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Subject: Economics

  • Why special situation funds are necessary

    Context

    India suffers from a chronic bad debt problem.  To overcome this problem, banks and financial institutions were initially allowed to sell their stressed loans only to ARCs. Now they can sell to SSFs too.

    How bad debt affects the credit supply in economy?

    • Higher bad debt requires higher provisioning, locking up more capital in the banking system.
    • This reduces credit supply and hurts economic growth.
    • To overcome this problem, banks and financial institutions were initially allowed to sell their stressed loans only to ARCs. 
    •  Transfer of stressed loans would release capital locked-up in the banking system and help improve credit supply.

    Two crucial reforms in financial markets

    • Indian financial markets witnessed two crucial reforms earlier this year.
    • 1] SSF: SEBI came out with a dedicated regulatory framework for special situation funds (SSFs).
    • 2] Dual structure bad bank: The RBI approved the new dual-structure bad bank, NARCL-IDRCL.
    • While the bad bank is an upgraded version of the existing asset restructuring companies (ARCs) model, the SSF is a relatively novel concept.

    Understanding AIFs and SSF

    • SEBI has introduced SSFs as a distinct sub-category of Category I Alternative Investment Funds (AIFs). 
    • AIFs manage privately pooled funds raised from sophisticated investors with deep pockets.
    • AIFs in equity market: While AIFs have traditionally played a prominent role in equity markets, their participation in distressed debt markets has been limited.
    • No participation in secondary market for corporate loans: Regulations did not permit AIFs to participate in the secondary market for corporate loans extended by banks and NBFCs.
    • The new regulations now create a special sub-category of AIFs, namely SSFs, which are allowed to participate in the secondary market for loans extended to companies that have defaulted on their debt obligations.

    What is Syndicated lending?

    • Syndicated lending is a financial instrument where a group of lenders, known as a syndicate, work together to provide a large loan to a single borrower.
    • This collaborative approach allows lenders to share the risk of borrower default, making it more manageable for individual lenders.
    • The syndicate typically includes a lead bank or underwriter, which plays a crucial role in assembling the syndicate and managing administrative tasks.

    Why SSFs must be allowed full participation across the entire spectrum of secondary market for corporate debt

    • Default is a lagging indicator of financial stress.
    • Lesser haircut: If lenders and bond investors could offload potentially stressed assets to SSFs before defaulting in the secondary market, they would benefit from a lesser haircut.
    • SSFs would also get adequate time for debt aggregation before default, reducing the collective action problems that may arise after default during insolvency or restructuring.
    • It would improve the liquidity: Allowing SSFs to purchase investment-grade loans would also improve the liquidity in the secondary market for corporate loans.
    • Traditionally, banks originated loans and held them till maturity.
    • Over time, lending moved from involving a single lender to multiple lenders via syndicated lending.
    • As volumes in the primary syndication market increased, demand for secondary trading also developed to allow liquidity, risk and portfolio management.
    • Suggestion by RBI task force: Secondary trading of loans is now institutionalised in international financial markets.
    • The RBI task force on secondary markets for corporate loans, chaired by T N Manoharan, made this suggestion in 2019.
    • These markets are liquid precisely because they are open to a wide variety of non-bank participants including insurance companies, pension funds, hedge funds and private equity funds.
    • SSFs are unlikely to jeopardise financial stability: SSFs cannot borrow funds or engage in any leverage except for temporary funding requirements.
    • Consequently, risks associated with liquidity, credit or maturity transformation and asset-liability mismatches are unlikely to arise.
    • Given their structure, SSFs are likely to acquire sufficient debt in a distressed company to acquire control or to influence its subsequent insolvency or restructuring process to maximise its value through business turnaround or sale.

    Consider the question “What are special situation funds (SSFs)? Suggest the changes needed in the secondary trading of loans in India’s.”

    Conclusion

    Overall, the introduction of SSFs promises to usher in a modern era of distressed debt investing in India. To realise their true potential, SSFs must be allowed full participation across the entire spectrum of secondary market for corporate debt and not just be confined to the post-default stage.

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  • Draft National Policy for Medical Devices, 2022

    The government is proposing a new Draft National Policy for Medical Devices, 2022 to reduce India’s dependence on import of high-end medical devices.

    Key features of the policy

    Objectives: Adopting public-private partnerships to reduce the cost of healthcare, drive efficiency, and aid quality improvements in medical devices manufactured in the country

    The key proposals include:

    1. Incentivising the export of medical devices and related technology projects through tax rebates and refunds
    2. Increasing government spending in “high-risk” projects in the medical devices sector
    3. Single-window clearance system for licencing medical devices
    4. Pricing environment with no price control on newly developed innovation in the sector
    5. Allot a dedicated fund for encouraging joint research involving existing industry players, reputed academic institutions and start-ups
    6. Incorporate a framework for a coherent pricing regulation, to make available quality and effective medical devices to all citizens at affordable prices
    7. NPPA (National Pharmaceutical Pricing Authority) shall be strengthened with adequate manpower of suitable expertise to provide effective price regulation balancing patient and industry needs.
    8. Pharmaceuticals Department will also work with industry to implement a Uniform Code for Medical Device Marketing Practices (UCMDMP)

    Need for such policy

    • Policy vacuum: India’s medical devices sector has so far been regulated as per provisions under the Drugs and Cosmetics Act of 1940, and a specific policy on medical devices has been a long standing demand from the industry.
    • Meaningful expense on R&D: The policy also aims to increase India’s per capita spend on medical devices. India has one of the lowest per capita spend on medical devices at $3, compared to the global average of per capita consumption of $47.
    • Reducing import dependence: With the new policy, the government aims to reduce India’s import dependence from 80 per cent to nearly 30 per cent in the next 10 years.
    • Becoming a global hub: It aims to become one of the top five global manufacturing hubs for medical devices by 2047.
    • Domestic manufacturing of high-end products: Indian players in the space have so far typically focussed on low-cost and low-tech products, like consumables and disposables, leading to a higher value share going to foreign companies.

    Earlier attempts for such policy

    • In February 2020, the government notified changes in the Medical Devices Rules, 2017 to regulate medical devices on the same lines as drugs under the Drugs and Cosmetics Act, 1940.
    • This was necessitated after revelations about faulty hip implants marketed by Johnson & Johnson, exposing the lack of regulatory teeth when it came to medical devices.
    • The government said the transition from partial regulation of selected medical services to the complete regulation and licensing of all medical devices is underway.

     

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  • India is amongst the world’s largest arms importers

    India is amongst the world’s largest arms importers, accounting for 11 per cent of global imports, according to the Stockholm International Peace Research Institute (SIPRI).

    India’s arm imports

    • India’s overall imports decreased by 21% between 2012-16 and 2017-21 but that it was still the world’s biggest importer of military hardware.
    • Russia, France and the US are India’s biggest suppliers of arms, accounting for 46%, 27% and 12% of the country’s imports in the last five years.
    • India’s share of global arms imports stood at 11% during 2017-21 compared to 14% in the previous five-year period.

    Dependence on Russia is declining

    • Russia’s arms exports to India fell 47% between 2012-16 and 2017-21 even though the deliveries of several platforms including air defence systems and warships are pending.
    • Russia was the largest supplier of major weapons and systems to India during the two comparative five-year periods.

    Significance of the report

    • The report has come at a time when India’s dependence on Russian military hardware, ranging from fighter jets to rifles and submarines to shoulder-fired missiles has come into sharp focus.
    • Though India has been procuring US military hardware in growing numbers about 60% of the weapons inventory of the three services continues to be of Russian-origin.
    • It is still unclear how the new sanctions against Russia could play out and the problems they could create for the armed forces in the short and long term.
    • The possible impact of Russia’s unprecedented economic isolation on India’s military preparedness and the serviceability of weapons and equipment is threatened.

    Is it a matter of relief?

    • India has major plans for arms imports because of perceived threats from China and Pakistan, and due to significant delays in indigenous production.
    • The drop in India’s arms imports is, therefore, probably a temporary result of its slow and complex procurement process as well as its shift in suppliers.

     

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  • Retail Inflation climbs to 6.07%

    India’s retail inflation inched up to an eight-month high of 6.07% in February from 6.01% in January, with rural India experiencing a sharper price rise at 6.38%.

    What is Retail Inflation?

    • When we generally talk about retail inflation, it often refers to the rate of inflation based on the consumer price index (CPI).
    • The CPI tracks the change in retail prices of goods and services which households purchase for their daily consumption.
    • The CPI monitors retail prices at a certain level for a particular commodity; price movement of goods and services at rural, urban and all-India levels.
    • The change in the price index over a period of time is referred to as CPI-based inflation, or retail inflation.

    What is Consumer Price Index (CPI)?

    • It is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers.
    • In India, there are four consumer price index numbers, which are calculated, and these are as follows:
      1. CPI for Industrial Workers (IW)
      2. CPI for Agricultural Labourers (AL)
      3. CPI for Rural Labourers (RL) and
      4. CPI for Urban Non-Manual Employees (UNME).
    • While the Ministry of Statistics and Program Implementation collects CPI (UNME) data and compiles it, the remaining three are collected by the Labour Bureau in the Ministry of Labour.
    • The base year for CPI is 2012.
    • To calculate CPI, multiply 100 to the fraction of the cost price of the current period and the base period.

    Significance of CPI

    • Generally, CPI is used as a macroeconomic indicator of inflation, as a tool by the central bank and government for inflation targeting and for inspecting price stability, and as deflator in the national accounts.
    • CPI also helps understand the real value of salaries, wages, and pensions, the purchasing power of the nation’s currency, and regulating rates.
    • CPI, one of the most important statistics to ascertain economic health, is generally based on the weighted average of the prices of commodities.
    • It basically gives an idea of the cost of the standard of living.

     

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  • What is Vibrant Village Programme?

    The Union government plans to open the villages along the Chinese border for tourists under the Vibrant Village programme announced in the Union Budget 2022-23.

    Vibrant Village Programme

    • The program aims to improve infrastructure in villages along India’s border with China.
    • Infrastructure will be improved in states like Uttarakhand, Himachal Pradesh, and Arunachal Pradesh.
    • Under the programme, residential and tourist centres will be constructed.
    • It will also provide for improvement in road connectivity and development of decentralized renewable energy sources.
    • Apart from that, direct access of Doordarshan and education related channels will be provided. Support will be provided for livelihood.

    Key focus areas

    • It focuses livelihood generation, road connectivity, housing, rural infrastructure, renewable energy, television and broadband connections.
    • This objective will be met by strengthening infrastructure across villages located near the Line of Actual Control (LAC).

    Why need such scheme?

    • The programme is a counter to China’s model villages but the name has been carefully chosen so as to not cause any consternation in the neighbouring country.
    • China has established new villages along the LAC in the past few years particularly across the Arunachal Pradesh border.
    • While China has been settling new residents in border areas, villages on the Indian side of the frontier have seen unprecedented out-migration.

     

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  • Issues with high gold demand

    Context

    Gold’s appeal as a safe haven is only rising: as tensions escalate in Ukraine, its price is approaching records.

    Factors explaining demand for gold in India

    • India is the world’s second-largest market for the yellow metal, behind China, though it produces almost none at home.
    • This is partly driven by tradition.
    • Brides are given jewellery as part of their dowry and it is deemed auspicious to buy bullion around certain religious festivals.
    • It is a handy store of undeclared wealth, too, often stashed in wardrobes or under the mattress.
    • But the pandemic has also affirmed an investment advice passed on over generations: park savings in gold as a rainy-day fund.

    Concerns with such a high demand

    • Vast gold imports can destabilise the economy.
    • During the 2013 “taper tantrum”, when India’s foreign-exchange reserves were lower than they are now, a rush of gold imports helped push the current-account deficit to 4.8% of GDP and fuelled worries of a currency crisis.
    • Savings stashed away as idle gold could be put to more productive use elsewhere. 
    • Indian households hold 22,500 tonnes of the physical metal—five times the stock in America’s bullion depository .

    Policy measures by the government

    • Import duties hover around 10%, even after cuts in last year’s budget aimed at keeping smuggling in check.
    • The central bank has ramped up issuance of sovereign gold bonds, which are denominated in grams of gold.
    • Of the 86 tonnes’ worth issued since 2015, about 60% were sold after the pandemic began.
    • And the gold monetisation scheme, which allows households to hand gold over to a bank and earn interest, was revamped last year to reduce limits on the size of deposits.
    • Lockdowns inadvertently helped the state’s agenda.
    • Mobile payments platforms like PhonePe and Google Pay reported rising appetite for digital gold, which is sold online and stored by the seller.
    • Money also rushed into gold exchange-traded funds (ETFs).
    • Their assets hit 184bn rupees ($2.5bn) in December, a 30% rise in a year.

    Conclusion

    Still, only a sliver of the population, mostly well-off urban types and millennials, invest in complex financial products. A large part of India’s demand for physical gold comes from rural areas, where it seems in no danger of losing its lustre.

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  • Why India must cancel its nuclear expansion plans

    Context

    A fire broke out near the Zaporizhzhia nuclear plant in Ukraine (Europe’s largest) during the course of a military battle. Had the fire affected the cooling system, the plant’s power supply, or its spent fuel pool, a major disaster could have occurred.

    Issues with India’s nuclear expansion plans

    • On December 15, 2021, the Indian government informed Parliament that it plans to build “10 indigenous reactors… in fleet mode” and had granted “in principle approval” for 28 additional reactors, including 24 to be imported from France, the U.S. and Russia.
    • Capital intensive: Nuclear power plants are capital intensive and recent nuclear builds have suffered major cost overruns.
    • Decreasing cost of renewable: In contrast, renewable energy technologies have become cheaper.
    • The Wall Street company, Lazard, estimated that the cost of electricity from solar photovoltaics and wind turbines in the U.S. declined by 90% and 72%, respectively, between 2009-21.
    • Recent low bids are of ₹2.14 per unit for solar power, and ₹2.34 for solar-wind hybrid projects; even in projects coupled with storage, bids are around ₹4.30 per unit.
    • Global trend suggests declining use of nuclear energy: In 1996, 17.5% of the world’s electricity came from nuclear power plants; by 2020, this figure had declined to just around 10%.
    • Safety concerns: In a densely populated country such as India, land is at a premium and emergency health care is far from uniformly available.
    • Local citizens understand that a nuclear disaster might leave large swathes of land uninhabitable — as in Chernobyl — or require a prohibitively expensive clean-up — as in Fukushima, where the final costs may eventually exceed $600 billion.
    • Indemnity clause: Concerns about safety have been accentuated by the insistence of multinational nuclear suppliers that they be indemnified of liability for the consequence of any accident in India.
    • India’s liability law already largely protects them.
    • But the industry objects to the small window of opportunity available for the Indian government to hold them to account.
    • Climate concerns: Climate change will increase the risk of nuclear reactor accidents.
    • Recently, a wildfire approached the Hanul nuclear power plant in South Korea and President Moon Jae-in ordered “all-out efforts” to avoid an accident at the reactors there.
    • In 2020, a windstorm caused the Duane Arnold nuclear plant in the U.S. to cease operations.
    • The frequency of such extreme weather events is likely to increase in the future.

    Consider the question “What are the concerns with the nuclear energy expansion plans of India? Suggest the way forward.”

    Conclusion

    Given the inherent vulnerabilities of nuclear reactors and their high costs, it would be best for the Government to unambiguously cancel its plans for a nuclear expansion.

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    Back2Basics: What is EPR (nuclear reactor)

    • The EPR is a third generation pressurised water reactor design.
    • It has been designed and developed mainly by Framatome (part of Areva between 2001 and 2017) and Électricité de France (EDF) in France, and Siemens in Germany.
    • In Europe this reactor design was called European Pressurised Reactor, and the internationalised name was Evolutionary Power Reactor, but it is now simply named EPR.

  • Taking stock of the Indian economy

    Context

    This article takes the stock of the Indian economy using the EFGHIJ framework.

    Export

    • The $400-billion target of goods exports in FY22 appears achievable:
    • This is a structural break from ~$300-330 billion per year over the last decade.
    • Note that in calendar year 2021, India exported almost $400 billion worth of goods.
    • This export growth comes at a time when global shipping and freight markets have been in a tizzy over the last few months as Covid-related supply chain disruptions across commodities and final products reverberated across the globe.

    Fiscal growth

    • India has significant fiscal headroom in FY23 with a 6.4% fiscal deficit pencilled in.
    • The revenue buoyancy, assumed at less than 1, is conservative as is the overall assumption on nominal growth at 11%.
    • In as volatile a world as this, the conservatism in forecasting should come to India’s advantage.
    • India saw healthy direct and indirect tax receipts in FY22: the GST collections have consistently remained above the `1 trillion-a-month mark for many months now.
    • Two aspects need a close watch:
    • (a) as the prices of various commodities rise, there can be calls for softening the blow on the final consumer via tax cuts or direct support, and
    • (b) the disinvestment programme of the government which could face a market where investor appetite is uncertain.

    Growth challenges and opportunities for India

    • India’s GDP growth in FY23 is projected to be 7.6-8.5%, making it one of the fastest-growing economies.
    • With the newly changed circumstances, it is possible that this tight range and the absolute number may require revision.
    • It is, however, too early to say in which direction and by what amounts.
    • Opportunities for India: Global dislocations of supply chain or the creation of new supply sources could create divergent challenges and opportunities for India.
    • The post Covid rebound in high frequency indicators (air and rail passengers, toll collections, UPI payments, etc.) suggests that the internal consumption economy is currently back on track.
    • It is important to note that India continues to be the fastest-growing nation of its size in the world.

    Health

    • India has now completed almost 1.8 billion doses.
    • The Omicron wave, thankfully both due to the inherent nature of the virus and the large vaccination drive, did not cause significant economic upheaval.
    •  It may be time to think of Covid as endemic and plan accordingly.

    Inflation

    • The inflation in 2021 was based on a sudden bout of fiscal-support-driven spending meeting with tight supply chain bottlenecks.
    • It was expected that as spending normalises and supply chains open, prices will stabilise.
    • However, the sharp uptick in the prices of crude, coal, commodities, and chips has created a more sustained scare for inflation.
    • Many measures may be taken across the world to curb the impact for the common man: from opening of oil reserves, to cutting of taxes, to direct support, etc—all of which could impact the fiscal.

    Capital

    • Denoted by K by economists, expect to see a lot of ebb-and-flow here as investors react to evolving, volatile trends.
    • Higher public investment in the last two years has supported economic recovery: India has planned for a record `10 lakh crore plus public capex.
    • Net FDI has been strong at $25.3 billion up to December in FY2022.
    • While FPIs have withdrawn $9.5 billion in FY22, DIIs and retail investors have supported the markets.

    Conclusion

    With two waves of COVID-19 largely behind us, many macroeconomic factors have changed dramatically, especially in the last fortnight.

    Source:

    https://www.financialexpress.com/opinion/efghijk-taking-stock-of-the-indian-economy/2457255/

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  • Why society gains when start-ups fail

    Context

    As per the Economic Survey 2021-22, India has become the third-largest startup ecosystem in the world after the US and China.

    Start-up ecosystem in India

    • India attracted huge investment in startups in 2021: Private equity investment was $77 billion, of which $42 billion went to early-stage ventures.
    • Every startup where salaries are paid by investors rather than customers is breathlessly rethinking business plans.

    How do startups benefit society?

    1] Innovation, productivity and job creation:

    • The high failure rate of startups is not a problem per se — society only needs a few successes to harness the gains of innovation, productivity and job creation.
    • A new book, The Power Law makes the case that startup investing is unlike public market investing.
    • He suggests public markets follow a “normal” distribution like human height — most people cluster around the average with a few exceptionally low or high.
    • But venture investments follow a “power law” of distribution, that is, most go to zero but the tiny number that succeeds more than compensate for the losses or mediocrity of the many.

    2] Losses caused by startups are not passed on to society

    • Startups don’t socialise their losses, Corporate bank loans expanded from Rs 18 lakh crore in 2008 to Rs 54 lakh crore in 2014.
    • Such high corporate bank loans created bad loans that needed many lakh crores of government money to recapitalise nationalised banks.
    • This money was diverted from government spending on healthcare, education and defence.
    • The current venture capital binge will also create many write-offs but this cost will fall on consenting adults with broad shoulders — foreign institutions, angel investors and entrepreneurs with successful previous exits.

    3] Startups will solve real problems for Indians:

    • Ending our poverty needs higher productivity regions, cities, sectors, firms and individuals.
    • A modern state is a welfare state that does less commercially so it can do more socially.
    • It needs allies in reimagining financial inclusion, supply chains, distribution logistics, employability, retail, transport, media, healthcare, agriculture and much else.
    • Many of our startups shall redeem their pledge to solve these problems “not wholly or in full measure, but very substantially”.

    Three issues related to startups

    • 1] Fiscal and monetary policy normalisation: The global capital supply fuelling startup funding faces challenges from fiscal and monetary policy normalisation: The rate-sensitive two-year US government bond recently touched a 1.6 per cent yield after being at 0.4 per cent as recently as November — because the risk-free return cannot be return-free-risk forever.
    • Investors are returning to weighing financial sustainability and capital efficiency along with addressable markets.
    • 2] Excesses: This explosive startup funding has created excesses.
    • 3] A different approach of public markets: Private markets are not only delaying IPOs — Amazon went public within three years of starting with less than half the value of a unicorn — but unicorn IPOs’ underperformance suggests that public markets have a different calibration.

    Conclusion

    The few startups that survive will raise India’s soft power and prosperity by using improbable ideas to solve impossible problems. What we need is to ensure the policy environment for the startups to boom.

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  • Inland water transport system in India: Potential and challenges

    • Month after setting sail on the Ganga from Patna, a vessel carrying 200 metric tonnes of food grains for the Food Corporation of India (FCI), docked at Guwahati’s Pandu port on the southern bank of the Brahmaputra.
    • The occasion is believed to have taken inland water transport, on two of India’s largest river systems, to the future.

    Why is a Ganga-Brahmaputra cargo vessel in focus?

    • There is nothing unusual about a cargo vessel setting sail from or docking at any river port.
    • This has rekindled hope for the inland water transport system which the landlocked northeast depended on heavily before India’s independence in 1947.

    Inland water service: A necessity for the NE

    • Seamless cargo transportation has been a necessity for the northeast.
    • Around Independence, Assam’s per capita income was the highest in the country.
    • This was primarily because of access for its tea, timber, coal and oil industries to seaports on the Bay of Bengal via the Brahmaputra and the Barak River (southern Assam) systems.
    • Ferry services continued sporadically after 1947 but stopped after the 1965 war with Pakistan, as Bangladesh used to be East Pakistan then.
    • The scenario changed after the river routes were cut off and rail and road through the “Chicken’s Neck”, a narrow strip in West Bengal, became costlier alternatives.
    • The start of cargo movement through the Indo-Bangladesh Protocol (IBP) route is going to provide the business community a viable, economic and ecological alternative.

    How did the water cargo service through Bangladesh come about?

    • The resumption of cargo transport service through the waterways in Bangladesh has come at a cost since the Protocol on Inland Water Transit and Trade was signed between the two countries.
    • India has invested 80% of ₹305.84 crore to improve the navigability of the two stretches of the IBP (Indo-Bangladesh Protocol) routes — Sirajganj-Daikhowa and Ashuganj-Zakiganj in Bangladesh.
    • The seven-year dredging project on these two stretches till 2026 is expected to yield seamless navigation to the north-eastern region.
    • With this, the distance between NW1 and NW2 will reduce by almost 1,000 km once the IBP routes are cleared for navigation.

    Policy boosts to IWs

    • The Government has undertaken the Jal Marg Vikas project with an investment of ₹4,600-crore to augment the capacity of NW1 for sustainable movement of vessels weighing up to 2,000 tonnes.
    • Sailors who made the cargo trips possible have had difficulties steering clear of fishing nets and angry fishermen in Bangladesh.
    • These hiccups will get sorted out with time.

    Why go for IWT?

    • Inland Water Transport (IWT) is a fuel-efficient, environment friendly and cost effective mode of transport having potential to supplement the over-burdened rail and congested roads.
    • It is a boon where road transport is least feasible.

    Back2Basics: Inland Waterways

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