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  • [Prelims Spotlight] Important International Economic Organizations

    Prelims Spotlight is a part of “Nikaalo Prelims 2020” module. This open crash course for Prelims 2020 has a private telegram group where PDFs and DDS (Daily Doubt Sessions) are being held. Please click here to register.

    Important International Economic Organizations

    25 April 2020 

    Bank for International Settlements (BIS)

    • Bank for International Settlements (BIS) – is an intergovernmental organization of central banks which “fosters international monetary and financial cooperation and serves as a bank for central banks.”
    • It is not accountable to any national government.
    • The mission of the Bank for International Settlements (BIS) is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.
    • The Basel Committee for Banking Supervision (BCBS), while technically separate from the BIS, is a closely associated international forum for financial regulation that is housed in the BIS’ offices in Basel, Switzerland
    • The BCBS is responsible for the Basel Accords, which recommend capital requirements and other banking regulations that are widely implemented by national governments.
    • The BIS also conducts research on economic issues and publishes reports.

    European Central Bank (ECB)

    • The European Central Bank (ECB) is the central bank responsible for monetary policy of those European Union (EU) member countries which have adopted the euro currency.
    • This region is known as the eurozone and currently comprises 19 members.
      The principal goal of the ECB is to maintain price stability in the euro area, thus helping preserve the purchasing power of the euro.
    • The European Central Bank (ECB) is headquartered in Frankfurt am Main, Germany. It has been responsible for monetary policy in the Euro area since January 1, 1999.

    KEY TAKEAWAYS

    • The European Central Bank (ECB) is the central bank of the combined Eurozone.
    • The ECB coordinates EU monetary policy, including setting the region’s target interest rates and controlling the supply of the Euro common currency.
    • The ECB’s primary mandate is to achieve price stability through low inflation.

    International Monetary Fund (IMF)

    • The International Monetary Fund (IMF) is the inter-governmental organisation established to stabilize the exchange rate in the international trade.
    • It helps the member countries to improve their Balance of Payment (BOP) condition thorough the adequate liquidity in the international market, promote the growth of global monetary cooperation, secure financial stability, facilitate international trade.
    • It is one of the Bretton woods twins, which came into existence in 1945, is governed by and accountable to the 189 countries that make up its near-global membership.

    Objectives of IMF:

    • To promote international monetary co-operation.
    • To ensure balanced international trade
    • To ensure exchange rate stability
    • To eliminate or to minimize exchange restrictions by promoting the system of multilateral payments.
    • To grant economic assistance to members countries for eliminating the adverse balance of payment
    • To minimize the imbalances in quantum and duration of international trade.

    IMF Quota & Voting Rights

    • Quotas was assigned to member countries reflecting their relative economic power & credit deposit to IMF
    • Subscription was to be paid 25% in gold or currency convertible into gold (effectively the dollar, which was the only currency then, still directly gold convertible for central banks) and 75% in the member’s own currency
    • Members were provided voting rights in proportion to their quota, hence member countries with higher quota have a higher say at IMF

    Special Drawing Rights

    • Special drawing rights (SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF)
    • SDR is not a currency, instead represents a claim to currency held by IMF member countries for which they may be exchanged.
    • The value of an SDR is defined by a weighted currency basket of four major currencies: the US dollar, the euro, the British pound, the Chinese Yuan and the Japanese yen
    • The central bank of member countries held SDR with IMF which can be used by them to access funds from IMF in case of financial crises in their domestic market

    Reverse Tansche

    • A certain proportion of a member country’s quota is specified as its reserve tranche.
    • The member country can access its reserve tranche funds at its discretion and is not under an immediate obligation to repay those funds to the IMF.
    • Member nation reserve tranches are typically 25% of the member’s quota.

    Organization for Economic Cooperation and Development (OECD)

    • Organisation for Economic Co-operation and Development (OECD) is an inter-governmental organization founded in 1961 to accelerate economic progress and world trade.
    • It is a very unique organization where 34 Democracies work together with market economies and 70 non-member economies promote economic growth, prosperity, and sustainable development.
    • The setting of the OECD reflects the peripheral discussion forum based on the policy research and analysis that helps governments in order to shape their policies that may lead to a formal agreement among member governments or be acted on in domestic or other international stages.
    • Most OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries.
    • The OECD headquarters at Paris, France. The OECD is funded by contributions from member states.

    United Nations Conference on Trade and Development (UNCTAD)

    • The United Nations Conference on Trade and Development (UNCTAD) was established in 1964. It is an intergovernmental body of the United Nations Generally Assembly for promoting the development-friendly integration of developing countries into the world economy.
    • UNCTAD grew from the view that existing institutions like GATT (now WTO), the International Monetary Fund (IMF), and World Bank were not properly organized to handle the particular problems of developing countries.

    Functions of UNCTAD

    • UNCTAD Objective is to maximize the trade, investment and development opportunities of developing countries and assist them in their efforts to integrate into the world economy on an equitable basis.
    • It functions as a forum for intergovernmental deliberations, supported by discussions with experts and exchanges of experience, aimed at consensus building.
    • It undertakes research, policy analysis and data collection for the debates of government representatives and experts.
    • It provides technical assistance tailored to the specific requirements of developing countries, with special attention to the needs of the least developed countries and of economies in transition.

    United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP)

    • The Economic and Social Commission for Asia and the Pacific (ESCAP) serves as the United Nations’ regional hub promoting cooperation among countries to achieve inclusive and sustainable development.
    • Established in 1947 with its headquarters in Bangkok, Thailand.
    • The largest regional intergovernmental platform with 53 Member States and 9 associate members, ESCAP has emerged as a strong regional think-tank offering countries sound analytical products that shed insight into the evolving economic, social and environmental dynamics of the region.
    • The Commission’s strategic focus is to deliver on the 2030 Agenda for Sustainable Development, which is reinforced and deepened by promoting regional cooperation and integration to advance responses to shared vulnerabilities, connectivity, financial cooperation and market integration.
    • ESCAP’s research and analysis coupled with its policy advisory services, capacity building and technical assistance to governments aims to support countries’ sustainable and inclusive development ambitions

    UN-ESCAP providing results-oriented projects, technical assistance and capacity building to member States in the following areas:

    • Macroeconomic Policy, Poverty Reduction and Financing for Development
    • Trade, Investment and Innovation
    • Transport
    • Environment and Development
    • Information and Communications Technology and Disaster Risk Reduction
    • Social Development
    • Statistics
    • Subregional activities for development
    • Energy

    United Nations Economic Commission for Africa (UNECA)

    • United Nations Economic Commission for Africa (UNECA) was established by the Economic and Social Council (ECOSOC) of the United Nations (UN) in 1958 as one of the UN’s five regional commissions, ECA’s mandate is to promote the economic and social development of its member States, foster intra-regional integration, and promote international cooperation for Africa’s development.
    • Made up of 54 member States, and playing a dual role as a regional arm of the UN and as a key component of the African institutional landscape, ECA is well-positioned to make unique contributions to address the Continent’s development challenges.
    • ECA’s strength derives from its role as the only UN agency mandated to operate at the regional and subregional levels to harness resources and bring them to bear on Africa’s priorities. T
    • o enhance its impact, ECA places a special focus on collecting up to date and original regional statistics in order to ground its policy research and advocacy on clear objective evidence; promoting policy consensus; providing meaningful capacity development; and providing advisory services in key thematic fields.

    ECA’s thematic areas of focus are as follows:

    Macroeconomic Policy
    Regional Integration and Trade
    Social Development
    Natural Resources
    Innovation and Technology
    Gender
    Governance
    Statistic

    United Nations Economic Commission for Europe (UNECE)

    • The United Nations Economic Commission for Europe (UNECE) was set up in 1947 by ECOSOC. It is one of five regional commissions of the United Nations.
    • UNECE’s major aim is to promote pan-European economic integration. UNECE includes 56 member States in Europe, North America and Asia. However, all interested United Nations member States may participate in the work of UNECE. Over 70 international professional organizations and other non-governmental organizations take part in UNECE activities.
    • Providing legal frameworks and assistance activities through instruments like the UNECE Multilateral Environmental Agreements.
    • Developing expertise and policy solutions in areas such as resource efficiency, environmental performance, environmental democracy, sustainable transport, sustainable energy, sustainable housing, green real estate markets, and sustainable forest products.
    • Measuring sustainable development and improving capacities for environmental monitoring and assessment.
    • Encouraging eco-innovations and green investment.
    • Raising awareness to change behavioral patterns towards sustainable consumption and production, for example through the UNECE Strategy for
    • Education for Sustainable Development.
    • Developing green standards, for example the standards for cleaner and smarter vehicles developed by the World Forum for the Harmonization of Vehicle Regulations.
    • The Customs Convention on International Transport of Goods under Cover of TIR Carnets, 1975 (TIR Convention) is an international customs transit system under the auspices of the United Nations Economic Commission for Europe (UNECE)
    • India has become the 71st nation to join the United Nations TIR (Transports Internationaux Routiers) Convention.

    World Bank Group

    • The World Bank Group (WBG) is a family of five international organizations that make leveraged loans to developing countries.
    • It is the largest and most famous development bank in the world and is an observer at the United Nations Development Group.
    • Its five organizations are the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID).

    The World Bank (IBRD)

    • IBRD provides loans and other assistance primarily to middle income and poor but creditworthy countries at interest rates slightly lower than that offered by other financial institutions but with long term maturity<countries which have the capacity to repay the loan amount with interest>

    Origins: IBRD, as the name suggests, was created in 1944 to help Europe reconstruct/ rebuild after World War II. To be a member of IBRD, a country has t join IMF first.

    Main function:

    • Long-term capital assistance to its member-countries for their reconstruction and development
    • It works closely with the rest of the World Bank Group to help developing countries reduce poverty, promote economic growth, and build prosperity.

    Other functions of IBRD Bank –

    • Supports long-term human and social development that private creditors do not finance.
    • Preserves borrowers’ financial strength by providing support in times of crisis, when poor people are most adversely affected
    • Promotes policy and institutional reforms (such as safety net or anti-corruption reforms)
    • Creates a favourable investment climate to catalyze the provision of private capital
    • Facilitates access to financial markets often at more favorable terms than members can achieve on their own
    • Resources of the Bank consist of the capital and borrowings.

     

    International Development Association

    • The International Development Association (IDA) is the part of the World Bank group that helps the world’s poorest countries.
    • Overseen by 173 shareholder nations, IDA aims to reduce poverty by providing loans (called “credits”) and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions.
    • IDA complements the World Bank’s original lending arm—the International Bank for Reconstruction and Development (IBRD). IBRD was established to function as a self-sustaining business and provides loans and advice to middle-income and credit-worthy poor countries.
    • IBRD and IDA share the same staff and headquarters and evaluate projects with the same rigorous standards.
    • IDA is one of the largest sources of assistance for the world’s 771 poorest countries, 39 of which are in Africa, and is the single largest source of donor funds for basic social services in these countries.
    • IDA lends money on concessional terms. This means that IDA credits have a zero or very low-interest charge and repayments are stretched over 25 to 40 years, including a 5- to 10-year grace period. IDA also provides grants to countries at risk of debt distress.
    • In addition to concessional loans and grants, IDA provides significant levels of debt relief through the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).
    • IDA’s work covers primary education, basic health services, clean water and sanitation, agriculture, business climate improvements, infrastructure, and institutional reforms.

    IFC

    Largest global development institution focused exclusively on the private sector in developing countries established in 1956

    Objectives of the IFC

    • To further economic development by encouraging the growth of private enterprise in member-countries
    • Invests in private enterprise in member-countries in association with private investors and without a Government guarantee, in cases where sufficient private capital is not available on reasonable terms
    • Seeks to bring together investment opportunities, private capital of both foreign and domestic origin, and experienced management
    • Stimulates conditions conducive to the flow of private capital – domestic and foreign – into productive investments in member-countries
    • IFC investment normally does not exceed 40% of the total investment of the enterprise.
    • In case of its investment by equity participation, it does not exceed 25% of the share capital.

    IFC and India

    • IFC makes strategic investments and advisory interventions to promote inclusive growth, help address climate change impacts, and encourage global and regional integration
    • In India, IFC is sharpening its focus on increasing access to energy, finance and healthcare; providing the sustainable infrastructure; and boosting regional linkages

    Focus Areas –

    Building infrastructure
    Facilitating renewable energy generation
    Promoting cleaner production, energy and water efficiency
    Supporting agriculture for improved food security
    Creating growth opportunities for small businesses
    Helping reform investment climate

    The Multilateral Investment Guarantee Agency (MIGA)

    • It is an international financial institution which offers political risk insurance and credit enhancement guarantees. Such guarantees help investors protect foreign direct investments against political and non-commercial risks in developing countries.
    • MIGA is a member of the World Bank Group and is headquartered in Washington, D.C., United States. It was established in 1988 as an investment insurance facility to encourage confident investment in developing countries.
    • MIGA’s stated mission is “to promote foreign direct investment into developing countries to support economic growth, reduce poverty, and improve people’s lives”. It targets projects that endeavour to create new jobs, develop infrastructure, generate new tax revenues, and take advantage of natural resources through sustainable policies and programs.
    • MIGA is owned and governed by its member states, but has its own executive leadership and staff which carry out its daily operations. Its shareholders are member governments which provide paid-in capital and have the right to vote on its matters.
    • It ensures long-term debt and equity investments as well as other assets and contracts with long-term periods. The agency is assessed by the World Bank’s Independent Evaluation Group each year.

    International Centre for the Settlement of Investment Disputes (ICSID)

    • It encourages the flow of foreign investment to develop countries through arbitration and conciliation facilities
    • Except for ICSID, India is a member of the other four groups <We don’t like external interference such as arbitration in our decision-making process, hence not the member of ICSID>

    Let’s revise World Bank in brief

    Name Main Function Comment
    IBRD (WB) Infrastructure loan to poor middle income but credit worthy countries at just below market rates India founder member, largest recipient of loan
    IDA Soft loan at virtually zero rate for poverty eradication to poorest countries India founder largest recipient, has crossed the per capita threshold for funding but will continue to receive IDA funds
    IFC Private sector arm of WB group, supports private enterprises in developing countries India founder, IFC launched India’s offshore masala bond
    MIGA Provide a guarantee to investors against non-commercial political risk India not a founding member
    ICSID Resolve disputes through arbitration and conciliation India not a member

    World Trade Organization (WTO)

    • The WTO is an intergovernmental organization that is concerned with the regulation of international trade between nations.
    • The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by 123 nations on 15 April 1994.
    • It replaced the General Agreement on Tariffs and Trade (GATT), which commenced in 1948.
    • It is the largest international economic organization in the world.

    Functions of WTO

    • The WTO deals with regulation of trade in goods, services and intellectual property between participating countries.
    • It provides a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments.

  •  Indian Debt market, that never was

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

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

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

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

    What are the problems of India’s debt market?

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

    Regulation and comparison with other countries

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

    The recent positive trend in the debt market

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

    Roll over of debt papers in India

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

    Conclusion

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

    Back2Basics: What is ASM?

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

    Priority Sector Lending (PSL)

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

    Roll over of debt

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

  • 24 April 2020 | Nikaalo Prelims Quiz – History Test 3: British Administrative, Educational, Legislative Measures; Governor Generals

    [WpProQuiz 401]

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

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

    Implications for the country’s retail landscape

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

    Opportunities for cross-selling

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

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

    What are the concerns in such deals?

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

    Conclusion

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

     

  • Don’t waste the oil crisis

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

    What negative price of the benchmark US crude WTI mean?

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

    The world running out of oil storage capacity

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

    So, where the oil prices are headed?

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

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

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

    1. Disruption of oil supply lines and problems of diaspora

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

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

    2. Empower the oil traders and remove bureaucratic control

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

    Conclusion

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

    Back2Basics: What is WTI  and Brent crude benchmark?

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

    Brent Crude

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

    Futures contract

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

  • Why US’s offer of financial aid to Greenland has angered Denmark?

    Context

    • The US had last year sent a proposal to “purchase” Greenland from the Nordic nation.
    • This proposal follows plans by the US government to open a consulate in Nuuk, Greenland’s capital.
    • This move is being considered to be “extremely provocative” interference by the US.

    Go for a detailed map reading of the Arctic region. It has been in news for several times this year.

    Why is the US opening a consulate in Greenland?

    • The US is opening a consulate in Greenland after nearly seven decades of closing its first consulate after the Second World War.
    • Russia has been steadily expanding its military presence in the Arctic and China has done its bit on the economic front.

    US’s interests in Greenland

    1) Domestic interest

    • The US claims that its aid is to ensure “sustainable growth” in the autonomous island.
    • It also cited Russia’s “aggressive behavior and increased militarisation in the Arctic” and China’s “predatory economic interests” as reasons for the decision.
    • The US acquiring new territory under Trump would appeal to the nationalistic and imperialistic views of Americans.
    • Acquiring Greenland would also secure Trump’s position in US history of having been the third president to add land to the country’s territory.

    2) Strategic interest

    • Due to climate change, the Arctic ice is melting at an accelerated rate, opening up water routes for military and maritime trade.
    • This is in addition to global superpowers and regional players vying for control over Greeland’s vast untapped natural resources.

    3) Economic interest

    • Greenland is also a resource-rich landmass, strategically located between the Arctic Sea and the Atlantic Ocean, with some of the largest deposits of rare-earth metals, including iron-ore, uranium, and by-products of zinc, neodymium, praseodymium, dysprosium and terbium.
    • These rare-earth metals are used in the production of electric cars, mobile phones and computers.
    • For the longest time, China has been the world’s largest supplier of these rare-earth metals and has expanded its acquisitory plans by excavating mines across the African continent.
    • An acquisition of Greenland would make the US less reliant on China for these rare-earth metals.
    • Greenland, as a part of the Arctic region, also has large deposits of undiscovered oil and gas, resources that the US always wants more of.

    The US obsession

    • Trump’s interest in Greenland is almost an extension of his world view and US foreign policy in his administration.
    • Purchasing another country or territory is unusual, but the US government has done this twice before.
    • Erstwhile President Thomas Jefferson acquired Louisiana from the French in 1803 and the second time when President Andrew Johnson purchased Alaska from Russia in 1867.

    Back2Basics: Greenland

    • Greenland is the world’s largest island located between the Arctic and Atlantic oceans, east of the Canadian Arctic Archipelago.
    • It is an autonomous territory within the Kingdom of Denmark.
    • Though physiographically a part of the continent of North America, Greenland has been politically and culturally associated with Europe
    • The majority of its residents are Inuit, whose ancestors migrated from Alaska through Northern Canada, gradually settling across the island by the 13th century.

  • What is Operation Twist?

    The Reserve Bank of India (RBI) has announced simultaneous purchase and sale of government bonds in a bid to soften long-term yields under its Operation Twist.

    Operation Twist

    • Operation Twist is a move taken by U.S. Federal Reserve in 2011-12 to make long-term borrowing cheaper.
    • It first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
    • It is the name given to a Federal Reserve monetary policy operation that involves the purchase and sale of bonds.
    • The operation describes a form of monetary policy where the bank buys and sells short-term and long-term bonds depending on their objective.

    Its genesis

    • The name “Operation Twist” was given by the mainstream media due to the visual effect that the monetary policy action was expected to have on the shape of the yield curve.
    • If we visualize a linear upward sloping yield curve, this monetary action effectively “twists” the ends of the yield curve, hence, the name Operation Twist.
    • To put another way, the yield curve twists when short-term yields go up and long-term interest rates drop at the same time.

     Back2Basics: Open Market Operations

    • Open market operations are the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
    • The objective of OMO is to regulate the money supply in the economy.
    • When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
    • OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.

  • Mobile Virology Research and Diagnostics Laboratory (MVRDL)

    The Defence Research and Development Organisation (DRDO) has developed a mobile virology research lab.

    We can expect a  prelim question on BSL ratings as the term is widely appearing in news these days.

    About the MVRDL

    • The MVRDL is the combination of a bio-safety level (BSL)-3 lab and a BSL-2 lab and was set up in a record time of 15 days.
    • It can process 1,000-2,000 samples a day.
    • The mobile lab will be helpful in carrying out a diagnosis of COVID-19 and in virus-culturing for drug screening, convalescent plasma-derived therapy, comprehensive immune profiling of patients towards vaccine etc.

    What are Biosafety Level (BSL) Ratings?

    • A BSL is a set of biocontainment precautions required to isolate dangerous biological agents in an enclosed laboratory facility.
    • The levels of containment range from the lowest biosafety level 1 (BSL-1) to the highest at level 4 (BSL-4).
    • BSL-1 is suitable for work with well-characterized agents which do not cause disease in healthy humans.
    • BSL- 2 is suitable for work involving agents of the moderate potential hazard to personnel and the environment.
    • BSL-3 is appropriate for work involving microbes which can cause serious and potentially lethal disease via the inhalation route.
    • BSL-4 is the highest level of biosafety precautions and is appropriate for work with agents that could easily be aerosol-transmitted within the laboratory and cause severe to fatal disease in humans for which there are no available vaccines or treatments.

  • [pib] Super-luminous Supernova SN 2010kd

    Indian researchers have found that SN 2010kd, a super-luminous supernova stands out with the amount of mass as well as Nickel ejected during explosion.

    Space science-related terms these days are often focused on Gravitational waves, Black holes etc. But basic terminologies are very important and need to be taken care of. For example, a layman may hardly find any difference between Novae-Supernovae, Neutron star, Nebula etc. UPSC often tries to bust you with such basic differences.

    What are Supernovae?

    • Supernovae are kind of energetic explosions were the core of massive stars (a few times to that of the mass of our Sun) goes to a catastrophic phase of explosion liberating huge amounts of energy and mass.
    • These events are visible through very far away distances much beyond our own solar system.
    • Super-luminous supernovae are a special type of stellar explosions having energy output 10 or more times higher than that of standard supernovae.

    What is so distinct about SN 2010kd?

    • The mass ejection from SN 2010kd is metallic and is much more than seen in case of normal core-collapse supernovae.
    • The scientists found that SN 2010kd exploded with a larger velocity but decayed slower than other similar supernovae.
    • The observations show that parameters like rotation and metallicity play a crucial role in stellar explosions.

  • [pib] ‘NanoBlitz 3D’ tool to map properties of nano-materials

    Indian scientists have developed an advanced tool for mapping nano-mechanical properties of materials like multi-phase alloys, composites, and multi-layered coatings.

    Nanotechnology is a pathbreaking technology which can create many new materials and devices with a wide range of applications, such as in nanomedicine, nanoelectronics etc.  NanoBlitz 3D is another distinct development. We can expect a prelims question asking what the NanoBlitz 3D is , with confusing options like 3d printing tool etc.

     NanoBlitz 3D

    • Scientists from Advanced Research Centre for Powder Metallurgy and New Materials (ARCI) an autonomous institute under the Dept. of S&T have developed this tool.
    • It is an advanced tool for mapping nano-mechanical properties of materials like multi-phase alloys, composites, and multi-layered coatings.
    • The tool has been useful to yield excellent results on a wide range of material systems, including glass-fibre-reinforced polymer composites, dual-phase steels, softwood and shale.
    • An important aspect of this technique is its high-throughput, with just a few hours of testing required for generating more than 10,000 data points that can be processed using machine learning (ML) algorithms.

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