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Subject: Economics

  • Ro-Pax Ferry Service

     

    Mumbai – the first metropolitan city in India has introduced Ro-Pax service to its transport infrastructure. M2M1 Ferry Vessel has commenced operations between Mumbai and Mandwa.

    Ro-Pax Ferry

    • Ro-Pax Ferry is a ferry that combines the features of a cruise ship and a roll-on/roll-off service.
    • This service has brought much to the relief of daily commuters, job seekers and holiday-goers travelling between Mumbai and Mandwa and also other parts of Alibaug.
    • Ro-Pax service enables people to ferry along with their vehicles on board, between Mumbai and Mandwa.
    • With this, Mumbai, Alibaug and the adjoining Konkan region will experience a boost in tourism, hinterland connectivity and also job opportunities.

  • The real reform

    Context

    The IBC has started emerging stronger as it delivered on its promise, passed the constitutional muster, earned global recognition and became the preferred option for stakeholders in case of default.

    Demystifying the myths surrounding IBC

    Myths about recovery:

    Most of the myths surround recovery. Consider the following example for quick appreciation.

    • M/s. Synergies Dooray was the first company to be resolved under the IBC. It was with the Board of Industrial and Financial Reconstruction (BIFR) for over a decade.
    • The realisable value of its assets was Rs 9 crore when it entered the IBC process. It, however, owed Rs 900 crore to the creditors.
    • How much did IBC recover? The resolution plan yielded Rs 54 crore for them.
    • Some condemned IBC because the resolution plan yielded a meagre 6 per cent of the claims of the creditors, disregarding the fact that they recovered 600 per cent of the realisable value of the company, which had been in the sick bed for over a decade.
    • If the company was liquidated, assuming no transaction costs, the creditors would have got at best Rs 9 crore — 1 per cent of their claims.

    The myth that recovery under IBC is dismal

    • Let’s examine the myth that the recovery through resolution plans is dismal.
      • Two hundred companies had been rescued till December 2019 through resolution plans.
      • They owed Rs 4 lakh crore to creditors. However, the realisable value of the assets available with them, when they entered the IBC process, was only Rs 0.8 lakh crore.
      • The IBC maximises the value of the existing assets, not of the assets which do not exist. Under the IBC, the creditors recovered Rs 1.6 lakh crore, about 200 per cent of the realisable value of these companies.
      • Why creditors had to take a haircut? Despite the recovery of 200 per cent of the realisable value, the financial creditors had to take a haircut of 57 per cent as compared to their claims. This only reflects the extent of value erosion that had taken place when the companies entered the IBC process.
      • What is the conclusion? As compared to other options, banks are recovering much better through IBC, as per RBI data.

    The myth that IBC is sending companies for liquidation:

      • What is the primary objective of IBC: Recovery is incidental under the IBC. Its primary objective is rescuing companies in distress.
      • More number of companies sent for liquidation: There is a myth that although the IBC process has rescued 200 companies, it has sent 800 companies for liquidation. The number of companies getting into liquidation is thus four times that of the companies being rescued.
      • The context for the numbers: Numbers, however, to be seen in context. The companies rescued had assets valued at Rs 0.8 lakh crore, while the companies referred for liquidation had assets valued at Rs 0.2 lakh crore when they entered the IBC process.
      • Looking from the value term angle: In value terms, assets that have been rescued are four times those sent for liquidation. It is important to note that of the companies rescued, one-third were either defunct or under BIFR, and of the companies sent for liquidation, three-fourths were either defunct or under BIFR.

    The myth that IBC is resulting in huge job losses

    • The next myth is that the IBC is resulting in huge job losses through liquidation. It is misconstrued that 600 companies — for which data are available and which have proceeded for liquidation — have assets (and consequently employment) at least equal to the aggregate claim of the creditors — Rs 4.6 lakh crore.
    • Unfortunately, they have assets on the ground valued only at Rs 0.2 lakh crore.
      • Take the examples of Minerals Limited and Orchid Healthcare Private Limited, which have been completely liquidated. They owed Rs 8,163 crore, while they had absolutely no assets and employment.
      • What matters in this context is the assets a company has or the employment it provides — not how much it owes to creditors.
    • The IBC process would release the idle or under-utilised assets valued at Rs 0.2 lakh crore, which would have dissipated with time, for business and employment.
    • One also needs to consider the jobs saved through the rescue of 80 per cent of the distressed assets, and the job being created by these companies, post-rescue.

    What changes IBC has brought?

    • Changed the behaviour of debtors: A distressed asset has a life cycle. Its value declines with time if the distress is not addressed.
      • The credible threat of the IBC process, that a company may change hands, has changed the behaviour of debtors.
    • Debtors are settling debt at an early stage: Thousands of debtors are settling defaults at the early stages of the life cycle of a distressed asset.
      • They are settling when the default is imminent, on receipt of a notice for repayment but before filing an application, after filing the application but before its admission, and even after admission of the application.
      • These stages are akin to preventive care, primary care, secondary care, and tertiary care with respect to sickness. Only a few companies, who fail to address the distress in any of these stages, reach the liquidation stage.
    • Value erosion at the liquidation stage: The value of the company is substantially eroded, and hence some of them would be rescued, while others are liquidated.
      • The recovery may be low at this stage, but in the early stages of distress, it is much higher — primarily because of the IBC.
      • The percentage of companies or distressed assets getting into liquidation is insignificant.
      • Stakeholders should increasingly address the distress in the early stages and the best use of the IBC would be not using it all.

    Conclusion

    Stakeholders who understand business and have the backing of sophisticated professionals are using IBC with open eyes after evaluating all options. There is no reason to doubt their commercial wisdom. The 25,000 applications filed so far under IBC indicate the value and trust that stakeholders place on the law — the ultimate test of its efficacy.

     

  • The circuit breaker in the stock market

    The stock markets in India are witnessing historic single-day falls with an increase in the number of COVID-19 cases.  Since the indexes plunged more than 10 per cent each day earlier, a circuit breaker was triggered for the first time since 2009 halting trading.

    What are circuit breakers?

    • In June 2001, the SEBI implemented index-based market-wide circuit breakers.
    • Circuit breakers are triggered to prevent markets from crashing, which happens when market participants start to panic induced by fears that their stocks are overvalued and decide to sell their stocks.
    • This index-based market-wide circuit breaker system applies at three stages of the index movement, at 10, 15 and 20 per cent.
    • When triggered, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide.

     

  • Is the worst really over for the country’s agricultural sector?

    Context

    Estimates of gross domestic product (GDP) released on 28 February confirmed that India’s economy is decelerating. The silver lining was growth in agriculture, which accelerated for the third quarter in a row to 3.5%.

    How agriculture sector has performed in the last few years?

    • Robust growth in the last 5 years: A look at the national accounts for a longer period shows robust agricultural growth during the first five years.
      • With agriculture growing at 3.17% per annum between 2013-14 and 2019-20.
      • This is remarkable, given that the broader economy is witnessing a slowdown.
    • Rural economy seen from the other indicators: A variety of other indicators show that the rural economy has been going through possibly its worst phase, with declining wage growth and farmer incomes causing serious distress.

    Crop sector growth rate at lowest

    • A clue to this disconnect between the national accounts and other indicators lies in a breakdown of the national accounts.
    • Crop sector growing at lowest in two decades: The GDP data for the agricultural sector shows that the crop sector, which accounts for 56% of total agricultural output and employs a majority of the farmers, has been growing at only 0.3%, the lowest in two decades.
      • By comparison, the sector grew 3.3% per annum during the 10 years under United Progressive Alliance governments.
    • Which sector of agri. is growing at a high rate? The agricultural sub-sectors that showed high growth between 2013-14 and 2018-19 were livestock (8.1%), forestry (3.1%) and fisheries (10.9%).
      • It is a puzzle what drove the high growth of livestock at a time when the crop sector was experiencing negligible growth.
      • The trend defies the logic: This defies past trends and is also difficult to believe, given contrasting trends in other indicators of livestock
    • The declining income of farmers and a decline in wages: The poor performance of the crop sector confirms the declining income of farmers, the majority of whom depend on crops for subsistence. Not surprisingly, even real rural wages are declining.
    • Inflationary pressure and hopes of growth in income of farmers: Hopes were kindled in the last three months as agricultural commodities showed signs of inflationary pressures, with food inflation hitting double-digit rates.
      • Increase in rural demand not the cause of inflation: A careful analysis of the data rules out rising rural demand as the cause of that inflationary trend.
      • Many price pressures were due to the mismanagement of cereal supplies by the government and supply shocks in vegetables.
      • In such circumstances, farmer income could not have risen. Some of this was also a result of food prices rising internationally.

    Trend pointing to the fall in agri. prices

    • Softening of food prices: Recent trends in international markets suggest a softening of food prices led by an overproduction of cereals and easing edible oil inflation. Following 3 factors may contribute to its fall.
    • Impact of fall in crude oil price: This trend will gain strength in the wake of the recent slide in crude oil prices.
      • With the global economy displaying signs of a slowdown, prices of agricultural commodities are likely to fall sharply.
      • Relation of food prices with oil prices: They tend to follow movements in crude oil prices, as was seen during the latter’s collapse in August 2014. In all likelihood, a similar decline in agricultural prices is upon us.
    • Food-grain stock with FCI: A second factor that may exacerbate the income troubles in agriculture is the presence of massive food-grain stocks with the Food Corporation of India.
      • This may slow the procurement of farm produce and lower price realizations, particularly cereals but also other crops.
    • The coronavirus outbreak: Lastly, the global slowdown due to the coronavirus outbreak is likely to dampen demand in the economy, and in turn hurt the agricultural sector.

    Conclusion

    • Limited room to improve the situation: These factors are likely to worsen agricultural incomes, and domestic policy has limited room to manoeuvre.
    • Opportunity to revive the demand: This situation is also an opportune time to revive rural demand The government could pass on some of the windfalls from the drop in oil prices to rural consumers. This could help lift rural incomes.
      • The government could also increase spending in rural areas to help boost demand and prevent a collapse in agricultural prices.
    • Worst for agriculture is not yet over: Whether the government uses the opportunity or fritters it away again will be known in the coming months. What appears certain for now, though, is that the worst of the rural slowdown is far from over.

  • [pib] The Mineral Laws (Amendment) Bill, 2020

    Parliament has passed The Mineral Laws (Amendment) Bill, 2020 for amendments in Mines & Mineral (Development and Regulation) Act 1957 and The Coal Mines (Special Provisions) Act, 2015. The bill will transform the mining sector in the country boosting coal production and reducing dependence on imports.

    Acts to be amended

    • The MMDR Act regulates the overall mining sector in India.
    • The CMSP Act provides for the auction and allocation of mines whose allocation was cancelled by the Supreme Court in 2014.
    • Schedule I of the Act provides a list of all such mines; Schedule II and III are sub-classes of the mines listed in the Schedule I.
    • Schedule II mines are those where production had already started then, and Schedule III mines are ones that had been earmarked for a specified end-use.

    Features of the Mineral Laws (Amendment) Bill, 2020 

    Removal of restriction on end-use of coal

    • Currently, companies acquiring Schedule II and Schedule III coal mines through auctions can use the coal produced only for specified end-uses such as power generation and steel production.
    • The Bill removes this restriction on the use of coal mined by such companies.
    • Companies will be allowed to carry on coal mining operation for own consumption, sale or for any other purposes, as may be specified by the central government.

    Eligibility for auction of coal and lignite blocks

    • The Bill clarifies that the companies need not possess any prior coal mining experience in India in order to participate in the auction of coal and lignite blocks.
    • Further, the competitive bidding process for auction of coal and lignite blocks will not apply to mines considered for allotment to:
    1. a government company or its joint venture for own consumption, sale or any other specified purpose; and
    2. a company that has been awarded a power project on the basis of a competitive bid for tariff.

    Composite license for prospecting and mining

    • Currently, separate licenses are provided for prospecting and mining of coal and lignite, called prospecting license, and mining lease, respectively.
    • Prospecting includes exploring, locating, or finding mineral deposit.  The Bill adds a new type of license, called prospecting license-cum-mining lease.
    • This will be a composite license providing for both prospecting and mining activities.

    Non-exclusive reconnaissance permits holders to get other licenses

    • Currently, the holders of non-exclusive reconnaissance permit for exploration of certain specified minerals are not entitled to obtain a prospecting license or mining lease.
    • Reconnaissance means preliminary prospecting of a mineral through certain surveys.
    • The Bill provides that the holders of such permits may apply for a prospecting license-cum-mining lease or mining lease.   This will apply to certain licensees as prescribed in the Bill.

    Transfer of statutory clearances to new bidders

    • Currently,upon expiry, mining leases for specified minerals (minerals other than coal, lignite, and atomic minerals) can be transferred to new persons through auction.
    • This new lessee is required to obtain statutory clearances before starting mining operations.
    • The Bill provides that the various approvals, licenses, and clearances given to the previous lessee will be extended to the successful bidder for a period of two years.

    Reallocation after termination of the allocations

    • The CMSP Act provides for the termination of allotment orders of coal mines in certain cases.
    • The Bill adds that such mines may be reallocated through auction or allotment as may be determined by the central government.
    • The central government will appoint a designated custodian to manage these mines until they are reallocated.

    Prior approval from the central government

    • Under the MMDR Act, state governments require prior approval of the central government for granting reconnaissance permit, prospecting license, or mining lease for coal and lignite.
    • The Bill provides that prior approval of the central government will not be required in granting these licenses for coal and lignite, in certain cases.
    • These include cases where: (i) the allocation has been done by the central government, and (ii) the mining block has been reserved to conserve a mineral.

    Advance action for auction

    • Under the MMDR Act, mining leases for specified minerals (minerals other than coal, lignite, and atomic minerals) are auctioned on the expiry of the lease period.
    • The Bill provides that state governments can take advance action for auction of a mining lease before its expiry.

    With inputs from PRS India

  • Corona, crude and credit

    Context

    Amid the gathering global crisis, its time India minds its own house.

    Panic and dislocation in Global markets

    • Panic at the level of the 2008 crisis: Global markets haven’t witnessed such panic and dislocation since the global financial crisis of 2008.
      • Global equity markets have collapsed, the US’s 10-year bond is at its lowest level ever, and crude prices underwent their largest single-day fall in 30 years.
    • Interaction of three global shocks: The market mayhem is the upshot of three global shocks interacting with each other.

    What are the three global shocks?

    • Negative demand shock due to Coronavirus: A negative demand shock around the world. As the coronavirus proliferates globally, households and businesses are understandably becoming risk-averse, and the consequent “social distancing” is expected to exert significant demand destruction around the world.
    • Negative supply shock emanating from China: The widespread industrial closures in China on the back of the COVID-19 outbreak will impact imports and supply chains in other countries, and thereby constitute an adverse supply shock for the rest of the world.
      • The magnitude of the shock: The 20-point drop in manufacturing output in the February PMI and the 17 per cent contraction in Chinese exports across January and February, suggests that the shock was large and immediate.
      • Supply shock likely to fade: That said, with the virus, gradually being contained in China, this supply shock is likely to fade even as the demand shock in the rest of the world widens and deepens.
    • Positive oil supply shock: The failure of oil producers to agree on production cuts has led to a price war with production increases on the anvil.
      • Cumulatively, crude pieces are down almost 50 per cent — about $30/barrel — since January.
      • A positive supply shock, which even adjusting for the concentrated stress in the oil sector, is growth-additive for the world and particularly for India.
    • India specific shock: There is a fourth India-specific force at play. The resolution and reconstruction of YES Bank was inevitable, but, at least temporarily, it is likely to result in a “flight to quality” in India’s financial sector, with resources moving from the financial periphery to the core.
      • Banks and NBFC may face difficulty in mobilising resources: To the extent that the periphery — smaller private banks and non-bank financial companies — will find it harder to mobilise resources, financial sector risk aversion could rise again.

    Implications for India’s macroeconomic stability

    • Significant negative impact due to export: India is a much more open economy than is widely believed with exports constituting almost 20 per cent of GDP. Therefore, the impact of the demand destruction around the world will not be trivial.
      • 40 bps decrease in the growth: If global growth is marked down by 100 basis points in 2020, which increasingly appears to be the case, we estimate that this would shave off about 40 bps from India’s growth through the export channel alone.
      • The cumulative drag to growth from exports and tourism would be a meaningful 60-70 bps.
    • Positive impact due to oil price shock: The near $30/barrel decline since January constitutes a large positive terms of trade shock for India — equivalent to about 1.3 per cent of GDP even accounting for reduced remittances from the Middle East.
      • Meaningful mitigant: If oil prices remain at this level for long, it would constitute a meaningful mitigant to India’s macro headwinds, boosting activity, dampening prices, creating fiscal space and reducing external imbalances.
    • Offsetting the negative impact of trade and tourism: Every $10 reduction in crude prices, boosts growths by about 20-25 bps.
      • Therefore, the $30 decline in crude, if it holds, should boost growth by about 60-70 bps, thereby largely offsetting the negative hit to growth from external trade and tourism.
    • Space for monetary easing: Furthermore, crude at $35-40, along with the global demand destruction is expected to generate large disinflationary forces, opening up space for monetary easing.
    • CAD would disappear: Finally, India’s current account deficit would virtually disappear, for the first time since 2003-04.

    The growth offset conditioned on coronavirus spread

    • The assumption in the offset: The above-mentioned growth offset, however, assumes that the coronavirus does not spread within India.
      • If India witnessed a rapid domestic proliferation, heightened risk aversion by economic agents could meaningfully hurt domestic demand.
    • A thought experiment on the impact on the economy: Discretionary services constitute about 35 per cent of GDP and have been growing at 8 per cent a year.
      • If that growth rate were to halve, that alone would deduct 140 bps from growth, and swamp any growth tailwinds from lower oil prices.
      • Furthermore, a “sudden stop” of demand to certain sectors may necessitate fiscal/liquidity support to ensure these don’t magnify into more disruptive credit events for the financial sector.
    • The best antidote to prolonged growth hit: The best antidote would be to aggressively contain the virus domestically, as authorities appear to be doing.
      • The experience from other countries suggests aggressive containment early in the process (isolation, quarantines, contract tracings, cancelled gatherings) reduces the growth rate of the virus from exponential to linear.
    • Macroeconomic outlook: The key to India’s macro outlook is whether the crude price decline can sustain and whether India can avoid a sharp domestic proliferation of COVID-19.

    Way forward

    • Pass the oil windfall to the public: Given current fiscal pressures, it’s tempting to advocate that the public sector appropriate much of the windfall. But with consumption under such pressure, there’s a strong case to pass this on to households.
      • A sharp cut in domestic fuel prices will boost household purchasing power and aggregate demand thereby creating contemporaneous counter-cyclical pressures.
    • Stick to the asset sale plan: While the turbulence in equity markets could understandably delay the government’s asset sale programme, it should not be allowed to derail it, given the criticality of asset sales to this year’s fiscal math.
      • Absorbing all the oil windfall through higher taxes as a substitute for asset sales would be a suboptimal mix.
    • Continue with the reforms: The salutary effects of falling crude prices — which would boost India’s macros relative to other emerging markets — should not mask the imperative to continue with reforms, particularly recognising and resolving any further financial sector stress proactively.

    Conclusion

    Global markets are witnessing their most acute volatility since 2008. All we can do is mind our own house amidst the gathering global storm.

     

  • AT-1 bonds

    India’s fourth-largest private lender YES bank was placed under a moratorium by RBI and its perpetual debt additional tier-1 (AT1 bonds) would become worthless if RBI does ask mutual funds to write down their value.

    What are AT1 bonds?

    • AT-1, short for Additional Tier-1 bonds, are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
    • AT-1 bonds are complex hybrid instruments, ideally meant for institutions and smart investors who can decipher their terms and assess if their higher rates compensate for their higher risks.
    • They carry a face value of ₹10 lakh per bond.
    • There are two routes through which retail folk have acquired these bonds — initial private placement offers of AT-1 bonds by banks seeking to raise money; or secondary market buys of already-traded AT-1 bonds based on recommendations from brokers.

    Why are they important?

    AT-1 bonds have several unusual features lurking in their fine print, which make them very different from plain bonds.

    • One, these bonds are perpetual and carry no maturity date. Instead, they carry call options that allow banks to redeem them after five or 10 years. But banks are not obliged to use this call option and can opt to pay only interest on these bonds for eternity.
    • Two, banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value without getting into hot water with their investors, provided their capital ratios fall below certain threshold levels. These thresholds are specified in their offer terms.
    • Three, if the RBI feels that a bank is tottering on the brink and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors. This is what has happened to YES Bank’s AT-1 bond-holders who are said to have invested ₹10,800 crore.

  •  How the country should make the most of a second oil windfall

    Context

    Amid the coronavirus scare came India’s silver lining in the form of a failure of the Organization of the Petroleum Exporting Countries (Opec) and Russia to reach an agreement on oil production cuts.

    Reasons for Russia’s decision and its aftermath

    • Why Russia declined to sign the agreement: Russia declined to cut its oil supply with an intention to compete with the US shale industry.
    • Start of the price war: Consequently, a price war has started as Saudi Arabia plans a big increase in its oil supply. Saudi Arabia, which is the world’s largest oil exporter, has started offering unprecedented discounts in Europe, the Far East and the US to increase its supplies at the cost of other oil producers.
    • Immediate fallout: An immediate fallout of the Russia-Opec meeting was a 9% fall in oil prices on Friday. Monday saw a sharper drop.

    Supply and demand shocks and implications for India

    • The demand shock: The impact of Covid-19 will be felt on the global demand for oil, too, as a dramatic increase in Covid-19 cases has put further downward pressure on demand for commodities, including oil.
    • Thus, both supply and demand shocks have coalesced to roil the crude oil market.
    • How much was the drop in price: Since the start of the year, oil prices have fallen by about a third.
      • Prices may drop further under the weight of the twin assault of higher supply and lower demand.
      • It is, therefore, not a stretch to expect oil prices over the coming financial year to be lower than they were in the previous two.
    • Implications for India: This has positive implications for India’s economy and policymaking, as it comes at a time when it has embarked on an uncertain and hesitant recovery.

    Opportunity for India

    • Precarious fiscal situation: The growth slowdown in the last two years has resulted in a precarious fiscal situation because of tax revenue shortfalls.
    • Implications of the fiscal constraints: A direct casualty is the ability of the government to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the goods and services tax (GST) framework.
    • Constraints holding back the government from offering stimulus: Budgetary constraints combined with the Fiscal Responsibility and Budget Management Act have held the government back from fully offsetting a private sector demand slowdown with its own spending.
    • Opportunity in the low oil prices: Low oil prices offer an opportunity to raise some revenue and improve its fiscal balance.

    Way forward

    • First- Passing half the benefit to consumers: As oil prices slide below levels in the previous two years and also below the price of India’s oil basket of $65 per barrel reportedly assumed for 2020-21, there’s an opportunity to pass on about half the benefit of lower global prices to consumers, while the other half can be used to shore up revenue by levying higher excise duty.
      • The Union government did something similar between 2014 and 2016.
      • Improving the fiscal health: It used low oil prices to improve its fiscal health, as the budget deficit it inherited from the previous government was higher than what the official figures suggested.
    • Second-Revenue generated should be used to clear dues: The additional tax revenue thus generated through higher excise duty should be used to clear all dues of the central government, whether to private companies, state governments, or others awaiting tax refunds.
      • Putting cash back in the hands of households and small businesses will go a long way in maintaining the growth of domestic demand, besides improving the credibility of the Union government as a trustworthy counter-party.
    • Third-Fiscal leeway: The potential excise duty windfall from oil prices could come in handy for the government to provide relief to beleaguered telecom companies.
      • The government will have fiscal leeway to allow a staggered and a longer schedule for the payments they have to make, arising out of the Supreme Court ruling on adjusted gross revenues.
      • The telecom growth story is an important component of the broader India story, and the sector needs an urgent breather to ensure we are adequately prepared for a 5G roll-out, whenever it happens.
    • Fourth-Recalibrate: A slowdown in economic activity, which is inevitable with restrictions placed on mobility and human interaction, will have adverse fiscal implications.
      • Tax collections will decline. So will remittances from Indian workers in the Gulf, if that region is buffeted by oil and virus shocks.
      • Hence, the quantum of the windfall from lower oil prices will need to be constantly re-assessed and fiscal strategies recalibrated.
    • Fifth-Hedging against the higher prices: Even as it should nimbly take advantage of the lower prices now, the government should seriously consider hedging against possible higher oil prices in the medium- to long-term through appropriate instruments available in financial markets. This idea should be extended to hedging against a fall in the rupee relative to the US dollar too.
    • Finally-Consider assembling the crack team: It may be worthwhile for the government to consider assembling a crack team of former and current bureaucrats, who have proven their mettle in different crises and in different sectors, to advise it on policy measures that should be adopted in these extraordinary times. Much policy innovation and courage, combined with integrity, will be needed for India to emerge stronger from 2020. For the country’s leadership, there isn’t much to lose from breaking free of old policy and behavioural shackles.

  • A prescription for revival

    Context

    The root cause of the present malaise in our economy is the “death of demand”.

    How demand matters for growth?

    • The relation between demand and growth: Growth in any economy depends on the growth in demand, both for investment as well as consumer goods.
    • How slackened demand leads to a vicious cycle: If demand slackens, then the installed capacity will not be fully utilised, the fresh investment will not take place, employment will slacken and the economy will get caught in a vicious cycle, as we are experiencing today.

    What needs to be done to break the vicious cycle?

    • What sequence to follow in reviving demand? The basic challenge, therefore, is to revive demand in the economy in a sequence where the revival takes place first in the investment goods sector, automatically followed by a boost in demand for consumer goods through enhanced employment opportunities.
    • Past precedents: This is the prescription we had followed in the Atal Bihari Vajpayee government when we were faced with the East Asian crisis and the post-Pokhran global economic sanctions soon after the government assumed office in March 1998.

    Demand in India

    • No dearth of demand in India: In a developing country like India, there is no dearth of “good” demand.
      • We still have to provide so many goods and services to our people in order to improve their “quality of life”.
    • Need to create new infrastructure: Simultaneously, we have to create new infrastructure and improve the existing ones to reduce the transaction cost in our economy and make it more competitive.
    • How infrastructure creation lead to the creation of demand: The emphasis on the construction of roads of all kinds — rural, state and national highways, the new telecom policy, the investment in railways, the emphasis on housing construction and development of the real estate, the improvement in rural infrastructure and reform in the agricultural sector were all meant to lead to the creation of demand in the economy.
    • Creation of the virtuous cycle: The creation of demand should be in such a way that the demand for investment goods picks up first and faster, which creates the virtuous cycle of full capacity utilisation.
      • Demand for consumer goods: Demand for investment goods is followed by fresh investment for new capacity creation, larger employment opportunities of various kinds — unskilled, skilled and highly skilled — which reached money into the pockets of people leading to a surge in demand for consumer goods.

    How the government should deal with the situation

    • Deal with the demand side instead of supply-side: All commentators are agreed now that instead of tackling the demand side government is dealing with the supply side.
      • Tax relief to corporates: For instance, if, instead of wasting a precious amount of Rs 1,45,000 crore on tax relief to a limited number of corporates the government had spent that money on rural infrastructure and agriculture and a part of it on railways and highways, it would have led to the creation of demand both for investment goods as well as consumer goods.
    • Issue of sticking to the fiscal deficit target: There is also the issue of resources. The government claims that it has stuck to the fiscal deficit targets.
      • But the provisions of Fiscal Responsibility and Budget Management (FRBM) Act have been treated in a cavalier manner by all subsequent governments.
      • What was the basic purpose of the act? The basic purpose of the act was to eliminate the revenue deficit completely within a short period of time and live with a limited fiscal deficit.
      • The original FRBM Act, therefore, mandated that revenue deficit should be eliminated completely and the rest of the fiscal deficit should be limited to one per cent of GDP.
      • In special circumstances like today, the fiscal deficit should be allowed to go up to even two per cent of the GDP, which will mean an amount of Rs four lakh crore.

    Figures of the latest budget and need for the reforms

    • Fiscal deficit figures: The government has taken credit in the Budget for the fact that it has successfully restricted total fiscal deficit for this fiscal to 3.8 per cent and for next fiscal at 3.5 per cent of the GDP.
    • The issue involved in fiscal deficit figures: The revenue deficit for the current fiscal is 2.4 per cent of the GDP and for the next fiscal it is 2.7 per cent. In other words, minus the revenue deficit the fiscal deficit is only 1.4 per cent of GDP for this year and for the next year, it is 1.7 per se.
    • Need for managing the expenditure: So, the real villain of the piece is revenue deficit and not fiscal deficit per se.
      • Need for the reforms: It is clearly the government’s responsibility to manage its expenditure and carry out reforms in it, including austerity in expenditure.
      • How will the reforms help? Controlled fiscal deficit will make more money available in the market for private sector investment and help RBI in reducing interest rates — things which will have an overall benign influence on the economy.

    Conclusion

    A lot of other things apart from austerity majors will have to be done, no doubt, like preventing companies, especially banks from failing, to further strengthen the growth impulses but in the present situation, the key is government spending and in the desired sequence.

  • Medicine and frontiers

    Context

    Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.

    Implications of the coronavirus disruption in China

    • Global dependence on China in focus: As the coronavirus spreads far and wide, the global dependence on China for drugs and medical supplies has come into sharp focus.
    • The argument for domestic production of medicine: In both the US and Europe, the shortage of essential drugs to treat the victims of the virus is strengthening the arguments for restoring some domestic production of pharmaceuticals.
    • National security implications: Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.

    China’s dominance in pharmaceutical production

    • Two factors that contributed to China rise:
      • Active state support from Beijing and-
      • Western drug companies eager to shift production to cheaper destinations has facilitated China’s emergence as the most important global source for pharmaceutical products and medical devices.
    • Global dependence on China for drugs: America and Europe are said to import nearly 80 per cent of their antibiotics from China.
      • India’s dependence for API: India is also an important supplier of generic drugs to the Western world, but it is itself dependent on massive imports of active pharmaceutical ingredients (APIs) from China.
      • Impact on India: The reduction in supplies from China after the virus breakout has been accentuated by the recent decision of Government of India to limit the export of common drugs like paracetamol.
    • How the US is responding to dominance? Well before the current crisis, there had been warnings in the US about the national security risks from the massive reliance on external sources for basic medicines.
      • Weaponising the dominance: Late last year, the US-China Security Review Commission, established by the US Congress, pointed to the prospects of China weaponising its dominance over pharmaceutical production and its massive consequences for healthcare in the US.
      • Government support in China: The report also pointed out that the Chinese government promotes and protects the nation’s pharmaceutical companies to the disadvantage of foreign competitors and that leaves other nations little leverage with China.
    • Need to limit the exposure to China in other sectors: While the current international focus is on the supply chains in the pharmaceutical sector, there has been growing recognition of the need to limit the expansive exposure to China in many different sectors.

    National security argument of the dominance

    • National security dimension of trade war: Trump’s case for bringing manufacturing back to America — by challenging the traditional framework of international trade — was not just economic.
      • It also had a strong national security argument — that the US cannot rely on China for servicing its national security needs in a range of sectors from digital components and drugs.
    • What supporters of the globalisation said? Supporters of economic globalisation had countered these arguments by saying that tight interdependence will reduce the incentives for taking unilateral advantage by nations.
    • China using trade dominance into leverage: The critics have pointed to the fact that China was turning its role as the “world’s factory” into powerful leverage.
      • Why did the West start regarding China as a challenge? The Chinese decision to stop rare earth exports to Japan during 2010 in relation to a minor political dispute had led many to put up red flags.
      • Since then, China’s greater political assertiveness and challenge to Western dominance in critical areas have strengthened the case in the West to regard China as a challenge if not an outright threat.
    • De-coupling gaining traction: As the bipartisan political consensus in the US and Europe in favour of a strong economic partnership with China began to break down in recent years, the case for de-coupling has gained much traction.

    How using economic leverage for strategic gains undergone changes?

    • Use of economic leverage and stockpiling: The history of statecraft suggests that it was quite common for states to use economic leverage for strategic gains.
      • Use of strategy during the cold war: Through the Cold War, both America and Russia sought to corner strategic resources around the world. They also adopted policies for stockpiling special materials for use during conflicts. Sustaining a strategic petroleum reserve, for example, was a major priority for the US during the Cold War.
    • Changes due to globalisation: The importance of hoarding resources at home and denying it to one’s adversaries seemed to diminish amidst great power harmony and economic globalisation that flourished after the Soviet Union collapsed.
      • Recent challenges due to weakening of globalisation: The erosion of that moment in the last few years has set up new tensions between the competing imperatives on Western governments.
    • Capital vs. Security issue: While the logic of security compels the state to limit strategic economic exposure, the logic of capital demands policies that reduce costs of production and increase the margins of profit.
      • This tension has been at the heart of the recent Western debates on the China question.

    Conclusion

    While the world finds ways to deal with the Chinese dominance in the other sector, meanwhile, in the health sector, large continental entities like the US, Europe and India are likely to insure against over-reliance on a single source for life-saving drugs. They are likely to find ways to shorten the supply chains, expand domestic production and explore coordination among like-minded nations.