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Subject: Economics

  • Managing Inflation and Ensuring Food Security in India

    Inflation

    Central Idea

    • India’s recent decline in consumer price index (CPI) inflation and food price inflation has brought a degree of comfort to the Reserve Bank of India (RBI). However, the challenge lies in managing inflation while aiming for a GDP growth of 6 to 6.5 percent in FY24. Collaborative efforts between the RBI and the Government of India are crucial to achieving this twin objective.

    Current Inflation Scenario

    • The CPI inflation for April 2023 stood at 4.7 percent, with food price inflation even lower at 3.84 percent.
    • Maintaining overall inflation below 5 percent and GDP growth above 6 percent throughout the year would be a commendable achievement.

    Importance of Managing Food Inflation

    • Managing food inflation is crucial due to its significant weightage in the consumer price index (CPI) basket in India. The food and beverages component holds the highest weightage of 45.86% among G20 countries.
    • Food inflation directly impacts the cost of living for the general population, particularly vulnerable sections that spend a significant portion of their income on food.
    • High food inflation can lead to increased household expenses, lower purchasing power, and a decline in the overall standard of living.
    • Food inflation can also have social and political implications, as rising food prices can cause public unrest and dissatisfaction.
    • Effective management of food inflation contributes to maintaining price stability, ensuring food affordability, and supporting macroeconomic stability.

    Implications of Monsoon Season

    • Agricultural Production: The monsoon is crucial for agricultural production as it provides the majority of the water needed for irrigation. A normal or above-normal monsoon season supports adequate water availability, leading to higher crop yields and increased agricultural output. Conversely, a below-normal monsoon can lead to drought-like conditions, affecting crop productivity and agricultural incomes.
    • Food Prices: The monsoon significantly influences food production, particularly for rain-fed crops. Insufficient rainfall can lead to lower agricultural output, resulting in reduced supplies and higher food prices. Inadequate monsoon rains can impact staple crops such as rice, wheat, pulses, and oilseeds, leading to inflationary pressures on food prices.
    • Rural Economy: As agriculture plays a vital role in the rural economy, the monsoon directly impacts rural livelihoods and income levels. A good monsoon season can boost rural incomes, increase agricultural employment opportunities, and stimulate rural consumption. Conversely, a poor monsoon can lead to income losses, lower agricultural wages, and reduced rural demand.
    • Hydroelectric Power Generation: The monsoon contributes to water reservoirs, which are essential for hydroelectric power generation. Adequate rainfall ensures sufficient water levels in reservoirs, supporting electricity generation from hydroelectric plants. Inadequate monsoon rains can result in lower water levels, impacting power generation and potentially leading to electricity shortages.
    • Groundwater Recharge: The monsoon plays a crucial role in replenishing groundwater levels. Adequate rainfall helps recharge aquifers, which are vital sources of water for irrigation, drinking water, and industrial use. Insufficient monsoon rains can lead to depleted groundwater levels, affecting agriculture, water availability, and overall water security.
    • Economic Growth: The performance of the agricultural sector, influenced by the monsoon, has implications for overall economic growth. Agriculture contributes significantly to India’s GDP and employment. A good monsoon season can stimulate rural demand, enhance agricultural productivity, and contribute to higher economic growth. Conversely, a poor monsoon can dampen agricultural output, impacting overall economic performance.
    • Fiscal Impact: The monsoon season also has implications for government finances. Adequate rainfall supports agricultural production and reduces the need for government interventions such as subsidies or price support measures. In contrast, a poor monsoon can strain government resources, necessitating increased spending on irrigation infrastructure, relief measures, or support to affected farmers.

    What are the challenges in milk inflation?

    • Supply-side Factors: Milk inflation is influenced by supply-side dynamics. Factors such as adverse weather conditions, including drought or floods, can impact the availability of fodder and water for cattle, leading to reduced milk production. Any disruptions in the supply chain, such as transportation issues or logistical challenges, can also affect the supply of milk and contribute to inflationary pressures.
    • Disease Outbreaks: Disease outbreaks among cattle, such as lumpy skin disease, foot-and-mouth disease, or other health issues, can affect milk production. These outbreaks may result in a decrease in the number of healthy and productive cattle, leading to a decline in milk output and subsequently driving up milk prices.
    • Fodder Prices: The cost of animal feed, such as fodder, plays a significant role in milk production costs. Fluctuations in fodder prices can impact the overall cost of maintaining dairy cattle. If fodder prices increase due to factors like supply-demand imbalances, weather conditions, or changes in agricultural practices, it can contribute to higher milk prices.
    • Input Costs: Various input costs involved in milk production, such as labor, veterinary services, and energy costs, can affect the overall cost structure. Increases in input costs, including wages, veterinary medicines, or energy prices, can exert upward pressure on milk prices.
    • Import Dependence: In some cases, countries may rely on milk imports to meet domestic demand. If the import costs increase due to factors like changes in international prices, trade policies, or exchange rate fluctuations, it can contribute to higher domestic milk prices.
    • Market Structure and Competition: The market structure and competition within the dairy industry can impact milk prices. If the market is concentrated with a limited number of dominant players, it may lead to less competition, allowing suppliers to exercise greater pricing power. This can contribute to higher milk prices for consumers.
    • Government Policies and Regulations: Government policies and regulations related to milk production, procurement, and pricing can influence milk inflation. Policies such as subsidies, import restrictions, quality standards, or pricing mechanisms can affect the overall supply-demand dynamics and pricing in the milk market

    Way ahead

    • Focus on buffer stocking policy: To tackle cereal inflation, using the buffer stocking policy more proactively is important. Unloading excess stocks in open market operations can be an effective tool in managing cereal inflation.
    • Preemptive policy actions: It is important to implement policy actions in a preemptive manner rather than being reactive to events. This includes timely unloading of excess stocks and adjusting import duties to maintain price stability.
    • Monitor and address external shocks: Given that food price inflation can be triggered by external shocks like droughts and supply chain disruptions, it is crucial to closely monitor such factors and take appropriate measures to mitigate their impact.
    • Strengthen milk production: To address milk inflation, efforts should be made to address factors like the lumpy skin disease and high fodder prices that have strained milk production. Policies supporting the growth and sustainability of the milk industry should be implemented.
    • Lower import duties on fat and skimmed milk powder (SMP): By reducing import duties to around 10 to 15 percent, there could be an increase in imports of fat and SMP, which may help in controlling milk and milk product prices.

    Conclusion

    • By effectively managing inflation, implementing proactive policies, and fostering collaboration between the RBI and the Government of India, India can navigate the challenges of inflation management, ensure economic stability, and promote sustainable development in critical sectors.

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  • Orders on ONDC grow rapidly

    ondc

    Central Idea

    • The Open Network for Digital Commerce (ONDC) is a government-backed modular network for e-commerce, food and grocery delivery, and cabs in India.
    • ONDC has witnessed significant growth, with a rising number of orders and participants.
    • India Post, one of the world’s largest logistics systems, is expected to join ONDC, strengthening the network.

    About ONDC

    • The ONDC is a private non-profit Section 8 company established by the Department for Promotion of Industry and Internal Trade (DPIIT) of the Government of India.
    • It aims to develop open e-commerce by creating a set of specifications designed to foster open interchange and connections between shoppers, technology platforms, and retailers.
    • It was incorporated on December 31, 2021, with an initial investment from Quality Council of India and Protean eGov Technologies Limited (formerly NSDL e-Governance Infrastructure Limited).

    What does one mean by ‘Open-sourcing’?

    • Free for all: An open-source project means that anybody is free to use, study, modify and distribute the project for any purpose.
    • Open licensing: These permissions are enforced through an open-source licence easing adoption and facilitating collaboration.

    What processes are expecting to be open-sourced with this project?

    • Several operational aspects including onboarding of sellers, vendor discovery, price discovery and product cataloguing could be made open source on the lines of Unified Payments Interface (UPI).
    • If mandated, this could be problematic for larger e-commerce companies, which have proprietary processes and technology deployed for these segments of operations.

    What does the DPIIT intend from the project?

    • ONDC is expected to-
    1. Digitize the entire value chain,
    2. Standardize operations,
    3. Promote inclusion of suppliers,
    4. Derive efficiencies in logistics and
    5. Enhance value for stakeholders and consumers

    Processes in the ONDC

    • Seller Onboarding: Sellers can register and onboard their businesses onto the ONDC platform.
    • Vendor Discovery: Buyers can discover relevant vendors and sellers on the ONDC network.
    • Price Discovery: Transparent marketplace for comparing prices across sellers.
    • Product Cataloguing: Sellers can create and manage catalogues of their products on the platform.
    • Transaction Processing: Secure and seamless payment infrastructure for completing purchases.
    • Order Fulfillment: Coordinating delivery or provision of purchased products or services.
    • Customer Support: Assistance for addressing queries and concerns of buyers and sellers.
    • Data Management and Security: Robust practices to protect user data and ensure security.

    Why such a move by the govt?

    • Digital boom: This COVID pandemic has made every business to go digital. India is a country with 700 million internet users of whom large crunch of population are active buyers on e-coms.
    • Promoting competition: ONDC aims to foster a more competitive marketplace by providing opportunities for small retailers and businesses.
    • Fostering inclusivity: It seeks to enable small retailers to access a wider customer base, promoting inclusivity in the digital commerce ecosystem.
    • Curbing monopolistic practices: ONDC addresses potential monopolistic behavior and rent-seeking tendencies by certain e-commerce platforms.
    • Enhancing efficiency: By streamlining operations and standardizing processes, ONDC aims to drive efficiencies in the digital commerce ecosystem.
    • Digital Public Infrastructure: ONDC is part of the government’s efforts to build and support essential digital services and infrastructure.
    • Government support: The government’s involvement in ONDC demonstrates its commitment to supporting small businesses and advancing digital transformation.

    Scope for ONDCs success

    • Government backing: ONDC is a government-backed initiative, indicating strong support and resources from the government to drive its success.
    • Inclusive approach: ONDC aims to create a level playing field for small retailers and businesses, empowering them to compete with larger e-commerce platforms.
    • Industry expertise: The drafting panel of ONDC includes experienced individuals from various sectors, bringing diverse perspectives and expertise to the table.
    • Successful track record: India has previously executed successful public digital platforms like UPI and Aadhaar-linked projects, demonstrating the country’s capability in implementing digital initiatives.
    • Open-Sourcing approach: The open-sourcing of processes within ONDC can foster innovation, collaboration, and widespread adoption, similar to the success of UPI.
    • Growing digital market: India has a large population of internet users, making it a thriving market for digital commerce. ONDC can tap into this market and capitalize on the increasing adoption of online services.
    • Potential for disruption: ONDC’s entry into the digital commerce ecosystem can disrupt existing players and bring about positive changes, offering more choices and opportunities for businesses and consumers.

    Issues that can be raised

    • EODB concerns: They may raise hues over operability and ease of doing business.
    • Compliance burden: MSMEs have already raised the growing compliance burden for e-commerce.

    Other challenges

    • Every platform has its own challenges so would the ONDC may have.
    • While UPI was ruled out (BHIM being the first) people were reluctant in using it due to transaction failures.
    • With subsequent improvements and openness people and businesses are using it in every walks of life. So it would work with ONDC.

    Conclusion

    • While challenges may exist, the combination of government support, industry expertise, and the aim to create a more inclusive and competitive digital commerce landscape provides a strong foundation for the success of ONDC.

     

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  • RBI advises banks to transit away from LIBOR

    Central Idea: The RBI has issued an advisory to banks and other RBI-regulated entities regarding the transition away from London Interbank Offered Rate (LIBOR) July 1.

    What is London Interbank Offered Rate (LIBOR)?

    Explanation
    Definition LIBOR is a benchmark interest rate used in financial transactions such as loans, derivatives, and bonds.

    It is the interest rate at which banks can borrow funds from other banks in the London interbank market.

    It serves as a benchmark rate for various financial transactions worldwide.
    Calculation Method LIBOR rates are calculated based on submissions from a panel of major banks in London.

    These banks estimate their borrowing costs for various currencies and tenors.

    The submissions are used to calculate an average rate, which is published daily by the Intercontinental Exchange (ICE), the administrator of LIBOR.
    Currencies and Tenors LIBOR is calculated for different currencies and tenors ranging from overnight to one year.

    The currencies include USD, EUR, GBP, JPY, CHF, and others.

    The tenors represent the time periods for which the rates are quoted.
    Importance It has been widely used since the 1980s as a benchmark for financial contracts worth trillions of dollars globally.

    It serves as a reference rate for various loans, derivatives, and other financial instruments.

     

    Why is RBI moving away from LIBOR?

    Like many other countries, has been working towards transitioning away from LIBOR. The primary reasons for this transition include:

    • Manipulation risks: Following the global financial crisis in 2008, there were concerns about the reliability and potential manipulation of LIBOR.
    • Discontinuation of LIBOR: The regulatory authority in the UK that oversees LIBOR, announced in 2017 that it will no longer compel banks to submit the necessary data to calculate LIBOR after the end of 2021.
    • Adoption of alternative Reference Rates: Various countries, including India, have identified and adopted alternative reference rates that are more reliable and based on actual market transactions. Ex RBI introduced the Secured Overnight Financing Rate (SOFR).
    • Alignment with International Standards: Many countries have already initiated the shift to alternative reference rates, necessitating India’s alignment to maintain consistency and harmonization in international financial markets.
    • Risk Mitigation: RBI’s move aims to mitigate the potential risks associated with an unreliable or manipulated benchmark rate.

    Related terminologies

    Mumbai Interbank Forward Outright Rate (MIFOR): MIFOR is a benchmark rate used in Indian financial markets. It represents the forward premium or discount on the USD-INR exchange rate based on the LIBOR rate.

    Fallbacks: They are provisions inserted into contracts to establish alternative reference rates if the original benchmark rate (such as LIBOR) becomes unavailable or unreliable.

     

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  • RBI to join Greenwashing TechSprint

    Central Idea: The RBI has announced its participation in the Global Financial Innovation Network’s (GFIN) Greenwashing TechSprint.

    What is Greenwashing?

    • Greenwashing is a term used to describe the practice of making exaggerated, misleading, or unsubstantiated claims about the environmental, social, and governance (ESG) credentials of a product, service, or company.
    • It is a deceptive marketing strategy that aims to portray an organization as environmentally friendly or socially responsible, even when its actions or practices do not align with these claims.
    • It creates the perception that a company is taking steps towards sustainability or social responsibility, but in reality, it may be engaging in practices that are harmful to the environment or society.

    There are various forms of greenwashing that companies may employ to deceive consumers or investors. These include:

    1. Vague or ambiguous claims: Companies may use general statements or buzzwords without providing specific details or evidence to support their environmental or social claims. For example, stating that a product is “eco-friendly” without explaining the specific environmental benefits or certifications.
    2. Irrelevant or misleading labels: Companies may use misleading labels or certifications that give the impression of sustainability or social responsibility but lack meaningful standards or independent verification. This can confuse consumers who rely on such labels to make informed choices.
    3. Hidden trade-offs: Greenwashing can involve emphasizing one positive aspect of a product or company’s operations while ignoring or downplaying other negative impacts. For instance, a company may highlight its use of renewable energy while disregarding other harmful environmental practices.
    4. Lack of transparency: Companies may fail to provide transparent information about their sustainability practices or refuse to disclose relevant data. This lack of transparency makes it difficult for consumers to verify the accuracy of the company’s claims.
    5. Inconsistent messaging: Some companies may adopt green initiatives or promote sustainable products as a public relations exercise, without making substantial changes to their overall operations. This inconsistency between their messaging and actual practices is a form of greenwashing.

    Implications of greenwashing

    • It undermines consumer trust, as people may make purchasing decisions based on misleading information.
    • It also hampers the credibility of genuinely sustainable businesses by creating scepticism in the market.
    • Moreover, it can divert attention and resources away from genuinely sustainable companies and initiatives.

    Back2Basics: Global Financial Innovation Network (GFIN)

    • GFIN was officially launched in January 2019.
    • It was inspired by the successful collaboration between 11 financial regulators during a cross-border pilot project known as the “Global Sandbox” in 2018.
    • The pilot project demonstrated the benefits of regulatory cooperation and information sharing in fostering responsible innovation in the financial sector.
    • GFIN consists of financial regulators and related organizations from around the world.
    • The network includes regulatory authorities, central banks, and supervisory bodies.

     

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  • Chheligada Irrigation Project in Odisha

    Central Idea: Officials recently directed to begin construction of the multipurpose irrigation project at Chheligada, Odisha.

    Chheligada Irrigation Project

    • The project is a multipurpose medium project located near the village of Chheligada in the Gajapati District of Odisha.
    • The project involves the construction of a 250m long and 30m high dam across the River Badjhore, a tributary of the River Vamsadhara.
    • It aims to preserve 5201 hectares of water and provide irrigation to 5760 hectares of land in Ganjam and 500 hectares of land in Gajapati districts.
    • The project will also supply drinking water to Brahampur City.
    • Furthermore, it includes the development of a mini hydel project at Shiali Loti, Kankata, and Dekili in the Gajapati district, with a capacity to generate 36 MW of electricity.

    Salient features of the project

    1. A centrally located Ogee-type gated spillway with a length of 90m.
    2. Construction of a 1.13 km long tunnel connecting the Chheligada reservoir with the Ghodahada river.
    3. Establishment of a canal system to facilitate irrigation in the Gajapati district directly from the dam.
    4. Implementation of a pipeline network for supplying drinking water to Berhampur in the Ganjam district.

     

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  • Assessing the Indian Economy: A Fuzzy Picture with Bright Spots

    Economy

    Central Idea

    • The Indian economy is in a state of ambiguity, with different viewpoints and statistics painting a fuzzy picture. While some argue that India is well-positioned to be an economic superpower, the true picture is not that straightforward.

    An assessment of the Indian economy based on various factors

    1. Inflation:
    • According to the MPC meeting minutes, inflation is under control, but households are witnessing an increase in the prices of goods and services.
    • While the base effect will bring down the inflation numbers, households still complain of having a cumulative inflation of over 18 per cent in the last three years.
    1. Growth:
    • The growth picture is ambivalent, with the new normal appearing to be 6-7 per cent.
    • While some argue that India is the fastest-growing economy, this is only true if smaller nations are excluded.
    • There is not too much optimism about being on track for the 8 per cent-plus growth rate, which we were used to earlier.
    1. Exports: While there has been satisfaction expressed by the new heights achieved in the exports of goods and services, exports of merchandise are not too satisfactory. For example, if refinery products are excluded from the export’s basket, there has been a fall in FY23.
    2. Investment:
    • The official position is that investment is picking up in the private sector, but data on all funding sources show that there is a slowdown.
    • Bank credit is buoyant more on the retail end than manufacturing. Debt issuances are dominated by the financial sector with manufacturing lagging.
    • External Commercial Borrowings (ECBs) have slowed down mainly due to the higher cost of loans.
    1. Consumption: The consumption picture is also fuzzy, with nominal consumption growing by 16 per cent in FY23, but this is pushed up by inflation, and pent-up demand for both goods and services post the full removal of the lockdown in 2022.
    2. Employment:
    • The average unemployment rate is around 7.5 per cent, but the concern is more on the labour participation rate, which has been coming down. This indicates a growing population in the working age group that is not interested in working.
    • Start-ups have not yet been job creators to the degree that was expected, given the push by the government over the years.
    1. Banking sector: The banking sector has emerged stronger with lower NPA levels and improved profitability, which implies that as and when the economy gets into the take-off mode, banks will be well-equipped to provide the funds.

    Facts for prelims: Basics

    External Commercial Borrowings (ECBs):

    • ECBs are loans obtained by entities in one country from non-resident lenders in another country.
    • ECBs provide an alternative source of funds for borrowers, enabling access to international capital markets.
    • They are primarily used by companies, banks, or other entities to finance activities, investments, or expansion plans.
    • The borrowing and utilization of ECBs are subject to guidelines and regulations set by the borrowing country’s central bank or regulatory authority.
    • The regulatory framework aims to control external debt, manage foreign exchange exposure, and ensure financial stability.

     What are the concerns?

    • Employment Generation: The decline in the labor force participation rate and layoffs in certain sectors raise significant challenges in terms of job creation and reducing unemployment levels.
    • Manufacturing Competitiveness: The decline in merchandise exports (excluding refinery products) indicates potential hurdles in enhancing the competitiveness of the manufacturing sector and expanding exports.
    • Execution of Investment Intentions: The gap between investment intentions and actual investments is a concern as it indicates potential bottlenecks or challenges in translating investment plans into action.
    • Consumption Growth and Affordability: Affordability issues due to inflation impacting real consumption growth raise concerns about sustained consumer demand.
    • Export Diversification: The dependence on a few economies for exports and the potential impact of a global economic slowdown on Indian exports are concerns. Diversifying export destinations and exploring new markets can help reduce vulnerability to global economic fluctuations and strengthen export resilience.
    • Effective Implementation of Banking Sector Reforms: While improvements have been observed in the banking sector, concerns about funding sources and the need for increased credit flow to the manufacturing sector indicate ongoing challenges.

    Economy

    Way ahead

    • Focus on inflation control: While the MPC has managed to keep inflation under control from a policy perspective, efforts should continue to address the impact of rising prices on households. Measures to enhance supply chain efficiency, promote competition, and reduce production costs can help alleviate inflationary pressures.
    • Promote sustainable and inclusive growth: While the current growth rate is positive, efforts should be made to achieve higher and more inclusive growth. This can be done by investing in infrastructure development, skill development programs, and initiatives that support the growth of MSMEs (Micro, Small, and Medium Enterprises).
    • Boost exports: Enhancing the competitiveness of Indian goods and services in global markets is crucial for a robust export sector. Continued efforts to improve the ease of doing business, implement the Production-Linked Incentive (PLI) scheme effectively, and diversify export destinations can help boost exports.
    • Facilitate investment: Policy measures should focus on encouraging private sector investment and reducing funding bottlenecks. This can involve improving the ease of doing business, simplifying regulatory processes, and providing incentives for both domestic and foreign investments.
    • Strengthen consumer demand: Initiatives to support consumer demand can include income support programs, targeted subsidies, and measures to enhance consumer confidence. Reducing the impact of inflation on household budgets and boosting purchasing power can help drive consumption growth.
    • Address unemployment and labor force participation: Policies aimed at promoting skill development, entrepreneurship, and job creation can help address unemployment concerns. Encouraging sectors with higher labor-intensive potential, such as manufacturing and services, and supporting start-ups and MSMEs can be vital in generating employment opportunities.
    • Continue banking sector reforms: While the banking sector has made progress in reducing NPAs and improving profitability, ongoing reforms should be sustained to strengthen the sector further. Maintaining prudent lending practices, enhancing risk management frameworks, and promoting transparency and governance will be essential.
    • Foster domestic innovation and technology adoption: Encouraging innovation, research and development, and technology adoption can boost productivity and competitiveness across sectors. This can be achieved through policies that promote collaboration between industry and academia, provide incentives for innovation, and invest in digital infrastructure.
    • Maintain macroeconomic stability: Ensuring fiscal discipline, sound monetary policy, and a stable regulatory environment will be crucial for sustaining macroeconomic stability. This can help maintain investor confidence and provide a conducive environment for economic growth.

    Conclusion

    • The Indian economy’s broad numbers look statistically realistic, but the triad of employment, consumption, and private investment has to bear fruit. Domestic initiatives have to drive the story forward, as the world economy slows down.

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    Also read:

    Indian Economic Growth Prospects: A Comprehensive Analysis

     

  • Energy Transition to Renewables: Challenges and the Way Ahead

    Energy

    Central Idea

    • Access to affordable and reliable energy is essential for economic development and public services. However, the global energy market has been disrupted due to demand and supply-side factors leading to rising prices and disruptions in energy supply chains. As a result, countries with a high dependence on fossil fuels, including India, faced a significant challenge.

    The correlation: Energy availability and economic development

    • The correlation between energy availability and economic development is that energy availability and accessibility are essential inputs for many public services, and securing affordable and reliable access to energy remains a central political and economic imperative for almost all governments.
    • Energy availability and accessibility are necessary for economic growth and development, and a lack of access to energy can hamper the growth of industries, limit productivity, and impede social development.

    Energy

    Factors that contributed to the Global Energy Crisis

    • Demand and Supply-side Factors: There have been disruptions in the oil and gas supply chains due to the ongoing Russia and Ukraine war. Additionally, energy prices came under pressure due to a sudden rise in demand resulting from abnormally high temperatures and associated heatwaves across the globe. These factors inflated the international price of oil and natural gas.
    • Dependence on Finite Fossil Fuels: Fossil fuels account for over 80% of global energy requirements and over 64% of electricity generation worldwide. Additionally, most countries are net importers of fossil fuels, and thus prone to adverse supply shocks resulting from various geopolitical and economic events.
    • Overdependence on Fossil Fuels: Many countries turned to coal to meet their energy needs, while those already using coal intensified its exploitation, putting immense pressure on the coal market.
    • Increased Cost of Electricity: The increased cost of electricity due to a higher usage of fossil fuel-based sources imposed a heavy burden on low-income households since they spend a larger share of their incomes on electricity and gas.
    • Widespread Power Outages: Widespread power outages in many countries due to disruptions in electricity supply threw lives out of gear.
    • Dependence on Imported Fossil Fuels: Europe, for instance, faced a challenging situation due to its historic high dependence on imported gas from Russia to meet its energy requirements.
    • Climate Change: Fossil fuels account for 75% of global greenhouse gas emissions and around 90% of carbon dioxide emissions. Climate events, such as floods and droughts, cause immense human and economic loss.

    Impact on countries

    • High energy prices: The increased cost of electricity due to a higher usage of fossil fuel-based sources imposes a heavy burden on low-income households since they spend a larger share of their incomes on electricity and gas.
    • Power outages: Widespread power outages in many countries due to disruptions in electricity supply throw lives out of gear. For instance, Bangladesh witnessed a countrywide blackout as many gas- and diesel-based power plants, responsible for approximately 85 percent of the country’s electricity generation, were forced to shut down due to fuel shortages.
    • Slowdown in economic growth: Increased prices and disrupted supply severely impacted those countries with a high dependence on fossil fuels, particularly its import, and led to a slowdown in global economic growth, forcing some countries and regions into recession.
    • Environmental degradation: Overdependence on fossil fuels impacts countries adversely in the form of air and water pollution and soil degradation, while also being a significant cause of climate change.
    • Foreign exchange reserves: The dependence on fossil fuels also affects countries’ foreign exchange reserves, as the fluctuations in prices of fossil fuels affect their import bills and balance of payments.
    • Revenue loss: Many regions and their economies, especially in developing countries, depend on incomes derived from fossil fuel-based employment, such as mining, power generation, transmission, and distribution and storage. In many regions, governments are also dependent on the revenue generated from fossil fuels to enhance infrastructure that enables local communities to expand and diversify their livelihood options.

    Challenges in way of transition to renewable sources of energy

    • Mobilizing capital: While the cost of clean energy is declining, many clean energy technologies require high upfront investment costs, which may be beyond the capacities of most developing countries. Additionally, international support for developing countries is lacking, making it difficult for them to transition to renewable energy sources without supportive international actions.
    • Ensuring a just transition: There is a need to ensure decent work opportunities and social support for people likely to lose their livelihoods in the process of transitioning to low-carbon and renewable-based economies. Many people are employed in the fossil fuel industry globally, and there is a risk of destabilizing local economies during the transition process.
    • Technical challenges: The transition to renewable energy sources may require significant upgrades to infrastructure, including energy storage and transmission systems, which can be costly.
    • Policy and regulatory challenges: The transition to renewable energy sources requires significant policy and regulatory changes, including reforms to subsidy systems, pricing mechanisms, and energy markets.
    • Reliability and intermittency of renewable sources: Unlike fossil fuels, renewable energy sources are often intermittent, making it difficult to guarantee a stable supply of electricity. This may require investments in energy storage and backup power systems to ensure reliable supply.
    • Public acceptance: The transition to renewable energy sources may face resistance from some stakeholders, including those who are reliant on fossil fuels for their livelihoods or those who are concerned about the visual and environmental impacts of renewable energy infrastructure.

    Energy

    Way ahead: Addressing these challenges

    • Mobilizing capital: Developed countries need to fulfill their commitment to providing climate finance to developing countries. Innovative financial instruments such as green bonds and blended finance could also be used to attract private investment.
    • Ensuring a just transition: Governments need to develop comprehensive plans that protect workers and communities affected by the shift to renewable energy. This could involve retraining programs, investment in new industries, and social safety nets.
    • Investing in research and development: Governments, international organizations, and the private sector need to invest in research and development to drive down the costs of renewable energy technologies and improve their efficiency.
    • Promoting energy efficiency: Governments and businesses need to prioritize energy efficiency measures such as retrofitting buildings and improving industrial processes to reduce energy demand and costs.
    • Accelerating deployment of renewable energy: Governments need to set ambitious targets for renewable energy deployment and create policy frameworks that incentivize investment in clean energy.
    • Building energy infrastructure: Governments need to invest in building the infrastructure needed to support the deployment of renewable energy, including grid upgrades, energy storage, and electric vehicle charging stations.
    • Promoting international cooperation: The transition to renewable energy requires international cooperation, especially between developed and developing countries. Developed countries can support developing countries through technology transfer, capacity building, and financial support.

    Facts for prelims

    Distributed Renewable Energy (DRE)

    • DRE refers to the generation and distribution of electricity from renewable energy sources, such as solar, wind, hydro, geothermal, and biomass, through small-scale, decentralized systems.
    • These systems are often installed in remote or rural areas where it is difficult or expensive to connect to a centralized power grid.
    • DRE systems can range from individual rooftop solar panels to small-scale wind turbines, mini-hydro systems, and biomass generators.
    • They are typically designed to serve a single household or community, rather than a large urban or industrial center.
    • DRE systems are also known as off-grid or mini-grid systems, and they can be standalone or connected to a larger power grid.

    Conclusion

    • The transition towards renewables is an attractive option for countries to hedge against the risks associated with fossil fuel-based energy sources. However, this requires access to affordable finance and international support to enable a just transition through on-the-job retraining programs, infrastructure investments, and so on. Access to affordable and reliable energy is crucial for sustainable economic development.

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    Also Read:

    Lessons Learned: Transition To A Self-reliant Clean Energy System

     

  • India coal imports surge to 162 MT in FY23

    Central Idea

    • India’s coal imports increased by 30% to 162.46 million tonnes in the 2022-23 financial year compared to 124.99 MT in the previous year, according to a report.
    • The report was released by mjunction, a B2B e-commerce platform that is a joint venture between Steel Authority of India (SAIL) and Tata Steel.

    India’s coal production and consumption

    • India is among the top five coal-producing countries in the world.
    • Despite being a major producer, India also imports coal to meet some of its demand.
    • India is a significant consumer of coal, which is used for power generation and industrial processes.

    Import of Coking Coal

    • Coking Coal: The import of coking coal rose by 5.44% to 54.46 MT over 51.65 MT in FY22, as per the report by mjunction. Coking coal is a key raw material used in steel making.
    • Non-coking coal: In March 2023, non-coking coal import stood at 13.88 MT against 12.61 MT in the same month last year.
    • Other imports: The total imports of various types of coal like anthracite, pulverised coal injection (PCI coal), met coke and pet coke, along with coking and non-coking coal, were at 249.06 MT in FY23, up from 200.71 MT in FY22, a rise of over 24%.

    Key inferences from this

    • The high demand for steam coal in India and the weakening of seaborne prices led to increased volumes during March.
    • This trend might continue in the coming months due to above-normal average temperatures expected during the summer.

    Why does India import coal?

    India imports coal primarily due to the following reasons:

    • Lack of good quality coal: India’s domestic coal reserves have limitations in terms of quality, and the country does not have sufficient reserves of good quality coking coal, which is used in steelmaking and allied industries. Therefore, India imports coal to compensate for the lack of good quality coal.
    • Growing energy demand: India’s energy demand is continuously increasing due to population growth and rapid urbanization. Coal is a significant contributor to India’s energy mix, and the country needs to import coal to meet its growing energy demand.
    • Infrastructure constraints: India’s domestic coal production is limited due to various factors such as geological constraints, land acquisition issues, and environmental regulations. Moreover, India’s domestic coal transport infrastructure is insufficient, and many power plants are located far away from the coal mines, making imports a more viable option.
    • Better quality and cost-effectiveness: Importing coal from other countries can sometimes be more cost-effective than producing it domestically, especially when the quality of imported coal is better than domestic coal.

     

    Key terminologies

    Coking coal: a type of coal that is used in the production of steel.

    Anthracite: a hard and compact type of coal that has a high carbon content.

    Pulverised coal injection (PCI coal): a method of injecting pulverized coal into a blast furnace to improve the efficiency of the iron-making process.

    Met coke: a type of coke made by heating coal in the absence of air, which is used as a fuel in blast furnaces to produce iron.

    Pet coke: a carbon-rich solid material that is derived from oil refining. It is used as a fuel in industrial processes.

     

    Try this PYQ from CSP 2012:

    Despite having large reserves of coal, why does India import millions of tonnes of coal?

    1. It is the policy of India to save its own coal reserves for the future, and import them from other countries for the present use.
    2. Most of the power plants in India are coal-based and they are not able to get sufficient supplies of coal from within the country.
    3. Steel companies need a large quantity of coking coal which has to be imported.

    Which of the statements given above is/are correct?       

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

    [wpdiscuz-feedback id=”qekagebaxt” question=”Please leave a feedback on this” opened=”1″]Post your answers here[/wpdiscuz-feedback]

     

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  • RBI’s gold reserves rise to 794.64 tonne

    Central Idea: The RBI has increased its gold reserves by 34.22 tonnes YoY to reach 794.64 tonnes at the end of March 2023, according to the central bank’s data.

    What are Gold Reserves?

    • Gold reserves refer to the physical gold holdings that a central bank or a country holds as a part of its foreign exchange reserves.
    • Central banks may acquire gold reserves through various means, including purchases from other central banks, international organizations, or commercial banks, and from domestic production or importation.
    • Gold reserves are typically held in the form of gold bars, which are stored in secure vaults or depositories.

    Why Gold?

    • Gold is considered a safe-haven asset and has been historically used to back a country’s currency.
    • Holding gold reserves is seen as a way to hedge against inflation, currency fluctuations, and other economic uncertainties.

    Significance of Gold Reserves

    • Economic stability: Gold reserves are often seen as a symbol of economic stability and confidence, especially during times of financial crisis or uncertainty. Holding gold reserves can help central banks to maintain the stability of their currency and the economy.
    • Diversification: Gold is considered a safe-haven asset and can provide diversification to a country’s foreign exchange reserves portfolio. Diversification helps to reduce the risks associated with any single asset class.
    • Hedge against inflation: Gold is considered an inflation hedge as its value tends to increase during times of high inflation or when the value of a currency is depreciating. Holding gold reserves can help to protect the purchasing power of a country’s currency.
    • International transactions: Gold reserves can be used as collateral for loans and international transactions. Countries can also use gold reserves to settle international debts.
    • Confidence-building: The level of a country’s gold reserves can be an indicator of the country’s financial strength and stability. High levels of gold reserves can help to build confidence among investors and other countries.

    Breakdown of RBI’s gold reserves

    • Total: As of March-end 2023, the RBI held 794.64 metric tonnes of gold, including gold deposits of 56.32 metric tonnes.
    • Domestic and abroad: Out of the total gold reserves, 437.22 metric tonnes of gold is held overseas in safe custody with the Bank of England and the Bank of International Settlements (BIS), while 301.10 metric tonnes of gold is held domestically.

    How much do these gold reserves value?

    • In value terms (USD), the share of gold in the total foreign exchange reserves increased from about 7.06% as of September-end 2022 to about 7.81% as of March-end 2023, as per the RBI’s report.
    • During the half-year period, the reserves increased from $532.66 billion as of September-end 2022 to $578.45 billion as of March-end 2023.

     

    New terminologies

    Foreign currency assets (FCA): a component of forex reserves that includes major traded currencies held by the central bank of a country.

    Special drawing rights (SDRs): an international reserve asset created by the International Monetary Fund (IMF) to supplement member countries’ official reserves.

    Reserve tranche position: a component of IMF’s financial accounts that represents a country’s reserve position in the organization.

    Back2Basics: Foreign Exchange (Forex) Reserve

    • Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
    • They are commonly used to support the exchange rate and set monetary policy.
    • In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
    • Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
    • Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.

    India’s forex reserves cover:

    1. Foreign Currency Assets (FCAs)
    2. Special Drawing Rights (SDRs)
    3. Gold Reserves
    4. Reserve position with the International Monetary Fund (IMF)

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  • India’s delayed implementation of mandatory Drug Recall Law

    Central Idea

    • Abbot published a public notice in newspapers, alerting people about a mislabelled batch of medicine that it had inadvertently shipped to the market.
    • Such recalls take place regularly in the US but it is uncommon in India for domestic or foreign pharmaceutical companies to recall substandard or mislabelled drugs.

    Recall of Medicines: India story

    India has been mulling the creation of a mandatory recall law for substandard drugs since 1976.

    • Drugs Consultative Committee (DCC) meeting in 1976: Resolved to have greater cooperation between state drug controllers to recall and destroy drugs that failed tests.
    • DCC meetings in 1989, 1996, 1998, 2004, 2007, and 2011: Issue of recalls came up but resulted in no amendments to the Drugs & Cosmetics Act.
    • CDSCO proposes draft recall guidelines in 2012: National regulator lacks power to convert guidelines into binding law
    • DCC and Drugs Technical Advisory Board meetings in 2016 and 2018-2019: Issue of recalls resurfaces but India still lacks a recall law, 46 years on.

    Why there is no concrete law in India?

    • Complex drug regulatory issues: The Drug Regulation Section of the Union health ministry is not equipped to tackle complex drug regulatory issues.
    • Multiple agencies: India has highly fragmented regulatory structure, with each state having its own drug regulator.
    • Exposing the loopholes: India’s drug regulators are aware that a mandatory drug recall system, will bring to public attention the poor state of affairs in India’s pharmaceutical industry.
    • Evading accountability: The delay in implementing a recall law exposes the lack of accountability and interest in protecting public health.

    Consequences of delay

    • Drug failure hazard: Dozens of drugs fail random testing in government laboratories every month.
    • Substandard quality: The lack of a mandatory recall law means substandard drugs, even those with dangerous consequences for consumers, can circulate in the market.
    • Public health crisis: People, including children, are likely dying or suffering from adverse health events because substandard drugs are not swiftly removed from the market.

    Reasons behind

    The lack of a mandatory recall law in India can be attributed to various factors, including-

    1. Lack of expertise
    2. Apathy
    3. Vested interests in enabling the growth of the pharmaceutical industry.

    Way forward

    • Implementation of a mandatory drug recall law: The Indian government can take steps to implement a mandatory drug recall law. This law should have teeth to hold pharmaceutical companies accountable for their products.
    • Centralization of regulatory powers: To create an effective recall mechanism, the responsibility of recalling drugs has to be centralized, with one authority that has the legal power to hold companies liable for failures to recall drugs from across the country, and further, to also search and seize batches of failed medicine.
    • Streamlining of regulatory processes: The Indian government can take steps to streamline regulatory processes to reduce the time taken for approvals and ensure that drugs are tested thoroughly before they enter the market.
    • Capacity building of regulatory bodies: The Drug Regulation Section of the Union health ministry should be equipped with the necessary resources, expertise and mandate to tackle complex drug regulatory issues.
    • Encouragement of ethical pharmaceutical companies: The Indian government can encourage ethical pharmaceutical companies by providing incentives to companies that comply with regulatory standards, penalizing those that do not, and promoting transparency in drug pricing.

     

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