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Subject: Economics

  • Krishi UDAN 2.0 Scheme

    The Union Minister of Civil Aviation has launched Krishi UDAN 2.0.

    Krishi UDAN 2.0

    • The scheme proposes to facilitating and incentivizing movement of Agri-produce by air transportation.
    • It lays out the vision of improving value realization through better integration and optimization of Agri-harvesting and air transportation.
    • It works by contributing to Agri-value chain sustainability and resilience under different and dynamic conditions.
    • It will be implemented at 53 airports across the country mainly focusing on Northeast and tribal regions and is likely to benefit farmer, freight forwarders and Airlines.

    Key highlights of the scheme

    • Facilitating and incentivizing movement of Agri-produce by air transportation: Full waiver of Landing, Parking, TNLC and RNFC charges for Indian freighters and P2C at selected Airports. Primarily, focusing on NER, Hilly, and tribal regions.
    • Strengthening cargo-related infrastructure at airports and off airports: Facilitating the development of a hub and spoke model and a freight grid.
    • Concessions sought from other bodies: Seek support and encourage States to reduce Sales Tax to 1% on aviation fuels for freighters / P2C aircraft as extended in UDAN flights.
    • Resources-Pooling through establishing Convergence mechanism: Collaboration with other government departments and regulatory bodies.
    • Technological convergence: Development of E-KUSHAL (Krishi UDAN for Sustainable Holistic Agri-Logistics).

    What is E-KAUSHAL?

    • It is a platform to be developed to facilitate information dissemination to all the stakeholders.
    • This will be a single platform that will provide relevant information at the same time will also assist in coordination, monitoring and evaluation of the scheme.
    • Furthermore, integration of E-KUSHAL with the National Agriculture Market (e-NAM) is proposed.

    Airports under the scheme

    Proposed timeline Locations
    2021 – 2022 Agartala, Srinagar, Dibrugarh, Dimapur, Hubballi, Imphal, Jorhat, Lilabari, Lucknow, Silchar, Tezpur, Tirupati, Tuticorin
    2022 – 2023 Ahmedabad, Bhavnagar, Jharsuguda, Kozhikode, Mysuru, Puducherry, Rajkot, Vijayawada
    2023 – 2024 Agra, Darbhanga, Gaya, Gwalior, Pakyong, Pantnagar, Shillong, Shimla, Udaipur, Vadodara
    2024 – 2025 Holangi, Salem

    7 focus routes & products

    Routes Products
    Amritsar – Dubai Babycorn
    Darbhanga – Rest of India Lichis
    Sikkim – Rest of India Organic produce
    Chennai, Vizag, Kolkata – Far East Seafood
    Agartala – Delhi & Dubai Pineapple
    Dibrugarh – Delhi & Dubai Mandarin & Oranges
    Guwahati  – Hong Kong Pulses, fruits & vegetables

     

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  • What to do about the heavy cost of doing business in India

    Context

    The controversy over Ease of the Doing Business (EoDB) notwithstanding, India must now sharpen its focus on the Cost of Doing Business (CoDB).

    Cost of Doing Business in India

    • India has made considerable progress on EoDB rankings since 2016.
    • While the Centre’s focus on EoDB has been commendable, several state governments have also made efforts to improve business conditions.
    •  India must now sharpen its focus on the Cost of Doing Business (CoDB).
    • India lags behind other countries in terms of CoDB on several counts.

    Two key factors influencing CoDB — energy costs and regulatory overload

    • High fuel costs: Diesel prices in India are 20.8 per cent higher than those in China, 39.3 per cent higher than in the US, 72.5 per cent higher than Bangladesh and 67.8 per cent higher than in Vietnam.
    • This is largely because of heavy taxation — total taxes on diesel account for over 130 per cent of the base price in India.
    • High power costs: In the case of electricity, prices for businesses in India were higher by around 7-12 per cent vis-à-vis those in the US, Bangladesh or China and by as much as 35-50 per cent as compared to those in South Korea or Vietnam prior to the recent coal/energy crisis.
    • Coal, which accounts for more than 70 per cent of electricity generation in India, is also pricier vis-à-vis other countries leading to higher electricity prices.
    • Like in the case of the petroleum sector, government levies account for nearly half of the prices paid by coal consumers.
    • And coal producers cannot claim input tax credit because electricity is not under GST.
    • Further, coal freight costs are amongst the highest in the world as high freight rates are used to cross-subsidise passenger fares by the railways.
    • Regulatory overload: Outsized regulatory levels also pose a significant burden on businesses.
    • A Teamlease report highlights that a small manufacturing company with just one plant and up to 500 employees is regulated by more than 750 compliances, 60 Acts and 23 licences and regulations.
    • A mid-sized manufacturing company with six plants spread across different states is regulated by more than 5,500 compliances, 135 Acts and 98 licences and registrations.
    •  Keeping track of such a large number of regulations along with the changes thereof, imposes huge operational and financial costs on businesses, particularly the MSME segment.

    Way forward

    • Including fuels under GST would lower costs for businesses owing to input tax credit even if taxation levels continue to remain high.
    • Cleaning up the power distribution sector, which is largely state-controlled, could potentially lower electricity prices for businesses.
    • Fiscal incentives by the Centre: A majority of the compliances stem from the states and reducing this burden would require a significant push on states to act on this front.
    • The Centre could leverage the “carrot and stick” framework — using fiscal incentives to nudge the states to act and disincentivise them from maintaining the status quo.

    Consider the question “What are the factors affecting the cost of doing business in India? Suggest the measures to reduce it.”

    Conclusion

    The Government must prioritise reducing the cost of energy and compliances for businesses rather than focusing on de jure measures to boost ease of doing business. These will boost India’s manufacturing competitiveness significantly and further increase formalisation in the economy.

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  • [pib] GoI Floating Rate Bonds

    The Government of India has announced the Sale (Re-issue) of Floating Rate Bonds, 2028’.

    What are Bonds?

    • Bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments.
    • Generally, bonds come with a fixed coupon or interest rate. For example, you can buy a bond of Rs 10,000 with a coupon rate of 5%.
    • Once the bond reaches maturity, the bond issuer returns the investor’s money.
    • Fixed income is a term often used to describe bonds, since your investment earns fixed payments over the life of the bond.

    Why are bonds launched?

    • Companies sell bonds to finance ongoing operations, new projects or acquisitions.
    • Governments sell bonds for funding purposes, and also to supplement revenue from taxes.

    What are Floating Rate Bonds?

    • A floating rate bond is a debt instrument that does not have a fixed coupon rate, but its interest rate fluctuates based on the benchmark the bond is drawn.
    • Benchmarks are market instruments that influence the overall economy.
    • For example, repo rate or reverse repo rate can be set as benchmarks for a floating rate bond.

    How do floating rate bonds work?

    • Floating rate bonds make up a significant part of the Indian bond market and are majorly issued by the government.
    • For example, the RBI issued a floating rate bond in 2020 with interest payable every six months. After six months, the interest rate is re-fixed by the RBI.

     

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  • Nutritional security and climate-friendly agriculture for Punjab

    Context

    As per the latest Situation Assessment Survey (SAS) of agricultural households conducted by the National Statistical Office (NSO), an average Indian farmer earned Rs 10,218 per month in 2018-19 (July-June).

    SAS analysis: Variation across the states and cause of concern for Punjab

    • Across states, the highest income was received by a farming household in Meghalaya (Rs 29,348) followed by Punjab (Rs 26,701), Haryana (Rs 22,841), Arunachal Pradesh (19,225) and Jammu and Kashmir (Rs 18,918).
    • While the lowest income levels were in West Bengal (Rs 6,762), Odisha (Rs 5,112) and Jharkhand (Rs 4,895).
    • But this is not a fair comparison as holding sizes vary widely across states.
    • After normalising these incomes of agri-households by their holding sizes, as in the SAS, Punjab’s ranking on per hectare income falls from 2nd to 11th and Haryana goes down from 3rd to 15th (see figure).
    • The states that would do well on this score are Jammu and Kashmir, Kerala, Meghalaya and Arunachal Pradesh.
    • In these states, people earn their income from cultivating fruits and vegetables, spices, and livestock.
    • These are high value in nature, not linked to MSPs, and market and demand-driven.
    • As per the SAS, the average operated area per holding for Punjab is 1.44 ha (we have used that in the figure), but the Census gives a much higher value of 3.62 ha of average operational holding.
    •  If we normalise incomes of agri-households using Census values of average holding sizes, Punjab’s rank would go further down to 21st (household monthly income Rs 7,376) out of 28 states.

    How can farmers in Punjab and Haryana augment their incomes with more sustainable agriculture?

    1) Swith from paddy to maize

    • Punjab’s former Chief Minister Amarinder Singh had approached the Centre with an idea to create a fund of around Rs 25,000 crore to help farmers switch from paddy to maize.
    • The Centre should give this idea a serious thought with the following modifications:
    • One, the fund should be under a five-year plan to shift at least a million hectares of paddy area (out of a total of 3.1 million hectares of paddy area in Punjab) to maize.
    • Two, the corpus should have equal contributions from the Centre and state.
    • Three, since Punjab wants that farmers be given MSP for maize, an agency, the Maize Corporation of Punjab (MCP), should be created to buy maize from farmers at MSP.
    • Four, this agency should enter into contracts with ethanol companies, and much of this maize can be used to produce ethanol as the poultry and starch industries will not be able to absorb this surplus in maize once a million hectares of paddy area shifts to maize.
    • Fifth, maize productivity must be as competitive as that of paddy in Punjab and the best seeds should be used for that purpose.
    • This is to ensure that ethanol from maize is produced in a globally competitive manner.
    • The GoI’s policy for 20 per cent blending of ethanol in petrol should come in handy for this purpose.

    2) Diversification

    • Other parts of the diversification strategy have to be along the lines of increasing the area under fruits and vegetables, and a more focused policy to build efficient value chains in not just fruits and vegetables but also livestock and fisheries.
    • They are more nutritious and the SAS data shows that their profitability is much higher in these enterprises than in crop cultivation, especially cereals.
    • The sector needs to be backed by proper processing, grading and packaging infrastructure to tap its full potential.

    Benefits of switching to maize from paddy

    • Punjab will arrest its depleting water table as maize needs less than one-fifth the water that paddy does for irrigation.
    • Also, Punjab will save much on the power subsidy to agriculture, which was budgeted at Rs 8,275 crore in the FY2020-21 budget, as paddy irrigation consumes much of the power subsidy.
    • This saving subsidy resulting from the switch from paddy to maize can be used to fund a part of the state’s contribution to the Maize Corporation of Punjab.
    • This could result in a win-win situation for all — farmers, the Government of Punjab and the country — as there will be lesser methane emissions and less stubble burning.
    • Moreover, ethanol will also reduce GHG emissions in vehicular pollution.

    Consider the question “Switching from paddy cultivation to maize can help the Punjab farmers deal with the several issues. In light of this, explain the issues with paddy cultivation and suggest the way forward.”

    Conclusion

    Their income on a per hectare basis needs to increase more sustainably, protecting the state’s land, water and air from further degradation, and producing more nutritious food. Punjab can then shine again on the nutritional security front with sustainable and climate-resilient agriculture.

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  • [pib] Amended Technology Up-gradation Fund Scheme

    Union Minister of Textiles has reviewed the Amended Technology Up-gradation Fund Scheme (ATUFS) to ease of doing business, bolstering exports & fuelling employment.

    What is ATUFS?

    • The Ministry of Textiles had introduced Technology Upgradation Fund Scheme (TUFS) in 1999.
    • It is a credit linked subsidy scheme intended for modernization and technology up-gradation of the Indian textile industry.
    • It aims at promoting ease of doing business, generating employment and promoting exports. Since then, the scheme has been implemented in different versions.
    • The ongoing ATUFS has been approved in 2016 and implemented through web based iTUFS platform.
    • Capital Investment Subsidy is provided to benchmarked machinery installed by the industry after physical verification.

     

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  • A clean energy transition plan for India

    Context

    India has a long way to go in providing electricity security to its people since its per capita electricity consumption is still only a third of the global average.

    Ensuring energy security and role of coal

    • Energy security warrants the uninterrupted supply of energy at affordable prices.
    •  Thanks to the Electricity Act of 2003, the installed coal-fired thermal power plant (TPP) generation capacity in India more than doubled from 94 GW to 192 GW between March 2011 and 2017.
    • This sharp increase in the installed capacity has enabled the government to increase per capita electricity consumption by 37% while reducing peak demand deficit from 9.8% (2010-11) to 1.6% (2016-17). 
    • TPPs contributed 71% of the 1,382 billion units (BU) of electricity generated by utilities in India during FY 2020-21 though they accounted for only 55% of the total installed generation capacity of 382 GW (as of March 2021).
    • Coal, therefore, plays a vital role in India’s ongoing efforts to achieve Sustainable Development Goal 7, which is “to ensure access to affordable, reliable, sustainable and modern energy for all”.

    Renewable energy utilisation issue and implications for consumers

    • While variable renewable energy (VRE) sources (primarily, wind and solar) account for 24.7% of the total installed generation capacity, as of March 2021, they contributed 10.7% of the electricity generated by utilities during FY 2020-21.
    • However, the ramp-up of VRE generation capacity without commensurate growth in electricity demand has resulted in lower utilisation of TPPs whose fixed costs must be paid by the distribution companies (DISCOMs) and passed through to the final consumer.
    • The current level of VRE in the national power grid is increasing the cost of power procurement for DISCOMs, leading to tariff increases for electricity consumers. 
    • Therefore, India must implement a plan to increase energy efficiency and reduce the emissions of carbon dioxide (CO2) and airborne pollutants from TPPs without making power unaffordable to industries that need low-cost 24×7 power to compete in the global market.

    Way forward: time-bound transition plan

    • Phasing out: The plan should involve the progressive retirement of TPPs(unit size 210 MW and below) based on key performance parameters such as efficiency, specific coal consumption, technological obsolescence, and age.
    • Increasing utilisation: The resulting shortfall in baseload electricity generation can be made up by increasing the utilisation of existing High-Efficiency-Low-Emission (HELE) TPPs that are currently under-utilised to accommodate VRE and commissioning the 47 government-owned TPPs.
    • In addition, the Nuclear Power Corporation of India Limited (NPCIL) is also constructing 11 nuclear power plants with a total generation capacity of 8,700 MW that will supply 24×7 power without any CO2 emissions.
    • The combined thermal (220 GW) and nuclear (15 GW) capacity of 235 GW can meet the baseload requirement (80% of peak demand) during the evening peak in FY 2029-30 without expensive battery storage.
    • The optimal utilisation of existing and under-construction HELE TPPs with faster-ramping capabilities and lower technical minimums also facilitates VRE integration.
    • Since HELE TPPs minimise emissions of particulate matter (PM), SO2, and NO2, the transition plan offers operational, economic, and environmental benefits including avoidance of sustenance Capex and FGD costs in the 211 obsolete TPPs to be retired besides savings in specific coal consumption and water requirement leading to reductions in electricity tariffs and PM pollution.

    Conclusion

    The implementation of transition plan will enable India to safeguard its energy security and ensure efficient grid operations with lower water consumption, PM pollution, and CO2 emissions.

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  • India’s gig economy

    Since the pandemic, there is a growing concern about the pay-out and job-securities of the delivery persons and other gig workers of the e-commerce companies.

    E-com boom in India

    • E-commerce in India is a nascent industry that is probably less than 13 years old.
    • In this short period, it has captured the collective imagination of the nation.
    • The covid-19 crisis has accelerated its adoption, and even die-hard fans of shopping at a physical store have switched to shopping online.

    Various issues faced by the gig workers

    • Harsh working conditions
    • Quality of work and the temporary nature of engagement
    • Absence of a social security net
    • Long hours
    • Delayed pay-outs
    • Pressure to maximize speed of delivery (at the risk of road accidents)

    E-coms under scanner

    The bigger an industry gets, and the more successful it is perceived to be, the more responsible and thoughtful it needs to be in everything it does.

    • Fairness in employment: Some of the concerns are fair and call for introspection on the part of e-commerce companies.
    • Premature regulation: There is a rising demand for regulation of the gig economy created by them.

    Significance of e-commerce sector

    Anyone complaining about the quality of jobs being created by the e-commerce industry probably needs to spend some time understanding the history of job creation in India.

    An attractive sector for India’s ‘jobs problem’

    • Ample workforce: India is a demographically youthful nation, and every year between 17 and 20 million people look for jobs.
    • Attractive sector: This includes around 5 million people who are abandoning highly exploitative and less remunerative farm jobs every year to find employment in other sectors, mostly in the nearest urban districts.
    • Limited success of service sector: The IT and business process outsourcing industry has less than 200,000 jobs a year during its 25 years of existence. This is just a minuscule 1% of the total number of jobs that need to be created.

    Data justifying un-steady flow of income

    • According to CSO, only about 17% of India’s workers are regular wage earners and less than 23% of Indian households have a regular wage earner.
    • In other words, 77% of our households did not have a steady flow of income.
    • Self-employed (46%) and casual labour (33%) together account for nearly 80% of the workforce and claimed to earn less than ₹10,000 per month.
    • These are the realities that cannot be ignored.

    E-commerce: A game-changer

    • The new-age platforms have done is nothing short of a miracle both in terms of creating jobs as well as paying a fair wage.
    • It can be well established that it has provided a better remedy for unemployment in India.

    Why do e-marketplaces matter?

    • Failure of Skills: Neither skill nor knowledge is enough to ensure one generates income.
    • Technology dependency and free market: Efficient marketplace which are enabled by technology, matters.
    • Common platform: A startup such as the Urban Company is an example of a technology-powered marketplace for common services such as plumbing, carpentry, beauty, and house-cleaning, among others.
    • Single marketplace: They brought consumers and suppliers of services (based on skills) on a common platform and made the whole process of matching demand and supply pretty seamless.

    Benefits offered

    • Decent pay: A consumer of a service is willing to pay more for better quality of service if there is a consistent and reliable process of evaluating the capability of service providers.
    • Self-employment: Most of these workers are always self-employed and even with these platforms, they operate in a gig mode which isn’t structurally different.
    • Better livelihood: Youth from rural India had been joining the Ola and Uber platforms in large numbers, many of whom were either unemployed or heavily under-employed.
    • No skill-compulsion: When skilling is voluntary and driven by a free market mechanism, the outcomes are magical.
    • Industrializing the services: These platforms did ‘industrialize’ the services—industrialization allowed effortless consumption and created structured mechanisms to scale services and service capabilities.
    • New consumption pattern: The technology enabled markets resulted in ‘new consumption’ which, in turn, led to creation of more goods and service providers.

    Way forward

    • As far as the e-commerce industry is concerned, there are several obvious lessons that can contribute towards its growth, going ahead.
    • Also it is not fair to paint the entire industry as exploitative or be unduly critical of the gig model which is actually a very good model.
    • Many of the gig workers themselves would be reluctant to take up full time and fixed salaried jobs. Pushing for premature regulation could be lethal.
    • And finally, it is unrealistic to expect the e-commerce industry to create jobs that are probably as well paying like the IT industry.

    Conclusion

    • Creating high-paying jobs was never easy and will never be easy.
    • Nor is it realistic that everyone, or even a majority of the 20 million, will be employed in high-paying jobs.

     

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  • Global Agricultural Productivity Report, 2021

    Global agricultural productivity (GAP) is not growing as fast as the demand for food, amid the impact of climate change, according to a new report.

    GAP Report

    • The GAP Report is released by Virginia Tech’s College of Agriculture and Life Sciences.
    • It urges the acceleration of productivity growth from smallholders to large-scale farmers to meet consumers’ needs and address current and future threats to human and environmental well-being.

    Key indicator: Total factor productivity (TFP)

    • In agriculture, productivity is measured as Total Factor Productivity or TFP.
    • An increase in TFP growth indicates that more crops, livestock, and aquaculture products were produced with the same amount (or less) land, labor, fertilizer, machinery, feed, and livestock.
    • TFP grows when producers increase output using improved technologies and practices, such as advanced seed varieties, precision mechanization, efficient nutrient and water management techniques, and improved animal care practices.
    • Using agricultural inputs efficiently to generate more output reduces agriculture’s environmental impact and lowers costs for producers and consumers.

    Highlights of the report

    • Total factor productivity (TFP) is growing at an annual rate of 1.36 per cent (2020-2019).
    • This is below the annual target of 1.73 per cent growth to sustainably meet the needs of consumers for food and bioenergy in 2050.
    • Climate change has already reduced productivity growth globally by 21 per cent since 1961, the report said.
    • In the drier regions of Africa and Latin America, climate change has slowed productivity growth by as much as 34 per cent.
    • The report noted that middle-income countries including India, China, Brazil and erstwhile Soviet republics continued to have strong TFP growth rates.

    Agricultural productivity in India

    • India has seen strong TFP and output growth this century.
    • The most recent data shows an average annual TFP growth rate of 2.81 per cent and output growth of 3.17 per cent (2010–2019).

    Key recommendations

    • The report urged accelerating investments in agricultural R&D to increase and preserve productivity gains, especially for small farmers.
    • It identified six strategies and policies that would create sustainable agricultural growth at all scales of production:
    1. Invest in agricultural research and development
    2. Embrace science-and-information-based technologies
    3. Improve infrastructure for transportation, information and finance
    4. Cultivate partnerships for sustainable agriculture, economic growth and improved nutrition
    5. Expand and improve local, regional and global trade
    6. Reduce post-harvest loss and food waste

     

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  • Trade Protectionism in India

    Context

    India’s efforts for deepening India’s trade ties with several countries could be scuttled by rising trade protectionism at home.

    Increasing protectionism by India

    • Increase in average tariffs: As Arvind Panagariya has argued, the simple average of India’s tariffs that stood at 8.9 per cent in 2010-11 has increased by almost 25 per cent to 11.1 per cent in 2020-21.
    • These increases in tariff rates have reversed the political consensus on tariff liberalisation that India followed since 1991.
    • Initiator of anti-dumping measures: India is the highest initiator of anti-dumping measures aimed at shielding domestic industry from import competition.
    • According to the WTO, from 2015 to 2019, India initiated 233 anti-dumping investigations, which is a sharp increase from 82 initiations between 2011 and 2014 (June).
    • The anti-dumping initiations by India from 1995 (when the WTO was established) till 2020 stand at 1,071.
    • Expanding the scope of Article 11(2)(f): India recently amended Section 11(2)(f) of the Customs Act of 1962, giving the government the power to ban the import or export of any good (not just gold and silver, as this provision applied earlier) if it is necessary to prevent injury to the economy. 
    • Expanding the scope of Article 11(2)(f) to cover any good is inconsistent with India’s WTO obligations.
    • WTO allows countries to impose restrictions on imports in case of injury to domestic industry, not to the “economy”.
    • Restrictive rules of origin: Finance Minister in her budget speech of 2020 said that undue claims of FTA benefits pose a threat to the domestic industry.
    •  Subsequently, India amended the rules of origin requirement under the Customs Act.
    • Rules of origin determine the national source of a product.
    • This helps in deciding whether to apply a preferential tariff rate (if the product originates from India’s FTA partner country) or to apply the most favoured nation rate (if the product originates from a non-FTA country).
    • But India has imposed onerous burdens on importers to ensure compliance with the rules of origin requirement.
    • The intent appears to be to dissuade importers from importing goods from India’s FTA partners.
    • Impact of vocal for local: The clarion call given by Prime Minister Narendra Modi to be “vocal for local” is creating an ecosystem where imports are looked at with disdain, upsetting competitive opportunities and trading partners.

    What are the implications?

    • Protectionist steps are justified on the ground that they would help domestic companies grow into viable competitors.
    • But the fact is that protectionism does not benefit the domestic economy.
    • It rather encourages inefficiency of domestic manufacturers.
    • It is likely to hurt exports, make domestic goods costlier and reduce benefits to consumers from increased competition.
    • So in the long term, protectionism is likely to have only a negative effect on industry’s ability to compete globally.
    • For India to reap the benefits of the summits and partnerships like Quad, there needs to be a fundamental shift in policy.
    • Amore pragmatic approach in line with the recent initiatives to reverse the retrospective tax legislation and provide support to the flailing telecom sector must be expanded.

    Conclusion

    India can’t maximise its interests at the expense of others. Its experiment with trade protectionism in the decades before 1991 was disastrous. We should recall Winston Churchill’s warning: “Those who fail to learn from history are condemned to repeat it.”

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  • Need for Strategic Reserves of Coal and Gas

    The Centre has stressed the need to build strategic reserves of imported coal and gas as was being done for petroleum products.

    Why need strategic reserves for Coal and Gas?

    • Many countries have started keeping strategic reserves, because when it comes to a crunch, every country will meet its needs first.
    • Russia has curtailed gas supply to Europe because they want more gas to be consumed within their country.
    • There is a surge in power demand combined with a fall in imports due to high global coal prices have led to supply disruptions.

    Do you know?

    In 1998, the AB Vajpayee administration proposed building petroleum reserves as a long-term solution to managing the oil market.

    What are Strategic Reserves?

    • Indian refiners maintain 64.5 days of crude storage, so India has overall reserve oil storage of 74 days
    • Indian Strategic Petroleum Reserves Limited (ISPRL) is an Indian company responsible for maintaining the country’s strategic petroleum reserves.
    • ISPRL is a wholly-owned subsidiary of the Oil Industry Development Board (OIDB), which functions under the administrative control of the Ministry of Petroleum and Natural Gas.
    • It maintains an emergency fuel store of total 5.870 million cubic meters of strategic crude oil enough to provide 9.5 days of consumption.

    SPRs in India

    S. No. Location Capacity
    1 Visakhapatnam, Andhra Pradesh 1.33 million tonnes
    2 Mangalore, Karnataka 1.5 million tonnes
    3 Padur, Karnataka 2.5 million tonnes and an additional 2.5 million tonnes under construction
    4 Chandikhol, Odisha 4 million tonnes (under construction)

     

    Why were SPRs created?

    • Gulf War, 1990: It caused a sharp rise in oil prices and a massive increase to India’s imports.
    • Forex fluctuations: During the subsequent 1991 Indian economic crisis, foreign exchange reserves could barely finance three weeks’ worth of imports while the government came close to defaulting on its financial obligations.
    • Price volatility: India was able to resolve the crisis through policies that liberalized the economy. However, India continued to be impacted by the volatility of oil prices.

    How are they constructed?

    • The crude oil storages are constructed in underground rock caverns and are located on the East and West coasts of India.
    • Crude oil from these caverns can be supplied to the Indian Refineries either through pipelines or through a combination of pipelines and coastal movement.
    • Underground rock caverns are considered the safest means of storing hydrocarbons.

     

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