Rating agencies influence the decisions of investors. So, when any economy is downgraded by them, it’s certainly a cause for concern. But to restart the economic engines, governments need to spend more by borrowing. This article suggests the way to achieve both: avoiding downgrade and increasing spending. How? Read to know…
To worry or not to worry: Issue of downgrading by rating agencies
Some economists urged the government amid covid pandemic to go out and spend without worrying about the increase in public debt.
They said the rating agencies would understand that these are unusual times.
If they did not and chose to downgrade India, we should not worry too much about it.
Well, the decision of the rating agency, Moody’s, to downgrade India from Baa2 to Baa3 should come as a rude awakening.
The present rating is just one notch above the ‘junk’ category.
Moody’s has also retained its negative outlook on India, which suggests that a further downgrade is more likely than an upgrade.
The downgrade, Moody’s says, has not factored in the economic impact of the pandemic.
Any further deterioration in the fundamentals from now on will push India into ‘junk’ status.
Here is why we should be worried about a downgrade
Whatever the failings of the agencies, in the imperfect world of global finance that we live in, their ratings do carry weight.
Institutional investors are largely bound by covenants that require them to exit an economy that falls below investment grade.
If India is downgraded to junk status, foreign institutional investors, or FIIs, will flee in droves.
The stock and bond markets will take a severe beating.
The rupee will depreciate hugely and the central bank will have its hands full trying to stave off a foreign exchange crisis.
That is the last thing we need at the moment.
So, what is the way out? Try for an upgrade!
We have to put our best foot forward now to prevent a downgrade and bring about an upgrade instead.
To do so, we need to note the key concerns that Moody’s has cited in effecting the present downgrade to our rating: slowing growth, rising debt and financial sector weakness.
These concerns are legitimate.
Bleak prospects
Many economists as also the Reserve Bank of India (RBI) expect India’s economy to shrink in FY 2020-21.
The combined fiscal deficit of the Centre and the States is expected to be in the region of 12% of GDP.
Moody’s expects India’s public debt to GDP ratio to rise from 72% of GDP to 84% of GDP in 2020-21.
The banking sector had non-performing assets of over 9% of advances before the onset of the pandemic.
Weak growth and rising bankruptcies will increase stress in the banking sector.
Fiscal deficit and growth: two concerns of rating agencies
The government’s focus thus far has been on reassuring the financial markets that the fisc will not spin out of control.
It has kept the ‘discretionary fiscal stimulus’ down to 1% of GDP.
That 1% figure is most modest in relation to that of many other economies, especially developed economies.
‘Discretionary fiscal stimulus’ refers to an increase in the fiscal deficit caused by government policy as distinct from an increase caused by slowinggrowth, the latter being called an ‘automatic stabiliser’.
Keeping the fiscal deficit on a leash addresses the concerns of rating agencies about a rise in the public debt to GDP ratio.
But it does little to address their concerns about growth.
The debt to GDP ratio will worsen and financial stress will accentuate if growth fails to recover quickly enough.
The government’s stimulus package relies heavily on the banking system to shore up growth.
But there is only so much banks can do.
More government spending is required, especially for infrastructure.
So, government need to increase fiscal stimulus without increasing public debt
We need to increase the discretionary fiscal stimulus without increasing public debt.
The answer is monetisation of the deficit, that is, the central bank providing funds to the government.
These fears are based on misconceptions about monetisation of the deficit and its effects.
What monetisation of debt mean?
A common misconception is that it involves ‘printing notes’.
But that is not how central banks fund the government.
The central bank typically funds the government by buying Treasury bills.
As proponents of what is called Modern Monetary Theory point out, even that is not required.
The central bank could simply credit the Treasury’s account with itself through an electronic accounting entry.
What is base money? When the government spends the extra funds that have come into its account, there is an increase in ‘Base money’, that is, currency plus banks’ reserves.
So, yes, monetisation results in an expansion of money supply.
But that is not the same as printing currency notes.
But expansion of money supply leads to inflation, what about that?
It could be that the expansion is inflationary.
This objection has little substance in a situation where aggregate demand has fallen sharply and there is an increase in unemployment.
In such a situation, monetisation of the deficit is more likely to raise actual output closer to potential output without any great increase in inflation.
No difference in borrowing from banks or RBI directly:MMT
Exponents of the Modern Monetary Theory (MMT) make a more striking point.
They say there is nothing particularly virtuous about the government incurring expenditure and issuing bonds to banks instead of issuing these to the central bank.
The expansion in base money and hence in money supply is the same in either route.
The preference for private debt is voluntary.
MMT exponents say it has more to do with an ideological preference for limiting government expenditure.
Central banks worldwide have resorted to massive purchases of government bonds in the secondary market in recent years, with the RBI joining the party of late.
These are carried out under Open Market Operations (OMO).
The impact on money supply is the same whether the central bank acquires government bonds in the secondary market or directly from the Treasury.
So why the shrill clamour against monetisation of public debt?
OMO is said to be a lesser evil than direct monetisation because the former is a ‘temporary’ expansion in the central bank’s balance sheet whereas the latter is ‘permanent’.
But we know that even so-called ‘temporary’ expansions can last for long periods with identical effects on inflation.
What matters, therefore, is not whether the central bank’s balance sheet expansion is temporary or permanent but how it impacts inflation.
As long as inflation is kept under control, it is hard to argue against monetisation of the deficit in a situation such as the one we are now confronted with.
Way forward
We now have a way out of the constraints imposed by sovereign ratings.
The government must confine itself to the additional borrowing of ₹4.2 trillion which it has announced.
Further discretionary fiscal stimulus must happen through monetisation of the deficit.
That way, the debt to GDP ratio can be kept under control while also addressing concerns about growth.
Consider the question “Examine the issues involved in the direct monetisation of the debt by the government to fund the spending in the wake of covid pandemic.”
Conclusion
The rating agencies should be worrying not about monetisation per se but about its impact on inflation. As long as inflation is kept under control, they should not have concerns — and we need not lose sleep over a possible downgrade.
Back2Basics: Automatic stabiliser
Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle.
Automatic stabilisers will influence the size of government borrowing.
Discretionary fiscal policy
Keynesian Perspective: Keynes noted that in a recession, confidence falls and the private sector cut back on spending and investment.
Therefore, we see a rise in private savings and a fall in aggregate demand. This can worsen the recession.
This is why Keynes advocated government borrowing – to make use of these surplus savings.
Keynes argued that automatic stabilisers may not be enough, and the government should specifically find public sector projects to inject money into the circular flow.
op-ed snap | International Relations | Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India,Effect Of Policies & Politics Of World On India'S Interests
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Gulf countries
Mains level: Paper 2- Stability and security in the Persian gulf and impact on India
This article analyses the security environment in the Gulf countries. Their common characteristic as being the oil producers and similarity in their social and security problems are also explained in detail in this article. And all this has implications for India. So, what are the implications? Read to know…
Let’s look at the importance of countries surrounding Persian Gulf
The United Nations defines this body of water as the Persian Gulf.
The lands around it are shared by eight countries: Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
All are the members of the UN.
There is a commonality of interest among them in being major producers of crude oil and natural gas.
And thereby contribute critically to the global economy and to their own prosperity.
This has added to their geopolitical significance.
At the same time, turbulence has often characterised their inter se political relations.
Arab Countries surrounding Persian Gulf
Power play and security of the region
For eight decades prior to 1970, this body of water was a closely guarded British lake, administered in good measure by imperial civil servants from India.
When that era ended, regional players sought to assert themselves.
Imperatives of rivalry and cooperation became evident and, as a United States State Department report put it in 1973, ‘The upshot of all these cross currents is that the logic of Saudi-Iranian cooperation is being undercut by psychological, nationalistic, and prestige factors, which are likely to persist for a long time.’
The Nixon and the Carter Doctrines were the logical outcomes to ensure American hegemony.
An early effort for collective security, attempted in a conference in Muscat in 1975, was thwarted by Baathist Iraq.
The Iranian Revolution put an end to the Twin Pillar approach and disturbed the strategic balance.
The Iraq-Iran War enhanced U.S. interests and role.
Many moons and much bloodshed later, it was left to the Security Council through Resolution 598 (1987) to explore ‘measures to enhance the security and stability in the region’.
Gulf regional security framework: Some questions
Any framework for stability and security thus needs to answer a set of questions:
Security for whom, by whom, against whom, for what purpose?
Is the requirement in local, regional or global terms?
Does it require an extra-regional agency?
Given the historical context, one recalls a Saudi scholar’s remark in the 1990s that ‘Gulf regional security was an external issue long before it was an issue among the Gulf States themselves.’
What should be the ingredients of a regional security framework?
The essential ingredients of such a framework would thus be to ensure: 1) conditions of peace and stability in individual littoral states; 2) freedom to all states of the Gulf littoral to exploit their hydrocarbon and other natural resources and export them; 3) freedom of commercial shipping in international waters of the Persian Gulf 4)freedom of access to, and outlet from, Gulf waters through the Strait of Hormuz; 5) prevention of conflict that may impinge on the freedom of trade and shipping and 6)prevention of emergence of conditions that may impinge on any of these considerations.
Could such a framework be self-sustaining or require external guarantees for its operational success?
If the latter, what should its parameters be?
Misunderstanding the role great powers can play
Statesmen often confuse great power with total power and great responsibility with total responsibility.
The war in Iraq and its aftermath testify to it.
The U.S. effort to ‘contain’ the Iranian revolutionary forces, supplemented by the effort of the Arab states of the littoral (except Iraq) GCC initially met with success in some functional fields and a lack of it in its wider objectives.
The turbulent nature of US-Iran relations
In the meantime, geopolitical factors and conflicts elsewhere in the West Asian region — Yemen, Syria, Libya — aggravated global and regional relationships.
And it hampered a modus vivendi in U.S.-Iran relations that was to be premised on the multilateral agreement on Iran’s nuclear programme agreed to by western powers and the Obama Administration.
But it was disowned by U.S. President Donald Trump whose strident policies have taken the region to the brink of armed conflict.
Perception of declining U.S. commitment to sub-regional security
Perceptions of declining U.S. commitment to sub-regional security have been articulated in recent months amid hints of changing priorities.
This is reported to have caused disquiet in some, perhaps all, members of the GCC, the hub of whose security concern remains pivoted on an Iranian threat (political and ideological rather than territorial).
And American insurance to deter it based on a convergence of interests in which oil, trade, arms purchases, etc have a role along with wider U.S. regional and global determinants.
It is evident that a common GCC threat perception has not evolved over time.
It has been hampered by the emergence of conflicting tactical and strategic interests and subjective considerations.
The current divisions within the organisation are therefore here to stay.
These have been aggravated by 1)the global economic crisis, 2) the immediate and longer term impact of COVID-19 on regional economies, 3) the problems in the Organization of the Petroleum Exporting Countries (OPEC), 4) and the decline in oil prices.
Let’s look at the emerging trends in the region
One credible assessment suggests that in the emerging shape of the region.
1) Saudi Arabia is a fading power.
2) UAE, Qatar and Iran are emerging as the new regional leaders.
3) Oman and Iraq will have to struggle to retain their sovereign identities.
4)The GCC is effectively ended, and OPEC is becoming irrelevant as oil policy moves to a tripartite global condominium.
None of this will necessarily happen overnight and external intervention could interfere in unexpected ways.
But it is fair to say that the Persian Gulf as we have known for at least three generations is in the midst of a fundamental transformation.
Improvement relations between Arab states and Iran
With the Arab League entombed and the GCC on life-support system, the Arab states of this sub-region are left to individual devices to explore working arrangements with Iraq and Iran.
The imperatives for these are different but movement on both is discernible.
With Iran in particular and notwithstanding the animosities of the past, pragmatic approaches of recent months seem to bear fruit.
Oman has always kept its lines of communication with Iran open.
Kuwait and Qatar had done likewise but in a quieter vein.
And now the UAE has initiated pragmatic arrangements.
These could set the stage for a wider dialogue.
Both Iran and the GCC states would benefit from a formal commitment to an arrangement incorporating the six points listed above.
So would every outside nation that has trading and economic interests in the Gulf. This could be sanctified by a global convention.
Record shows that the alternative of exclusive security arrangements promotes armament drives, enhances insecurity and aggravates regional tensions.
It unavoidably opens the door for Great Power interference.
Ties with India and impact on its strategic interests
Locating the Persian Gulf littoral with reference to India is an exercise in geography and history.
The distance from Mumbai to Basra is 1,526 nautical miles and Bander Abbas and Dubai are in a radius of 1,000 nautical miles.
The bilateral relationship, economic and political, with the GCC has blossomed in recent years.
The governments are India-friendly and Indian-friendly and appreciate the benefits of a wide-ranging relationship.
This is well reflected in the bilateral trade of around $121 billion and remittances of $49 billion from a workforce of over nine million.
GCC suppliers account for around 34% of our crude imports and national oil companies in Saudi Arabia and Abu Dhabi are partners in a $44 billion investment in the giant Ratnagiri oil refinery.
In addition, Saudi Aramco is reported to take a 20% stake in Reliance oil-to-chemicals business.
The current adverse impact of the pandemic on our economic relations with the GCC countries has now become a matter of concern.
India’s relationship with Iran
The relationship with Iran, the complex at all times and more so recently on account of overt American pressure, has economic potential and geopolitical relevance on account of its actual or alleged role in Pakistan and Afghanistan.
Iran also neighbours Turkey and some countries of Central Asia, the Caucasus and the Caspian Sea region.
Its size, politico-technological potential and economic resources, cannot be wished away, regionally and globally, but can be harnessed for wider good.
Consider the question “Stability and security of the Persian Gulf region has wider consequences for Indians strategic concerns. Comment.”
Conclusion
Indian interests would be best served if this stability is ensured through cooperative security since the alternative — of competitive security options — cannot ensure durable peace.
From UPSC perspective, the following things are important :
Prelims level: PM-KISAN
Mains level: Paper 3- Agri-marketing reforms
agriculture plays an important role in decreasing rural poverty in developing countries. Improved irrigation methods, seeds, and fertilizers have led to increased agricultural production in rural areas. The ECA is an act which was established to ensure the delivery of certain commodities or products, the supply of which if obstructed owing to hoarding or black-marketing would affect the normal life of the people. The ECA was enacted in 1955. This includes foodstuff, drugs, fuel (petroleum products) etc
From UPSC perspective, the following things are important :
Prelims level: BPTA 1993
Mains level: Paper 2- India-China relations
India-China border issue and the latest standoff in Ladakh has forced India to consider the lasting solution to the problem. This article explains China’s anti-India strategy. And options available with India in the face of aggression are also considered.
LAC: the reason for frequent face-offs
The debate has persisted whether it was China’s National Highway 219 cutting across Aksai Chin or Nehru’s “forward policy” which constituted the actual reason for the Sino-Indian border-conflict of 1962.
After declaring a unilateral ceasefire on November 20, troops of the Peoples Liberation Army (PLA) withdrew 20 kms behind what China described as the “line of actual control” (LAC).
The LAC generally conformed to the British-negotiated McMahon Line.
In the west, the Chinese stuck to their 1959 claim-line in Ladakh, retaining physical control of the 14,700 sq km Aksai Chin.
The 1962 ceasefire line became the de facto Sino-Indian border.
But in a bizarre reality, both sides visualised their own version of the LAC, but neither marked it on the ground; nor were maps exchanged.
This has inevitably led to frequent face-offs.
So, what were the steps taken the resolve the border issue after 1962?
Post-conflict, it is customary for belligerents to undertake early negotiations, in order to establish stable peace and eliminate the casus belli.
Strangely, in the Sino-Indian context, it took 25 years and a serious military confrontation in 1987 to trigger a dialogue.
The dialogue led the two countries to sign the first-ever Sino-Indian Border Peace and Tranquility Agreement (BPTA) in 1993.
Indian diplomats claim that this has helped maintain “mutual and equal security”, while the bilateral relationship has progressed in other spheres.
And yet, the failure to negotiate a boundary settlement after 22 meetings of special representatives of the two countries cannot be seen as anything but a failure of statesmanship and diplomacy.
Now, let’s analyse China’s anti-India strategy and how LAC and Pakistan problem fits into it
China’s post-civil war leadership had conceived an early vision of the country’s future.
Ambitious and realist in scope, this strategy visualised China attaining, in the fullness of time, great-power status and acquiring a nuclear-arsenal.
Since the vision saw no room for an Asian rival, neutralising India became a priority.
It was for this specific purpose, that Pakistan was enlisted in 1963 as a partner.
In China’s anti-India strategy, Pakistan has played an invaluable role by sustaining a “hot” border and holding out the threat of a two-front war.
In China’s grand-strategy, an undefined LAC has become a vital instrumentality to embarrass and keep India off-balance through periodic transgressions.
These pre-meditated “land-grabs”, blunt messages of intimidation and dominance, also constitute a political “pressure-point” for New Delhi.
Possibility of escalation into shooting war
While Indian troops have, so far, shown courage and restraint in these ridiculous brawls with the PLA.
But there is no guarantee that in a future melee, a punch on the nose will not invite a bullet in response.
In such circumstances, rapid escalation into a “shooting-war” cannot be ruled out.
Thereafter, should either side face a major military set-back, resort to nuclear “first-use” would pose a serious temptation.
What are the options available with India?
For reasons of national security as well as self-respect, India cannot continue to remain in a “reactive mode” to Chinese provocations and it is time to respond in kind.
Since India’s choices vis-à-vis China are circumscribed by the asymmetry in comprehensive national power, resort must be sought in realpolitik.
According to theorist Kenneth Waltz, just as nature abhors a vacuum, international politics abhors an imbalance of power, and when faced with hegemonic threats, states must seek security in one of three options: 1) Increase their own strength, 2) ally with others to restore power-balance, 3) as a last resort, jump on the hegemon’s bandwagon.
India’s decision-makers can start by posing this question to the military: “For how long do you have the wherewithal to sustain a combat against two adversaries simultaneously?” Depending on the response, they can consider the following 2 options.
1. Alliance with the USA
Nehru, when faced with an aggressive China in 1962, asked support from the USA.
Indira Gandhi in the run-up to the 1971 war with Pakistan asked support from the USSR.
Both had no qualms of jettisoning the shibboleth of “non-alignment” and seeking support from the USA and USSR respectively.
Today, India has greater freedom of action and many options to restore the balance of power vis-à-vis China.
Xi Jinping has opened multiple fronts — apart from the COVID-19 controversy — across the South China Sea, South East Asia, Hong Kong,Taiwan and South Asia.
Donald Trump is burning his bridges with China.
In the world of realpolitik, self-interest trumps all and India must find friends where it can.
Given China’s vulnerabilities in the Indian Ocean and the real possibility of America losing its strategic foothold in Diego Garcia, India has a great deal to offer as a friend, partner or even an ally; with or without the Quad.
2. Accommodation with China
If ideological or other reasons preclude the building of a power-balancing alliance, coming to an honourable accommodation with China remains a pragmatic option.
Zhou Enlai’s proposal of 1960 — repeated by Deng Xiaoping in 1982 — is worth re-examining in the harsh light of reality.
The price of finding a modus vivendi [an arrangement or agreement allowing conflicting parties to coexist peacefully]for the Sino-Indian border dispute may be worth paying if it neutralises two adversaries at one stroke and buys lasting peace.
Consider the question “In the harsh light of reality and faced with aggression from its neighbour, India has to ally with other powers to restore the balance of power. Examine.”
Conclusion
Neither option will be easy to “sell”. However, India cannot afford to continue with the current situation for long and must choose one of the options to end the to find the solution.
From UPSC perspective, the following things are important :
Prelims level: CDS
Mains level: Paper 3- Defence reforms.
This article draws on the model used for accident investigation but in a reverse manner. For proper functioning of the defence system of a country, proper alignment of various domains is essential. This article divides the defence system of the country into three layers and visualises them as a slice of cheese in the model. Each component is analysed and the issues associated with it are looked into.
What is the Swiss Cheese Model?
The Swiss cheese model is associated with accident investigation in an organisation or a system.
A system consists of multiple domains or layers, each having some shortcomings.
These layers are visualised in the model as slices of Swiss cheese, with the holes in them being the imperfections.
Normally, weaknesses get nullified, other than when, at some point, the holes in every slice align to let a hazard pass through and cause an accident.
Applying the Swiss Cheese Model for nations defence preparedness
When applied to a nation’s defence preparedness, the Swiss cheese model, in its simplest form, works the reverse way.
The slices represent the major constituents in a nation’s war-making potential, while the holes are pathways through which the domains interact.
At the macro level, there are only three slices with holes in each.
These must align to ensure that a nation’s defence posture is in tune with its political objectives.
Any mismatch may turn out to be detrimental to the nation’s aatma samman (self-respect) when the balloon goes up.
In these days of the Aatmanirbhar Bharat Abhiyan, a clinical analysis is necessary to obviate any missteps that may prove costly a few years or decades down the line.
Let’s analyse the Indian defence set-up from three slice perspective
In the Indian defence set-up, the three slices are as described below-
1)The policymaking apparatus comprising the Department of Military Affairs (DMA) and Ministry of Defence (MoD).
2) The defence research and development (R&D) establishment and domestic manufacturing industry.
3) The three services.
When the MoD alone existed, a certain relationship between the three layers saw India prosecute four major wars since independence.
The holes in the three slices were aligned to different degrees and hence the results were varied in each conflict.
That the system required an overhaul would be an understatement.
So, let’s look at the three-slices of Indian defence
1) Policymaking: How changes in technology forced militaries to be joint?
With technology progressing exponentially, a single service prosecution of war was no longer tenable.
Because the advent of smart munitions, computer processing, networking capabilities and the skyrocketing cost of equipment brought in the concept of parallel warfare.
Synergised application of tools of national power became an imperative.
Thus, it became essential for militaries to be joint to apply violence in an economical way.
Economical in terms of time, casualties, costs incurred, and political gains achieved.
The setting up of the DMA and the creation of the post of Chief of Defence Staff (CDS) to achieve synergy are the most fundamental changes.
As further modifications and tweaking take place in the way the services prepare to go to war, it is imperative that the transformation be thought through with clinical analysis, without any external, emotional, political or rhetorical pressure.
Hostile security environment
India’s security managers have to factor in the increasingly belligerent posture of the country’s two adversaries.
Terrorist activities have not reduced in Jammu and Kashmir.
Ongoing incidents along the northern border with China do not foretell a peaceful future.
And the China-Pakistan nexus can only be expected to get stronger and portentous.
Such a security environment demands that capability accretion of the three services proceed unhindered.
2) Indigenous R&D and manufacturing is still some years away
To elaborate, the Indian Air Force at a minimum requires 300 fighters to bolster its squadron strength.
The Army needs guns of all types; and the Navy wants ships, helicopters, etc.
The requirements are worth billions of dollars but with COVID-19-induced cuts in defence spending.
Enter the well-meaning government diktat for buying indigenous only, but for that, in-house R&D and manufacturing entities have to play ball.
Hindustan Aeronautics Limited can, at best, produce just eight Tejas fighters per year presently.
The Army has had to import rifles due to the failure of the Defence Research and Development Organisation to produce them.
And the Navy has earnest hopes that the hull designs that its internal R&D makes get the vital innards for going to war.
So, the Swiss cheese slice representing indigenous R&D and a manufacturing supply chain that ensures quality war-fighting equipment, at the right time and in required quantities, is still some years away.
3) The three services and creation of theatre commands
The forthcoming reform of creating theatre commands is the most talked about result of jointness expected from the Swiss cheese slice in which lie the DMA and a restructured MoD.
Doing so would be a shake-up of huge proportions as it strikes at the very foundation of the war-fighting structure of the services.
The three-year deadline spoken about by the CDS must take into account the not-so-comfortable state of assets of each service which would need to be carved up for each theatre.
The Chinese announced their ‘theaterisation’ concept in 2015; it is still work in progress.
The U.S. had a bruising debate for decades before the Goldwater-Nichols Act came into force in 1986.
New relationships take time to smooth out, and in the arena of defence policymaking, which is where the DMA and MoD lie, the element of time has a value of its own.
Any ramming through, just to meet a publicly declared timeline, could result in creating a not-so-optimal war-fighting organisation to our detriment.
So, the three services that constitute the third Swiss cheese slice have to contend with the other two slices being in a state of flux for some time to come.
Consider the question “Any defence system reforms must ensure the alignment and coordination of the various component of it which involves policymaking apparatus, defence R&D and manufacturing and the three services. Comment.”
Conclusion
The political, civil and military leadership must have their feet firmly on ground to ensure that the holes in their Swiss cheese continue to stay aligned; impractical timelines and pressures of public pronouncements must not be the drivers in such a fundamental overhaul of our defence apparatus.
From UPSC perspective, the following things are important :
Prelims level: G-7 Members, their combined gdp in the world
Mains level: Paper 2- Expansion of G-7 membership
Recently, there was a call for expansion of the membership of the G-7 by the U.S. President. But the expanded group should not be seen as an anti-China gang-up. Disciplining and not isolating China is what most of the members of the group would want. And to do so, this new group needs to have new agenda. This article discusses the items that must form the part of the new agenda.
Evolution of the G-7
When it started in 1975—with six members, Canada joining a year later—it represented about 70% of the world economy.
And it was a cosy club for tackling issues such as the response to oil shocks.
Now it accounts for about 40% of global gdp.
Since the global financial crisis of 2007-09 it has sometimes been overshadowed by the broader g20.
The G-7 became the G-8 in 1997 when Russia was invited to join.
In 2014, Russia was debarred after it took over Crimea.
Call for expansion of the membership
It was the French who first flew the kite of membership expansion.
France had invited heads of government of several “emerging economies” for a meeting of the group at Évian-les-Bains, France, in June 2003.
After 2003, G-8 host countries began organising a meeting on the sidelines of their summits with a select group of five or six developing countries.
India and China were invited to all those summits.
Now, President Trump has, however, gone a step further.
Rather than invite “guests” to a G-7 summit, he has suggested expanding the G-7 to a G-10 or G-11.
Trump has come up with an interesting list of new members — Australia, India, South Korea and, possibly, Russia.
Inclusion of Russia: Trump’s pragmatism in including Russia should be welcomed.
The advantage of getting Russia in is that the group would not be viewed merely as an anti-China gang-up but, in fact, as a club of “free market democracies”.
The group could easily be made the G-12 with the inclusion of Indonesia — one of the few democratic nations in the Islamic world.
Discipline China, not isolate it
Trump’s motivation in expanding the G-7 to include India and Russia while keeping China out is transparent.
If keeping China out was not the intention, the G-7 could easily have dissolved themselves and revitalised the presently inert G-20.
There are, of course, good reasons why Xi Jinping’s China requires to be put on notice for its various acts of omission and commission and disrespect for international law.
However, disciplining China is one thing, isolating it quite another.
If the new group is viewed as yet another arrow in the China containment quiver it would place India and most other members of the group in a spot.
Everyone wants China disciplined, few would like to be seen seeking its isolation.
Asia needs a law-abiding China, not a sullen China.
Japan and Australia, have serious concerns about China’s behaviour.
But they may not like the new group to be viewed purely as an anti-China gang-up.
That may well be the case with South Korea too.
Indeed, even India should tread cautiously.
India has more issues with China than most others in the group, spanning across economic and national security issues and yet it should seek a disciplined China, not an isolated one.
So, what should be on the agenda of the new group?
The proposed new group should define its agenda in terms that would encourage China to return to the pre-Xi era of global good behaviour.
The G-7 came into being in the mid-1970s against the background of shocks to the global financial and energy markets.
The G-12 would come into being against the background of a global economic crisis and the disruption to global trade caused both by protectionism and a pandemic.
The two items on the next summit agenda would have to be the global response to the COVID-19 pandemic, the rising tide of protectionism and mercantilism and the global economic slowdown.
The summit will have to come forward with some international dos and don’ts to deal with the challenge posed by these disruptions.
New rules should apply to both the US and China
These new rules of international conduct would have to apply to both China and the US.
The G-12— have a shared interest in ensuring that both China and the US respect international law and desist from unilateralism in dealing with neighbours and global challenges.
Widening the agenda
To be able to alter China’s behaviour without isolating it, the G-12 will have to widen their agenda.
Widening involves going beyond the purely economic issues that the G-7 originally focused on, and include climate change, health care and human rights.
What should the “free market democracies” mean
In identifying themselves as “free market democracies” the G-12 must issue a new charter of respect for human rights, adherence to international law and multilateralism in trade and security.
This is easier said than done.
President Trump will have to re-assure the group’s members that he has their combined interests at heart in proposing a new group.
And he also has to show that he has an imagination beyond just an “America First” policy.
Even as the world is increasingly wary of an assertive China and of Xi Jinping’s China Dream and his version of a “China First” policy, it is also wary of Trump’s unilateralism on many fronts.
What should the invitee nations consider before joining the group?
Many countries share Trump’s displeasure with China for its manipulation of the World Health Organisation.
But many of them are equally unhappy with the manner in which the Trump administration has treated the World Trade Organisation.
A G-12 cannot ignore such partisan behaviour by either the US or China.
If Trump does issue an invitation to the three or four new members to join the new group, they should seek clarity on the terms of membership.
Russia’s experience, of being invited and then disinvited and now being considered for being re-invited should be a salutary message to all others invitees.
Consider the question- “The expanded new G-12 with India as its member, should also needs new agenda with its focus beyond China. Comment.”
Conclusion
As the world’s largest free market democracy India deserves to be a member of not just a G-12 but of even a new G-7. India’s political and economic credentials are certainly stronger than those of Canada, Britain and Italy.
From UPSC perspective, the following things are important :
Prelims level: India-China trade
Mains level: Paper 2- India-China border issue
Though the rest of the world is preoccupied with Covid pandemic, China is busy in raising tension over border issues with its neighbour-India. What explains such actions by China? And timing selected by China has also puzzled many. India, on its part, faces a dilemma. This article dissects the various issues related to the standoff and explains the options available with India to deal with the Chinese intimidation.
Why the latest transgression by PLA is unprecedented?
There are around 400 transgressions/faceoffs each year on an average along the LAC.
But the recent spate of territorial transgressions by the People’s Liberation Army (PLA) is unprecedented in its scope and manner.
Even as independent accounts point out that Chinese troops are yet to withdraw from the transgressed territories and restore status quo ante.
Those territories are traditionally considered by both sides to be on the Indian side of the LAC.
Chinese officials have gone ahead and stated that the “Situation in China-India border is overall stable & controllable”.
What this move by China signals?
The Indian government is left with two basic choices: 1) accept territorial loss as a fait accompli or 2) force or negotiate a reversal to status quo ante, unless of course the PLA unilaterally withdraws.
Either way, China’s growing territorial aggression on the LAC signals the end of Beijing’s peaceful rise and its traditional desire to maintain regional status quo with India.
China under its President, Xi Jinping, unequivocally seeks to demonstrate that it is the preponderant power in the region.
Let’s analyse the aggression
While the timing could be explained by the global political distraction caused by COVID-19.
And also the international pressure on China (including by India) to come clean on the origins of the novel coronavirus could have played the role.
But the proximate causes could be several. Consider the following-
1. Statement by India on Aksai Chin
For one, New Delhi’s terse statements about Aksai Chin following the Jammu and Kashmir reorganisation in August last year had not gone down well with Beijing.
While not many in India believe that New Delhi was serious about getting back Aksai Chin from Chinese control, Beijing may have viewed it as India upping the ante.
More pertinently, in a clear departure from the past, New Delhi has been carrying out the construction of infrastructural projects along the LAC — a long overdue activity — which is something that seems to have made China uneasy.
2. Broader context of long-term geopolitical world view
The Chinese angle to the J&K conundrum deserves more attention here.
The aggression must also be viewed in the broader context of a long-term geopolitical world view China has for the region. Consider the following in this regard-
1) China’s China–Pakistan Economic Corridor (CPEC) connectivity to Pakistan through the Karakoram and New Delhi’s criticism of it.
2) The reported presence of PLA troops in Pakistan Occupied Kashmir (PoK).
3) India’s new-found activism on Aksai Chin.
4) The PLA’s incursions into areas in eastern Ladakh.
3. Strategic goals
It is equally important to appreciate the larger Chinese strategic calculations behind its recent spate of aggressions.
Having given up its traditional slogan of ‘peaceful rise’, China, under Mr. Xi, is beginning to assert itself as the next superpower.
Over the years, Beijing has perhaps realised that India is not keen on toeing the Chinese line in the region.
So this is Beijing sending a message to New Delhi to fall in line.
A message that will not go unnoticed in the smaller capitals around China — from Colombo to Kathmandu to Hanoi.
4. Political message
Given that China is currently engaged in what many analysts are describing as a new cold war with the United States, in the middle of a crackdown in Hong Kong along with fighting COVID-19 at home, one would not have expected the Chinese leadership to open another front.
And yet, by opening a limited military front with India on the LAC, China is signalling the U.S. that it can handle pressure.
And telling India that it has the political and military wherewithal to put pressure on New Delhi notwithstanding its other preoccupations.
Why limited scope confrontation is cost-effective and preferred option by China?
China’s limited scope military expeditions on the long-contested border is cost effective for the PLA.
This is because the ever-growing conventional military superiority that it enjoys with India.
Moreover, because limited fights or smaller land grabs may not provoke an all-out confrontation or nuclear use.
The side with conventional superiority and more border infrastructure would likely carry the day.
India’s China dilemma
Picking a direct fight with India which might lead to an undesirable military escalation with India does not suit Beijing’s interests.
But carrying out minor military expeditions with the objective of inflicting small-scale military defeats on India is precisely what would suit the Chinese political and military leadership.
They are cost effective, less escalatory, and the message gets conveyed.
More so, India’s military response would depend a great deal on how far the regime in New Delhi is willing to acknowledge such territorial losses due to domestic political constraints.
If New Delhi acknowledges loss of territory, it would have to regain it, but doing so vis-à-vis a conventionally superior power would not be easy.
Put differently, growing conventional imbalance and domestic political calculations could prompt New Delhi to overlook minor territorial losses on the LAC.
But let us be clear: the more New Delhi overlooks them, the more Beijing would be tempted to repeat them.
These considerations lie at the heart of India’s China dilemma.
How India could respond?
Yet, there are limits to China’s LAC adventurism.
1) There are several places along the several thousand kilometre long LAC where the PLA is militarily weak, the Indian Army has the upper hand.
And, therefore, a tit-for-tat military campaign could be undertaken by New Delhi.
2) While China enjoys continental superiority over India, maritime domain is China’s weak spot, in particular Beijing’s commercial and energy interest to which the maritime space is crucial.
3) Finally, and most importantly, would Beijing want to seriously damage the close to $100 billion trade with India with its military adventurism on the LAC?
Way forward
In any case, for India, the age of pussyfooting around Chinese intimidation strategies is over.
The time has come to checkmate Beijing’s military aggression even as we maintain a robust economic relationship with our eastern neighbour.
It is also a reminder for us to get more serious about finalising a border agreement with China.
The bigger the power differential between India and China, the more concessions Beijing would demand from New Delhi to settle the dispute.
Consider the question-“There have been growing instances of PLA aggression on India-China border. Examine the multiple objectives China’s actions seek to achieve. What are the options available with India to deal with situation?
Conclusion
There is little doubt that China is our neighbour and that we have to live next to the larger and more powerful China. However, India should not accept Beijing’s attempts at land grabs, or military intimidation. That China is a rising superpower located next door to us is a reality, but how we deal with that reality is a choice we must make as a nation.
From UPSC perspective, the following things are important :
Prelims level: ATC losses.
Mains level: Paper 3- Subsidy on electricity and problem with it
tSometimes solutions that are meant to solve one problem results in the creation of another problem. Nowhere is this more evident than in the subsidies given on urea and electricity to the farmers. This article deals with the perils of the subsidy on electricity bills of farmers. However, there is an equally substantive argument in favour of the subsidies as well. So, what is the way out? Read to know…
Replacing free power supply scheme with DBT
The Centre has prescribed that the free power supply scheme should be replaced with the direct benefits transfer (DBT) as a condition to allow States to increase their borrowing limit.
It is not the first time that the Union government has recommended DBT with regard to electricity.
But what is new is setting the time frame for implementing it.
By December this year, the DBT should be introduced at least in one district of a State and from the next financial year, a full roll-out should be made.
Resistance from the states
Tamil Nadu, which was the first State to introduce free power in September 1984, is strongly resisting the Centre’s stipulation.
Tamil Nadu Chief Minister has taken a categorical stand against the proposal.
Though Chief Ministers of Andhra Pradesh, Telangana and Punjab, where free power scheme is in vogue, are yet to express their views.
But it is not difficult to predict their response.
After all, Punjab Chief Minister who had abolished the scheme during his first innings is now a strong votary of the scheme.
Let’s get the overview of the power subsidy bill
In the last 15 years, Maharashtra has been the only State that scrapped the scheme within a year of introducing it.
Karnataka, which has been implementing it since 2008, may become the first southern State to have DBT in power supply if the hint dropped by Chief Minister in early March is any indication.
The power subsidy bills in the four southern States and Punjab are at least ₹33,000 crore, an amount the State governments will struggle to meet due to resource crunch in the light of the COVID-19 pandemic.
But, why the Central government want to scrap the scheme?
It is because of the following issues-
1. Wastage of water and electricity
The financial stress apart, the universal application of the scheme has had deleterious consequences.
Primarily, the scheme has led to widespread wastage of water and electricity.
It is inherently against incentivising even a conscientious farmer to conserve the two precious resources.
It may be pertinent to point out that India is the largest user of groundwater at 251 billion cubic meters, exceeding the combined withdrawal by China and the U.S., as pointed out by Bharat Ramaswami of the Indian Statistical Institute last year.
2. Worrying rate of the groundwater table depletion
Be it parts of the Cauvery delta in Tamil Nadu or Sangrur district of Punjab, the story about the groundwater table is the same — a worrying rate of depletion.
There is one more attendant problem.
To sustain their activity, farmers need to go for submersible or high-capacity pumpsets. [Consider the fact that to draw same quantity of water you have to use more power if your water table is low]
3. It encourages the installation of more pump sets
Third, the extension of the scheme to different States over the years has only encouraged the installation of more pumpsets. Karnataka is a classic example, The number of irrigation pumpsets, which was around 17 lakh 12 years ago, is now around 30 lakh.
4. Misuse of scheme
There is misuse of the scheme for which not just a section of farmers but also field officials have to be blamed.
5. AT & C losses clubbed as consumption by farmers
In the absence of meters for these connections or segregation of feeders or metering of distribution transformers, accurate measurement of consumption becomes tricky.
Those in charge of power distribution companies find it convenient to reduce their aggregate technical and commercial (AT&C) losses by clubbing a portion of the losses with energy consumption by the farm sector.
What is the argument of the supporter of the scheme?
Proponents of the free power scheme have a couple of valid points in their support.
Apart from ensuring food security, free power provides livelihood opportunities to landless workers.
When farmers dependent on supplies through canals get water almost free of cost, it is but fair that those not covered by canal irrigation should be given free electricity.
Though there is substance in the argument, it is not difficult to arrive at a fair pricing mechanism.
Small and marginal farmers and those who are outside the canal supply deserve free power, albeit with restrictions.
But there is no justification for continuing with the scheme perpetually to other farmers.
However, those enjoying free power need to be told about the need for judicious use of groundwater and how to conserve it.
Consider the question-“Subsidies given to farmers on electricity has become an albatross around the States neck. However, such subsidies could also be termed as a necessary evil. Critically examine.”
Conclusion
Making use of the situation created by the COVID-19 pandemic, the Centre is trying to make lasting changes in areas where such measures are long overdue. At least in the area of power sector, its attempt can yield meaningful results only if there is a change in the mindset of agriculturists and political parties towards the concept of free power.
From UPSC perspective, the following things are important :
Prelims level: G7 countries
Mains level: Paper 2- Challenges the current form of multilateralism faces and opportunity for India to shape the new multilateralism.
The world is going through turmoil. The new world that will emerge will be different from what we have known. This provides India with some unique opportunities. This article explains the changes that are taking place and gives the outline of the changing order. So, how can India set and shape the global response? And what should be the principles on which the new multilateralism should be based? Read to know…
Opportunity for India to set the global response
As chair of the Executive Board of the World Health Assembly – India can set the global response in terms of multilateralism, not just medical issues.
How can India set a global response in terms of multilateralism? Consider the following- a rare alignment of stars for agenda-setting.
1) In September, the United Nations General Assembly will discuss the theme, “The Future We Want”.
2) In 2021, India joins the UN Security Council (non-permanent seat).
3) And chairs the BRICS Summit in 2021.
4) Also hosts the G-20 in 2022.
New principles for international system: At the online summit of the Non-Aligned Movement, in May, Prime Minister Modi called for new principles for the international system.
His new globalisation model based on humanity, fairness and equality has wide support in a more equal world as, for the first time since 1950, everyone is experiencing the same (virus) threat.
Changing global context
China is losing influence and the dynamics in its relations with the United States.
And Asia again is emerging as the centre of global prosperity.
The global governance, economy, scientific research and society are all in need of being re-invented.
India should use this opportunity to recover our global thought leadership.
The US-China powerplay and its consequences for multilateralism
The clash between China and the U.S. at the just concluded World Health Assembly in May marks the end of the multilateralism of the past 70 years.
The donor-recipient relationship between developed and developing countries has ended with China’s pledge of $2-billion.
The agenda-setting role of the G7 over UN institutions and global rules has also been effectively challenged by WHO ignoring the reform diktat of the U.S. leading to its withdrawal, and characterisation of the G7 as “outdated”.
The U.S. has also implicitly rejected the G20 and UN Security Council, for an expanded G7 “to discuss the future of China”.
Important shift in the UN: After World War II, the newly independent states were not consulted when the U.S. imposed global institutions fostering trade, capital and technology dependence.
This was done ignoring the socio-economic development of these countries.
But social and economic rights have emerged to be as important as political and procedural rights.
Against this backdrop, China’s President Xi Jinping deftly endorsed the UN Resolution on equitable access to any new vaccine.
Emergence of Asia and China: Challenges for the US and the West
The U.S. faces an uphill task in seeking to lead a new multidimensional institution in the face of China’s re-emergence.
The re-emergence of China is based on technology, innovation and trade balancing U.S. military superiority.
At the same time, there is a clear trend of declining global trust in free-market liberalism, central to western civilisation.
With the West experiencing a shock comparable to the one experienced by Asia, 200 years ago, the superiority of western civilisation is also under question.
The novel coronavirus pandemic has accelerated the shift of global wealth to Asia suggesting an inclusive global order based on principles drawn from ancient Asian civilisations.
Colonised Asia played no role in shaping the Industrial Revolution.
But, the Digital Revolution will be shaped by different values.
It is really this clash that multilateralism has now to resolve.
World is questioning both U.S. and China’s exceptionalism
China has come out with alternative governance mechanisms to the U.S.-dominated International Monetary Fund, World Bank and World TradeOrganization with its all-encompassing Belt and Road Initiative.
The U.S., European Union and Japan are re-evaluating globalisation as it pertains to China and the U.S. is unabashedly “America First”.
The world is questioning both U.S. and China’s exceptionalism.
For India, the strategic issue is neither adjustment to China’s power nor deference to U.S. leadership.
Opportune moment for India to propose new multilateralism
The global vacuum, shift in relative power and its own potential, provides India the capacity to articulate a benign multilateralism.
It should include in its fold NAM-Plus that resonates with large parts of the world and brings both BRICS and the G7 into the tent.
This new multilateralism should rely on outcomes, not rules, ‘security’ downplayed for ‘comparable levels of wellbeing’ and a new P-5 that is not based on the G7.
India in a important role
China, through an opinion piece by its Ambassador in India, has suggested writing “together a new chapter” with “a shared future for mankind”.
The U.S. wants a security partnership to contain China.
And the Association of Southeast Asian Nations trade bloc — with the U.S. walking out of the negotiations — is keen India joins to balance China.
With a new template. India does not have to choose.
Three principles the new system should be based on-
1. Peaceful coexistence
First, the Asian Century should be defined in terms of peaceful co-existence, freezing post-colonial sovereignty.
Non-interference in the internal affairs of others is a key lesson from the decline of the U.S. and the rise of China.
National security now relies on technological superiority in artificial intelligence (AI), cyber and space, and not expensive capital equipment, as India’s military has acknowledged.
Instead of massive arms imports, we should use the savings to enhance endogenous capacity.
And mould the global digital economy between state-centric (China), firm-centric (the U.S.) and public-centric (India) systems.
2. New principles of trade
A global community at comparable levels of well-being requires new principles for trade, for example, rejecting the 25-year-old trade rule creating intellectual property monopolies.
Global public goods should include public health, crop research, renewable energy and batteries, even AI as its value comes from shared data.
We have the scientific capacity to support these platforms as part of foreign policy.
3. Civilisational values
Ancient civilisational values provide the conceptual underpinning, restructuring both the economic order and societal behaviour for equitable sustainable development.
Which is what a climate change impacted world, especially Africa, is seeking.
Consider the question-“The global order is going through serious churn, and it provides India with an opportunity to shape the new multilateralism based on humanity, fairness and equality. Comment.”
Conclusion
In the new cold war, defined by technology and trade not territory, non-alignment is an uncertain option; India should craft a global triumvirate.
From UPSC perspective, the following things are important :
Prelims level: WHA
Mains level: Paper 2- Policy that India should follow at WHA executive board
India has been tasked with helming the WHO executive board at the turbulent times. The world is facing the health crisis. It is against this backdrop, India has to lead the executive board. This article suggests 5 elements that should form the part of India’s policy approach.
Challenges for India as it heads WHO executive board
Minister of Health and Family Welfare is elected as the Chair of the World Health Organization’s (WHO) executive board.
The 34-member body is tasked with implementing the decisions of the recently concluded World Health Assembly (WHA).
The elevation affords India an important platform to steer the global public health response to COVID-19.
It also comes at a time when the WHO is being rocked politically as never before.
WHO: caught between the US-China crossfire
Recently, U.S. President Donald Trump wrote a letter to the WHO Director-General.
In the letter, he threatened to make permanent his temporary funding freeze as well as reconsider the U.S’s membership in the organisation if the latter did not commit to major substantive reforms within 30 days.
By contrast, at the WHA plenary, Chinese President Xi Jinping pledged $2 billion to fight the virus.
He also promised to pair up 30 African hospitals with domestic counterparts, accelerate the building of the Africa Centers for Disease Control headquarters, and ensure that vaccine development in China, when available, would be made a global public good.
So, as WHO executive body chair, India will have to navigate this treacherous power landscape with candour and tact. Following 5 elements should inform its policy approach.
1. Set epidemic prevention and control as a priority
India must insist that epidemic prevention and control remain the international community’s foremost priority.
As the virus’ chain of transmission is broken, the focus should shift to identifying the animal-to-human transmission origins of SARS-CoV-2.
China shares an important interest in facilitating international access to investigate COVID-19’s zoonotic origins.
Why China shares interest? Because Wuhan and other previously infected zones could yet be susceptible to the risk of viral reintroduction.
2. Review the early response of China and WHO to outbreak
India should lean on the WHO secretariat to fast-track the “impartial, independent, and comprehensive review” of the WHO’s – and China’s – early response to the outbreak.
The review’s findings should illuminate best practice and highlight areas for improvement, both in the WHO’s leadership and capacity as well as member states’ implementation of the International Health Regulations.
For those in New Delhi inclined to relish the prospect of Beijing’s comeuppance, the review’s findings may yet sorely disappoint.
The WHO-China Joint Mission featuring renowned global epidemiologists had termed China’s early COVID-19 response as the “most ambitious, agile and aggressive disease containment effort in history”.
3. Ensure equitable access to COVID-19 vaccines for all
For ensuring equitable access to COVID-19 therapeutics and vaccines for all countries, India must promote the establishment of an appropriate multilateral governance mechanism.
The envisaged voluntary pooling mechanism to collect patent rights and regulatory test data should be suitably tailored to the needs of crisis.
And the World Trade Organization’s intellectual property rights provisions should be overridden as is allowed during a public health emergency to assure affordable vaccine availability.
4. Taiwan issue at WHA: India should stay aloof
India must stay aloof from the West’s campaign to re-seat Taiwan as an observer at the WHA.
When Taipei last attended in 2016, it did so under the explicit aegis of UN General Assembly Resolution 2758, whereby the UN considers Taiwan to be an integral part of the People’s Republic of China.
That the independence-minded Tsai government is unwilling to concede this basis for attendance has more to do with domestic political manoeuvring than Chinese or international ostracism.
5.Global ban on consumption of wild animals
India must lead the call for a permanent global ban on the consumption and trade of wild animals.
This ban should be with limited exceptions built-in for scientific research, species protection and traditional livelihood interests.
With two-thirds of emerging infections and diseases now arising from wildlife, the destruction of natural habitats and biodiversity loss must be taken much more seriously.
Consider the question “The WHO has been facing the credibility crisis for its response to the Covid-19. In such a difficult time for the agency, India has to lead the executive board of WHA. In light of this, suggest the policy approach that India should adopt at WHA.”
Conclusion
India has its work cut out. The government should seize the moment to steer the global response in addressing the shortcomings in various areas exposed by the Covid-19 pandemic.
From UPSC perspective, the following things are important :
Prelims level: Policy rates
Mains level: Paper 3- Why interest differential could be a problem?
Do you remember Operation Twist by the RBI? what was being twisted there? It was the yield curve that was sought to be twisted. It had been aimed at reducing the gap between long term interest rates and short term policy rates. This article explains the impact such gap could have on the economy.
Why long term loans come with a higher interest rate?
Long term loans equate to long repayment periods.
More uncertainty during these long periods can translate to higher risks.
And to compensate for the high risks involved, banks quote higher interest rates when corporates borrow from them to build and operate stuff.
However, when banks borrow from the RBI they are borrowing over short intervals.
And so they get charged lower interest rates.
So, why banks are keeping interest rates high despite borrowing at low rates from the RBI?
Ever so often, the RBI cuts rates in the hopes of making loans more accessible to banks.
They are hoping banks will also extend this benevolence to their customers by cutting long term interest rates.
But right now, banks are scared.
They don’t think the corporates can pay back.
So they are keeping long term rates at elevated levels despite borrowing at consistently low rates from the RBI.
What happens when gap between long-term and short term interest rates widen?
Capital wasn’t cheap to begin with for corporate borrowers, and it’s getting more expensive.
This comes just as migrant rural workers have been driven out of urban production centers because of shuttered factories.
Even if this labor is safely put back on, say, road construction, concessionaires [think private road contractors] might still go bankrupt before completing any projects.
That’s because their annuity payments from the government are linked to falling short-term policy rates, whereas their long-term borrowing costs are both high and sticky
To understand the issue of annuity payment and its relation with interest rates, let’s dig deeper into 3 types of models-
1. Build-Operate-Transfer (BOT) Model
So, NHAI is the National Highways Authority of India and is largely responsible for building and maintaining roads.
Its preferred method to get the job done is to deploy what is called the BOT model.
The Build-Operate-Transfer (BOT) model, as the name suggests is a way for NHAI to offload its responsibilities of road building to private contractors.
Under BOT model, private contractors build the road, operate it, make money off of collecting toll, and after about 10–15 years, they hand over the road back to NHAI.
There aren’t enough private contractors willing to bid for such projects because — hey, maintaining and operating a road is a pain.
Why pain? You have to wait 15 years to recoup all the money you had to pour in to build the damn thing. That’s the pain.
2. Engineering, procurement and Construction (EPC) model
Under the EPC (Engineering, Procurement & Construction) model, NHAI pays private contractors first, so that they can help NHAI build the road.
The contractor does not operate or collect tolls here.
Instead, it can walk away scot-free with money in its coffers once it’s done building the road.
But it’s hard for the government to shore up all the resources required upfront.
3. Hybrid Annuity Model (HAM)- The middle path
It’s a nice little mix of both EPC and BOT.
Under it, NHAI pays some money upfront in fixed installments usually, 40% of the project cost.
And the private contractor does his bit by putting up the rest and finishing the project.
However, once the construction is complete, the contractor does not make money off of collecting toll.
Instead, he transfers the assets over to NHAI.
So its incumbent on the government to pay the rest of the money once the project takes off.
And the payments are dependent on the asset created, the performance of the developer, and a few other things.
However, since the payouts usually last 15–20 years we need to find a way to determine what kind of money the government pays the contractor every 6 months.
And here’s the best way to think about this — So when the government pays the 40% upfront, it’s promising to pay the 60% sometime in the future.
It’s money they owe the contractor.
And, here is the crux of the matter
So when the repayments, are made, they’ll have to pay the principal and the interest.
The interest involves a fixed component (3%) and a variable component.
What is varible component? The variable component is effectively the short term policy rates.
So if the RBI keeps cutting these short term rates, private contractors get less money per instalment even if their roads are all nice and shiny.
And this can’t bode well for them because they probably put up the 60% back in the day by borrowing from another bank.
A bank that’s charging them long term interest rates that refuse to come down.
Conclusion
The widening gap between the short term policy rates and long term interest could easily spell the disaster for the entrepreneurs and in turn for the economy as a whole. The government should consider a special package for such entities given the unprecedented situations we found ourselves in.
From UPSC perspective, the following things are important :
Prelims level: Treaty of Peace and Friendship between India and Nepal
Mains level: Paper 2-India-Nepal border issue
A new map released by Nepal delivered a blow to the India-Nepal relations. But this is hardly the first time this has happened. The article clears some cobwebs about Nepal’s foreign policy. First, it throws light on the past trend set by Nepal. And drawing on the past experience, it suggests the changes India should adopt in new framework to deal with Nepal.
Nepal’s new map: Yet another knock on India-Nepal relations
As the parliament in Nepal gets ready to approve a new map that will include parts of Indian territory in Uttarakhand, Delhi is bracing for yet another knock to a bilateral relationship.
Many in the Indian strategic community believe that the train wreck was avoidable.
But others view the collision between Delhi and Kathmandu as both inevitable and imminent.
Even if the territorial issue had been finessed, something else would have triggered the breakdown.
Bigger fissures in relation
A closer look suggests that the territorial dispute is merely a symptom of the structural changes.
These structural changes are unfolding in the external and internal context of the bilateral relationship.
The question, then, is not what Delhi could have done to prevent the current crisis.
It should be about looking ahead to build more sustainable ties with Kathmandu.
2 factors India must consider and depart from
Any new framework for engaging Kathmandu must involve two important departures from the past in Delhi.
1) First is coming to terms with Nepal’s natural politics of balance.
2) The other is the recognition that Delhi’s much-vaunted “special relationship” with Kathmandu is part of the problem.
Let’s look at the history of Nepal’s geopolitics
The founder of the modern Nepali state, Prithvi Narayan Shah, described Nepal as a “yam between two rocks”.
He was pointing to the essence of Nepal’s geographic condition between the dominant power in the Gangetic plains on the one hand and Tibet and the Qing empire on the other.
Contrary to the conventional wisdom in India, China has long been part of Kathmandu’s international relations.
As the East India Company gained ground at the turn of the 19th century, Nepal’s rulers made continuous offers to Beijing to act as China’s frontline against Calcutta’s expansion into the Himalayas.
Kathmandu also sought to build a coalition of Indian princes to counter the Company.
Even after it lost the first Anglo-Nepal war in 1816, Kathmandu kept up a continuous play between Calcutta and Beijing.
As the scales tilted in the Company’s favour after the First Opium War (1839-42), Nepal’s rulers warmed up to Calcutta.
When the 1857 Mutiny shook the Company, Kathmandu backed it and regained some of the territories it lost when the Raj replaced the Company.
As the fortunes of the Raj rose, Kathmandu rulers enjoyed the benefits of being Calcutta’s protectorate.
India inherited this framework but has found it impossible to sustain.
Why the Treaty of Peace and Friendship (1950) lost its appeal?
The 1950 Treaty of Peace and Friendship gave the illusion of continuity in Nepal’s protectorate relationship with the Raj and its successor, independent India.
That illusion was continuously chipped away amid the rise of mass politics in Nepal, growing Nepali nationalism, and Kathmandu’s acquisition of an international personality.
The 1950 Treaty, which proclaims an “everlasting friendship” between the two nations, has become the symbol of Indian hegemony in Nepal.
In a paradox, its security value for India has long been hollowed out.
It is a political millstone around India’s neck that Delhi is unwilling to shed for the fear of losing the “special relationship”.
Delhi has been trapped into a perennial political play among Kathmandu’s different factions and responding to Nepal’s China card.
Weakening of “special relationship”: Essence of Nepal’s foreign policy
Once the Chinese Communist Party consolidated its power in Tibet and offered assurances to Nepal, Kathmandu’s balancing impulses were back in play.
At the risk of oversimplification, Nepal’s foreign policy since the 1950s has, in essence, been about weakening the “special relationship” with India and building more cooperation with China.
Kathmandu has used different labels to package its desire for greater room for manoeuvre between its two giant neighbours — non-alignment, diversification, “zone of peace”, equidistance, and a Himalayan bridge between India and China.
The stronger China has become, the wider have Kathmandu’s options with India become.
Way forward
It makes no sense for Delhi to hanker after a “special relationship” that a large section of Kathmandu does not want.
If Delhi wants a normal and good neighbourly relationship with Kathmandu, it should put all major bilateral issues on the table for renegotiation.
Such issues should include the 1950 treaty, national treatment to Nepali citizens in India, trade and transit arrangements, the open border and visa-free travel.
Delhi should make it a priority to begin talks with Nepal on revising, replacing, or simply discarding the 1950 treaty.
It should negotiate a new set of mutually satisfactory arrangements.
India had conducted a similar exercise with Bhutan to replace the 1949 treaty during 2006-07.
The issues and political context are certainly more complicated in the case of Nepal.
It is better that Delhi bites the bullet and makes a fresh beginning with Kathmandu rather than let the relationship deteriorate.
No bilateral relationship between nations can be built on sentiment — whether it is based on faith, ideology or inheritance.
Only those rooted in shared interests will endure.
Rather than object to Kathmandu’s China ties, Delhi must focus on how to advance India’s relations with Nepal.
It should bet that the logic of Nepal’s economic geography, its pursuit of enlightened self-interest, and Kathmandu’s natural balancing politics, will continue to provide a strong framework for India’s future engagement with Nepal.
Conclusion
Discarding the appearances of the “special relationship” might, in fact, make it easier for Delhi to construct a more durable and interest-based partnership with Kathmandu that is rooted in realism and has strong popular support on both sides.
From UPSC perspective, the following things are important :
Prelims level: Import of crude oil and its proportion in total consumption.
Mains level: Paper 3- Energy security.
The era we are living in is reigned by the uncertainties. And the oil market is not immune to these uncertainties. Against this background, India’s energy security is discussed in this article. Switching to the “just in case” needs with respect to crude oil is suggested by the author. But, that would require capital. So, how could the problem of capital be solved? Read the article to know…
Switching from just in time to just in case
The post-COVID “world (will be) switching from just in time to just in case” said economist Alan Kirman.
This is more so for the Indian petroleum sector.
The decision-makers of this sector should switch to a “just in case” policy mode.
Oil market: Land full of uncertainties
The oil market is in no man’s land. Few speak with conviction about its future trajectory.
Last month, it dropped into negative territory for a day in the USA.
But today the price of the same crude quality is above $30/barrel.
If one reads the commentary of experts, some predict that prices will soon cross $50/barrel while some predict price-crash to below $20/barrel.
The fine print of these reports is always caveated with the disclaimer, “it all depends” on one or more of the comparably uncertain variables.
These variables include economic growth, geopolitics — US-China relations, the timing of the development of an anti-COVID vaccine or a combination of all these variables.
The fact is no one really knows how the petroleum sector will fare in the “new normal” of the post-COVID world.
The problems policy-makers face: some known, some unknown
Policy-makers know that irrespective of the twists and turns in the petroleum market, India will need fossil fuels (coal, oil and gas) to drive its economic growth for at least the next decade, if not longer.
And that a sizeable percentage of these requirements will have to be imported.
The country does not have the geology to expect gushers especially in an environment of volatile (and relatively low) oil prices.
What must also be discomforting is the “known unknown” of the post-COVID stress.
They know that COVID has knocked the props from under the Indian economy.
They also know that every petroleum company, irrespective of whether it is in the private or public sector, will face an increasingly uncertain and challenging future business environment.
What they do not know is the nature of these challenges, and therefore, the conditions, sine qua non, for managing them.
Let’s look at some facts and figures of India’s crude oil requirements
India consumes around 50,00,000 barrels of crude oil every day.
Of that, it imports approximately 45,00,000 barrels/day making the country the third-largest crude market in the world.
Every month, on average, 70 loaded VLCC (very large crude carriers ) — accounting for 10 per cent of the global tanker market — bring crude oil to India.
Approximately 60 per cent of this oil is discharged in and around the Jamnagar area and then carried by pipelines to refineries in Jamnagar, Mathura, Panipat, Bina and Bhatinda.
And 50 per cent or so is sourced from Saudi Arabia, Kuwait, Abu Dhabi, Iran and Iraq.
It is against this background of post-COVID uncertainties and above facts India should consider switching to “just in case” policy mode.
Why should India consider switching to “just in case” policy mode?
We should analyse this by considering two scenarios
ONGC/OIL are strategically important PSUs.
Few have questioned the support to these two companies and the importance of harnessing our indigenous oil and gas reserves.
Until now, this support has been premised on the view that oil supplies are relatively scarce and that prices will trend upwards.
1) Low oil prices scenario
1) We now need to ask: What if, “just in case” the oil market is structurally oversupplied and prices fall to such low levels that it makes no commercial sense for ONGC/OIL to expend public resources on “ high risk, high cost” exploration?
Oil and gas are, after all, tradables and can be purchased on the high seas.
Should they not, given this possibility, contemplate redefining their core purpose and perhaps pivot away from oil and gas towards clean energy?
2) Choking of supply lines scenario
Looked at through a different lens but with a “just in case” mindset, the preponderance of crude supplies sourced from countries facing deep political, economic and social tensions raises the question:
What if these domestic problems choked our access?
How would we manage the disruption?
Our decision-makers have worried about supply security for decades.
But the circumstances created by COVID are new.
The issue of strategic reserves could, for instance, acquire a different hue.
We have currently 11 days of reserve cover (5.33 million tonnes) with plans to increase it to 24 days (11.83 million tonnes).
Were we to decide to build up these reserves to levels comparable to other countries of between 70 to 100 days of import cover, the issue would be capital.
Given the slowdown of the economy and the pressures on the exchequer, the government would not have the financial resources to invest in the creation of additional facilities.
The only way this financial hurdle could be overcome is if the government and the private sector invest jointly.
This collaborative option would have to be considered to counter the “just in case” contingency of prolonged and major disruption.
And if indeed such an option were acceptable, it could be extended to cover trading, crude purchases, co-freighting, subject of course to anti-trust and competition rules.
Consider the example to understand the importance of “just in case” thinking
An example to embed the importance of “just in case” thinking can be drawn from the geopolitics of our neighbourhood.
What if the relations between India/Pakistan/China took an ugly turn?
What security measures should we contemplate to protect the petroleum assets located in Mumbai and Jamnagar?
Consider the question “Over the decades, India has been grappling with the issue of energy security. With the rising uncertainties around the world, the issue has gained more prominence. In light of this, suggest the ways to tide over the disruption in oil supplies.”
Conclusion
In the backdrop of COVID, when all hands on decks are needed to tackle the “urgent” task of reviving the economy, the government must not, in the process, lose sight of the “importance” of creating, if nothing else, the mindset of preparedness to respond to “just in case outcomes”.
From UPSC perspective, the following things are important :
Prelims level: Provision for various sectors in stimulus package
Mains level: Paper 3-Comparison of of stimulus package of India with other economies.
Following the announcement of relief and stimulus package, the debate began over its various aspects. This article assesses the various aspects of the package and draws comparison with the package announced by the other countries. So, how does India fare compared with other countries?
Fiscal component of stimulus package
According to the IMF-PT (policy tracker), the fiscal component of the Indian package is estimated to be at least 3.5 per cent of GDP as expenditure for poor households, migrant workers and agriculture.
There is an additional 0.5 per cent of GDP for states to spend unconditionally, bringing the fiscal package excluding loans to businesses to at least 4 per cent of GDP.
The support for businesses (MSMEs) is estimated to be 2.7 per cent of GDP.
Of this, at least 2 per cent of GDP is in the form of 100 per cent credit guarantees and equity infusion.
Comparison with major emerging economies
Among major developing economies, only Brazil -8 per cent of GDP– and Peru -7 per cent of GDP– have a fiscal stimulus higher than the 5 per cent level for India.
The Brazil estimate includes about 3 per cent of GDP as working capital loans to businesses and households.
The fiscal support level for some important emerging economies is — China 2.5 per cent of GDP and Indonesia 3.5 per cent.
Why it is difficult to segregate the stimulus package?
While comparing the fiscal stimulus packages across countries, it is important to understand that such packages are in the nature of additional spending and tax reliefs.
Which can work directly through aggregate demand or indirectly by mitigating risk and enhancing access to fund.
Access to fund is ensured in the nature of credit guarantees to financial institutions and non-financial enterprises
A large number of fiscal stimulus packages announced by different countries contain credit guarantees to financial institutions, SMEs, and agriculture.
Hence, it is difficult to segregate fiscal stimulus into its pure and impure components.
Most economists, and international organisations, recognise that fiscal stimulus consists of both the pure and impure.
And includes three broad items — a direct “above-the-line” component, a “below-the-line” component and guarantees of various forms primarily credit.
The choice of using only one component of the fiscal stimulus is selective and highly inappropriate.
India as a positive fiscal stimulus outlier
To put the packages into perspective, the average of all fiscal measures in the G24 developing economies is equal to 3.6 per cent.
No matter how the calculation is done, India is a positive fiscal stimulus outlier; by IMF-PT calculations.
The stimulus is close to the largest among major emerging market economies.
So, how much rich countries are spending?
The rich nations are spending more — they can afford to. Japan announced what may be the upper limit to the expansion — 21.1 per cent of GDP.
However, this does include large elements of loans and credit guarantees.
Through a combination of several fiscal measures (tax deferrals, credit guarantees, etc.) the US has pledged close to 13 per cent of GDP.
The European Union, on average, has pledged 4 per cent of GDP.
The average for advanced countries is around 6 per cent of GDP.
Significance of monetary policy change made by RBI
The monetary policy change in India is quite significant.
The change paves the way for internationally competitive monetary policy.
That is, real interest rates comparable to those prevalent in competitor economies.
The repo rate now stands at 4 per cent, with inflation well contained.
This is substantially a much different, and much-improved RBI response than that what occurred in 2008-09.
At that time, as a monetary counter to the financial crisis, the RBI reduced the repo rate by 425 basis points to 4.75 per cent.
This was done over seven months and the prevailing CPI inflation rate was 10 per cent.
Economic reforms as a part of stimulus package
India has announced several economic reforms as a part of the stimulus package.
These are long-awaited — freeing up of the labour market, allowing farmers to sell their produce and land to who they choose, removal of archaic laws like the Essential Commodities Act, with the promise of more to come.
This is not an empty promise — the Centre will advance another 1.5 per cent of GDP to states to expand spending.
This advance will be conditional on them for undertaking long-pending reforms.
The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures.
Conclusion
The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures. We should use the crisis to re-orient India towards its long-awaited destiny.
From UPSC perspective, the following things are important :
Prelims level: G-7 countries, TPP
Mains level: Paper 2- US-China relations and implications for India
While the world is busy battling pandemic, China has embarked upon completing its pet project: stripping Hong Kong off its special status. This article explains the significance of China’s actions. And the options the U.S. could explore as a response to China’s move.
Tipping points in History
In 1911 Germany sparked an international crisis when it sent a gunboat into the Moroccan port of Agadir.
Winston Churchill wrote in his history of the First World War, “all the alarm bells throughout Europe began immediately to quiver.”
In 1936 Germany provoked another crisis when it marched troops into the Rhineland, in flagrant breach of its treaty obligations.
In 1946, the Soviet Union made it obvious it had no intention of honoring democratic principles in Central Europe, and Churchill was left to warn that “an iron curtain has descended across the Continent.”
Analogies: Not perfect, but not inapt, either.
Analogies between these past episodes and China’s decision this week to draft a new national security law on Hong Kong aren’t perfect.
First, Hong Kong is a Chinese port, not a faraway foreign one.
Second, Hong Kong’s people have ferociously resisted Beijing’s efforts to impose control, unlike the Rhineland Germans who welcomed Berlin’s.
And lastly, the curtailment of freedom that awaits Hong Kong is nothing like the totalitarian tyranny that Joseph Stalin imposed on Warsaw, Budapest and other cities.
But the analogies aren’t inapt, either.
Beijing has spent the better part of 20 years subverting its promises to preserve Hong Kong’s democratic institutions.
Now it is moving to quash what remains of the city’s civic freedoms through a forthcoming law that allows the government to punish speech as subversion and protest as sedition.
The concept of “one country, two systems,” was supposed to last at least until 2047 under the terms of the 1984 Sino-British Joint Declaration.
Now China’s rulers have been openly violating that treaty, much as Germany openly violated the treaties of Locarno and Versailles.
Rethink of the U.S. strategic approach to China
US administration has undertaken a sober rethink of it’s strategic approach to China.
The outlines of which are described in a new inter-agency document quietly released by the White House last week.
Gone from this new vision are the platitudes about encouraging China’s “peaceful rise” as a “responsible stakeholder” in a “rules-based order.”
Instead, Beijing is described, accurately, as a habitual and aggressive violator of that order.
It also describes China as a domestic tyrant, international bully and economic bandit that systematically robs companies of their intellectual property, countries of their sovereign authorities, and its own people of their natural rights.
A critic might note that this description of China’s behavior sounds a lot like Trump’s.
Sort of, except that the comparison trivializes the scale of China’s abuses and neglects the breadth and longevity of its challenge.
Why Now and what is the US response?
Beijing almost certainly chose this moment to strike because it calculated that a world straining under the weight of a pandemic and a depression lacked the will and attention to react.
On Friday, Trump said he would strip Hong Kong of its privileged commercial and legal ties to the U.S.
Issue with the move: That punishes the people of Hong Kong at least as much as it does their rulers in Beijing.
What’s a better course for the U.S.? A few ideas:
Sanction Chinese officials engaged in human-rights abuses in Hong Kong under the Global Magnitsky Act.
Upgrade relations with Taiwan and increase arms sales, including top-shelf weapons’ systems such as the F-35 and the Navy’s future frigate.
Re-enter the Trans-Pacific Partnership (TPP)agreement as a counter to China’s economic influence.
Publicly press all G-7 countries to stop doing business with telecom-giant Huawei as a meaningful response to the Hong Kong law.
Give every Hong Kong person an opportunity to easily obtain a U.S. residency card, even a passport.
Conclusion
If all this and more were announced now, it might persuade Beijing to pull back from the brink. In the meantime, think of this as Rhineland moment with China — and remember what happened the last time the free world looked aggression in the eye, and blinked
From UPSC perspective, the following things are important :
Prelims level: Industrial Disputes Act 1947
Mains level: Paper 2- Threshold limits in IDA and issues with it.
Sometimes the measures we come up with end up doing exactly the opposite of what they were supposed to do. This might be the case with some provisions in the Industrial Dispute Act. This article deals with 3 such provisions in the IDA. So, what are these provisions? How the issues caused by these provisions could be resolved? Read to know more…
How provisions of IDA could be detrimental?
What made so many migrants suddenly long for their village after lockdown?
The answer lies in our Industrial Disputes Act (IDA), the motherboard of our labour laws.
IDA has encouraged short-term employment, low skills and zero security.
It did this by setting up thresholds which disincentivised long-term commitment of workers to entrepreneurs and vice versa.
It also kept firms informal and unwilling to invest in human capital.
This is why when the lockdown happened, it turned into a migrant crisis.
Let’s look at 3 thresholds in IDA that are causing harm
1) Hire more than 99 workers, and you will have to notify the government before you can fire any one of them.
2) Hire more than 20 and you open yourself up to provident fund commitments and bonus payments.
3) If you want to deny workers severance pay, never keep them continuously employed for more than 240 days.
So, how IDA ends up discouraging formalisation?
Given these provisions in the IDA, entrepreneurs are reluctant to hire more than 99 workers for over 240 days.
The employers are naturally tempted to observe these thresholds and duck under the radar.
This is made easier by the fact that these thresholds mesh well with the fear that the middle-class — and upwards — have of a working-class takeover.
As a result, these thresholds have only encouraged the informal sector, where both unregistered labour and unregistered entrepreneurs dominate.
It has led to the proliferation of informal enterprises and low-skill workers.
In the first 15 years of this century itself, over half the increase in total employment has been that of contract workers.
This has also led to a phenomenal rise in MSMEs as the IDA has discouraged entrepreneurs from harbouring any ambitions to grow big and formal.
The MSMEs have, consequently, increased in number from 3.6 crore units in 2012 to about 6 crore today.
Since there are constraints on both the workforce size and duration of employment, upskilling and R&D naturally become early casualties.
India spends only 0.7 per cent of its GDP in R&D, one of the lowest in the world, while South Korea spends 4.2 per cent.
Contribution of MSME in GDP is not increasing
Over 94 per cent of MSMEs are in the Micro sector and their contribution to GDP is just not measuring up.
In 2012, MSMEs produced 37.54 per cent of our GDP.
But this number fell to 30.7 per cent in 2015, and in 2019 it decreased further to 29.7 per cent, though they are still working full throttle.
Yet, the lure to stay on the good side of the IDA thresholds is so compelling that even formal units are today outsourcing from the informal ones.
Over time, the IDA has succeeded in converting a large number of organised sector companies into strange, hybrid economic creatures, both fishy and foul.
But, how removal of the 3 thresholds will change the situation?
If the 3 mentioned thresholds are removed, every worker — regardless of factory size — is entitled to the same rights.
Likewise, every employer, regardless of factory size, can hire and fire workers.
There is greater freedom on both sides, but this freedom comes with a price that does not discourage either size or skills in an enterprise.
The worker can now be fired without notifying the government, but must be compensated with severance wages, regardless of the size of the firm.
Also, unlike the IDA, all the firms must have a formal dispute resolution board.
Now that the enterprises have been freed of the size threshold, entrepreneurs get no advantage in dwarfing their firms.
Other reforms can soon follow, such as allowing for workers’ representation in a firm’s supervisory board, as it happens in Germany.
Measures such as these create trust between employees and employers, and also remove the threatening spectre of a working-class strike.
Consider the question “Various provision of the Industrial Disputes Act which were enacted but with a different purpose now seems to place both the workers and employers in a disadvantageous position. In light of this statement, examine the issues with the threshold limits of the number of employees and number of employment days in the Industrial Disputes Act.”
Conclusion
In the ultimate analysis, the IDA does not produce winners, only losers. The workers remain skill-stunted and insecure, and the entrepreneurs, too, pull back from releasing their much-vaunted “animal spirits”. So, the IDA thresholds must go and not be merely fiddled with, as some states have done.
Back2Basics: Industrial Disputes Act 1947
The main purpose of the Industrial Disputes Act, 1947 is to ensure fair terms between employers and employees, workmen and workmen as well as workmen and employers.T
The objective of the Industrial Disputes Act is to secure industrial peace and harmony by providing machinery and procedure for the investigation and settlement of industrial disputes by negotiations.
From UPSC perspective, the following things are important :
Prelims level: India-Africa Forum summit
Mains level: Paper 3- Scope to increase the ties between India and Africa amid covid pandemic.
Long thought to be the backwater of the world, Africa has been successful in shading its past image and emerge on the global stage as region hard to ignore. And countries across the world are vying to increase their engagement with the region. This article examines the scope for increasing the ties with the region amid the pandemic.
India’s association with African Union
Africa Day is observed every year on May 25 to commemorate the founding of the Organisation of African Unity, now known as the African Union.
India has been closely associated with it on account of its shared colonial past and rich contemporary ties.
The Manohar Parrikar Institute for Defence Studies and Analyses has hosted an Africa Day Round Table annually for the last four years in order to commemorate this epochal event.
Economy and pandemic
The World Bank in its April report, assessed that the COVID-19 outbreak has sparked off the Sub-Saharan Africa (SSA) region’s first recession in 25 years.
Growth is expected to plummet to between -2.1 and -5.1 per cent in 2020, from a modest 2.4 per cent in 2019.
With high rates of HIV, malaria, diabetes, hypertension and malnourishment prevalent, a large number of Africans were already faced with a health and economic crisis.
The steep decline in commodity prices has spelt disaster for the economies of Nigeria, Zambia and Angola.
Need for financial support
Precarious fiscal positions have ruled out any major governmental stimulus.
Public debt has mounted.
According to the World Bank, the SSA region paid $35.8 billion in total debt service in 2018.
Which is 2.1 per cent of regional gross domestic product (GDP).
Together, African countries have sought a $100 billion rescue package.
This rescue package includes a $44 billion waiver of interest payment by the world’s 20 largest economies.
The IMF’s debt service relief of $500 million is meant for 25 countries of which 19 are in Africa, but that is a drop in the bucket.
It is clear that without outside support, Africa will find it very difficult to meet the challenge.
Why the increased interest in engagement with Africa?
Africa’s rich natural resources, long-term economic potential, youthful demography and influence as a bloc of 54 countries in multi-lateral organisations is apparent.
Many have an eye for economic opportunities, including in energy, mining, infrastructure and connectivity.
Japan hosted the 7th Tokyo International Conference for African Development (TICAD) in August 2019.
Russia hosted the first-ever Russia-Africa Summit last year.
Brazil, home to the largest population of people of African descent outside of Africa, has also sought to develop closer ties.
Cuba has sent medical teams to help Africa.
Chinese Bonhomie with the region
China’s engagement of Africa, as elsewhere, is huge but increasingly regarded as predatory and exploitative.
Its annual trade with Africa in 2019 stood at $208 billion, in addition to investments and loans worth $200 billion.
Traditionally, China’s participation in infrastructure projects has been astonishing.
Having famously built the 1,860 km Tanzania-Zambia railway line in 1975, and the Addis Ababa-Djibouti and Mombasa-Nairobi lines more recently, China is now eyeing to develop the vast East Africa Master Railway Plan.
It is also developing the Trans-Maghreb Highway, the Mambilla Hydropower Plant in Nigeria, the Walvis Bay Container Terminal in Windhoek and the Caculo Cabaca Hydropower project in Angola.
At the Forum for China-Africa Cooperation (COCAC) in 2018, China set aside $60 billion in developmental assistance.
And it was followed by a whopping $1 billion Belt and Road (BRI) Infrastructure Fund for Africa.
China has followed up with robust health sector diplomacy in the wake of the pandemic.
But its image has been tarnished by defective supplies of PPE gear and discriminatory behaviour against Africans in Guangzhou.
This also led to an embarrassing diplomatic row.
India’s relations with Africa
In the last few years, India’s relations with Africa saw a revival.
India-Africa trade reached $62 billion in 2018 compared to $39 billion during 2009-10.
After South Asia, Africa is the second-largest recipient of Indian overseas assistance with Lines of Credit (LOC) worth nearly $10 billion (42 per cent of the total) spread over 100 projects in 41 countries.
Ties were boosted at the India Africa Forum Summit (IAFS) in 2015.
40 per cent of all training and capacity building slots under the ITEC programme have traditionally been reserved for Africa.
Approximately 6,000 Indian soldiers are deployed in UN peace-keeping missions in five conflict zones in Africa.
Bilateral cooperation includes solar energy development, information technology, cyber security, maritime security, disaster relief, counter-terrorism and military training.
India has also launched several initiatives to develop closer relations, including the first-ever India Africa Defence Ministers conclave in February this year on the margins of the Defence Expo 2020.
India provides about 50,000 scholarships to African students each year.
The huge Indian diaspora is a major asset.
India had planned to host the Fourth India Africa Forum Summit in September this year.
However, the COVID-19 pandemic may cause it to be delayed.
India’s support amid covid pandemic
India has already despatched medical assistance to 25 African countries.
PM Modi has had a telephonic talk with President Cyril Ramaphosa of South Africa who is the current chairperson of the African Union, and separately others such as the presidents of Uganda and Ethiopia.
India could consider structuring a series of virtual summits in zonal groups with African leaders across the continent over the next few months.
That could both provide a platform for a cooperative response to the pandemic and also serve as a precursor to the actual summit in the future.
The Ministry of External Affairs has already extended the e-ITEC course on “COVID-19 Pandemic: Prevention and Management Guidelines for Healthcare Professionals” to healthcare workers in Africa.
The Aarogya Setu App and the E-Gram Swaraj App for rural areas for mapping COVID-19 are technological achievements that could be shared with Africa.
Since the movement of African students to India for higher education has been disrupted, India may expand the e-VidyaBharti (tele education) project to establish an India-Africa Virtual University. Agriculture and food security can also be a fulcrum for deepening ties.
With the locust scourge devastating the Horn of Africa and the pandemic worsening the food crisis, India could ramp up its collaboration in this sector.
India could also create a new fund for Africa and adapt its grant-in-aid assistance to reflect the current priorities.
This could include support for new investment projects by Indian entrepreneurs especially in the pharmaceutical and healthcare sectors in Africa.
Time for Quad Plus to propose cooperation with African countries
Both India and Japan share a common interest in forging a partnership for Africa’s development.
It is time for the Quad Plus, in which the US, India, Japan and Australia have recently engaged other countries such as the ROK, Vietnam, New Zealand, Israel and Brazil, to exchange views and propose cooperation with select African countries abutting the Indian Ocean.
After all, the Indo-Pacific straddles the entire maritime space of the Indian Ocean.
Consider the 2015 question asked by the UPSC “Increasing interest of India in Africa has its pros and cons. Critically examine”
Conclusion
The pandemic is a colossal challenge but it may create fresh opportunities to bring India and Africa closer together.
From UPSC perspective, the following things are important :
Prelims level: Hong Kong, Taiwan location in the map
Mains level: Paper 2- India-China relation and tension over border dispute
The recent India-China standoff in Ladakh points to a larger picture of the Chinese agenda of regional dominance. The US-China tension has proved to be the backdrop against which the Ladakh standoff is playing out. This article suggests that this standoff is not a standalone event. It could well be a trigger for domino effect.
What the intensification of tension between India-China suggests?
1) China is feeling threatened
An authoritarian regime whose legitimacy rests primarily on its economic performance is faced with a situation where growth is expected to plummet.
It is a sign that Beijing is increasingly feeling beleaguered.
In response, it has embarked on a strategy of brinkmanship with several goals in mind.
External adventurism, when cloaked in the garb of ultra-nationalism, can shore up a regime’s legitimacy at home.
2) It could be a move to divert the attention of the world
Simultaneously, it can act as a diversionary measure to escape international criticism for Beijing’s attempt to cover up the spread of the coronavirus.
Many countries hold China responsible for the huge cost in human lives and suffering as well as the unprecedented economic distress.
In the face of such criticism, the Chinese regime is increasingly using jingoistic jargon to build up domestic support.
President Xi Jinping’s recent speech to the PLA is an outstanding example of this strategy.
He exhorted the Chinese armed forces to “prepare for war” in order to “resolutely safeguard national sovereignty” and “the overall strategic stability of the country”.
This is a sign that the Communist Party of China (CPC) feels increasingly threatened both domestically and externally.
Let’s look at the deterioration of the US-China relations
China’s relations with the U.S. have been going downhill almost since the beginning of the Donald Trump presidency.
Washington has periodically imposed economic sanctions on China and Beijing has retaliated in kind.
Trade talks have faltered because of growing protectionist sentiments in the U.S. and Chinese inability to adequately respond to them.
The chipping away at Hong Kong’s autonomous status by Beijing and the suppression of the pro-democracy movement in Hong Kong has led to severe criticism by the U.S. administration and in the Congress.
Differences over the issue of Taiwan have added to tensions, with China viewing the U.S. as the primary impediment preventing Taiwan’s integration.
The Trump administration has significantly increased support to Taiwan with arms sales that have added to China’s concern.
U.S.-China rivalry in South-China Sea
Above all, the U.S.-China rivalry in the South China Sea acts as the potential flashpoint that may well lead to a shooting war.
So far, it has been careful that these moves do not trigger a serious confrontation with the U.S.
Washington has a strong interest in preventing China from asserting control over the South China Sea as maintaining free access to this waterway is important to it for economic reasons.
It also has defence treaty obligations to the Philippines, which has vigorously contested Chinese territorial claims.
Further, China’s control of the South China Sea would be a major step toward replacing the U.S. as the foremost power in the Indo-Pacific region.
India-China relation questions have been the leitmotif in the UPSC papers. Just the theme of the question changes. Consider 2017 question “China is using its economic relations and positive trade surplus as a tool to develop potential military power status in Asia. In light of this statement, discuss its impact on India as her neighbour.”
Conclusion
Increased Chinese adventurism could result in an escalation of U.S.-China confrontation in the South China Sea. If that happens, the India-China face-off in Ladakh could become part of a much larger “great game”, with the U.S. trying to preserve the status quo and China attempting to change it to further its objective of regional dominance at the U.S.’s expense. The current India-China crisis should, therefore, be seen in its proper context and not as an isolated event.
From UPSC perspective, the following things are important :
Prelims level: APMC Act, ECA
Mains level: Paper 3- Reforms in agri-marketing and amendment in ECA and APMC Acts.
The article discusses the recently announced reforms in the agri-marketing. The legal changes promised are expected to deal with problems farmer face in selling their products and a law dealing with contract farming. These legal reforms are expected to increase farmers’ income.
Some of the issues faced by the farmers
If any class of economic agents of our country has been denied the constitutional right of freedom of trade, it is farmers.
They don’t have the freedom of selling their produce even in their neighbourhood.
Remunerative price is still a mirage for them.
Their farm incomes are at the mercy of markets, middlemen and money lenders.
For every rupee that a farmer makes, others in the supply chain get much more.
Both farmers and consumers are the sufferers of the exploitative procurement and marketing of farm produce.
The public investments in irrigation and other infrastructure has increased.
The institutional credit and minimum support price given over the years has been increasing.
Yet, farmers are shackled when it comes to selling their produce.
Restriction on the farmers: Echoes from the past
This exploitation of farmers has its roots in the Bengal famine of 1943, World War II, and the droughts and food shortages of the 1960s.
The Essential Commodities Act, 1955, and the Agricultural Produce Market Committee (APMC) Acts of the States are the principle sources of violation of the rights of farmers to sell their produce at a price of their choice.
These two laws severely restrict the options of farmers to sell their produce.
Farmers continue to be the victims of a buyers’ market.
This is the principal cause of their exploitation.
Renowned farm scientist M.S. Swaminathan has for long argued for the right of farmers to sell their produce as they deem fit.
Balancing the interest of consumers and the farmers
Given the economic disparities in the country, the interests of consumers need to be protected.
But that should not happen at the cost of the producers of the very commodities that the consumers need.
For various reasons, a balance in this regard could not be struck.
The restrictive trade and marketing policies being practised with respect to agricultural prices have substantially eroded the incomes of farmers.
Let’s have a look at a study on agricultural policies in India
A study on agricultural policies in India by the Indian Council for Research on International Economic Relations-Organisation for Economic Co-operation and Development (2018), co-authored by the renowned farm economist Ashok Gulati, was published with startling revelations.
It concluded that the restrictions on agricultural marketing amounted to ‘implicit taxation’ on farmers to the tune of ₹45 lakh crore from 2000-01 to 2016-17.
This comes to ₹2.56 lakh crore per year.
No other country does this.
Reforms to remove the hurdles in farmer getting remunerative price
Recently announced package has approximately ₹4 lakh crore support for farming and allied sectors, aimed at improving infrastructure and enhancing credit support.
But the most welcome feature of this package is the firm commitment to rewriting the Essential Commodities Act and the APMC laws.
The revision of these restrictive laws is long overdue and will remove the hurdles that farmers face in getting a remunerative price for their produce by giving them more options to sell.
This long-awaited revision needs to be undertaken with care and responsibility so that no space or scope is left for farmers to be exploited yet again.
While allowing several buyers to directly access the produce from the farmers, a strong and effective network of Farm Producers’ Organisations should be created to enhance the bargaining power of farmers.
This will ensure that individual farmers are not exploited.
An effective law on contract farming is also the need of the hour.
Law on contract farming will secure incomes of farmers besides enabling private investments.
Yet another unique feature of this package has been its comprehensiveness towards improving the incomes of farmers through a range of activities.
A study by the National Institute of Agricultural Extension Management has revealed that of the 3,500 farmers’ suicides examined, there was no farmer who had supplementary incomes from dairy or poultry.
The huge support to animal husbandry and fisheries in the stimulus package underlines the need for diversifying the income sources of farmers.
Consider the question “The APMC Acts of the has been blamed for poor price realisation by the farmers. Recently announced reforms promise to do away with such issues in the APMC Act. In light of this, examine the issues with APMC Acts and how the promised reforms are expected to resolve such issues.”
Conclusion
It is time to allow our farmers to sell their produce anywhere for their benefit. All stakeholders should be taken on board while revising restrictive agri-marketing laws.
From UPSC perspective, the following things are important :
Prelims level: Upstream and downstream sectors
Mains level: Paper 3-Disruption in supply chains and ways to ensure their recovery.
Disruption of the supply chains lies at the heart of the decline in the output amid lockdown. And the government has announced the fiscal stimulus to revive the economy. How effective will be the fiscal stimulus to streamline the supply chains? The focus of this article is on tackling this question.
Disruption in supply chains and decline in output
Much of the decline in output is due to supply chain disruptions generated by the lockdown.
Government spending can do little to alleviate this.
Putting money in the hands of people can increase the demand for goods but cannot increase the supply of goods and services.
In modern economies, the production of goods happens through complex supply chains that traverse geographical boundaries.
Let’s understand how supply chains work
Upstream sectors like ‘mining’ produce metals that are in turn used to produce machines.
These machines are used to sow seeds, harvest crops, and transport fuel.
Finally, the harvested crops are used by downstream sectors to produce flour and bread.
At each step, machines and labour combine to produce goods which are the inputs for sectors further downstream.
So, how lockdown affected the supply chains?
Under the lockdown, numerous inputs have not moved from their producers to their users.
These disruptions may not at first generate a reduction in consumer goods like bread.
However, the availability of consumer goods will begin to decline as bakers run out of flour, and mills exhaust their stocks of wheat.
And there is no way to guarantee the flow of essential goods while suspending the production of non-essential goods.
Automotive spare parts may be non-essential in the short run, but become essential as food-carrying trucks begin to break down.(i.e. in the long run)
How far is the long run? This is difficult to say; there may be some variation across goods.
Impact of labour shortage on supply chains
The supply chain disruptions are going to be amplified by labour shortage as workers remain at home.
Countries like India are likely to experience a greater reduction in output on this count than, say, Europe or the U.S.
This is because of the higher labour intensity of production in India.
To understand this, think of the difference in unloading of goods in the port at Rotterdam and the port at Kochi.
Is it viable to substitute labour with capital? Poorer countries are less likely to be able to substitute locked down labour with capital because of the dearth of capital in these nations.
Adapting and Adjusting to the new reality
As economies emerge out of the lockdown, entrepreneurs, workers, and consumers must adjust to the new reality.
The world supply chain must adapt.
Firms may choose to source inputs from suppliers in their geographical proximity to minimise the risk of future disruptions.
But this involves building productive capacity at new locations, all of which requires investments fuelled by savings.
Furthermore, the investments must be guided by price signals.
Within a market economy, the movement of prices provides the incentive and information needed to adapt and grow.
As economist Ronald Coase put it, prices are bundles of information wrapped in an incentive.
As the prices of some inputs rise, the buyers of these inputs look for alternate suppliers, and firms which did not hitherto produce the good have an incentive to do so.
The key to economic recovery lies in millions of such adjustments.
Through such adjustments, firms locate new providers of inputs, new buyers of their output, and build factories at new locations.
How fiscal stimulus would disrupt the recovery of supply chains?
Market adjustment processes are likely to be disrupted by government stimulus packages.
Governments spend by printing money, raising debt, or increasing taxes.
Irrespective of the way in which the expenditure in funded, resources are transferred from private entrepreneurs to government bureaucrats.
When governments print money, they draw resources through inflation.
Bureaucrats tend to be less efficient than profit-motivated firms in allocating scarce resources.
Bureaucrats have little incentive or information to bring about the granular supply chain adjustments necessary to revive growth.
As the stimulus package kicks in, economic efficiency is likely to decline and so are the chances of a timely recovery of output.
A lesson from West Germany after WW II
The experience of West Germany after World War II has a useful lesson for India.
Beginning mid-1944, Allied bombing disrupted the German supply chain by targeting bottleneck sectors like electric power generation.
This destruction of the supply chain devastated the German economy.
Per person food production fell to about half of its pre-war level.
Two years later, this changed after Chancellor Ludwig Erhard lifted price controls and cut taxes.
West German entrepreneurs re-established a thriving supply chain through which goods went from upstream sectors to final consumers.
By 1950, per capita income in West Germany had reached its pre-war level.
Consider the question “Supply chain disruption has been at the core of economic consequences of the corona pandemic. New adjustment in the supply chains would be the norm in the aftermath of the pandemic. What these readjustments would entail? Suggest the measures to help the supply chains recover.”
Conclusion
The recent supply chain disruptions are likely to last long. The path to recovery lies in cutting government expenditure, removing price controls, and opening up trade.
