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  • How are inflation rate and interest rate linked?

    The Monetary Policy Committee of the RBI has decided to keep the benchmark interest rates of the economy unchanged.

    Try this PYQ:

    Q.Which one of the following is not the most likely measures the Government/RBI takes to stop the slide of Indian rupee? (CSP 2019)

    (a) Curbing imports of non-essential goods and promoting exports

    (b) Encouraging Indian borrowers to issue rupee-denominated Masala Bonds

    (c) Easing conditions relating to external commercial borrowing

    (d) Following an expansionary monetary policy

    What is the link between growth, inflation and interest rates?

    • In a fast-growing economy, incomes go up quickly and more and more people have the money to buy the existing bunch of goods.
    • As more and more money chases the existing set of goods, prices of such goods rise.
    • In other words, inflation (which is nothing but the rate of increase in prices) spikes.

    How interest rates dominate?

    • To contain inflation, a country’s central bank typically increases the interest rates in the economy.
    • By doing so, it incentivizes people to spend less and save more because saving becomes more profitable as interest rates go up.
    • As more and more people choose to save, money is sucked out of the market and inflation rate moderates.

    What happens when growth rate decelerates or contracts?

    • When growth contracts or when its growth rate decelerates, people’s incomes also get hit.
    • As a result, less and less money is chasing the same quantity of goods.
    • These results in either the inflation rate decline.
    • In such situations, a central bank cuts down the interest rates so as to incentivise spending and by that route boost economic activity in the economy.
    • Lower interest rates imply that it is less profitable to keep one’s money in the bank or any similar saving instrument.
    • As a result, more and more money comes into the market, thus boosting growth and inflation.

    Why has RBI not raised interest rates this quarter?

    • RBI is facing an odd situation at present: GDP is contracting even as inflation is rising.
    • This is happening because the pandemic has reduced demand, on the one hand, and disrupted supply on the other.
    • As a result, both things are happening — falling growth and rising inflation.
    • It is true that for containing inflation, RBI should raise interest rates.
    • And under normal circumstances, it would have done just that. But raising interest rates at this stage would be catastrophic for India’s GDP growth.

    Risks of altering interest rates

    • If the RBI cuts the interest rate, it may be fuelling retail inflation further. It must be remembered that inflation hits the poor the hardest.
    • So, the RBI has chosen to do what many expected it to do: stay put and waits for another couple of months to figure out how growth and inflation are shaping up.

    Back2Basics: Monetary Policy Committee (MPC)

    • The RBI Act, 1934 (RBI Act) was amended by the Finance Act, 2016,  to provide for a statutory and institutionalized framework for an MPC, for maintaining price stability, while keeping in mind the objective of growth.
    • The MPC is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
    • The meetings of the MPC are held at least 4 times a year and it publishes its decisions after each such meeting.
    • As per the provisions of the RBI Act, out of the six members of the committee, three members are from the RBI and the other three Members of MPC are appointed by the Central Government.
    • Governor of the RBI is ex officio Chairman of the committee.

    Economics | Monetary Policy Explained with Examples

  • SN5 Starship by SpaceX

    SpaceX has successfully test-launched its “Mars ship”, a stainless steel test vehicle called SN5, and which is a part of the Starship spacecraft.

    Elon Musk’s aerospace company has been putting continuous wins on the board ever since it became the first privately funded group to put a payload in Earth orbit.

    What is Starship?

    • Designed by SpaceX, Starship is a spacecraft and super-heavy booster rocket meant to act as a reusable transportation system for crew and cargo to the Earth’s orbit, Moon and Mars.
    • SpaceX has described Starship as “the world’s most powerful launch vehicle” with an ability to carry over 100 metric tonnes to the Earth’s orbit.
    • Starship has been under development since 2012 and is a part of Space X’s central mission to make interplanetary travel accessible and affordable and to become the first private company to do so.

    So what all can Starship do?

    • SpaceX is planning its first cargo mission to the red planet by 2022 and by 2024, the company wants to fly four ships including two cargo and two crewed ones to Mars.
    • Once functional, the Starship spacecraft will enter Mars’ atmosphere at a speed of 7.5 km per second and will be designed to withstand multiple entries.
    • Starship is also expected to help carry large amounts of cargo to the Moon, for human spaceflight development and research.
    • Beyond the Moon, the spacecraft is being designed for carrying crew and cargo for interplanetary missions as well.

    A quest for reusability

    • Therefore, the company is working on building a fleet of reusable launch vehicles, capable of carrying humans to Mars and other destinations in the solar system.
    • Reusability is at the heart of making interplanetary travel accessible.

  • Appointment of new Lt. Governor of the UT of J&K

    A veteran politician has been appointed as Lieutenant Governor of the Union Territory of Jammu and Kashmir.

    Try this PYQ:

    Q.Which one of the following suggested that the Governor should be an eminent person from outside the State and should be a detached figure without intense political links or should not have taken part in politics in the recent past? (CSP 2019)

    (a) First Administrative Reforms Commission (1966)

    (b) Rajamannar Committee (1969)

    (c) Sarkaria Commission (1983)

    (d) National Commission to Review the Working of the Constitution (2000)

    Office of the Lt. Governor

    • A Lt. Governor is the constitutional head of the union territories in India.
    • She/he is appointed by the President of India for a term of five years and holds office at the President’s pleasure.
    • Since the union territories of Delhi, J&K and Puducherry have a measure of self-government with an elected legislature and council of ministers, the role of the lieutenant governor there is mostly a ceremonial one, akin to that of a state’s governor.
    • In Andaman and Nicobar Islands and Ladakh however, the lieutenant governor holds more power, being both the head of state and head of government.
    • The other three UTs—Chandigarh; Dadra and Nagar Haveli and Daman and Diu; and Lakshadweep—are governed by an administrator.

    Some related facts

    • Unlike the lieutenant governors of other territories, they are usually drawn from the IAS or IPS.
    • Lieutenant governors do not hold the same rank as a governor of a state in the list of precedence.
    • Since 1985 the Governor of Punjab has also been the ex-officio Administrator of Chandigarh.

  • [pib] Sahakar Cooptube NCDC Channel

    Union Minister of Agriculture & Farmers’ Welfare has launched the Sahakar Cooptube NCDC Channel, a new initiative by National Cooperative Development Corporation (NCDC).

    Note: Article 19 states that the Right to form co-operative societies is a Fundamental Right and DPSP Article 43-B provides for the promotion of co-operative societies.

    Sahakar Cooptube

    • The Sahakar Cooptube Channel aims to facilitate the involvement of the youth in the cooperative movement.
    • Cooperatives lend strength to farmers to minimize risks in agriculture and allied sectors and act as a shield against exploitation.
    • The channel will give a boost to Atmanirbhar Bharat Abhiyan under which the government has announced a series of transformative measures and sector-specific financial packages to help agriculture.
    • The initiatives are steps towards One Nation One Market with the objective for India to become a food factory of the world.

    Back2Basics: NCDC

    • The NCDC is a statutory Corporation set up under an Act of Parliament on 13 March 1963.
    • The objectives of NCDC are:

    planning and promoting programmes for production, processing, marketing, storage, export and import of agricultural produce, foodstuffs, industrial goods, livestock and certain other notified commodities and services on cooperative principles and for matters concerned therewith or incidental thereto

    • NCDC Act has been further amended which will broad-base the area of operation of the Corporation to assist different types of cooperatives and to expand its financial base.
    • NCDC will now be able to finance projects in the rural industrial cooperative sectors and for certain notified services in rural areas like water conservation, irrigation and micro-irrigation, agri-insurance, agro-credit, rural sanitation, animal health, etc.

  • 7th August 2020| Daily Answer Writing Enhancement

    Important Announcement:  Topics to be covered on 10th August-

    GS-1 Role of women and women’s organization

    GS-4 Case Studies

    Question 1) 

    Comment upon the need for closing the gender gap in science in the country. 10 marks

     

    Question 2)

    Examine the factors that are responsible for inadequate progress in the research and development(R&D) in India. Also elaborate the importance of post-academic research in advancement of the country in research. 10 marks

     

    Question 3)

    The financial disruption caused by the pandemic has been leading to several concessions from the banks. But what we need is patiently balancing financial inclusion and stability. In light of this examine the balance between lenders and borrowers? Suggest the strategy to do so. 10 marks

    Question 4)  

    “Non-cooperation with evil is as much a duty as it is to cooperate with the good”, explain in the context of civil services. 10 marks

     

     

    Reviews will be provided in a week. (In the order of submission- First come first serve basis). In case the answer is submitted late the review period may get extended to two weeks.

    *In case your answer is not reviewed in a week, reply to your answer saying *NOT CHECKED*. If Parth Sir’s tag is available then tag him.

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  • 06th August 2020 | Prelims Daily with Previous Year Questions

    [WpProQuiz 497]

    [WpProQuiz_toplist 496]

  • Drug pricing and dependence on China

    Whether or not the drug pricing system in India resulted in the growing dependence on China for APIs is analysed in this article. 

    Incentives for domestic production of APIs

    • The department of pharmaceuticals (DoP) has recently notified the Production-Linked Incentive (PLI) scheme.
    • The scheme aims to encourage domestic production of 41 active pharmaceutical ingredients (APIs), key starting materials (KSMs) and drug intermediaries (DIs).
    • A Drug Security Committee constituted by the DoP had identified 53 APIs with high dependence on China.

    Did drug price control policy increase dependence on China?

    • India was self-reliant on APIs until the mid-1990s.
    • Liberalisation in import restrictions led to a gradual influx of APIs from China.
    • India had a more stringent price control policy before the 1990s.
    • If price control system were the culprit, India would not have been self-sufficient in APIs until the mid-1990s.
    • A cost-based price control system that existed until 2013 regulated the prices of both APIs and formulations.
    • The approach to price control shifted from a cost-based to a market-based one since 2013.
    • The new price control policy does not regulate the price of APIs.
    • New price control policy regulates the prices of formulations of those APIs, which figure in the National List of Essential Medicines (NLEM).
    • There are many APIs which do not fall under DPCO but are still imported in a significant way from China.

    Understanding the growing dependence on China from the past perspective

    • Even though India now has a less stringent drug price control policy, the dependence on Chinese imports has been growing.
    • The share of China in India’s total import of APIs has increased from 61% in 2011 to 69% in 2019.
    • The experience in India was that firms would tend to rely on imported APIs if they have an option.
    • The Hathi Committee (1975), which had looked into why Indian firms were not engaging in the production of APIs, found that the capital invested to turnover ratio of APIs was much lower as compared to formulations.
    • This ratio was 1:1 for APIs at best and 1:2.6 for formulations on average, and in some cases, as high as 1:7.2.
    • Subsequently, various measures were adopted.
    • The ‘ratio parameter’ mandatorily required the producers of formulations to produce a certain quantity of APIs.
    • It was the government interventions to overcome the market failure that resulted in India attaining self-sufficiency in APIs.

    Consider the question “What are the APIs? Examine the implications of India’s dependence on imports for API and suggest the measures to reduce such dependence.”

    Conclusion

    An enquiry into the causes of dependence on China needs to go much beyond price control policy and look into whether the state continued to play a proactive role during the post-1991 period to maintain an ecosystem to enhance the competence of Indian API industry.

    Source-

    https://www.financialexpress.com/opinion/drug-pricing-is-certainly-not-the-issue-in-growing-dependence-on-china/2046086/

  • Issues with the nuclear deterrence

    On 6 August 1945 world witnessed the destructive potential of the nuclear weapons. Today’s nuclear weapons are several times more destructive than the one used there. This calls for the close scrutiny of the idea of the nuclear deterrence. This article dwells over the same issue.

    Context

    • While Hiroshima and Nagasaki have been the last two cities to be destroyed by nuclear weapons, we cannot be sure that they will be the last.
    • Since 1945, several countries have armed themselves with nuclear weapons that have much more destructive power in comparison to those that destroyed Hiroshima and Nagasaki.

    Vulnerability

    • Over 1,26,000 nuclear weapons have been built since the beginning of the atomic age.
    • There is no realistic way to protect ourselves against nuclear weapons.
    • The invention of ballistic missiles has made it impossible to intercept nuclear weapons once they are launched.
    • Neither fallout shelters nor ballistic missile defence systems have succeeded in negating this vulnerability.
    • Nuclear weapon states are targets of other nuclear-weapon states, but non-nuclear-weapon states are vulnerable as well.

    Idea of nuclear deterrence

    The idea of nuclear deterrence consists of following two proposition.

    • 1) That nuclear weapons are so destructive that no country would use them.
    • 2) Such use would invite retaliation in kind, and no political leader would be willing to risk the possible death of millions of their citizens.

    Issues with the idea of deterrence

    • 1) It is claimed that nuclear weapons do not just protect countries against use of nuclear weapons by others, but even prevent war and promote stability.
    • These claims do not hold up to evidence.
    • 2) The apparent efficacy of deterrence in some cases may have been due to the more credible prospect of retaliation with conventional weapons.
    • 3) Implicitly, however, all nuclear-weapon states have admitted to the possibility that deterrence could fail.
    • they have made plans for using nuclear weapons, in effect, preparing to fight nuclear war.
    • 4) The desire to believe in the perfect controllability and safety of nuclear weapons creates overconfidence, which is dangerous.
    • Overconfidence is more likely to lead to accidents and possibly to the use of nuclear weapons.

    So, what prevented the nuclear war if not deterrence?

    • While a comprehensive answer to this question will necessarily involve diverse and contingent factors, one essential element in key episodes is just plain luck.

    Consider the question “What are the problems involved in the idea of nuclear deterrence. Also, examine the factors responsible for the failure of nuclear disarmament.”

    Conclusion

    Humanity has luckily survived 75 years without experiencing nuclear war, can one expect luck to last indefinitely?

    Original articles:

    https://www.thehindu.com/opinion/op-ed/taking-nuclear-vulnerabilities-seriously/article32279584.ece

  • How to pay for the stimulus package

    The article addresses the issue of apprehensions over money financing. It also compares the option of borrowing from international institutions.

    Issues with public spending

    • Greater public spending will increase the fiscal deficit and this expansion has to be financed.
    • Theoretically, it can be financed by higher taxes.
    • But when the economy is in a recession, this option cannot be explored even though the balanced-budget multiplier is one.
    • When the multiplier is one, output expands by exactly the same amount as the increase in government spending.

    So, what are the options?

    There are two options

    1) Issuing debt to the public (Debt financing)

    2) Borrowing from the RBI (Money financing)

    Borrowing from World Bank and IMF?

    This borrowing has 4 issues with it-

    • 1) This borrowing will have to be paid back in hard currency.
    • This would involve India having to earn hard currency by stepping up exports.
    • If a stimulus of approximately 10% of the GDP is envisaged, with exports at 25% of the GDP, it would imply stepping up exports by close to 50%.
    • This would be a herculean task under present circumstances.
    • 2) There is the issue of conditionalities.
    •  It is not obvious what conditionalities will come along with the loan.
    • 3) The loan is bound to take some time to be negotiated, taxing the energies of a government that ought to be engaged in the day to day battle with COVID-19.
    • 4) The external debt is truly national which, arguably, government bonds held by the country’s private sector are not.

    Issues with money financing

    • The standard economic argument against money financing is that it is inflationary.
    • However, whether a fiscal expansion is inflationary or not is related more to the state of the economy than the medium of its financing.
    • When resources are unemployed, output may be expected to expand without inflation.

    Consider the question “Examine the issues with the money financing of the fiscal deficit.”

    Conclusion

    There is no reasoned case for denying ourselves the option of money financing to take us back to pre-COVID-19 levels of output and employment.

  • 6th August 2020| Daily Answer Writing Enhancement

    Important Announcement:  Topics to be covered on 7th August-

    GS-1 Indian Society and Diversity of India

    GS-4 Utilization of public funds, challenges of corruption

    Question 1) 

    How does India Socialism contrast with Socialism embraced by the Communist countries? Discuss the idea of Democratic socialism. 10 marks

    Question 2)

    Elucidate the India Constitution’s approach towards secularism, and how it is different from the idea of secularism in the West. 10 marks

     

    Question 3)

    Despite its huge potential, nuclear energy has not been adopted as a solution to the energy problem. Examine the advantages and issues with the adoption of nuclear energy in India. 10 marks

    Question 4)  

    What do you understand by “lateral entry”? Elucidate upon the merits and challenges associated with it.10 marks

     

     

    Reviews will be provided in a week. (In the order of submission- First come first serve basis). In case the answer is submitted late the review period may get extended to two weeks.

    *In case your answer is not reviewed in a week, reply to your answer saying *NOT CHECKED*. If Parth Sir’s tag is available then tag him.

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