💥Mains Ready By December. Smash Mains & Smash PYQ Admissions Open
Talk to Mentor

Civilsdaily

Login

Search results for: “”

  • 25 May 2020 | Prelims Daily with Previous Year Questions

    [WpProQuiz 444]

  • [Burning Issue] India-China Skirmish in Ladakh

    “Hindi Chini bhai bhai” – The tale of these brothers is filled with so much action and drama that it can give Bollywood writers a run for money. See, border issues is never easy to resolve, never has been and never will be. Pangong Tso or Doklam – All point to Troubled LAC and an aggressive neighbour, which is a tough combination for India. Let’s dive into this article to learn about the border skirmishes.

    Current Incidents

    On May 5, around 250 Indian and Chinese army personnel clashed with iron rods, sticks, and even resorted to stone-pelting in the Pangong Tso lake area of Ladakh, in which soldiers on both sides sustained injuries. In a separate incident, nearly 150 Indian and Chinese military personnel were engaged in a face-off near Naku La Pass in the Sikkim sector on May 9. At least 10 soldiers from both sides sustained injuries.

    After Chinese accusation of Indian Army’s border transgressions and strong Indian pushback, Ladakh has become a new festering point for the Sino-Indian relations.

    A deeper look into reasons of present tensions

    • The stand-off in Galwan valley, according to reports, was triggered by China moving in troops and equipment to stop construction activity by India.
    • Delhi claims that it was well within India’s side of the LAC. The LAC was thought to be settled in this area which has not seen many incidents in the past, but China now appears to think otherwise.
    • The northern bank of Pangong lake has, however, been a point of contention where there are differing perceptions of the LAC.
    • The Sikkim incident is unexpected as the contours of the LAC are broadly agreed to in this sector.
    • Unofficial reason: The broader context for the tensions appears to be a changing dynamic along the LAC, as India plans to catch-up in improving infrastructure there.

    Some old bruises in border relations

    • India and China do not have a well-defined border, and troop face-offs are common along its 3,500 km Line of Actual Control (LAC), though not a bullet has been fired for four decades.
    • After the 1962 Sino-Indian war, one of the longest standoffs between the Indian and Chinese armies happened at Sumdorongchu (near the Bhutan tri-junction) in 1986, when the troops had an eye-to-eye stalemate.
    • In 2017, at Doklam, near the same Bhutan tri-junction, the troops of India and China were engaged in a 73-day stand-off, triggering fears of a war between the two nuclear-armed neighbours.

    The Gandhi-Deng bargain

      • A year after a military skirmish between India and China in the Sumdorong Chu Valley in Arunachal Pradesh, then PM Rajiv Gandhi visited his counterpart Deng Xiaoping in Beijing to mend ties.
      • The two leaders agreed to establish a forward-looking relationship but border dispute were temporarily set aside.
      • The reason for this pragmatism was rooted in economic and strategic factors: Both China and India needed a stable external environment to promote domestic economic development.
      • China was already a decade into the dramatic economic reforms that Deng had initiated, while Gandhi’s India had also embarked on a similar path.
      • The Gandhi-Deng bargain paved the way for a number of border management agreements (including the 1993 and 1996 agreements related to confidence-building measures.

    Then, Why do face-offs occur so frequently?

    • Basic: Face-off and stand-off situations occur along the LAC in areas where India and China have overlapping claim lines. The LAC has never been demarcated.
    • The boundary in the Sikkim sector is broadly agreed but has not been delineated.
    • Face-offs occur when patrols encounter each other in the contested zones between overlapping claim lines.
    • Protocols agreed to in 2005 and 2013 detail rules of engagement to prevent such incidents, but have not always been adhered to.

    What are the various sectors on the India-China border?

    • The border can be broadly divided into three sectors—Western, Middle and Eastern.
    • The Western sector, which includes Ladakh, is governed by the Johnson Line, making Aksai Chin (controlled by China) in Jammu and Kashmir contested territory for India.
    • The Middle sector, consisting of Uttarakhand and Himachal, is relatively tranquil. Even map exchanges between the two countries have taken place, based on a broad understanding of borders.
    • In the Eastern Sector (where Indian controls territory based on the MacMahon Line), China claims Arunachal Pradesh as part of southern Tibet, while India contests it.
    • The MacMahon Line was drawn at the tripartite 1913-14 Simla Convention attended by British India, Tibet and China; the problem: Tibet is involved and China is not a signatory to this pact.

    LAC: Why no solution yet?

    • It’s not like nothing has been done!
    • Maps have been exchanged in the Middle Sector, but the exercise fell through in the Western Sector where divergence is the greatest.
    • China has rejected this exercise, viewing it as adding another complication to the on-going boundary negotiations.
    • India’s argument is rather than agree on one LAC, the exercise could help both sides understand the claims of the other, paving the way to regulate activities in contested areas until a final settlement of the boundary dispute.

    Also, Chinese transgressions are frequent: Dragon’s aggressiveness

    • A higher number indicates that the Chinese soldiers are coming to the Indian side more often, and their movements are being observed and recorded by the Indian soldiers.
    • This can be seen as an indicator of increased Chinese assertiveness.
    • Since 73-day Doklam standoff on Sikkim-Bhutan border in 2017 there had been no major standoff.
    • PM Modi and President Xi met in Wuhan, following the Doklam crisis, and passed some instructions.

    Wuhan Coziness turned sour

    • Modi and Xi had met for their first informal summit at Wuhan in April 2018, where the two leaders had issued strategic guidance to their respective militaries.
    • These guidelines aimed to strengthen communication in order to build trust and mutual understanding and enhance predictability and effectiveness in the management of border affairs.
    • They had also directed their militaries to earnestly implement various confidence-building measures agreed upon between the two sides, including the principle of mutual and equal security.
    • But the latest border issues show hollowness of such talks.

    International forces in this bilateral ties

    • In addition to the border dispute, some of the core issues in the Sino-Indian rivalry include Tibet (the presence of the Dalai Lama, the Tibetan government-in-exile), the burgeoning China-Pakistan partnership, and the two countries’ overlapping spheres of influence in Asia.
    • These issues have become more salient in the context of the two countries’ simultaneous but asymmetric rising power.
    • In addition to accruing power domestically, India is also building strong strategic partnerships with China’s other rivals, especially the US and Japan.
    • Meanwhile, a rising China has stabilized its northern borders with Russia and is working to undermine the US primacy in the East Asian maritime (particularly the South China Sea).
    • This basically leaves only one border issue with a rival unresolved: namely, the Sino-Indian border.
    • It is hardly surprising that it is exerting periodic pressure on India along this front—a trend that is only likely to escalate.

    India should not fear. Why?

    To be sure, China’s regional aggression is COVID-proof. From Japan to Malaysia, Vietnam, Philippines and Taiwan, everyone has had to push back against Beijing’s marauding missions.

    1) India can retaliate

    • India, while still under-resourced, is no longer a pushover, having emerged stronger and wiser from the Depsang incident of 2013, when Chinese troops pitched tents to establish their control over the area.
    • India and China are both nuclear-armed countries with strong militaries.
    • India has been building a road along the Galwan River to Daulat Beg Oldie that would improve India’s access to the Karakoram Highway, as well as 61 border roads with a total length of 3,346 km across the Himalayan frontier.
    • The Indian Air Force’s capabilities have improved as well.

    2) China is wooing its people

    • Presently, China is in the midst of its annual “2 Sessions” of the CPCC (Chinese People’s Political Consultative Process) and NPC (National People’s Congress), where the ruling sentiment is how China is being bold and tough.
    • Hong Kong was an example of that sentiment. It is likely the India moves may be related. No softening or reasonableness can be expected from China until the NPC ends.
    • China is, as usual, changing the ground realities to influence a future boundary agreement.

    The ground realities before we think settlement

    • India sees China as occupying 38,000 sq km in Aksai Chin. In the east, China claims as much as 90,000 sq km, extending all across Arunachal Pradesh.
    • A swap was hinted at by China in 1960 and in the early 1980s, which would have essentially formalized the status quo.
    • Both sides have now ruled out the status quo as a settlement, agreeing to meaningful and mutual adjustments.
    • At the same time, the most realistic solution will involve only minor adjustments along the LAC, considering neither side will be willing to part with territory already held.

    Way forward

    • India and China should grasp the current situation as an opportunity to revive the stalled process of clarifying the LAC.
    • Clarifying the LAC may even provide a fresh impetus to the stalled boundary talks between the Special Representatives.
    • Beyond the posturing, both sides know a final settlement will ultimately have to use the LAC as a basis, with only minor adjustments. Only a settlement will end the shadow boxing on the LAC.
    • With both countries in the midst of an unprecedented global pandemic, the time to push for a settlement to a distracting, protracted dispute is now.

    Conclusion

    • The issue is basically the fundamental difference in how both sides view the boundary question.
    • India insists that its relations with China won’t improve until the border dispute is resolved.
    • But China differs here.
    • In some sense, Beijing appears to view an unsettled border as holding some leverage with India, one of the many pressure points it could use to keep India off-guard.
    • But for now, India should resist the Chinese design which could have disastrous consequences for India’s defence and strategic interests. Lastly, Diplomatic channels is always a better option than skirmishes on the borders.

     

     

  • India Nepal Border issue: Colonial legacy or the Dragon’s Power Play

    India – Nepal relations are having its “see saw swing” moment. At one end, lies the 1950 treaty of peace and friendship, close people to people relations and India’s aid during 2015 earthquake. But on the other end lies the economic blockade and Madhesi protest. Another entry to the later side is the Border issue.

    • The inauguration of road from Dharchula to Lipu Lekh was done with great fanfare, at least on the Indian side.
    • The metalled road is a BIG relief for pilgrims and traders on the traditional route for the Kailash-Mansarovar yatra, who otherwise were stuck for days in the arduous walk.

    So, where is the issue?

    The issue lies in Nepal’s charge claiming that the stretch passes though Nepalese territory. This was displayed by some politicized moves like-

    • Intemperate remarks by Nepal’s PM in the Nepalese Parliament.
    • Manner (airdropped to the location by helicopters) and timing(why now?) of the Deployment of armed police at Chharung, close to Kalapani, in its Sudoor Paschim.
    • Finally, Nepalese government has raised the stakes further by authorizing a new map extending its territory across an area sensitive for India’s defence.

    The very beginning: The Sugauli Treaty

    • Before the 1816 Treaty of Sugauli, the Nepalese kingdom stretched from the Sutlej river in the west to the Teesta river in the East.
    • Nepal lost the Anglo-Nepalese War and with the signing of Sugauli Treaty was brought down to its present territories.

    The Sugauli Treaty stated that “[t]he Rajah of Nipal [Nepal] hereby cedes to the Honourable [the] East India Company in perpetuity all the under-mentioned territories”, including “the whole of the lowlands between the Rivers Kali and Rapti.” It elaborated further that “[t]he Rajah of Nipal [Nepal] renounces for himself, his heirs, and successors, all claim to or connection with the countries lying to the west of the River Kali and engages never to have any concern with those countries or the inhabitants there of.”

    • The present controversy arose with Nepalese contest that the tributary that joins the Mahakali river at Kalapani is not the Kali river. Nepal now contends that the Kali river lies further west to the Lipu Lekh pass.
    • But here’s the catch!
    • The British used the Lipu Lekh pass for trade with Tibet and China.
    • Even Survey of India maps since the 1870s shows the area of Lipu Lekh down to Kalapani as part of British India.
    • Even though the areas of Nepalgunj and Kapilvastu were restituted to Nepal as a reward for the military help rendered by Jung Bahadur Rana in quelling the 1857 uprising. The British did not return any part of Garhwal or Kumaon, including the Kalapani area, to Nepal.
    • Infact, both the Rana rulers of Nepal and the Nepalese Kings accepted the boundary and did not raise any objection with the government of India after India’s Independence.
    • True that India did not existed in 1816 when the Treaty of Sugauli was concluded.
    • But many borders of the world and India are colonial legacy, which we have to work out.

    The path to peace

    • The Nepal-India Technical Level Joint Boundary Working Group was set up in 1981 to resolve boundary issues, to demarcate the international border, and to manage boundary pillars.
    • By 2007, the group completed the preparation of 182 strip maps, signed by the surveyors of the two sides, covering almost 98% of the boundary, all except the two disputed areas of Kalapani and Susta.
    • Not able to solve the border issues in these disputed areas has left us hanging.

    India has successfully resolved far more intractable border issues with Bangladesh.

    • The land boundary settlement required an exchange of territories, including the transfer of population, and a constitutional amendment to give effect to the 1974 India-Bangladesh Land Boundary Agreement.
    • The maritime boundary issue with Bangladesh involved going to the Hague-based Permanent Court of Arbitration. Despite knowing well that if the Court applied the principle of equity, India would lose up to four-fifths of the disputed area. India lost but the government of India accepted the ruling.
    • Compared to what was accomplished between India and Bangladesh, the India-Nepal border issues appear more easily solvable.

    Respecting out Ties

    • India Nepal ties are unique.
    • Historical link between the nations.
    • Spirit of maintaining India’s close and friendly bilateral relations with Nepal.
    • The people-to-people relationship between India and Nepal is unmatched.

    What lies ahead?

    • This matter can be best handled bilaterally, through quiet diplomacy.
    • The Official Spokesperson of India’s Ministry of External Affairs, Anurag Srivastava, has said recently that India and Nepal have an established mechanism to deal with all boundary matters.
    • He has affirmed that India is committed to resolving outstanding boundary issues through diplomatic dialogue.
    • The remaining issues concerning the boundary i.e Kalapani and Susta are not difficult to resolve unless they are caught up in domestic or international concerns.
    • The next steps should be approval of the strip maps by the respective governments (that of the Nepalese Government is still awaited), the resolution of the differences of opinion over Kalapani and Susta, and speeding up the erection of damaged or missing border pillars.

    Consider the question “India-Nepal ties are unique. Both countries have many things in common. Yet, recent developments over the border dispute threaten to snap these ties. Examine the border issue between the two countries. What is India’s stand on the issue? Suggest ways to resolve the issue.”

    Conclusion

    The more the trouble festers, those who stand to gain by deteriorating India-Nepal relations will benefit. There is need for the two countries to lower the temperature and defuse the issue. They must invest time and effort to find a solution. Raking up public controversy can only be counterproductive to the relationship.

  • Digital currency plan made in China

    Central banks all over the world have had mixed feelings towards cryptocurrencies. Some of them have resorted to banning them altogether. And yet, cryptocurrencies exist and have been flourishing. But China seems to be bent on taking the “road less travelled”. This article explains the various aspects underlying the China’s move. These somehow apply to all the central banks, including the RBI. Read more to know more about such aspects.

    Digital currency by China’s central bank

    • In December 2019, a pilot programme was launched in Beijing to intensively advance the trial work of fintech innovation regulation.
    • This pilot has now been expanded to include several other cities.
    • This expansion of the pilot marks the initiation of China’s central bank digital currency (CBDC).
    • Christened Digital Currency Electronic Payment (DCEP), available via a mobile wallet app.
    • It is pegged 1:1 with fiat currency, and designed to replace M0 which comprises currency issued by the PBoC less the amount held by banking institutions.
    • This is the first such serious initiative in the whole world.

    Why central banks are sceptical of cryptocurrencies?

    • Historically, monetary authorities everywhere have been sceptical of cryptocurrencies.
    • The reasons for scepticism includes following problems-
    • 1) Wild fluctuations in the value of cryptocurrencies.
    • 2) The implied challenge to the monopoly of central banks in issuing fiat currencies.
    • 3) The looming possibility of software bugs.
    • 4) The tainted shadow of the dark web.

    But some central banks have been planning to issue fiat digital currency

    • Authorities were far more intrigued by CBDCs.
    • In fact, the Basel-based Bank for International Settlement (BIS) has been conducting surveys on this issue for some time.
    • The recent survey of 2019 “Proceeding with Caution – a Survey on Central Bank Digital Currency” revealed that while in general, central banks have been proceeding cautiously towards introducing central banks digital currencies.
    • Some have been planning to issue a fiat digital currency in the short to medium term.
    • In particular, the survey revealed that nearly 25% of central banks have the required authority to issue a CBDC, while a third do not, and 40% remain unsure.

    If you cannot beat them, join them

    • So, what factors led China to release the cryptocurrency?
    • Chinese investors were always attracted to cryptocurrencies.
    • With the bearish turn in the Chinese stock market in 2015-16, bitcoins became increasingly popular as an alternative asset class in China.
    • As in media reports, in the recent past, China has emerged as the capital of the crypto ecosystem, accounting for nearly 90% of trading volumes and hosting two-thirds of bitcoin mining operations.
    • The PBoC tried hard to curtail this exuberance but achieved limited success.
    • The recent move to introduce the CBDC in China is a logical outcome of the efforts to curb and tackle its runaway cryptomarket practices.
    • Or, the philosophy of the PBoC could simply have been, if you cannot beat them, join them.

    Advantages and concerns

    • At a practical level, the benefits of CBDC are manifold.
    • First, paper money comes with high handling charges and eats up 1% to 2% of GDP.
    • Second, by acting as a powerful antidote for tax evasion, money laundering and terror financing, CBDCs can materially boost tax revenues while also improving financial compliance and national security.
    • Third, as a tool of financial inclusion, particularly in emergencies, direct benefit transfers can be instantly delivered by state authorities deep into rural areas, directly into the mobile wallets of citizens who need them.
    •  Fourth, CBDCs can provide central banks with an uncluttered view and powerful insights into purchasing patterns at the citizen scale.
    • In the long run, it is believed that CBDCs will make cross-border payments fast and frictionless.

    Concerns

    • All these salutary benefits come packaged with a deep and abiding concern about the relentless rise of a surveillance state and the concomitant erosion in citizen privacy and anonymity.
    • If face-recognition technology enables states to spy on the physical movement of citizens, will CBDCs be used to spy on every movement of their money?

    But how Central bank’s digital currency is different from private cryptocurrencies such as Bitcoin?

    • An earlier research paper by PBoC Deputy Governor favoured a two-tier CBDC model.
    • In this model instead of directly interacting with the public, the central bank would involve financial intermediaries such as commercial banks.
    • In tier 1, the central bank would interface with financial intermediaries.
    • In tier 2, the financial intermediaries would interface with the general public.
    • Advantage? Such a model is accretive in that it preserves the power of existing financial systems and extends their influence further.
    • It is believed that the DCEP uses a DLT architecture (with central controls) which preserves the primacy of the monetary authority, unlike private cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) that are truly decentralised.

    Silver bullet to slay three dragons

    • What may China be signalling with the launch of DCEP?
    • First, on the world economic stage, it may want DCEP to challenge the hegemony of the U.S. dollar as the default global reserve currency.
    • Second, in its war with American BigTech, it may want to showcase DCEP as its weapon of choice to counter FB or Facebook’s Libra, which is planning to offer a common cryptocurrency to 2 billion-plus FB users across the world.
    • Third, and still in the realm of speculation, it may wish to use the DCEP to clip the wings of AliPay and WeChatPay, gigantic fintech duopolies that control 90% of the China’s domestic digital payments, and whose ambitions may one day pose a threat to the aura and authority of the central bank.

    Consider the question “Most of the central banks have been sceptical in their attitude toward the cryptocurrencies. Yet, they persisted. Next came the Supreme Court decision lifting ban on them. In light of this, examine the advantages and concerns that come with the cryptocurrencies.”

    Conclusion

    From gold to silver to paper to digital, the march of currencies goes on. China has rolled the dice on central bank digital currencies, challenging other nations to follow. Welcome to the future of money.

  • 23 May 2020 | Prelims Daily with Previous Year Questions

    [WpProQuiz 443]

  • Neglect of demand side

    What should the government focus on first: increasing demand or streamlining the supply side. This question is at the heart of the debate that has been going on after the government announced the stimulus package. This article argues on two lines- Inadequate size of the package and the neglect of the demand side in the package.

    Why stakeholders are not happy with the package?

    • Agriculture sector: There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured.
    •  Marketing reforms and infrastructure creation are distant promises.
    • MSME sector:  The backbone of the economy that provides 25 per cent of employment, 32 per cent of the GDP and 45 per cent of exports, is unhappy despite the Rs 3 trillion line of credit for loans without collateral.
    • In their experience, lenders are not always supportive in extending loans.
    • While buyers-central and state governments, public sector firms and the private sector- owe them as much as Rs 5 trillion.
    • What is more, most MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period.
    • Corporate sector: There is nothing for the corporate sector in manufacturing or services.
    • The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
    • Ironically, there is little for public health, already in a dilapidated state.
    • Even stock markets, characterised by irrational exuberance in the past month, have dropped.

    Government expenditure in the fiscal stimulus

    • The fiscal stimulus, which can be defined as government expenditure that could stimulate demand, is difficult to separate.
    • This is because the package is neither clear nor transparent about the cost to be borne by the government in each component.
    • Even so, there are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 per cent to 1.3 per cent of the GDP.
    • The effective fiscal stimulus, in terms of extra resources provided by the government, is Rs 1.76 trillion, or 0.8 per cent of the GDP.
    • Its contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.

    Focus of the package: supply side

    • It is clear that the design of this relief package seeks to focus on the supply side.
    • Package emphasises on providing liquidity through lines of credit, where the RBI is providing as much as Rs 8 trillion.
    • Focus is not on the demand side by stepping up government expenditure.
    • This is done with the aim of minimising the cost to the government.
    • The arithmetic is obviously imaginative — as much as Rs 10 trillion of the relief package will have to be financed by sources other than the Centre and the RBI.

    So, let’s understand why focus on supply side is flawed strategy

    • This stress on the supply-side, while neglecting the demand-side, reveals a flawed understanding of economies in crisis.
    • Speed of adjustment: Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time.
    • Whereas the speed of adjustment on the demand-side is fast as incomes spent raise consumption demand without any time-lag.
    • At present, if there is little or no increase in demand, supply responses will be slower than usual because producers would not wish to pile up inventories of unsold goods.
    • In terms of the chicken-and-egg parable, demand must be revived first to kickstart the economy.
    • For this reason, the fiscal stimulus should have been much larger.

    Excessive concerns over fiscal deficit

    • The decision-makers have been timid, intimidated by the prospect that, because of revenue shortfalls (2 per cent of the GDP or more), the fiscal deficit would be 5.5 per cent of the GDP.
    • Which would have exceeded the budget estimate at 3.5 per cent of the GDP.
    • The conclusion drawn, wrongly, is that there is no fiscal space.
    • The obsessive concern about the fiscal deficit is deeply embedded in government thinking.
    • In this situation, the extra fiscal stimulus should have been Rs 7-9 trillion i.e. 3-4 per cent of the GDP and that would have been modest compared to what other countries have done.

    Monetising the deficit  and issues involved in doing so

    • This enlarged fiscal deficit (3-4 % of GDP) cannot be financed by market borrowing.
    • Such market borrowing would simply drive up interest rates and nip recovery in the bud.
    • It would have to be financed by monetising the deficit — RBI buying government T-bills — printing money, now termed “helicopter money”.
    • Inflation concerns: The idea that monetised deficits will unleash inflation is blind to the reality that, at this juncture, if there is no further intervention by the government, the GDP could contract by 5 per cent in 2020-21, with lingering consequences.
    • In fact, a monetised deficit might be the only way of increasing aggregate demand to revive economic growth.
    • Rating downgrade issue: The worry about a downgrade from credit rating agencies is bizarre.
    • For one, their ethics and integrity have seen steady erosion.
    • Moreover, how many sovereign governments will they downgrade?
    • In fact, we might be better off without the footloose and volatile portfolio investment inflows.

    Consider the question- “Do you agree with the view that the focus of the supply side should be at the heart of any stimulus package announced in the financial crisis? Give reasons in the support of your agreement.”

    Conclusion

    If the government does not accept the necessity or wisdom of expansionary macroeconomic policies, it must set out its alternative plan for recovery. The relief package will not suffice.

  • Focus on supply side

    Whether to focus on supply side or demand side is the dilemma governments often face while deciding the measures to cure the ailing economy. This article explains using basic economics and evidence from across the world to make the case for a focus on the supply side. In doing so, it explains the problems with demand side measures such as cash transfers and tax rebets.

    Issue of neglect of demand side

    • The Union government is often criticised for its apparent neglect of the demand side and its excessive focus on the supply side.
    • Structural reforms — the COVID-19 package was no exception.
    • Low credit growth, weak inflation, and flat wage growth are the factors focused by demand-side proponents.
    • The deand side proponents suggest measures such as cash transfers, income tax cuts, and cheap credit to consumers.

    So, let’s focus on Demand vs. Supply side debate

    Low growth in credit to MSME

    • A demand shock typically leads to a rise in both volume and the price.
    • A supply shock not only hurts the volume but also leads to price rise.
    • In banking, a good proxy for the price of credit is the spread.
    • Spread is difference between lending rate and the funding rate  repo rate or deposit rates for the banks.
    • The spread reflects the risk premium banks charge to their customers.
    • The spread has consistently risen from just below 4 per cent at the start of 2018 to around 6 per cent in January 2020.
    • That means, the banks charged 4-6 per cent more on loan than it paid to its depositor or to RBI on the funds it got from them.
    • The fact that spreads are rising was highlighted by the 2019 Economic Survey as well.
    • At the same time, the credit growth — especially for public banks and to the MSME sector — has been sluggish for the previous two to three years.
    • The MSME sector witnessed sub-zero credit growth for the whole of 2017 and even now, the credit growth is very tepid at around 2 per cent Y-o-Y.
    • Rising spreads with lower credit volume provide a clear sign that credit supply is broken.

    What a paper by Nobel laureates on MSME says?

    • Paper by Nobel laureates Abhijit Banerjee and Esther Duflo examines the reasons for MSME problems.
    • The paper amply highlights the fact that the MSME sector suffers from lack of credit availability to finance investments rather than the lack of demand for credit.
    • They showed that when the government changed the definition of small firms, the firms newly covered by the priority sector lending programme used the extra credit to increase production and investment.
    • If there was no demand for credit, cheaper credit under the priority sector programme should have been used to repay the older expensive sources of borrowings.

    So, how will the recently announced package help MSEs?

    • Consistent with this view, we think that the government’s approach of guaranteeing SME credit by resolving the risk-sharing problem for banks will expand credit to credit-starved SMEs at lower credit spreads.
    • Similarly, expansion of the universe of small/medium firms will bring fresh investments from the firms, which are newly covered under priority sector programme as they will be able to get cheaper credit.

    2 Measures to increase consumer demand and issues involved

    1. Direct transfers schemes

    • No doubt that cash-transfers are superior to distortive subsidies and the “Garib Kalyan” package was a step in this direction.
    • In fact, the government has already transferred close to Rs 40,000 crore to bank accounts including Rs 10,000 crore to women under PMJDY.

    But is cash-transfers the ultimate solution to recovery?

    • In fact, the PMJDY account balance has increased.
    • The increase is from close to Rs 1,17,000 crore before the advent of COVID-19 to Rs 1,35,911 crore as of May 13 .
    • This is a massive jump of close to Rs 18,000 crore.
    • Recent research by Prasanna Tantri and co-authors shows that PMJDY account holders actively use the accounts — 1.12 transactions per quarter compared to the World Bank standard of one transaction.
    • In fact, PMJDY accounts see withdrawals when account holders are in distress, according to the study.
    • So the rise in balances is not mechanical.

    So, why are they not spending?

    • It’s not that people covered under PMJDY are comfortable financially.
    • A number of papers show that tax rebates boost demand in the short-run, but the quantum is limited.
    • For example, Sumit Agarwal and his co-authors show that the 2001 tax rebate programme in the US led to an average spending of only $60 on $500 rebate over nine months.
    • A recent study at the Kellogg Business School by Christian Borda and co-authors shows that tax rebates after the 2008 crisis in the US led to rise in spending, but by only 3.5 per cent in the first month of the rebates.
    • The crux is that no rational consumer goes on a consumption spree when he is facing job uncertainty!

    2. What about providing cheap credit to customers?

    • Trying to boost demand by providing cheap credit to consumers is not a good idea either as evidenced by the debt-financed housing boom in the US, which led to the 2008 crisis.
    • In fact, Atif Mian and Amir Sufi, using a large panel of 30 countries, uncover a more general pattern — an increase in household debt to GDP ratio leads to a sustained drop in future GDP, investments, and unemployment.
    • On the other hand, the economic cycles are much more muted when the initial growth is caused by structural reforms as pointed in a recent IMF study covering over 80 countries.

    Consider the question “Whenever governments decide on the stimulus package amid financial crises, supply side vs. demand side debate flares up. This has also been the case in India as the government announced the stimulus package recently. In light of this, examine the issues involved in demand side measures.”

    Conclusion

    To put the burden of recovery on risk-averse consumers, incentivising them to spend rather than save when there is employment uncertainty, is against any reasonable risk-sharing principle. Risk should be borne by those who have the appetite — the firms and government.

  • How China is seeking more control on Hong Kong?

    China has started pushing for an “improvement” in the Basic Law — the mini-constitution that defines ties between Hong Kong and Beijing — signalling a fundamental change in the way the highly autonomous city-state is run. The Chinese parliament is debating a controversial national security law for Hong Kong.

    Practice question for mains:

    Q. Democracy and authoritarianism cannot co-exist in the same country. Comment in context to the situation generated in Taiwan. How is the situation different from the withdrawl of special category status of Jammu and Kashmir.

    Chinese authoritarian grip on Hong Kong

    Hong Kong’s ‘Basic Law’

    • Hong Kong is a Special Administrative Region (SAR) of China.
    • It has observed a “one country, two systems” policy since Britain returned sovereignty to China on July 1, 1997, which has allowed it certain freedoms, the rest of China does not have.
    • It is governed by a mini-constitution called the Basic Law — which affirms the principle of “one country, two systems”.
    • The constitutional document is a product of the 1984 Sino-British Joint Declaration.
    • Under this, China promised to honour Hong Kong’s liberal policies, the system of governance, an independent judiciary, and individual freedoms for a period of 50 years from 1997.

    Uproar in Hong Kong

    • China accuses that the Hong Kong SAR has not acted out its constitutional duty for national security in line with China’s Constitution and the Basic Law.
    • Since the handover, Hong Kong residents have time and again taken to the streets to protect their Basic Law freedoms, with the first major pro-democracy protest taking place in 2003.
    • In 2014, over one lakh city residents took part in the ‘Umbrella Revolution’ to protest against China’s denial of democratic reforms.

    Impact of the 2019 protests

    • The largest protests since the 1997 handover took place last year in 2019 when for months tens of thousands of Hong Kongers agitated against a proposed extradition law.
    • The protest continued with pro-democracy marches even after the legislation was withdrawn.
    • These protests were seen as an affront by mainland China, which under President Xi Jinping has increasingly adopted a more hardline approach to foreign policy and internal security issues in recent years.

    Rise of Taiwanese aspirations

    • The Hong Kong unrest is also believed to have left its mark on Taiwan, another prickly issue for Beijing which considers the island state as its own.
    • In this year’s presidential election, Taiwanese voters brought to power the Democratic Progressive Party, which openly opposes joining China.

    The National Security Law

    • Under Article 23 of the Basic Law, Hong Kong has to enact a national security law “to prohibit any act of treason, secession, sedition, and subversion against the Chinese government.
    • When the Hong Kong government first tried to enact the law in 2003, the issue became a rallying point for the city-wide protests which occurred that year.
    • Since then, the government has steered clear of introducing the legislation again.
    • Beijing could now make the law applicable to Hong Kong by another route — by inserting the legislation in Annex III of the Basic Law.
    • The Chinese parliament is expected to vote on a resolution that will make way for the new law, which could be promulgated in Hong Kong.

    What could happen if such a law takes effect?

    • The new law would ban seditious activities that target mainland Chinese rule, as well as punish external interference in Hong Kong affairs.
    • Many expect a revival of the protests that rocked the city last year.
    • China, on the other hand, has sought support and understanding of India and other countries for its controversial decision as a precautionary measure.

  • U.S. set to exit the ‘Open Skies Treaty’ Copy

    The U.S. has given notice that it will exit the Open Skies Treaty (OST) in response to Russia who had allegedly violated the treaty.

    The New START, INF and now the OST …. Be clear about the differences of these treaties. For example- to check if their inception was during cold war era etc.

    Open Skies Treaty (OST)

    • OST is an agreement that allows countries to monitor signatories’ arms development by conducting surveillance flights over each other’s territories.
    • The idea behind the OST was first proposed in the early years of the Cold War by former U.S. President Dwight Eisenhower.
    • It came to existence decades later and was signed in 1992, during the George H.W. Bush presidency and after the Soviet Union had collapsed.
    • The OST came into effect in 2002 under the George W. Bush administration and it allows its 34 signatories to conduct unarmed reconnaissance flights over the territory of treaty countries.

    Issues with the OST

    • The U.S. has used the treaty more intensively than Russia.
    • Between 2002 and 2016, the U.S. flew 196 flights over Russia (in addition to having imagery from other countries) compared to the 71 flights flown by Russia.

    Significance

    • The U.S.’s exit last year from other arms deal the West had signed with Russia — the Intermediate-Range Nuclear Forces (INF) treaty — as well as its imminent departure from the OST has raised the strong possibility that the Trump administration may not renew the New Start Treaty.
    • The New START Treaty was signed by the Obama administration with Russia that caps Russian and U.S. nuclear arsenal. The New Start Treaty is due to expire in February 2021.
    • The Trump administration has been worried that extending New START would negatively impact an arms deal with China and Russia.
    • It is concerned that China’s nuclear stockpile could be doubled if the New Start Treaty continued as is, without including China.

    Back2Basics: New START pact

    • The New Strategic Arms Reduction Treaty (New START) pact limits the number of deployed nuclear warheads, missiles and bombers and is due to expire in 2021 unless renewed.
    • The treaty limits the US and Russia to a maximum of 1,550 deployed nuclear warheads and 700 deployed missiles and bombers, well below Cold War caps.
    • It was signed in 2010 by former US President Barack Obama and then-Russian President Dmitry Medvedev.
    • It is one of the key controls on superpower deployment of nuclear weapons.
    • If it falls, it will be the second nuclear weapons treaty to collapse under the leadership of US President Donald Trump.
    • In February 2019, the US withdrew from the 1987 Intermediate-Range Nuclear Forces Treaty (INF), accusing Moscow of violating the agreement.

    INF Treaty

    • Under the INF treaty, the US and Soviet Union agreed not to develop, produce, possess or deploy any ground-based ballistic and cruise missiles that have a range between 500 and 5,500 km.
    • It exempted the air-launched and sea-based missile systems in the same range.
    • The INF treaty helped address the fears of an imminent nuclear war in Europe.
    • It also built some trust between Washington and Moscow and contributed to the end of the Cold War.

  • [pib] UMANG Mobile App

    To further enhance the initiatives of Digital India Programme, the India Meteorological Department (IMD) services have been brought on the “UMANG App”.

    UPSC may puzzle you by asking a question such as: Which of the following services are included under UMANG App?  It would provide some ambiguous 5-6 options.

    UMANG App

    • The UMANG is an acronym for Unified Mobile Application for New-age Governance.
    • It is an all-in-one single, unified, secure, multi-channel, multi-platform, multi-lingual, multi-service mobile app, powered by a robust back-end platform providing access to high impact services of various organizations.
    • It was in 2017 to bring major government services on a single mobile app, with a larger goal to make the government accessible on the mobile phone of our citizens.
    • About 660 services from 127 departments & 25 states and about 180 utility bill payment services are live and more are in pipeline.
    • UMANG user base has crossed 2.1 Crore including Android, iOS, Web and KaiOS.
    • Citizens can also access their Digilocker from UMANG and give their feedback after availing any service through Rapid Assessment System (RAS) which has been integrated with UMANG.

    Key features

    • Unified Platform: It brings together all government departments and their services on a single platform to provide better and easier services to citizens.
    • Mobile-First Strategy: It aligns all government services with the mobile-first strategy to leverage mobile adoption trends.
    • Integration with Digital India Services: It provides seamless integration with other Digital India Services like Aadhaar, DigiLocker, and PayGov. Any new such service will automatically be integrated with the platform.
    • Uniform Experience: It is designed to enable citizens to discover, download, access, and use all government services easily.
    • Secure and Scalable: It supports Aadhaar-based and other authentication mechanisms for service access. The sensitive profile data is saved in an encrypted format and no one can view this information.

    Benefits for Citizens

    • Single-Point Ubiquitous Access: All government services are available for citizens on a unified platform for easy access through multiple online and offline channels (SMS, email, app, and web).
    • More for Less: Only a single mobile app needs to be installed instead of each app of each department.
    • Convenience: Citizens do not even need to install or update the app again to avail government services if more services are added to the platform.
    • Saving of Time and Money: Citizens can anytime and anywhere avail these services through their mobile phones, desktops, and laptops without any need for visiting the department office and standing in queues.
    • Uniform Experience: All the government services including payment-based transactions provide secure and uniform experience.

More posts