerging markets — should not mask the imperative to continue with reforms, particularly recognising and resolving any further financial sector stress proactively.

    Conclusion

    Global markets are witnessing their most acute volatility since 2008. All we can do is mind our own house amidst the gathering global storm.

     

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  • Role of Lieutenant Governor

    | Polity | Mains Paper 2: Federalism

    The Madras High Court has held that the role of Puducherry’s Lieutenant Governor and that of an elected government in the UT were intertwined as per law, and therefore they were expected to act in unison and not in division.

    What did the court rule?

    • The government headed by the CM and the Administrator/Lieutenant Governor of Puducherry shall work in unison and not in division.
    • The Madras HC set aside a single bench judgment that had held that the Lieutenant Governor (LG) does not have the right to interfere in the daily affairs of the elected government of Puducherry.
    • The HC has held that the Administrator is bound by the aid and advice of the Council of Ministers in matters where the Legislative Assembly is competent to enact laws.
    • This power of Assembly is contemplated under Section 44 of the Government of Union Territories Act, 1962.

    How is Puducherry different from other UTs?

    • UT of Puducherry is headed by the Lieutenant Governor of Puducherry as its nominal head, with a democratically elected CM as real head of the executive.
    • Other union territories don’t have an elected government and legislative assembly.
    • Puducherry, National Capital Territory of Delhi and Jammu and Kashmir (newly formed UT) are the three territories which have democratically elected governments like Indian states.
    • The State legislatures were a creation of the Constitution, whereas the UT legislatures were created under a law such as the Government of UTs Act, 1963.
    • The constitutional provisions, the 1963 Act as well as the Rules of Business of the Government of Puducherry lay expect the Lieutenant Governor to act as a bridge between the local government and the Centre.
    • The Administrator is expected to play the role of an umpire whenever there was a disagreement between the Lieutenant Governor and the Council of Ministers.

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  • Coronavirus – Health and Governance Issues

    Explained: Epidemic Diseases Act, 1897

    | Governance | Mains Paper 2: Health & Education

    Till today, at least 60 COVID-19 cases have been confirmed in India. So it was decided in a Cabinet Secretary meeting that States and UTs should invoke provisions of Section 2 of Epidemic Diseases Act, 1897, so that Health Ministry advisories are enforceable.

    History of the 1897 Epidemic Diseases Act

    • The Epidemic Diseases Act is routinely enforced across the country for dealing with outbreaks of diseases such as swine flu, dengue, and cholera.
    • The colonial government introduced the Act to tackle the epidemic of bubonic plague that had spread in the erstwhile Bombay Presidency in the 1890s.
    • Using powers conferred by the Act, colonies authorities would search suspected plague cases in homes and among passengers, with forcible segregations, evacuations, and demolitions of infected places.
    • Historians have criticised the Act for its potential for abuse.
    • In 1897, the year the law was enforced, Lokmanya Tilak was punished with 18 months’ rigorous imprisonment after his newspapers Kesari and Mahratta admonished imperial authorities for their handling of the plague epidemic.

    Provisions of the 1897 Epidemic Diseases Act

    • The Act is one of the shortest Acts in India, comprising just four sections. It aims to provide for the better prevention of the spread of Dangerous Epidemic Diseases.
    • The then Governor-General of colonial India had conferred special powers upon the local authorities to implement the measures necessary for the control of epidemics.
    • Although, the act does define or give a description of a “dangerous epidemic disease”.

    Its various sections can be summarized as under:

    • The first section describes all the title and extent, the second part explains all the special powers given to the state government and centre to take special measures and regulations to contain the spread of disease.
    • The second section has a special subsection 2A empowers the central government to take steps to prevent the spread of an epidemic, especially allowing the government to inspect any ship arriving or leaving any post and the power to detain any person intending to sail or arriving in the country.
    • The third section describes the penalties for violating the regulations in accordance with Section 188 of the IPC. Section 3 states, “Six months’ imprisonment or 1,000 rupees fine or both could be charged out to the person who disobeys this Act.”
    • The fourth and the last section deals with legal protection to implementing officers acting under the Act.

    Examples of implementation

    The act has been invoked several times since independence. Few recent incidents include-

    • In 2018, the district collector of Gujarat’s Vadodara issued a notification under the Act declaring a town as cholera-affected.
    • In 2009, to tackle the swine flu outbreak in Pune, Section 2 powers were used to open screening centres in civic hospitals across the city, and swine flu was declared a notifiable disease.

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  • Zoonotic Diseases: Medical Sciences Involved & Preventive Measures

    Genome sequencing of Coronavirus

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

    Scientists across the world are trying to develop a line of treatment and a possible vaccine for COVID-19. However, with the most optimistic timelines we don’t see a line of treatment or vaccine arriving before next year.

    Genome sequencing of Coronavirus

    • A global effort is on to collect and analyse the genetic composition of the new virus, which would be key to developing a cure and a vaccine.
    • Genome sequence is the unique code of genetic material of any organism, and determines the characteristic of any organism.
    • Whole genome sequencing is the process of determining the complete DNA sequence of an organism’s genome at a single time.
    • The gene composition of novel coronavirus, for instance, is different from that of the influenza virus. Every organism has a unique genome sequence.
    • Laboratories in various countries have been isolating and sharing the genome sequences of the virus on an international platform.

    Why are so many genome sequences being isolated?

    • When viruses multiply, or reproduce, there is a copying mechanism that transfers the gene information to the next generation.
    • However, no copying mechanism is perfect. When the virus multiplies, there will be small changes, which are called mutations.
    • These mutations accumulate over time, and after prolonged periods, are responsible for evolution into new organisms.
    • Within a single reproduction, the changes are extremely minor. More than 95 per cent of the gene structure remains the same.

    How it helps scientists?

    • However, the small changes that occur are crucial to understanding the nature and behaviour of the organism.
    • In this case, for example, the small changes could provide scientists with information about the origin, transmission, and impact of the virus on the patient.
    • It could also hold clues to the differing effects the virus could have on patients with different health parameters.

    How many genome sequences are required?

    • India has far fewer positive cases compared to China, South Korea, Iran, Italy, or even the US.
    • Patients who have been infected with the virus in similar conditions are unlikely to show any significant changes in the genome sequences.
    • Patients with existing medical conditions could be other candidates from where genome sequences of this virus could be isolated.
    • This could help scientists to look for clues to possible impact of virus amidst those existing medical conditions.

    Currently, what is the most effective medication?

    • As of now, there is none such. Right now, drugs are being repurposed, meaning old drugs for similar diseases are being checked for their efficacy against COVID-19.
    • These drugs, if they work, will require clinical trials, and then can be made widely available for people.
    • In most cases, symptomatic treatment for fever, body ache, and cough will be sufficient. More severe cases will require oxygen and respiratory support.

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  • Changes in SDGs

    Prelims Only | Trivia | Mains Paper 2: International Institutions

    Thirty-six major changes to the global indicator framework for the Sustainable Development Goals (SDGs) were approved and adopted by the UN Statistical Commission (UNSC).

    Sustainable Development Goals

    • The UN General Assembly in its 70thSession considered and adopted the Sustainable Development Goals (SDGs) for the next 15 years.
    • The 17 SDGs came into force with effect from 1stJanuary, 2016.
    • Though not legally binding, the SDGs have become de facto international obligations and have potential to reorient domestic spending priorities of the countries during the next fifteen years.
    • Countries are expected to take ownership and establish a national framework for achieving these Goals.
    • Implementation and success will rely on countries’ own sustainable development policies, plans and programmes.

    About the changes

    • These changes are based on the ‘2020 comprehensive review’ conducted by the UN Inter-Agency and Expert Group on SDG Indicators (IAEG-SDGs).
    • The revised global framework will have 231 indicators, approximately the same number as in the original framework, the statement said.
    • The global indicator framework was adopted by the UN General Assembly on July 6, 2017.

    Eight additional indicators were added across six SDG goals — 2, 3, 4, 10, 13 and 16.

    These include:

    • Indicator 13.2.2 on the total greenhouse gas emissions per year for the SDG target 13.2 to integrate climate change measures into national policies, strategies and planning.
    • Prevalence of anaemia in women aged 15-49 years, by pregnancy status (percentage) under the target 2.2 to end forms of malnutrition by 2030.
    • A new indicator on reducing the percentage of bloodstream infections due to selected antimicrobial-resistant organisms has been added under the Global health goal (SDG 3).
    • Indicator 10.7.3 on the number of migrants killed while attempting to cross maritime, land and air borders.
    • Indicator 10.7.4 on the proportion of the population who are refugees, by country of origin.

    Six indicators across six SDG goals — 1, 4, 8, 11, 13 and 17 — have been deleted.

     These include:

    • Indicator 1.a.1 on the proportion of domestically-generated resources allocated by the government directly to poverty reduction programmes.
    • Indicator 4.2.1 on the proportion of children under five years of age who are developmentally on track in health, learning and psychosocial well-being, by sex.
    • The portion of the indicator that measures progress for children between 0 and 23 months of age, which is currently in tier III was proposed for deletion by the IAEG.
    • Under the SDG goal on combating climate change, the indicator 13.3.2, quantifying the number of countries that have communicated the strengthening of capacity-building for implementing adaptation, mitigation and technology transfer, and development actions has been deleted.

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  • Capital Markets: Challenges and Developments

    AT-1 bonds

    Prelims Only | Economics | Mains Paper 3: Indian Economy

    India’s fourth-largest private lender YES bank was placed under a moratorium by RBI and its perpetual debt additional tier-1 (AT1 bonds) would become worthless if RBI does ask mutual funds to write down their value.

    What are AT1 bonds?

    • AT-1, short for Additional Tier-1 bonds, are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
    • AT-1 bonds are complex hybrid instruments, ideally meant for institutions and smart investors who can decipher their terms and assess if their higher rates compensate for their higher risks.
    • They carry a face value of ₹10 lakh per bond.
    • There are two routes through which retail folk have acquired these bonds — initial private placement offers of AT-1 bonds by banks seeking to raise money; or secondary market buys of already-traded AT-1 bonds based on recommendations from brokers.

    Why are they important?

    AT-1 bonds have several unusual features lurking in their fine print, which make them very different from plain bonds.

    • One, these bonds are perpetual and carry no maturity date. Instead, they carry call options that allow banks to redeem them after five or 10 years. But banks are not obliged to use this call option and can opt to pay only interest on these bonds for eternity.
    • Two, banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value without getting into hot water with their investors, provided their capital ratios fall below certain threshold levels. These thresholds are specified in their offer terms.
    • Three, if the RBI feels that a bank is tottering on the brink and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors. This is what has happened to YES Bank’s AT-1 bond-holders who are said to have invested ₹10,800 crore.

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  • Innovations in Biotechnology and Medical Sciences

    [pib] ARI-516 Grape Variety

    PIB | Science Tech | Mains Paper 3: Achievements Of Indians In S&T

     

    Pune’s Agharkar Research Institute (ARI), an autonomous institute of the DST has developed a hybrid variety of grapes which is resistant to fungal diseases, high yielding and has excellent juice quality.

    ARI-516

    • The hybrid variety ARI-516 has been developed by interbreeding of two species from the same genus — Catawba variety of Vitis labrusca and Beauty seedless variety of Vitis vinifera.
    • It is a result of collaboration between Maharashtra Association for the Cultivation of Science (MACS) and ARCI and can benefit farmers, the processing industry and consumers.
    • This variety of grapes is resistant to fungal diseases, high yielding and has excellent juice quality.
    • The fungal resistance of ARI-516 has been derived from Catawba, which is an American grape variety.

    Commercial benefits

    • It is also suitable for preparation of juice, raisin, jam and red wine and farmers are enthusiastically adopting the variety.
    • It has superior quality fruits and higher yield per unit area.
    • An early ripening hybrid, it matures in 110 – 120 days after pruning.
    • Being moderately resistant to a majority of fungal diseases, its cost of production is lower.

    Back2Basics

    Grape production in India

    • India ranks twelfth in the world in terms of grape production.
    • About 78% of grape production in India is utilized for consumption, 17-20 % for raisin production, 1.5 % for wine and 0.5 % for juice.
    • Maharashtra leads in the production of grapes in India with a share of 81.22 %. A negligible share of grapes is used for juice production.
    • A majority of farmers in Maharashtra cultivate ‘Thompson seedless’ and its clones for table purpose or raisin making.

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

     How the country should make the most of a second oil windfall

    | Economics | Mains Paper 3: Indian Economy

    Context

    Amid the coronavirus scare came India’s silver lining in the form of a failure of the Organization of the Petroleum Exporting Countries (Opec) and Russia to reach an agreement on oil production cuts.

    Reasons for Russia’s decision and its aftermath

    • Why Russia declined to sign the agreement: Russia declined to cut its oil supply with an intention to compete with the US shale industry.
    • Start of the price war: Consequently, a price war has started as Saudi Arabia plans a big increase in its oil supply. Saudi Arabia, which is the world’s largest oil exporter, has started offering unprecedented discounts in Europe, the Far East and the US to increase its supplies at the cost of other oil producers.
    • Immediate fallout: An immediate fallout of the Russia-Opec meeting was a 9% fall in oil prices on Friday. Monday saw a sharper drop.

    Supply and demand shocks and implications for India

    • The demand shock: The impact of Covid-19 will be felt on the global demand for oil, too, as a dramatic increase in Covid-19 cases has put further downward pressure on demand for commodities, including oil.
    • Thus, both supply and demand shocks have coalesced to roil the crude oil market.
    • How much was the drop in price: Since the start of the year, oil prices have fallen by about a third.
      • Prices may drop further under the weight of the twin assault of higher supply and lower demand.
      • It is, therefore, not a stretch to expect oil prices over the coming financial year to be lower than they were in the previous two.
    • Implications for India: This has positive implications for India’s economy and policymaking, as it comes at a time when it has embarked on an uncertain and hesitant recovery.

    Opportunity for India

    • Precarious fiscal situation: The growth slowdown in the last two years has resulted in a precarious fiscal situation because of tax revenue shortfalls.
    • Implications of the fiscal constraints: A direct casualty is the ability of the government to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the goods and services tax (GST) framework.
    • Constraints holding back the government from offering stimulus: Budgetary constraints combined with the Fiscal Responsibility and Budget Management Act have held the government back from fully offsetting a private sector demand slowdown with its own spending.
    • Opportunity in the low oil prices: Low oil prices offer an opportunity to raise some revenue and improve its fiscal balance.

    Way forward

    • First- Passing half the benefit to consumers: As oil prices slide below levels in the previous two years and also below the price of India’s oil basket of $65 per barrel reportedly assumed for 2020-21, there’s an opportunity to pass on about half the benefit of lower global prices to consumers, while the other half can be used to shore up revenue by levying higher excise duty.
      • The Union government did something similar between 2014 and 2016.
      • Improving the fiscal health: It used low oil prices to improve its fiscal health, as the budget deficit it inherited from the previous government was higher than what the official figures suggested.
    • Second-Revenue generated should be used to clear dues: The additional tax revenue thus generated through higher excise duty should be used to clear all dues of the central government, whether to private companies, state governments, or others awaiting tax refunds.
      • Putting cash back in the hands of households and small businesses will go a long way in maintaining the growth of domestic demand, besides improving the credibility of the Union government as a trustworthy counter-party.
    • Third-Fiscal leeway: The potential excise duty windfall from oil prices could come in handy for the government to provide relief to beleaguered telecom companies.
      • The government will have fiscal leeway to allow a staggered and a longer schedule for the payments they have to make, arising out of the Supreme Court ruling on adjusted gross revenues.
      • The telecom growth story is an important component of the broader India story, and the sector needs an urgent breather to ensure we are adequately prepared for a 5G roll-out, whenever it happens.
    • Fourth-Recalibrate: A slowdown in economic activity, which is inevitable with restrictions placed on mobility and human interaction, will have adverse fiscal implications.
      • Tax collections will decline. So will remittances from Indian workers in the Gulf, if that region is buffeted by oil and virus shocks.
      • Hence, the quantum of the windfall from lower oil prices will need to be constantly re-assessed and fiscal strategies recalibrated.
    • Fifth-Hedging against the higher prices: Even as it should nimbly take advantage of the lower prices now, the government should seriously consider hedging against possible higher oil prices in the medium- to long-term through appropriate instruments available in financial markets. This idea should be extended to hedging against a fall in the rupee relative to the US dollar too.
    • Finally-Consider assembling the crack team: It may be worthwhile for the government to consider assembling a crack team of former and current bureaucrats, who have proven their mettle in different crises and in different sectors, to advise it on policy measures that should be adopted in these extraordinary times. Much policy innovation and courage, combined with integrity, will be needed for India to emerge stronger from 2020. For the country’s leadership, there isn’t much to lose from breaking free of old policy and behavioural shackles.

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  • Government Budgets

    A prescription for revival

    op-ed snap | Economics | Mains Paper 3: Government Budgeting

    Context

    The root cause of the present malaise in our economy is the “death of demand”.

    How demand matters for growth?

    • The relation between demand and growth: Growth in any economy depends on the growth in demand, both for investment as well as consumer goods.
    • How slackened demand leads to a vicious cycle: If demand slackens, then the installed capacity will not be fully utilised, the fresh investment will not take place, employment will slacken and the economy will get caught in a vicious cycle, as we are experiencing today.

    What needs to be done to break the vicious cycle?

    • What sequence to follow in reviving demand? The basic challenge, therefore, is to revive demand in the economy in a sequence where the revival takes place first in the investment goods sector, automatically followed by a boost in demand for consumer goods through enhanced employment opportunities.
    • Past precedents: This is the prescription we had followed in the Atal Bihari Vajpayee government when we were faced with the East Asian crisis and the post-Pokhran global economic sanctions soon after the government assumed office in March 1998.

    Demand in India

    • No dearth of demand in India: In a developing country like India, there is no dearth of “good” demand.
      • We still have to provide so many goods and services to our people in order to improve their “quality of life”.
    • Need to create new infrastructure: Simultaneously, we have to create new infrastructure and improve the existing ones to reduce the transaction cost in our economy and make it more competitive.
    • How infrastructure creation lead to the creation of demand: The emphasis on the construction of roads of all kinds — rural, state and national highways, the new telecom policy, the investment in railways, the emphasis on housing construction and development of the real estate, the improvement in rural infrastructure and reform in the agricultural sector were all meant to lead to the creation of demand in the economy.
    • Creation of the virtuous cycle: The creation of demand should be in such a way that the demand for investment goods picks up first and faster, which creates the virtuous cycle of full capacity utilisation.
      • Demand for consumer goods: Demand for investment goods is followed by fresh investment for new capacity creation, larger employment opportunities of various kinds — unskilled, skilled and highly skilled — which reached money into the pockets of people leading to a surge in demand for consumer goods.

    How the government should deal with the situation

    • Deal with the demand side instead of supply-side: All commentators are agreed now that instead of tackling the demand side government is dealing with the supply side.
      • Tax relief to corporates: For instance, if, instead of wasting a precious amount of Rs 1,45,000 crore on tax relief to a limited number of corporates the government had spent that money on rural infrastructure and agriculture and a part of it on railways and highways, it would have led to the creation of demand both for investment goods as well as consumer goods.
    • Issue of sticking to the fiscal deficit target: There is also the issue of resources. The government claims that it has stuck to the fiscal deficit targets.
      • But the provisions of Fiscal Responsibility and Budget Management (FRBM) Act have been treated in a cavalier manner by all subsequent governments.
      • What was the basic purpose of the act? The basic purpose of the act was to eliminate the revenue deficit completely within a short period of time and live with a limited fiscal deficit.
      • The original FRBM Act, therefore, mandated that revenue deficit should be eliminated completely and the rest of the fiscal deficit should be limited to one per cent of GDP.
      • In special circumstances like today, the fiscal deficit should be allowed to go up to even two per cent of the GDP, which will mean an amount of Rs four lakh crore.

    Figures of the latest budget and need for the reforms

    • Fiscal deficit figures: The government has taken credit in the Budget for the fact that it has successfully restricted total fiscal deficit for this fiscal to 3.8 per cent and for next fiscal at 3.5 per cent of the GDP.
    • The issue involved in fiscal deficit figures: The revenue deficit for the current fiscal is 2.4 per cent of the GDP and for the next fiscal it is 2.7 per cent. In other words, minus the revenue deficit the fiscal deficit is only 1.4 per cent of GDP for this year and for the next year, it is 1.7 per se.
    • Need for managing the expenditure: So, the real villain of the piece is revenue deficit and not fiscal deficit per se.
      • Need for the reforms: It is clearly the government’s responsibility to manage its expenditure and carry out reforms in it, including austerity in expenditure.
      • How will the reforms help? Controlled fiscal deficit will make more money available in the market for private sector investment and help RBI in reducing interest rates — things which will have an overall benign influence on the economy.

    Conclusion

    A lot of other things apart from austerity majors will have to be done, no doubt, like preventing companies, especially banks from failing, to further strengthen the growth impulses but in the present situation, the key is government spending and in the desired sequence.

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