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Subject: Economics

  • Explained: 9 minutes light-out and its impact on grids

    In his address to the nation, our PM has urged people across to turn off the lights in their homes for 9 minutes on April 5, starting at 9 pm. In response to this appeal, grid managers across states have flagged some risks.

    Why is the 9-minute exercise a problem?

    • India is one of the largest synchronous interconnected grids in the world, with an installed capacity of about 370 GW (3,70,000 MW), and a normal baseload power demand of roughly 150 GW.
    • The big worry is that just before 9 pm there may be unprecedented load reduction, followed by a sudden increase in load post at 9.09 pm.
    • The concern is that grid frequency should not swing beyond permissible limits and that all generators across the country must give frequency response as per the Grid Code.
    • During this 9-minute lights out exercise, up to 10,000-15,000 MW of power demand could to drop suddenly and then come on stream a few minutes later.

    How does grid function normally?

    • Power System Operation Corporation Ltd (POSOCO), the national electricity grid operator, projects daily demand for power and regulates supply from power generators based on these projections.
    • Frequency reflects the load generation balance in the grid at a particular instant and is one of the most important parameters for assessment of the security of the country’s power system.
    • The nominal frequency is 50 hertz and POSOCO endeavours to maintain frequency within a permissible band (49.9- 50.5 hertz), primarily by balancing the demand-supply equation.

    Impacts of light-out

    • The frequency needs to be maintained within this range as all the electrical equipment and appliances at our homes are designed to perform safely and efficiently in a certain power supply band.
    • An increase in frequency results in an increase in the voltage and a decrease in frequency results in a decrease in voltage.
    • Exigency does occur during an outage at a power plant or the tripping of a transmission line or a sudden change in electrical demand.
    • The grid operator needs to ensure that there is an automatic corrective response manually by curtailing demand or ramping generation from another source within a really short period of time.
    • Handling imbalances are the most crucial function of the grid operator.

    What are the key areas of concern?

    While the possibility of the grid tripping on account of this is highly unlikely, operators expect a “jerk”. While the system is generally planned for an outage of the single largest unit outage, there are two riders:

    1) Lockdown has severed domestic consumption

    • One, the grid load is primarily on account of the domestic load now, especially since the lockdown implemented.
    • The normal baseload power demand of roughly 150 gigawatts has already dropped by 20 per cent since the lockdown announcement as most of the industry and commercial establishments are not operational.
    • With hotels and factories, malls, railway stations, airports closed, the domestic load is the predominant load.
    • So the lighting load as a percentage of total loads is much higher now and the impact of a sudden drop in lighting load could be more accentuated than during regular times.

    2) Fear of complete power-offs

    • The second concern is if housing clusters and societies switch off mains, or if overzealous discoms switch off street lighting or even feeders to show compliance.
    • During this part of the year, domestic load peaks at about 9 pm.
    • This load could then be impacted much more than what’s being anticipated in the normal course, a concern that grid operators are flagging.

    Why is this demand of significance in such a big grid?

    • The domestic load is about 30-32 per cent of total load during normal times.
    • Of India’s total electricity demand load pattern, industrial and agricultural consumption accounts for 40 per cent and 20 per cent load, while commercial electricity consumption accounts for 8 per cent of demand.
    • So, theoretically, if only lighting load goes off, it should not have a major impact on grid frequency during normal times.

  • Opportunity in the Covid-19 crisis

    Context

    Coronavirus pandemic offers a trigger to fundamentally strengthen the Indian economy, and protect the vulnerable. This requires cooperation between the Centre and states.

    Opportunity to do things good for the medium term

    • Minimising the impact on the vulnerable: The current crisis is so terrible in its toll of life and livelihoods that the need of the hour must be minimising the health, humanitarian and economic costs, especially for the most vulnerable.
    • Rising expenditure may force hard choices: Rising public expenditures to help tens of millions of workers and their families alongside plummeting resources will inevitably force hard choices.
    • Appropriately, much of the policy discussion and the government’s first response have focussed on addressing the immediate imperatives.

    This crisis is also an opportunity to do things that are not only good for now but for the medium term as well. Few are discussed below.

    1. Revamp macro-fiscal framework

    • Massive fiscal expenditure may require: If the pandemic follows the exponential trajectory seen in other countries, the crisis is going to entail massive fiscal expenditures, perhaps up to 4-5 per cent of GDP, much more than what the government has announced.
    • Macro-fiscal targets have to be exceeded: Consequently, the basic macro-fiscal framework — for example, the Centre’s FRBM target of 3.5 per cent of GDP, and the revenue and deficit estimates for 2020-21 — has been fundamentally overtaken by events.
    • Allow states to exceed deficit targets: The Centre should immediately announce that even the states will be allowed to exceed their fiscal responsibility legislation targets because they will be in the front line of taking action against the pandemic.
    • Opportunity to review the FRBM: The crisis is an opportunity to revisit the entire framework.
    • The focus on unattainable targets, the fact that the FRBM has been honoured only in the breach, and the consequences in terms of loss in budgetary integrity and transparency need serious review, even overhaul.
    • Once the crisis ebbs, India might be looking at overall deficits well in excess of 10 per cent and debt levels much greater than those today. If the starting point is going to be so different, the old goals and targets won’t retain meaning.

    2. Remake finance and adopt a data-driven lending model

    • Going into the crisis, India’s corporate and financial sector were under severe stress — the so-called Four Balance Sheet problem.
    • This crisis will, unfortunately, add consumers and small and medium enterprises to that This will be an extremely hard — but critical — problem to address.
    • A takeover of bad loans will be unavoidable: To allow banks to revert to normalcy, a largescale takeover of their bad loans will be unavoidable not least because the current bankruptcy process will be severely inadequate.
    • Opt for the tech. driven lending model: This crisis opens the door for the new lending model proposed by Nandan Nilekani i.e. technology-driven lending.
    • What is Technology-driven lending? It uses data rather than collateral, allowing the 10 million-odd businesses with deep digital footprints (for example, based on GST invoices), to get loans from the thriving ecosystem of new financial players.

    3. Complete JAM

    • One of the major achievements of the government was to create the plumbing — Jan Dhan, Aadhaar, and Mobile (JAM) — to augment weak state capacity.
    • How JAM is proving helpful in this crisis? The state could now make cash transfers swiftly, with reduced leakages, whether as income support, scholarships or pensions, and potentially eventually implementing a Universal Basic Income.
    • In the current crisis, it is proving to be an important part of the social safety net that is helping to cushion the most adversely affected groups.
    • JAM is not complete yet: But the JAM plumbing is still incomplete because there is a “last mile problem”.
    • Not all those with bank accounts can access money either because of difficult geography or because bank functionaries give incomplete or misleading information.
    • Opportunity to fix the shortcomings: This crisis is an opportunity not just to leverage JAM to enhance cash transfers, but to empower citizens. This will require the government to identify remaining weaknesses on a war footing and fix them.

    4. Re-shape Indian agriculture

    • Need to create one market for agriculture: The need to preserve supply chains in agriculture in times of crisis reinforces the need to create one market for agriculture across India.
    • This requires eliminating legislation like the Essential Commodities Act and the panoply of resulting restrictions.
    • Phase-out subsidies and opt for DBT: Second, the crisis has shown the possibilities created by JAM and direct transfers.
    • Phasing out in cycles: Building on PM-Kisan and various state-level schemes, pernicious subsidies, especially for fertilisers and power, could be phased out over 5-6 crop cycles.
    • This could be done through small but frequent increases in fertiliser prices (the technique used to eliminate fuel subsidies).

    5. Focus on Make in India

    • The critical source for almost all the essential Active Pharmaceutical Ingredients (API) used to manufacture drugs, the ability also to fight death, is largely made in China.
    • India was once a major producer of such APIs but lost ground to China.
    • Frame intelligent industrial policy: The crisis should be the opportunity to go on war footing to do intelligent industrial policy — incentives, regulatory help, trade policy — that would resurrect India’s manufacturing capability.
    • Previous Make in India attempts have shown lackadaisical results.
    • Focus on the pharmaceutical sector: The crisis creates the momentum to focus the effort on one sector, pharmaceuticals. As a result, the ability to save lives could be Made in India, again.

    6. Establish migrants as full citizens

    • Need to change the place-based benefits to person-based benefits: The plight of migrant workers reinforces the need to move from immobile place-based benefits to mobile person-based benefits, which is possible as the JAM infrastructure is strengthened.
    • Portability of benefits: This will require portability of benefits, including access to the PDS, Ujjwala and Ayushman Bharat.
    • The crisis has highlighted the travails of migrant labour and their second-class status.
    • The large gap between the organised and unorganised sector worker: It reflects a broader chasm between the few securely employed in the organised sector and the vast majority subject to the vicissitudes of the unorganised sector.
    • Differences not just in the levels of income but in their volatility as well as differential access to social insurance (healthcare, pensions) distinguish these two classes.

    7. Upgrade Health

    • Weakest state capacity in health and education: State capacity over 70 years in India has been weakest in the areas of education and health.
    • The COVID-19 pandemic must lead to a serious strengthening of the health infrastructure for dealing with pandemics.
    • Set up an apex institution on the lines of US’s CDC: To start with, India needs an apex institution like the US’ Centers for Disease Control with a network across all the states.
    • They should invest in disease surveillance systems, set up diagnostics labs, be able to gather real-time data and analyse them etc.
    • The Taiwan model, which has been so successful in this pandemic, could be studied.
    • More fundamentally, the crisis is a wake-up call to address India’s severe limitations in the provision of basic health.
    • Focus on basic public health: Creating tertiary health facilities must be subservient to strengthening basic public health and early childhood care.

    8. Build a National Solidarity Fund

    • The severe downturn in economic activity ahead will savagely hit the informal poor.
    • How would the Solidarity fund be set up? The government should consider a Solidarity Fund with a one-time annual contribution coming from the wealthy and the employees in the organised sector.
    • Contribution to the fund: This contribution can take the form of taxes or elimination of middle-class subsidies identified in the Economic Survey of 2016.
    • The wealthy could contribute via a wealth tax with thresholds set by property values say above Rs 5 crore.
    • Salaried employees in the public and private sectors could contribute via a small, progressive tax on salaries and pensions.
    • Middle-class subsidies that could be eliminated include interest and tax deductions for small savers, favourable taxation of gold and other luxuries.
    • Wealth taxes and elimination of subsidies for the rich should, in any event, be part of the long-run reform agenda to reduce growing inequality.

    Conclusion

    These examples illustrate how the crisis can be converted to an opportunity to fundamentally strengthen the Indian economy, and protect the vulnerable. A common thread to many of these actions — indeed prerequisites for their success — is cooperation between the Centre and states. Central direction combined with flexibility and nimbleness in the states and local bodies is India’s way through the crisis and beyond.

  • [pib] CCI Green Channel Route

    The Competition Commission of India (CCI) has received a request for merger of a company following green channel combination route.

    What is a Green Channel Route?

    • In a bid to facilitate mergers and acquisitions (combination) in the country, the Competition Commission of India (CCI) has taken inspiration from the customs department and established a ‘green channel’.
    • Every Combination above a certain threshold, seeking to be sanctioned has to necessarily pass the CCI scanner in order to be approved.
    • The CCI characterizes the ‘green channel’ as an automatic system of approval for Combinations wherein the Combination is deemed to be approved upon filing the notice in the format prescribed.
    • The ‘green channel automatic approval upon notification route’ is a right step by CCI towards the propaganda of ease of doing business in India.

  • The battle to set oil prices

    Context

    The global economy, grappling with the COVID-19 pandemic, is now facing an energy war, with crude oil prices crashing in the international market.

    Developments that contributed to the fall in oil prices

    • First, Crude oil prices tanked, as the Organisation of the Petroleum Exporting Countries (OPEC) and its alliance partners failed to reach any consensus on cutting back production to levels that would enable prices to remain stable.
    • Second, the U.S., as the largest oil producer today, has stayed away from the OPEC-plus arrangement, hoping that production cuts by OPEC-plus countries will help it increase its market share.
    • Russia refused any production cuts, unleashing an energy war with Saudi Arabia. There has been a spectacular fall of around 30% in crude oil prices.
    • The International Energy Agency (IEA) has scaled down global demand for oil, a move not taken by the energy watchdog since 2009.
    • COVID-19 Factor: Demand for oil had already weakened owing to the global economic slowdown, and this weakening has become more pronounced due to the COVID-19 pandemic, which has hit China’s economy and reduced consumption by the world’s largest importer.

    The US-Russia oil war

    • Denying market share to the US oil producer: Russia’s decision to reject any production cuts is driven directly by its strategy of denying market share to American shale oil producers.
    • Shale oil companies can sustain in high prices only: The American shale oil producers rely on higher prices in the range of $50-$60 to remain profitable because of higher production costs.
    • At $31 per barrel, not more than five American shale oil producers can remain profitable.
    • Sanctions on Rosneft: Russia also remains resentful of sanctions imposed on Rosneft, which is building the gas pipeline project Nord Stream 2 across the Baltic Sea, carrying Siberian gas to Germany, a major consumer.
    • Delay in completion of the pipeline: This pipeline was delayed due to opposition from Denmark’s environmental activists and could not be completed before the U.S. sanctions kicked in.
    • Moscow has accused Washington of using geopolitical tools for commercial reasons.
    • The energy war over prices is Russia’s revenge, to cripple the American shale oil industry.
    • Russia’s signal to Saudi Arabia: Russia is also signalling to Saudi Arabia that its American patrons can do little to protect its oil interests and it would be prudent for Saudi Arabia to reach some understanding with Russia.
    • Both Saudi Arabia and Russia depend heavily on oil revenues — upwards of 80% of export revenues accrue from crude oil.
    • Russia and Saudi Arabia fighting for market share: Both are also fighting to retain market share.
    • Impact on India: It has been reported that Saudi Arabia has agreed to supply crude oil at lower rates to refiners in India and China, two primary customers, but refused to supply to other refiners in Asia. This will have an impact on India’s oil procurement from the U.S.

    The benefits to importing countries

    • Why the price drop matters to India? Lower crude oil prices are not necessarily bad news for oil importing countries like India, which is the world’s third-largest importer of crude oil and the fourth largest importer of LNG.
    • Collateral adverse consequences: There are, however, collateral adverse consequences like the battering of the stock markets worldwide.
    • Impact on the global economy: The global economy, already impacted by President Donald Trump’s trade war with China and other countries, including India, and the COVID-19 pandemic, may find lower energy costs helpful in overall growth.

    Benefits for India

    • From a high of $147 per barrel in 2008, crude oil prices have fallen to around $24 per barrel and may even go further southwards.
    • How much the price drop matter for India? India, with 80% of its energy requirements met by imports from the international market, stands to save ₹10,700 crores for every $1 drop in prices.
    • Non-oil related factors: While this may help manage the current account deficit, fiscal deficit and inflation, there are non-oil related collateral factors that can cause countervailing adverse economic impact.

    How long Russian and Saudi Arabia can sustain the war?

    • Can Russia and Saudi Arabia sustain the energy war for long?
    • Saudi Arabia’s production cost is the cheapest in the world and it can ramp up production to around 12 million barrels a day.
    • By offering discounts, it can undercut other producers, including Russia.
    • Domestic considerations also matter.

    Conclusion

    There is no doubt that India will benefit from lower oil prices if the cost of fuel at the pump is passed on to consumers. It will reduce transportation costs and boost demand. The consumer, however, may not benefit much since the government may choose to use this financial windfall for other purposes, like bailing out banks which have been hollowed out by NPAs to leading Indian companies.

  • Pull out all the stops

    Context

    Though there is coherence in India’s response to the Covid-19, still there is more that needs to be done.

    Sense of coherence in India’s response

    • Since last week, a sense of coherence is settling over India’s response to the COVID-19 outbreak.
    • The national lockdown, the incomes and credit support, and the three-month debt moratorium announced by the government and the RBI are the needed first steps to contain the outbreak on the one hand and lessen the economic impact on the other hand.

    Uncertainty in two important factors

    • Several laundry lists of measures have already been proffered by many, however, these are not of much help.
    • Uncertainty: Given the extreme uncertainty clouding how long and intensely social distancing policies will need to be pursued, the attendant economic impact and, crucially, how quickly and strongly the recovery can take place.
    • 1. The answer to the first depends on how much the outbreak tests the capacity of the already-stretched public health system.
    • Extending the social distancing policy: If the lockdown does not slow the spread of the virus to a rate that the healthcare system can handle, then the social distancing policies, in some form or another, will need to be extended.
    • Destruction of demand: The longer such containment measures last, the larger will be the destruction to (of) demand and the bigger the collapse in output and incomes.
    • 2. Then, there is the question about the pace and strength of the recovery.
    • Much will depend on how much damage the eventual output loss inflicts on households’ and corporates’ balance sheets.
    • Lower consumption: For example, even if a worker starts earning once the lockdown is lifted if one has incurred large debts in the interim, one’s consumption demand will naturally be much lower than before the crisis.
    • The same holds for corporates, both big and small.
    • No help from global demand: What makes the situation worse is that there is not likely to be much help coming from global demand.
    • Growth estimates: It is now expected global growth would decline to 5 per cent (annualised) in 1H20 (first half 2020), considerably more than during the global financial crisis, and rebound only partially in 2H20, leaving global GDP 2.5 percentage points below its pre-crisis level at the end of this year.

    How the uncertainty makes policy response calibration difficult?

    • Difficulty in assessing economic damage: Given these extreme uncertainties, it is very hard to assess the economic damage with any degree of conviction.
    • In fact, in last week’s policy review, the Monetary Policy Committee refrained from providing any projections for future growth and inflation, breaking from its normal practice.
    • So, if the outlook is so uncertain, how does one calibrate the policy response?
    • 1. Under-support the economy: One can easily under-support the economy, which could prolong the slowdown.
    • 2. Or over-support the economy, which could end up stoking inflation (as it did in 2010-13 when the massive monetary and fiscal easing during the global financial crisis was not withdrawn quickly) or creating asset price bubbles.

    What is the way out in such a situation?

    • Don’t try to calibrate: The way out is not to even try calibrating policies under such extreme uncertainty but to let the size of the support be determined endogenously by the extent and nature of the economic damage.
    • Falling back of first principles: This requires falling back on first principles. We know that the economic damage could be very large.
    • Delay in recovery: We also know that if the damage to households’ and firms’ balance sheets is substantial, then the recovery could be delayed and weakened.
    • Give extensive income support: This calls for extensive income support through existing government Jan Dhan and Mudra accounts to households and SMEs, and temporary tax cuts or deferments to the larger corporates.
    • Tax cuts needed: It also needs substantial cuts in indirect taxes (GST) when social distancing is relaxed.

    Problems with RBI measures

    • RBI providing support: The RBI has begun to provide support via its liquidity facility (TLTRO) and regulatory forbearance that allows banks to offer a debt moratorium to their customers for the next three months.
    • But both these measures work through banks.
    • The problem of bank turning risk-averse: Given that banks have turned substantially risk-averse because of the restructuring and bad debt problems of the last few years, the RBI likely needs to start providing liquidity directly to corporates, as recently announced by the US Fed.
    • At the same time, any debt moratorium will reduce profit and, in turn, capital, banks might be reluctant to extend it to all their customers.
    • Accommodate capital shortfall in the bank: Consequently, the RBI also needs to change regulations to accommodate possible shortfalls in bank capital because of the debt moratorium.

    What should be the scope and size of the policy support?

    • Support should be based on the extent of the damage: The scope and size of such policy support need to be determined by the extent of the economic damage, and not by perceived limits about what India can afford or those imposed by existing institutional arrangements and practices.
    • It is quite possible that the size of the economic damage ends up requiring support that widens the fiscal deficit substantially.
    • India clearly does not have the fiscal space to provide any material economic support when measured against standard benchmarks of fiscal prudence.
    • Directly funding the budget deficit: The market is on edge, and fears of eventual large government borrowing has spiked long-term interest rates despite large cuts in short-term rates by the RBI, which are likely to delay and weaken the recovery.
    • Any large bond auction by the government, even if it is offset by the RBI through open market operations, is not likely to calm market nerves and bring down lending rates.
    • The government should invoke “natural disaster” clause: What is needed is for the government to invoke the “escape” or the “natural disaster” clause in the fiscal responsibility act (FRBM) that allows the RBI to directly fund the budget deficit without having to go through market auctions.

    Conclusion

    Such a proposal is likely to raise the hackles of any fiscal conservative and there is the natural question about how rating agencies might react. As long as the government credibly commits to reversing the action as soon as the crisis is over, rating agencies and fiscal conservatives alike will likely treat this kindly, as it is a response to a crisis caused not by poor economic policies, but by an act of nature.

  • Counter-cyclical Capital Buffers (CCyB)

    The RBI has announced that banks need not activate countercyclical capital buffers (CCyB) amid slowdown due to COVID-19 outbreak.

    What is Countercyclical Capital Buffer (CCyB)?

    • A capital buffer is a mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements.
    • CCyB is the capital to be kept by a bank to meet business cycle related risks. It is aimed to protect the banking sector against losses from changes in economic conditions.
    • Banks may face difficulties in phases like recession when the loan amount doesn’t return.
    • To meet such situations, banks should have own additional capital. This is an important theme of the Basel III norms.

    CCyB framework in India

    • The framework on CCyB was put in place by the RBI in terms of guidelines issued in 2015 wherein it was advised that the CCyB would be activated as and when the circumstances warranted.
    • The framework envisages the credit-to-GDP gap as the main indicator, which is used in conjunction with other supplementary indicators.
    • It requires banks to build up a buffer of capital in good times, which may be used to maintain flow of credit to the real sector in difficult times.
    • The buffer was also meant to restrict the banking sector from indiscriminate lending in the periods of excess credit growth, which have often been associated with the building up of system-wide risk.

  • Ways and Means Advances (WMA)

     

    The RBI has raised the Ways and Means Advances, or WMA, limit by 30% for all States and UTs to enable them to tide over the crisis caused by COVID-19 outbreak.

    What are Ways and Means Advances?

    • The RBI gives temporary loan facilities to the centre and state governments as a banker to the government.  This temporary loan facility is called WMA.
    • It is a mechanism to provide to States to help them tide over temporary mismatches in the cash flow of their receipts and payments.
    • It was introduced on April 1, 1997, after putting an end to the four-decade-old system of adhoc (temporary) Treasury Bills to finance the Central Government deficit.
    • Under Section 17(5) of RBI Act, 1934, the RBI provides Ways and Means Advances (WMA) to the central and State/UT governments.

    How is WMA availed?

    • This facility can be availed by the government if it needs immediate cash from the RBI.
    • The WMA is to be vacated after 90 days.
    • The interest rate for WMA is currently charged at the repo rate.
    • The limits for WMA are mutually decided by the RBI and the Government of India.

    Types of WMA

    There are two types of WMA — (1) Normal and  (2) Special :

    • Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state.
    • After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate.
    • The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.

    Back2Basics

    How the govt. meets temporary cash needs?

    The fund deficit or cash-flow mismatches of the Government are largely managed through:

    1. Issuance of Treasury Bills
    2. Getting temporary loans from the RBI called Ways and Means Advances (WMA) and
    3. Issuance of Cash Management Bills (CMBs)
    • Treasury Bills are short term (up to one year) borrowing instruments of the Government of India which enable investors to park their short term surplus funds while reducing their market risk.
    • CMBs are short term bills issued by the central government to meet its immediate cash needs. The bills are issued by the RBI on behalf of the government having a maturity of less than 90 days.

  • PM-CARES Fund

    Context

    In the midst of all of this, our Prime Minister announced the creation of the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM-CARES), which—if the intention is to allow funds to move fast and circumvent bureaucratic hurdles—is a great initiative.

    About PM CARES Fund

    • The Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) was created on 28 March 2020 following the COVID-19 pandemic in India. 
    • The fund will be used for combating, containment and relief efforts against the coronavirus outbreak and similar pandemic like situations in the future. 
    • The Prime Minister is the chairman of the trust. Members will include the defence, home and finance ministers.
    • The fund will also enable micro-donations. The minimum donation accepted for the PM CARES Fund is ₹10 (14¢ US).
    • The donations will be tax exempt and fall under corporate social responsibility.
    • The Prime Minister had said that the PMO had received many requests to help in the war against COVID-19.
    • Accordingly, the fund was set up and will be used for disaster management and research

    The backdrop against which the fund was created

    • The battle is a struggle for so many people. The Prime Minister called for physical distancing and the shutdown.
    • But physical distancing is a luxury. Many people cannot do so, because they live in tiny homes, in close proximity to each other.
    • And then there are the migrant workers who are squeezed next to each other as they struggle to head home.
    • The announcement of the PM-CARES Fund will convince more people to give to the cause.
    • However, certain aspects make one to look at the PM-CARES fund with mixed emotions. Here is why:

    1. The government has faced challenges on the execution side

    • The PM did a great job rallying the country together, but the pictures of migrants walking hundreds of miles to get to the safety of their homes are heart-wrenching.
    • Criticism in hindsight: Of course, such decisions had to be made quickly, and it is easy to criticise the government in hindsight.
    • Inaction could be more damaging: And sometimes there are limited alternatives when one is doing work on a war footing. Mistakes are bound to be made, and in many cases, inaction could be more damaging.
    • The PM also acknowledged and apologised for these hardships in his latest Mann Ki Baat address.

    2. Non-profits working on relief and rehabilitation are already struggling

    • In this environment, nonprofits are already struggling on the funding side.
    • Many will shut down or go into hibernation over the next three months and their employees will join the daily wage earners as workers who suddenly do not have any income.

    3. Based on media reports, PM-CARES has been set up as a trust

    • Legislation to ban CSR funding to trusts: Despite the fact that the government is currently pushing legislation that aims to ban Corporate Social Responsibility (CSR) funding to nonprofits set up as trusts or societies.
    • Poor governance of the trusts: One of the reasons given for doing so is the alleged poor governance structure of trusts and societies when compared to Section 8 companies.
    • Why then has the government set up PM-CARES as a trust aimed at targeting corporate CSR funds?

    4. PM-CARES has made no announcements on governance, accountability, etc.

    • No questions asked: While many donors have stepped up to fund non-profits working on covid-19 relief measures, their amounts pale in comparison to how much PM-CARES raised in its first two days.
    • Moreover, donors have grilled nonprofits on how we will ensure proper delivery.
    • But no such questions are being asked of the PM-CARES Fund.
    • How will success be measured? What audited accounts will be given? This information has not been shared.
    • So far, the success with respect to funds raised for PM-CARES is a reflection of the confidence people have in our Prime Minister.
    • Problems are surfacing: However, problems are already surfacing, like reports of fake online accounts being set up to steal funds meant for PM-CARES.
    • Presumably, issues will be addressed over the next few days, because everything is moving so fast and decisions are being taken on a war footing.

    5. Centralised funding could hurt localised solutions

    • Solution comes from decentralisation: The internet has taught us that ideas and solutions come from decentralised, empowered teams driven by big, hairy, audacious goals.
    • Involving people in finding solutions: There are so many smart people across our country—in governments, research institutions and academia, the private sector, nonprofits, and civil society.
    • Today, more than ever, we need to get them all involved in finding solutions. And doing so requires money.
    • If a lot of funding for covid-19 gets centralised, funds to other players could get curtailed and localised solutions will die.
    • Funding to innovative solutions: Here again, it is hoped that the funds collected will also be given to other groups who are coming up with innovative solutions.

    6. The government needs to trust and work closely with the nonprofit sector

    • The central, as well as many state governments, are talking to individuals, nonprofits, and the private sector for help to handle this pandemic.
    • And they are relying on the generosity (and duty) of the citizens to come up with solutions because, as with all disasters, the state cannot handle this problem on its own.
    • At the same time, the stimulus packages offered to the private sector have been very little.
    • Nonprofits, most of whom are funded either by philanthropists or CSR, will, therefore, be squeezed for funding, as their donors pull back discretionary money.
    • And many nonprofit professionals are worried that they may not have a job soon.
    • So, on one hand, various governments rush to the private players for help, while at the same time some people in the government treat the nonprofit sector with suspicion.

    Conclusion

    It is hoped that PM-CARES will help various teams in the public and private sector work together, bridging our trust deficits, to fight the virus and reduce the pain inflicted on so many vulnerable people on various fronts—physical, mental, and financial.

  • The sudden return of quantity planning in the wake of covid-19

    Context

    We could take a leaf out of a booklet by Keynes in our effort to tackle some of the challenges posed by the covid-19 pandemic.

    The Crisis-Keynesian Mode response mode to pandemic

    • What is the war economy? One of the defining features of a war economy is that economic thinking is focused on quantities rather than prices.
    • Much of the ongoing global response to the covid-19 pandemic is still in crisis-Keynesian mode.
    • What is a crisis-Keynesian response: The nation-state has become the income supporter, financier and consumer of last resort.
    • However, there are also clear signs of war economics as well.
    • Signs of war economics: The decision by US President Donald Trump to use America’s Defense Production Act to force General Motors to make ventilators is one resonant example.
    • Just consider some of the key questions that are being asked right now.
    • How many ventilators are available? Are there ample food stocks? Can more hospital beds be made available? How many masks be produced in the next few weeks? Can the production of testing kits be ramped up? It’s all about quantities, quantities, quantities.

    Historical background and impact of a shift in economic strategies

    • Impact persists in subsequent decades: Such big shifts in economic strategies are usually not reversed overnight. Decisions taken in response to a particular emergency tend to remain with us in subsequent decades.
    • World War II example: What happened in India during World War II is instructive. Many of the controls that were introduced during that global conflagration formed the basis of the later interventionist state that sought to control who produces how much. Here are a few examples.

    1. Quantitative import controls

    • One of the first moves by the colonial state was to impose quantitative import controls in May 1940.
    • There were two reasons why this was done—to conserve foreign exchange as well as ensure that shipping capacity was used to bring in only what was essential to the war economy.

    2. Food rationing

    • Food rationing was also introduced during the war years.
    • Over 700 towns were covered by some rationing scheme or the other by the end of the War.
    • The government also brought in measures to buy surplus grain from farmers at administered prices.
    • Various forms of rent control were also instituted. Most of these controls continued after India gained independence.

    3. Balance of payment crisis in 1957

    • India was hit by a balance of payments crisis in 1957.
    • The massive investment thrust in the Second Five Year Plan had severely strained the country’s foreign exchange reserves.
    • The Indian government, once again as a temporary measure, imposed stringent controls on imports.
    • Many of these were quantitative in nature. They survived well into the 1980s.
    • In fact, the entire trade policy approach since the 1957 crisis was to minimize imports in a bid to preserve foreign exchange.

    Will the government opt for automatic monetisation of the deficit?

    • Money creation by the RBI to fund deficit: There is now a growing consensus that the Indian government will have to fund part of its growing fiscal burden through money creation by the Reserve Bank of India.
    • What about inflationary consequences? The inflationary consequences will be muted—for now—because the velocity of narrow money is most likely set to fall on account of weak demand conditions under a lockdown.
    • Precedence: The automatic monetization of Indian government deficits was part of the policy playbook after the 1950s till it was thankfully discontinued in 1997.
    • The main instrument for that was ad hoc treasury bills.
    • These were introduced in 1954 as a temporary measure to replenish the cash balances the government maintains with the central bank.
    • What was ad hoc treasury bills? Ad hoc treasury bills were not introduced through any formal law but as an arrangement between mid-level bureaucrats in New Delhi and Mumbai (i.e. RBI).
    • What began as a temporary measure to smoothen government cash holdings had become a near-permanent feature of Indian macroeconomic policy by the 1970s.

    The uncertain future

    • Longer the war more profound will be the changes: The longer the global battle against the pandemic lasts, the more profound will be the changes across the economic landscape.
    • In an insightful article in Bloomberg, Andy Mukherjee uses the lessons of history to look into the uncertain future.
    • Among the possibilities he mentions are the contrasting ones of an economy run by robots and algorithms but with little labour, or an economy in which labour has clawed back the power it lost in the second age of globalization.

    Managing the resources in the time of war

    • Managing the resources: In 1940, John Maynard Keynes wrote a little booklet How To Pay For The War, Keynes essentially argued that the main challenge was not how to finance the war effort, but how to manage real resources to produce the arms that the UK needed to defend herself.
    • Suppression of consumption: He then argued that war production would necessarily involve suppression of consumption, either through higher taxes or some scheme of deferment.

    Conclusion

    The war against the covid-19 pandemic is very different from the military war that Keynes was thinking about. Yet, his booklet offers useful lessons on how to think about some of our current challenges—and also about what we can expect once the situation returns to normal.

  • Fully Accessible Route (FAR)

    The Reserve Bank of India (RBI) has introduced a separate channel, namely ‘Fully Accessible Route’ (FAR), to enable non-residents to invest in specified government bonds with effect from April 1.

    Fully Accessible Route (FAR)

    • The move follows the Union Budget announcement that certain specified categories of government bonds would be opened fully for non-resident investors without any restrictions.
    • Under FAR, eligible investors can invest in specified government securities without being subject to any investment ceilings.
    • This scheme shall operate along with the two existing routes, viz., the Medium Term Framework (MTF) and the Voluntary Retention Route (VRR).

    Benefits

    • This will substantially ease access of non-residents to Indian government securities markets and facilitate inclusion in global bond indices.
    • This would facilitate inflow of stable foreign investment in government bonds.

    Back2Basics

    Voluntary Retention Route (VRR)

    1. RBI had announced a separate scheme called VRR to encourage Foreign Portfolio Investors (FPIs) to undertake long-term investments in Indian debt markets.
    2. Under this scheme, FPIs have been given greater operational flexibility in terms of instrument choices besides exemptions from certain regulatory requirements.
    3. The details are as under:
    • The aggregate investment limit shall be ₹ 40,000 crores for VRR-Govt and ₹ 35,000 crores for VRR-Corp.
    • The minimum retention period shall be three years. During this period, FPIs shall maintain a minimum of 75% of the allocated amount in India.
    • Investment limits shall be available on tap for investments and shall be allotted by Clearing Corporation of India Ltd. (CCIL) on ‘first come first served’ basis.