Coronavirus – Economic Issues

Pathways to design a resilient economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- India economy in the post Covid world.

The pandemic of COVID is a watershed moment in the way we look at the world. Truly, the future vocabularies will consist of ‘Pre COVID world’ and ‘Post COVID world’. Undoubtedly, the economic system shall be deeply affected by the COVID wave. The focus of this article is to redesign our economy through new 7 golden rules in the aftermath of Covid-19. As we read these ideas we also come across the faults that lie at the bottom of the present system. This is our opportunity to design a resilient and just system. So, what is the way forward to achieve this? Read to know!

  • When complex systems come to catastrophes, they re-emerge in distinctly new forms.
  • The COVID-19 global pandemic is a catastrophe, both for human lives and our complex
  • Economists cannot predict in what form the economy will emerge from it. But we can develop principles for what lies ahead.

7 Radical ideas to build back economy

The COVID-19 catastrophe has challenged the tenets of economics that have dominated public policy for the past 50 years.

Here are seven radical ideas emerging as pathways to build a more resilient economy and a more just society.

1. Time to rethink GDP as a measure of growth

  • The obsession with GDP as the measure of progress has been challenged often, but its challengers were dismissed.
  • Now, Nobel laureates in economics-Joseph Stiglitz, Amartya Sen, Abhijit Banerjee, Esther Duflo and others-are calling upon to rethink the fundamentals of economics, especially the purpose of GDP.
  • A five-point ‘de-growth’ manifesto by 170 Dutch academics has gone viral amidst the heightened Internet buzz during the lockdown.
  • Goals for human progress must be reset.

2. Opening boundaries is not always good

  • Boundary-lessness is a mantra for hyper-globalisers. Boundaries, they say, impede flows of trade, finance, and people.
  • However, since countries are at different stages of economic development, and have different compositions of resources, they must follow different paths to progress.
  • According to systems’ theory, sub-systems within complex systems must have boundaries around them, be permeable ones, so that the sub-systems can maintain their own integrity and evolve.
  • This is the explanation from systems science for the breakdown of the World Trade Organization (WTO).
  • In WTO system, all countries were expected to open their borders.
  • Opening borders caused harm to countries at different stages of development.
  • Now COVID-19 has given another reason to maintain sufficient boundaries.

3. Role of the government is indispensable

  • Ronald Reagan’s dictum, “Government is not the solution… Government is the problem”, has been upended by COVID-19.
  • Even capitalist corporations who wanted governments out of the way to make it easy for them to do business are lining up for government bailouts.

4. Problems caused by marketization

  • The “market” is not the best solution.
  • Money is a convenient currency for managing markets and for conducting transactions.
  • Whenever goods and services are left to markets, those who do not have money to obtain what they need are at loss.
  • Moreover, by a process of “cumulative causation”, those who have money and power can acquire even more in markets.
  • The “marketization” of economies has contributed to the increasing inequalities in wealth over the last 50 years, which Thomas Piketty and others have documented.

5. Focus on citizen welfare, not consumer welfare

  • In economies, human beings are consumers and producers. In societies, they are citizens.
  • Citizens have a broader set of needs than consumers.
  • Citizens’ needs cannot be fulfilled merely by enabling them to consume more goods and services.
  • They value justice, dignity, and societal harmony too.
  • Economists’ evaluations of the benefits of free trade, and competition policy too, which are based on consumer welfare alone.
  • Such evaluations fail to account for negative impacts on what citizens value.

6. Competition Vs. Collaboration

  • Competition must be restrained: Collaboration is essential for progress.
  • Faith in “Darwinian competition”, with the survival of only the fittest, underlies many problems of modern societies and economies.
  • Blind faith in competition misses the reality that human capabilities have advanced more than other species’ have, by evolving institutions for collective action.
  • Further progress, to achieve the Sustainable Development Goals will require collaboration among scientists in different disciplines and among diverse stakeholders, and collaboration among sovereign countries.
  • Improvement in abilities to share and govern common resources have become essential for human survival in the 21st century.

7. Public ownership of technologies

  • We are living in an era of knowledge.
  • Just as those who owned more land used to have more power before, now those who own knowledge have more power and wealth than the rest.
  • Intellectual property monopolies are producing enormous wealth for their owners, though many were developed on the back of huge public investments.
  • Moreover, powerful technologies can be used for benign or malign purposes.
  • It is imperative to evolve new institutions for public ownership of technologies and for the regulation of their use.

How to walk the talk?

  • COVID-19 has revealed structural weaknesses in the global economy. Putting more liquidity in the system as was done in case of 2008 crisis will not be sufficient.
  • The system is in the need of paradigm change.
  • 1. Coordination among experts
  • Experts need to work together with keeping in mind the larger picture.
  • The economic system cannot be redesigned by domain experts devising solutions within their silos.
  • 2. Focus on innovation
  • Innovations are required at many levels to create a more resilient and just world.
  • Innovations will be required in business models too, not just for business survival but also to move businesses out of the 20th-century paradigm that “the business of business must be only business”. 

The UPSC can ask a question based on the issues discussed here. Consider this question- “COVID has upended the global economy in such a way that it would need an overhaul. The basic tenets of the global economic order would undergo a revaluation. In light of the above statements examine the factors that contributed to the vulnerability of the Indian economy. Suggest the ways to make it more resilient and just.”

Conclusion

The redesign of economies, of businesses, and our lives, must begin with questions about purpose. What is the purpose of economic growth? What is the purpose of businesses and other institutions? What is the purpose of our lives? What needs, and whose needs, do institutions, and each of us, fulfil by our existence?

Parliament – Sessions, Procedures, Motions, Committees etc

Should we do away with the MPLADS?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : MPLADS and its provision.

Mains level : Paper 2- Issues with MPLADS.

Since its inception in 1993, MPLADS has continued uninterrupted for 27 years. But COVID-19 came as a roadblock for MPLADS. Recently, it was suspended by the government for two years. As expected it led to huge political drama. However, as an aspirant, it is our duty to cut the drama out and focus on issues that matter. This article discusses MPLADS and argues for its abolition owing to various issues associated with it.

Reason for suspension of MPLADS

  • The government suspended the scheme to strengthen the government’s efforts in managing the challenges and adverse impact of COVID-19 in the country.
  • It has been suspended for two years.
  • BTW scheme in short: Each MP has the choice to suggest to the District Collector for works to the tune of ₹5 crores per annum to be taken up in his/her constituency.

Why should MPLADS be abolished?

1. It goes against the spirit of the Constitution

  • The scheme violates one of the cardinal principles: separation of powers.
  • Simply put, this scheme, in effect, gives an executive function to legislators or the legislature.
  • The argument that MPs only recommend projects, but the final choice and implementation rest with the district authorities is unfounded.
  • There are hardly any authorities in the district who have the courage to defy the wishes of an MP.

2. Lacunae in implementation

  • Consider some of the observations made by the Comptroller and Auditor General (CAG) of India:
  • Expenditure incurred by the executing agencies being less than the amount booked.
  • Utilisation of funds between 49 to 90% of the booked amount.
  • The scheme envisages that works under the scheme should be limited to asset creation, but 78% of the works recommended were for improvement of existing assets.
  • Wide variations in quantities executed against the quantities specified in the BOQ (Bills of Quantity) in 137 of the 707 works test-checked. Variations ranged from 16 to 2312%.
  • Use of lesser quantities of material than specified by contractors resulting in excess payments and sub-standard works.
  • Delays in issuing work orders ranging from 5 to 387 days in 57% of the works against the requirement of issuing the work order within 45 days.
  • Extensions of time granted to contractors without following the correct procedure.
  • Register of assets created, as required under the scheme, not maintained, therefore location and existence of assets could not be verified.

3. Wide variation in utilisation of MPLADS funds

  • A report published in IndiaSpend has some very interesting insights based on data made available to it by the Ministry of Statistics and Programme Implementation.
  • A year after they took office, 298 of 543 members of the 16th Lok Sabha— have not spent a rupee from the ₹5 crore.
  • Though ₹1,757 crore had been released for MPLADs, only ₹281 crore had been utilised by all the 543 MPs till May 15, 2015.
  • This means only 16% of the money had been spent in one year by all the MPs put together, because the Lok Sabha was constituted in May 2014.
  • Since the MPLADS began in 1993, ₹5,000 crore was lying unspent with various district authorities by May 15, 2015.
  • It is clear from the details above, as well as later experience, that most MPs use money under MPLADS quite haphazardly, and a significant portion of it is left unspent.

4. Misuse of the money under MPLADS

  • There is widespread talk of money under MPLADS being used to appease or oblige two sets of people: opinion-makers or opinion-influencers, and favourite contractors.
  • There have been cases of the contractor and the MP being financially linked with each other.

5. Legality issue

  • The constitutional validity of MPLADS was challenged in the Supreme Court of India in 1999, followed by petitions in 2000, 2003, 2004, and 2005.
  • The combined judgment for all these petitions was delivered on May 6, 2010, with the scheme being held to be constitutional.
  • The SC seems to have placed an unquestioned trust in the efficacy of the scheme of implementation of MPLADS drawn up by the government without an assessment of the situation prevalent in the field.
  • The court should pay more attention to its skewed implementation, evidence of which is available in audit reports.

Contrast and compare the provision of MPLADS with the Saansad Adarsh Gram Yojana. A direct question on the MPLADS could be asked by the UPSC, for instance, consider this question-“There has been the debate around the MPLADS. Discuss the issues involved in the MPLADS.”

Conclusion

Reports of underutilisation and misutilisation of MPLADS funds continue to surface at regular intervals but there seems to have been no serious attempt to do anything about it till now. Some concrete decisions on the future of the scheme is now inevitable.


 Back2Basics: What is MPLADS?

  • MPLAD is a central government scheme, under which MPs can recommend development programmes involving the spending of Rs 5 crore every year in their respective constituencies.
  • MPs from both Lok Sabha and Rajya Sabha, including nominated ones, can do so.
  • MPs do not receive any money under these schemes.
  • The government transfers it directly to the respective local authorities.
  • The legislators can only recommend works in their constituencies based on a set of guidelines.
  • For the MPLAD Scheme, the guidelines focus on the creation of durable community assets like roads, school buildings etc.
  • Recommendations for non-durable assets can be made only under limited circumstances.

For example, last month, the government allowed the use of MPLAD funds for the purchase of personal protection equipment, coronavirus testing kits etc.

 

 

BRICS Summits

BRICS’ fight against COVID

Note4Students

From UPSC perspective, the following things are important :

Prelims level : BRICS, NDB.

Mains level : Paper 2- BRICS's potential for coordination on humanitarian assistance and disaster relief .

“BRICS” is an acronym coined by Jim O’Neill in 2001. In the start of the 21st century, BRICS seemed like the future economic powerhouse. Somehow this picture faded a little with time. This article shows the resilience and potential demonstrated by BRICS in times of Covid-19. It throws light on the latest initiatives of BRICS like New Development Bank. Finally what lies in the future for BRICS?

The “I” in BRICS

  • India has reinforced its reputation as a rapidly emerging pharmacy of the world.

  • As the world’s largest producer of hydroxychloroquine, India has exported the drug to many countries like Russia, Brazil, Israel, U.S,  SAARC and Gulf nations.

  • Pharma-alliance: The above developments have set the stage for India to forge an inclusive BRICS-driven pharma alliance, which could also actively explore the production of vaccines.

The “C” in BRICS

  • Despite allegations, China has responded strongly in containing the pandemic, leveraging its position as the workshop of the world.

  • China, using it’s manufacturing capabilities, responded to the disease by providing the “hardware” — masks, gloves, coveralls, shoe covers and testing kits — to hotspots across the globe.

  • Under its Health Silk Road doctrine, the Chinese are reaching out to two of the worst global hotspots, Italy and Iran.

  • China has also rolled out a medical air bridge for Europe.

The “R” in BRICS

  • Despite fighting the virus at home, Russia too has sent its doctors and virologists overseas including an air mission to Italy.

  • At the request of U.S. President Donald Trump, Russia offered help in the form of medical experts and supplies.

The “S” in BRICS

  • South Africa, the current rotating head of the African Union, is engaged in framing a pan-African response to COVID-19.

The “B” in BRICS

  • Only Brazil’s response may need a course correction.

  • In Brazil’s case resistance to breaking the infection chains through travel bans, lockdowns, isolation and testing appear to have led to an infection surge.

Where does the NDB’s model fit in this picture?

  • The New Development Bank of the BRICS has already demonstrated the way forward to allocate financial resources to combat COVID-19.

  • In April, NDB announced that it is going to disburse a $1 billion emergency loan to China, and subsequently to India, South Africa and Brazil.

  • The NDB had the financial heft to provide $10 billion in “crisis-related assistance” to BRICS member countries.

The next step for BRICS –  COORDINATION

  • BRICS has demonstrated their comparative strengths as providers of Humanitarian Assistance and Disaster Relief (HADR).

  • BRICS countries now need to pool and coordinate their efforts, in partnership with the WHO, and Europe and North America, as part of a global assault on the virus.

  • BRICS countries also need to earmark resources and assets to combat a whole range of natural disasters, with special focus on the emerging economies and the global south.

  • The NDB’s financial model demonstrated to address the pandemic, can now become a template to address natural disasters.

Bodies like BRICS have remained the favourite child of UPSC. Be it questions in prelims or mains. A question based on the regional grouping could be asked by the UPSC, for ex- “BRICS nations have proved to be more than merely an economic grouping. In light of the above statement, discuss the Humanitarian Assistance and Disaster Relief (HADR) potential of the BRICS countries.”

Conclusion

BRICS in future can leverage the coordination among them to work on finding the vaccine and also build on the experience gathered from the pandemic to form a disaster response policy in the future.


Back2Basics: BRICS

  • BRICS is the acronym coined for an association of five major emerging national economies: Brazil, Russia, India, China and South Africa.
  • Originally the first four were grouped as “BRIC” (or “the BRICs”), before the induction of South Africa in 2010.
  • The BRICS members are known for their significant influence on regional affairs; all are members of G20.
  • Since 2009, the BRICS nations have met annually at formal summits. China hosted the 9th BRICS summit in Xiamen on September 2017, while Brazil hosted the most recent 11th BRICS summit on 13-14 November 2019.

New Development Bank and the Fortaleza Declaration

  • During the sixth BRICS Summit in Fortaleza (2014), the leaders signed the Agreement establishing the New Development Bank (NDB).
  • In the Fortaleza Declaration, the leaders stressed that the NDB will strengthen cooperation among BRICS and will supplement the efforts of multilateral and regional financial institutions for global development, thus contributing to collective commitments for achieving the goal of strong, sustainable and balanced growth.
  • The bank was established in July 2015 by the BRICS countries (Brazil, Russia, India, China and South Africa).
  • The aim of the bank is to mobilize funding for infrastructure and sustainable development.
  • Its ownership structure is unique, as the BRICS countries each have an equal share and no country has any veto power.
  • In this sense, the bank is a physical expression of the desire of emerging markets to play a bigger role in global governance.
  • NDB was created to help fill the funding gap in the BRICS economies and was intended to grow its global scope over time.
  • The bank, with its subscribed capital base of US$50bn, is now poised to become a meaningful additional source of long-term finance for infrastructure in its member countries.

Coronavirus – Economic Issues

RBI’s job involves trade-offs, not conflicts

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Role of the RBI.

Mains level : Paper 3- Role of the RBI and trade-offs involved in its decisions.

The article discusses three things for the RBI to follow in fulfilling its role, these are- 1) Prudence 2) Flexibility 3) Acting within the mandate. Besides that, problems the RBI has been facing are also discussed. These things are discussed against the backdrop of Covid-19.

Role of the RBI

  • A central bank like the RBI must replace intellectual certainty with the continuous debate over their actions.
  • RBI’s job involves complex trade-offs — next quarter vs quarter century, growth vs stability, and mandates vs expectations.
  • A global anthropological shock-like COVID makes these trade-offs — they are not conflicts — even harder.
  • The RBI must remember three things — acting prudently to balance the next quarter and quarter century, acting flexibly to blunt this economic cataclysm, and acting within their mandate to ensure institutional legitimacy and immunity.

These three things are discussed below-

1. Acting prudently

  • If everybody believed that in the long run we are all dead, we would never sit under trees planted by people who had no chance of sitting under them.
  • The coronavirus is a human tragedy but a central bank must not act like a commercial bank because that would compromise the balance between today and tomorrow.
  • A narcissism — bordering on solipsism — already reflects in global debt levels that steal from our grandchildren.
  • More importantly, India doesn’t have the economic strength to copy the US Federal Reserve’s $2.3 trillion offer to lend to businesses of all sizes and sorts.
  • And run anything close to this year’s expected US fiscal deficit of 15 per cent of GDP, or sustain Japan’s public debt levels at 240 per cent of GDP.
  • We are all in the same storm but we are all not in the same boat.

2. Acting flexibly within the mandate

  • Renaissance physician Paracelsus had important advice for central banks; the dose makes the poison.
  • Anything powerful enough to help has the power to hurt; handling the inevitable tensions between the RBI’s dual mandate of growth and stability requires continuous work.
  • Our inflation targeting regime is a macroeconomic gift to India.
  • But recognising that is hardly inconsistent with acknowledging that inflation’s secular decline has many parents, some economic models are useful but all are incomplete, and the fog of war involves making second-best choices as long as they are reversible, proportional, and accountable.
  • Central banks often undertake liquidity management while leaving policy rates unchanged; current actions are not a conspiracy to undermine the MPC or its interest rate corridor (between reverse repo rate and MSF rate with repo rate midpoint targeting and call rate operating target).
  • They are a pragmatic encouragement for banks to lend to clients rather than lend Rs 7 lakh crore to the RBI.
  • Other virus flexibility includes repayment moratoriums (with 10 per cent provisions), bad loan accounting forbearance (despite past experience of breaking the thermometer doing little for the fever) and bank windows for NBFC/Mutual Fund liquidity.
  • Listening is hardly compromise.
  • Especially if accompanied by a will to unwind liquidity, asymmetry and forbearance when the planet’s gap year ends.

3. Follow the mandate

  • Central bank governance is a fine balance; they function best when they don’t declare separation from the government and they aren’t considered a part of the finance ministry.
  • The difficulty of balance isn’t uniquely Indian.
  • The RBI must build on its track record of wisely balancing the trade-offs between depositors vs borrowers, companies vs banks, and stability vs growth.
  • And it must continue to stay out of the government’s domain.
  • The central bank crisis role debate is skewed by the great book, Lords of Finance, by Liaquat Ahamed that shows how central bankers of the 1920s failed to fight the Great Depression.
  • History matters but nobody knows if this is the beginning or ending of the virus.
  • Yet the global central bank COVID toolbox has been substantial; buying corporate bonds, making corporate loans, cutting interest rates, conducting open market operations, and reducing reserve ratios.
  • Additionally, banks have been permitted to grant loan moratoriums, hold less capital, restructure loans, pay lower deposit insurance premiums and delay bad loan recognition.
  • The emergency authority under Section 13 of the US Federal Reserve Act being used — prematurely — also exists in Section 18 of the RBI Act.
  • But emergency powers are the last resort. We are not there yet.
  • The recovery being V-shaped, U-shaped, or Bathtub-shaped is only modellable after the lockdown.

Pre-existing problems facing the RBI

  • The RBI’s COVID balm is constrained by pre-existing conditions in Indian banking, which are given below-
  • Bad loans which peaked at Rs 14 lakh crore but still large.
  • Inadequate competition- scheduled commercial bank numbers have hovered between 90 and 100 since 1947.
  • Private bank governance- CEO so powerful that boards and shareholders are weak.
  • Public sector bank governance- shareholder so powerful that boards and CEOs are weak.
  • And the RBI’s own game (process, technology and human capital in regulation and supervision).
  • All these must be tackled with urgency when normalcy returns.

A question based on the role of the central bank can be asked by the UPSC. Consider the following question “Crises have always tested the utility of central banks, be it the Great Depression, 2008 financial crisis or Covid-19. In light of this statement, explains the trade-offs involved in the RBI’s decisions and how shocks like Covid-19 makes these trade-offs even harder.”

Way forward

  • Supplementing India’s fiscal and monetary policy interventions by announcing two bold reform plans — 90-day flick-of-pen and one-year structural — that tackle overdue reforms in labour, education, cities, finance, compliance, and civil services, will catalyse hope among employers, employees, banks, and overseas investors.

Conclusion

Creating a prosperous India needs many things. One of them is an independent, accountable, and boundaried central bank that listens.

 

Coronavirus – Economic Issues

Pandemic calls for deep-set forces and scientific concepts of development for building a modern economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : e-VTOLs.

Mains level : Paper 3- Recovery strategy after Covid-19 and adoption of green technologies.

The article discusses the recovery strategies for India. There are three examples from the past from which we can draw the lessons. 1) Recovery of the US and Europe after the World Wars 2) Recovery of Japan after World War 3) China’s stimulus package after the 2008 financial crisis. In the case of the first two, climate change was not the factor. But in case of the 2008 financial package, China emphasised green technologies and was benefited from it. Drawing on China’s example, the article suggests three pronged strategy for India’s recovery taking into account the climate change factor.

Decisions on recovery and lessons from the past recovery frameworks

  • The decisions and directions taken by states from hereon will be judged ruthlessly by historical lenses.
  • Though India has managed the pandemic with relative precision, we cannot deny an impending emergence of a new socio-economic order, where the recovery is going to be hard-earned.
  • This is not the first time the world has faced an economic crisis and won’t be the last.
  • Can a country like India, which might be one of the few countries to come out of the crisis without a recession, take lessons from past recovery frameworks?
  • Recovery frameworks: Even though the very nature of the current health crisis is much different from the past crises like World Wars and their repercussions in Europe, the US and Japan.
  • But the evidence shows that ambitious recovery plans made these nation-states more prosperous than the pre-crisis period.

Recovery lessons form the western world after the World Wars

  • Hurt by the two World Wars and a Great Depression in between, the western world demonstrated unprecedented recovery to attain post-war full employment and stabilized income levels.
  • Almost thirty years between World War II and 1973 recession (“Glorious Thirties“), the countries like the US, Canada, Germany, and France experienced a golden period of growth.
  • In the US, the labour productivity grew at 2.82% per year which meant that productivity doubled every 25 years thanks to better machines driven by electricity and internal combustion engines, better education and massive capital investment.
  • The world wars accelerated technological innovations in energy, manufacturing and vastly improved the labour pool.

Recovery of Japan after World War

  • Severely hit by the war, Japan’s miraculous growth from 1950 to 1990 is another example of a state using great adversity to propel itself towards prosperity.
  • Post-war liberalization was augmented by multilateral trade agreements and export promotion schemes.
  • That propelled the Japanese economy to dizzying heights making it the second-largest economy at the time.
  • Apart from fiscal stimuli, immense efforts went into strengthening human capital by promoting R&D and skilling activities.
  • Suddenly, Japan becomes one of the most ingenious economies churning out one innovative product after another in fields like electronics.
  • In addition, pioneering quality systems made Japan the first Asian economy to become a developed state.

Recoveries based on values and technological innovations

  • All the above recoveries are rooted in modern values like create, explore and meet challenges.
  • While large investments garner a lot of attention, role played by massive skilling and resultant technological innovation should not be forgotten.
  • Skilling and innovation enabled creating goods and services of the future.

Climate change and recovery

  • These successful recovery plans did not have the responsibility to plan for an impending climate change hanging over our head by a thread.
  • The times were different; the needs were different: more importantly, the evidences were not as irrefutable as now.
  • A 2018 study titled ‘Earth’s future’, estimated that India will lose 10% of its GDP annually in a 3°C scenario and lose 14% of its GDP annually in a 4°C scenario in the long term.
  • And the time to act is ‘now’, as consequences of inaction are existential.

China’s stimulus after the 2008 crisis with a focus on green technologies

  • Fast-forwarding to the 21st century, the 2008–09 Chinese economic stimulus plan pumped in $586 billion to manage the crisis.
  • With serious money of $586 billion going into upgrading selected industrial sectors to firm up its presence in the global value chains (GVC).
  • Interestingly, a sizeable portion went into green technologies.
  • China understood that if the world is provided with affordable green technologies at scale, the states will incentivize the increasingly eco-aware consumers to buy these products.
  • Catalyzed by plans like “Ten Cities, Thousand Vehicles and “Thousand Talents Program (TTP)” and generous state incentives, China became a global leader in e-vehicles.
  • Chinese-made buses started roaming famous cities across the world, the roads traditionally dominated by European makers.
  • Powered by generous capital infusion, China also attained leadership in solar panels, batteries and associated supply chains in a short period setting up a sustainable growth module.
  • A lesson in fiscal prudence: The 2008–09 Chinese economic stimulus plan is also criticized for raising the Chinese debt levels, hence giving us lessons in fiscal prudence.

Should India opt for a green recovery module?

  • Can a developing India afford to allocate a significant portion of its precious resources towards a green recovery module?
  • Unbridled economic growth and sustainable development are not mutually exclusive.
  • In fact, we might not have a choice, given the movement of global supply chain towards green technologies and tightening screws around strict sustainability standards.
  • European Commission, for instance, has announced that every euro into the recovery plan will be linked to green recovery.

A three-pronged approach is suggested for recovery

1. Investment and incentives for green economic activities in the selected sectors

  • First, ambitious investment and incentives in catalyzing futuristic green economic activities in selected sectors.
  • Developing, manufacturing and deploying low carbon products could help India create more jobs: the kind of jobs that will survive into the future.
  • With Giga scale battery and solar manufacturing plans already underway, there is a huge demand globally for sustainable supply chain of even traditional sectors such as textiles.
  • India could choose 5 sectors where it can fill the sustainability vacuum helping the sub-continent emerge as a new global leader in those sectors.
  • India has the potential to scale-up currently ready technologies like e-VTOLs (intra-city electric aerial mobility), which will upend the global mobility modules, increasing the profitability of growing Indian e-mobility supply chain.
  • Companies like Hyundai who have already announced manufacturing of e-VTOLs should be attracted to India.
  • Crisis situations often provide policy windows, where all the stakeholders are empowered, and historically time-consuming decisions are fast-forwarded.
  • If India manages to efficiently remove regulatory bottlenecks and creates standards for e-VTOLs before anyone else, it will take a huge chunk of the global future mobility pie.
  • Similar initiatives for other strategic sectors could be carried out.

2. Resolve regulatory and on-ground legacy issues

  • Aggressively resolving on-ground legacy issues and challenges.
  • Shackles around entrepreneurship from labour laws to clearances regimes should be broken one by one.
  • It could be done by leveraging the cooperative and competitive federalism evidenced through the crisis under the able leadership of the Hon’ble Prime Minister.
  • And the current policy window might be an ideal opportunity for Indian democracy to deliver.

3. Focus on skilling people

  • Third, a big-ticket omni-channel skilling architecture should be instituted.
  • Universities should be empowered and enabled to come up with new-age educational programmes to serve futuristic industries.
  • A special focus should be given to develop enough trainers to train the millions of Indian youth getting ready for the labour market every year, in new-age skills.
  • Adequate online-offline training courses must be designed in a way that it does not affect daily wages drastically.
  • The big-ticket vocational programmes, specially directed at the informal sector which constitute more than 90% of the total workforce, has the potential to employ displaced and poor labourers.
  • A strategic skill committee may be empowered to dynamically identify key skills and tweak the training modules.
  • This can be integrated with the Ministry of Environment’s Green Skill Development Program to train 10 million youth by 2030.

The issues discussed here are important for achieving sustainable and inclusive growth. A question based on this theme was asked by UPSC in 2019.

Consider the question “It is argued that the strategy of inclusive growth is intended to meet the objectives of inclusiveness and sustainability together. Comment on this statement.”

Conclusion

The current pandemic calls for deep-set forces and scientific concepts of development for building a dynamic and modern economy. Green growth is one such concept that will add a new dimension to the economic dynamism of the sub-continent helping it serve the aspirations of its citizens.

Foreign Policy Watch: India-Afghanistan

Afghan peace and India’s elbow room

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Countries sharing border with Afghanistan.

Mains level : Paper 2- Implications for India of the return of Taliban in Afghanistan after US-Taliban deal.

The article discusses India’s exclusion from the Afghan peace process. As India seeks to fight back its exclusion there are certain issues that need to be addressed. India’s reluctance to enter into talks with the Taliban in one such issue, which needs a rethink. And there are several areas in which India needs to continue working like-the goodwill in Afghanistan, participation in assistance work, bringing together the major leaders in that country.

India left out of the meeting on peace in Afghanistan

  • Earlier this month, the United Nations Secretariat held a meeting of what it calls the “6+2+1” group on regional efforts to support peace in Afghanistan.
  • The group includes six neighbouring countries: China, Iran, Pakistan, Tajikistan, Turkmenistan and Uzbekistan; global players the United States and Russia, and Afghanistan itself.
  • India was conspicuous by its absence from the meeting on April 16, given its historical and strategic ties with Afghanistan.
  • This has not happened for the first time, India was left out form talks similarly in 2001 and 2010.
  • In both 2001 and 2010, however, India fought back its exclusion
  • At the Bonn agreement of 2010, India played a major role in Northern Alliance accepting Hamid Karzai as the Chairman of the interim arrangement that replaced the Taliban regime.
  • After the 2010 conference, New Delhi redoubled its efforts with Kabul, and in 2011 India signed the historic Strategic Partnership Agreement, which was Afghanistan’s first such agreement with any country.

Reasons for not inviting India

  • In 2020, the reason given for keeping India out of regional discussions on Afghanistan was ostensibly that it holds no “boundary” with Afghanistan.
  • But in fact, it is because New Delhi has never announced its support for the U.S.-Taliban peace process.
  • As planners in South Block now consider their next steps in Afghanistan, they must fight back against the idea that any lasting solution in Afghanistan can be discussed without India in the room, while also studying the reasons for such exclusions.

Following are the issues that Indian must consider and act on as it seeks to fight back its exclusion from the peace talks.

India’s position on Afghan-led peace process and reality

  • India’s resistance to publicly talking to the Taliban has made it an awkward interlocutor at any table.
  • Its position that only an Afghan-led, Afghan-owned, and Afghan-controlled process can be allowed is a principled one but has no takers.
  • The Ashraf Ghani government does not lead, own or control the reconciliation process today, comprising the U.S.-Taliban negotiation for an American troops withdrawal, and intra-Afghan talks on power-sharing.
  • The U.S.-Taliban peace deal means that the Taliban, will become more potent as the U.S. withdraws soldiers from the country.
  • Taliban will hold more sway in the inter-Afghan process as well, as the U.S. withdraws funding for the government in Kabul.

Two effects of India’s position

  • New Delhi’s decision to put all its eggs in the Ghani basket has had a two-fold effect:
  • 1) Its voice in the reconciliation process has been limited.
  • 2) It has weakened India’s position with other leaders of the deeply divided democratic setup in Kabul such as the former chief executive Abdullah Abdullah.

India should not let its diplomatic strength weaken

  • India painstakingly built up its presence inside Afghanistan since 2001.
  • This presence is being threatened anew by terror groups such as the Islamic State Khorasan Province (ISKP).
  • ISKP is believed to be backed by Pakistan’s establishment.
  • Intercepts showed that the brutal attack, in March, that killed 25 at a gurudwara in Kabul was meant for the embassy in Kabul.
  • The government cleared out both of its consulates this month.
  • While the government has said that the novel coronavirus pandemic prompted its decision to clear out both consulates.
  • The truth is that a full security reassessment is under way for them.
  • Either way, India’s diplomatic strength in Afghanistan should not appear to be in retreat just when it is needed the most.

Goodwill in Afghanistan and damage caused due to CAA

  • The government must also consider the damage done to the vast reservoir of goodwill India enjoys in Afghanistan because of recent events in the country, especially the controversy over the Citizenship (Amendment) Act.
  • The building blocks of that goodwill are India’s assistance in infrastructure projects, health care, education, trade and food security, and also in the liberal access to Afghans to study, train and work in India.
  • Above all, it is India’s example as a pluralistic, inclusive democracy that inspires many.
  • Afghanistan’s majority-Muslim citizens have felt cut out of the move to offer fast track citizenship to only Afghan minorities.
  • The damage was also done by reports of anti-Muslim rhetoric and incidents of violence in India.

Regain upper hand in the narrative in Afghanistan

  • While many of these are problems of perception, New Delhi must move swiftly to regain the upper hand in the narrative in Afghanistan.
  • India has provided the assistance of more than $3 billion in projects.
  • Bilateral trade is about $1 billion.
  • A $20 billion projected development expenditure of an alternate route through Chabahar.
  • And support to the Afghan National Army, bureaucrats, doctors and other professionals for training in India should assure it a leading position in Afghanistan’s regional formulation.
  • Three major projects along with hundreds of small development projects (of schools, hospitals and water projects) have cemented that position in Afghan hearts nationwide, regardless of Pakistan’s attempts to undermine that position, particularly in the South.
  • The three major projects include 1) the Afghan Parliament, 2) the Zaranj-Delaram Highway, 3)the Afghanistan-India Friendship Dam (Salma dam).

 Pursue opportunities to fulfil its role in the peace efforts

  • India must also pursue opportunities to fulfil its role in the peace efforts in Afghanistan, starting with efforts to bridge the Ghani-Abdullah divide.
  • India could also play role in bringing together other major leaders with whom India has built ties for decades.
  • It would be an utter tragedy if the Taliban were to enter the government in Kabul as the U.S. deal envisages, to find the opposing front collapse as it did in 1996.
  • An understanding between Iran and the U.S. on Afghanistan is necessary for a lasting peace as well, and India could play a mediatory part, as it did in order for the Chabahar project.

Return of the Taliban has several implications for India. 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.”

Use UN call for peace to put hostilities with Pakistan on hold

  • Finally, New Delhi should use the United Nations’s call for a pause in conflicts during the novel coronavirus pandemic, to ensure a hold on hostilities with Pakistan.
  • This will be even more difficult than it sounds given the abyss that bilateral relations have fallen into in the past year over Kashmir.

Conclusion

It would be a mistake, at this point, to tie all India’s support in only to Kabul or the Ghani government; the government must strive to endure that its aid and assistance is broad-based, particularly during the novel coronavirus pandemic to centres outside the capital, even if some lie in areas held by the Taliban.

Coronavirus – Economic Issues

Recovery from COVID-19 is an opportunity to create economies that are more resilient and fair

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Creating economy that is resilient and fair.

This article discusses the three principles which could form the basis for recreation of the economy devastated by the Covid-19. The first is adopting the economies of “scope” instead of economies of scale. The second is about governance and focus on bottom-up approach. And third is about empowering the people.

Impact of Covid-19 on the ideology of globalisation

  • The history of the globalisation has turned out to be very brief.
  • In 2020, the global COVID-19 pandemic has forced millions of Indians to return to their villages.
  • Jetsetters have been locked in their gated communities.
  • Global supply chains have been broken apart.
  • People are scrambling for essentials from local suppliers.
  • The ideology of globalisation has hit realities on the ground.

Recovery from COVID-19 is an opportunity to create economies that are more resilient and fair. The following three architectural principles must apply.

1. Replace economies of scale by the economies of scope

  • COVID-19 has settled, for now, the debate between free-trade evangelists and advocates of industrial policy.
  • The vulnerability of global supply chains: A complex global economy in which local producers obtain scale (and lower costs) by supplying products for global markets is vulnerable to shutdowns anywhere.
  • The resilience of local economies: Local economies that have a variety of capabilities within them, albeit on smaller scales, are more resilient.
  • Therefore, local economic webs must be strengthened, in preference to global supply-chains.
  • “Make in India,” which was dismissed by free traders as a reversion to pre-1991 economic policies, has become a necessity.
  • Make in India is necessary to maintain supplies of essentials and to create employment for the hundreds of millions of Indians with fragile incomes who have been badly shaken by the lock-down of the Indian economy.

2. Local systems solution to global problems

  • Local systems solutions are essential for global systemic problems.
  • Privatisation: Garrett Hardin had coined the expression, “The Tragedy of the Commons”, in 1968.
  • The Tragedy of the Commons is a term for the proposition that a resource that belongs to everybody will not be cared for by anybody.
  • This supported policies to privatise public property, ostensibly for the benefit of everybody and became the dominant school of economics from the 1970s onwards.
  • A different explanation: Elinor Ostrom, who was awarded the Nobel Prize for economics in offered a different explanation for the tragedy of the commons.
  • She argued that common resources are well-managed when those who benefit from such resources the most are in close proximity to them.
  • For her, the tragedy occurred when external groups exerted their power (politically, economically or socially) to gain a personal advantage.
  • Bottom-up approach: She was greatly supportive of the “bottom-up” approach to issues: Government intervention could not be effective unless supported by individuals and communities.
  • The world is facing challenges of ecological sustainability and persistent inequalities, which seem to get worse with the prevailing paradigm of economic growth.
  • These challenges are described in the 17 Sustainable Development Goals (SDGs).
  • They cut across national boundaries.
  • They also span several domains of expertise and institutional mandates.
  • The final, 17th goal states the principle by which all the goals will be achieved — “partnerships”.

Actions theory Vs. Systems thinking

  • Action theory: The prevalent action theory, used by governments, businesses and philanthropic organisations to solve complex problems, focuses on breaking complex problems into components and then tackling the components in separate silos.
  • Problems caused by the actions theory: This widely prevalent theory of action has contributed greatly to causing the systemic, interconnected problems the SDGs now aim to address.
  • What is systems thinking: Effective action to address multiple challenges together requires “systems thinking” — that is, a systemic vision spanning across the problems.
  • Systems thinking is essential, amongst experts at the top and amongst partners on the ground.
  • Several organisations are promoting collaborative action with systems thinking on the ground in India.
  • Kudumbashree in Kerala has proven the power of community action.
  • The Foundation for Ecological Security, guided by Elinor Ostrom’s ideas, is working in many Indian states.
  • Dainik Bhaskar is promoting “SDG chaupals” in Indian villages.

3.  Empowering the people

  • The third principle for the new economy is, empower the people, the fundamental requirement for genuine democracy.
  • India’s Constitution seeks self-governance in India’s towns and villages.
  • These are not being implemented by governments and policy experts who do not want to give up power to the people.
  • India lives in its villages, Mahatma Gandhi had said. Most of India still does.
  • And many, who had migrated to cities looking for jobs, are returning, shaken by the pandemic.
  • Gandhi was a systems thinker. For Gandhi, the global village was an abstract concept.
  • This cannot be realised until local villages and towns become harmonious communities, where people live in harmony with each other and with nature around them.

The corona crisis has laid bare some of the problems associated with globalisation. It has forced a rethink of the economic policies and model adopted by the world. Against this backdrop, a question can be asked by the UPSC that demands the analysis of problems that have surfaced and solutions. For ex. “Covid-19 pandemic has brought into a sharp focus some inherent problems associated with the globalisation. In this context suggest the ways to make the Indian economy resilient to such shocks and fair to all the sections of society”

Conclusion

COVID-19 marks the end of the economics’ paradigm of the Washington Consensus. New models of economies, and new rules of global governance, must be bottom-up, not top-down. That’s how the whole world can move from relief, to recovery, and into resilience.


Back2Basics: What was the Washington Consensus?

  • The Washington Consensus refers to a set of free-market economic policies supported by prominent financial institutions such as the International Monetary Fund, the World Bank, and the U.S. Treasury.
  • A British economist named John Williamson coined the term Washington Consensus in 1989.
  • The ideas were intended to help developing countries that faced economic crises.
  • In summary, The Washington Consensus recommended structural reforms that increased the role of market forces in exchange for immediate financial help.
  • Some examples include free-floating exchange rates and free trade.

RBI Notifications

RBI should preserve its inflation credibility

Note4Students

From UPSC perspective, the following things are important :

Prelims level : MPC

Mains level : Paper 3- MPC and RBI actions which are inimical to mandate of MPC.

This article by Urjit Patel elaborates on the recent actions of the RBI which are likely to result in making the role of MPC redundant. Some of the moves cited are injection of liquidity by the RBI and reduction of reverse repo rate by the RBI. Implications such actions could have for the macroeconomic stability are also discussed.

Stimulus package after the 2008 financial crisis and problems created by it

  • Following the global financial crisis of 2007-08, India, like many other countries, embarked on a stimulus.
  • The pump-priming did not end too well.
  • Inflation and bad loans: By 2013, India crossed or approached double-digit figures in inflation and the national fiscal deficit, in addition to looming bad loans.
  • Taper tantrum: In summer 2013, when the Federal Reserve indicated a possible reversal of its ultra-accommodative policy, macroeconomic parameters for India were so weak that it got caught up in the “taper tantrum” and experienced external sector fragility.

Inflation targeting and the role of MPC

  • While fiscal excesses and financial sector stress remain issues today, India has improved significantly on at least one dimension — namely, inflation — which has also stabilised the external sector.
  • How was this beneficial progress achieved?
  • Starting in September 2013, the Reserve Bank of India (RBI) initiated an effort to build credibility with domestic savers and international investors on maintaining inflation at prudent levels.
  • Three years thereafter, the RBI Act was amended to put in place a flexible inflation targeting framework.
  • A Monetary Policy Committee (MPC), comprising of RBI representatives and external members appointed by the Government of India, was enjoined with the legal mandate of managing the policy (repo) rate.
  • MPC was mandated to keep consumer price inflation at a target level of 4 per cent, while keeping in mind economic growth.

Assessment of MPC’s performance

  • By objective measures, the MPC framework until recently worked rather well.
  • It lent transparency and democratic accountability to the process of interest-rate setting.
  • Combined with efforts on managing food inflation, it has brought inflation closer to the target.
  • It has contributed to tempering household inflation expectations.
  • It has kept borrowing costs in the economy at reasonable levels in spite of the high level of government borrowing and several other distortions.
  • Appreciation by the rating agencies: Indeed, rating agencies and multilateral institutions repeatedly mention the MPC and the inflation targeting framework as a landmark structural reform towards sound macroeconomic management.

Latest monetary actions by RBI that reduced MPC’s role

  • Since last year, a series of monetary actions by the RBI have left the MPC’s decision on the policy rate partly redundant, diluted the accountable process of monetary decision-making.
  • This has put at stake the sanctity of the MPC framework.
  • With a stated intention to improve the transmission of monetary policy to households and corporations, the RBI has pumped unprecedented levels of money (close to Rs 7 trillion) into the banking system.
  • It has done so mostly by purchasing government bonds but partly also by purchasing dollars.
  • No desired results: Given impaired financial sector balance-sheets, transmission to economic growth has been at best muted; liquidity is no silver bullet to durably address financial sector stress.
  • The primary effect of excessive liquidity has, instead, been to monetise the government’s expenditures and keep its borrowing costs low.
  • With its declared aim not being met satisfactorily, the RBI has doubled down on liquidity supply, with the same outcome.
  • An important casualty has been the MPC framework.
  • Contradictory actions: At times, even when the MPC has kept the policy rate unchanged, the RBI has injected yet more liquidity to move medium-term interest rates down.
  • The two actions have been noted to be in direct contradiction of each other.
  • If the objective is to move medium-term rates, why not build consensus within the MPC to cut the policy rate more aggressively and communicate the rationale?
  • Change in reverse repo by the RBI: Further, given the enormous liquidity glut, every night banks park liquidity with the RBI at a (reverse repo) rate lower than the policy rate and which is not set by the MPC; nevertheless, this rate used to be changed only as part of the MPC Resolution.
  • Lately, the RBI has moved reverse repo rate progressively lower than the policy rate; recently.
  • It has done so outside of the MPC meeting cycle and not as part of the MPC Resolution.
  • There are straightforward tools in liquidity management to ensure that in surplus conditions also, the central bank transacts with banks at the policy rate — technically, by switching from “deficit” to “floor” system of liquidity management.
  • Such a switch is routinely adopted by central banks when they provide excess liquidity; the RBI has chosen not to do so.

What are the implications?

  • The net effect is that market interest rates are being increasingly controlled by the RBI rather than the MPC.
  • Indeed, there is a proposal that the rate at which the RBI absorbs liquidity be still lower, likely divorced from the policy rate set by the MPC.
  • The spirit of the MPC framework enshrined in the RBI Act is being violated.
  • It is unclear how the MPC can be expected to satisfy its legal mandate if what it seeks to achieve via the setting of the policy rate is in conflict with, or compromised by, the RBI’s liquidity management.
  • These developments have the potential to pose risks for India’s macroeconomic stability going forward.
  • The implicit monetisation of fiscal expenditures through government bond purchases by the RBI in the secondary market has postponed the recognition of the untenable fiscal reality.
  • The delay has meant the government has had limited policy space since the onset of COVID.
  • Supply-chain disruptions due to measures taken to contain the pandemic raise the possibility of cost-push inflationary pressures, especially given the excessively easy fiscal and monetary conditions.
  • This can abruptly raise economy-wide borrowing rates, inflict losses on banks, and imperil financial stability.
  • If the gains in inflation credibility built by the MPC framework are dissipated by ineffective policies and operations, both household and investor expectations for inflation in India could unhinge.
  • Worse, it could instigate turmoil in the external sector.
  • Excessively low bank deposit rates may induce some non-resident deposits to exit the country.

A question based on the issue of RBI’s action and its implication for MPC and overall economy can be asked by the UPSC, for ex- “The MPC framework has performed well in delivering on its mandate. Yet, there were some actions by the RBI recently which could be perceived as inimical to the functions of the MPC. Discuss.”

Conclusion

In a highly unpredictable time such as this, the RBI should preserve its inflation credibility. The decision on monetary policy actions based on voting by committee members, provision of inflation and growth forecasts in the resolution statement, and coordination of rate-setting and liquidity management, need to be adhered to.


Back2Basics: What is MPC?

  • The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016,  to provide for a statutory and institutionalised framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth.
  • The Monetary Policy Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
  • The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
  • As per the provisions of the RBI Act, out of the six Members of Monetary Policy Committee, three Members are from the RBI and the other three Members of MPC are appointed by the Central Government.
  • Governor of the RBI is ex officio Chairman of the committee.

Nuclear Diplomacy and Disarmament

World at the edge of a new nuclear arms race

Note4Students

From UPSC perspective, the following things are important :

Prelims level : CTBT, New START, INF etc.

Mains level : Paper 2- CTBT and reasons for India's decision to withdraw from the talks.

The focus of this article is on the possible revival of the nuclear arms race among the US, China and Russia. In this context, the purpose and present status of the CTBT, which was aimed at ending the nuclear arms race is also discussed. The article ends by predicting the beginning of new arms race and possible demise of the CTBT.

What were the findings of US compliance report?

  • State Department Report: In mid-April, a report was issued by the United States State Department on “Adherence to and Compliance with Arms Control, Nonproliferation, and Disarmament Agreements and Commitments (Compliance Report).
  • Tests with low yields by China: The report raised concerns that China might be conducting nuclear tests with low yields at its Lop Nur test site.
  • And these tests are conducted in violation of its Comprehensive Nuclear-Test-Ban treaty (CTBT)
  • Violation by Russia: The U.S. report also claims that Russia has conducted nuclear weapons experiments that produced a nuclear yield and were inconsistent with ‘zero yield’ understanding underlying the CTBT.
  • Though it was uncertain about how many such experiments had been conducted by Russia.
  • Russia and China have rejected the U.S.’s claims.
  • New nuclear arms race: With growing rivalry among major powers the report is a likely harbinger of a new nuclear arms race.
  • The demise of CTBT: This new nuclear arms race would also mark the demise of the CTBT that came into being in 1996 but has failed to enter into force even after a quarter-century.

Background of the CTBT

  • Test ban-first step: For decades, a ban on nuclear testing was seen as the necessary first step towards curbing the nuclear arms race but Cold War politics made it impossible.
  • A Partial Test Ban Treaty was concluded in 1963 banning underwater and atmospheric tests but this only drove testing underground.
  • By the time the CTBT negotiations began in Geneva in 1994, global politics had changed. The Cold War had ended and the nuclear arms race was over.
  • The Union of Soviet Socialist Republics, or the USSR, had broken up and its principal testing site, Semipalatinsk, was in Kazakhstan (Russia still had access to Novaya Zemlya near the Arctic circle).
  • In 1991, Russia declared a unilateral moratorium on testing, followed by the U.S. in 1992.
  • By this time, the U.S. had conducted 1,054 tests and Russia, 715.
  • Negotiations were often contentious.
  • Eventually, the U.S. came up with the idea of defining the “comprehensive test ban” as a “zero yield” test ban that would prohibit supercritical hydro-nuclear tests but not sub-critical hydrodynamic nuclear tests.

Make note of the points mentioned under “entry-into-force” provision given below. The reasons for India’s withdrawal from the negotiation are important from the UPSC perspective.

“Entry-into-force” provision and India’s objections to it

  • Another controversy arose regarding the entry-into-force provisions (Article 14) of the treaty.
  • Why India withdrew from negotiations? After India’s proposals for anchoring the CTBT in a disarmament framework did not find acceptance, in June 1996, India announced its decision to withdraw from the negotiations.
  • Unhappy at this turn, the U.K., China and Pakistan took the lead in revising the entry-into-force provisions.
  • What is “entry-into-force” provision? The new provisions listed 44 countries by name whose ratification was necessary for the treaty to enter into force and included India.
  • India’s objection: India protested that this attempt at arm-twisting violated a country’s sovereign right to decide if it wanted to join a treaty but was ignored.
  • The CTBT was adopted by a majority vote and opened for signature.
  • Of the 44 listed countries, to date, only 36 have ratified the treaty.
  • Signed but not ratified: China, Egypt, Iran, Israel and the U.S. have signed but not ratified.
  • China maintains that it will only ratify it after the U.S. does so but the Republican-dominated Senate had rejected it in 1999.
  • Not signed, not ratified: In addition, North Korea, India and Pakistan are the three who have not signed.
  • All three have also undertaken tests after 1996; India and Pakistan in May 1998 and North Korea six times between 2006 and 2017.
  • The CTBT has therefore not entered into force and lacks legal authority.

An organisation to verify CTBT

  • Even though CTBT has not entered into force, an international organisation to verify the CTBT was established in Vienna with a staff of about 230 persons and an annual budget of $130 million.
  • Ironically, the U.S. is the largest contributor with a share of $17 million.
  • The Comprehensive Nuclear-Test-Ban Treaty Organisation (CTBTO) runs an elaborate verification system built around a network of over 325 seismic, radionuclide, infrasound and hydroacoustic (underwater) monitoring stations.
  • The CTBTO has refrained from backing the U.S.’s allegations.

The revival of the nuclear arms race

  • End of the unipolar world for the US: The key change from the 1990s is that the S.’s unipolar moment is over and strategic competition among major powers is back.
  • The U.S. now identifies Russia and China as ‘rivals’.
  • Its Nuclear Posture Review asserts that the U.S. faces new nuclear threats because both Russia and China are increasing their reliance on nuclear weapons.
  • The U.S., therefore, has to expand the role of its nuclear weapons and have a more usable and diversified nuclear arsenal.
  • The Trump administration has embarked on a 30-year modernisation plan with a price tag of $1.2 trillion, which could go up over the years.
  • Concerns of Russia and China: Russia and China have been concerned about the U.S.’s growing technological lead particularly in missile defence and conventional global precision-strike capabilities.
  • Russia has responded by exploring hypersonic delivery systems and theatre systems while China has embarked on a modernisation programme to enhance the survivability of its arsenal which is considerably smaller.
  • Cyber capabilities being increased: In addition, both countries are also investing heavily in offensive cyber capabilities.
  • The New Strategic Arms Reduction Treaty (New START) limits U.S. and Russian arsenals but will expire in 2021
  • And U.S. President Donald Trump has already indicated that he does not plan to extend New START.
  • Instead, the Trump administration would like to bring China into some kind of nuclear arms control talks.
  • But China has avoided such talks by pointing to the fact that the S. and Russia still account for over 90% of global nuclear arsenals.

Context of the US backtracking from negotiated agreements

  • Both China and Russia have dismissed the U.S.’s allegations.
  • They pointed to the Trump administration’s backtracking from other negotiated agreements such as the Iran nuclear deal or the U.S.-Russia Intermediate-Range Nuclear Forces (INF)
  • Tensions with China are already high with trade and technology disputes, militarisation in the South China Sea and most recently, with the novel coronavirus pandemic.
  • The U.S. could also be preparing the ground for resuming testing at Nevada.

In the context of the latest developments, a question can be asked by the UPSC, for ex- “In the light of the latest developments on the global platform which are pointing to the revival of the nuclear arms race, how far India’s decision to not sign the CTBT is justified?”

Conclusion

New rivalries have already emerged. Resumption of nuclear testing may signal the demise of the ill-fated CTBT, marking the beginnings of a new nuclear arms race. 


Back2Basics: What is “zero-yield test?”

  • This means that the agreement prohibits all nuclear explosions that produce a self-sustaining, supercritical chain reaction of any kind whether for weapons or peaceful purposes.
  • The decision not to include a specific definition of scope in the Treaty was a deliberate decision by the negotiating parties, including the United States, made to ensure that no loopholes were created by including a highly technical and specific list of what specific activities were and were not permitted under the Treaty.
  • A thorough review of the history of the Treaty negotiation process, as well as statements by world leaders and the negotiators of the agreement, shows that all states understand and accept the CTBT as a “zero-yield” treaty.

Coronavirus – Economic Issues

Lockdown with a human face: Immediate focus should be on alleviating hardships of poor, vulnerable groups

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- What measures are necessary to revive the economy after corona crisis?

The article deals with the policy response to the crisis. Reducing the pain inflicted on the poor and vulnerable section should be the priority. The size and nature of the stimulus package is also discussed in the article.

The dilemma of lives Vs. livelihood

  • As the coronavirus spreads, severe dilemmas haunt policymakers.
  • Testing of lockdown? Even the scientific community is confused and does not seem to know whether the South Korean model of more intensive testing is preferable to the European model of a complete lockdown.
  • The economic crisis that we are facing today is very different from any crisis that we have encountered recently.
  • This is the first economic crisis in recent memory to have been triggered by a non-economic factor — a pandemic.
  • A lockdown essentially amounts to limited economic activity and this results in throwing temporary workers and daily wage earners out of employment.
  • Migrant labour falls in this category.
  • According to the 2011 census, the number of migrant workers under the category, “migrants for work/employment” was 41.42 million.
  • This number must have grown substantially by now.
  • The impact of the lockdown has fallen very heavily on the poor and vulnerable groups.
  • We need to bear this in mind while evolving the strategy to combat the virus.

Expenditure during the pandemic

  • First, medical and healthcare expenditure, which includes the money spent on extension of hospital facilities, employment of additional medical and healthcare workers, costs of testing on a much wider scale and the purchase of accessories like personal protection equipment, ventilators and testing kits.
  • The expenditure under this category is a “must” and there can be no compromise on it.
  • The length of the battle will decide the cost.
  • Second, the expenditure involved in taking care of the people thrown out of employment, and other vulnerable sections of the population.
  • Third, stimulation expenditure aimed at restarting the economy. Here, the financial system presided over by the RBI will play an important role. But the government also has a role.

Two issues to consider while deciding on the lockdown

  • The “life” versus “livelihood” dilemma pertains to the lockdown policy.
  • A tight lockdown over an extended period may save lives by curtailing the progress of the virus.
  • But at the same time, it places several segments of society under severe hardship.
  • With the lack of economic activity, many will go hungry.
  • In this context, the government must look at two issues.
  • First, it must consider to the extent to which the lockdown can be relaxed while keeping in mind the priority of restricting the spread of the virus.
  • The government has recently announced some relaxations.
  • This is a welcome step. However, it must keep this concern under continuous consideration. It must explore other options on the medical front as well.
  • For example, will more testing make it possible to reduce restrictions?
  • Second, if the lockdown is a “compulsion”, we need to pay adequate attention to the plight of people who have been affected adversely.
  • The government had earlier announced certain measures to help some segments of society.
  • With the lockdown being extended, it is necessary to raise the levels of relief, and also cover segments of society not covered earlier — migrant labour, for example.

The following points about the stimulus package are appearing repeatedly in most of the article on economic damage to the economy. They are also relevant from the UPSC perspective. A question based on it,  like “What steps were taken by the government to revive the Indian economy in the aftermath of the corona crisis?” can be asked.

What should be the nature of the stimulus package?

  • There is much talk about a “stimulation package” to revive the economy.
  • The financial system will have to lead the charge.
  • Additional expenditure: Expectations regarding additional expenditures by the government vary from 2 per cent of the GDP to 5 per cent of the GDP.
  • Normal sources of financing will not be adequate to meet this order of expenditure.
  • Many analysts felt that the figure of 3.5 per cent of the GDP as the fiscal deficit, indicated in the budget for 2020-21, would be exceeded.
  • The pandemic will necessitate an increase in expenditure.
  • Moreover, with the decline in economic activity, revenues will also go down.
  • The revenue projections were made on the assumption that the nominal income growth would be 10 per cent.
  • But this is unlikely to be achieved. The nominal income growth is likely to be 7 per cent, at best.
  • Given the increase in expenditures and the slowdown in revenue collection, the borrowing programme will exceed significantly over what was indicated in the budget.
  • The monetisation of debt is inevitable and it will have its own consequences.
  • Provisions for states: The brunt of the expenditures will be borne by the state governments and therefore, the Centre must allocate additional resources to them.
  • They may also be allowed additional borrowing above 3 per cent of the state domestic product.

What will be the overall growth rate for India?

  • In the first quarter of 2020-21, the GDP growth rate will be negative.
  • Agricultural performance during the year could be the same as in 2019-20 as the rainfall is expected to be normal.
  • The developed world may go through a recession over the year.
  • Thus the external sector may not be of much help.
  • It is quite possible for the economy to have a V-type recovery from the second quarter of 2020-21.
  • On that assumption, the overall growth rate for the year can be 3 per cent. This is an optimistic estimate.

Conclusion

To return to the present, the focus of the government has to be two-fold. It must act vigorously to contain the virus, explore the possible alternatives to complete lockdown. Second, it must take all actions to provide adequate help to the poor and the needy including the migrant workers. Lockdown, as necessary, must be with a human face.

 

Capital Markets: Challenges and Developments

 Indian Debt market, that never was

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Asset-to-liability mismatch, Types of debt markets, Priority sector lending certificates, roll-over etc.

Mains level : Paper 3- What is the importance of debt market for the economy of a country? What are the factor responsible for the shallowness of the India's debt market?

India’s bond market suffers from several issues. This article discusses such issues, and also highlights the recent positive trends seen in the debt market owing to several steps taken by the government.

The Indian debt market, primarily of the fixed-income variety, can be broadly classified into:

  • 1. Money Market
  • Where the borrowing is for a tenor of less than a year.
  • Different types of money market instruments: Inter-Bank Term Money, repo transactions, Certificate of Deposits, Commercial Papers, T-Bills, etc. are some of the money market instruments.
  • Through these instruments, short term requirement of funds is met by banks, institutions and the state and central governments.
  • 2. Bank and Corporate Deposits
  • Bank fixed deposits (FDs) have been popular and widely subscribed to, as the feeling of no-default-risk.
  • Corporate deposits are FDs issued by a company (non-bank).
  • 3. Government Securities
  • G-Secs are sovereign-rated debt papers, issued by the government with a face value of a fixed denomination.
  • 4. Corporate & PSU Bond Market
  • Corporate bonds are issued by public sector undertakings (PSUs) and private firms.
  • These bonds are issued for a wide tenor between 1 year – 15 years.
  • These bonds carry a different risk profile and hence will have associated rating.

Debt market plays a significant role in the economy of a country. But India’s debt market suffers from shallowness. Some of the steps taken by the government to improve the situation have been showing positive trends. In the light of this development, the UPSC can frame a direct question, for ex. “What are the factors responsible for the shallowness of the debt market in India? Suggest ways to increase the depth of the debt market in India.”

What are the problems of India’s debt market?

  • Wholesale market: The Indian debt market is largely a wholesale market.
  • It is a wholesale market in a sense that a majority of institutional investors comprises of mainly banks, financial institutions, mutual funds, EPFO, insurance companies and corporates.
  • The concentration of these large players has resulted in the debt markets being fairly skewed, evolving into a wholesale & bilaterally-priced trades.
  • Lack of retail sell and transparency: It also lacks the retailness and the contractual transparency that the Indian capital markets have been able to build in the past 2 decades.
  • Skewed towards G-secs: Structurally, the debt market remains firmly skewed towards government securities (G-secs).
  • Also, the largest investor group in the G-secs market are the banks, due to their regulatory requirement to invest in SLR.
  • Low and unstable trading in the corporate bond market: The Indian corporate bond market has low & unstable trading volumes.
  • Sadly, the corporate bond market remains largely about top-rated financial and public sector issuances.
  • The domestic debt managers have forgotten that the logic of the business of finance is “to price the risk”.

Regulation and comparison with other countries

  • RBI regulates money markets & G-secs.
  • SEBI regulates the Corporate debt market & bond markets.
  • The domestic debt market in India amounts to about 67% of GDP.
  • The size of India’s corporate bond market is a mere 16% of GDP — compared with 46% in Malaysia, and 73% in South Korea.

The recent positive trend in the debt market

  • In the past few years, the domestic corporate bond market had seen increasing volumes, largely due to financial investments going into it, including retail participation.
  • Also, the banks had ceded space to NBFCs over past many years.
  • This is because banks found it easier to buy securitisation pools to achieve their PSL targets rather than develop competencies that NBFCs had built-in serving affinity groups, in smaller cities & towns.
  • And post the ILFS crisis, the markets have started shunning non-banks again.
  • Policy initiative by the government: The various policy initiatives undertaken in the last few years would take time to fructify and to stabilise.
  • These include the IBC, SEBI’s bond market policies, RBI’s large borrower framework for enhancing credit supply.
  • Some of these have already seen changes/addendums to the original draft, with the intent being to course-correct, for the stability of the markets.

Roll over of debt papers in India

  • We have seen liquidity problems in our markets every few years.
  • The concept of “roll-over” of debt paper was usual as our markets did not build long term papers.
  • With the ILFS slowdown, it was easy for name-calling on “ALM mismatch” concept.
  • Not much had been anyways done before and later to address the availability of debt to reduce the Asset-to-Liability mismatches.
  • Also, we have played it safe so far by even lending for large infra projects with shorter paper and hoped to roll it over at the end of the debt term.

Conclusion

This is the time that our regulators need to work along with the various governments, especially the states, for smoother ironing of fiscal hiccups and use this to redress any structural glitches. It’s time that there is actual intent to deepen the domestic debt market and to listen to the industry about their requirements.


Back2Basics: What is ASM?

  • Banks’ primary source of funds is deposits, which typically have short- to medium-term maturities.
  • They need to be paid back to the investor in 3-5 years.
  • In contrast, banks usually provide loans for a longer period to borrowers.
  • Home loans, for instance, can have a tenure of up to 20 years.
  • Providing such loans from much shorter maturity funds is called an asset-liability mismatch.
  • It creates risks for banks that need to be managed.
  • The most serious consequences of asset-liability mismatch are interest rate risk and liquidity risk.
  • Because deposits are of shorter maturity they are repriced faster than loans.
  • Every time a deposit matures and is rebooked if the interest rates have moved up the bank will have to pay a higher rate on them.
  • But the loans cannot be repriced that easily. Because of this faster adjusting of deposits to interest rates asset-liability mismatch affects net interest margin or the spread banks earn.

Priority Sector Lending (PSL)

  • Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low-income groups and weaker sections etc.

Roll over of debt

  • When debt becomes due there is a need to either repay the principal or alternatively, to enter into a new agreement.
  • Structurally, funds from the second debt are used to repay the first debt.
  • Then you repay the second debt as required. Quite often these new terms will be agreed with the initial lender.
  • In essence, you’re ‘rolling’ the repayment obligation from one period into the next.
  • This all leads to rollover risk, which is the risk you that you won’t be able to find anyone willing to lend the value of the outstanding debt and/or offer a comparable rate as the first principle repayment obligation approaches.
  • This may be due to either movement in the borrowers perceived credit status and/or changes to the broader credit environment.
  • This was a key theme during the financial crisis of 2007 – 2008.
  • The reasons for refinancing may include the above, but also other themes such as debt consolidation (which doesn’t directly imply a change to the debt term).

FDI in Indian economy

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

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Routes of FDI, External commercial borrowing etc.

Mains level : Paper 3- What are the factors responsible for declining FDI in India? Discuss the changes made in FDI policy amid covid pandemic.

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

What changes were made in the FDI policy?

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

Ambiguities arising due to press note

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

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

Difficulties in seeking government approval

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

No restrictions on external commercial borrowings (ECB)

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

Conclusion

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


Back2Basics: What is ‘Rights issue’

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

What is the Limited Liability Partnership (LLP)?

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

What is the FVCI route of investment?

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

Indian Ocean Power Competition

Significance of Indian Ocean Commission for India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IOC and its member countries.

Mains level : Paper 2- How increasing cooperation with IOC could help India in its vision enshrined in SAGAR?

India got an observer status at IOC (Indian Ocean Commission) in March. This article discusses the significance of IOC in the Western Indian Ocean. The IOC is also significant for India as India’s leadership is made clear in SAGAR (Security and Growth for All in the Region) which is “consultative, democratic and equitable”. There are things that India need to learn from IOC like-“bottom-up regionalism” and there are things that India can contribute to IOC like its expertise. These issues are discussed here.

About Indian Ocean Commission (IOC)

  • Founded in 1982, the IOC is an intergovernmental organisation.
  • It comprises five small-island states in the Western Indian Ocean: the Comoros, Madagascar, Mauritius, Réunion (a French department), and Seychelles.
  • Though Réunion brings a major power, France, into this small-state equation, decisions in the IOC are consensus-based.
  • While France’s foreign policy interests are represented, the specifics of Réunion’s regional decision-making emerge from its local governance structures.
  • Over the years, the IOC has emerged as an active and trusted regional actor, working in and for the Western Indian Ocean and implementing a range of projects.

Maritime security by IOC and India’s interests

  • More recently, the IOC has demonstrated leadership in the maritime security domain.
  • Since maritime security is a prominent feature of India’s relations with Indian Ocean littoral states, India’s interest in the IOC should be understood in this context.
  • However, India has preferred to engage bilaterally with smaller states in the region.
  • The IOC is a cluster of small states which do not seek a ‘big brother’ partnership.
  • The IOC has its own regional agenda.
  • The IOC has made impressive headway in the design and implementation of regional maritime security architecture in the Western Indian Ocean.

MASE program and RMIFC to help maritime security

  • What is MASE program? The European Union-funded programme to promote Maritime Security in Eastern and Southern Africa and the Indian Ocean.
  • In 2012, the IOC was one of the four regional organisations to launch the MASE Programme
  • Under MASE, the IOC has established a mechanism for surveillance and control of the Western Indian Ocean with two regional centres.
  • RMIFC: The Regional Maritime Information Fusion Center (RMIFC), based in Madagascar, is designed to deepen maritime domain awareness by monitoring maritime activities and promoting information sharing and exchange.
  • The Regional Coordination Operations Centre (RCOC), based in Seychelles, will eventually facilitate joint or jointly coordinated interventions at sea based on information gathered through the RMIFC.
  • These centres are a response to the limitations that the states in the region face in policing and patrolling their often enormous Exclusive Economic Zones (EEZs).
  • They deliver an urgently needed deterrent against unabating maritime crime at sea.
  • Which was only partly addressed by the high-level counter-piracy presence of naval forces from the EU, the Combined Maritime Forces, and Independent Forces.
  • Seven states in the region have signed agreements to participate in this multilateral maritime security architecture, and once ratified, will provide its legal foundation.
  • Many major powers have expressed interest in accessing the RMIFC.

In 2013, a question based on the “strings of pearls” was asked by the UPSC. In 2014 question with respect to the  South China Sea and the freedom of navigation was asked. On similar lines, a question can be asked from the Western Indian Ocean region dealing with maritime security. Such a question would require information about IOC.

What India can learn from IOC?

  • The IOC’s achievements offer an opportunity for India to learn, and also to support.
  • The IOC style of ‘bottom-up regionalism’ has produced a sub-regional view and definition of maritime security problems and local ownership of pathways towards workable solutions.
  • A 2019 policy brief published by the IOC ‘Strengthening Maritime Security in the Western Indian Ocean’, sets out how the counter-piracy response off the coast of Somalia delivered unprecedented regional and international cooperation in the domain of maritime security.
  • However, it resulted in multiple players, the duplication of actions, and regional dependence on international navies.
  • The IOC has been seeking more sustainable ways of addressing maritime security threats in the region, with the RMIFC and RCOC as part of this response.
  • Its regional maritime security architecture is viewed locally as the most effective and sustainable framework to improve maritime control and surveillance and allow littoral States to shape their own destiny.
  • Moreover, with proper regional coordination, local successes at curbing maritime threats will have broader security dividends for the Indian Ocean space.

How India can contribute?

  • Nearly all littoral states in the Western Indian Ocean need assistance in developing their maritime domain awareness and in building capacity to patrol their EEZs.
  • All would benefit from national information fusion centres that can link to those of the wider region.
  • With its observer status, India will be called upon to- 1. Extend its expertise to the region. 2. Put its satellite imagery to the service of the RMIFC. 3. Establish links with its own Information Fusion Centre.
  • As a major stakeholder in the Indian Ocean with maritime security high on the agenda, India will continue to pursue its interests and tackle maritime security challenges at the macro level in the region.
  • However, as an observer of the IOC, a specific, parallel opportunity to embrace bottom-up regionalism presents itself.
  • There are those in the Western Indian Ocean who are closely watching how India’s “consultative, democratic and equitable” leadership will take shape.

Conclusion

India, with its principles of leadership made clear in SAGAR has an opportunity to learn from and partner with IOC to reinforce the maritime security in the Western Indian Ocean.

Oil and Gas Sector – HELP, Open Acreage Policy, etc.

Let’s make the most of dirt-cheap oil

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Strategic Petroleum Reserves.

Mains level : Paper 3-How India can make the most of cheap oil prices?

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

Oil selling for negative price

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

How did we get here?

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

How can India maximise potential gains?

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

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

Fill up the strategic petroleum reserves (SPRs)

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

Negotiate long term contracts at current prices

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

Geographically diversify the SPR holdings

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

Conclusion

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

 

Coronavirus – Economic Issues

Economy in lockdown: On India’s worst-case scenario

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- A stimulus package to deal with the economic disruption of pandemic is suggested by various experts. What should be its size and how effective it would be in your opinion?

This op-ed discusses the latest projections by the IMF. The latest projection and suggestions by IMF are the bleak reminder of economic disruption we have been experiencing.

IMF discards its previous projections

  • Less than two months ago, IMF had asserted that “global growth appears to be bottoming out” (i.e. announcing the worst is over).
  • But the pandemic induced ‘Great Lockdown’ has forced the IMF to junk all its previous projections for economic output in 2020.
  • Faced with the stark reality of sweeping shutdowns of almost entire economies worldwide, the fund last week acknowledged that the current “crisis is like no other”.
  • The IMF slashed its projection by 6.3 percentage points from its January forecast for 3.3% growth to a 3% decline.
  • This is the sharpest contraction in world output since the Great Depression of the 1930s.
  • Comparison with 2009 slowdown: In contrast, the recession of 2009 saw world output contract by a mere 0.1%.
  • The IMF was blindsided by the comments from Chinese authorities and WHO.
  • Which is clear from the fact that as recently as February 22, the fund’s chief, Kristalina Georgieva, told G20 Finance Ministers that “global growth would be about 0.1 percentage points lower” than forecast in January.
  • China’s GDP, she projected, would expand by 5.6% this year, 0.4 percentage points slower than assumed in January.

Latest projections for China by the IMF

  • Last week, the IMF slashed China’s forecast to a growth of 1.2%, citing data on industrial production, retail sales, and fixed asset investment that, it said, suggested a contraction of about 8% in the first quarter.
  • China reported a 6.8% first-quarter contraction.
  • Still, in projecting an annual expansion in Asia’s largest economy, the fund is rather optimistically foreseeing a sharp rebound in activity over the rest of the year.

The following data of the revised projections gives us an idea about the extent to which the crisis has been damaging the economy. There are also suggestions about the strategy to deal with the crisis and that includes a stimulus package.

Projections and suggestions for India

  • On India, the IMF has cut its projection for growth in the fiscal year that started on April 1, from January’s 5.8%, to 1.9%.
  • This projection is base on two assumptions given below.
  • 1. This again appears predicated on the fund’s baseline scenario that assumes that the pandemic would ‘fade in the second half of 2020’, allowing containment efforts to be unwound and economic activity to normalise.
  • 2. Another key assumption by the IMF’s economists is the availability of policy support to nurture the revival once activity restarts.
  • Suggestion for India: Jettisoning its storied fiscal conservatism, the IMF’s chief economist, Gita Gopinath, has advocated ramping up a broad-based and coordinated stimulus once the disease has been contained.
  • Such measures would help avoid the errors of the Great Depression years when premature efforts to prune budget deficits prolonged the downturn.
  • Inadequate fiscal measures in India: In this context, India’s fiscal measures pale in terms of scale when compared with what several other nations have undertaken.

Conclusion

Given the size of the informal sector in India as well as the anticipated prolonged disruption in labour supply even in more formal parts of the economy, the Centre needs to proactively commit to a substantial stimulus package in order to ensure that once the economy reopens, it has the legs to run.

RBI Notifications

Time for govt, RBI to rethink bank architecture

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various policy rates of the RBI.

Mains level : Paper 3- What were the measures announced by the RBI to deal with the impact of Covid-19 on economy and how far were the measure successful in achieving the intended goals?

To deal with the damage inflicted by the corona crisis on the economy, both the RBI and the government are planning various monetary and fiscal measures. In its latest measures, the RBI has further reduced the reverse repo rate. This article discusses the impact of these measures and explains why the first round of measures failed in achieving the desired result.

What was announced in the second round of policy measures by the RBI?

  • RBI reduces the interest on money banks keep in the central bank (reverse repo down by 25 basis points).
  • RBI gives ₹50,000 crores to banks through targeted long-term repo operations or TLTRO 2.
  • And another ₹50,000 crores to Small Industries Development Bank of India (Sidbi) and National Bank for Agriculture and Rural Development (Nabard) to lend to microfinance institutions (MFIs) and non-banking financial companies (NBFCs).

Banks not transmitting the money

  • Banks globally have a problem.
  • They are not transmitting the money that central banks are providing to businesses that need the money.
  • Imagine that the world has been put into a business coma as we wait for the pandemic to recede.
  • Money to pay rents, interest and salaries is needed by the business to stay alive during this period and banks are showing reluctance to step in.
  • Firms and tiny entrepreneurs need to borrow to stay afloat.
  • Banks typically lend to the larger part of the market and NBFCs and MFIs to the rest—they provide the last mile that banks do not.

Measures by the RBI to increase the money supply in the market

  • The US Fed buying bonds directly: The US Federal Reserve has taken to buying corporate bonds directly rather than through banks.
  • RBI has not gone that far, but is using its firepower to nudge banks to lend to those who are credit-worthy and who desperately need the money.
  • It has done two things to facilitate this.

What reduction in Reverse Repo rate by the RBI means?

  • What is reverse repo rate? This is the rate at which banks lend to the central bank—they keep their surplus money with the RBI and get some interest on it.
  • Banks borrow from RBI at the repo rate, which is 4.4% right now.
  • A few weeks ago, the central bank had reduced the reverse repo by a larger percentage than the repo to decrease the incentive to banks to keep money with RBI.
  • But that had a limited impact as on 15 April, banks still had almost ₹7 trillion with the RBI under this window.
  • In the second round, RBI has cut the reverse repo by another 25 basis points to 3.75% to increase the difference between the borrowing rate and the lending rate.
  • What would be the impact of the second reduction in the reverse repo? The RBI is hoping that this would make banks lend to firms, rather than keeping their money safe with RBI.
  • The difference between the rate of borrowing and lending is now 65 basis points.

An issue of monetary policy transmission is a recurring one. The RBI always try to ensure the transmission but there are several factor that prevent it. Make note of these factors.

Risk aversion of the banks

  • Banks are displaying deep risk aversion—the desire to keep their capital safe rather than risk investing in investment-worthy bonds.
  • The first round of money put into the system through TLTRO 1.0, brought ₹1 trillion.
  • TLTRO is long-term (one-to-three years) funding to banks at the repo rate or a short-term rate.
  • TLTRO money didn’t reach small and medium firms: Banks took the cheap loan and lent to high-rated public sector units (PSUs) and AA-plus firms—essentially entities who had enough liquidity.
  • The money did not find its way to smaller and medium firms, NBFCs and MFIs—entities that actually reach the last mile.
  • RBI has put another ₹50,000 crores as part of TLTRO 2.0.
  • Banks can only get this money if they lend to NBFCs and MFIs.
  • For A and A-minus (these are still investment-worthy) bonds issued by firms in these sectors, banks stand to get a return of between 10-14%.
  • Banks are borrowing at 4.4% and have the option to lend at a multiplier.
  • That is the incentive given by the RBI to get money down the pipeline.
  • Banks stand to lose 65 basis points if they seek the safety of money with the RBI or stand to gain almost 6-10 percentage points in interest if they lend.
  • It remains to be seen if banks take this nudge and begin lending to lower than the highest safety bonds.

Refinance to three institutions

  • Another ₹50,000 crores is being provided as a refinance to three institutions-Sidbi, Nabard and National Housing Bank.
  • These banks reach the small-scale firms, rural sector, housing finance firms, NBFCs and MFIs.
  • Again, this should help money reach the last mile.
  • Clearly, there is too much competition at the top end of the market—everybody wants the safe paper and deals.

The UPSC could ask a direct question with reference to the issue of policy transmission and how it is a serious challenge in crisis such as Covid -19. So, following are some suggestions to deal with this issue.

Way forward

  • Rethink the bank architecture: With transmission, or the liquidity given by the central bank not going down the line, maybe this is a good time for the government and the RBI to rethink its bank architecture.
  • Develop bond a corporate bond market: There is very little action at the middle and lower end of the market. The development of a robust corporate bond market will help.
  • Early alarm system: The setting up of an early alarm system as proposed by the Financial Resolution and Deposit Insurance (FRDI) Bill to prevent a financial firm failure that takes the whole system down would be a step in the right direction.

Back2Basics: What is the transmission of monetary policy?

  • Monetary transmission refers to the process by which a central bank’s monetary policy signals (like repo rate) are passed on, through the financial system to influence the businesses and households.
  • There are many monetary policy signals by the RBI; the most powerful one is the repo rate.
  • When repo rate is changed, it brings changes in the overall interest rate in the economy as well.
  • As a result of a decrease in repo rate, the interest rate on loans by banks also changes and this encourages consumption and investment activities of businesses and households.
  • In an economy, both consumption and investment are often financed by borrowings from banks.
  • As the repo rate brings changes in market interest rate, the repo rate channel is often referred to as interest rate channel of monetary transmission.

Innovations in Sciences, IT, Computers, Robotics and Nanotechnology

Virus outbreak can potentially spur the next quantum leap for computing

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Qubit, superposition.

Mains level : Paper 3- What do you understand by quantum technology? What are its applications? How it is different from the classical computer technology?

The article suggests that the corona crisis would speed up research in the field of quantum computing. The tremendous speed offered by quantum computers will help us find a cure for diseases like Covid-19 in a much shorter duration. This article explains the limitations of classical computers, working of quantum technology, and how quantum computer overcomes these limitations.

Use of supercomputer to find the cure of Covid-19

  • The whole world is pressurized into quickly discovering a vaccine and a cure for covid-19.
  • IBM’s Summit, the world’s fastest supercomputer, was used for running numerous simulations and computations.
  • These simulations and computations help scientists find promising molecules to fight the pandemic.
  • The latest update says the Summit has been able to identify 77 candidate molecules that researchers can use in trials.
  • This was achieved in just two days, while, traditionally, it has taken months to make such progress.

Computing capacity as a limit on molecular discoveries

  • Today, faster molecular discoveries are limited by computing capacity.
  • Molecular discoveries are also limited by the need for scientists to write codes for harnessing the computing power.
  • It is no secret that classical computing power is plateauing (e. it is not growing anymore)
  • And till we have scalable artificial intelligence (AI) and machine learning (ML), scientists will have to write code for not only different scenarios but also for different computing platforms.
  • So, what we need today is more computing power.

The following points explain the limits of classical computers. Pay attention to the Moore’s law, and how it explains the development of semiconductor technologies and in turn computers as a whole.

What is the solution to the limits of classical computers?

  • Given that we have already neared the peak of classical computing, the solution probably is quantum computing.
  • Not just vaccines, quantum computing can accelerate many innovations, such as hyper-individualized medicines, 3-D printed organs, search engines for the physical world etc.
  • All innovations currently constrained by the size of transistors used in classical computing chips can be unleashed through quantum computing.
  • Moore’s law: In 1965, Gordon Moore had said the number of transistors that can be packed into a given unit of space will double about every two years.
  • Subsequently, in an interview in 2005, he himself admitted that this law can’t continue forever.
  • He had said: “It is the nature of exponential functions, they eventually hit a wall.”
  • Over the last 60 years, we reaped the benefits of Moore’s law in many ways.
  • For instance, compared to initial days of the Intel 4004, the modern 14nm processors deliver way bigger impact—3,500 times better performance and 90,000 times improved efficiency, at 1/60,000th the cost!
  • Yet, we are also seeing his 2005 statement coming true. All the experts agree that the ‘wall’ is very near.
  • So, what next? The answer again is probably the same—quantum computing.

Quantum technology is one of the emerging and revolutionary technologies, you should be aware of the terms and general principle which lies at the heart of such technology. So, terms like superposition, qubit, binary etc are important if you want to answer a questions related to this technology.

Quantum computing and its applications

  • It is no more a concept, there are working models available on the cloud.
  • How it works: Quantum computing uses the ability of sub-atomic particles to exist in multiple states simultaneously, until it is observed.
  • The concept of qubits: Unlike classical computers that can store information in just two values, that is 1 or 0, quantum computing uses qubits that can exist in any superposition of these values,
  • This superposition enables quantum computers to solve in seconds problems which a classical computer would take thousands of years to crack.
  • Applications: The application of this technology is enormous, and just to cite a few, it can help with the discovery of new molecules, optimize financial portfolios for different risk scenarios.
  • It can also crack RSA encryption keys, detect stealth aircraft, search massive databases in a split second and truly enable AI.

Investment in the development of technology

  • In the Union budget this year, the Indian government announced investments of ₹8,000 crores for developing quantum technologies and applications.
  • Globally, too, countries and organizations are rushing to develop this technology and have already invested enormous capital towards its research.

Conclusion

Historically, unprecedented crises have always created more innovations than routine challenges or systematic investments. Coincidentally, current times pose similar opportunities in disguise for the development of quantum technologies.


Back2Basics: Difference between bit and qubit

  • A binary digit, characterized as 0 and 1, is used to represent information in classical computers.
  • A binary digit can represent up to one bit of information, where a bit is the basic unit of information.
  • In classical computer technologies, a processed bit is implemented by one of two levels of low DC voltage.
  • And whilst switching from one of these two levels to the other, a so-called forbidden zone must be passed as fast as possible, as electrical voltage cannot change from one level to another instantaneously.
  • There are two possible outcomes for the measurement of a qubit—usually taken to have the value “0” and “1”, like a bit or binary digit.
  • However, whereas the state of a bit can only be either 0 or 1, the general state of a qubit according to quantum mechanics can be a coherent superposition of both.
  • Moreover, whereas a measurement of a classical bit would not disturb its state, a measurement of a qubit would destroy its coherence and irrevocably disturb the superposition state.
  • It is possible to fully encode one bit in one qubit.
  • However, a qubit can hold more information, e.g. up to two bits using superdense coding.
  • For a system of n components, a complete description of its state in classical physics requires only n bits, whereas in quantum physics it requires 2n−1 complex numbers.

Insolvency and Bankruptcy Code

Can the insolvency code handle the aftermath of the corona crisis?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Committee of creditor, difference between financial and operational creditors etc.

Mains level : Paper 3- Issues in the IBC and suggestion to improve it.

The article is about the aftermath of Covid-19 for the Indian business. Though the government has announced the slew of relief packages, one expects a significant spike in the number of bankruptcies. Will India’s Insolvency and Bankruptcy Code be able to deal with this new normal? Some pressing issues that could arise and solutions are discussed here.

Rise in the pending cases with NCLT

  • Since the commencement of the IBC and setting up of the National Company Law Tribunal (NCLT), 12,000 cases have been filed.
  • Around 4,500 cases have been settled before resolution, with a settlement amount of almost ₹2 trillion.
  • 1,500 cases have been admitted and 6,000 cases are waiting in the queue.
  • The covid-19 epidemic will only increase this traffic jam.
  • Increasing the capacity of NCLT: The pile-up of cases needs to be addressed by increasing capacity of the NCLT, and by ensuring that as many cases as possible are settled without going to the IBC.

Every issue mentioned here is important from Mains point of view. IBC has been a significant step by the government to streamline the process of insolvency and bankruptcy.

Need for a relook at section 29A(c) of IBC

  • What is section 29A(c) of IBC? This provision makes ineligible the defaulting person (promoter) from bidding for the asset (buying back) if it has been NPA for a year or more.
  • What was the purpose of section 29A(c): The intent of section 29A is to prevent persons who, by their misconduct or fraudulent motives contributed to the default of the corporate debtor, from “buying back” the corporate debtor from the creditors, potentially at steep discounts.
  • What’s the issue? While this is clearly a justifiable objective, the short window of one year has prevented even genuine promoters who faced major setbacks on account of unforeseen circumstances from being given a second chance.
  • Even though such promoters are often in good the best position to revive their businesses.
  • In view of the current force majeure, we recommend that the grace period of one year under section 29A(c) be extended to two years.
  • And further extensions should be made possible on the approval of a supermajority (i.e. 75%) of the Committee of Creditors.
  • Further, the newly introduced Section 12A allows the bank, which was the insolvency applicant, to exit the insolvency process.
  • Which brings the promoter back in control—provided 90% of the Committee of Creditors agrees and the public bidding process has not commenced.
  • The requirement for exit should be reduced to 75% of the committee.

Extension of timelines

  • Recently, the Supreme Court did well by passing a suo-moto order on the extension of limitation generally.
  • Based on these SC orders, the National Company Law Appellate Tribunal has ordered that such extension also apply to the outer limit of 330 days for the resolution of corporate insolvency cases.
  • This could be further extended once the gravity of the situation becomes clear over the next few months.
  • The moratorium period on debt financing recently announced by RBI should also be extended to cover money market instruments.

Need for providing more financing options to corporate debtors

  • While the IBC does provide for interim finance with a preferential position for a corporate debtor, there are known limitations and residual risks on the provision of such finance.
  • The government would do well to look at expanding the market by making changes.
  • The changes could include permitting interim funding by asset reconstruction companies even without being creditors.
  • And making provisions for a minimum return even in case of liquidation, and extending the enhanced priority standing given to interim financiers in the IBC phase to the pre-IBC phase.
  • Post the lockdown, incremental working capital support upto, say, 25% of existing working capital exposure could be allowed in deserving cases even if the account is in default or NPA.
  • This can be deemed to be priority lending to also protect bankers’ interests.
  • The provision could also be made for the extension of concessional finance within limits based on demonstrated export potential.
  • For example- order, short lead-time business, margin adjustments) in order to contribute to the recovery of exporting industries.

Equitable treatment of operational creditor

  • In the Swiss Ribbons judgment, the Supreme Court urged equitable, though not equal, treatment of operational creditors.
  • The need to protect the interests of operational creditors in bankruptcy proceedings is all the more critical in difficult market conditions where credit would be hard to obtain.
  • Some broad guidelines appear to be desirable.
  • For instance, one could stipulate that in the absence of quality issues, two operational creditors belonging to the same sub-class in terms of the type of product or service sold, should be treated equally.
  • This should be irrespective of group relationships or continuity in the business of the resolved entity.

Facilitating resolution outside the corporate insolvency resolution process

  • On the issue of closing a case before the onset of insolvency proceedings, there was a case for doing this even before the corona outbreak, and even without the paucity of processing capacity.
  • The labelling of a company as insolvent or bankrupt has a chilling effect on its already dim prospects.
  • Vendors, customers and employees start having second thoughts about associating with this company.
  • Certain rules get triggered—for instance, the rule barring an infrastructure company from accepting new orders.
  • The current outbreak amplifies the case for facilitating resolution outside the corporate insolvency resolution process.
  • At the same time, there is a need to streamline the process to ensure enhanced proceeds.

Conclusion

All institutions of the economy will need to fire together in order to maximize the prospects of recovery. A suitably modified bankruptcy framework has a crucial role to play.


Back2Basics: Difference between financial and operational creditors

  • Financial and operational creditors are different in the sense that their liabilities arise from different origins.
  • Where a financial creditor is liable because of a contract such as a loan or debt and operational creditor is liable because of operational transactions.
  • The difference between a financial creditor and an operational creditor is that a financial creditor is an individual whose relationship with the entity is solely based on financial contracts, such as a loan or debt security.
  • Whereas, an operational creditor is an individual whose liabilities from the entity comes in the form of future payments in exchange for goods or services already delivered.

Coronavirus – Economic Issues

Economic liberalisation and its faults

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How the Covid-19 brought into focus the faults of economic liberalisation.

The article describes the problems economic liberalisation has created. Covid-19 has exposed these problems even as developed countries faced shortages of masks and ventilators. The focus is on China’s dominance as a manufacturing hub and its implication for the world and India.

Background of the end of the ‘Licence Raj’ in India

  • Manmohan Singh’s 1991-92 Budget speech marked the beginning of the end of the ‘Licence Raj’ in India.
  • The Budget also announced the reduction of import duties and paved the way for foreign-manufactured goods to flow into India.
  • Following this, most of the manufacturing sector was opened up to foreign direct investment.
  • India’s industrial policy was virtually junked, and policymakers and the political leadership became contemptuous of the idea of self-reliance.

Shifting of the base in developing countries

  • In the late 1980s, transnational corporations started shifting the production base to smaller companies in developing countries, especially Asia.
  • The reason for this shift was cheap labour and raw materials.
  • Developed countries supported the move because shifting the polluting and labour-intensive industries suited them as long as ownership remained with their companies.
  • Development of global supply chains: The world witnessed the development of global supply chains in many products starting with garments.

The dominance of China in the global supply chain is at the root of trade war between the US and China. The outbreak of Covid-19 has added it a new dimension and has forced many countries to reframe their trade policies. And India is no different. This makes it an important topic for UPSC. A question can be framed from an impact angle or the US-China trade war angle.

The emergence of China as a global manufacturing hub

  • Though many developing countries participated in the global production/value/supply
  • The substantial value addition in developing countries happened in a few production hubs, of which China emerged to be a major one.
  • Decentralised to localised production: Manufacturing shifted from a decentralised production system spread across different counties to just a few locations.
  • The countries like China defied the logic of supply/value chains ensuring substantial value addition for themselves.
  • They even carried out backward integration and thus emerged as global manufacturing hubs for certain products.
  • In the case of health products, China became the global supplier of active pharmaceutical ingredients (API), personal protective equipment (PPE), and medical devices diagnostics.

What were the implications of China’s dominance in a fight against Covid-19?

  • China’s dominance has major implications for the  COVID-19 outbreak.
  • The resultant loss of manufacturing base has affected the ability of many governments, including of developed countries, to put up an effective response to the crisis.
  • The U.K. Prime Minister asked the country’s manufacturers to produce ventilators in order to provide care for critical COVID-19 patients.
  • Similarly, the U.S. President invoked the Defense Production Act of 1950 to ramp up N95 mask production.
  • Under this legislation, the U.S. President can direct U.S. manufacturers to produce goods according to the directions of the government.
  • Similarly, the French Health Minister stated that the country may nationalise vaccine companies if necessary.
  • Spain nationalised all its private hospitals.
  • Israel and Chile issued compulsory licences to ensure that medicines are affordable.
  • Lack of preparedness and dependence: This exposes the poor state of preparedness and dependence on imports for essential goods required to meet the challenge of any major disease outbreak.
  • This shows that what is good for the company may not be good the country in all circumstances.
  • So, the overwhelming objective of private sector-led economic growth has proved to be disastrous.

Pay attention to the impact on India. The following two points are very important.

How economic liberalisation affected India’s ability?

  • In India, economic liberalisation has damaged the government’s capacity in two ways.
  • 1. It incapacitated the government to respond to emergencies based on credible information.
  • The dismantling of the ‘Licence Raj’ resulted in the elimination of channels of information for the government, which is crucial to make informed policy choices.
  • For example, it took the government several meetings to determine the production capacity of various pharmaceutical companies.
  • Similarly, there were difficulties in finding out India’s production capacity of PPE, medical devices and diagnostics.
  • 2. The logic and policies of economic liberalisation seriously undermined the manufacturing capabilities of health products in India.
  • The short-sighted policy measures, with the objective of enhancing profitability of the private sector, allowed the import of raw materials from the cheapest sources and resulted in the debasing of the API industry, especially in essential medicine.
  • According to a report of the Confederation of Indian Industry (CII), nearly 70% of India’s API import is from China.
  • The CII report lists nearly 58 API where the dependence is 90% to 100%.
  • The disruption in the supply of API due to the COVID-19 outbreak has impacted the production of not only medicines required for COVID-19 patients, but also of other essential medicines in India.
  • As a cost-effective producer of medicines, the world is looking to India for supply, but it cannot deliver due to its dependence on China.
  • This dependence has also forced India to impose export restrictions on select medicines.
  • Similar dependence exists with regard to PPE, medical devices and diagnostic kits.
  • The 100% dependence on Reagents, an important chemical component for testing, is limiting the capacity of the government from expanding testing because the cost of each test is ₹4,500.
  • Dangers of dependence: In the name of economic efficiency, India allowed unconditional imports of these products and never took note of the dangers of dependency.

Loss of jobs and poor working conditions

  • Destruction of manufacturing base: Global supply/production chains destroyed the manufacturing base in developed and developing countries.
  • That also resulted in the loss of jobs and poor working conditions in these sectors.
  • Developing countries were asked to ease their labour protection laws to facilitate global production and supply chains popularly known as global value chains.
  • As a result, people were forced to work in precarious working conditions without any social security net.
  • This created an unorganised army of labourers and is preventing many developing country governments from effectively offering relief.

Conclusion

A virus has made us rethink our obsession with the economic efficiency theory. It implores us to put in place an industrial policy to maintain core capacity in health products so that we can face the next crisis more decisively.

Panchayati Raj Institutions: Issues and Challenges

Removal of AP State Election Commissioner by ordinance route

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Appointment, removal, change in the conditions of service of the SEC.

Mains level : Paper 2- Power of the state governments to change the tenure of the SEC can affect the independence of the body in conducting free and fair elections.

The removal of the SEC by the ordinance route raises the question over the legality of the move. And if it passes the judicial scrutiny it would harm the independence of the body.

The legality of the removal and its implication for free and fair elections

  • The fact that it was the culmination of an open conflict between the Election Commissioner and Chief Minister makes it a glaring instance of misuse of power.
  • The State government got the Governor to issue an ordinance to cut the SEC’s tenure from five to three years.
  • The ordinance also amended the criterion for holding that office from being an officer of the rank of Principal Secretary and above to one who had served as a High Court judge.
  • This automatically rendered the SEC’s continuance invalid.
  • Last month, just days before the local body polls were to be held, the SEC postponed the elections, citing the COVID-19 outbreak.
  • The State government approached the Supreme Court, but the court declined to interfere.
  • Having exhausted its legal remedy, the government should have waited for the ongoing fight against the disease to be over.
  • The Chief Minister has no legal right to terminate the SEC’s tenure.
  • The Constitution makes the holder of that post removable only in the same manner as a High Court judge.
  • If courts uphold this means of dislodging the head of an independent election body, it would mark the end of free and fair elections.

Past judgements on the issue

  • The State government seems to have gone by legal opinion that citedAparmita Prasad Singh vs. State of U.P. (2007).
  • Cessation of term vs. removal: In that judgement the Allahabad High Court ruled that cessation of tenure does not amount to removal, and upheld the State Election Commissioner’s term being cut short.
  • The Supreme Court, while dismissing an appeal against the order, kept open the legal questions arising from the case.

UPSC can frame the question based on the judgement in case by the SC and its implication for the independence of the body in conducting the fair, free and impartial election.

Issues arising out of the past judgements

  • The judgment seems erroneous, as it gives freedom to the State government to remove an inconvenient election authority by merely changing the tenure or retirement age.
  • This was surely not what was envisioned by Parliament, which wrote into the Constitution provisions to safeguard the independence of the State Election Commission.
  • It is a well-settled principle in law that what cannot be done directly cannot be done indirectly.
  • Therefore, the removal of an incumbent SEC through the subterfuge of changing the eligibility norms for an appointment may not survive judicial scrutiny.
  • Prohibition on the variation of condition of service: Further, the Constitution, under Article 243K, prohibits the variation of any condition of service to the detriment of any incumbent.
  • Even if the State government argues that a change of tenure does not amount to varying the conditions of service, the new norm can only apply to the successor SEC, and not the one holding the office now.

Conclusion

In order to ensure the independence of the SEC and free and fair elections, legality of the move should not pass the legal scrutiny. Even if it passes the legal scrutiny the government should amend this provision avoid such instances in the future.