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  • FDI in Indian economy

     Indian’s decision on FDI to stop predatory Chinese hunt for Indian companies

    20 April 2020 | op-ed snap | Economics
    Mains Paper 3: Indian Economy

    This editorial discusses the implications of growing Chinese investment in India. After People’s Bank of China bought 1 per cent stake in HDFC bank, Indian government made prior government approval mandatory for investment from countries sharing border with India. Various aspects of the move are discussed here.

    No separating commerce and security in dealing with China

    • India’s move to prevent a predatory Chinese hunt for Indian companies comes at a time when the stock market has been badly bruised by the coronavirus.
    • It underlines the emerging perception in India that there is no separating commerce and security in dealing with China.
    • India’s concerns are similar to those being expressed elsewhere in the world.
    • A number of European countries have already moved in that direction.
    • In recent years, apprehensions have grown, in both the developing and developed world, that China is targeting their infrastructural, industrial and technological assets for control.
    • But many governments were willing to give the benefit of doubt to Beijing.
    • That willingness has rapidly eroded in the wake of the corona crisis that has devastated the Western world.

    Taking economic advantage of other nation’s misery

    • Although few world leaders want to join the US President in publicly attacking China.
    • Many of them know that Beijing bears some responsibility for letting a health emergency in one of its cities become a global pandemic.
    • That Chinese companies, with access to easy money and strong political support in Beijing, are now taking economic advantage of other nations’ misery has added insult to injury.
    • While most leaders are preoccupied with the corona crisis, they are not likely to let Beijing have its way.
    • Even in Britain, where the Boris Johnson government is now taking a second look.
    • Last week, the British Foreign Secretary, said there will be no going back to “business as usual” with China.

    China’s growing influence has been posing challenges for India on various fronts. Its growing footprint on India’s economy is one of such challenges. The UPSC frames question in relation to China from various angles. So, the penetration of China in India economy is also an important aspect from the Mains perspective.

    Rethinking the commercial engagement with China

    • Beyond the question of accountability for the spread of the coronavirus, many countries are rethinking the very nature of their commercial engagement with China.
    • Gaming the system by China: On a host of issues ranging from trade and investment to intellectual property protection, there is an inescapable sense that China has gamed the global system for unilateral gains.
    • India late in learning: India certainly has had a longer learning curve than the West in recognising the relationship between commerce and national security.
    • Since the early 1990s, Delhi bet that expanding economic cooperation with China will help mitigate political disputes.
    • But the differences have only become intractable even as China became stronger economically.
    • India gave China an easy pass into the WTO.
    • India’s trade deficit: It let cheap imports from China undermine India’s manufacturing sector and run up a massive trade surplus.
    • India allowed massive Chinese penetration of its telecom, digital and other advanced sectors only to discover the multiple negative consequences.
    • India’s new approach: The last few years have seen a new approach that has seen India oppose China’s Belt and Road Initiative and walk out of the RCEP negotiations citing the trade imbalance with China.

    Conclusion

    The decision on Chinese FDI can be seen as one of the piece of the puzzle India has to face on the various front. But the puzzle of dealing with a rising China’s strategic economic onslaught will test India for a long time.

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  • Coronavirus – Health and Governance Issues

    Beijing’s response to Covid underlines that the world needs more democracy, not less

    20 April 2020 | op-ed snap | International Relations
    Mains Paper 2: Effect Of Policies & Politics Of World On India’S Interests

    The article deals with the fundamental differences between democratic states and one-party state against the backdrop of response to Covid-19. The second part of the article focuses on post-Covid-19 scenarios like changes in the supply chains and the state of the China’s economy.

    Two aspects of Chine’s propaganda campaign

    • China, with the lack of transparency inherent in its one-party authoritarian system, contributed to the spread of Covid-19.
    • There is a desperate effort on the part of China to erase its culpability in unleashing COVID-19 across the world.
    • It has sought to overcome the damaging global public opinion which it has suffered by a subsequent sustained propaganda campaign.
    • This has two aspects.
    • 1. Highlighting the success: One highlights the success China claims to have achieved in arresting the pandemic within the country through drastic measures on a massive scale.
    • Thereby demonstrating the superiority of its authoritarian system.
    • This authoritarian system is contrasted with the delayed and often less-than-effective measures taken in democratic European countries and the US in particular.
    • 2. Publicity of assistance provided to other countries: The other seeks blanket publicity of much-needed medical equipment and medical teams to assist affected countries.
    • The main target is Europe, though assistance to other countries is also given prominence.
    • Chinese diplomats are using Twitter, Facebook and other social media platforms to create an image of a benign China providing public goods to a grateful community of beleaguered nations.
    • In reporting on India, Chinese media has often highlighted the plight of migrant workers and the frequent violations of social distancing regulations.
    • It is true that India has sought and received much-needed medical supplies from China.

    What China would like us to believe?

    • China wants us to believe that COVID-19 virus did erupt in Wuhan, but it may not have originated in China.
    • That there may have been a delay in acknowledging the seriousness of the crisis, but this was due to missteps by the local leadership in Wuhan city and Hubei province.
    • Once the gravity of the situation was recognised, Chinese leaders promptly informed the WHO and shared the DNA sequence of the virus with it and other countries.
    • The unprecedented measures adopted by Chinese authorities bought valuable time for the rest of the world to get prepared to deal with the pandemic.
    • Having achieved notable success in arresting the spread of the virus, valuable assistance is now being provided to affected countries in the spirit of solidarity.
    • China’s economy is beginning to recover and this will contribute to the recovery of the global economy.

    China has been highlighting its success in dealing with Covid-19 as an achievement of its single-party system. So, it is important to understand why it is not entirely true. And UPSC can frame a question like “To what extent has democratic system helped India in dealing with the corona crisis? “. Following points highlight the advantages of democracy in this regard.

    Democracy Vs. One-party system

    • Has China demonstrated the superiority of China’s one-party system as compared to democracies? No!
    • There is no escaping the fact that COVID-19 may not have become a pandemic if China were a democracy.
    • With a free flow of information through an independent media and accountable political leadership, the rest of the world would have been alerted in time.
    • There are democracies which have done as well if not better than China without resorting to its sledgehammer tactics.
    • Notably, there is Taiwan, which is constantly bullied by China.
    • There is South Korea, which has even held parliamentary elections after having brought the pandemic under control.
    • Even in India, the government is providing daily updates on the spread of the virus.
    • Conclusion: The bottom line is that as a result of being a democracy, we have a better chance of knowing the true dimensions of the crisis.
    • With the democracy we have a better chance of being able to obtain constant feedback on people’s reactions and access the best advice from multiple sources.

    China’s assistance and resentment against it

    • One must acknowledge China’s assistance to affected countries despite reports of defective and low-quality materials.
    • But recipients have often been “persuaded” to express fulsome praise for China.
    • This accompanying publicity overdrive has caused resentment rather than gratitude
    • Then there have been reports from Guangzhou on racial discrimination against stranded African students.
    • This has led to a sharp reaction from African countries.
    • This will be difficult to live down.

    The revival of China’s economy

    • There is no doubt that economic activity in China is beginning to revive after a steep drop of 6.8 per cent (year on year) in GDP during the first quarter of 2020.
    • Latest estimates are that the Chinese economy is now functioning at about 80 per cent of the level last year, which is impressive.
    • Less dependence on export: China’s economy is not as export-dependent as it has been in the past.
    • Exports were 5 per cent of GDP in 2018 against 32.6 per cent in 2008.
    • But the external economic environment is critical for China’s globalised economy.
    • It is a significant node in the most important regional and global supply chains.

    Changes in supply chains in the future and opportunity for India

    • China’s position as a significant node will be impacted by countries re-shoring production or opting for shorter and closer-to-home supply chains.
    • Japan will spend $2.2 billion to assist Japanese companies to shift units from China back to Japan or relocate to South East Asia.
    • In 2012, when China-Japan tensions were at a peak, there was a similar move and India was seen as an alternative.
    • But that opportunity was lost. Perhaps India has a second chance.
    • Decoupling from the US economy: China will suffer from accelerated “decoupling” from the US economy with COVID-19 sharpening the already fraught bilateral relations.
    • In a sense, China was already decoupled from the US by denying entry to US tech giants, Google, Facebook, Microsoft and Amazon.
    • This even while its own tech multinationals like Huawei and Alibaba have built markets in the West.
    • This cannot be sustained.
    • The winners in the more digital world which will emerge post-COVID-19 will be the American tech giants, even though the US is politically dysfunctional.
    • Democracies sometimes win even if their politics is frustrating.

    Conclusion

    Rather than express envy of Chinese authoritarianism, Indians should be thankful that we are a democracy. We need more democracy, not less, to overcome the COVID-19 challenge. India should also be ready to grab the opportunities in the post-Covid-19 era in the economic realms.

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  • Banking Sector Reforms

    How reverse repo rate became benchmark interest rate in the Indian economy?

    20 April 2020 | | Economics
    Mains Paper 3: Indian Economy

    Context

    • The Indian economy’s slowdown during 2018 and 2019 is becoming much worse in 2020 with the spread of COVID-19 and the stalling of almost all economic activity.
    • Like most other central banks in the world, the RBI, too, has tried to cut interest rates to boost the economy.
    • However, unlike in the past, when the RBI used its repo rate as the main instrument to tweak the interest rates, today, it is the reverse repo rate that is effectively setting the benchmark.

    We can expect a straight forward question based on this newscard.  For example:  “Critically examine the efficacy of reverse repo rate as benchmark interest rate in the Indian economy. “

    What are repo and reverse repo rates?

    • The repo rate is the rate at which the RBI lends money to the banking system (or banks) for short durations.
    • The reverse repo rate is the rate at which banks can park their money with the RBI.
    • With both kinds of the repo, which is short for repurchase agreement, transactions happen via bonds — one party sells bonds to the other with the promise to buy them back (or repurchase them) at a later specified date.
    • In a growing economy, commercial banks need funds to lend to businesses.
    • One source of funds for such lending is the money they receive from common people who maintain savings deposits with the banks. Repo is another option.

    Repo as benchmark

    • Under normal circumstances, that is when the economy is growing; the repo rate is the benchmark interest rate in the economy.
    • This is because it is the lowest rate of interest at which funds can be borrowed and, as such, it forms the floor rate for all other interest rates in the economy.
    • For instance, the interest rate consumers would have to pay on a car loan or the interest rate they will earn from a fixed deposit etc.

    What has changed now?

    • Over the last couple of years, India’s economic growth has decelerated sharply.
    • This has happened for a variety of reasons and has essentially manifested in lower consumer demand.
    • In response, businesses held back from making fresh investments and, as such, do not ask for as many new loans.
    • Add to this, the pre-existing incidence of high non-performing assets (NPAs) within the banking system.
    • Thus, the banks’ demand for fresh funds from the RBI has also diminished. This whole cycle has acutely intensified with the ongoing lockdown.

    Consequences: Rise in Liquidity

    • As such, the banking system is now flush with liquidity for two broad reasons.
    • On the one hand, the RBI is cutting repo rates and other policy variables like the Cash Reserve Ratio to release additional and cheaper funds into the banking system so that banks could lend.
    • On the other, banks are not lending to businesses, partly because banks are too risk-averse to lend and partly because the overall demand from the businesses has also come down.

    So, how has reverse repo become the benchmark rate?

    • The excess liquidity in the banking system has meant that banks have been using only the reverse repo (to park funds with the RBI) instead of the repo (to borrow funds).
    • As of April 15, RBI had close to Rs 7 lakh crore of banks’ money parked with it.
    • In other words, the reverse repo rate has become the most influential rate in the economy.

    What has the RBI done?

    • Recognising this, the RBI has cut the reverse repo rate more than the repo (see graph) twice in the spate of the last three weeks.
    • The idea is to make it less attractive for banks to do nothing with their funds because their doing so hurts the economy and starves the businesses that genuinely need funds.

    Will the move to cut reverse repo, work?

    • It all depends on the revival of consumer demand in India.
    • If the disruptions induced by the outbreak of novel coronavirus continue for a long time, consumer demand, which was already quite weak, is likely to stay muted.
    • Businesses, in turn, would feel no need to borrow heavily to make fresh investments.
    • If consumer demand revives quickly, the demand for credit will build up as well.

    Concerns of lower reverse repo

    • From the banks’ perspective, it is also important for them to be confident about new loans not turning into NPAs, and adding to their already high levels of bad loans.
    • Until banks feel confident about the prospects of an economic turnaround, cuts in reverse repo rates may have little impact.

    Back2Basics: Long Term Repo Operations (LTRO)

    • The LTRO is a tool under which the RBI provides 1-3 year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
    • Funds through LTRO are provided at the repo rate.
    • But usually, loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
    • According to the RBI, the LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
    • The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo etc.

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  • International Monetary Fund,World Bank,AIIB, ADB and India

    SDR general allocation by IMF

    20 April 2020 | | Economics
    Mains Paper 3: Indian Economy

    • Finance Minister has said that India could not support a general allocation of new Special Drawing Rights (SDR) by the IMF because it might not be effective in easing coronavirus-driven financial pressures.
    • FM Nirmala Sitharaman has stated that such a global liquidity boost by the IMF could produce potentially costly side-effects if countries used the funds for “extraneous” purposes.

    Details of SDR mechanism:

    What is SDR?

    • The SDR is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.
    • To participate in this system, a country was required to have official reserves.
    • This consisted of a central bank or government reserves of gold and globally accepted foreign currencies that could be used to buy the local currency.
    • It is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi.
    • It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members.
    • The value of the SDR is not directly determined by supply and demand in the market but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket.

    Who can hold SDRs?

    • SDRs can be held and used by member countries, the IMF, and certain designated official entities called “prescribed holders”.
    • It cannot be held, for example, by private entities or individuals.
    • Its status as a reserve asset derives from the commitments of members to hold, accept, and honour obligations denominated in SDR.
    • The SDR also serves as the unit of account of the IMF and some other international organizations.

    General allocation of SDRs

    • An SDR allocation is a low-cost way of adding to members’ international reserves, allowing members to reduce their reliance on more expensive domestic or external debt for building reserves.
    • The IMF has the authority under its Articles of Agreement to create unconditional liquidity through “general allocations” of SDRs to participants in its SDR Department (currently, all members of the IMF) in proportion to their quotas in the IMF.

    The SDR Interest Rate

    • The interest rate on SDRs, or the SDRi, provides the basis for calculating the interest rate that is charged to member countries when they borrow from the IMF and paid to members for their remunerated creditor positions in the IMF.
    • It is also the interest paid to member countries on their own SDR holdings and charged on their SDR allocation.
    • The SDRi is determined weekly based on a weighted average of representative interest rates on short-term government debt instruments in the money markets of the SDR basket currencies, with a floor of five basis points.

    How many SDRs have been allocated so far?

    The general SDR allocation of August 28, 2009 is by far the biggest allocation to date:

    • SDR 9.3 billion was allocated in yearly installments in 1970–72.
    • SDR 12.1 billion was allocated in yearly installments in 1979–81.
    • SDR 161.2 billion was allocated on August 28, 2009.

    What happens to the SDRs once they are allocated?

    • The IMF’s SDR Department keeps records of members’ SDR allocations and holdings; the SDR Department is also the channel through which all transactions and operations involving SDRs are conducted.
    • Once allocated, members can hold their SDRs as part of their international reserves or sell part or all of their SDR allocations.
    • Members can exchange SDRs for freely usable currencies among themselves and with prescribed holders; such exchange can take place under a voluntary arrangement or under designation by the Fund.
    • IMF members can also use SDRs in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for future quota increases.

    Issues with new allocations

    • New reserves are allocated according to members’ quotas — or shares in the IMF.
    • A great deal of the benefit in 2009 went to advanced economies that didn’t need help in accessing markets or financing fiscal deficits.
    • If the same system is being used now, only 40 per cent of the total would be given to the emerging economies. That is not good enough.

    Other reasons

    • The possible extraneous purposes FM could be referring to maybe misuse of resources for terror funding or some such purpose by neighbours.
    • This may seem far-fetched to some, but is par for the course for the government.
    • The other possibility is that India is merely trying to prove its loyalty to the Trump administration.
    • India has already requested to access the US Fed’s currency swaps.

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  • ISRO Missions and Discoveries

    [pib] What is Big Bang Nucleosynthesis (BBN)?

    20 April 2020 | PIB | Science and Technology
    Mains Paper 3: Awareness in various sc and tech fields

    Indian researchers have discovered hundreds of Li-rich giant stars produced during BBN indicating that Li is being produced in the stars and accounts for its abundance in the interstellar medium.

    Most of the space based theories and missions are focussed on the formation of our solar system. BBN is the most basic auxillary among them.

    What is Big Bang Nucleosynthesis (BBN)?

    • BBN is the production of nuclei other than those of the lightest isotope of hydrogen during the early phases of the Universe.
    • Primordial nucleosynthesis is believed by most cosmologists to have taken place in the interval from roughly 10 seconds to 20 minutes after the Big Bang.
    • It is calculated to be responsible for the formation of most of the universe’s helium in various isotopic forms.
    • Essentially all of the elements that are heavier than lithium were created much later, by stellar nucleosynthesis in evolving and exploding stars.

    Lithium in space

    • Lithium (Li), is one of the three primordial elements, apart from Hydrogen and Helium (He), produced in the Big Bang Nucleosynthesis (BBN).
    • However, the present measurement of Li in the interstellar medium and very young stars is about 4 times more than the primordial value.
    • Thus, identifying sources of Li enrichment in our Galaxy has been a great interest to researchers to validate BBN as well as a stellar mixing process.
    • In general, stars are considered as Li sinks. This means that the original Li, with which stars are born, only gets depleted over stars’ life-time as Li burns at relatively very low temperatures.

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  • ISRO Missions and Discoveries

    [pib] What are Blazars?

    20 April 2020 | PIB | Science and Technology
    Mains Paper 3: Awareness in various sc and tech fields

    Researchers from the Indian Institute of Astrophysics (IIA), Bangalore have conducted the first systematic study on the gamma-ray flux variability nature on different types of Blazars.

    Strange terminologies from space-based studies are very important from prelims point of view.  We can expect a statement based question seeking to identify the term which is being referred to in the paragraph.

    What are Blazars?

    • At the center of most galaxies, there’s a massive black hole that can have mass of millions or even billions of Suns that accrete gas, dust, and stellar debris around it.
    • As these material falls towards the black hole, their gravitational energy gets converted to light forming active galactic nuclei (AGN).
    • A minority of AGN (~15%) emit collimated charged particles called jets travelling at speeds close to the speed of light.
    • Blazars are AGN whose jets are aligned with the observer’s line of sight.
    • Some blazars are thought to host binary black holes in them and could be potential targets for future gravitational-wave searches.

    Studying blazars

    • Blazars are the most luminous and energetic objects in the known universe were found to be emitters of gamma-rays in the 1990s.
    • It is only with the capability of Fermi Gamma-ray space telescope (launched in 2008) to scan the entire sky once in three hours one is able to probe the flux variability characteristics of blazars on a range of time scales.
    • Gamma-ray band is one of the bands of the electromagnetic spectrum on which there is limited knowledge on the flux variability of blazars.
    • Major problem while studying them is to localize the site for the production of gamma-rays.

    Significance

    • The study of blazars could provide clues to the processes happening close to the black hole, not visible through direct imaging.
    • Exploring blazars will provide key inputs to constrain the high energy production site as well as the high energy emission processes.

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  • Matterhorn Mountain of the Swiss Alps

    20 April 2020 | Prelims Only | Environment
    Mains Paper 1: Geographical Features & Their Location

    Switzerland has expressed solidarity with India in its fight against the coronavirus pandemic by projecting the tricolour on the famous Matterhorn Mountain in the Swiss Alps.

    It has been long time since a question on global mountains/mountain ranges has not been asked in the prelims. Gear up for the uncertainty. Make a special sheet of geographical locations in news.

    Mt. Matterhorn

    • The Matterhorn is a mountain of the Alps, separating the main watershed and border between Switzerland and Italy.
    • It is a large, near-symmetric pyramidal peak in the extended Monte Rosa area of the Pennine Alps, whose summit is 4,478 metres.
    • It is one of the highest summits in the Alps and Europe (Mont Blanc being highest).
    • The four steep faces, rising above the surrounding glaciers, face the four compass points and are split by the Hörnli, Furggen, Leone/Lion, and Zmutt ridges.

    Its formation

    • The Matterhorn is mainly composed of gneisses originally fragments of the African Plate before the Alpine orogeny.
    • The mountain’s current shape is the result of cirque erosion due to multiple glaciers diverging from the peak, such as the Matterhorn Glacier at the base of the north face.

    Back2Basics: Alps mountain range

    • The Alps are the highest and most extensive mountain range system that lies entirely in Europe.
    • It stretches approximately 1,200 kilometres across eight Alpine countries (from west to east): France, Switzerland, Monaco, Italy, Liechtenstein, Austria, Germany, and Slovenia.
    • The mountains were formed over tens of millions of years as the African and Eurasian tectonic plates collided.
    • Extreme shortening caused by the event resulted in marine sedimentary rocks rising by thrusting and folding into high mountain peaks such as Mont Blanc and the Matterhorn.
    • Mont Blanc spans the French–Italian border, and at 4,809 m (15,778 ft) is the highest mountain in the Alps.

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  • RBI Notifications

    Time for govt, RBI to rethink bank architecture

    18 April 2020 | |
    Mains Paper 3: Indian Economy

    To deal with the damage inflicted by the corona crisis on the economy, both the RBI and the government are planning various monetary and fiscal measures. In its latest measures, the RBI has further reduced the reverse repo rate. This article discusses the impact of these measures and explains why the first round of measures failed in achieving the desired result.

    What was announced in the second round of policy measures by the RBI?

    • RBI reduces the interest on money banks keep in the central bank (reverse repo down by 25 basis points).
    • RBI gives ₹50,000 crores to banks through targeted long-term repo operations or TLTRO 2.
    • And another ₹50,000 crores to Small Industries Development Bank of India (Sidbi) and National Bank for Agriculture and Rural Development (Nabard) to lend to microfinance institutions (MFIs) and non-banking financial companies (NBFCs).

    Banks not transmitting the money

    • Banks globally have a problem.
    • They are not transmitting the money that central banks are providing to businesses that need the money.
    • Imagine that the world has been put into a business coma as we wait for the pandemic to recede.
    • Money to pay rents, interest and salaries is needed by the business to stay alive during this period and banks are showing reluctance to step in.
    • Firms and tiny entrepreneurs need to borrow to stay afloat.
    • Banks typically lend to the larger part of the market and NBFCs and MFIs to the rest—they provide the last mile that banks do not.

    Measures by the RBI to increase the money supply in the market

    • The US Fed buying bonds directly: The US Federal Reserve has taken to buying corporate bonds directly rather than through banks.
    • RBI has not gone that far, but is using its firepower to nudge banks to lend to those who are credit-worthy and who desperately need the money.
    • It has done two things to facilitate this.

    What reduction in Reverse Repo rate by the RBI means?

    • What is reverse repo rate? This is the rate at which banks lend to the central bank—they keep their surplus money with the RBI and get some interest on it.
    • Banks borrow from RBI at the repo rate, which is 4.4% right now.
    • A few weeks ago, the central bank had reduced the reverse repo by a larger percentage than the repo to decrease the incentive to banks to keep money with RBI.
    • But that had a limited impact as on 15 April, banks still had almost ₹7 trillion with the RBI under this window.
    • In the second round, RBI has cut the reverse repo by another 25 basis points to 3.75% to increase the difference between the borrowing rate and the lending rate.
    • What would be the impact of the second reduction in the reverse repo? The RBI is hoping that this would make banks lend to firms, rather than keeping their money safe with RBI.
    • The difference between the rate of borrowing and lending is now 65 basis points.

    An issue of monetary policy transmission is a recurring one. The RBI always try to ensure the transmission but there are several factor that prevent it. Make note of these factors.

    Risk aversion of the banks

    • Banks are displaying deep risk aversion—the desire to keep their capital safe rather than risk investing in investment-worthy bonds.
    • The first round of money put into the system through TLTRO 1.0, brought ₹1 trillion.
    • TLTRO is long-term (one-to-three years) funding to banks at the repo rate or a short-term rate.
    • TLTRO money didn’t reach small and medium firms: Banks took the cheap loan and lent to high-rated public sector units (PSUs) and AA-plus firms—essentially entities who had enough liquidity.
    • The money did not find its way to smaller and medium firms, NBFCs and MFIs—entities that actually reach the last mile.
    • RBI has put another ₹50,000 crores as part of TLTRO 2.0.
    • Banks can only get this money if they lend to NBFCs and MFIs.
    • For A and A-minus (these are still investment-worthy) bonds issued by firms in these sectors, banks stand to get a return of between 10-14%.
    • Banks are borrowing at 4.4% and have the option to lend at a multiplier.
    • That is the incentive given by the RBI to get money down the pipeline.
    • Banks stand to lose 65 basis points if they seek the safety of money with the RBI or stand to gain almost 6-10 percentage points in interest if they lend.
    • It remains to be seen if banks take this nudge and begin lending to lower than the highest safety bonds.

    Refinance to three institutions

    • Another ₹50,000 crores is being provided as a refinance to three institutions-Sidbi, Nabard and National Housing Bank.
    • These banks reach the small-scale firms, rural sector, housing finance firms, NBFCs and MFIs.
    • Again, this should help money reach the last mile.
    • Clearly, there is too much competition at the top end of the market—everybody wants the safe paper and deals.

    The UPSC could ask a direct question with reference to the issue of policy transmission and how it is a serious challenge in crisis such as Covid -19. So, following are some suggestions to deal with this issue.

    Way forward

    • Rethink the bank architecture: With transmission, or the liquidity given by the central bank not going down the line, maybe this is a good time for the government and the RBI to rethink its bank architecture.
    • Develop bond a corporate bond market: There is very little action at the middle and lower end of the market. The development of a robust corporate bond market will help.
    • Early alarm system: The setting up of an early alarm system as proposed by the Financial Resolution and Deposit Insurance (FRDI) Bill to prevent a financial firm failure that takes the whole system down would be a step in the right direction.

    Back2Basics: What is the transmission of monetary policy?

    • Monetary transmission refers to the process by which a central bank’s monetary policy signals (like repo rate) are passed on, through the financial system to influence the businesses and households.
    • There are many monetary policy signals by the RBI; the most powerful one is the repo rate.
    • When repo rate is changed, it brings changes in the overall interest rate in the economy as well.
    • As a result of a decrease in repo rate, the interest rate on loans by banks also changes and this encourages consumption and investment activities of businesses and households.
    • In an economy, both consumption and investment are often financed by borrowings from banks.
    • As the repo rate brings changes in market interest rate, the repo rate channel is often referred to as interest rate channel of monetary transmission.

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  • Coronavirus – Health and Governance Issues

    A virus, social democracy, and dividends for Kerala

    18 April 2020 | op-ed snap | Governance
    Mains Paper 2: Governance, Transparency & Accountability, Citizens Charters, Health & Education, NGO, SHG & Civil Society

    This article is an analysis of Kerala’s success in dealing with the Covid-19. Factors that emerge are-strong emphasis on the social democracy, the participation of civil society and strong social compact between the government and citizenry. We have also covered the same subject in a previous article but focus there was more on the administrative level.

    Kerala’s success story

    • Kerala was the first State with a recorded case of coronavirus and once led the country in active cases.
    • It now ranks 10th of all States and the total number of active cases (in a State that has done the most aggressive testing in India) has been declining for over a week and is now below the number of recovered cases.
    • Given Kerala’s population density, deep connections to the global economy and the high international mobility of its citizens, it was primed to be a hotspot.
    • Yet not only has the State flattened the curve but it also rolled out a comprehensive ₹20,000 crore economic package before the Centre even declared the lockdown.

    Why does Kerala stand out in India and internationally?

    • Kerala’s much-heralded success in social development has invited endless theories of its cultural, historical or geographical exceptionalism.
    • But taming a pandemic and rapidly building out a massive and tailored safety net is fundamentally about the relation of the state to its citizens.
    • From its first Assembly election in 1957, through alternating coalitions of Communist and Congress-led governments, iterated cycles of social mobilisation and state responses have forged what is in effect a robust social democracy.
    • The current crisis underscores the comparative advantages of social democracy.

    Kerala’s success is built on social democracy in the state. Following are the factors that constitute the social democracy in the state which is helping it fight against the Covid-19 pandemic with considerable success. These factors are also important from the Mains point of view if the question is framed on Kerala’s success story.

    How social democracy is practised in Kerala?

    • Social democracies are built on an encompassing social pact with a political commitment to providing basic welfare and broad-based opportunity to all citizens.
    • In Kerala, the social pact itself emerged from recurrent episodes of popular mobilisation.
    • Popular mobilisations include the temple entry movement of the 1930s to the most recent various gender and environmental movements.
    • These movements nurtured a strong sense of social citizenship.
    • These movements also drove reforms that have incrementally strengthened the legal and institutional capacity for public action.
    • Second, the emphasis on rights-based welfare has been driven by and in turn has reinforced a vibrant, organised civil society.
    • This civil society demands continuous accountability from front-line state actors.
    • Third, this constant demand-side pressure of a highly mobilised civil society and a competitive party system has pressured all governments in Kerala.
    • The pressure made governments to deliver public services and to constantly expand the social safety net, in particular a public health system that is the best in India.
    • Fourth, that pressure has also fuelled Kerala’s push over the last two decades to empower local government.
    • Nowhere in India are local governments as resourced and as capable as in Kerala.
    • Finally, all of this ties into the greatest asset of any deep democracy, that is the generalised trust that comes from a State that has a wide and deep institutional surface area.
    • That on balance treats people not as subjects or clients, but as rights-bearing citizens.

    How the built-in social democracy is helping in dealing with the pandemic?

    • A government’s capacity to respond to a cascading crisis such as the COVID-19 pandemic relies on a very fragile chain of –(1)mobilising financial and societal resources, (2)getting state actors to fulfil directives, (3)coordinating across multiple authorities and jurisdictions and maybe, most importantly, (4)getting citizens to comply.
    • First, an effective response begins with programmatic decision-making.
    • From the moment of the first reported case in Kerala, Chief Minister convened a State response team that coordinated 18 different functional teams.
    • The CM held daily press conferences and communicated constantly with the public.
    • Kerala’s social compact demanded no less.
    • Second, the government was able to leverage a broad and dense health-care system.
    • The health-care system, despite the recent growth of private health services, has maintained a robust public presence.
    • Kerala’s public health-care workers are also of course highly unionised and organised, and from the outset the government lay emphasis on protecting the health of first responders.
    • Third, the government activated an already highly mobilised civil society.
    • As the cases multiplied, the government called on two lakh volunteers to go door to door, identifying those at risk and those in need.
    • A State embedded in civil society — the women’s empowerment Kudumbasree movement being a case in point.
    • Kudumbasree movement was in a good position to co-produce effective interventions, from organising contact tracing to delivering three lakh meals a day through Kudumbasree community kitchens.
    • Fourth, you can get the politics right and you can have a great public health-care system, but its effectiveness in a crisis like this will only be as good as the infamous last kilometre.
    • And this is where two decades of empowering local governments have clearly paid off.

    Conclusion

    At a time when India is dealing with this unprecedented crisis, it is important to be reminded that Kerala has managed the crisis with the most resolve, the most compassion and the best results of any large State in India. And that it has done so precisely by building on legacies of egalitarianism, social rights and public trust. Other states and the Central government must learn from Kerala’s experience.

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  • Anti Defection Law

    Institutional fixes and the need for ethical politics

    18 April 2020 | op-ed snap | Polity
    Mains Paper 2: Indian Constitution – historical underpinnings, evolution, features, amendments, significant provisions and basic structure, Parliament & State Legislatures

    The article discusses the recent event in Madhya Pradesh where a group of legislature resigned bringing down the government. A most important issue arising out such incidents is circumventing of the laws made to avoid such things from happening. Several such issues along with their solutions are described here.

    New method to bypass the anti-defection law

    • The political activities in Madhya Pradesh represent a new method of bypassing the anti-defection law and toppling elected governments.
    • The government in Karnataka was brought down in July last year in a similar manner with 17 MLAs of the ruling coalition resigning and joining the BJP.
    • What method was used? Under this novel method, a set of legislators of the party in power is made to resign from the Assembly to reduce the total strength of the House enough for the opposition party to cross the halfway mark to form the government.
    • In the ensuing by-elections, the members who resigned were then fielded as ruling party candidates (most of whom have been re-elected in the case of Karnataka).
    • The same practice is likely to be repeated in Madhya Pradesh soon.

    A question based on anti-defection law and its implication for healthy debate in the parliament was asked in 2013. And that issues still persist. So, take note of these issues.

    Exploiting the loophole in the Tenth Schedule

    • This method of mass defection circumvents the provisions of the Tenth Schedule of the Constitution (better known as the anti-defection law)
    • What is the Tenth Schedule? The tenth schedule prescribes the grounds for disqualification of legislators: voluntarily giving up party membership and voting or abstaining to vote against party directions.
    • Resignation is not mentioned as a ground for disqualification.
    • However, the Speaker in Karnataka disqualified them for the rest of the Assembly’s term, thereby barring them from contesting the by-polls.
    • While the Supreme Court upheld the disqualification.
    • It stuck down the bar from contesting by-polls.
    • In Madhya Pradesh, since the Speaker has accepted the resignation of the MLAs, the defectors can in any case contest the by-polls.

    Damaging the underpinnings of democracy

    • The recurrence of this model of defection signals the exploitation of the inherent weaknesses of the anti-defection law.
    • While solo legislators jumping ship might have reduced now, “horse-trading” seems to have gone from retail to wholesale.
    • This threatens the underpinnings of India’s electoral democracy since such surreptitious capture of power essentially betrays the people’s mandate in a general election.

    Kihoto case is an important case in relation to the anti-defection law.

    Time to reframe the anti-defection law

    • In this context, it is important to examine whether the anti-defection law fulfils any purpose.
    • This law raises fundamental concerns regarding the role of a legislator in a parliamentary democracy.
    • Issues with the law: It denies the legislator the right to take a principled position on a policy matter and reduces her to an involuntary supporter of the whims of party bosses.
    • Challenge to the constitutionality: The constitutionality of the Tenth Schedule was challenged for violating the Basic Structure of Constitution with regard to parliamentary democracy and free speech.
    • Judicial review of the Speaker’s decision: The Supreme Court in Kihoto Hollohan v. Zachillhu (1992) in a 3-2 verdict upheld the law while reserving the right of judicial review of the Speaker’s decision.

    What are the shortcomings in the anti-defection law?

    • Restriction on the freedom of legislator: The anti-defection law, on the one hand, severely restricts the freedom of a legislator and makes her a slave of party whips.
    • Failure in preventing the horse-trading: On the other hand, it has not been able to meet its primary objective of preventing horse-trading and continues to be circumvented to bring down elected governments.
    • This calls for reforms that address concerns at both ends of the spectrum.

    Following two are the solutions offered here. They are important from Mains point of view. As solutions are often asked for the pressing issues.

    Dinesh Goswami Committee and other suggestion

    • Restrict the scope of the binding whip: For addressing the first issue, as the Dinesh Goswami Committee also suggested, the scope of the binding whip should be restricted to a vote of confidence.
    • For addressing the second issue, it is best to institutionalise the Karnataka Speaker’s decision to bar the defected members from contesting in the ensuing by-poll, if not for a longer period.
    • This will disincentivise MLAs from jumping ship.
    • These reforms would require a constitutional amendment to the Tenth Schedule, an uphill task under the current circumstances.

    Conclusion

    We are facing a deeper challenge of the corrosion of India’s parliamentary system, for even in jurisdictions without such anti-defection laws, we do not see “horse-trading” and “resort politics”. Hence, beyond institutional fixes, we also need a popular articulation of an ethical politics that causes the public to shun such political manoeuvres.

    Back2Basic: What is the Tenth Schedule?

    • The Tenth Schedule was inserted in the Constitution in 1985.
    • It lays down the process by which legislators may be disqualified on grounds of defection by the Presiding Officer of a legislature based on a petition by any other member of the House.
    • A legislator is deemed to have defected if he either voluntarily gives up the membership of his party or disobeys the directives of the party leadership on a vote.
    • This implies that a legislator defying (abstaining or voting against) the party whip on any issue can lose his membership of the House.
    • The law applies to both Parliament and state assemblies.
    • Exceptions under the law: Legislators may change their party without the risk of disqualification in certain circumstances.
    • The law allows a party to merge with or into another party provided that at least two-thirds of its legislators are in favour of the merger.
    • In such a scenario, neither the members who decide to merge nor the ones who stay with the original party will face disqualification.
    • Is there any time limit to decide on the matter? The law does not specify a time period for the Presiding Officer to decide on a disqualification plea.
    • Given that courts can intervene only after the Presiding Officer has decided on the matter, the petitioner seeking disqualification has no option but to wait for this decision to be made.

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