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Foreign Policy Watch: India-Nepal

For a reset in India-Nepal relationsop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Treat of Sugauli in 1816

Mains level : Paper 2- Indiao-Nepal relations and territorial dispute.


Over the past few years, we have been  witness to the deteriorating India-Nepal relations. Reserves of goodwill which India had accumulated is fast depleting in Nepal. The latest issue over the map is a new addition to the decline in relations. This article stresses the need for political maturity to find the solution to the complex issue of the underlying problem.

Need for the fundamental reset in relations between Indian and Nepal

  • The immediate provocation for the contention is the long-standing territorial issue surrounding Kalapani.
  • It is a patch of land near the India-Nepal border, close to the Lipulekh Pass on the India-China border.
  • However, the underlying reasons are far more complex.
  • Yet, Nepali Prime Minister K.P. Sharma Oli’s exploitation of the matter, by raising the banner of Nepali nationalism and painting India as a hegemon, is part of a frequent pattern.
  • Which indicates that relations between the two countries need a fundamental reset.

Let’s look at the historical background of the India-Nepal border

  • India inherited the boundary with Nepal, established between Nepal and the East India Company in the Treaty of Sugauli in 1816.
  • Kali river constituted the boundary, and the territory to its east was Nepal.
  • The dispute relates to the origin of Kali.
  • Near Garbyang village in Dharchula Tehsil of the Pithoragarh district of Uttarakhand, there is a confluence of different streams coming from north-east from Kalapani and north-west from Limpiyadhura.
  • The early British survey maps identified the north-west stream, Kuti Yangti, from Limpiyadhura as the origin.
  • But after 1857 changed the alignment to Lipu Gad, and in 1879 to Pankha Gad, the north-east streams, thus defining the origin as just below Kalapani.
  • Nepal accepted the change and India inherited this boundary in 1947.

More past events dealing with the LIpulech pass

  • The Maoist revolution in China in 1949, followed by the takeover of Tibet, created deep misgivings in Nepal.
  • So, India was ‘invited’ by Nepal to set up 18 border posts along the Nepal-Tibet border.
  • The westernmost post was at Tinkar Pass, about 6 km further east of Lipulekh.
  • In 1953, India and China identified Lipulekh Pass for both pilgrims and border trade. After the 1962 war, pilgrimage through Lipulekh resumed in 1981, and border trade, in 1991.
  • In 1961, King Mahendra visited Beijing to sign the China-Nepal Boundary Treaty that defines the zero point in the west, just north of Tinkar Pass.
  • By 1969, India had withdrawn its border posts from Nepali territory.
  • The base camp for Lipulekh remained at Kalapani, less than 10 km west of Lipulekh.
  • In their respective maps, both countries showed Kalapani as the origin of Kali river and as part of their territory.
  • After 1979, the Indo-Tibetan Border Police has manned the Lipulekh Pass.

So, when was the issue of the origin of Kali river raised?

  • After the 1996 Treaty of Mahakali -Kali river is also called Mahakali/Sarada further downstream-the issue of the origin of Kali river was first raised in 1997.
  • The matter was referred to the Joint Technical Level Boundary Committee that had been set up in 1981 to re-identify and replace the old and damaged boundary pillars along the India-Nepal border.
  • The Committee clarified 98% of the boundary, leaving behind the unresolved issues of Kalapani and Susta when it was dissolved in 2008.
  • It was subsequently agreed that the matter would be discussed at the Foreign Secretary level.
  • Meanwhile, the project to convert the 80-km track from Ghatibagar to Lipulekh into a hardtop road began in 2009 without any objections from Nepal.

Objections raised by Nepal to the new map released by India

  • The Survey of India issued a new political map (eighth edition) on November 2, 2019, to reflect the change in the status of Jammu and Kashmir as two Union Territories.
  • Nepal registered a protest though the map in no way had changed the boundary between India and Nepal.
  • However, on November 8, the ninth edition was issued.
  • The delineation remained identical but the name Kali river had been deleted.
  • Predictably, this led to stronger protests, with Nepal invoking Foreign Secretary-level talks to resolve issues.

New map released by Nepal and issues with it

  • A new map of Nepal based on the older British survey reflecting Kali river originating from Limpiyadhura in the north-west of Garbyang was adopted by parliament and notified on May 20.
  • On May 22, a constitutional amendment proposal was tabled to include it in a relevant Schedule.
  • The new alignment adds 335 sq km to Nepali territory, territory that has never been reflected in a Nepali map for nearly 170 years.

Following issue explains why there is need for rewriting the fundamental of India-Nepal relations

1. Nepali nationalism is being equated to anti-Indianism

  • Prime Minister Narendra Modi has often spoken of the “neighbourhood first” policy.
  • But the relationship took a nosedive in 2015 when India first got blamed for interfering in the Constitution-drafting in Nepal.
  • And then for an “unofficial blockade” that generated widespread resentment against the country.
  • It reinforced the notion that Nepali nationalism and anti-Indianism were two sides of the same coin.

2. China factor

  • In Nepali thinking, the China card has provided them the leverage to practise their version of non-alignment.
  • In the past, China maintained a link with the Palace and its concerns were primarily related to keeping tabs on the Tibetan refugee community.
  • With the abolition of the monarchy, China has shifted attention to the political parties as also to institutions like the Army and Armed Police Force.
  • Also, today’s China is pursuing a more assertive foreign policy and considers Nepal an important element in its growing South Asian footprint.

3. India has ignored the changing political narrative for long

  • The reality is that India has ignored the changing political narrative in Nepal for far too long.
  • India remained content that its interests were safeguarded by quiet diplomacy even when Nepali leaders publicly adopted anti-Indian postures.
  • Long ignored by India, it has spawned distortions in Nepali history textbooks and led to long-term negative consequences.
  • For too long India has invoked a “special relationship”, based on shared culture, language and religion, to anchor its ties with Nepal.
  • Today, this term carries a negative connotation — that of a paternalistic India that is often insensitive and, worse still, a bully.
  • The 1950 Treaty of Peace and Friendship which was sought by the Nepali authorities in 1949  is viewed as a sign of an unequal relationship, and an Indian imposition.
  • The purpose of the treaty was to continue the special links Nepal had with British India and it  provides for an open border and right to work for Nepali nationals
  • Yet, Nepali authorities have studiously avoided taking it up bilaterally even though Nepali leaders thunder against it in their domestic rhetoric.

Consider the question, “Examine the issues that have been testing the old ties between India and Nepal.”

Conclusion

The urgent need today is to pause the rhetoric on territorial nationalism and lay the groundwork for a quiet dialogue where both sides need to display sensitivity as they explore the terms of a reset of the “special relationship”. A normal relationship where India can be a generous partner will be a better foundation for “neighbourhood first” in the 21st century.

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Understanding the monetisation of deficitop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Relation between bond yield


The RBI could finance the government debt by buying bonds from the secondary market. Or it could directly finance the debt. And both could stoke inflation. But, do they carry the same inflation risk. The answer is an unambiguous ‘No’. So, how monetisation of debt is different from Open Market Operation by the RBI? Read the article to know…

What monetisation of deficit mean (and doesn’t mean)

  • Monetisation of the deficit does not mean the government is getting free money from the RBI.
  • If one works through the combined balance sheet of the government and the RBI, it will turn out that the government does not get a free lunch.
  • But it does get a heavily subsidised lunch.
  • That subsidy is forced out of the banks.
  • And, as in the case of all invisible subsidies, they don’t even know.

So, is the RBI monetising the debt?

  • It is not as if the RBI is not monetising the deficit now; it is doing so.
  • It is doing so indirectly by buying government bonds in the secondary market through what are called open market operations (OMOs).
  • Note that both monetisation and OMOs involve printing of money by the RBI.
  • But there are important differences between the two options that make shifting over to monetisation a non-trivial decision.

Historical context of the monetisation of debt: An agreement

  • In the pre-reform era, the RBI used to directly monetise the government’s deficit almost automatically.
  • That practice ended in 1997 with a landmark agreement between the government and the RBI.
  • It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO route.
  • The implied understanding also was that the RBI would use the OMO route not so much to support government borrowing.
  • So, the RBI uses OMO as liquidity instrument to manage the balance between the policy objectives of supporting growth, checking inflation and preserving financial stability.

So, what were the outcomes of the agreement?

  • The outcomes of that agreement were historic.
  • Since the government started borrowing in the open market, interest rates went up.
  • HIgh interest rates incentivised saving and thereby spurred investment and growth.
  • Also, the interest rate that the government commanded in the open market acted as a critical market signal of fiscal sustainability.
  • Importantly, the agreement shifted control over money supply, and hence over inflation, from the government’s fiscal policy to the RBI’s monetary policy.
  • The India growth story that unfolded in the years before the global financial crisis in 2008 when the economy clocked growth rates in the range of 9 per cent was at least in part a consequence of the high savings rate and low inflation which in turn were a consequence of this agreement.

What is the reasoning for jeopardising the hard-won gains of agreement?

  • The Fiscal Responsibility and Budget Management Act as amended in 2017 contains an escape clause.
  • Escape clause permits monetisation of the deficit under special circumstances.
  • What is the case for invoking this escape clause?
  • The case is made on the grounds that there just aren’t enough savings in the economy to finance government borrowing of such a large size.
  • Bond yields would spike so high that financial stability will be threatened.
  • The RBI must therefore step in and finance the government directly to prevent this from happening.

No, the situation is not so grim-Look at the bond yields

  • There is no reason to believe that we are anywhere close to the above-mentioned situation.
  • Through its OMOs, the RBI has injected such an extraordinary amount of systemic liquidity that bond yields are still relatively soft.
  • In fact the yield on the benchmark 10 year bond which was ruling at 8 per cent in September last year has since dropped to just around 6 per cent.
  • Even on the day the government announced its additional borrowing to the extent of 2.1 per cent of GDP, the yield settled at 6.17 per cent.
  • That should, if anything, be evidence that the market feels quite comfortable about financing the enhanced government borrowing.

Why worry about monetisation if OMO also leads to inflation?

The following four issues make clear the difference in OMO and monetisation

1. Issue of RBI’s control over monetary policy

  • Both monetisation and OMOs involve expansion of money supply which can potentially stoke inflation.
  • If so, why should we be so wary of monetisation?
  • Because although they are both potentially inflationary, the inflation risk they carry is different.
  • OMOs are a monetary policy tool with the RBI in the driver’s seat, deciding on how much liquidity to inject and when.
  • In contrast, monetisation is, and is seen, as a way of financing the fiscal deficit with the quantum and timing of money supply determined by the government’s borrowing rather than the RBI’s monetary policy.
  • If RBI is seen as losing control over monetary policy, it will raise concerns about inflation.
  • That can be a more serious problem than it seems.

2. Credibility of RBI on curbing inflation

  • India is inflation prone.
  • Note that after the global financial crisis when inflation “died” everywhere, we were hit with a high and stubborn bout of inflation.
  • In hindsight, it is clear that the RBI failed to tighten policy in good time.
  • Since then we have embraced a monetary policy framework and the RBI has earned credibility for delivering on inflation within the target.
  • Forsaking that credibility can be costly.

3. Yield on bond could shoot up anyway

  • If, in spite of above problems, the government decides to cross the line, markets will fear that the constraints on fiscal policy are being abandoned.
  • Perception in the market will be that the government is planning to solve its fiscal problems by inflating away its debt.
  • If that occurs, yields on government bonds will shoot up, the opposite of what is sought to be achieved.

4. Monetisation is not inevitable yet

  • What is the problem that monetisation is trying to solve?
  • There are cases when monetisation — despite its costs — is inevitable.
  • If the government cannot finance its deficit at reasonable rates, then it really doesn’t have much choice.
  • But right now, it is able to borrow at around the same rate as inflation, implying a real rate (at current inflation) of 0 per cent.
  • If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure.
  • We are not there yet.

Consider the question asked in 2019, “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your argument.”

Conclusion

Though OMO and monetisation both leads to inflation, the issues with monetisation have far-reaching consequences. Also, the situation we are in doesn’t yet warrant monetisation which should be seen as a last resort.

Innovations in Sciences, IT, Computers, Robotics and Nanotechnology

R&D: Path to self-reliant Indiaop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Mains level : Paper 3- Importance of innovation for self-reliance.


What does it take to be self-reliant? (Hint: R&D!) This is the question this article tries to answer.  After independence, we had a good start in R&D. But what went wrong? What was the role played by globalisation? Did the globalisation deliver on its promise of technology transfer? And finally, what lies on the way forward for India? This article answers all such question.

What went wrong: historical perspective

  • India chose the path of self-reliance in state-run heavy industries and strategic sectors after independence.
  • In the decades following independence, this choice of self-reliance had placed India ahead of most developing countries.
  • In the 1970s and 80s, however, India did not modernise these industries to climb higher up the technological ladder.
  • The private sector, which had backed the state-run core sector approach in its Bombay Plan, stayed content with near-monopoly conditions in non-core sectors in a protected market.
  • Little effort was made to modernise light industries or develop contemporary consumer products.
  • India’s industrial ecosystem was thus characterised by low productivity, poor quality and low technology, and was globally uncompetitive.

What did India lose in the ‘lost decades’?

  • India completely missed out on the ‘third industrial revolution’.
  • Third industrial revolution comprised electronic goods, microprocessors, personal computers, mobile phones and decentralised manufacturing and global value chains during the so-called lost decade(s).
  • Today, India is the world’s second-largest smartphone market.
  • However, it does not make any of these phones itself.
  • India manufactures only a small fraction of solar photovoltaic cells and modules currently used, with ambitious future targets.

What happened to ‘self-reliance’ after India embraced globalisation?

  • At the turn of the millennium, when India embarked on liberalisation, privatisation and globalisation.
  • So, the very concept of self-reliance was rubbished.
  • This happened in the belief that it was like reinventing the things already invented and wasting money on it.
  • And when advanced technologies could simply be bought from anywhere at lower costs. 
  • Two related ideas have prevailed since then, and neither delivered the desired results.

So, what are these two basic ideas?

1. Unsuitability of PSUs in the globalised world

  • The first idea was that public sector undertakings (PSUs) are, by definition, inefficient and sluggish for the competitive globalised scenario.
  • No effort was made to engender either real autonomy or a transition to new technological directions.
  • Instead, PSUs with capability and scale were undermined or abandoned, along with many nascent research and development (R&D) efforts, for instance, in photovoltaics, semiconductors and advanced materials.

So, what was the result of this attitude towards PSUs?

  • The private sector displayed little interest in these heavy industries and showed no appetite for technology upgradation.
  • With entry of foreign corporations, most Indian private companies retreated into technology imports or collaborations.
  • Even today, most R&D in India is conducted by PSUs.
  • And much of the smaller but rising proportion of private sector R&D is by foreign corporations in information technology and biotechnology/pharma.
  • Conclusion: Given the disinclination of most of the private sector towards R&D and high-tech manufacturing, significant government reinvestment in PSUs and R&D is essential for self-reliance.

2. Foreign companies were expected to bring new technologies in India

  • The second idea was that inviting foreign direct investment and manufacturing by foreign majors would bring new technologies into India’s industrial ecosystem.
  • This was thought to obviate the need for indigenous efforts towards self-reliance.

So, what happened on the ground?

  • But mere setting up of manufacturing facilities in India is no guarantee of absorption of technologies.
  • There is no evidence from any sector that this has taken place or has even been attempted.
  • The fact is, foreign majors jealously guard commercially significant or strategic technologies in off-shore manufacturing bases.
  • Conclusion: The key problem of self-reliance is therefore neither external finance nor domestic off-shore manufacturing, but resolute indigenous endeavour including R&D.

Let’s look at experience of other Asian countries towards self-reliance

Three models emerge from Asian countries.

1. Focus on technology and industries

  •  Japan’s post-war success, was seen as a template by some countries to follow.
  • These include countries like South Korea, Taiwan, Singapore and Hong Kong
  • These countries took huge technological and industrial strides in the 1970s and 80s.
  • South Korea emerged as a global powerhouse in manufacturing, but also in indigenously developed technologies.
  • Taiwan developed technologies and manufacturing capacities in robotics and micro-processors.
  • While Singapore and Hong Kong adapted advanced technologies in niche areas.
  • These self-reliant capabilities were enabled, among other factors, by planned state investments in R&D including basic research (3-5% of GDP), technology and policy support to private corporations, infrastructure and, importantly, education and skill development (4-6% of GDP).

2. Focus on off-shore manufacturing and not on self-reliance

  • Countries like Thailand, Malaysia, Indonesia and Vietnam have focused on off-shore manufacturing lower down the value chain and without the thrust on self-reliance.
  • This is useful for job creation but is an unsuitable model for a country of India’s size and aspirations.

3. China: Transition from low-end manufacturing to dominant role in supply chains

  • China is, of course, unique in scale and in its determination to become a superpower not just geopolitically but also in self-reliant S&T and industrial capability.
  • China advanced purposefully from low-end mass manufacturing to a dominant role in global supply chains.
  • It has now decided on shifting to advanced manufacturing.
  • It has set itself a target of becoming a world leader by 2035 in 5G, supercomputing, Internet of Things (IoT), artificial intelligence (AI), autonomous vehicles, biotech/pharma and other technologies of the ‘fourth industrial revolution’.

Way forward for India

  • India may well have missed the bus in many of technologies in which the U.S., Europe and China have established perhaps insurmountable leads.
  • Yet, self-reliant capabilities in electric and fuel cell vehicles, electricity storage systems, solar cells and modules, aircraft including UAVs, AI, robotics and automation, biotech/pharma and others are well within reach.
  • Large-scale concerted endeavours would, however, be required, since self-reliance will not happen by itself.
  • State-funded R&D, including in basic research, by PSUs and research institutions and universities needs to be scaled-up significantly, well above the dismal 1% of GDP currently.
  • Upgraded and reoriented PSUs would also be crucial given their distinctive place in the ecosystem.
  • Private sector delivery-oriented R&D could also be supported, linked to meaningful participation in manufacturing at appropriate levels of the supply chain.
  • India’s meagre public expenditure on education needs to be substantially ramped up including in skill development.

Consider the question “The path to the self-reliance of any country goes through robust capabilities in the R&D. Comment”

Conclusion

Self-reliance would need a paradigm shift in our approach toward many things. First and foremost is the R&D. Potential of the PSUs has to be tapped to their fullest in the realms of R&D. The second area of focus should be education. These two areas are the key to achieve self-reliance and should be the focus of policymakers.


Back2Basics: Bombay Plan

  • The Bombay plan was a set of proposal of a small group of influential business leaders in Bombay for the development of the post-independence economy of India.
  • This plan was published in two parts or volume- first in 1944 and second in 1945.
  • The prime objectives of the plan were to achieve a balanced economy and to raise the standard of living of the masses of the population rapidly by doubling the present per capita income within a period of 15 years from the time the plan goes into operation.

 

Coronavirus – Economic Issues

The perils of the liquidity pushop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Liquidity, demand side, supply side, LTRO

Mains level : Paper 3- Way out to restart the economy,


Whether to focus on demand side or supply side is the dilemma policymakers dealing with the financial crises have always faced. If we look closely, the focus of the package announced by the government is on the supply side and pushing liquidity in the economy. This article examines the various measure announced in the package and elaborated why such measures are likely to fail.

Focus on credit and liquidity in the package

  • The government has relied heavily on measures aimed at pushing credit to banks, non-banking financial companies (NBFCs) and businesses big and small.
  • These are expected to use borrowed funds to lend to others, make payments falling due, compensate employees even while under lockdown, and otherwise spend even while not earning.
  • The thrust is to get the Reserve Bank of India (RBI) and other public financial institutions to infuse liquidity and increase lending by the financial system.
  • RBI offered the financial institution capital for longer periods at a repo or policy interest rate that has been cut by more than a percentage point to 4%.

Let’s understand liquidity and its role in crisis

  • The Prime Minister in his speech calling for a “self-reliant India” identified, besides land, labour and laws, “liquidity” as among the areas of focus of the package.
  • What is liquidity: In economic and business parlance, liquidity refers to ease of access to cash.
  • A liquid asset is one that can be easily sold for or replaced with cash.
  • And a liquid firm or agent is a holder of cash, a line providing access to cash, or assets that can be easily and quickly converted to cash without significant loss of value.
  • In periods of crisis, individuals, small businesses, firms, financial institutions and even governments tend to experience a liquidity crunch.
  • Relaxing that crunch is a focus of the government’s crisis-response package.
  • So, the government has given a much larger role to enhancing liquidity than it does either to direct transfers.

So, let’s look at steps taken by the government to ensure liquidity

1. LTRO and issues with it

  • Among the first steps taken by the RBI was the launch of special and ‘targeted’ long term repo operations (TLTROs).
  • LTROs allowed banks to access liquidity at the repo rate to lend to specified clients.
  • One round of such operations, which was relatively more successful, called for investment of the cheaper capital in higher quality investment grade corporate bonds, commercial paper, and non-convertible debentures.
  • What went wrong? That funding allowed big business, varying from Reliance and L&T to financial major HDFC, to access cheap capital to substitute for past high-cost debt or finance ongoing projects.
  • There is little evidence that this is triggering new investment decisions.

2. Focus on saving NBFCs and why it failed to give the desired result?

  • The second round was geared to saving NBFCs, whose balance sheets were under severe stress even before the COVID-19 strike.
  • NBFCs were finding it difficult to roll over the short-term debt they had incurred to finance longer-term projects.
  • Banks were wary about lending to these NBFCs.
  • Banks feared that their clients could default in amounts that would bring the viability of these institutions into question.
  • Those fears were confirmed when Franklin Templeton announced that it was shutting down six of its funds.
  • Franklin Templeton set off redemption requests across the NBFC sector, as investors rushed to take back their money.
  • This happened at a  time when the ability of these institutions to mobilise funds to meet these demands had been impaired.
  • Not surprisingly, banks were unwilling to respond when liquidity was infused to target lending to the NBFCs.

3. More intermediaries and credit guarantee by the government

  • Building on these initial liquidity infusion efforts, the COVID-19 package identified more intermediaries.
  • These intermediaries include the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, and the National Housing Bank.
  • The intermediaries were expected to refinance lending by the banks to different sections.
  • To persuade the banks and other intermediaries to take up these offers when the clients they must lend to MSME, street vendors, marginal farmers, etc. are themselves stressed, in some instances the government offered them partial or full credit guarantees in case their clients defaulted.
  • The government also sought to persuade the RBI to lend directly to NBFCs against their paper.

Why the above 3 measure won’t succeed?

  • These measures, which are only marginally effective even in the best of times, will not work during this crisis.
  • Consider a bank or NBFC lending to small business.
  • With economic activity either at a complete stop or at a fraction of the normal, those who can access credit would either not borrow or only do so to protect themselves and not use the funds either to pay their workers or buy and stock inputs.
  • Even after the lockdown is lifted, the compression of demand resulting from the loss of employment and incomes would be considerable.
  • It would be aggravated by the fact that spending by a fiscally conservative government would fall sharply because of a collapse in revenue collections.
  • Faced with sluggish demand, firms are unlikely to meet past and current payments commitments and help the revival effort, just because they have access to credit.
  • This would mean that credit flow would actually not revive.
  • This danger is even greater because the government has been measly with its guarantees.
  • The government doesn’t want to accumulate even contingent liabilities that do not immediately affect the fiscal deficit.

4. Increasing the disposable income

  • Another component of the “liquidity” push is the measures that temporarily increase the disposable income of different sections.
  • Such measures include advance access to savings like provident fund contributions, lower tax deduction at source, reduced provident fund contributions and moratoriums on debt service payments for a few months.
  • These measures are expected to provide access to cash inflows and reduce cash outflows, to induce agents to meet overdue payments or just spend to enhance the incomes of others.
  • These are marginal in scope, if relevant at all.
  • They have been combined with non-measures like adding on pending payments such as income tax refunds to spike “liquidity provision”.

Way forward

  • What is needed now is government support in the form of new and additional transfers to people in cash and kind, and measures such as wage subsidies, equity support and spending on employment programmes.
  • That, as many have acknowledged, would require debt financed spending by the government, with borrowing at low-interest rates from the central bank or a “monetisation” of the deficit.
  • Unfortunately, obsessed as it is with fiscal conservatism and tax forbearance, the government is unwilling to take that route.

Consider the question “Every stimulus package provokes a debate for its emphasis on either supply-side or the demand side. Examine the provision in the stimulus package announced by the government which focuses on the supply side. What are the issues with supply-side focus in the package?”

Conclusion

Overall, the “transmission” of the supply side push from these monetary policy initiatives for relief and revival is bound to be weak. Given the circumstances, the liquidity push, even if partially successful, would only culminate in eventual default, as borrowers use the debt to just stay afloat in the absence of new revenues.

Coronavirus – Health and Governance Issues

Examining role played by Civil Society and NGOs in fight against Covid-19op-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 2- Role of NGO and Civil Society amid pandemic.


Social capital is what civil societies are known as. The article highlights the valuable role played by the civil society, and NGO in the pandemic. They constitute the backbone of the collective expression of citizen  interest in a democracy. So, read about the ways in which they can contribute in dealing with destruction due to pandemic.

Partnership with 3 key stakeholders: NGO, Private Sector, international development organisation

  • The nature and scale of the crisis which the COVID-19 pandemic has led to is unparalleled.
  • In such a scenario, solutions are unlikely to come from past experiences or best practices.
  • The biggest source of strength now is the partnerships we have built over the years.
  • The situation at hand calls for stakeholders to come together, work side by side and support each other.
  •  The fight against COVID-19 needed as many hands as were available.
  • The job was too big for the government to handle alone.
  • The strategy was to leverage vertical and horizontal partnerships: Vertical partnerships, which the stakeholders have built within their organisations and horizontal partnerships, which the government has institutionalised with stakeholders.
  • This is precisely what one of the Empowered Groups created by the government has been doing since it was formed.

 Role played by NGOs

Significance of NGOs

  • The NGOs, given their deep connect with spatial and sectoral issues, were a natural partner in this endeavour.
  • There is nobody better placed than the NGOs to understand the pulse at the grassroots and engage closely with communities.
  • Around 92,000 organisations were urged to partner with district administrations and contribute to the response efforts.

How the NGOs helped?

  • Chief Secretaries of all states were requested to engage NGOs in relief and response efforts and designate state and district nodal officers to coordinate with them.
  • The approach was to leverage the strength and reach of the local NGOs in identifying priority areas for action and avoid duplicity of efforts.
  • NGOs have been actively setting up community kitchens, creating awareness about prevention, and physical distancing, providing shelter to the homeless, the daily wage workers, supporting government efforts in setting up health camps and in deputing volunteers to deliver services to the elderly, persons with disabilities, children, and others.
  • An outstanding contribution of NGOs was in developing communication strategies in different vernaculars which went a long way in taking awareness measures to the community level.
  • Akshaya Patra, Rama Krishna Mission, Tata Trusts, Piramal Foundation, Bill and Melinda Gates Foundation, Action Aid, International Red Cross Society, Prayas, Help-age India, SEWA, Sulabh International, Charities Aid Foundation of India, Gaudia Math, Bachpan Bachao Andolan, the Salvation Army, and Catholic Bishops’ Conference of India are some partners who have embodied the whole-of-society approach in COVID-19 response management.

Important role played by startups

  • The crisis has brought out the best in the start-up space.
  • Many of them have risen to the occasion and accelerated the development of low cost, scalable, and quick solutions.
  • The results have been promising.
  • AgVa accelerated the development of ventilators which are low-cost, mobile, low on power consumption and require minimal training for operators.
  • Biodesign has developed a robotic product called ResperAid, which enables mechanised use of manual ventilators.
  • Kaaenaat has developed highly portable ventilators which can be used to serve two patients simultaneously and has a built-in battery, oxygen concentrator, and steriliser cabinet.
  • The products of a few non-ventilator start-ups too came to the aid of the COVID-19 fighting machinery.
  • The AI-enabled analysis of chest X-Rays developed by Qure.ai enables large-scale screening to identify potential cases.
  • GIS and geo-fencing technologies by Dronamaps enabled information cluster strategies for hotspots.
  • AI-powered online doctor consultation and telemedicine platform by Mfine connects diagnostics labs and pharmacies with doctors and patients.
  • The AI-enabled thermal imaging camera developed by Staqu facilitated large-scale screening at low cost.
  • These developments strengthen the argument that low-cost and scalable solutions designed and developed domestically must drive our country’s transformation.

How the stakeholders operated through partnership?

  • The manner in which stakeholders have responded to the pandemic reinforces the power of partnerships.
  • In fact, they have operated through partnerships.
  • The NGO leaderships created momentum throughout their networks and delivered the much needed response.
  • They also brought to the attention of the group the problems from the grassroots.
  • Multiple agencies of international development organisations designed and executed joint response initiatives, leveraging their presence across the country.
  • The coalitions which industry organisations such as CII, FICCI, and NASSCOM have built over the years brought people and resources together, identified problems at multiple levels, channelised ideas and solutions and facilitated innovations.
  • The role played by the government has been facilitative in nature.
  • This role was based on the institutional and informal partnerships built with the three groups of stakeholders over the years.

Adaptiveness of Indian Industry

  • Until three months ago, not a single N95 mask or personal protective equipment (PPE) was manufactured in India.
  • Today, we have 104 domestic firms making PPEs and four manufacturing N95 masks.
  • Over 2.6 lakh PPEs and two lakh N95 masks are being manufactured in India, daily.
  • Domestic manufacturing of ventilators has strengthened manifold — orders for more than 59,000 units have been placed with nine manufacturers.
  • While this shows the adaptiveness of Indian industry, the shift to domestic production must happen on a larger scale for a wider set of sectors in the long run, as envisioned by Make in India.

Consider the question-“As facilitators, mediators, and advocates of collective articulation of citizen interest in a democracy, Civil Society and NGOs have put people before everything else during this crisis. In light of this, examine the role played by them in unparalleled crisis brought in by Covid-19 pandemic.”

Conclusion

Civil society, and voluntary and non-government organisations constitute the backbone of the collective articulation of citizen interest in a democracy. Surely, they can prove to be an asset in our fight against corona pandemic.

Foreign Policy Watch: India-Nepal

India Nepal Border issue: Colonial legacy or the Dragon’s Power Playop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Treaty of Sugauli, Lipu Lekh pass.

Mains level : Paper 2- India-Nepal ties, and issues involved.


India – Nepal relations are having its “see saw swing” moment. At one end, lies the 1950 treaty of peace and friendship, close people to people relations and India’s aid during 2015 earthquake. But on the other end lies the economic blockade and Madhesi protest. Another entry to the later side is the Border issue.

  • The inauguration of road from Dharchula to Lipu Lekh was done with great fanfare, at least on the Indian side.
  • The metalled road is a BIG relief for pilgrims and traders on the traditional route for the Kailash-Mansarovar yatra, who otherwise were stuck for days in the arduous walk.

So, where is the issue?

The issue lies in Nepal’s charge claiming that the stretch passes though Nepalese territory. This was displayed by some politicized moves like-

  • Intemperate remarks by Nepal’s PM in the Nepalese Parliament.
  • Manner (airdropped to the location by helicopters) and timing(why now?) of the Deployment of armed police at Chharung, close to Kalapani, in its Sudoor Paschim.
  • Finally, Nepalese government has raised the stakes further by authorizing a new map extending its territory across an area sensitive for India’s defence.

The very beginning: The Sugauli Treaty

  • Before the 1816 Treaty of Sugauli, the Nepalese kingdom stretched from the Sutlej river in the west to the Teesta river in the East.
  • Nepal lost the Anglo-Nepalese War and with the signing of Sugauli Treaty was brought down to its present territories.

The Sugauli Treaty stated that “[t]he Rajah of Nipal [Nepal] hereby cedes to the Honourable [the] East India Company in perpetuity all the under-mentioned territories”, including “the whole of the lowlands between the Rivers Kali and Rapti.” It elaborated further that “[t]he Rajah of Nipal [Nepal] renounces for himself, his heirs, and successors, all claim to or connection with the countries lying to the west of the River Kali and engages never to have any concern with those countries or the inhabitants there of.”

  • The present controversy arose with Nepalese contest that the tributary that joins the Mahakali river at Kalapani is not the Kali river. Nepal now contends that the Kali river lies further west to the Lipu Lekh pass.
  • But here’s the catch!
  • The British used the Lipu Lekh pass for trade with Tibet and China.
  • Even Survey of India maps since the 1870s shows the area of Lipu Lekh down to Kalapani as part of British India.
  • Even though the areas of Nepalgunj and Kapilvastu were restituted to Nepal as a reward for the military help rendered by Jung Bahadur Rana in quelling the 1857 uprising. The British did not return any part of Garhwal or Kumaon, including the Kalapani area, to Nepal.
  • Infact, both the Rana rulers of Nepal and the Nepalese Kings accepted the boundary and did not raise any objection with the government of India after India’s Independence.
  • True that India did not existed in 1816 when the Treaty of Sugauli was concluded.
  • But many borders of the world and India are colonial legacy, which we have to work out.

The path to peace

  • The Nepal-India Technical Level Joint Boundary Working Group was set up in 1981 to resolve boundary issues, to demarcate the international border, and to manage boundary pillars.
  • By 2007, the group completed the preparation of 182 strip maps, signed by the surveyors of the two sides, covering almost 98% of the boundary, all except the two disputed areas of Kalapani and Susta.
  • Not able to solve the border issues in these disputed areas has left us hanging.

India has successfully resolved far more intractable border issues with Bangladesh.

  • The land boundary settlement required an exchange of territories, including the transfer of population, and a constitutional amendment to give effect to the 1974 India-Bangladesh Land Boundary Agreement.
  • The maritime boundary issue with Bangladesh involved going to the Hague-based Permanent Court of Arbitration. Despite knowing well that if the Court applied the principle of equity, India would lose up to four-fifths of the disputed area. India lost but the government of India accepted the ruling.
  • Compared to what was accomplished between India and Bangladesh, the India-Nepal border issues appear more easily solvable.

Respecting out Ties

  • India Nepal ties are unique.
  • Historical link between the nations.
  • Spirit of maintaining India’s close and friendly bilateral relations with Nepal.
  • The people-to-people relationship between India and Nepal is unmatched.

What lies ahead?

  • This matter can be best handled bilaterally, through quiet diplomacy.
  • The Official Spokesperson of India’s Ministry of External Affairs, Anurag Srivastava, has said recently that India and Nepal have an established mechanism to deal with all boundary matters.
  • He has affirmed that India is committed to resolving outstanding boundary issues through diplomatic dialogue.
  • The remaining issues concerning the boundary i.e Kalapani and Susta are not difficult to resolve unless they are caught up in domestic or international concerns.
  • The next steps should be approval of the strip maps by the respective governments (that of the Nepalese Government is still awaited), the resolution of the differences of opinion over Kalapani and Susta, and speeding up the erection of damaged or missing border pillars.

Consider the question “India-Nepal ties are unique. Both countries have many things in common. Yet, recent developments over the border dispute threaten to snap these ties. Examine the border issue between the two countries. What is India’s stand on the issue? Suggest ways to resolve the issue.”

Conclusion

The more the trouble festers, those who stand to gain by deteriorating India-Nepal relations will benefit. There is need for the two countries to lower the temperature and defuse the issue. They must invest time and effort to find a solution. Raking up public controversy can only be counterproductive to the relationship.

Agricultural Sector and Marketing Reforms – eNAM, Model APMC Act, Eco Survey Reco, etc.

Structural issues in agri-marketingop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : APMC Act

Mains level : Paper 3- Structural issues in agri-marketing.


The article discusses the structural issues that may not go away with the reforms announced by the government recently. Issues like inadequacies in APMC infrastructure, regulation of APMCs need are discussed in detail.

What is the issue?

  • The Union government signalled the intention to enact a new central law.
  • The new law would override existing state regulations that restrict the farmer from legally selling to anyone other than a buyer licensed by the local Agricultural Produce Marketing Committee (APMC).
  • The decision to push for a central law comes after dissatisfaction with two decades of partial and uneven reforms by different states.

So, will the change in the law solve the marketing problem?

  •  This will be overstating the power of legal reform in guaranteeing economic freedom and outcomes.
  • The problems farmers face are of two type-
  • 1) Problems that are a result of vested, monopolistic interests.
  • 2) Problems that are rooted in larger structural conditions that significantly weaken their terms of engagement in agricultural markets.
  • Type 1 may be addressed by regulatory intervention.
  • But type 2 will need location-specific policies, well-directed investment, and well-functioning agricultural institutions.
  • So, solving either of these problems require consensus, coordination and capacity in which the states will need to play a major role.

Why do farmers sell their produce outside APMC mandis?

  • The dominant narrative is that farmers are forced to sell their produce only to licensed APMC traders.
  • But the reality is that even today the majority of Indian farmers sell their produce to small-scale and largely unlicensed traders and intermediaries.
  • This is true, especially of small and marginal cultivators.
  • But, if farmers are bound by law to sell in APMC mandis, why are so many of them selling outside?

But, do we have enough mandis?

  • At least part of the answer to the question of why farmers sell outside mandis is that India still doesn’t have enough mandis.
  • Over the decades, most states in general, and specific regions in particular, have hugely under-invested in the basic infrastructure required to create viable, primary wholesale markets within easy physical reach of farmers.
  • The 2017 Doubling Farmers Income Report estimates that in addition to the current 6,676 principal and sub-market yards under APMCs India needs over 3,500 additional wholesale markets.
  • Approximately 23,000 rural periodic markets (or haats) have also suffered long-standing neglect.
  • So, the new allocation towards market infrastructure must be fully utilised to build up an appropriately designed physical marketing ecosystem, especially in remote regions.
  • Most importantly, unlike in the past, this process should engage deeply with farmers and traders in each location to avoid misdirected and misplaced infrastructure and assets.

Regulatory reforms in mandis needed

  • Where APMC mandis do exist and have established themselves as dominant market sites, mandi committees have typically done everything in their power to restrict competition.
  • Obtaining a licence for a new entrant — has most often proved to be a bureaucratic nightmare and a costly affair.
  • This is where regulatory reform to remove conflicts of interests, enable the entry of new buyers, and facilitate the flow of trade both within and outside the mandi system is absolutely crucial.
  • No state has done enough in this direction, but here too there are cautionary lessons.

Perils of complete deregulation: Example of Bihar

  • Complete deregulation, as we have seen in the decade following Bihar’s repeal of its APMC Act in 2006, does not necessarily transform agricultural markets and spur competition.
  • Even after all restrictions were lifted, there was little uptake in direct procurement by formal players in the state.
  • When corporations entered the maize market in a big way, they chose to buy from larger traders and aggregators and not from farmers.
  • Most farmers have seen little change in marketing practice and continue to sell to village traders as they had done before the repeal.
  • Where private markets have emerged — mainly for horticultural produce — they are constituted and run by local traders and commission agents.
  • But across the system, traders complain about deteriorating infrastructure.
  • And the regulatory vacuum has led to the proliferation of brokers to deal with counter-party risk in growing and dynamic commodity markets such as maize.

Benefits of limited degree of regulation: MP and Karnataka example

  • Madhya Pradesh and Karnataka have undertaken some degree of regulatory reform instead of repeal.
  • In these states, we do observe, at least to some extent, the fruits of competition.
  • In the early 2000s, MP granted ITC a licence to set up procurement hubs outside mandi yards.
  • Establishment of ITC procurement hubs not only resulted in price competition, but also from electronic weighing and quick payments, as mandis upgraded in response.
  • But ITC’s procurement channel was understandably restricted to select commodities (and qualities), seasons and farms within its own commercial strategy.
  • These limitations revealed the mandi’s comparative advantage as a permanent multi-buyer, multi-commodity market for all local producers.
  • The key lesson to draw from studies of direct procurement and contracting is the need for a regulatory architecture that enables both new and existing systems to respond, adapt, and compete.

Issue of intermediation

  •  Small traders and intermediaries exist — and persist — because they are able to respond — in cash, credit, time and place — to the multiple needs of farmers and firms across the interconnected domains of production, marketing, processing and consumption.
  • This is not to say that they do not exploit farmers when the opportunity arises.
  • So, the organised and technologically driven procurement and marketing systems will only work if they manage to address the real constraints that farmers face on the ground, especially access to credit, inputs, storage, transport, and timely payments.
  • Most of these constraints originate in the relations of land ownership and access and the limits and exclusions they impose on smallholding farmers and landless cultivators.
  • Simply put, farmers will not be in a position to exercise any newly granted regulatory freedom in the market if they cannot overcome these constraints.
  • Equally, while increasing competition for intermediaries is desirable, their elimination is a misguided — and indeed dangerous — objective if one does not respect or replace the roles and risks that they cover.

Issue of re-regulation and new barriers to entry

  • Agriculture is at the very heart of the essential economy and our food system runs on the backs of small-scale producers, traders, commission agents, processors, wholesalers, retailers, and labourers.
  • Regulatory reform to increase competition must not degenerate into re-regulation that unduly favours large-scale consolidation and channel control by erecting new barriers to entry and operation for agro-commercial MSMEs.

The UPSC asked a direct question about the APMC Act in 2014- ” There is also a point of view that Agriculture Produce Market Committees (APMCs) set up under the State Acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine.”

Conclusion

While going for the reforms government must consider the issues underlying the problems and try to address them. We must recognise and strengthen the diversity, dynamism, enterprise, and resilience of India’s agricultural markets.

 

 

Defence Sector – DPP, Missions, Schemes, Security Forces, etc.

Towards self-reliance in defence manufacturingop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Ordinance Factory Board

Mains level : Paper 3- Self-sufficiency in defence manufacturing


External dependence for defence equipment could turn out to be the chink in the armour of any country, literally. As one of the major importer of defence equipment, India has been struggling to wean itself away from this vulnerability. This article discusses the recent changes announced by the finance minister in defence procurement and manufacturing policy. So, what are the changes and how will these changes benefit us? Read to know more…

Promoting self-reliance: Addressing strategic and national security concern

  • Recently the Finance Minister announced measures to promote self-reliance in defence production.
  • This address long-standing strategic and national security concerns about the extent of India’s external dependence for its defence-preparedness.
  • For most of the past decade, India had the dubious distinction of being the world’s largest arms importer.
  • India accounted for about 12% of global arms imports.
  • Saudi Arabia jumped to first place in 2018 and 2019, but India still takes over 9% of global imports.
  • This external dependence for weapons, spares and, in some cases, even ammunition creates vulnerabilities during military crises.
  • COVID-19 has, once again, focused minds on the impact of supply chain disruptions on both civil and defence sectors.
  • With its security environment, its great power ambitions and its technological capacities, India should have a robust defence manufacturing capacity.
  • New Defence Procurement Procedures (DPP) 2020 are under formulation.
  • We now have a Chief of Defence Staff (CDS) tasked with promoting indigenous equipment in the armed forces.

Following are some of the moves declared by the government and their significance for the country

1. Encouraging  private manufacturers

  • The decision i) to notify a list of weapons systems for sourcing entirely from Indian manufacturers, ii) the promise to progressively expand this list iii) a separate Budget provision for domestic capital procurement- will encourage our private defence manufacturers.
  • The research capacities, technological skills and quality commitment of our private defence manufacturer are often better appreciated by foreign clients for whom they are subcontractors.
  • There is a range of platforms and subsystems, developed in India and qualified in trials, some of which face hurdles to their induction by our armed forces because of foreign competition.
  • These include missile systems such as Akash and Nag, the Light Combat Aircraft and the Light Combat Helicopter, artillery guns, radars, electronic warfare systems and armoured vehicles.

2. Time-bound procurement

  • The government has promised i) a time-bound defence procurement process, ii) overhauling trial and testing procedures iii) establishing a professional project management unit.
  • To understand the significance of the above measures consider the fact below-
  • Over the past five years, the Indian government has approved over 200 defence acquisition proposals, valued at over ₹4 trillion.
  • But most are still in relatively early stages of processing.
  • Of course, this delay now provides the opportunity to re-examine them and to prioritise those with indigenous research and development.
  • The CDS could also examine them from a tri-service angle, to avoid redundancy of capacities across the services.

3. Corporatisation of Ordnance Factory Board

  • Over the decades, our ordnance factories have been the backbone of indigenous supplies to our armed forces.
  • Their structure, work culture and product range now need to be responsive to technology and quality demands of modern armed forces.
  • Corporatisation, including public listing of some units, ensures a more efficient interface of the manufacturer with the designer and end-user.
  • The factories would be better integrated into the larger defence manufacturing ecosystem.

4. Realistic specifications of desired weapon platforms

  • Our defence planners will frame “realistic” specifications for their desired weapons platforms.
  • These specifications should be based on the requirements of India’s defence strategy, rather than on aspirational considerations which, the Finance Minister said, may lead to a single foreign vendor.
  • It is also imperative that when we import weapon systems, we should plan for the ammunitions and spares for them to be eventually manufactured in India.
  • This will ensure that we are not driven to seek urgent replenishments from abroad during crises.
  • The same goes for repair, maintenance and overhaul facilities and, at the next level, the upgrade of weapons platforms.

5. FDI limit increased to 74% by automatic route

  • The liberalisation of foreign direct investment in defence manufacturing, raising the limit under the automatic route to 74%, should open the door to more joint ventures of foreign and Indian companies for defence manufacturing in India.
  • It would also sustain domestic industrial activity in the research, design and manufacture of systems and sub-systems.
  • Our companies would now get the opportunity to directly contribute to Indian defence manufacturing.

Way forward

  • The development of a thriving indigenous defence industry needs an overhaul of existing regulations and practices.
  • A long-term integrated perspective plan of the requirements of the armed forces should give industry a clear picture of future requirements.
  • DPP 2020 should incorporate guidelines to promote forward-looking strategic partnerships between Indian and foreign companies.
  • This partnership should be with a view to achieving indigenisation over a period of time for even sophisticated platforms.
  • Cost evaluation has to evolve from mechanical application of the L1 (lowest financial bid) principle to prioritising indigenous content.
  • The definition of indigenisation itself needs to privilege technology over value or volume.
  • Investment, Indian or foreign, will be viable only if the door to defence exports is opened, with a transparent policy.
  • To give private industry a level playing field for developing defence technologies, conflicts of interest, created by the role of our Defence Research and Development Organisation (DRDO) as the government’s sole adviser, developer and evaluator of technologies have to be addressed.

Consider the question, “India has been aspiring to reduce its external dependence for defence equipment but has not succeeded in doing so. Examine the challenges in the way of self-sufficiency in this area. How effective will be the recent policy changes made in meeting the goal?”

Conclusion

The government has rightly clarified that self-reliance would not be taken to overzealous extremes. The thrust for indigenous research and development will coexist with the import of cutting-edge military technologies to obviate near-term defence vulnerabilities. Of the key components of any major reform — money, method and mindset — mindset is the most critical and the most intractable. It takes a crisis to change it.

 

 

 

 

Foreign Policy Watch: India-China

Tracking Chinese diplomacyop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Afro-Asian conference.

Mains level : Paper 2- Rise of China and changes in diplomacy.


We are no stranger to the assertive nature of China in geopolitics. But had it always been the same? This article captures the transformation of the nature of Chinese diplomacy. Two personalities that had a profound impact on the nature of the diplomacy of that country are Zhou Enlai and Deng Xiaoping. Each of them imparted special characteristic to diplomacy. Now, that all seems lost from present China. Read the article to know about the contribution of two personalities and trends in Chinese diplomacy now.

Zhou Enlai: Preference for Persuasion and compromise

“All diplomacy is a continuation of war by other means.” – Zhou Enlai

  • If Mao Zedong represented the crude face of Chinese communism, then Zhou was the epitome of its refinement.
  • Zhou preferred to seduce his opponents through word and gesture in the pursuit of national self-interest.
  • Force was used rarely, and only when all other means of persuasion failed.
  • So, amid Korean War in 1950, when the U.S. Army crossed into North Korea, Zhou Enlai delivered message against crossing 38th Parallel through Indian Ambassador, instead publicly declaring this.
  • He chose to give diplomacy a chance.

Role in First Indochina War

  • In 1954, the Chinese made their entry onto the world stage in Geneva.
  • The Vietnamese were winning against the French in the First Indochina War.
  • And the Americans were preparing to intervene fearing that another “domino” would fall to communism.
  • China’s self-interest lay in ending this war while denying the U.S. a foothold in its backyard.
  • Zhou’s strategy was to undermine western unity.
  • His watchwords were persuasion and compromise.
  • He even gave “face” to the French who had just lost to the Vietnamese in the battle of Dien Bien Phu, by travelling the “extra mile” to meet Prime Minister of France to secure the peace.

Low profile at Afro-Asian Conference in Bandung

  • In 1955, at the Afro-Asian Conference in Bandung, Zhou used the same tactics to pursue another objective: Developing relations with leaders of the Afro-Asian countries.
  • He deliberately kept a low profile, allowing Prime Minister Jawaharlal Nehru and Indonesian President Sukarno to take the lead.
  • His tactic, he reported to Mao, was “not to be involved in provocative or disruptive debate”.
  • His guidance to his team was to “strive to expand the united front of the world peace force.
  • He also instructed the team to create conditions for establishing diplomatic work or diplomatic relations between China and a number of Afro-Asian countries.

So, how Zhou shaped China’s foreign policy?

  • Zhou’s style of diplomacy came to define Chinese foreign policy over the next half-century.
  • The strategy was consistent: avoid isolation, build solidarity with non-aligned countries, divide the West.
  • The tactics were called ‘united front’ — isolate the main threat by building unity with all other forces.
  • Under Zhou, diplomats of calibre kept handled the task of diplomacy with skill and held firm even in storms like the Cultural Revolution.
  • When the tide rose, these diplomatic fishermen gathered the fish — expanding China’s global presence and gaining international acceptability.
  • When it ebbed, they saw to it that the ship remained firmly moored.
  • They navigated the Cold War, playing the Soviets against the Americans.
  • To relieve pressure, Zhou opened border talks with the Soviets and channels to the U.S.
  • Public animosity did not deter him from turning on the full extent of his diplomatic skills on either Alexei Kosygin or Henry Kissinger.
  • In February 1972, he persuaded U.S. President Richard Nixon to abandon Taiwan.
  • It was a staggering act of diplomacy.

Deng Xiaoping: hide our capacities and bide our time

“Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.”

  • In the 1980s, Deng Xiaoping took up the reins.
  • Deng supplemented Zhou’s strategy with a “24-Character Strategy” of his own(the above quote).

Character of Chinese diplomacy in Deng Xiaoping’s time

  • “24-Character Strategy” became the ‘mantra’ of Chinese diplomacy.
  • Chinese diplomats measured their words and kept their dignity.
  • They projected power but rarely used more words than needed.
  • They were masters of their brief because Zhou had taught them that the real advantage in negotiations was to know more than the other side.
  • They flattered acquaintances, calling them “old friends”.
  • They built relationships by making it a point to engage the less friendly interlocutors with greater courtesies than friends.
  • Behind closed doors, they were tireless in reducing opposition through negotiation.
  • And skillfully in putting the onus of responsibility for failure on the other party.
  • And occasionally, they would hold out a veiled threat with a look of concern rather like an uncle anxious to save you from embarrassment.
  • But they rarely offended.

Tumultuous period of 1980s and 1990s and entry into WTO

  • The 1980s and 1990s were the peak for Chinese diplomacy.
  • The U.S. President George Bush and Russian leader Mikhail Gorbachev visited China.
  • They normalised relations, settled borders and won hearts and minds through general financial help.
  • So effective was Chinese diplomacy that the Americans even broke their own sanctions imposed after the 1989 ‘Tiananmen Incident’, within a matter of four weeks.
  • A decade later, the U.S. and the European Union bought into Chinese assurances that it would soon transition to a market economy.
  • And helped steer China into the World Trade Organization.

After Deng Xiaoping: Arrogance and threats in diplomacy

  • Deng died in 1997. China prospered just as Deng had imagined.
  • It began to occupy centre stage in world diplomacy, but the basics of Chines diplomacy started changing
  • A new generation of diplomats, with knowledge of the English language and a careerist mindset, has started to destroy the foundations set down by Zhou and Deng.
  • Arrogance has replaced humility.
  • Persuasion is quickly abandoned in favour of the stick when countries take actions contrary to Chinese wishes.
  • The Chinese pursue unilateralism instead of compromise in the South China Sea.
  • In place of ‘united front’ tactics, they are bent on creating irritations simultaneously with multiple China neighbouring countries.
  • Avenging the ‘Century of Humiliation’ that endured in the hands of western imperial powers from roughly 1839-1840 to 1949 is on their mind now.
  • To avenge that they adopt a one-size-fits-all approach.
  • But they forget that much of the world has done nothing to China and, indeed, shares a similar historical experience.
  • Statements of fact or reasoned opinion are seen by them as insult or humiliation.
  • Foreign governments are educated about their responsibilities in managing the media and the narrative, even as the Chinese manipulate the same media to serve their purposes.
  • They expect to receive gratitude for everything they do, including handling COVID-19, as if it was only done with the foreigner in mind.
  • The veneer of humility has thinned.
  • The reserves of goodwill are fast depleting. The ship seems to be adrift at sea.

Questions related to China has been a recurrent theme in the UPSC papers. Consider the question asked in 2017  “China is using its economic relations and positive trade surplus as a tool to develop potential military power status in Asia. In light of this statement discuss its impact on India and her neighbours.”

Conclusion

In the post-pandemic world, India and the rest of the world will have to reckon the role played by China in the pandemic. In such a changing scenario India will do well to take note of the changing trends of Chinese diplomacy.


Coronavirus – Economic Issues

Where the “fiscal space” debate should focus?op-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Primary deficit, AQR

Mains level : Paper 3- Factors to be considered while deciding the size of stimulus package.


The article focuses on the “fiscal space” debate in India. So, what is this debate? This debate is focuses upon the size of the fiscal deficit this year in India, ways that could be used to finance it and upper limit of this deficit etc. But the author argues that we should focus on debt/GDP trajectory in the subsequent years. Besides this, he suggests what our policy intervention comprise.

Monetary policy and fiscal policy: Efficacy Vs. Space debate

  • In response to the economic disruption caused by Covid-19, monetary policy has moved swiftly and aggressively in many economies.
  • But questions remain on its incremental efficacy.
  • With a high level of uncertainty around, risk-averseness is evident in the financial systems.
  • This risk-averse tendency reduces the efficacy of lower rates and higher liquidity.
  • So, while monetary policy may have space, how much efficacy will it have?
  • Fiscal policy i.e. spending by the governments can have much efficacy.
  • But how much space does it have? Therein lies the debate.

Focus on Debt/GDP trajectory, not on level

  • The “fiscal space” debate in India has centred exclusively on this year’s deficit and how it will be financed.
  •  But a more holistic assessment of fiscal space should focus on two factors 1) the government’s inter-temporal budget constraint 2)  how India’s debt/GDP evolves in the coming years.
  • These two are the factors that rating agencies and foreign investors will eventually focus on.
  • Following are the question that debate should focus on.
  • How much will India’s debt/GDP jump up this year?
  • More importantly, what happens thereafter?
  • Will debt/GDP keep rising year after year? Or will it start declining?
  • As research has found, it’s typically the trajectory of debt/GDPmore than the level — that impacts future growth.

Evolution of debt

  • The evolution of debt is essentially a function of three variables:
  • 1) The primary deficit.
  • 2) Nominal GDP growth
  • 3) The government’s cost of borrowing.
  • The higher is the difference between growth and cost of borrowing, the greater is the depreciation of the existing debt stock.
  • High growth allows countries to “grow out” of their debts.
  • In contrast, high primary deficits worsen the debt burden.

Where does India stand?

  • India comes into COVID-19 with a debt/GDP of about 70 per cent.
  • A primary deficit across the Centre and states of about 2.5 per cent of GDP including the Centre’s extra-budgetary resources. — based on the Revised Estimates for 2019-20.
  • A weighted average sovereign borrowing cost of about 7.5 per cent (on the stock of debt) and an estimated pre-COVID nominal GDP growth of 7.5 per cent in 2019-20.
  • In other words, the favourable gap between growth and borrowing costs had closed.
  • With this backdrop, one can simulate what happens to debt/GDP in the coming years under different growth, fiscal and interest-rate scenarios.
  • What do we find?
  • Even under relatively benign scenarios –nominal GDP growth of 4 per cent and a fiscal expansion of 3 per cent of GDP this year- India’s debt/GDP will balloon towards 80 per cent by the end of the year.
  • But India will not be alone. Public debt is expected to balloon all over the world.
  • Instead, what will matter for sustainability is the trajectory of debt thereafter.
  • Does debt/GDP come down or keep going up in subsequent years?

 Fiscal space depends on potential growth in coming years

  • The subsequent trajectory of Debt/GDP depends overwhelmingly on medium-term growth.
  • Consider the following two scenarios and refer to the figure given below-
  • 1. Fiscal Deficit 6%
  • Consider that this year’s combined fiscal deficit widens by 6 per cent of GDP.
  • But the primary deficit is then consolidated back to 2 per cent of GDP in the next 3 years.
  • And as long as nominal GDP is 10 per cent in the medium term which corresponds to real GDP growth of 7 per cent.
  • Debt/GDP gets on to a constantly declining path after the third year.
  • This suggests a bigger fiscal intervention is sustainable but only if medium-term growth prospects are lifted in tandem.
  • 2. Fiscal Deficit 3%
  • Consider that this year’s deficit widens by “just” 3 per cent of GDP.
  •  But medium-term nominal GDP growth settles at 8 per cent that is, real GDP growth of 5 per cent.
  • Debt/GDP rises relentlessly for the next decade towards 90 per cent of GDP.

Key takeaway: focus on medium-term growth

  • This suggests even a relatively-conservative fiscal response this year becomes unsustainable if medium-term growth prospects are diminished.
  • Small changes in medium-term growth have large implications for fiscal sustainability.
  •  How much fiscal space India has to respond in the crisis year will depend crucially on what potential growth is likely to be in the coming years.
  • The more that India’s policy response can preserve, protect and boost medium-term growth — both through the nature of the policy intervention this year and the accompanying reforms — the larger the fiscal response India can mount.
  • Put more starkly, the fiscal debate between “need” and “affordability” is endogenous.
  • The medium-term sustainability of any fiscal package this year will depend on the nature of growth-enhancing interventions and reforms that accompany it.

So, what could the interventions comprise?

1. Keep small business afloat

  • Policy must ensure that all viable enterprises can survive the pandemic.
  • If economically-viable but illiquid small and medium enterprises go under, the implications both for unemployment and India’s underlying production capacity could be severe.
  • The government’s credit-guarantee scheme is, therefore, very important and should hopefully induce banks to provide much-need working capital to keep small businesses afloat.

2. Reforms in the finance sector

  • It is important to jump-start a risk-averse financial sector into funding an economic recovery, more broadly.
  • Last week’s bond market interventions which involved special liquidity and partial guarantee funds are important to ease conditions at the financial periphery.
  • Over time, however, liquidity must give way to capital and reform.
  • Following steps will be crucial to strengthening the financial sector-
  • 1)Pre-emptively recapitalising public sector banks for growth and resolution capital.
  • 2) Conducting an AQR for the NBFC sector after pandemic.
  • 3) Then converting well-run NBFCs into banks to avail of a stable deposit franchise.
  • 4) Modifying the incentives under which public sector banks operate.
  • Higher potential growth is only feasible if the financial sector is able to fund it.

3. Reforms in the other sectors

  • Real reforms must accompany those in the financial sector.
  • The government’s announcement on unshackling agriculture — if carried through to its logical conclusion — is potentially game-changing for farmers and will be a landmark reform for the sector.
  • As COVID-19 hastens the reorganisation of supply-chains within Asia, India must seize the moment to integrate into the Asian supply chain.
  • Revisit a Special Export Zone (SEZ) model with the appropriate regulatory environment to avoid the pitfalls of the past.
  • Path dependence will be key. If the first one or two SEZs succeed, it would create a powerful demonstration effect both externally to help attract more firms into India.
  • And internally inducing different states to compete to create their own SEZs to drive jobs and investment.

4. Social infrastructure and ways to pay for it

  • If the virus has taught the world anything, it’s the criticality of social infrastructure.
  • India will not be able to fundamentally alter its growth potential without crucial investments in health and education.
  • The government’s announcement to boost health spending is, therefore, very welcome.
  • But how will this be paid for? This is where policy must get creative.
  • Existing assets on the public sector balance sheet must be aggressively monetised to fund growth-enhancing investments in physical and social infrastructure.
  • This will simultaneously take the pressure off the fiscal and financial sectors, and deliver a productivity-enhancing swap on the public sector balance sheet.

The article is helpful to consolidate the basic understanding of the macroeconomic parameters of economy. Consider the question asked by UPSC last year “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments”

Conclusion

Higher potential growth is the antidote to many pressures, from incomes to jobs to debt sustainability. To the extent this unprecedented crisis creates political space and capital to reform, the opportunity must be seized.


Back2Basics: Nominal GDP

  • Nominal gross domestic product is gross domestic product (GDP) evaluated at current market prices. 
  • GDP is the monetary value of all the goods and services produced in a country.
  • Nominal differs from real GDP in that it includes changes in prices due to inflation, which reflects the rate of price increases in an economy.

Primary Deficit

  • Primary deficit refers to the difference between the current year’s fiscal deficit and interest payment on previous borrowings.
  • It indicates the borrowing requirements of the government, excluding interest.
  • It also shows how much of the government’s expenses, other than interest payment, can be met through borrowings.

Debt/GDP ratio

  • The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP).
  • By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.
  • Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

AQR- Asset Quality Rating

  • An asset quality rating refers to the assessment of credit risk associated with a particular asset, such as a bond or stock portfolio.
  • The level of efficiency in which an investment manager controls and monitors credit risk heavily influences the rating bestowed.
  • And because asset quality is an important determinant of risk that profoundly impacts liquidity and costs, analysts go to great lengths to make sure they issue the most accurate evaluations possible.
  • After all, their pronouncements can greatly affect the overall condition of a business, bank, or portfolio for years to come.
Foreign Policy Watch: India-Afghanistan

India on the margins of Afghanistan diplomacyop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Countries bordering Afghanistan.

Mains level : Paper 2- Peace process in Afghanistan and implications for India.


From economic, strategic to security, India has many interests in “future” Peaceful and Developed Afghanistan. But India was sidelined from the recently organised meeting on Afghanistan. This article analyses what went wrong in India’s foreign and security policy. Two factors are emphasised in the article- India’s reluctance to talk with the Taliban and the US’s desperation to get out of Afghanistan.

India’s Rigid policy toward Afghanistan

  • Recent developments in Afghanistan demand a flexible approach.
  • But India’s foreign and security planners have lacked flexibility in their approach.
  • Right approach should have included seeking to establish open connections with all its political groups, including with those perceived to be in Pakistan’s pocket.
  • Instead, they continued to rigidly cling to Afghanistan President Ashraf Ghani even as his influence diminished with each passing month.

India’s support to Mr Ghani

  • Prime Minister Narendra Modi congratulated Mr Ghani for winning the elections, in December 2019 when the Afghanistan election commission had only announced the preliminary results.
  • And most countries had maintained a discreet silence then.
  • When the final result came it was rejected by Mr Ghani’s main rival, Abdullah Abdullah.
  • The international community ultimately supported Mr Ghani.
  • But qualified it with an insistence that he enters into a real power-sharing agreement with Mr Abdullah.

India sidelined from meeting on Afghanistan

  • The United Nations Secretariat organised a meeting on Afghanistan where it invited the 6 current physical neighbours of Afghanistan—China, Pakistan, Iran, Turkmenistan, Uzbekistan and Tajikistan.
  • In addition, invitations were extended to the United States, Russia and the Ghani government.
  • Obviously, Mr Ghani did not condition his participation on India’s inclusion.
  • The constructive role New Delhi has played in Afghanistan’s reconstruction since the Taliban were ousted from the country in 2001-2002 after 9/11 was neglected.

US going along with India’s absence

  • The role and action of the US proved that the U.S. acts to promote its interests in Afghanistan.
  •  It obviously expects that if in doing so Indian interests are exposed, India will protect them as best as it can.
  • U.S. Special Representative for Afghanistan Reconciliation said that ‘India should talk directly to Taliban, discuss terror concerns directly’.
  • He noted that despite India’s contributions to Afghanistan’s economic development — and these are undeniably significant covering large parts of the country, and are popular — as well as its long history of contacts with that country, it does not have a place in international diplomacy on Afghanistan.
  • He also said that when it comes to international efforts, India yet does not have a role that it could.
  • He patronisingly added that the U.S. wants India to have a more active role in the peace process.

So, why India’s presence was not considered vital?

  • U.S. Special Representative for Afghanistan Reconciliation thinks that by avoiding open contacts with the Taliban, India has reduced its role in international diplomatic efforts.
  • That the U.S. is currently crucially dependent on Pakistan for the successful implementation of its Taliban deal.
  • It is reminiscent of the time in the 1990s when, at Pakistan’s insistence, India was considered a problem and kept out of crucial global forums on Afghanistan.

Way forward

  • In such a situation, it is essential for India to maintain its strong links with the Afghan government, built and support its traditional Afghan allies.
  • But India should also established open lines of communication with the Taliban.
  • This is important because they are informally conveying that India should not consider them as Pakistan’s puppets and also because they have gained international recognition.
  • Contacts and discussions do not mean acceptance of their ways but its still a step forward.
  • India should act keeping in mind that there are no countries on the horizon which are really opposed to the Taliban acquiring a major place in the Afghanistan’s formal power structures.

In 2013, the UPSC asked a question related to developments in Afghanistan against the backdrop of the proposed withdrawal of the International Security Assistance Force. Similarly, a question based on the latest development can be asked, for ex-“The return of Taliban after the US-Taliban deal in Afghanistan is fraught with major security implications for the countries in the region. Examine in the light of the fact that India is faced with a plethora of challenges and needs to safeguard its own strategic interests.”

Conclusion

India needs to take corrective diplomatic action even at this late stage, and even in the time of COVID-19. It must begin openly talking to the Taliban and with all political groups in the country. It must realise that its Afghan policy needs changes.

Defence Sector – DPP, Missions, Schemes, Security Forces, etc.

War and Peace: Analysis of BSF’s roleop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : BSF

Mains level : Paper 3 -Wartime role of BSF


The BSF came into being in the wake of the 1965 India-Pakistan war. So, its ‘innate’ tasks involves both wartime and peacetime roles. This article is written by a retired IPS officer who has been ADG of BSF.  Our aim is to provide you with on-ground experience of issues in this security force. Focus of the article is on the preparedness of the BSF for its wartime role. From the exam perspective, focus on issues and possible solutions.

Role of BSF

  • Officially, its role is defined in expansive terms like ‘security of the border of India and matters connected therewith’.
  • The tasks of BSF are divided into peacetime and wartime.
  • 1) The peacetime tasks include preventing smuggling and any other illegal activity, and unauthorised entry into or exit from the territory of India, etc.
  • 2) The wartime tasks of the BSF include holding ground in less threatened sectors, etc.

Unpreparedness in wartime role

  • The BSF, in terms of its defences, equipment, weaponry and training, is not at all prepared for its wartime role.
  • This means that in the eventuality of any military assault, our ‘first line of defence’ would simply crumble.
  • Falling back on army’s mobilizations for a counterattack may take up to several days.
  • Retreat and loss of territory in this period is a possible scenario.
  • The report titled ‘Border Security: Capacity Building and Institutions’ of the department-related Parliamentary Standing Committee on Home Affairs, submitted to the Rajya Sabha on April 11, 2017:
  • Does not talk about the wartime role of the BSF even once.
  • It talks only of its peacetime role including fencing, floodlights and roads along the borders, development of integrated check posts, and construction of strategic roads.

The fallacy of infantry attack

  • The founders of the BSF, including the committee of secretaries, had a wrong presumption that the assault on the ‘first line of defence’ will be by the enemy’s ‘exposed’ infantry.
  • This assault, they imagined, would be repulsed by BSF soldiers wielding similar arms.
  • But that presumption is a folly.
  •  Now, as a rule of thumb, infantry assault, whether supported by armour or not, or even a purely armour assault on any position is preceded by as heavy and as accurate artillery bombardment as possible.
  • If the attacking nation could afford it, such as the US during the 1991 Gulf War the bombardment could be aerial also.

Unprepared to withstand shelling

  • Our ‘first line of defence’ does not have any defensive structures or fortifications that could withstand artillery bombardment even for a minute.
  • According to photographs available in the public domain, most BSF observation posts on the international border are ramshackle structures of tin sheets and sandbags erected on small mounds of earth.
  • Adding to that, the mounds are in full view of the enemy and their locations are known to them to the last centimetre.

 Uninspiring weaponry

  • The photographs of the 105 mm Indian Field Gun and their staple, the 7.62 mm medium machine gun are available in public domain.
  • The 105 mm Indian Field Guns have been placed under the operational command of the army, and BSF would not be able to use them when the enemy makes first contact with them.
  • That leaves them with their 51 mm and 81 mm mortars.
  • The 51mm mortar, with just 109 grams of explosive per shell and a maximum range of  850 m is as good as useless in a war.
  • The 81 mm mortar bomb with an explosive charge of 750 grams has a maximum range of 6000 m.
  • The enemy artillery would in any case be firing from way beyond that range, thereby making effective retaliation through mortars impossible.
  • Even when enemy IFV/APC or armour would come closer and in range, the smooth-bore 81 mm mortar is inherently not accurate enough to hit a moving vehicle. (smoothness of bore reduces accuracy)
  • Even the NATO rifled 120 mm mortars have a CEP (circular error probable) of 136 m.
  • As for the 7.62 mm medium machinegun, it is an anti-personnel weapon with the armour penetration of the M80 bullet being just 3 mm at 500m.
  • That makes it useless against even lightly armoured vehicles.
  • This means that the BSF outposts will not be able to deliver any effective fire at all on an enemy assault.

IPS leadership issue

  • Since the BSF’s inception, the force’s Indian Police Service (IPS) leadership has not focused on the wartime role of the BSF.
  • The IPS officers in top positions in the BSF lack knowledge of military science that could enable them to appreciate and address the wartime role.

Way forward

  •  The only defence feasible against artillery bombardment is to go sub-surface—in the form of deep concrete dugouts and fire trenches.
  • Then we also need elaborate anti-tank ditches.
  • To deliver effective fire on enemy armoured and lightly armoured vehicles, and infantry operating under their protection, the BSF needs weapons which carry enough explosive payloads to tackle armour, both light and heavy.
  • Portability, manoeuvrability and accuracy are important considerations in the ‘first line of defence’ attacking armour.
  • A veritable battery of ATGMs and cheaper yet accurate options like the 80 mm Breda Folgore RCL are available.
  • Using them effectively would require defensive fighting positions interconnected by communication trenches.
  • Research needs to be done to mount weapons like the Shipunov 2A42 30 mm autocannon on platforms faster than the BMP-2.
  • Similarly, MMGs/GPMGs need mobile platforms like Humvees to increase their survivability as well as effectivity.

Consider the question “The BSF, which is often hailed as India’s ‘first line of defence’ has tasked with wartime and peacetime roles. Though it is quite adept in peacetime role, its wartime preparedness needs an overhaul. Comment.”

Conclusion

These issues with the BSF could result in a  situation where there is every possibility of rout and retreat in the early days of the war. This issue needs to be urgently addressed by the government.

 

Coronavirus – Economic Issues

How the economic package will play out for MSMEs?op-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Measures announced for MSMEs

Mains level : Paper 3- Significance of MSMEs and measures for supporting the MSME during corona crisis.


Recently, a stimulus package worth 20 lakh crore was announced by the government. How effective will these measures prove for the MSMEs? How the liquidity issue plaguing the NBFCs is sought to be solved? Finally, what are the issues with the package? All such question are dwelled upon here!

Why ensuring flow of credit is important?

  • While assessing policy measures during the lockdown there are two over-arching principles one must keep in mind
  • One, the flow of funds will slow down with economic activity.
  • Two, firms do not go bankrupt because of insolvency, but because of lack of access to funds also called liquidity.
  • World over policymakers are pulling out all stops to make sure that the flow of credit continues.
  • Of the Rs 20-lakh-crore economic support announced by the Prime Minister on May 12, we have details for about Rs 16 lakh crore.
  • Monetary and financial interventions taken by the government and the RBI to provide credit to those who need it make up more than 90 per cent of it.

Limited impact of RBI’s measures

  • Most of the measures announced by the RBI earlier have not had the desired effect.
  • The quantum of cheap funds being made available being more or less the same as the increase in the amount being deposited in the RBI every night by banks.
  •  Just reducing the cost of funds (i.e. lower Repo rate and LTRO) had no impact on the volume and cost of the credit they provided.
  • This happened due to the heightened risk aversion in banks.

So, how government sought to address this problem?

  • The series of measures announced to provide credit support to the micro, small and medium enterprises (MSMEs) attempts to address this gap.
  • For MSMEs that have been servicing their loans so far new loans up to 20 per cent of the current outstanding credit will be fully backstopped by the government.
  • That is, if there is a default, the government will pay the bank.(i.e. act as a backstop).
  • So, how backstop by the government could help?
  • The move could lead to immediate credit creation, as guarantees are available only for loans extended in the next six months.
  • Also, the lenders have zero risk, and the borrowers are most likely stressed and would want these funds.
  • It is possible if not likely that firms will use these loans to just pay interest and cover losses.
  • But if so, that in a way is the purpose of this scheme — the government absorbing losses upfront rather than the likely larger lost taxes and potential bank bailouts if there is a bankruptcy.
  • For the government, the costs of this guarantee would be spread over several years, with at most 10 per cent incurred in this fiscal year.

Move to provide liquidity to NBFCs

  • The two schemes together, targeting to provide Rs 75,000 crore of liquidity to non-banking finance companies (NBFCs), may be a bit less successful.
  • The special purpose vehicle that is to provide liquidity to NBFCs provides funds for three months at a time, may succeed in addressing problems like an NBFC defaulting due to lack of liquidity.
  • But it may not suffice to get them to grow.
  • The partial credit guarantee given to banks’ loans to NBFCs may be more effective for a subset of NBFCs.
  • But as it is only available to public sector banks, it would depend on their willingness and ability to extend new loans.

Fund to provide equity for MSMEs

  • The Rs 50,000 crore fund to provide equity for MSMEs, with a corpus of Rs 10,000 crore being provided by the government, which would then be leveraged, is an interesting initiative.
  • Losses incurred in the current lockdown are depleting risk capital.
  • Replenishing if not growing that is paramount to restoring India’s growth potential.
  • While global as well as local private equity and venture capital funds would continue to explore and invest in smaller firms, such a fund can scale up the funds availability significantly.

Issues with the package

  • The natural limitation of the policy interventions thus far is that they only affect enterprises in the formal sector and in agriculture.
  • The problems in informal non-agricultural enterprises may stay unaddressed, and remain an impediment on growth.
  • While less than 10 per cent of the announcements thus far has been the fiscal cost.
  • One senses a fiscal caution in government measures that is overdone, and could hurt more than it helps. (avoiding direct expenditure)

Stability: of bond market and value of rupee

  • Two things minimised the volatility in the bond market: 1) pre-announcing the additional bond issuance for the year 2) giving an implicit assurance that additional deficits would be financed separately.
  • Even though that potentially means the RBI purchasing government bonds, the rupee has been remarkably stable.
  • There was fear that fiscal spending financed by the central bank would be frowned upon and drive currency weakness.

Consider the question-“MSME sector forms the backbone of Indian economy. List challenges it faces in present times. Critically analyse whether the current stimulus package is suitable to boost growth in this sector.”

Conclusion

The road ahead remains unclear, but it is likely that the economic damage is already much larger than the measures undertaken so far. A continued focus on reforms and on sustaining India’s growth potential will be critical in preventing macroeconomic instability.


Back2Basics: The two schemes announced for NBFCs

  • The FM announced a Rs 30,000-crore liquidity scheme for NBFCs.
  • The government will buy debt papers by NBCs, MFIs and HFCs.
  • The buying of papers will be fully guaranteed by the government of India.
  • Under this scheme investment will be made in both primary and secondary market transactions in investment-grade debt paper ofNBFCs/HFCs/MFIs.
  • The move is seen providing liquidity support for NBFCs and mutual funds and create confidence in the market.
  • The FM also announced Rs 45,000 crore partial credit guarantee scheme (PCGS) 2.0 for NBFCs.
  • Existing PCGS scheme will be extended to cover borrowings such as primary issuance of bonds/ CPs of such entities.
  • The first 20 per cent of loss will be borne by the government of India.

50000 Crore fund for MSMEs

  • Finance Minister Nirmala Sitharaman announced Rs 50,000-crore equity infusion through Fund of Funds for MSMEs.
  •  The Fund of Funds will be set up with a corpus of Rs 10,000 crore.
  • The Fund of Funds will be operated through a mother fund and a few daughter funds.
  • The fund structure will help leverage Rs 50,000 crore at daughter-fund levels.
  • This will help MSMEs expand size as well as capacity.
  • It will encourage MSMEs to get listed on the main board of stock exchanges, the government said.
  • Based on the recommendations of UK Sinha Committee, the Fund of Funds was first announced in the Union Budget on February 1, 2020.
  • An investment of Rs. 10,000 crore was proposed in the Budget for the scheme.

 

Coronavirus – Economic Issues

What self-reliant economy means?op-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Making the economy self reliant.


‘Atma-nirbhar’ has become a buzzword after PM Modi mentioned it in his speech. This article analyses the policy statement announced by the PM that focuses on self-reliance of the country in the future.  So, what exactly the term self-reliance could include? what are the areas in which India is dependent on other economies? Read the article to know more about these issues.

Policy statement of 1991

  • In 1991, only four policy statements were made —the end of licence-permit Raj, steep cuts in fiscal deficit and tariffs,  and devaluation of the Rupee.
  • With four policy measures, the economy was pulled out of a crisis and placed on a new growth path.
  • The key to 1991 was the political articulation of a vision that went beyond platitudes.

What is there in the PM’s vision statement?

  • The PM’s vision statement had four elements.
  • First, a step up in public spending and investment, aimed at promoting the welfare and raising the investment rate.
  • Second, policy reforms aimed at making the domestic economy more globally competitive.
  • Third, a long-term structural shift making the economy more “self-reliant” and less dependent on the world economy.
  • The fourth wheel of this new growth engine will be Lockdown Model 4 that is to be announced in a few days.

 Commitment of political leadership: key to spending and investment

  • Increased public spending will certainly boost demand and generate employment in the short term and add to infrastructure capacity in the medium term.
  • Policy reform, including changes in land, labour and other policies, could yield results in the medium term.
  • But for now, investors will wait and watch to test the sincerity and efficiency of governments at the Centre and in the states.
  • They will wait to see how the various policy steps being announced by the FM get implemented — how quickly and how efficiently.
  • The government can meet with success if investors, consumers and other economic agents believe in the commitment of the political leadership and the capability of the administration to deliver.

Focus on the self-reliance

  • PM has said that his version of self-reliance does not imply isolationism and inward-orientation.
  • His version of self-reliance will inject greater self-confidence in the people by reducing the country’s dependence on other nations.
  • Theotonio Dos Santos, defined dependence as a situation in which a country’s economy is “conditioned by the development and expansion of another economy”. 
  • He said that to be self-reliant the growth process of an economy “should not become dominated or dependent on another economy”.

So, on which economies is India excessively dependent?

  • 1. The oil-exporting economies.
  • Oil and gas account for a bulk of India’s imports.
  • Whatever new sources of energy India may tap in the foreseeable future, it will remain import-dependent for energy.
  • Fortunately, for India, the global crude oil and gas markets are likely to remain buyers’ markets for some time to come.
  • 2. Dependence on foreign exchange.
  • Second is the dependence on foreign exchange inflows both in the form of remittances, mainly from the Gulf and the US, and financial flows into capital markets.
  • It is not clear how the new Modi strategy of self-reliance proposes to deal with this dependence.
  • If anything, India is seeking more FDI and external debt.
  • 3. Defence equipment.
  • The third dependence is on imported defence equipment, mainly from Russia, the US, Israel and France.
  • 4. Electronic and pharmaceuticals.
  • Fourth, import dependence in electronic goods and pharmaceuticals, mainly from China.
  • Thus far, government policy does not address these dependencies.
  • The immediate focus of PM’s self-reliance seems to be China.

How to turn import dependence into import power?

  • Post-Deng Xiaoping China established long ago that for a large economy, it is possible to be both self-reliant and globalised at the same time.
  • Trade in itself does not create dependence if a country is able to grow both exports and imports.
  • China has demonstrated the geo-economic power of both exports and imports by making trade partners dependent on it on both counts.
  • When China refuses to buy wine and beef from Australia, it is using its import power, not demonstrating its import dependence.
  • If an economy is willing to live without those imports or can substitute them with domestic production, then it is not badly hurt.

So, what are the lessons for India?

  • It is export dependence that can make even a large economy vulnerable.
  • It is China’s dependence on US markets that President Donald Trump has aimed to reduce by waging a trade war.
  • India has never had such export dependence on any one country.
  • Indian government’s hope that multinational companies exiting China will relocate to India can only make India more export-dependent since these MNCs aim to sell globally.
  • Making India less dependent on China cannot be the only measure of self-reliance.

Consider the question “For India, it is not trading dependence that makes India vulnerable but the inadequacy of its human capital. Comment”

Conclusion

For India to be truly self-reliant and self-confident, public investment in education, human capability and research and development has to increase.

Coronavirus – Economic Issues

JDY or NREGA card: What is better option for cash transfers?op-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : JAM

Mains level : Paper 3- Issues associated with JAM and options to deal with them.


JAM Trinity is one of the flagship policy of the government. In times of COVID crisis, this article highlights some limits of JAM trinity. Issues of inclusion error, exclusion error and even problem of transparency with JAM accounts are discussed. The NREGA cards instead of Jan Dhan account is suggested as the better option. Why is it so? Read to know more…

High hopes from JAM

  • The original formulation, in 2015, mentioned two possible forms of the JAM trinity: mobile banking and post office payments.
  • The second option never made much progress.
  • So, Aadhaar-enabled mobile banking became the supreme goal.
  • In January 2017, NITI Aayog CEO Amitabh Kant predicted the imminent demise of all cash-transfer paraphernalia other than mobiles.
  • These hopes reached new heights as the JAM project latched on to another flourishing narrative, universal basic income (UBI).
  • If you want to make cash transfers to everyone, what better platform can you have than Aadhaar, India’s unique biometric ID, doubling up as a permanent financial address?

Corona crisis belied the hopes from JAM

  • In the early days of the crisis, JAM was often invoked sometimes along with UBI as a possible tool of emergency relief.
  • But when the time actually came to make cash transfers to the poor, JAM turned out to be of little use.
  • The JAM had not gone beyond some fancy digital-payment systems for the privileged.
  • Poor people were still running from pillar to post to collect their meagre benefits from old-fashioned bank accounts.
  • Some also use the services of “business correspondents”, but those have little to do with JAM.
  • Sure enough, long bank queues and related hardships started to emerge, especially in rural areas where the density of banks is relatively low.
  • In a Dalberg survey conducted last month in 10 states, only 25% of poor households reported that it was “easy” to access cash benefits.

NREGA job Cards: A better option than Jan Dhan Account

  • The lead cash-relief measure in the national relief package consists of monthly transfers of ₹500 to women’s JDY accounts.
  • But is that a good idea?
  • Let’s compare women’s JDY accounts with another possible basis for cash transfers, at least in rural areas: the list of households that have a National Rural Employment Guarantee Act (NREGA) job card.
  • The numbers of accounts are roughly comparable: about 14 crore for NREGA job cards, and 12 crore or so for women’s JDY accounts in rural and semi-urban.

JDY approach fares poorly on the following 3 counts

1. Lack of transparency and clarity

  • JDY accounts are a mighty mess – the NREGA job-cards list is far more transparent and well-organised. 
  • During the frantic initial JDY wave, in 2014-15, banks opened JDY accounts en masse to meet the targets. Banking norms were not followed always.
  • Later on, a large proportion of JDY accounts – 40% in March 2017, down to 19% in January 2020– went “dormant” as customers were unable or unwilling to use them.

2. Large exclusion error

  • The cash transfers to women’s JDY accounts are likely to involve large exclusion errors.
  • According to a recent Yale study, less than half of poor adult women have a JDY account, an even lower proportion, 21%, know that they have a JDY account.
  • The NREGA job-card list is likely to have much better coverage of poor households.
  • The natural complementarity between NREGA and social security pensions covering more than four crore persons under the National Social Assistance Programme alone would further help to reduce exclusion errors.

3. Large inclusion error

  • Inclusion errors are also likely to be larger in the JDY approach.
  • Job cards are meant for rural workers, JDY accounts are for everyone.
  • National Election Studies 2019 data show that JDY beneficiaries tend to be better-off than NREGA beneficiaries. ( and still, they would get benefits i.e. inclusion error)
  • Earlier survey data suggest that the probability of having a JDY account is more or less the same for poor and non-poor households.

Comparison on reliability basis

  • There have been significant issues e.g. delayed, rejected, blocked or diverted payments with NREGA payments, often related to Aadhaar.
  • But then, numerous “direct benefit transfer” schemes –social security pensions, scholarships, maternity benefits, among others have faced similar problems, also reflected in official transaction data.
  • Both the Aadhaar Payment Bridge System(APBS) and the Aadhaar-enabled Payment System (AePS) are shot through with technical glitches.
  • Transfers to women’s JDY accounts are unlikely to be more reliable than transfers to job-card holders.

Cash in hand option

  • As far as effective payment is concerned, there is a further argument in favour of the NREGA job-cards list.
  • Unlike JDY accounts, it lends itself to the “cash-in-hand” method on-the-spot payment in cash, instead of bank payments as a possible fallback.
  • The reason is that the job-cards list is a transparent, recursive household list with village and gram panchayat identifiers, while the list of JDY accounts is an opaque list of individual bank accounts.
  • Cash-in-hand may seem like the antithesis of JAM, but this option may become important in the near future if the banking system comes under further stress.
  • There are precedents of effective use of the cash-in-hand method, notably in Odisha for pension payments, and in various states for NREGA wage payments.
  • Several states including Andhra Pradesh, Odisha and Tamil Nadu have already resorted to cash-in-hand for relief payments during the lockdown.

Consider the question, ” The need for financial inclusion is far more in times of corona crisis. Discuss opportunities and challenges with respect to policies like JAM trinity during corona pandemic. Suggest other alternatives for such transfers.”

Conclusion

There is nothing compelling about the use of women’s JDY accounts for cash relief. In fact, it is a bit of a shot in the dark. The government do well to consider other options for further relief majors, including a switch to the NREGA job-cards list in rural areas.

Parliament – Sessions, Procedures, Motions, Committees etc

Should Rajya Sabha be abolished?op-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Articles related to Rajya Sabha.

Mains level : Paper 2- Importance of Rajya Sabha.


This article is about Rajya Sabha, the second chamber of our union legislature. Its utility was intensely debated in the Constituent Assembly. Now, after almost seven decades of its existence, we know that the house has proved its utility. So, what was the reasoning of those who were in support of its creation and what those who opposed its creation had on their mind? How bicameralism is connected to federalism? You’ll come to know the answers to these questions after reading the article.

Historical background

  • The Rajya Sabha came into being on April 3, 1952 and held its first session on May 13 the same year.
  • The central legislature that came into being under the Government of India Act, 1919 was bicameral.
  • Under 1919 Act, Council of States had 60 members and Legislative Assembly had 145 members.
  • The membership and voting norms for the Council of States were restrictive.
  • These restrictions meant only wealthy landowners, merchants and those with legislative experience could enter it.
  • Women could neither vote nor seek membership.
  • The Government of India Act, 1935 proposed an elaborate and improved version of the second chamber, but this never materialised.
  • The Constituent Assembly, which was formed in 1947, after adoption of the Constitution became the Provisional Parliament and made laws till 1952.

Bicameralism and the utility of second house

  • Bicameralism is a principle that requires the consent of two differently constituted chambers of Parliament for making or changing laws.
  • This principle came into operation in 1787 with the adoption of the U.S. Constitution.
  • At present, 79 Parliaments of the world (41% of the total number) are bicameral.
  • In The Federalist, the famous essay, it was stated that the second chamber enables a second and reflective expression of representative opinion besides checking the propensity to yield to the impulse of sudden and violent passions.
  • French philosopher Montesquieu who said, “The legislative body being composed of two parts, they check one another by the mutual privilege of rejecting”.
  • Walter Bagehot later noted that the retarding chamber will impede minor instances of parliamentary tyranny, though it will not prevent or really impede revolution.

Federalism and link with bicameralism

  • Federalism has been in vogue since ancient times when some states got together to confer the power of law-making on a central authority.
  • But modern federalism is entirely different given the complexity of geographical, regional, social and economic diversities marking the constituent units of a federation or a union.
  • It is more so in India. The U.S. is a federation and so is India — each unit has a set of unique features.
  • Federalism and bicameralism are linked because the federal character of a nation comprising constituent units can be reflected in, and secured by, a bicameral legislature.

Debate in the Constituent Assembly over need for the second house

  • The proposal for the Rajya Sabha as a second chamber was subjected to serious argumentation and had a narrow escape.
  • Opponents’ stand: A member of the Constituent Assembly asserted that an Upper House was not essential and viewed it as a creation of imperialism.
  • Other member warned that such a chamber would only prove to be a “clog in the wheel of progress” of the nation.
  • The proponents’ stand: A supporter of idea felt that it would introduce an element of sobriety and second thought besides lending voice to the constituent units in the legislative scheme of things.
  • Ananthasayanam Ayyangar argued that a second chamber would enable the genius of the people to have full play besides checking hasty legislation.
  • Replying to the debate on the motion N. Gopalaswami Ayyangar had to make a strong case for the second chamber.
  • He argued that the most that we expect the Second Chamber to do is 1) to hold dignified debates on important issues 2) to delay legislation which might be the outcome of passions of the moment until the passions have subsided.

Consider the question, “Examine the role played by the Rajya Sabha as a law-making body. Do you agree that the Rajya Sabha has been successful in fulfilling the role expected of it by the makers of our Constitution?”

Conclusion

The mandate of the Rajya Sabha, as can be gleaned from the Constituent Assembly debates and the experiences of other Parliaments, is legislation — to revise or delay legislation without proving a clog in the wheel of the progress; to represent the interests of the States as a federal chamber, and be a deliberative body holding high-quality debates on important issues.

Agricultural Sector and Marketing Reforms – eNAM, Model APMC Act, Eco Survey Reco, etc.

Taking India’s agri-marketing and PDS system on a more efficient pathop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : APMC, e-NAM

Mains level : Paper 3- Agri-marketing and PDS, scope for improvement


Agriculture is still the mainstay of Indian economy. There are certain problems that persist in the agri-marketing and PDS. The author suggests to use the present corona crisis to embark on the path of the reform in these areas.

 Supply lines maintained during the lockdown

  • India seems to have contained the mortality rate from Covid-19 to 3.3% which is lower than the global average of about 7 per cent.
  • On the food front too, India has done reasonably well.
  • Despite initial disruptions in supply lines, India has somehow managed to feed its large population of 1.37 billion.
  • In fact, if there is any complaint, it is from the producer’s side that the prices of perishables have collapsed in some parts of the country.
  • But, from the consumer’s point of view, even for perishables like milk and vegetables, supply lines were quickly restored and food is easily available in the markets at reasonable prices.
  • On keeping supply lines for essential food alive and running, those in the government managing the food logistics surely deserve to be complimented.

Reforms in agri-marketing and PDS

  • Agriculture still engages India’s largest workforce.
  • And it may be the only sector that registers a respectable growth this year as almost all other major sectors may plummet into negative territory.
  • Agriculture sector is in urgent need of the reforms that can help farmers get a better price for their produce with consumers still paying a reasonable price for their food.
  • Following ways are suggested for agri-marketing:
  • While the APMC markets can keep doing their business as usual, it is time to open channels for direct buying from farmers/farmer producer organisations (FPOs).
  • Any registered large buyer, be it processors or retail groups or exporters must be encouraged by providing them with a license, that is valid all over India.
  • They should be exempted from any market fee and other cesses as they will not be using the services of the APMC market yards.
  • E-NAM can flourish if grading and dispute settlement mechanisms are put in place.
  • Private mandis with modern infrastructure need to be promoted in competition with APMCs.
  • On the PDS front, we need to move towards cash transfers that can be withdrawn from anywhere in the country.
  • Some initiative has already been taken by the Madhya Pradesh and even Uttar Pradesh is now moving along these lines.
  • But much more can be done to put India’s agri-marketing and PDS system on a more efficient path.

Consider the question asked by the UPSC in 2014 “There is also a point of view that Agricultural Produce Marketing Committees set up under the State Acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine.”

Conclusion

The recovery of the economy, whether it will be V-shape or J-shape, depends upon the package that the government announces. The mega reforms need to be built in this recovery package.


Agriculture Produce Marketing Committee Regulation (APMC) Act.

  • All wholesale markets for agricultural produce in states that have adopted the Agricultural Produce Market Regulation Act (APMRA) are termed as “regulated markets”.
  • With the exception of Kerala, J & K, and Manipur, all other states have enacted the APMC Act.
  • It mandates that the sale/purchase of agricultural commodities notified under it are to be carried out in specified market areas, yards or sub-yards. These markets are required to have the proper infrastructure for the sale of farmers’ produce.
  • Prices in them are to be determined by open auction, conducted in a transparent manner in the presence of an official of the market committee.
  • Market charges for various agencies, such as commissions for commission agents (arhtiyas); statutory charges, such as market fees and taxes; and produce-handling charges, such as for cleaning of produce, and loading and unloading, are clearly defined, and no other deduction can be made from the sale proceeds of farmers.
  • Market charges, costs, and taxes vary across states and commodities.
Coronavirus – Economic Issues

New approach to the revival of economyop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NPA, IBC.

Mains level : Paper 3- Novel approach needed to deal with the bankruptcy problem.


As our attention now shifts to the revival of the economy, we have to take stock of the damage to the economy. As recently as 2008 we have faced a financial crisis, but this crisis is bigger in the scale and our fiscal health is weaker than it was at the time of the 2008 crisis. So, to deal with the situation we have to adopt a novel approach. What should be the approach? Read further to know.

From 2014 to Covid-19 in finance and banking

  • TBS challenge: As far back as December 2014, the banking sector and infrastructure firms had come under financial stress, a problem that was termed the Twin Balance Sheet (TBS) challenge.
  • By December 2019, the problem had spread to the NBFC and real estate sectors, raising the number of stressed balance sheets to four.
  • Following the Covid-19 shock, the problem of stressed balance sheets will spread across the economy.

How bad is the damage likely to be?

  • Reports suggest that around one-third of industrial and service firms have applied for moratoria on their bank loans.
  • If only a quarter of these deferred loans eventually go bad, then the stock of non-performing assets (NPAs) would increase by Rs 5 lakh crore.
  • Senior bank officials have been quoted as estimating that the stock of NPAs could increase by as much as Rs 9 lakh crore.
  • In this case, we would be looking at NPAs of Rs 18 lakh crore, equivalent to around 18 per cent of current loans outstanding.

So, how is the situation different from 2008 financial crisis?

  • At one level, the answer is simple: The shareholders of the financial institutions, which in most cases means the government.
  • But this is where the ubiquity of the balance sheet problem comes in.
  • When the TBS challenge first materialised, after the Global Financial Crisis of 2008-09, the government had a relatively strong balance sheet.
  • Deficits were low, and the consolidated debt-GDP ratio, having fallen by 17 percentage points over the previous 7 years, stood at just over 60 per cent of GDP.
  • So, fiscal room was available, allowing the government to recapitalise the PSU banks.
  • This time, the government’s financial position will be quite different.
  • Central and state government deficits and debts will increase dramatically this year.
  • Revenues, already slowing, have been decimated by the Covid crisis, while expenditures have increased.
  • Add in a slowly recovering economy, and it becomes clear that the fiscal position will remain weak for some considerable time.
  • What are the options with the government? The government will want to pass the burden onto the corporate and household sectors, in the form of higher taxes, more arrears, and possibly higher inflation.
  • But these sectors will resist, for they have financial problems of their own.

2 ways to minimise the size of the loss

  • It will be tempting to delay recognising the problem, pushing it into the future, by allowing banks not to classify bad loans as NPAs, and barring them from taking defaulters to the IBC system.
  • But this would be the wrong approach and there are two ways to minimise the loss.
  • 1. Prevent bankruptcies from occurring.
  • To do this, banks will need to identify the firms that are viable, and lend them the funds they need to tide them over the immediate crisis.
  • But banks are reluctant to bear the risk of making such loans.
  • So, the government might need to create a guarantee fund to support lending.
  • 2. When firms default, resolve as quickly as possible
  • Speed is necessary because the financial position of stressed firms tends to worsen over time.
  • By definition, stressed firms have poor cash flows and can’t obtain much in the way of loans from banks.
  • So, they don’t have enough money to fund their operations properly.
  • Which means that over time their underlying business deteriorates, destroying the firms’ market value.
  • While public attention focuses on the size of the NPAs, a much more important number is the recovery rate — the degree to which the banks can recover on these loans.
  • And the only way to maximise the recovery rate is to sort out the bad loans speedily.
  • The economy will reap an additional benefit since the resolved firms will be able to contribute to the recovery.

Consider the question “As the economy stares at the destruction caused by the pandemic certain novel measures to salvage the economy are necessary. In light of this statement suggest the measures that the government should take to avoid the NPA problem from mounting.”

Conclusion

A new approach is consequently needed. The immediate problems created by the crisis must be addressed, decisively and quickly. Then the attention will have to turn to address the pre-COVID legacy balance sheet problems.


Back2Basics: What is NPA?

  • A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
  • Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
  • Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
  • Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
Coronavirus – Health and Governance Issues

Law to deal with pandemicsop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NDMA 2005, Epidemics Act 1897

Mains level : Paper 2- Laws invoked for dealing with pandemic.


India lacks specific legislation to deal with pandemics like COVID. While NDMA 2005 and Epidemic Diseases Act 1897 has been invoked to deal with the present situation, both acts lack specific provision in dealing with the pandemics. Here we can take lessons from UK’s Coronavirus Act and Singapore’s regulations to create a well-drafted Indian COVID 19 law.

Which acts were used for enforcing lockdown?

  • The home ministry issued directions to State governments and district authorities under the Disaster Management Act of 2005.
  • Under the Act, the National Disaster Management Authority (NDMA) was set up under the Prime Minister, and the National Executive Committee (NEC) was chaired by the Home Secretary.
  • The State governments and authorities exercised powers under the Epidemic Diseases Act of 1897 to issue further directions.
  • District authorities such as the Commissioner of Police have consequently issued orders to impose Section 144 of the Criminal Procedure Code in public places.

Issues with the laws used for lockdown

  • The invoking of the Disaster Management Act has allowed the Union government to communicate seamlessly with the States.
  • But serious questions remain whether the Act was originally intended to or is sufficiently capable of addressing the threat of a pandemic.
  • The use of the archaic Epidemic Diseases Act reveals the lack of requisite diligence and responsiveness of government authorities in providing novel and innovative policy solutions to address a 21st-century problem.
  • Another serious problem is that any violation of the orders passed would be prosecutable under Section 188 of the Indian Penal Code.
  • But section 188 of IPC is a very ineffective and broad provision dealing with disobedience of an order issued by a public servant.

The UK and Singapore’s laws to deal with the pandemic

  • U.K’s Coronavirus Act, 2020: It deals with issues including emergency registration of healthcare professionals, temporary closure of educational institutions, audio-visual facilities for criminal proceedings, powers to restrict gatherings, and financial assistance to industry.
  • Singapore’s Infectious Diseases Regulations, 2020: These regulations provides for the issuance of stay orders which can send ‘at-risk individuals’ to a government-specified accommodation facility.
  • Both U.K.’s and Singapore’s laws set out unambiguous conditions and legally binding obligations.
  • As such, under Singaporean law, the violators may be penalised up to $10,000 or face six months imprisonment or both.
  • In contrast, Section 188 of the Indian Penal Code has a fine amount of ₹200 to ₹1,000 or imprisonment of one to six months.
  • Even then, proceedings under Section 188 can only be initiated by private complaint and not through a First Information Report.
  • As such, offences arising out of these guidelines and orders have a weak basis in terms of criminal jurisdiction thereby weakening the objectives of the lockdown.

Problems in the government’s approach

  • The Union government showed no inclination towards drafting or enacting COVID-19-specific legislation that could address all the issues pre-emptively.
  • There has been little clarity on a road map to economic recovery.
  • A consolidated, pro-active policy approach is absent.
  • In fact, there has been ad hoc and reactive rule-making, as seen in the way migrant workers have been treated.
  • This has also exposed the lack of coordination between the Union and State governments.

Consider the question, “Unlike many countries which legislated specific acts to deal with Covid-19 pandemic, India was already equipped with acts which enabled it to deal with the pandemic. Describe the acts and their provisions used to deal with the pandemic. What were the issues  with these provisions?”

Conclusion

In past instances, the Union government has not shied away from promulgating ordinances. These circumstances call out for legislative leadership, to assist and empower States to overcome COVID-19 and to revive their economic, education and public health sectors.


Back2Basics: National Disaster Management Act 2005

  • On 23 December 2005, the Government of India enacted the Disaster Management Act.
  • The act envisaged the creation of the National Disaster Management Authority (NDMA), headed by the Prime Minister.
  • The act also provides for State Disaster Management Authorities (SDMAs) headed by respective Chief Ministers.
  • NDMA and SDMAs spearhead and implement a holistic and integrated approach to Disaster Management in India.
  • The NDMA was formally constituted on 27thSeptember 2006, in accordance with the Disaster Management Act, 2005 with Prime Minister as its Chairperson and nine other members, and one such member to be designated as Vice-Chairperson.
  • According to the Disaster Management Act, 2005 a disaster is defined as-
  • A catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or manmade causes, or by accident or negligence which results in substantial loss of life or human suffering or damage to, and destruction of, property, or damage to, or degradation of, environment, and is of such a nature or magnitude as to be beyond the coping capacity of the community of the affected area.
  • The MHA has defined a disaster as an “extreme disruption of the functioning of a society that causes widespread human, material, or environmental losses that exceed the ability of the affected society to cope with its own resources.

Epidemic Diseases Act  1897

  • The Epidemic Diseases Act is routinely enforced across the country for dealing with outbreaks of diseases such as swine flu, dengue, and cholera.
  • The colonial government introduced the Act to tackle the epidemic of bubonic plague that had spread in the erstwhile Bombay Presidency in the 1890s.
  • Using powers conferred by the Act, colonies authorities would search suspected plague cases in homes and among passengers, with forcible segregations, evacuations, and demolitions of infected places.
  • Historians have criticised the Act for its potential for abuse.
  • In 1897, the year the law was enforced, Lokmanya Tilak was punished with 18 months’ rigorous imprisonment after his newspapers Kesari and Mahratta admonished imperial authorities for their handling of the plague epidemic.

Provisions of the 1897 Epidemic Diseases Act

  • The Act is one of the shortest Acts in India, comprising just four sections. It aims to provide for the better prevention of the spread of Dangerous Epidemic Diseases.
  • The then Governor-General of colonial India had conferred special powers upon the local authorities to implement the measures necessary for the control of epidemics.
  • Although, the act does define or give a description of a “dangerous epidemic disease”.

Its various sections can be summarized as under

  • The first section describes all the title and extent, the second part explains all the special powers given to the state government and centre to take special measures and regulations to contain the spread of disease.
  • The second section has a special subsection 2A empowers the central government to take steps to prevent the spread of an epidemic, especially allowing the government to inspect any ship arriving or leaving any post and the power to detain any person intending to sail or arriving in the country.
  • The third section describes the penalties for violating the regulations in accordance with Section 188 of the IPC. Section 3 states, “Six months’ imprisonment or 1,000 rupees fine or both could be charged out to the person who disobeys this Act.”
  • The fourth and the last section deals with legal protection to implementing officers acting under the Act.
WTO and India

Global crisis and opportunities for Indiaop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 2-Challenges to the globalisation due to covid pandemic, apportunities for India


Multilateralism has been on the decline for some time now.  The corona pandemic has acted like a catalyst to heightene this crisis. China’s role in weaponising the interdependence of multilateralism would have far-reaching consequences to the world as we know it. Yet, the crisis presents India with some unique opportunities. What are these opportunities? How can we save multilateralism? or do we even need to? These questions and such other issues are discussed in the article.

The basic Idea

  • Multilateralism has its benefits like to reduce the further spread of the virus, to develop effective medical treatments, and to curtail the worst effects of the inevitable recession- cooperation among nations will be necessary.
  • But the very foundation of multilateralism is shaking today. Hence, the need of the hour is a meaningful fix.
  • The US faces multiple internal challenges like the divisive Presidential election in November and China is facing a global crisis of credibility.
  • Thus, India is uniquely positioned to help resuscitate multilateralism.
  • New Delhi can assume leadership in strengthening constructive transnational cooperation.
  • India may also help China: Through mediation to temper what is increasingly seen as Beijing’s unilateralist revisionism; revive the promise of the gradual socialisation of China into the international system; and its acceptance of the norms and rules that regulate the principal multilateral institutions.

So, when did the crisis of multilateralism start?

  • The malaise that afflicts multilateralism is not new.
  • 1) The paralysis of all three functions of the World Trade Organization (WTO) — negotiation, dispute settlement, and transparency — was one sign of that deep-rooted malaise.
  • 2) The severely dented credibility of the World Health Organization (WHO) is just another more recent indicator.
  • The pandemic has heightened the crisis of multilateralism, not created it.
  • Pandemic has highlighted the misuse of international institutions (like WHO) and multilateralism is incapable of dealing with it.

Weaponisation of the global supply chain by China

  • Post-war multilateral system was based on the idea of peace and prosperity.
  • It was expected that economic inter-mingling among various countries would lead to peace.
  • Most of the countries of were democratic and countries with a different system of governance were not part of this system.
  • Our multinational institutions were not designed to handle the situation in which one country starts misusing its dominant position in interdependence (ex. global supply chains).
  • The misuse of existing loopholes within the existing rules by China to gain an unfair advantage in trade relations was already attracting critique in the last years.
  • China has been accused of forced technology requirements, intellectual property rights violations, and subsidies.
  • But the pandemic has provided us with some even more alarming illustrations of how damaging the weaponisation of global supply chains can be.

Examples of China weaponising interdependence

  • When India complained that test kits imported from China were faulty, China slammed it for “irresponsible” behaviour.
  • When Australia indicated that it would conduct an independent investigation of China’s early handling of the epidemic, China threatened it with economic consequences.
  • Several actors, including the EU and India, were alarmed at the prospects of predatory takeovers of their companies by China.

Against this background, repeated calls by heads of governments and international organisations urging countries to remain committed to multilateralism ring hollow.

So, what are remedies to save multilateralism?

  • 1. Policies with renewed commitment
  • There is the need for reassurance and policies that reflect a renewed commitment to the raison d’étre of multilateralism.
  • A “retreating” United States must demonstrate that it remains committed to strengthening global supply chains.
  • Global supply chains must be based on the promise of ensuring global stability and the attendant promise of peace and prosperity.
  • 2. Strategic separation of value chains
  • There is an urgent need for some strategic decoupling, handled smartly in cooperation with other like-minded countries.
  • It will undoubtedly cause considerable disruption to existing global value chains.
  • We will be less prosperous. But we will also be more secure.
  • 3. Closer integration with some distancing from others
  • A multilateralism that recognises the need for decoupling will necessitate closer cooperation with some and distancing from others.
  • Membership of such renewed multilateral institutions would not be universal.
  • Rather, one would limit deep integration to countries with which one shares values — such as pluralism, democracy, liberalism, animal welfare rights, and more.

Opportunities for India

  • India is a country whose pluralism, democracy and liberalism have often been underestimated by the West.
  • As some constituencies in the West seek a gradual decoupling from China, they would be well served to look toward India.
  • To make use of the opportunities, for itself and for the provision of certain global public goods, India’s cooperation with like-minded actors will be key.
  • India could work closely with the Alliance for Multilateralism, an initiative launched by Germany and France, to shape both the alliance itself and the reform agenda at large.
  • Working together with a group of countries from the developed and developing countries could further amplify India’s voice.
  • China may recover faster than most economically, and its military might remains intact, its image as a reliable partner has suffered a huge dent.
  • India could lead a coalition to bridge the deficit of trust between China and the rest of the world.

Consider the following question “Covid pandemic has been acting as a catalyst in precipitating the fall of global order and multilateralism. At the same time, we are well aware of the utility of the multilateralism. Examine the opportunities that falling global order provides for India in restoring it in the new form.”

Conclusion

The disruption in the global order provides India with a unique opportunity. One the one hand it has to steer the gradual decoupling with China and on the other hand, it has the opportunity to lead the coalition to bridge trust deficit with China. India should not squander these opportunities.