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Subject: Economics

  • Don’t waste the oil crisis

    This article discusses the factors that contributed to oil prices falling below zero, and where the prices are headed in the near future. There are suggestions for India to make the most of this oil crisis. In the last week, we covered the same topic but its focus was on increasing the storage capacity. This article also covers the geopolitical implications of oil prices remaining low for long.

    What negative price of the benchmark US crude WTI mean?

    • The collapse in the price of WTI reflected a technical peculiarity of futures trading.
    • Paper traders would normally have had two options- 1) To let their contract expire and take physical delivery 2) To pass on the contract to someone else.
    • The US was running out of crude oil storage capacity and traders knew they could not “risk” taking delivery.
    • There was no physical space to hold the product.
    • So their only option was to sell the contract.
    • On the last day before the contracts expired, the traders in desperation “paid” to offload their risk.
    • There was no physical transaction of oil.
    • The current future price is back in positive territory.

    The world running out of oil storage capacity

    • The world and not just the US was fast running out of storage capacity.
    • Production in excess of demand: This was because oil production was way in excess of demand.
    • The latter had crashed by almost 30 million barrels a day or mbd (the equivalent of OPEC’s entire production) because of the COVID-induced lockdown of transportation and industry.
    • The price of the other crude benchmarks had also dropped but not the same extent — the North Sea Brent fell, for instance, to $15/bbl, a level not seen since 1999.
    • The reason was that unlike the WTI, which is traded in the US and therefore dependent on US inland storage capacity, the other crudes have access to seaborne storage (oil tankers).
    • This latter capacity is, however, fast filling up and the price of these crudes may also hit historic lows.

    So, where the oil prices are headed?

    • Oil prices will be volatile downwards until demand picks up and/or supply is further cut.
    • Demand will depend on the curve of post-COVID economic recovery.
    • Supply will rest on the outcome of further discussions amongst OPEC, Russia and, ironically, the US.
    • OPEC and Russia had earlier this month agreed to cut production by 10 mbd.
    • But clearly, this is not enough and further cutbacks have to be agreed on.
    • Whatever the scenario for economic recovery or supply constraints, there is a slim likelihood of crude oil prices reaching the average price levels of 2019 ($64) over the next 12 months or so.
    • More likely, they will be volatile downwards with $50 as the ceiling and with no floor.
    • This “low for longer” price outlook raises two issues for India’s policy-makers.

    As India depends on imports for over 80% of its oil requirements, oil prices have wide implications for the financial health of India. Safe oil supply lines are essential for its energy security. Both these points are important from the UPSC point of view. Following two points deal with these two factors.

    Two issues that India’s policy-makers need to consider-

    1. Disruption of oil supply lines and problems of diaspora

    • Every oil producer with no exception will face a budgetary crisis.
    • Some, like Saudi Arabia, the UAE and Kuwait will finance their social and economic commitments by cutting costs, increasing debt and drawing down on their sovereign reserves.
    • Others like Iran, Iraq, Nigeria and Venezuela, who have no such cushion and whose credit ratings are junk, will confront deepening political and social crises.
    • Economic plan: India should build into its economic plans the possibility that its traditional oil supply routes could get disrupted.
    • And that its diaspora, whose remittances are of significance, could face disproportionate hardship as these economies retrench.

    India has the largest diaspora in the world and sends as much as $80 billion back home as remittances. So, any impact on diaspora in oil economies has implication for India from this perspective as well.

    2. Empower the oil traders and remove bureaucratic control

    • On the day prices hit negative territory, it is unclear whether the trading experts in our oil PSUs had the flexibility to even contemplate “buying” the WTI futures contract for June, taking delivery, shipping it to India and storing it someplace.
    • It is also not clear whether they had the authority to lock in low prices through forward contracts.
    • Storage capacity and WTI quality mismatch: There is a shortage of storage capacity in India and a mismatch between the quality of WTI and the requirements of our refineries.
    • India cannot leverage the current market conditions of low and volatile oil prices to our national advantage unless we empower the traders and leave them unencumbered from bureaucratic control.
    • Most importantly, protect them from the three Cs ( CVC, CBI and CAG) in case their trade goes awry.

    Conclusion

    This oil market crisis could be made to work to our advantage. We must not waste this opportunity. There is a need to remove the bureaucratic hurdles in our PSUs, increasing storage capacity and sound financial planning by the government to make the most of this oil crisis.

    Back2Basics: What is WTI  and Brent crude benchmark?

    • West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.
    • This grade is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.

    Brent Crude

    • Brent Crude is a trading classification of sweet light crude oil that serves as one of the two main benchmark prices for purchases of oil worldwide.
    • This grade is described as light because of its relatively low density, and sweet because of its low sulphur content.

    Futures contract

    • In finance, a futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other.
    • The asset transacted is usually a commodity or financial instrument.

  • What is Operation Twist?

    The Reserve Bank of India (RBI) has announced simultaneous purchase and sale of government bonds in a bid to soften long-term yields under its Operation Twist.

    Operation Twist

    • Operation Twist is a move taken by U.S. Federal Reserve in 2011-12 to make long-term borrowing cheaper.
    • It first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
    • It is the name given to a Federal Reserve monetary policy operation that involves the purchase and sale of bonds.
    • The operation describes a form of monetary policy where the bank buys and sells short-term and long-term bonds depending on their objective.

    Its genesis

    • The name “Operation Twist” was given by the mainstream media due to the visual effect that the monetary policy action was expected to have on the shape of the yield curve.
    • If we visualize a linear upward sloping yield curve, this monetary action effectively “twists” the ends of the yield curve, hence, the name Operation Twist.
    • To put another way, the yield curve twists when short-term yields go up and long-term interest rates drop at the same time.

     Back2Basics: Open Market Operations

    • Open market operations are the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
    • The objective of OMO is to regulate the money supply in the economy.
    • When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
    • OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.

  • Recent amendments to FDI policy – a boon or a bane?

    This article deals with the recent changes made by the government in the FDI policy. The major change was that the government approval route was made mandatory for investment coming from certain countries. There are certain ambiguities and issues with the latest changes.These are discussed here.

    What changes were made in the FDI policy?

    • Government approval route for investment: Investment is permitted through government route only in the following cases-
    • 1) An entity situated in a country which shares a land border with India.
    • 2) Where the owner of investment into India is situated in or is a citizen of any such country.
    • Further, any transfer of ownership of any existing or future foreign direct investment (FDI) in an entity in India (indirectly or indirectly) resulting in the beneficial ownership falling within the purview of the above restrictions, would require the government’s approval.

    Ambiguities arising due to press note

    • There appear to be certain ambiguities arising from the press note and the amendments to the Rules.
    • The usage of the term “FDI” in the press note and the relevant amendments to Rule 6(a) of the Rules, seem to suggest that the restrictions are on investments that are structured as FDI.
    • FDI is defined under the Rules to mean investment through equity instruments by a person resident outside India in an unlisted Indian company, or in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company
    • The restriction doesn’t seem to be on investments by an FPI registered with SEBI.
    • FPI is permitted to invest in listed or to be listed Indian companies’ securities, in the manner set out in Schedule II of the Rules.
    • Also not on investments under the FVCI route.
    • Investment through FVCI is an investment in the securities of Indian companies operating in certain specific sectors, in the manner set out in Schedule VII of the Rules.
    • It is also unclear if “foreign investments” in LLPs, not being FDI, would also be subject to these restrictions.
    • This ambiguity is further amplified by the subject line of the press note, which reads “curbing opportunistic takeovers/acquisitions of Indian companies”, without making any reference to LLPs.
    • And the amendments to Rule 6(a) of the Rules, which only pertain to investments in equity instruments of an Indian company under Schedule I of the Rules.

    The points mentioned here add to our understanding of FDI and issues with it. A question based on the issue can be asked, for ex-“What are the reasons for a steady decline in FDI in India? To what extent FDI poilcy is responsible for this?”

    Difficulties in seeking government approval

    • The requirement of seeking government approval may also pose operational difficulties for many entities.
    • For instance, the approval requirement seems to be applicable in all cases of further investments irrespective of the threshold.
    • It applies whether or not such investments are in the form of rights issue (where all or almost all existing shareholders also participate) or preferential allotments.
    • Which results in causing some amount of hardship for entities to raise further capital, especially where entities already have existing investments from investors situated in countries like China.
    • The amendments to the Rules also do not attempt to clarify the applicability of the approval requirements where there is no change in the shareholding percentage of the investor pursuant to a follow-on investment.
    • Another aspect which is important, is the usage of the terms “directly or indirectly” in the context of transfer/ divestment of beneficial ownership of existing FDI, to entities in/ citizens of a country which shares a land border with India.
    • This may require global acquisitions of entities in other jurisdictions which have subsidiaries/ investee companies in India, by a person in one of India’s neighbouring countries, to be subject to the approval requirements, thereby impacting timelines for closing.

    No restrictions on external commercial borrowings (ECB)

    • There are presently no such commensurate restrictions under the ECB regulations.
    • Therefore, an eligible borrower could avail ECB from a recognised lender.
    • That includes a foreign equity holder in one of India’s neighbouring countries which are FATF compliant for any immediate funding requirements.
    • Any conversion of the ECB or any part thereof, into shares of the Indian company, would be subject to the restrictions and approval requirements under the FDI policy and the Rules.

    Conclusion

    The government/RBI should provide necessary clarifications on these issues and ambiguities at the earliest. With there being no sunset clause presently contemplated on the applicability of these restrictions, only time will tell if the amendments to the Rules are a boon to the economy and a step in the right direction, or otherwise.

    Back2Basics: What is ‘Rights issue’

    • Cash-strapped companies can turn to rights issues to raise money when they really need it.
    • In these rights offerings, companies grant shareholders the right, but not the obligation, to buy new shares at a discount to the current trading price.
    • A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.
    • This type of issue gives existing shareholders securities called rights.
    • With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.
    • The company is giving shareholders a chance to increase their exposure to the stock at a discount price.
    • Until the date at which the new shares can be purchased, shareholders may trade the rights on the market the same way that they would trade ordinary shares.
    • The rights issued to a shareholder have value, thus compensating current shareholders for the future dilution of their existing shares’ value.
    • Dilution occurs because a rights offering spreads a company’s net profit over a larger number of shares.
    • Thus, the company’s earnings per share, or EPS, decreases as the allocated earnings result in share dilution.

    What is the Limited Liability Partnership (LLP)?

    • LLPs are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners.
    • In a general partnership, all partners share liability for any issue that may arise.
    • The LLP is a formal structure that requires a written partnership agreement and usually comes with annual reporting requirements depending on your legal jurisdiction.

    What is the FVCI route of investment?

    • Foreign Venture Capital Investor’ (FVCI) means an investor incorporated and established outside India and registered with Securities and Exchange Board of India under Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000.
    • The amount of consideration for all investment by an FVCI has to be received/made through inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained by the FVCI with an AD bank in India.
    • The foreign currency account and SNRR account shall be used only and exclusively for transactions under the relevant Schedule.

  • Restarting the coronavirus-hit economy

    The theme of the article is the restarting of the Indian economy. Striking the right balance between livelihood and the spread of the virus is important for India. While India has been doing well on the curbing of the spread of the virus, its economy remains in the complete shutdown. So, we must restart our economy and this article offers some suggestions to do so and some trends that our economy is showing are discussed here.

    Striking the balance between the economy and the spread of the virus

    • One critical problem is striking the right balance between curbing the spread of the virus and keeping the economy functioning.
    • We cannot have the poor, the labourers and the migrants bear the brunt of the effort to contain the spread of the virus.
    • And nor do we want to weaken the foundations of the economy so much that we emerge from the pandemic onto an economic wasteland.
    • The choice between lives and economy is also a choice between lives and lives.

    Appreciation of India’s effort to curb the virus

    • India’s effort to curb the spread of the virus has received appreciation — not just the state of Kerala, which has got accolades from around the world, but the country as a whole.
    • The incidence of COVID-19 remains low in India.
    • Of every 10 million people, there are as yet 5 lives lost in India.
    • Comparison with the world: This is vastly lower, not just compared to Belgium, which tops the list with 5,180 fatalities for every 10 million people, but many other nations, such as the United States with 1,370 fatalities, Spain with 4,550, Italy with 4,080 and the UK with 2,550 fatalities.

    One of the many puzzles associated with the Covid-19 is variation shown by it in fatality rate across the globe. Following are some figures about it.

    Worldwide variation in the fatality rate

    • To be fair, the low fatality, per 10 million population, is not specific to just India.
    • We have comparably low figures currently in almost all African and South Asian nations.
    • Thus, it is seven for Bangladesh, three for Sri Lanka, nine for Pakistan, two for Tanzania, one for Nigeria, and 0.3 for Ethiopia.
    • No one fully understands these huge differences between Europe and North America, on the one hand, and Africa and South Asia, on the other.
    • Isolation of nation, not a factor: This cannot be because these nations are more isolated.
    • Bangladeshis are among the most globally scattered people and Ethiopia has huge interactions with China, but the fatality rates are low in both countries.
    • Why is this so? The short answer is we do not know.

    Defeating the virus by keeping reproduction number below one

    • It is important to realise that the risk cannot be cut to zero — nothing in life is a zero-risk activity.
    • To defeat the virus, the aim has to be to keep the “reproduction number”, or R-0, down to less than one.
    • R-0 refers to the number of people, on average, who get infected by each infected person.
    • When R-0 reaches less than one in any given region, such as is the case in Kerala, we know that the incidence of the disease is winding down in that region.

    Following points are important from the UPSC perspective. A question can be framed on the economic damage of the Covid-19, opportunities provided by it, its implications for the vulnerable section of the society, unemployment, international trade, changes in the economic policies of the government etc.

    Coming out of lockdown: Economic policy challenge

    • The economic policy challenge is about how to come out of the lockdown.
    • This has to be done carefully, but quickly.
    • The stringency of India’s lockdown at top: A study by researchers at the University of Oxford, of the stringency of lockdowns in 73 countries, places India right on top.
    • For a short while, this is worth it, and also impressive for a populous nation like India.
    • Not desirable position: The top rank on the stringency index is not something any country will want to occupy for long.
    • That will have a devastating effect on the poor and damage the nation’s long-run economic prospects.

    Trends in the Indian economy

    • Unemployment rate at an all-time high: There are studies showing that India’s unemployment rate is now at 24 per cent, an all-time high.
    • Biggest ever capital outflow in a month: March also saw the biggest outflow of capital from the nation ever recorded in one month — roughly $15 billion left the nation.
    • This also happens to be the largest capital outflow from any emerging economy in March.
    • Clearly, global players are reacting to the fact that the economy is not functioning.
    • Rupee at an all-time low: These sentiments have weakened the Indian rupee, which is now at an all-time low.
    • Some of these problems are inevitable in this dystopian world; we can deal with these problems for a short while.
    • Global trade: If these trends persist, India would end up ceding space to other nations in global trade, exports and business, and the suffering will be huge on the working classes.

    Way forward in opening the economy

    • Once this phase of the lockdown ends on May 3, we will have to start opening businesses, allowing the private sector, especially the informal enterprises and small firms, to operate.
    • Rule of behaviour: There will have to be rules of behaviour in place, such as social distancing, masks, hand-washing, but we have to begin to facilitate poor labourers to reach their place of work, and our farms and factories to function.
    • Focus on participation, not permission: We have to encourage the rules of behaviour to continue by “participation” and not by bureaucratic “permission”.
    • India has a long history of the “permit raj”, where all businesses were beholden to the bureaucracy for what they did.
    • This had a tendency to strangle all but a few big firms and had held up the nation’s economic growth for long.

    Conclusion

    India stands at an important juncture. A misstep at such moment could turn the course of history for the nation. So, the right steps at various fronts from containing the spread to the reopening of the economy are required from the government.

  • [pib] Nutrient Based Subsidy (NBS) rates and its fixation

    Union Cabinet has approved fixation of Nutrient Based Subsidy (NBS) rates for Phosphatic and Potassic (P&K) fertilizers for the year 2020-21.

     

    Fertilizer subsidy  accounts for large fiscal subsidies (about 0.73 lakh crore or 0.5 per cent of GDP), the second-highest after food.  We can expect a question like – “Discuss the role of NBS in ensuring land fertility and farm productivity in India.”

     

    About Nutrient Based Subsidy (NBS) Scheme

    • The NBS Scheme for fertilizer was initiated in the year 2010 and is being implemented by the Department of Fertilizers.
    • Government is making available fertilizers, Urea and 21 grades of P&K fertilizers to farmers at subsidized prices through fertilizer manufacturers/importers.

    What NBS provides?

    • The scheme allows the manufacturers, marketers, and importers to fix the MRP of the Phosphatic and Potash fertilizers at reasonable levels.
    • The MRP will be decided considering the domestic and international prices of P&K fertilizers, inventory level in the country and the exchange rates.
    • The NBS ensures that adequate quantity of P&K is made available to the farmers at a statutory controlled price.

    Fertilizers covered

    • Under this, a fixed amount of subsidy decided on an annual basis is provided on each grade of subsidized Phosphatic and Potassic (P&K) fertilizers, except for Urea based on the nutrient content present in them.
    • It is largely for secondary nutrients like N, P, S and K and micronutrients which are very important for crop growth and development.
    • In India, urea is the only controlled fertilizer and is sold at a statutory notified uniform sale price.

  • Fiscal empowerment of States

    The article elaborates on the central role played by the States in the fight against Covid-19. The article emphasises the role that States can play in the implementation of the various measures to tackle the epidemic and economic revival of the country. It also highlights the lack of resources at the States’ disposal and reasons for the lack such as revenue loss in the lockdown and lower devolution by the Central Government. In the end, there is a suggestion to increase the borrowing limit of the States’.

    Time to relax fiscal constraints on the States

    • The speed of economic revival will depend on how long it will take to revive economic activities and the volume of stimulus through public spending the government is able to provide.
    • It now appears that the lockdown will be lifted in stages and the recovery process will be prolonged.
    • The country is literally placed in financing a war-like situation.
    • The government will have to postpone the fiscal consolidation process for the present, loosen its purse strings and finance its deficits substantially through monetisation.
    • This is also the time for the government to announce relaxation in the States’ fiscal deficit limit to make them effective participants in the struggle.

    The following points highlight the importance of States in dealing with the crisis. The federal structure of India comes to the fore here. The UPSC can aks question on this theme, for example, “Discuss the important role played by the States in dealing with the Covid-19 and how it underscores the federal character of the Indian polity?”

    The important role played by the States

    • Prioritise health spending: It is also important for the States to realise the importance of health and prioritise spending on health-care services.
    • Being closer to the people, the States have a much larger responsibility in fighting this war.
    • Public health, as well as public order, are State subjects in the Constitution.
    • Acts invoked for lockdown: Some States were proactive in dealing with the COVID-19 outbreak by involving the Epidemic Diseases Act, 1897, even before the Government of India declared a universal lockdown invoking the Disaster Management Act, 2005.
    • Of course, the Centre under Entry 29 of the Concurrent List has the powers to set the rules of implementation which states, “Prevention of the extension from one State to another of infectious or contagious diseases or pests affecting men, animals or plants”.
    • Implementation at the ground level: While Central intervention was done to enable, “consistency in the application and implementation of various measures across the country”, the actual implementation on the ground level will have to be done at the State level.
    • Furthermore, States are better informed to decide the areas and activities where relaxations should be done as the coronavirus curve is flattened.
    • Coordination: Hopefully, there will be better coordination between the Union and State governments instead of claiming credit and apportioning blame.

    Covid-19 has made clear the neglect and poor state of health in India. The UPSC can frame the question based on the health infrastructure and expenditure on it. The question can be framed on the following lines “Covid-19 has highlighted India’s lack of preparedness and the poor health infrastructure in the country. What are the reasons for it? Give suggestions to improve it.”

    Neglect of the health-care sector in the country

    • The pandemic has underlined the historical neglect of the health-care sector in the country.
    • Expenditure on health as a percentage of GDP: The total public expenditures of Centre and States works out to a mere 3% of GDP.
    • In 2017-18, in per capita terms, the public expenditure on medical and public health varied from an abysmal ₹690 in Bihar and ₹814 in Uttar Pradesh to the highest of ₹2,092 in Kerala.
    • The centrally sponsored scheme, the National Health Mission, is inadequately funded, micromanaged with grants given under more than 2,000 heads and poorly targeted.
    • The focus of “Ayushman Bharat” has been to advocate insurance rather than building wellness centres.

    Economic revival by the States

    • Besides protecting lives and livelihoods, States will have to initiate and facilitate economic revival, and that too would require substantial additional spending.
    • Hand holding small and medium enterprises which have completely ceased production, providing relief to farmers who have lost their perishable crops and preparing them for sowing in the kharif season are other tasks that require spending.
    • In fact, States have been proactive. Kerala came out with a comprehensive package allocating ₹20,000 crores to fight the pandemic.
    • Almost all States have taken measures to provide food to the needy besides ramping up health-care requirements.

    Lack of resources and revenue loss suffered by the States

    • While the requirement of States for immediate expenditures is large, they are severely crippled in their resources.
    • In the lockdown period, there has virtually been no economic activity and they have not been able to generate any revenue from State excise duty, stamp duties and registration fees, motor vehicles tax or sales tax on high-speed diesel and motor spirit.
    • The revenue from Goods and Services Tax is stagnant and compensation on time for the loss of revenue has not been forthcoming.
    • As the recovery process will be staggered, it is doubtful whether tax revenues will register any positive growth in 2020-21.
    • Not surprisingly, the State has decided to monetise land through auctions to get money besides regularising unauthorised constructions by paying high fees.

    Lower tax devolution from the Centre

    • The position regarding tax devolution from the Centre is even more precarious.
    • To begin with, the tax devolution in the Union Budget estimate is lower than the Commission’s estimate by ₹70,995 crores.
    • In fact, the Budget estimate for 2020-21 itself is a huge overestimate when seen against the 11-month actual collections in 2019-20.
    • The required growth to achieve the Budget estimate is 33.3% over the annualised actual collection.
    • The projections are that the growth of nominal GDP in 2020-21 will be just about 4%.
    • And if the tax revenue increases by the same rate, devolution to the States would be lower by ₹2.2-lakh crore than the Finance Commission’s estimate.
    • This results in a loss of ₹9,173 crores for Tamil Nadu, ₹9,000 crores for Andhra Pradesh, ₹8,000 crores for Karnataka, ₹4,671 crores for Telangana, and ₹4,255 crores for Kerala.
    • Supplementary report by the Finance Commission: There is a strong case for the States to go back to the Finance Commission with a request to make and give a supplementary report.

    Of late, the poor fiscal health of the States has been in the news. Following are some of the factors that are responsible for it. A question can be asked with relation to this problem like “The States are facing fiscal constraints owing to the lack of revenue. What are the reasons for it? What are the options available to help the States to deal with such a situation?”

    Problems faced by the States in raising resources

    • There is only a limited scope for expenditure switching and reprioritisation now.
    • Limited space for borrowing: Their borrowing space too is limited by the fiscal responsibility and budget management limit of 3% of Gross State Domestic Product (GSDP).
    • High yield no the State bonds: Faced with an acute fund crunch, Kerala floated 15-year bonds but was faced with a huge upsurge in the yield to 8.96%.
    • Increase in the WMA limit: The announcement by the Reserve Bank of India on the increase in the limit of ways and means advances by 60% of the levels prescribed in March 31 could help States to plan their borrowing better.
    • But that is too little to provide much relief.

    Conclusion

    It is important for the Central government to provide additional borrowing space by 2% of GSDP from the prevailing 3% of GSDP. This is the time to fiscally empower States to wage the COVID-19 war and trust them to spend on protecting lives, livelihoods and initiate an economic recovery.

  • Super-power rivalries exacerbated by coronavirus pandemic offer India an opportunity

    The article discusses three fronts on which actions are required viz- health, economy and geopolitics. How much the global economy is going to be affected? how the US-China rivalry would affect the recovery? what the lack of global coordination means? all such questioned are discussed here.  It also suggests actions that India should take to deal with the crisis.

    Many unknowns than knowns about Covid-19

    • The virus currently has many more unknowns than knowns.
    • We don’t know for sure how it spreads, whether people can get re-infected, whether it is mutating, whether the hot weather kills it, and what the real fatality rate is.
    • We don’t know for sure how far we are from an anti-viral.
    • We know that we are at least 18 months away from having a vaccine that works and is available at scale.
    • Till an anti-viral is found, economic activity will be constrained, and this will affect people, industries and countries in disparate ways.

    The extent of damage to the global economy

    • Loss of ten trillion dollars: The global economy is set to lose close to ten trillion dollars because of the “self-induced coma” it has been put into — to use Paul Krugman’s evocative phrase.
    • Loss of effectiveness of monetary policy: The preceding global financial crisis (GFC) has exhausted the efficacy of monetary tools.
    • In addition, corporates globally are leveraged to the tune of $12 trillion.
    • The slump in demand: The accompanying oil price collapse, beginning due to a spat between producers Saudi Arabia and Russia have been compounded by a precipitous slump in demand.
    • The Chinese economy can’t help as it did during the GFC, as it is hemmed in itself.
    • Even if it could, there is too much global suspicion of China to allow it to do so. So, countries will largely be on their own.

    Tensions between the US and China

    • The tensions between the US and China have escalated into a full-scale superpower crisis after the virus spread.
    • Since 2010, there has been great concern in the US about China’s rise.
    • China’s muscular foreign policy together with its aggressive stance on multiple issues, most importantly on technology and technology standards, has created conflict.
    • The coronavirus is spreading in the US in an election year and smashing its economy.
    • The virus infected over three-quarter of a million people in the country and killed more than 40,000.
    • After this, China could be seen as enemy number one in the US.

    No global coordination

    • No wonder then that at a time when the world yearns for global coordination, there is almost none — in healthcare responses and economic coordination.
    • Multilateral agencies, especially the WHO and UN, suffer a complete loss of credibility.
    • India needs to chart its own course in these turbulent times.
    • If India takes the requisite actions it may come out well.

    Following suggestions are important from the UPSC perspective. The suggestions deals with three fronts-health, economic and geopolitics.

    How India could come out of the crisis?

    • India needs to act at three levels — health, economic and geopolitical.

    1. Actions at the health level

    • The Union Ministry of Health and Family Welfare has done well to stem the spread of the infection.
    • It has sensitised the public, introduced the concept of social distancing and isolation in the most challenging situations.
    • Now it must test at scale and isolate.

    2. Actions at the economic level

    • Indians cannot afford to stay locked much longer.
    • We are too poor and too many of us live on a day-to-day basis — not even on a paycheck to paycheck basis.
    • Economic activity will be subdued in the near-term, but it must be “unlocked”.
    • The current IMF projections suggest that India will have the highest growth rate in the world this year.
    • Oil prices have collapsed, really helping our balance of payments.
    • Our food stocks are plentiful, the rabi crop has been good, and the prognosis for the monsoon is positive.
    • Low inflationary pressure: This, together with the fact that aggregate demand is down, will dampen inflationary impulses.
    • The “new RBI” has acted boldly and strongly.
    • It has taken prompt actions to reduce rates, increase liquidity, adjust prudential norms, allow moratoriums, and protect financial entities.
    • Indian is better placed: The weakened rupee will help our exports and with a debt to GDP ratio of about 73 per cent, along with better growth prospects, India is relatively better placed than several other countries.
    • We should, therefore, not unduly worry about our credit rating. This both allows and actually requires the government to act on the fiscal front.
    • The government needs to implement the following four steps to spur the economy.
    • (1) It should do so by “printing money” given the moderated inflation
    • (2) It needs to provide additional direct benefit transfers of Rs 2,000 every month for three months to Jan Dhan accounts, together with foodgrains release from the FCI, to the tune of around Rs 65,000 crore, to alleviate people’s miseries.
    • (3) It needs to protect MSMEs directly by providing them working capital (with an RBI backstop) and, like in the UK, provide 80 per cent of the salary to employees of the “GST-paying MSMEs” for six months.
    • (4) It needs to launch a massive public works programme outside the Budget as suggested by the chairman of CII’s National Committee of Infrastructure and PPP, Vinayak Chatterjee.
    • This fund should be earmarked for infrastructure and a quarter of its budget should be set aside for strengthening and upgrading primary health centres.
    • The allocation should not be less than Rs 200,000 crore.
    • Push through pending reforms: The government should take advantage of the crisis to push through much needed pending reforms in agriculture-especially those pertaining to APMC), power-pricing and discoms, banks-government ownership at 30 per cent and bad banks.
    • Revenue from private gold: Given the paucity of tax revenues, the government could also consider having the PM making an appeal for private gold from people and temples.
    • It could target 1,000 tonnes of gold worth $30 billion and offer a five per cent tax-free return repayable ($1.5 billion a year) after 10 years, in rupees or gold.

    3. Actions at the geopolitical level

    • India can come out ahead if we act now.
    • Super-power rivalries will create opportunities to replace China as a major supplier to the US and Japan.

    Conclusion

    The battle to deal with the corona disaster has to be fought on many fronts. India must form a strategy and act on various front i.e. health, economic and geopolitical- to be victorious at the end.

  • Monetary Policy Committee (MPC) to meet 5x this Fiscal

    The rate-setting Monetary Policy Committee (MPC) will be meeting five times in FY21, against seven in FY20.

    Monetary Policy tools are all-time favourites of UPSC. Kindly go through the link given in the Back2Basics section.

    Monetary Policy Committee (MPC)

    • The Monetary Policy Committee (MPC) is a committee of the RBI, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
    • The RBI Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC to bring more transparency and accountability in fixing India’s Monetary Policy.
    • The policy is published after every meeting with each member explaining his opinions.
    • The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.
    • Suggestions for setting up a Monetary policy committee is not new and goes back to 2002 when YV Reddy committee proposed to establish an MPC, then Tarapore committee in 2006, Percy Mistry committee in 2007, Raghuram Rajan committee in 2009 and then Urjit Patel Committee in 2013.

    Composition and Working

    • The committee comprises six members – three officials of the RBI and three external members nominated by the Government of India.
    • The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
    • The Governor of RBI is the chairperson ex officio of the committee.
    • Decisions are taken by a majority with the Governor having the casting vote in case of a tie.
    • They need to observe a “silent period” seven days before and after the rate decision for “utmost confidentiality”.

    Back2Basics

    Monetary Policy tools and Money Supply in India

     

    Also read:

    How reverse repo rate became benchmark interest rate in the Indian economy?

  • Let’s make the most of dirt-cheap oil

    For the first time in history, oil prices hovered in the negative territory recently. This article discusses how this opportunity can be utilised by India in various ways.

    Oil selling for negative price

    • In a dramatic and unprecedented turn of events on Monday, crude oil began trading in negative territory for the first time since records began.
    • The price on a futures contract for West Texas crude that was due to expire on 21 April crashed to minus $37.63 a barrel.
    • Covid effect: This is a direct result of the market mayhem caused by covid-19, which has resulted in lockdowns around the world, brought economies to a screeching halt, and crushed demand for transport fuel.
    • No space to store oil: Reports say there is so much unused oil in the US that there is no space left to store fresh supplies.
    • Storage costs money. Thus, oil producers had to pay to offload their stock.

    How did we get here?

    • Thanks to the covid-19 pandemic, multiple demand and supply shocks are wrecking economies across the globe and bringing economic activity to a standstill.
    • Assembly lines have halted, supply chains have snapped, commodity prices have fallen, the services sector has ground to a halt, financial markets are in a panic.
    • And the Great Lockdown has depressed various other economic variables and pushed the world into a deep recession.
    • Tensions among suppliers: The sudden fall in oil prices is tied not just to a demand crunch, but also tensions among the world’s major suppliers.
    • Relatively high prices over 2019 had allowed non-traditional players like US shale oil companies to thrive.
    • Meanwhile, Saudi Arabia and Russia, the most influential members of OPEC+, the Organization of Petroleum Exporting Countries that have allied with Russia on and off since 2016, had been in competition to expand their market share.
    • A flashpoint arose in early March, when Moscow refused to agree to OPEC’s desired production cuts to keep prices stable.
    • This prompted a price war with Riyadh, as both attempted to increase market share or put other competitors (particularly US shale) out of business.
    • Though a production cut has since been agreed to between Russia and Saudi Arabia, demand is estimated to have fallen far more than that.
    • Contracts for late 2020 are still going for only around $30 per barrel.
    • As a result, producers such as Kuwait, Oman, Nigeria, and Venezuela will continue to feel the strain.

    How can India maximise potential gains?

    • India imports nearly 80% of the oil it consumes, and so cheap oil is to be taken as an opportunity.
    • Under normal circumstances, such a drastic fall in oil prices would have a big positive effect on the finances of the Union government and the economy in general.
    • The current circumstances, however, are anything but normal.
    • So, India must use this low price opportunity in the following ways.

    The strategic petroleum reserves (SPRs) assumes significance in India’s energy security whenever tension rises in the region from which we import our oil. Take note of the suggestion with respect to SPRs.

    Fill up the strategic petroleum reserves (SPRs)

    • The best way to turn this situation to India’s advantage, therefore, is to grab this chance to fill up the country’s strategic petroleum reserves (SPRs).
    • Like other large consumers, India holds oil inventories for the sake of energy security during a supply cut-off or some other emergency.
    • How much are our SPRs? Our SPRs are estimated at five days’ worth of oil imports, stored in underground salt caverns, and a further 65 days’ worth held by commercial refineries.
    • Current prices provide a perfect opportunity to bolster these reserves in preparation for future shocks.
    • The government-owned agency, Indian Strategic Petroleum Reserves Limited (ISPRL), should now be focused on filling up and utilizing the existing capacity of the country’s underground caverns.
    • In fact, it should be hardwired to consider filling these up each time the price of Brent crude falls below $40.
    • Separately, in the second phase of India’s SPR plans should be fast-tracked.
    • Working with private players: This involves working with private players to design, build, finance, operate, and transfer underground oil tanks.

    Negotiate long term contracts at current prices

    • Commercial refineries, many of which are public-sector enterprises, should strike and renegotiate long-term contracts with suppliers based on current prices.
    • Other firms reliant on oil and subject to the vagaries of oil prices, such as airline companies, should also do likewise.

    Geographically diversify the SPR holdings

    • This is also an opportune time for the Indian government to geographically diversify its SPR holdings.
    • To lower transport and storage costs, and to diversify risk, Oman or Fujairah in the UAE could be contracted to hold a quantity of oil on India’s behalf.
    • These reserves can be shipped to India when needed.
    • India should also operationalize, modernize and add to its oil tank facilities in Trincomalee, Sri Lanka, which is partially owned by India.

    Conclusion

    The global energy landscape is likely to remain volatile in the near future and oil is likely to remain an important part of India’s energy needs. This is a good time to enhance the country’s energy security.

     

  • The occasion to revisit the state’s role

    The role of the state has come in the focus in the corona crisis. This article describes how the dominant role once played by the state declined over time and what implications it has for society. In the next part of the article, need to revisit the political system of the country is emphasised.

    Paradigm shift due to Covid-19

    • We are unlikely to return to pre-coronavirus homeostasis after the war against it is won.
    • No section or sector is going to remain untouched and unaltered by the devastation the novel coronavirus is now unleashing.
    • Its annihilation in the near future is not on the cards.
    • Vaccines are going to be slow in coming; therefore, its taming is not immediate.
    • The second wave of an outbreak is a realistic probability.
    • Unlike the other threats: Unlike other threats to humanity such as global warming and nuclear armageddon, this threat is now, not in the future.
    • It is here simultaneously for everyone, not for someone else and somewhere else; its casualties are around us, not in faraway battlefields or polar regions and coastal areas.
    • No country can rescue another; it is each one fending for itself.

    Possibility of a deep recession in the world

    • If the lockdown continues, the world economy will contract by as much as 6% according to the International Monetary Fund.
    • If it is not extended, the loss of human lives could be of unacceptable proportions.
    • The global community will be fortunate if it does not spiral into depression.
    • Both demand and supply contractions are likely to be severe.
    • They are not going to be short-lived. Political systems, economic architectures and cultural mores are on trial.

    Time to build a new paradigm

    • Work patterns, production and distribution practices are up for
    • Denial and wishing away unpleasant, yet probable, realities by governments, global organisations and public intellectuals will only compound economic, social, political and human costs.
    • Build a new paradigm: We must now be quick in seizing lessons from the present crisis and get ready to embark on measures to build a new paradigm of life, work and governance.

    Role of state in focus once again

    • The enlarged economic role of the state in the aftermath of the Second World War came under major assault since the 1980s.
    • Leaders who asked ‘where is society?’ rode to power on the promise of cutting down the government’s role.
    • Systems that were alternatives to capitalism fell out of favour.
    • Entrepreneurs heading unicorns and ‘soonicorns’ have become the new demigods.
    • Minimum governance became the mantra.
    • India too without much consideration joined this creed.
    • Role of state in focus: But COVID-19 is beginning to challenge the political economy of this creed.
    • Very soon the full scores of the performance of state and non-state actors in the COVID-19 stress test will be available across the globe.
    • The Indian state will also have to give answers as far as its report card is concerned.

    How the state’s role declined in India?

    • India embarked on the path of reducing the role of the state, initially, with such caveats as ‘safety net’ and ‘reform with a human face’.
    • Gradually, those caveats fell by the wayside.
    • The Indian state’s role in health care, education, creation and maintenance of infrastructure and delivery of welfare has shrunk or become nominal, half-hearted, inefficient, and dysfunctional.
    • Of course, it is true that it did not give a great account of itself in these sectors even before the 1991 departure.
    • Disappointment with the dismal performance in its economic and administrative functions in the backdrop of a changing global ideological ecosystem encouraged a sharp de facto downsizing of the Indian state’s role.
    • Acceptance among the upper section of society: Its retreat from vital functions and abdication of its social responsibility have gained acceptance and legitimacy among the articulate upwardly mobile.
    • While retreat and abdication found influential and forceful evangelists, the selective retreat had few advocates.
    • This departure, however, was not vigorously interrogated.
    • Supporters of the departure, on the other hand, had little engagement in giving shape to the new policy.
    • Nor did they worry about calibrating the architecture of the emerging role for the state.
    • As a result, ‘private sector’ became the new holy cow in place of the ‘state sector’.
    • What made matters worse is the culture of a simplistic and shallow discourse of public policy that took hold in civil society.
    • It mindlessly privileges the agenda of corporates. It transacts in the idiom of stock exchanges and international rating agencies.

    Who is affected due to declined role of the state?

    • Today, those who bear the brunt of the consequences of shrunken and unresponsive state are the farmer and farm labour, the migrant worker, the unemployed, those in the unorganised sector, the rural poor, and the small entrepreneur.
    • They are paying the highest price for the necessary but unbearable lockdown.
    • They are either stranded far away from home or confined to their homes with no work and incomes, unsupported by the state.
    • Underfunded public health systems are unable to serve them.
    • But the dominant strand of public discourse is out of its depth. It has no time for these concerns.
    • Worse, this discourse can be gamed from time to time.
    • And the alternative discourse is too feeble to draw the attention of the government to the grave implications of COVID-19 for the weak in our society.

    State’s responsibility towards the marginalised

    • The state’s first responsibility is marginalised.
    • The marginalised are also the crucial part of our economy. They lubricate its wheels and generate demand.
    • Demand-side needs to be revived: Announcing stimulus packages that address the supply side alone without beefing up the demand side will be self-defeating to corporates.
    • Prioritising the needs of corporate entities will lead to convulsions in our body politic in the wake of COVID-19.
    • The state is in danger of forfeiting legitimacy if it does not ensure the survival and revival of the marginalised sections.

    From the Mains perspective,  following points are important to highlight the importance of the state’s role in ensuring the welfare of society and why there is a need to revisit the current system owing to certain problems in it.

    Time to revisit the political economy of the Indian state and its role

    • The country should begin a vigorous discourse on redefining every aspect of its involvement in our collective political, economic and social life.
    • The relation between the state and economy, its role in allocating resources and addressing questions of inequality, its duty to provide basic human needs, the extent of the market’s role in providing services such as health, education, civic amenities needs to be revisited.
    • The responsibility of the state and private enterprise towards deprived sections need urgent attention.
    • Re-examining the political structure: We should re-examine the efficacy of our political structures too.
    • The equation between citizens and government and what its implications are for individual freedom, privacy and national security.
    • Also, the equation between the legislature and executive needs to be re-visited.
    • Financial powers: The balance of administrative and financial power between provinces and the union on the one hand and provinces and local bodies on the other should be reconsidered.
    • Election of the representatives: The way we elect our representatives to legislatures must also come under the lens.
    • The issue of weakened local authorities and enfeebled legislatures need attention.
    • For, they are at the coalface, delivering the state to the citizen.
    • The way legislatures are elected and governments are made and unmade must be scrutinised.
    • Our outrage at the power of big money in our electoral system has not arrested its growth.
    • The role of serving and retired members of higher judiciary ought to be a part of the debate.
    • We had an opportunity for intensive debate when the Justice Venkatachaliah Commission submitted its report in 2002 to review the working of the Constitution.

    Conclusion

    The opportunity that COVID-19 provides should not be squandered and must be utilised to have a fresh look at the various issues regarding our social, economic and political life. And states responsibility towards marginalised.