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.
From UPSC perspective, the following things are important :
Prelims level: GSTN
Mains level: Paper 3- Challenges ON-ORC could face and how the GST could offer valuable lesson for ON-ORC
Never before we felt the necessity of portable benefit schemes as we did in the wake of the pandemic. Portable ration card could have mitigated the suffering of migrant workers to some extent. But it was not to be. This article examines the challenges in implementing the idea of ON-ORC and offers the solution to these challenges by drawing on the lessons learned from GST. At the same time, the shortcoming of GST can also be avoided in the ON-ORC.
What is One Ration Card (ON-ORC)?
In the present system, a ration cardholder can buy foodgrains only from an Fair Price Shop that has been assigned to her in the locality in which she lives.
However, this will change once the ONORC system becomes operational nationally.
Under the ONORC system, the beneficiary will be able to buy subsidised foodgrains from any FPS across the country.
The new system, based on a technological solution, will identify a beneficiary through biometric authentication on electronic Point of Sale (ePoS) devices installed at the FPSs.
This would enable that person to purchase the number of foodgrains to which she is entitled under the NFSA.
Portable welfare benefit and attempts so far to achieve it
The idea of portable welfare benefits means a citizen should be able to access welfare benefits irrespective of where she is in the country.
In the case of food rations, the idea was first mooted under the UPA government by a Nandan Nilekani-led task force in 2011.
The current government had committed to a national rollout of One Nation, One Ration Card (ON-ORC) by June 2020, and had initiated pilots in 12 states.
Progress on intra-state and inter-state portability
While intra-state portability of benefits has seen good initial uptake, inter-state portability has lagged.
The finance minister has now announced the deadline of March 2021 to roll out ON-ORC.
So, to ensure a smooth rollout, let’s review the challenges thus far
1) The fiscal implications:
ON-ORC will affect how the financial burden is shared between states.
2) The larger issues of federalism and inter-state coordination:
Many states are not convinced about a “one size fits all” regime because i) they have customised the PDS through higher subsidies, ii) higher entitlement limits, and iii) supply of additional items.
3) The technology aspect:
ON-ORC requires a complex technology backbone that brings over 750 million beneficiaries, 5,33,000 ration shops and 54 million tonnes of food-grain annually on a single platform.
How the lessons learned from GST can be applied to deal with the above 3 challenges?
1. Fiscal challenge
Just like with ON-ORC, fiscal concerns had troubled GST from the start.
States like Tamil Nadu and Gujarat that are “net exporters” were concerned they would lose out on tax revenues to “net consumer” states like UP and Bihar.
Finally, the Centre had to step in and provide guaranteed compensation for lost tax revenues for the first five years.
The Centre could provide a similar assurance to “net inbound migration” states such as Maharashtra and Kerala that any additional costs on account of migrants will be covered by it for the five years.
2. We could have a National council for ON-ORC
GST also saw similar challenges with broader issues of inter-state coordination.
In a noteworthy example of cooperative federalism, the central government created a GST council consisting of the finance ministers of the central and state governments to address these issues.
The government could consider a similar national council for ON-ORC.
To be effective, this council should meet regularly, have specific decision-making authority, and should operate in a problem-solving mode based on consensus building.
3. Technological aspect: PDS Network
GST is supported by a sophisticated tech backbone, housed by the GST Network (GSTN), an entity jointly owned by the Centre and states.
A similar system would be needed for ON-ORC.
The Nilekani-led task force recommended setting up of a PDS network (PDSN).
PDSN would track the movement of rations, register beneficiaries, issue ration cards, handle grievances and generate analytics.
Since food rations are a crucial lifeline for millions, such a platform should incorporate principles such as inclusion, privacy, security, transparency, and accountability.
The IM-PDS portal provides a good starting point.
Also, there are certain shortcomings in GST which we could avoid in ON-ORC
We should learn from the shortcomings and challenges of the GST rollout. For example:
1)Delay in GST refunds led to cash-flow issues.
Similar delays in receiving food rations could be catastrophic.
Therefore, ON-ORC should create, publish and adhere to time-bound processes.
The time-bound processes could be in the form of right to public services legislation that have been adopted by 15 states, and rapid grievance redress mechanisms.
2)Increase in compliance burdenfor MSMEs, especially for those who had to digitise overnight.
Similar challenges could arise in ON-ORC.
PDS dealers will need to be brought on board, and not assumed to be compliant.
Citizens will need to be shielded from the inevitable teething issues by keeping the system lenient at first.
This can be done by providing different ways of authenticating oneself and publicising a helpline widely.
Consider the question “One Nation-One Ration Card(ON-ORC) could solve many problems faced by the beneficiaries when they move across the country. Examine the challenges the ON-ORC could face. Suggest ways to deal with these challenges.”
Conclusion
If done well, ON-ORC could lay the foundation of a truly national and portable benefits system that includes other welfare programmes like LPG subsidy and social pensions. It is an opportunity to provide a reliable social protection backbone to migrants, who are the backbone of our economy.
From UPSC perspective, the following things are important :
Prelims level: MOOCs
Mains level: Paper 2- Is online learning a substitute for the traditional educational institutions?
Left with no choice, many education institutions turned to online mode. But could that be a new normal? This article analyses the indispensable role of online education. However, online education cannot be a substitute for traditional education institutes. WHY? Read the article to know about the vital role of traditional educational institutions…
Online education (OE): Supplement not the substitute
The incredible synergy unleashed by information and communications technology (ICT) is the best thing to have happened to education since the printing press.
Indeed, higher education today is unthinkable without some form of the computer and some mode of digitised data transmission.
OE can use content and methods that are hard to include in the normal curriculum.
OE can put pressure on lazy or incompetent teachers.
OE can provide hands-on experience in many technical fields where simulations are possible.
And OE can, of course, be a powerful accessory for affluent students able to afford expensive aids.
As products of this revolution, online methods of teaching and learning deserve our highest praise — but only when cast in their proper role.
This proper role is to supplement, support and amplify the techniques of face-to-face education.
The moment they are proposed as a substitute for the physical sites of learning we have long known — brick-and-cement schools, colleges, and universities — online modes must be resolutely resisted.
So, what are the vested interests involved?
Resistance to OE is often dismissed as the self-serving response of vested interests, notably obstructive, technophobic teachers unwilling to upgrade their skills.
But these are not the only vested interests involved.
Authoritarian administrators are attracted by the centralised control and scaling-at-will that OE offers.
Educational entrepreneurs have been trying to harvest the billions promised by massive open online courses (MOOCs) — think of Udacity, Coursera, or EdX.
Pundits are now predicting post-pandemic tie-ups between ICT giants like Google and Amazon and premium education brands like Harvard and Oxford that will launch a new era of vertically-integrated hybrid OE platforms.
Is OE a viable alternative to traditional educational institutions (TEI) for the typical Indian student?
No one with access to an elite TEI chooses OE.
Instead, we know that OE always loses in best-to-best comparisons.
Favourable impressions about OE are created mostly by comparing the best of OE with average or worse TEIs.
But is it true that the best OE is better than the average college or university?
OE claims that neither the campus nor face-to-face interaction are integral to education.
Since the comparative evaluation of virtual versus face-to-face pedagogic interaction needs more space, the campus question is considered here.
How does the typical student’s home compare with a typical TEI campus?
Census 2011 tells us that 71 per cent of households with three or more members have dwellings with two rooms or less.
According to National Sample Survey data for 2017-18, only 42 per cent of urban and 15 per cent of rural households had internet access.
Only 34 per cent of urban and 11 per cent of rural persons had used the internet in the past 30 days.
It is true that many TEIs (both public and private) have substandard infrastructure.
But these data suggest that the majority (roughly two-thirds) of students are likely to be worse off at home compared to any campus.
The impact of smartphone capabilities and stability of net connectivity on OE pedagogy also needs to be examined.
Importance of college as a social space
It is as a social rather than physical space that the college or university campus plays a critical role.
Public educational institutions play a vital role as exemplary sites of social inclusion and relative equality.
In Indian conditions, this role is arguably even more important than the scholastic role.
The public educational institution is still the only space where people of all genders, classes, castes, and communities can meet without one group being forced to bow to others.
Whatever its impact on academics, this is critical learning for life.
Women students, in particular, will be much worse off if confined to their homes by OE.
Consider the question- “Covid-19 pandemic forced many educational institute to explore the online more of education. And this also brought to the fore the potential of the online mode of education. In light of this, examine the issues with substituting the online mode of education for the traditional educational mode.”
Conclusion
Though an indispensable supplement for traditional education, there are certain aspects of education and a social life that online learning cannot substitute. So, the government should not divert its attention from the traditional educational institution and look at online education as its substitute.
From UPSC perspective, the following things are important :
Prelims level: Various location mentioned in the article.
Mains level: Paper 2- Implications of dispute for India China relation
The article gives an in-depth analysis of the current border dispute between India and China in Ladakh. But the present dispute follows the pattern. China has been encroaching and gaining control over the disputed territory since the 1980s. And this dispute also fits into that pattern.
China acting strategically in Ladakh
While India has pursued its core national interests in J&K, China’s response was strategic — a shift that may have a lasting imprint on geopolitics.
We have been harping on the “differing perception” theory of the LAC for decades.
But in reality China has been gaining control over a massive “disputed territory” in Eastern Ladakh since the 1980s.
Major Chinese encroachment events
The Chinese first made encroachments into the 45-km long Skakjung pastureland in Demchok-Kuyul sector.
This resulted in local Changpas of Chushul, Tsaga, Nidar, Nyoma, Mud, Dungti, Kuyul, Loma villages gradually losing their winter grazing.
Ladakh’s earlier border lay at Kegu Naro — a day-long march from Dumchele.
Starting from the loss of Nagtsang in 1984, followed by Nakung (1991) and Lungma-Serding (1992), the last bit of Skakjung was lost in 2008.
The PLA followed the nomadic Rebo routes for patrolling in contrast to Indian authorities restricting Rebo movements that led to the massive shrinking of pastureland and border defence.
By the 2000s, the PLA’s focus shifted to desolate, inhospitable Chip Chap which remains inaccessible until end-March.
After mid-May, water streams impede vehicles moving across Shyok, Galwan, and Chang-Chenmo rivers leaving only a month and a half for effective patrolling by the Indian side.
No human beings inhabit here, a 1962 war site, an entry point into Ladakh for the Uyghurs and Tibetans.
Local Ladakhi personnel manned the posts here, but patrolling in the 972 sq km Trig Height area has been lax.
Easier accessibility allowed the PLA to intrude into Chip Chap with impunity during July-August — its regulars usually spent a few hours before crossing back.
But, during the 21-day Depsang stand-off in 2013, when Burtse became a flashpoint, the PLA set up remote camps 18-19 km inside Indian territory.
Chinese soldiers virtually prevented Indian troops from getting access to Rakinala near Daulat Beg-Olde (DBO) where the IAF reactivated the world’s highest landing strips in 2008.
2008 Daulat Beg Oldi Stand-off
This plus the reopening of Fukche and Nyoma airbases perhaps provoked the PLA’s intrusion in Depsang.
So, what is the current stand-off about?
Despite topographical challenges, the BRO has lately fast-tracked the 260 km long Shayok-DBO road construction.
That road construction probably triggered the PLA intrusion in early May sparking the current Galwan stand-off.
Towards the south at Pangong Tso, forces had physical scuffles over area-denial for patrolling at Sirijap on May 5-6 and on May 11.
The situation remains tense at Sirijap’s cliff spurs and also at the Tso, where troops are chasing each other in high-speed patrol boats.
Clearly, intrusions are part of China’s never-ending effort to push Indian troops westward of the Indus and Shyok rivers and reach the 1960 claimed line.
Details of the disputed border in Ladakh
Out of the 857 sq km long border in Ladakh only 368 sq km is the International Border, and the rest of the 489 sq km is the LAC.
The two traditional disputed points included Trig Heights and Demchok.
At eight points, the two sides have differing perceptions.
But lately, China has raised two fresh dispute points at Pangong Tso 83 sq km and at Chumur where it claims 80 sq km.
The old dispute sites were at the end point of Pangong Tso and at Chushul — the 1962 battle-site.
Three-pronged strategy
1) The Sirijap range on the northern bank of the lake remains most contested, from which several cliff spurs jut out — the “finger series” 1 to 8.
India’s LAC claim line is at Finger-8, but the actual position is only up to Finger-4.
The Chinese are asserting further west to claim 83 sq km here.
The PLA has built a 4.5 km long road to prevent patrolling by Indian troops.
The PLA’s road network from here extends to Huangyangtan base located near National Highway G219.
2) Further south in Demchok, China claims some 150 sq km.
The PLA has built massive infrastructure on its side, moved armoured troops into Charding Nalla since 2009.
Tibetan nomads pitch tents on Hemis Monastery’s land throughout 2018-2019.
3)In Chumur, China claims 80 sq km and probably wants a straight border from PT-4925 to PT-5318 to bring Tible Mane (stupa) area under its control.
For India, holding of Chumur is critical for the safety of the Manali-Leh route.
PLA demanded removal of India’s fortified positions in Burtse (2013) and Demchok and Chumur (2014) for its retreat.
What could be the implications for India?
Overall, the pattern shows the PLA’s desperate design to snatch the lake at Lukung through a three-pronged strategy of attacking from Sirijap in the north, Chuchul in the south and through the lake water from middle.
This is the key chokepoint from where the Chinese can cut off Indian access to the entire flank of Chip Chap plains, Aksai Chin in the east and Shayok Valley to the north.
Which means that Indian control is pushed to the west of the Shyok river and south of the Indus river, forcing India to accept both rivers as natural boundaries.
And once China gets control of the southern side of the Karakoram it can easily approach Siachen Glacier from the Depsang corridor.
And meet at Tashkurgan junction from where the CPEC crosses into Gilgit-Baltistan.
That would be disastrous for Indian defence, leaving the strategic Nubra vulnerable, possibly impacting even India’s hold over Siachen.
China’s access to Changla-pass through Lukung and Tangtse would threaten the entire Indus Valley.
It is quite possible that China is eyeing the waters of the Shyok, Galwan and Chang-Chenmo rivers, to divert them to the arid Aksai Chin and its Ali region.
Consider the question “What could be the strategic and security implications of China’s claim in Pangong Tso region for India?”
Conclusion
India should resist the Chinese design which could have disastrous consequences for India’s defence and strategic interests. This should involve diplomatic channels rather than skirmishes on the borders.
From UPSC perspective, the following things are important :
Prelims level: Regions of Afghanistan
Mains level: Paper 2- Implications of the return of Taliban for India.
The US-Taliban peace deal signals growing heft of the Taliban in Afghanistan. Pashtuns constitute nearly 42 per cent population of Afghanistan and the Taliban is essentially a Pashtun formation. Also, remember Pakistan: just like the kid who is always up to something. The ethnic fragmentation and Pakistan’s meddling is a recipe for perpetual conflict zone in the region.
The question of India’s engagement with Taliban
Taliban’s effective control of territory in Afghanistan expanded in recent years.
This led to the question of India’s direct dialogue with the Taliban gain some relevance.
It has acquired some immediacy after the US announced plans for a significant draw down of its forces from Afghanistan and signed a peace deal with the Taliban earlier this year.
Also, recently the US Special Envoy for Afghanistan, Zalmay Khalilzad, called on India to open a political conversation with the Taliban.
The interest was further amplified by a signal from the Taliban that it is eager for a productive relationship with India.
So, what should India do?
Those calling for direct engagement with the Taliban say that Delhi can’t ignore such an important force in Afghan politics.
Opponents say there is no reason for Delhi to join the international stampede to embrace the Taliban.
If and when the Taliban becomes a peaceful entity and joins the quest for a political settlement with Kabul, they argue, Delhi should have no objection to direct talks.
So, opening a dialogue with the Taliban is a tactical issue focused on when, how and on what terms.
Pashtun question and India’s enduring interest in Afghanistan
The Taliban remains an important sub-set of the larger and more strategic Pashtun question.
The Pashtun question holds the key to India’s enduring interest in Afghanistan: Promoting a peaceful, independent and a sovereign Afghanistan that is not a subaltern to the Pakistan army.
2 Basic issues that will define the Pashtun question
1. Forming unity among multiple ethnic groups
First is the problem of reconciling the interests of multiple ethnic groups in Afghanistan.
The Pashtuns constitute nearly 42 per cent of the population.
The sizeable Afghan minorities include 27 per cent Tajiks, 9 per cent each of Hazaras and Uzbeks.
Irrespective of the nature of the regimes in Kabul over the last four decades— constructing a stable internal balance has been hard.
That problem will acquire a new intensity as the Taliban stakes claim for a dominant role in Kabul.
But has the Taliban learnt to live in peace with the minorities?
The Taliban, an essentially Pashtun formation, had brutally crushed the minorities during its brief rule in the late 1990s.
There are some indications that the Taliban is now reaching out to the minorities but it is some distance away from winning their trust.
2. Pakistan’s meddling in Afghanistan
The problem of constructing internal balance in Afghanistan has been complicated by Pakistan’s meddling.
Pakistan would like to have the kind of hegemony that the British Raj exercised over Afghanistan.
Neither can Pakistan replicate that dominance nor are the Afghans willing concede it to the Pakistan army.
What about the Pashtun minority in Pakistan?
There are more than twice as many Pashtuns living in Pakistan than in Afghanistan.
The Pashtun population is estimated to be around 15 million in Afghanistan and 35 million in Pakistan.
And as mentioned above, the Taliban is essentially Pashtun formation.
Although Pashtun separatism has long ceased to be a force in Pakistan, Islamabad finds the Pashtun question re-emerge in a different form.
Pakistan can’t really bet that the Taliban will not put Pashtun nationalism above the interests of the Pakistani state.
The Taliban, for example, has never endorsed the Durand Line as the legitimate border with Pakistan.
It is by no means clear if Pakistan’s construction of the Taliban as a conservative religious force has obliterated the group’s ethnic character.
Sufferings of Pakistani Pashtun People: Islamabad’s quest for control over Afghanistan over the last four decades has heaped extraordinary suffering on the Pashtun people on Pakistan’s side of the Durand Line.
As the Pashtun Tahafuz Movement seeks a peaceful redressal of its demands for basic human rights, Pakistan has unleashed massive repression.
India’s importance in Afghanistan
That the Taliban wants to talk to India and Pakistan brands Pashtun leaders as Indian agents only underlines Delhi’s enduring salience in Afghanistan.
Consider the question “After the US-Taliban peace deal, India is forced with a difficult prospect of opening the dialogue with the Taliban. Examine the implications of the return of Taliban in Afghanistan for India. What is your opinion on India starting the dialogue with Afghanistan?”
Conclusion
Pakistan’s expansive military and political investments in Afghanistan have not really resolved Islamabad’s security challenges on its western frontier. If an Afghan triumph eludes Pakistan, Delhi can’t escape the complex geopolitics of the Pashtun lands.
From UPSC perspective, the following things are important :
Prelims level: MSP and income support schemes of various state governments
Mains level: Paper 3-Issues with the income support schemes for farmers.
Both States and Center have income support schemes for the farmers. Coincidentally, they both suffer from common problems such as the exclusion of tiller from the benefit and identifying the landless labourers. This article floats the idea of merging all the support schemes in favour of an umbrella scheme. So, what are the solutions and how will an umbrella scheme be more beneficial? Read to know…
Not much ‘new cash’ in the relief package
On May 12, the PM announced that his government’s relief-cum-stimulus package would be Rs 20 lakh crore, almost 10 per cent of India’s GDP.
But when Finance Minister unveiled the package, sector by sector, many wondered where the “new cash” was?
So, it became clear that additional relief and stimulus in the system is just about 1 per cent of the GDP — not 10 per cent.
Much of the rest is directed towards increasing liquidity and deferring some loan payments, but not much additional cash.
Cash-transfer schemes by the state governments: Chhatisgarh and other states
In this context, the Chhattisgarh government deserves compliments for launching the Rajiv Gandhi Kisan Nyay Yojana (RGKNY).
RGKNY is an income transfer scheme at Rs 10,000/acre for paddy farmers and Rs 13,000/acre for sugarcane farmers.
The state’s chief minister has said that the scheme will be extended to farmers of other crops — in fact, to landless labourers as well.
On the face of it, RGKNY will help put money directly into the hands of farmers and poor agricultural labourers.
In kharif 2018-19, Telangana announced a cash transfer scheme of Rs 4,000/acre, per season — this was raised to Rs 5,000/acre per season in kharif 2019-20.
There is a live portal that gives the details of the scheme and its progress.
In the rabi season of 2018-19, the Odisha government launched the KALIA scheme-Krushak Assistance for Livelihood and Income Augmentation- on a somewhat similar pattern.
West Bengal’s Krishak Bandhu and Jharkhand’s Mukhya Mantri Krishi Aashirwad Yojana are the other income support schemes worth mentioning.
2 Issues with income support policies and solutions
1. The beneficiary is not always tiller of the land
Ideally, the money of the policies should go to the real tiller.
But in large parts of the country, there is no record of tenancy.
The government data shows only 10 per cent tenancy in the country.
While several micro-level studies indicate that it could be anywhere between 25-30 per cent.
In fact, in many regions like the Godavari belt, it could be even more than 50 per cent.
It does not make much sense to put money into the accounts of absentee landlords.
So, what is the solution to this problem?
1) The best way would be to change the tenancy laws.
Open up land lease markets, ensuring that the owner of the land has full rights to take his land back after the expiry of the lease period.
The current law, favouring “land to the tiller”, is loaded against the owner.
As a result, much of tenancy in the country remains oral.
2) In the absence of such legal changes in land lease laws, the only way forward is to fully inform the tiller that the owner has got income support.
And then appeal to the owner to pass on this benefit to the tiller — or adjust the land rent accordingly.
Information and persuasion campaigns in radio and newspapers would increase the chances of the benefits being passed on to the real tillers.
2. Identifying the landless labourers working on the farms
The other issue is identifying the landless labourers working on farms.
Majority of them are temporary and seasonal workers.
And leaving the task of identification to panchayats and patwaris can open doors for large leakages and corruption.
What is the solution to this problem?
There have been talks in the past for synchronising MGNREGA with farm operations.
The synchronising will have two benefits-
1)It will contain the cost of farming.
2) It will ensure that those engaged in this employment guarantee scheme do useful and productive work.
The legal framework of the MGNREGA scheme does allow this on farms owned by people of SC/ST communities, and on the lands of marginal farmers.
Merging Income Support Schemes: The way forward
The time has come to think seriously about merging income support schemes.
The merger will include the PM KISAN and state-level schemes, with the MGNREGA and price-subsidy schemes — food and fertiliser subsidies given by Centre and power subsidies given by state government.
These schemes amount to Rs 5 lakh crore — that’s a good sum of money to start a basic income cover for poor households.
Markets could then be left to operate freely.
This approach can cover landless labourers, farmers, and poor consumers — these categories overlap.
Let there be an expert group to look closely into the functioning of each one of these schemes and create an umbrella scheme to take care of the poor and the needy.
Consider the question-“Examine the issues with the income support schemes for farmers by the States as well as the Central government. Do you think that an umbrella scheme after merging all the support schemes will be helpful in overcoming such issues?”
Conclusion
Though income support schemes by the state government and the Centre are a welcome move, however, when one looks at the issues with these schemes an umbrella scheme after merging all the present schemes will go a long way in solving the problems which almost all these schemes face today.
Back2Basics: PM- KISAN
Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)is a Central Sector Scheme with 100% funding from the Government of India.
It is being implemented by the Ministry of Agriculture and Farmer’s Welfare.
Under the scheme, the Centre transfers an amount of Rs 6,000 per year, in three equal instalments, directly into the bank accounts of the all landholdingfarmers irrespective of the size of their land holdings.
It intends to supplement the financial needs of the Small and Marginal Farmers (SMFs) in procuring various inputs to ensure proper crop health and appropriate yields, commensurate with the anticipated farm income at the end of each crop cycle.
The entire responsibility of identification of beneficiary farmer families rests with the State / UT Governments.
From UPSC perspective, the following things are important :
Prelims level: APMC Act
Mains level: Paper 3- The issues with APMC reforms
Reforms in agri-marketing has been long overdue. So, the government recently announced three reforms in this regard. This article examines the problems of agri-marketing. And it concludes that the said reforms are far from being the silver bullet for these problems. So, why these reforms are not going to be effective? Does demand play any role in the problems agriculture is facing currently? Read to know about these issues.
Announcement of reforms regarding agricultural marketing
The announcement of reforms in agricultural marketing by Finance Minister in May, has been hailed by some as the “1991” moment for agriculture.
The three reforms regarding agricultural marketing were the reforms in the 1) Agricultural Produce Marketing Committee (APMC) Act, 2) the Essential Commodities Act, 3) Contract farming.
All of these have been in discussion for almost two decades, with the APMC Act having already seen substantial reforms in many States.
The first comprehensive model act on APMC was proposed during 2003, and since then, similar efforts to push for more reforms have been proposed in 2007, 2013, and as late as 2017 by the present government.
So, let’s a look at provisions of APMC Act and issues with it
What is the main argument against APMC Act?
Two main arguments against the APMC Act are-
1) It creates barriers to the entry and exit of traders.
2) Makes the sale and purchase of agricultural produce compulsory for farmers as well as traders.
Different steps taken by the state governments to address the issues
So, as many as 17 State governments have amended the APMC Act to make it more liberal.
In fact, the regulations and the functioning of mandis vary a great deal across States.
Kerala does not have an APMC Act.
Bihar repealed it in 2006.
But several others such as Maharashtra, West Bengal, Odisha, Gujarat, and Andhra Pradesh deregulated fruits and vegetables trade, allowed private markets, introduced a unified trading licence and have introduced a single-point levy of market fee.
Tamil Nadu has already reformed its APMC with no market fee.
Several others such as Jharkhand, Himachal Pradesh, Uttarakhand, Haryana and Rajasthan have undertaken one or more of these reforms.
Many States have introduced direct marketing of farm produce, examples being the Uzhavar Sandhai (Tamil Nadu), the Rythu Bazaar (Andhra Pradesh and Telangana), the Raitha Santhe (Karnataka), the Apni Mandi (Punjab) and the Krushak Bazaar – (Odisha).
So, why the mandis are still blamed for farmers’ problems?
Despite the above-stated reforms, APMC mandis continue to be vilified for-1) all the ills plaguing marketing infrastructure 2) the low prices received by the farmers for their produce.
What is the problem? The problem with mandis is not the regulation per se and the structure of mandis but the political interference in the functioning of the markets.
These are more obvious in case of large mandis specialising in commercial crops and fruits and vegetables, where production is regionally concentrated.
But even with these deficiencies, APMC mandis continue to play an important role in providing access to the market for farmers.
What the Bihar example teaches us?
Bihar repealed the APMC Act in 2006.
The general argument in favour of reforms is that 1) it will allow private investment in marketing infrastructure and 2) provide more choices to farmers, leading to better prices received by farmers.
But in the case of Bihar, no investment came in building market infrastructure.
The loss of revenue due to the repeal of the APMC also led to deterioration of existing infrastructure in the State.
The revenue collected from the APMC earlier was used not only for the modernisation of these market yards but also for the laying of roads and construction of other infrastructure to provide farmers better access to markets.
But after the repeal, there have been no takers for these market yards, with no investment in creating private mandis.
On the other hand, it has led to proliferation of private unregulated markets which charge a market fee from traders as well as farmers, and without any infrastructure for weighing, sorting, grading and storage.
Even in other States where there is deregulation to allow private traders, there is hardly any investment to create market spaces let alone provide other facilities.
There is also no evidence that farmers have received better prices in private mandis outside the APMC.
While there have been instances of collusion and corruption in the running of the APMC, they continue to provide essential services to farmers.
Inadequacies of the regulated market
As against the recommendation that a regulated market should be available to farmers within a radius of 5 km currently regulated markets is in the radius of 12 km.
There are more than 7,000 regulated markets and 20,000 rural markets when the need is at least twice these figures.
Most of the existing ones require investment in upgradation of infrastructure.
Price received is more a function of demand than access to market
The argument that the only bottleneck for farmers not receiving remunerative prices is due to the APMC Act is flawed.
More than 80% of farmers, most of whom are small and marginal farmers, do not sell their produce in the APMC mandis.
For a majority of farmers, prices received are more a function of the demand for agricultural commodities than access to markets.
So, let’s come to decline in demand for agriculture produce
For much of the period during the last two years, terms of trade have moved against agriculture.
Agricultural commodity price inflation had been negative for a large part of the last two years.
With underlying weakness in demand and obsession with inflation targeting through fiscal and monetary policies, most agricultural commodities have seen a sharp decline in demand and, consequently, prices received by farmers.
The argument for choice of markets is only valid as long as there are buyers with purchasing power in the market.
No amount of marketing reforms will lead to higher price realisation for farmers if the underlying macroeconomic conditions are unfavourable to agriculture and farmers.
What is solution to decline in demand?
The primary task of the government should have been to increase fiscal spending to revive demand in the economy.
This has become even more necessary after the sharp decline in incomes, job losses and decline in demand following the lockdown and expected contraction in economic activity for the year ahead.
With international prices also showing declining trend, the urgency is to protect the farmers from the decline in commodity prices.
Consider the question “Though the APMC Act has often been blamed for the woes of the farmers in price realisation, the act is not the sole reason for price realisation problems faced by the farmers. Critically examine.
Conclusion
The announced reforms are less likely to be effective if carried out without consulting the states. And on the demand side, government needs to increase fiscal spending to create demand in the economy. These two steps will go a long way in ensuring higher incomes to farmers.
Back2Basics: Agriculture Produce Marketing Committee Regulation (APMC) Act.
All wholesale markets for agricultural produce in states that have adopted the Agricultural Produce Market Regulation Act (APMRA) are termed as “regulated markets”.
With the exception of Kerala, J & K, and Manipur, all other states have enacted the APMC Act.
It mandates that the sale/purchase of agricultural commodities notified under it are to be carried out in specified market areas, yards or sub-yards. These markets are required to have the proper infrastructure for the sale of farmers’ produce.
Prices in them are to be determined by open auction, conducted in a transparent manner in the presence of an official of the market committee.
Market charges for various agencies, such as commissions for commission agents (arhtiyas); statutory charges, such as market fees and taxes; and produce-handling charges, such as for cleaning of produce, and loading and unloading, are clearly defined, and no other deduction can be made from the sale proceeds of farmers.
Market charges, costs, and taxes vary across states and commodities.
Essential Commodities Act 1955
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.
It has since been used by the Government to regulate the production, supply and distribution of a whole host of commodities it declares ‘essential’ in order to make them available to consumers at fair prices.
Additionally, the government can also fix the maximum retail price (MRP) of any packaged product that it declares an “essential commodity”.
The list of items under the Act includes drugs, fertilizers, pulses and edible oils, and petroleum and petroleum products.
The Centre can include new commodities as and when the need arises, and takes them off the list once the situation improves.
How ECA works?
If the Centre finds that a certain commodity is in short supply and its price is spiking, it can notify stock-holding limits on it for a specified period.
The States act on this notification to specify limits and take steps to ensure that these are adhered to.
Anybody trading or dealing in the commodity, be it wholesalers, retailers or even importers are prevented from stockpiling it beyond a certain quantity.
A State can, however, choose not to impose any restrictions. But once it does, traders have to immediately sell into the market any stocks held beyond the mandated quantity.
This improves supplies and brings down prices. As not all shopkeepers and traders comply, State agencies conduct raids to get everyone to toe the line and the errant are punished.
The excess stocks are auctioned or sold through fair price shops.
From UPSC perspective, the following things are important :
Prelims level: BIS, cryptocurrency.
Mains level: Paper 3- Challenges and opportunity in cryptocurrencies.
Central banks all over the world have had mixed feelings towards cryptocurrencies. Some of them have resorted to banning them altogether. And yet, cryptocurrencies exist and have been flourishing. But China seems to be bent on taking the “road less travelled”. This article explains the various aspects underlying the China’s move. These somehow apply to all the central banks, including the RBI. Read more to know more about such aspects.
Digital currency by China’s central bank
In December 2019, a pilot programme was launched in Beijing to intensively advance the trial work of fintech innovation regulation.
This pilot has now been expanded to include several other cities.
This expansion of the pilot marks the initiation of China’s central bank digital currency (CBDC).
Christened Digital Currency Electronic Payment (DCEP), available via a mobile wallet app.
It is pegged 1:1 with fiat currency, and designed to replace M0 which comprises currency issued by the PBoC less the amount held by banking institutions.
This is the first such serious initiative in the whole world.
Why central banks are sceptical of cryptocurrencies?
Historically, monetary authorities everywhere have been sceptical of cryptocurrencies.
The reasons for scepticism includes following problems-
1) Wild fluctuations in the value of cryptocurrencies.
2) The implied challenge to the monopoly of central banks in issuing fiat currencies.
3) The looming possibility of software bugs.
4) The tainted shadow of the dark web.
But some central banks have been planning to issue fiat digital currency
Authorities were far more intrigued by CBDCs.
In fact, the Basel-based Bank for International Settlement (BIS) has been conducting surveys on this issue for some time.
The recent survey of 2019 “Proceeding with Caution – a Survey on Central Bank Digital Currency” revealed that while in general, central banks have been proceeding cautiously towards introducing central banks digital currencies.
Some have been planning to issue a fiat digital currency in the short to medium term.
In particular, the survey revealed that nearly 25% of central banks have the required authority to issue a CBDC, while a third do not, and 40% remain unsure.
If you cannot beat them, join them
So, what factors led China to release the cryptocurrency?
Chinese investors were always attracted to cryptocurrencies.
With the bearish turn in the Chinese stock market in 2015-16, bitcoins became increasingly popular as an alternative asset class in China.
As in media reports, in the recent past, China has emerged as the capital of the crypto ecosystem, accounting for nearly 90% of trading volumes and hosting two-thirds of bitcoin mining operations.
The PBoC tried hard to curtail this exuberance but achieved limited success.
The recent move to introduce the CBDC in China is a logical outcome of the efforts to curb and tackle its runaway cryptomarket practices.
Or, the philosophy of the PBoC could simply have been, if you cannot beat them, join them.
Advantages and concerns
At a practical level, the benefits of CBDC are manifold.
First, paper money comes with high handling charges and eats up 1% to 2% of GDP.
Second, by acting as a powerful antidote for tax evasion, money laundering and terror financing, CBDCs can materially boost tax revenues while also improving financial compliance and national security.
Third, as a tool of financial inclusion, particularly in emergencies, direct benefit transfers can be instantly delivered by state authorities deep into rural areas, directly into the mobile wallets of citizens who need them.
Fourth, CBDCs can provide central banks with an uncluttered view and powerful insights into purchasing patterns at the citizen scale.
In the long run, it is believed that CBDCs will make cross-border payments fast and frictionless.
Concerns
All these salutary benefits come packaged with a deep and abiding concern about the relentless rise of a surveillance state and the concomitant erosion in citizen privacy and anonymity.
If face-recognition technology enables states to spy on the physical movement of citizens, will CBDCs be used to spy on every movement of their money?
But how Central bank’s digital currency is different from private cryptocurrencies such as Bitcoin?
An earlier research paper by PBoC Deputy Governor favoured a two-tier CBDC model.
In this model instead of directly interacting with the public, the central bank would involve financial intermediaries such as commercial banks.
In tier 1, the central bank would interface with financial intermediaries.
In tier 2, the financial intermediaries would interface with the general public.
Advantage? Such a model is accretive in that it preserves the power of existing financial systems and extends their influence further.
It is believed that the DCEP uses a DLT architecture (with central controls) which preserves the primacy of the monetary authority, unlike private cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) that are truly decentralised.
Silver bullet to slay three dragons
What may China be signalling with the launch of DCEP?
First, on the world economic stage, it may want DCEP to challenge the hegemony of the U.S. dollar as the default global reserve currency.
Second, in its war with American BigTech, it may want to showcase DCEP as its weapon of choice to counter FB or Facebook’s Libra, which is planning to offer a common cryptocurrency to 2 billion-plus FB users across the world.
Third, and still in the realm of speculation, it may wish to use the DCEP to clip the wings of AliPay and WeChatPay, gigantic fintech duopolies that control 90% of the China’s domestic digital payments, and whose ambitions may one day pose a threat to the aura and authority of the central bank.
Consider the question “Most of the central banks have been sceptical in their attitude toward the cryptocurrencies. Yet, they persisted. Next came the Supreme Court decision lifting ban on them. In light of this, examine the advantages and concerns that come with the cryptocurrencies.”
Conclusion
From gold to silver to paper to digital, the march of currencies goes on. China has rolled the dice on central bank digital currencies, challenging other nations to follow. Welcome to the future of money.
From UPSC perspective, the following things are important :
Prelims level: Demand side and supply side in the economics
Mains level: Paper 3- Why is it necessary to focus on the demand side in stimulus package?
What should the government focus on first: increasing demand or streamlining the supply side. This question is at the heart of the debate that has been going on after the government announced the stimulus package. This article argues on two lines- Inadequate size of the package and the neglect of the demand side in the package.
Why stakeholders are not happy with the package?
Agriculture sector: There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured.
Marketing reforms and infrastructure creation are distant promises.
MSME sector: The backbone of the economy that provides 25 per cent of employment, 32 per cent of the GDP and 45 per cent of exports, is unhappy despite the Rs 3 trillion line of credit for loans without collateral.
In their experience, lenders are not always supportive in extending loans.
While buyers-central and state governments, public sector firms and the private sector- owe them as much as Rs 5 trillion.
What is more, most MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period.
Corporate sector: There is nothing for the corporate sector in manufacturing or services.
The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
Ironically, there is little for public health, already in a dilapidated state.
Even stock markets, characterised by irrational exuberance in the past month, have dropped.
Government expenditure in the fiscal stimulus
The fiscal stimulus, which can be defined as government expenditure that could stimulate demand, is difficult to separate.
This is because the package is neither clear nor transparent about the cost to be borne by the government in each component.
Even so, there are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 per cent to 1.3 per cent of the GDP.
The effective fiscal stimulus, in terms of extra resources provided by the government, is Rs 1.76 trillion, or 0.8 per cent of the GDP.
Its contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.
Focus of the package: supply side
It is clear that the design of this relief package seeks to focus on the supply side.
Package emphasises on providing liquidity through lines of credit, where the RBI is providing as much as Rs 8 trillion.
Focus is not on the demand side by stepping up government expenditure.
This is done with the aim of minimising the cost to the government.
The arithmetic is obviously imaginative — as much as Rs 10 trillion of the relief package will have to be financed by sources other than the Centre and the RBI.
So, let’s understand why focus on supply side is flawed strategy
This stress on the supply-side, while neglecting the demand-side, reveals a flawed understanding of economies in crisis.
Speed of adjustment: Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time.
Whereas the speed of adjustment on the demand-side is fast as incomes spent raise consumption demand without any time-lag.
At present, if there is little or no increase in demand, supply responses will be slower than usual because producers would not wish to pile up inventories of unsold goods.
In terms of the chicken-and-egg parable, demand must be revived first to kickstart the economy.
For this reason, the fiscal stimulus should have been much larger.
Excessive concerns over fiscal deficit
The decision-makers have been timid, intimidated by the prospect that, because of revenue shortfalls (2 per cent of the GDP or more), the fiscal deficit would be 5.5 per cent of the GDP.
Which would have exceeded the budget estimate at 3.5 per cent of the GDP.
The conclusion drawn, wrongly, is that there is no fiscal space.
The obsessive concern about the fiscal deficit is deeply embedded in government thinking.
In this situation, the extra fiscal stimulus should have been Rs 7-9 trillion i.e. 3-4 per cent of the GDP and that would have been modest compared to what other countries have done.
Monetising the deficit and issues involved in doing so
This enlarged fiscal deficit (3-4 % of GDP) cannot be financed by market borrowing.
Such market borrowing would simply drive up interest rates and nip recovery in the bud.
It would have to be financed by monetising the deficit — RBI buying government T-bills — printing money, now termed “helicopter money”.
Inflation concerns: The idea that monetised deficits will unleash inflation is blind to the reality that, at this juncture, if there is no further intervention by the government, the GDP could contract by 5 per cent in 2020-21, with lingering consequences.
In fact, a monetised deficit might be the only way of increasing aggregate demand to revive economic growth.
Rating downgrade issue: The worry about a downgrade from credit rating agencies is bizarre.
For one, their ethics and integrity have seen steady erosion.
Moreover, how many sovereign governments will they downgrade?
In fact, we might be better off without the footloose and volatile portfolio investment inflows.
Consider the question- “Do you agree with the view that the focus of the supply side should be at the heart of any stimulus package announced in the financial crisis? Give reasons in the support of your agreement.”
Conclusion
If the government does not accept the necessity or wisdom of expansionary macroeconomic policies, it must set out its alternative plan for recovery. The relief package will not suffice.
From UPSC perspective, the following things are important :
Prelims level: MSME
Mains level: Paper 3- Credit problems faced by MSMEs
Whether to focus on supply side or demand side is the dilemma governments often face while deciding the measures to cure the ailing economy. This article explains using basic economics and evidence from across the world to make the case for a focus on the supply side. In doing so, it explains the problems with demand side measures such as cash transfers and tax rebets.
Issue of neglect of demand side
The Union government is often criticised for its apparent neglect of the demand side and its excessive focus on the supply side.
Structural reforms — the COVID-19 package was no exception.
Low credit growth, weak inflation, and flat wage growth are the factors focused by demand-side proponents.
The deand side proponents suggest measures such as cash transfers, income tax cuts, and cheap credit to consumers.
So, let’s focus on Demand vs. Supply side debate
Low growth in credit to MSME
A demand shock typically leads to a rise in both volume and the price.
A supply shock not only hurts the volume but also leads to price rise.
In banking, a good proxy for the price of credit is the spread.
Spread is difference between lending rate and the funding rate repo rate or deposit rates for the banks.
The spread reflects the risk premium banks charge to their customers.
The spread has consistently risen from just below 4 per cent at the start of 2018 to around 6 per cent in January 2020.
That means, the banks charged 4-6 per cent more on loan than it paid to its depositor or to RBI on the funds it got from them.
The fact that spreads are rising was highlighted by the 2019 Economic Survey as well.
At the same time, the credit growth — especially for public banks and to the MSME sector — has been sluggish for the previous two to three years.
The MSME sector witnessed sub-zero credit growth for the whole of 2017 and even now, the credit growth is very tepid at around 2 per cent Y-o-Y.
Rising spreads with lower credit volume provide a clear sign that credit supply is broken.
What a paper by Nobel laureates on MSME says?
Paper by Nobel laureates Abhijit Banerjee and Esther Duflo examines the reasons for MSME problems.
The paper amply highlights the fact that the MSME sector suffers from lack of credit availability to finance investments rather than the lack of demand for credit.
They showed that when the government changed the definition of small firms, the firms newly covered by the priority sector lending programme used the extra credit to increase production and investment.
If there was no demand for credit, cheaper credit under the priority sector programme should have been used to repay the older expensive sources of borrowings.
So, how will the recently announced package help MSEs?
Consistent with this view, we think that the government’s approach of guaranteeing SME credit by resolving the risk-sharing problem for banks will expand credit to credit-starved SMEs at lower credit spreads.
Similarly, expansion of the universe of small/medium firms will bring fresh investments from the firms, which are newly covered under priority sector programme as they will be able to get cheaper credit.
2 Measures to increase consumer demand and issues involved
1. Direct transfers schemes
No doubt that cash-transfers are superior to distortive subsidies and the “Garib Kalyan” package was a step in this direction.
In fact, the government has already transferred close to Rs 40,000 crore to bank accounts including Rs 10,000 crore to women under PMJDY.
But is cash-transfers the ultimate solution to recovery?
In fact, the PMJDY account balance has increased.
The increase is from close to Rs 1,17,000crore before the advent of COVID-19 to Rs 1,35,911 crore as of May 13 .
This is a massive jump of close to Rs 18,000 crore.
Recent research by Prasanna Tantri and co-authors shows that PMJDY account holders actively use the accounts — 1.12 transactions per quarter compared to the World Bank standard of one transaction.
In fact, PMJDY accounts see withdrawals when account holders are in distress, according to the study.
So the rise in balances is not mechanical.
So, why are they not spending?
It’s not that people covered under PMJDY are comfortable financially.
A number of papers show that tax rebates boost demand in the short-run, but the quantum is limited.
For example, Sumit Agarwal and his co-authors show that the 2001 tax rebate programme in the US led to an average spending of only $60 on $500 rebate over nine months.
A recent study at the Kellogg Business School by Christian Borda and co-authors shows that tax rebates after the 2008 crisis in the US led to rise in spending, but by only 3.5 per cent in the first month of the rebates.
The crux is that no rational consumer goes on a consumption spree when he is facing job uncertainty!
2. What about providing cheap credit to customers?
Trying to boost demand by providing cheap credit to consumers is not a good idea either as evidenced by the debt-financed housing boom in the US, which led to the 2008 crisis.
In fact, Atif Mian and Amir Sufi, using a large panel of 30 countries, uncover a more general pattern — an increase in household debt to GDP ratio leads to a sustained drop in future GDP,investments, and unemployment.
On the other hand, the economic cycles are much more muted when the initial growth is caused by structural reforms as pointed in a recent IMF study covering over 80 countries.
Consider the question “Whenever governments decide on the stimulus package amid financial crises, supply side vs. demand side debate flares up. This has also been the case in India as the government announced the stimulus package recently. In light of this, examine the issues involved in demand side measures.”
Conclusion
To put the burden of recovery on risk-averse consumers, incentivising them to spend rather than save when there is employment uncertainty, is against any reasonable risk-sharing principle. Risk should be borne by those who have the appetite — the firms and government.
From UPSC perspective, the following things are important :
Prelims level: Provisions of MGNREGA
Mains level: Paper 2- Issues and scope for improvement in MGNREGA
With migrant workers returning home, work demand under MGNREGA is bound to rise. Sensing that the government increased the allocation to MGNREGA. This article suggests some steps to make the MGNREGA more effective in catering to this surge in the wake of the pandemic. Some issues that plague the scheme are also examined at the end. So, what are the suggestion? and what are the issues? Read to know….
Acknowledgement of the importance of MGNREGA
The government made an allocation of an additional Rs 40,000 crore as part of the stimulus package.
This is an acknowledgement of the importance of MGNREGA.
The most important part of MGNREGA’s design is its legally-backed guarantee for any rural adult to get work within 15 days of demanding it.
This demand-based trigger enables the self-selection of workers and gives them an assurance of at least 100 days of wage employment.
Let’s put allocation in context of World Bank recommendations
Since 2012, an average of 18 per cent of the annual budgetary allocation for MGNREGA has been spent on clearing pending liabilities from the previous years.
Even this financial year began with pending wage and material liabilities of Rs 16,045 crore.
An allocation of Rs 1 lakh crore for FY 2020-21 would mean that approximately Rs 84,000 crore is available for employment generation this year.
This will still be the highest allocation for MGNREGA in any year since the passage of the law.
However, the allocation, which amounts to 0.47 per cent of the GDP continues to be much lower than the World Bank recommendations of 1.7 per cent for the optimal functioning of the programme.
Some immediate steps to ensure the MGNREGA lives up to its potential
First, state governments must ensure that public works are opened in every village.
Workers turning up at the worksite should be provided work immediately, without imposing on them the requirement of demanding work in advance.
Second, local bodies must proactively reach out to returned and quarantined migrant workers and help those in need to get job cards.
Third, at the worksite, adequate facilities such as soap, water, and masks for workers must be provided free of cost. For reasons of health safety, MGNREGA tools should not be shared between workers.
The government should provide a tool allowance to all workers — some states are already providing such an allowance.
Fourth, procedures for implementing MGNREGA must be simplified but not diluted.
The pandemic has demonstrated the importance of decentralised governance.
Gram panchayats and elected representatives need to be provided with adequate resources, powers, and responsibilities to sanction works, provide work on demand, and authorise wage payments to ensure there are no delays in payments.
Fifth, as per a study by the RBI, more than half the districts in the country are under-banked.
The density of bank branches in rural India is even more sparse.
At this time, payments need to not only reach bank accounts on time, but cash needs to reach the workers easily and efficiently.
The limited coverage of bank infrastructure in rural areas must not be made a hurdle.
Attempts to distribute wages in cash, sans biometric authentication, must be rolled out.
Sixth, there needs to be flexibility in the kinds of work to be undertaken, while ensuring that the community and the workers are the primary beneficiaries.
Issuse with MGNREGA
Over the last few years, MGNREGA had begun to face an existential crisis.
Successive governments capped its financial resources, and turning it into a supply-based programme.
Workers had begun to lose interest in working under it because of the inordinate delays in wage payments.
With very little autonomy, gram panchayats had begun to find implementation cumbersome.
Barring a few exceptions, state governments were only interested in running the programme to the extent funds were made available from the Centre.
Allocating work on demand, and not having enough funds to pay wages on time was bound to cause great distress amongst the workers and eventually for the state too.
As a result, state governments had begun to implement MGNREGA like a supply-driven scheme, instead of running it like a demand-based guarantee backed by law.
Consider the question “With migrant workers returning to villages in the wake of corona pandemic, demand for work is likely to increase. In light of this, discuss the utility of MGNREGA and challenges it may face.”
Conclusion
With nearly eight crore migrant workers returning to their villages, and with an additional allocation for the year, this could be a moment for the true revival of MGNREGA. A revival led by workers themselves.
Mahatma Gandhi National Rural Employment Guarantee Act, 2005
The Act aims at enhancing the livelihood security of people in rural areas by guaranteeing hundred days of wage employment in a financial year to a rural household whose adult members (at least 18 years of age) volunteer to do unskilled work.
The central government bears the full cost of unskilled labour, and 75% of the cost of material (the rest is borne by the states).
It is a demand-driven, social security and labour law that aims to enforce the ‘right to work’.
Ministry of Rural Development (MRD), Government of India in association with state governments, monitors the implementation of the scheme.
From UPSC perspective, the following things are important :
Prelims level: Aggregate demand
Mains level: Paper 3- Stimulus package to address demand side and supply side problems
Economic disruption caused by the corona crisis stems from both-demand side and supply side. So, the stimulus package announced was expected to address the issues on both sides. This article breaks downs the various elements of the package in demand-side as well as supply-side measures. We also know aggregate demand is not just consumption demand. So, this fact was also considered while deciding the demand-side measures.
Twin mantra of stimulus package
1) To ensure that human cost of the crisis is minimised, especially for those at the bottom of the pyramid.
2) To convert this crisis into an opportunity by implementing bold structural reforms.
Such reforms will go beyond repairing the damage to the production capacities and enhance the overall supply response capabilities of the economy.
Impact on demand side as well as supply side
The present crisis is far worse than both the Asian financial crisis of the late Nineties as well as the global financial crisis of 2008-09.
It has seriously impacted both the supply and demand side of the economy.
The government’s response has been to effectively address both these aspects.
Government’s four-fold response to address supply-side problems
1. Ensuring food security
To ensure that the government declared agriculture and all related activities as essential services.
This permitted the successful harvesting and efficient procurement of the critical Rabi crop.
It also implied pumping in Rs 78,000 crore as new purchasing power in the hands of the farmers.
2. Preventing cash/liquidity crunch
Preventing the pressing cash/liquidity crunch was necessary to avoid insolvencies and bankruptcies.
An immediate moratorium was announced on their debt servicing obligations to commercial banks.
This measure was reinforced for MSMEs, for whom an additional credit line of Rs 3 trillion without any fresh collateral was extended.
MSMEs could also avail of new equity from the Rs 50,000 crore fund of funds and take advantage of the subsidiary debt facility announced by the FM.
These measures provided succour to a large number of businesses, especially those in the services sectors like hospitality, entertainment and retail.
The Rs 90,000 crore credit package made available to state discoms should also be included in this set of measures.
It will prevent bankruptcies of state electricity utilities and the power producers, which would have had disastrous results.
3. Reforms in agriculture and manufacturing sector
The third set of measures were directed to significantly improve the ecosystem for private producers, both in agriculture and manufacturing.
Long-pending reforms to give farmers the much-needed freedom to choose their clients and for traders and exporters of agro-products to maintain necessary stocks have now been announced.
Defence production and exports will get a new fillip with the liberalisation measures.
Greater space will be given to private businesses in sectors in which public sector enterprises hitherto had either a monopoly or a predominant presence.
4. Credit to street vendors
Finally, this is a measure that does not have a large fiscal footprint, but touches the lives and livelihoods of more than 50 lakh families.
Under which street vendors all over the country have been given a credit of Rs 10,000 each for re-stocking and use as working capital.
Understanding the aggregate demand
It is important to point out that aggregate demand is made up of- i) consumption, ii) investment iii) demand for intermediate goods.
So, the cash-in-hand of consumers is not the only means for reversing the declining demand in the economy.
Therefore, additional credit lines provided to MSMEs, vendors or farmers will contribute to the strengthening of aggregate demand.
Government’s response to address demand-side problems
A significant number of measures were announced to hike consumption demand directly as well.
Among these are:
Rs 1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20 crore female Jan Dhan account holders who will receive monies directly into their bank accounts.
Rs 50,000 additional incomes in the hands of those whose TDS and TCS were reduced by 25 per cent.
Rs 40,000 crore additional allocation for MNREGA, which will provide jobs and succour to those returning to their villages from metros and cities.
Rs 30,000 crore for construction workers.
Rs 17,800 crore transferred to 12 crore farmers and Rs 13,000 crore transferred to states to finance the costs of running quarantine homes and shelters for migrant workers.
These measures, which will directly benefit different categories of individuals, will surely raise the flagging demand — the necessary condition for triggering a fast-paced recovery in economic activity.
Consider the question “The stimulus package announced by the government in the wake of pandemic sought to address both the demand side as well as supply-side problems. Examine the various components of package and other reforms announced in the economy.”
Conclusion
Combined with the significant number of bold structural reform measures, which hold the potential to make Indian firms attain global scales and competitiveness and give the much-needed freedoms, flexibility and financial strength to our beleaguered farmers, “the package” promises to promote India’s economic recovery in the post-COVID-19 period.
From UPSC perspective, the following things are important :
Prelims level: Various components of the economic package
Mains level: Paper 3- Impact of pandemic on India economy.
The article broadly discusses the impact of the pandemic on the Indian economy. While the package has been declared to alleviate the economic pain, the government faces the challenge of finding the resources to plug the gaps. Though pandemic erupted from China, it successfully controlled it. This along with the its calibrated approach towards strategic progression is going to stand China in good stead.
Grappling with the “unknown unknowns”
Several weeks before the advent of the COVID-19 pandemic, India’s Minister for External Affairs delivered a lecture.
In the lecture, he had observed that “what defines power and determines national standing is also no longer the same. Technology, connectivity and trade are at the heart of the new contestations.”
He did mention a point about “known unknowns”.
But the pandemic has forced us to face the “unknown unknowns”.
Within a few weeks, his prediction would be overtaken by a tectonic shift in the global situation thanks to a virus and a pandemic.
Impact on India’s economy
What distinguishes the present pandemic from earlier ones is its economic impact.
The economic impact is perhaps even more threatening than the human costs involved.
In the case of India, all forecasts have had to be shredded.
Job losses have been massive, specially in urban areas.
India’s exports in the month of April, for instance, were the worst in the past 30 years.
Finding resources for the stimulus package
Well before pandemic India had been witnessing a persistent economic downward slide.
Prime Minister Narendra Modi’s announcement of a ₹20-lakh crore stimulus package was, hence, timely.
Even though economists now believe that in real terms it amounts to around 2% of GDP rather than 10% .
Finding resources for even this stimulus package will, however, not be easy.
The Centre’s finances are not in the best of health. It has already had to resort to a second tranche of $1 billion loan from the World Bank to support COVID-19 relief measures.
The finances of States are, to say the least, in a perilous state.
Questions are, thus, bound to be raised as to whether adequate funds would be forthcoming for relief purposes.
Since its early recovery, China has followed a calibrated approach — one that stems from a policy of deliberate strategic progression conceived over the years.
It may be worthwhile to understand the facts so as to underscore the gap that currently exists between China and India.
In 2015, China’s President, Xi Jinping, had floated the idea of “a Community of Common Destiny of Mankind”.
In this, he outlined China’s viewpoint on aspects such as economic globalisation and the information technology revolution.
The Belt and Road Initiative — which encompasses policy, infrastructure, trade, financial, and people-to-people connectivity, and, implicitly also, security ties — was an adjunct to it.
The 19th National Congress of the Communist Party of China (2017), thereafter, gave its assent, considering it essential to enable China to achieve pre-eminence status within the global order.
Ever since, China has focused on-
i) attaining economic and technological progress.
ii) defining how power would be determined in the new globalised era through devising new international norms in many emerging domains such as cyber, space, artificial intelligence, etc.
China also set about rewriting international rules, premised not so much on governing where global goods are made, but on setting standards that define production, exchange and consumption.
China Standards 2035 plans to set new standards with regard to the Industrial Internet of Things (IoT) and define next-generation information technology and biotechnology infrastructure.
China is hoping, to reap the “early bird” advantage, even as other industrial nations struggle to recover from the devastation caused by the COVID-19 pandemic.
Internationalisation of Chinese standards would provide China a clear advantage by providing it an opportunity to set the standards in emerging industries such as high-end equipment manufacturing, unmanned vehicles, new materials, cybersecurity and the like.
This would enable it gain a dominant position in the global economy.
India must plan well to cope with the China challenge
Mounting an effective challenge to China at this time would require a well-conceived and carefully calibrated plan of action by India.
As of now, this is not evident.
India and China will certainly emerge from the pandemic more diminished than previously, but to varying extents.
Each country will, no doubt, suffer an economic setback.
But while both nations would be among the very few that would still have a positive growth rate in the near future.
Which is 1% in the case of China and 1.8% in the case of India, according to the International Monetary Fund.
Given the size of China’s economy, it does not translate into a massive shift in India’s favour.
Consider the question “Economies across the world have been bruised by the corona pandemic. There have also been talks of India being the beneficiary of changes in the global supply chains. In light of this, examine the issues and challenges that India may face in this regard.”
Conclusion
India would more than welcome some of the entities exiting China, but there are no “green shoots” to suggest that such a shift has, or is, about to take place. Many alternatives are available to these companies and it would be excessively optimistic on our part to hold on to the belief that India is the only alternative choice for most of them.
From UPSC perspective, the following things are important :
Prelims level: Investment rate, purchasing power
Mains level: Paper 3- Option to raise the money for package.
What are the options available with the government to fill up the budgetary gaps created by the stimulus package? Well, one seems to be exercising its disinvestment or privatisations plans. But like always disinvestment comes with its own set of issues. The next could be raising the taxes and duties on the fuels. But this will defeat the very purpose of the package. Third option is borrowing. But borrowing in the external currency is another problem story. Let’s figure this all out with this article….
Containing the fiscal deficit through privatisation
Government is apparently hopeful that money could come partly from the new privatisation programme.
Finance Minister recently said that privatisation — a policy that has already gained momentum in the last budget, would now be the order of the day.
According to the new Public Sector Enterprises Policy (PSEP), a list of strategic sectors will be notified where there will be no more than four public sector enterprises.
The PSEP is a strategic move intended to rationalise the public sector.
Before the COVID-19 crisis, the government needed the privatisation money partly because its revenue from GST among other things was declining.
And this void could only partly be filled by alternative sources of tax revenues such as that on fuel.
Today, the government needs this money in order to contain the fiscal deficit.
So, the privatisation programme has suddenly been expanded.
The Centre has set a budget target of Rs 2.1 lakh crore from disinvestment in the current fiscal year.
Progress made so far on disinvestment process
Towards the end of 2019, the government approved the privatisation of BPCL and the Shipping Corporation of India.
In addition to selling stakes in the Container Corporation of India, THDC and NEEPCO.
The government had initially planned to complete its “strategic disinvestment” in BPCL and Air India by the end of this fiscal year.
It now wants it completed earlier. Some estimate say that the government’s disinvestment in BPCL, SCI and CONCOR could fetch it Rs 78,400 crore.
Should India’s flying Maharaja also find a buyer, the government could raise over Rs 1,05,000 crore.
Issues with privatisation
The revenue from privatisation is a one-off benefit and generally, only profit-making units are sold at a good price.
Privatisation is a two-way street — it requires a buyer and a seller. Who will be the buyers?
Excessive political interference with the private sector makes owning an ex-government entity risky.
A handful of Indian capitalists who are already at the helm of oligopolies may be in a position — financially and politically — to buy the big PSUs.
If they were allowed to grow even more by acquiring public entities, sectors of the economy would be under the influence of quasi-monopolies.
This could foster crony capitalism and may even result in the making of oligarchs.
Where else can the government find the money it needs?
1. Increasing tax and duties on fuel
Government has already increased the excise duty on petrol and diesel by Rs 3 per litre — the steepest hike since 2012.
The government imposed additional taxes while global crude oil prices fell.
As oil prices can only go up after the last round of negotiations between Russia and Saudi Arabia, the Indian government will not be in a position to use this source of revenue again.
Such a move would contradict the very idea of a relief and stimulus package anyway. Why?
An increase in the excise duty or tax would affect purchasing power, when the package is supposed to help the poor and to boost demand.
Low demand and lowest investment rate: Even before the present crisis, industrialists complained that 25 per cent of their productive capacity was idle.
And that’s why their investment rate had never been this low, in the 21st century at least.
2. Borrowing money and issues with it
Even if some privatisation helps India financially, it seems that the country will need to borrow money.
External borrowing, however, is problematic. There are three issues with external borrowing-
1) The only way governments pay back external borrowings is by wisely using borrowed capital to drive high GDP growth and generating revenues.
Which is unlikely to happen any time soon as a recession is round the corner.
2) The rupee is at its lowest level compared to the US dollar.
Any more devaluation will only make it harder for the government to pay back its debt.
Since external borrowings must be paid back in borrowed currency, exports and foreign reserves or gold reserves are generally the only two reliable options.
The third one being borrowing more to pay back the previous debts — a slippery slope to pay government debt.
However, India should account for the inevitable global slump in international demand and a consequent drop in its exports.
Other countries may also move towards “atmanirbharta” and over-regulate imports.
3) Indian industries are already a bit debt-laden.
Following factors compelled industries to resort to overseas borrowing-
i)The risk in the banking sector, tight liquidity in debt markets,
ii) Comparatively lower international borrowing rates
iii) The RBI’s ECB rationalising measures.
More overseas borrowing, combined with the industry’s high debt status, could lead to rating agencies downgrading India’s investment prospects — deterring foreign investments in the process.
3. Foreign reserves and other options
On the positive side, India’s foreign reserves stand at an all-time high which could be strategically used to finance its needs.
The rest may have to come from privatisation, taxation, loans and more international aid.
Already, India is receiving more funds from the World Bank, the ADB and the Japanese ODA.
India may help others, but it needs aid too.
Consider the question- “The government had to declare the relief and stimulus package in the wake of corona crisis. This expenditure leads to budgetary gaps. What are the options with the government to close this gap? Examine the issues associated with these options.”
Conclusion
The government must weigh each option with due consideration and explore all the possible avenues. Options like privatisation or borrowing must be exercised with caution. As these decisions could have severe consequences for the economy in the future.
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Terrorism and related issues
Pakistan is a unique country in the sense that it is both a victim and the perpetrator of terrorism. This article explains the situations which made Pakistan home to the terrorism. So, why some terrorist organisations turned against Pakistan? What are the ideologies followed by various terrorist organisation and how it makes a difference in their functioning? Read to know…
Terrorism paradox of Pakistan: Both Victim and perpetrator
This Terrorism paradox can be traced to the deliberate policy of the Pakistani state to create and foster terrorist groups in order to engage in low-intensity warfare with its neighbours.
Pakistan first operationalised this strategy in regard to Afghanistan in 1973.
And intensified it with the cooperation of the U.S. and Saudi Arabia after the Marxist coup of 1978 after which USSR entered Afghanistan.
Soviet withdrawal and rise in insurgency in Kashmir
The Soviet withdrawal in 1989 left the Pakistani military with a large surplus of Islamist fighters that it had trained and armed.
Islamabad decided to use this “asset” to intensify the insurgency in the Kashmir Valley.
Radicalisation of Pakistani population
The decade-long Afghan “jihad” in Afghanistan had also radicalised a substantial segment of the Pakistani population.
Radicalisation was intense in the North-West Frontier Province and Punjab.
Sectarian divisions were also on the rise not only between Sunnis and Shias but also among various Sunni sects.
The division was intense between two Sunni sects-the puritanical Deobandis and the more syncretic and Sufi-oriented Barelvis.
In the process, a number of homegrown terrorist groups emerged that the Pakistan Army co-opted for its use in Kashmir and the rest of India.
But, it soon became clear that Pakistan had created a set of Frankenstein’s monsters some of whom turned against their creator.
The Musharraf government, under American pressure, decided to collaborate with the latter in the overthrow of the Taliban regime in Afghanistan.
This resulted in some of the terrorist organisation turning against Pakistan.
Monsters who don’t spare even its creator
The Tehreek-e-Taliban Pakistan (TTP), which has ideological affinity with the Afghan Taliban.
The TTP and its affiliates have fought pitched battles with the Pakistan Army in the Federally-Administered Tribal Areas (FATA) and parts of the NWFP.
Also, the Jaish-e-Mohammad (JeM) has not hesitated to launch terrorist attacks on targets within Pakistan as well, especially against the Shias and Sufi shrines.
Did all terrorist organisation turn against Pakistan?
No!
Consider the case of ‘loyalist’ LeT.
Lashkar-e-Taiba (LeT), is a classic example of a “loyalist” terrorist organisation that has played by the rules set by the Pakistani military.
It only launches attacks on targets outside Pakistan, primarily in India.
As the evidence in the case of the Mumbai carnage of 2008 clearly indicates LeT operations are coordinated with the Inter-Services Intelligence (ISI).
ISI provides it with intelligence and logistical support in addition to identifying specific targets.
This is why the LeT and its front organisations have continued to receive the military’s patronage and unstinting support.
Consequently, its leader, Hafiz Saeed, was until recently provided protection by the Pakistani state.
Ideological differences
Both the LeT and the Jaish-e-Mohammed (JeM) have been engaged in attacks on Indian targets identified by Pakistan’s ISI.
The difference between LeT and JeM lies in the fact that while the LeT is more pragmatic and less ideological.
The JeM is highly ideological and sectarian.
JeM draws its ideological inspiration from a very extreme form of Deobandi puritanism.
That extreme form considers all those who do not believe in its philosophy beyond the pale of Islam.
For many JeM diehards, these include not only Shias and Barelvis but also the Pakistani state and the Pakistani military.
LeT on the other hand does not consider Muslims of different theological orientations as non-believers and therefore legitimate targets of attack.
This relatively “liberal” interpretation is related to the fact that LeT draws its ideological inspiration from the sect called the Ahl-e-Hadis, which composes only a small proportion of Pakistan’s Muslim population and cannot afford to engage in sectarian conflict.
Moreover, it draws its membership from different Muslim sects including the Sufi-oriented Barelvis and the puritanical Deobandis.
Both these factors drive LeT toward greater tolerance in sectarian terms and to eschew intra-Islamic theological battles.
Its primary goals are political; above all, driving India out of Kashmir.
This jells well with the objectives of the Pakistani military and makes LeT and Hafiz Saeed, favourites of the Pakistani establishment.
Consider the question asked by UPSC in 2017-“The scourge of terrorism is a grave challenge to national security. What solution do you suggest to curb this growing menace? What are the major sources of terrorist funding?
Conclusion
The fact that using terrorist outfits for state objectives is a highly risky business whose blowback cannot be predicted and can have very negative consequences for the stability of the state itself.
From UPSC perspective, the following things are important :
Prelims level: Electricity Act 2003.
Mains level: Paper 3- Problems of DISCOMs.
Despite several policy measures, DISCOMs continue to suffer from various issues. This article focuses on the comprehensive proposal to amend the Electricity Act 2003. But here’s a catch, we will be discussing some issues with proposed amendment. Let’s dive into our DISCOMs analysis.
Two-part tariff policy
At the core of DISCOM woes is the two-part tariff policy.
Two-part tariff policy was mandated by the Ministry of Power in the 1990s at the behest of the World Bank.
As more private developers came forward to invest in generation, DISCOMs were required to sign long-term power purchase agreements (PPA).
Under PPA, DISCOMs were committed to pay- 1) a fixed cost to the power generator, irrespective of whether the State draws the power or not, 2) a variable charge for fuel when it does.
How Over-optimistic projection led to losses?
The PPAs signed by DISCOMs were based on over-optimistic projection of power demand estimated by the Central Electricity Authority (CEA).
The 18th Electric Power Survey (EPS) overestimated peak electricity demand for 2019-2020 by 70 GW.
The 19th EPS published in 2017, by 25 GW, both pre-Covid 19.
Thus, DISCOMs were locked into long-term contracts, ended up servicing perpetual fixed costs for power not drawn.
Due to the CEA’s overestimates, the all-India plant load factor of coal power plants is at an abysmal 56% even before COVID-19.
This means that coal power plants are generating electricity only 56% of what maximum these power plants are able to generate.
Renewable energy factor
Renewable impacted the power sector in the following 3 ways-
1) From 2010, solar and wind power plants were declared as “must-run”.
This required DISCOMs to absorb all renewable power as long as there was sun or wind, in excess of mandatory renewable purchase obligations.
This means backing down thermal generation to accommodate all available green power.
This resulted in further idle fixed costs payable on account of two-part tariff PPAs.
2) Power demand peaks after sunset.
In the absence of viable storage, every megawatt of renewable power requires twice as much spinning reserves to keep lights on after sunset.
DISCOMs, especially in the southern region, have had to integrate large volumes of infirm power, mostly from solar and wind energy plants.
These renewable energy plants enjoy must-run status irrespective of their high tariffs.
The tariff is ₹5/kwh in Karnataka and ₹6/kwh in Tamil Nadu for solar power.
All this even as the demand growth envisaged in the 18th EPS failed to materialise.
3) In 2015 the Centre announced an ambitious target of 175 gigawatts of renewable power by 2022.
This followed with a slew of concessions to renewable energy developers, and aggravating the burden of DISCOMs.
Incidentally, China benefited by as much as $13 billion in the last five years from India’s solar panel imports.
So, what are the proposals in the Electricity Act-2020?
1. Sub-franchisees and issues with it
The amendment proposes sub-franchisees, presumably private, in an attempt to usher in markets through the back door.
Issue: Private sub-franchisees are likely to cherry-pick the more profitable segments of the DISCOM’s jurisdiction.
The Electricity Bill 2020 containing the proposed amendments is silent on whether a private sub-franchisee would be required to buy the expensive power from the DISCOM or procure cheaper power directly from power exchanges.
If it is the first, the gains from the move are doubtful since the room for efficiency improvements is rather restricted in the already profitable regions attractive to sub-franchisees.
If it is the second, DISCOMs will then be saddled with costly power purchase from locked-in PPAs and fewer profitable areas from which to recover it.
2. Concession to renewable
The amendment proposes even greater concessions to renewable power developers.
This would have a cascading impact on idling fixed charges, impacting the viability of DISCOMs even more.
3. Elimination of cross-subsidies
The most controversial amendment proposed, seeks to eliminate in one stroke, the cross-subsidies in retail power tariff.
This means each consumer category would be charged what it costs to service that category.
Rural consumers requiring long lines and numerous step-down transformers and the attendant higher line losses will pay the steepest tariffs.
The proposed amendments envisage that State governments will directly subsidise whichever category they want to, through direct benefit transfers.
Cross-subsidy is a fact of life in even private industries, soap, newspapers, or even utilities such as telecom.
But eliminating them in one stroke is bound to be ruinous to State finances.
There are also myriad problems with Direct Benefit Transfer.
This proposal is practically infeasible; if forcibly implemented, it will lead to chaos.
4. Selection of the State regulator
State regulators will henceforth be appointed by a central selection committee.
The composition of which inspires little confidence in its objectivity.
This could result in jeopardising not only regulatory autonomy and independence but also the concurrent status of the electricity sector.
5. Electricity Contract Enforcement Authority
Its members and chairman will also be selected by the same selection committee referred to above.
The power to adjudicate upon disputes relating to contracts will be taken away from State Electricity Regulatory Commissions and vested in this new authority.
This is being done ostensibly to protect and foster the sanctity of contracts.
This is also to ensure that States saddled with high-priced PPAs and idling fixed costs, yet forced to keep increasing the share of renewables in their basket, have no room for manoeuvre.
Consider the question “Despite various policy interventions, DISCOMs continue to suffer from financial woes. Analyse the reasons for their woes. Examine the proposals in the Electricity Act (Amendment) Bill 2020.”
Conclusion
Beyond a doubt, the Electricity sector requires change but we must try to bring holistic and participatory approach to find solutions.
Back2Basics: Electricity Act 2003
The act covers major issues involving generation, distribution, transmission and trading in power.
Before Electricity Act, 2003, the Indian Electricity sector was guided by The Indian Electricity Act, 1910 and The Electricity (Supply) Act, 1948 and the Electricity Regulatory Commission Act, 1998.
The Electricity Act 2003 consolidates the position for existing laws and aims to provide for measures conducive to the development of electricity industry in the country.
The act attempted to address certain issues that have slowed down the reform process in the country and consequently had generated new hopes for the electricity industry.
From UPSC perspective, the following things are important :
Prelims level: WHO
Mains level: Paper 2- Role of WHO under scanner for handling corona pandemic.
WHO has been in news recently for all the wrong reasons. This article focuses on wide-ranging support for the resolution calling for the inquiry into the origin of the novel coronavirus. With this resolution, WHO has a chance to redeem its credibility. Until recently China seemed to be in the control of the global narrative on the pandemic. And now we witness near-unanimous support to this resolution.
Inquiry of the origin of the virus
International attention is riveted on the question of an inquiry into the origin of the corona-virus.
The call for an international investigation was first voiced formally by the Australian prime minister, Scott Morrison.
Beijing reacted with open threats of trade sanctions. But Canberra pushed the investigation ahead.
It is working with the European Union to promote a resolution at this week’s World Health Assembly (WHA), which brings ministers from all the member states of the WHO.
The resolution also calls for an “impartial, independent and comprehensive” evaluation into the international response to the corona pandemic.
The WHA has 194 members.
So, the entire international community — has a voice in addressing the key issues raised by the corona crisis by debating the resolution.
Wide support to the resolution
According to media reports, the resolution is close to gaining support from two-thirds of the WHA’s 194 members.
Australia and the EU hope to have the resolution approved unanimously.
Since the resolution does not mention China by name, Canberra and Brussels hope Beijing will not oppose the resolution.
They also hope to persuade Washington, which wanted tougher language including references to China, to endorse the resolution.
Whatever the fate of the resolution, the wide-ranging support it has got amidst the vocal Chinese opposition is impressive.
So, how effective is the resolution?
To be sure, the resolution was watered down to get the maximum possible backing at the WHO.
But it is said to have enough teeth to dig deep into the issues raised by the corona crisis.
How China controlled the corona narrative until now?
A few weeks ago, it seemed China and the Director-General of WHO, had full control over the corona narrative on the issues involved.
The Trump administration’s aggressive questioning of China’s role and WHO DG’s role had not gone down well.
Nor did the US threat to cut off funding for the WHO.
Within the US itself, opposition Democrats and the foreign policy establishment has attacked Trump for trying to “divert attention”.
China’s success in quickly getting things under control at home and its expansive mask diplomacy seemed to give Beijing an upper hand at the WHO.
China’s growing clout in the developing world and bilateral economic levers against major developed countries, including in Europe, appeared to insure against any serious international questioning of its handling of the virus.
What factors played the role in the passing of the resolution?
1) The public pressure from the US concentrated minds at the WHO.
2) Some quiet diplomacy by middle powers, including India, appears to have created the political basis for learning the right lessons from the pandemic and preventing similar eruptions in the future.
Is it a setback for China?
Some observers see a unanimous approval of the resolution as a diplomatic setback for Beijing.
Since limiting the demands for an external inquiry has been a major political priority for Beijing.
There are similar demands at home for an investigation into a crisis that led to an enormous loss of life in China and punishing those responsible.
The leadership in Beijing is not comfortable with these demands.
Issues with the WHO that India must pay attention to
1. International norms for early detection
There is the need to develop new international norms that will increase the obligations of states and the powers of the WHO in facilitating early detection and notification of pandemics.
This will involve finding ways to bridge the contested notions of state sovereignty and collective security.
2. Funding of the WHO
If you have a club that depends on donations rather than membership fees, donors will inevitably set the agenda.
Over the decades, the WHO has become ever more reliant on voluntary contributions from governments and corporations rather than assessed contributions from the member states.
This is going to leave the WHO rather vulnerable to pressures.
3. WHO’s focus should be on fewer objectives
India must also ask if the WHO is trying to do too many things.
The WHO’s initial successes came when it focused on a few objectives like combatting malaria and the elimination of smallpox.
A limited agenda might also make the WHO a more effective organisation.
Way forward for India
India knows it is one thing to pass to a resolution and entirely another to compel a great power like China to comply.
Any current effort to understand the origin and spread of the COVID-19 virus and a long-term strategy to deal with future pandemics must necessarily involve more than a measure of Chinese cooperation.
Sustained engagement with Beijing, then, is as important for Delhi as deeper cooperation with Washington and the “Quad plus” nations.
India should also focus on more intensive engagement with the non-aligned nations in promoting a new global regime on preventing and managing pandemics.
Consider the question “Corona pandemic and its handling by the WHO resulted in the loss of its credibility. But the collective efforts of the nations which resulted in the passage of the resolution for inquiry of the origin of the virus, could soften the blow the credibility of WHO had suffered. Comment.”
Conclusion
For India, the widespread support for the resolution is a vindication of its early call for transparency and accountability in the responses of China and the WHO to the pandemic. India should take initiative to ensure the reforms at WHO and the formation of global order for preventing and managing the global order.
From UPSC perspective, the following things are important :
Prelims level: GDP rankings
Mains level: Paper 3- Atmanirbhar Bharat Abhiyan
The article examines the various aspects of the recently announced Atmanirbhar Bharat Abhiyaan (ANBA). But before digging deeper into the ANBA the author ruminates over India’s growth (GDP) story. Reasons for India’s failure to deliver on the economic empowerment are also examined. In the end, the relation between the free economies and the welfare states is examined.
The good and the bad of India’s GDP story
India crossed the UK two years ago, France last year, and will cross Germany and Japan in the next five years. (In terms of nominal GDP)
That will leave only America and China ahead of us.
But India’s per capita GDP story is on a different track.
We once equalled Korea (1960) and China (1997) but today there are 138 countries ahead of us.
The COVID-19 lockdown and the stories of pain inflicted on migrant workers exposes how per capita GDP is more important for our citizens than total GDP.
A take on Economic empowerment
Ramchandra Guha, in his book- Gandhi: The Years that Changed India, suggests that while other patriots had used Swaraj to signify national independence, Gandhiji made India aware of its true or original meaning, Swa-Raj, or self rule- both political and economic.
Our collective political Swaraj hasn’t always translated into individual economic Swa-Raj because of inadequate formalisation, industrialisation, urbanisation, financialisation, and skilling.
Atmanirbhar Bharat Abhiyaan(ANBA) – A step towards Swaraj
The Atmanirbhar Bharat Abhiyaan (ANBA) policy announcements are important moves in meeting Gandhiji’s vision of individual self-reliance and recognising poverty as the worst form of violence.
ANBA targets avoiding unemployment becoming hunger and illiquidity becoming insolvency.
The agriculture package of Rs 1.63 lakh crore included farm-gate and aggregation point infrastructure, fisheries, animal husbandries, and others like animal vaccination, micro food enterprises.
The non-bank liquidity package of Rs 5.94 lakh crore included MSMEs, NBFCs, MFIs, housing finance companies, power discoms, and others (PF, tax relief).
The migrant and farmer package of Rs 3.16 lakh crore included concessional credit via kisan credit card, farmer working capital, affordable housing, and others (food, street vendors, microloans).
The welfare and health package of Rs 1.85 lakh crore included women and pensioner benefits, MNREGA, emergency health response, and others like food, financial security.
RBI’s liquidity measures of Rs 5.24 lakh crore included two phases of targeted long-term repo operations, CRR cut, marginal standing facility limit increase, refinancing facilities, and mutual fund special liquidity facility.
The reform to the Essential Commodities Act, APMCs and contract farming directly impact prosperity as 45 per cent of our agricultural labour force generates only 14 per cent of GDP.
How ANBA maintained fiscal health?
ANBA is also important for what it is not. It’s not fiscal profligacy-i.e. the government is spending with due care for fiscal deficit figures.
Total spending may be higher if the loans for which government has stated to stand as a guarantor turns NPAs (for ex. MSMEs loans).
But for now, it marginally raises our already difficult fiscal deficit.
It’s not an institutional assault — RBI’s role in ANBA keeps it away from the political minefield that the US Federal Reserve has entered.
The US Fed is buying the bonds sold by corporations (i.e. Fed is spending itself) while the RBI has only lent the money to banks.
There is a recognition that RBI has lending powers, not spending powers.
It’s not a mindless public sector expansion: The end of monopolies (public sector monopoly) and new public-private partnership opportunities signal pragmatism and efficiency targeting.
It’s not waiting for potential COVID upsides: it makes us worthy if risky global just-in-time supply chains get replaced by resilient just-in-case diversification.
It’s not shutting off India from the world i.e. Atmanirbhar is not isolationist policy.
It creates new openness to ideas, investment, and trade.
What is on agenda for ANBA 2.0?
The unfinished agenda for ANBA 2.0 includes following-
Civil service reform-the steel frame has become a steel cage.
Government reform-Delhi doesn’t need 57 ministries and 250 people with Secretary rank.
Financial reform-sustainably raising credit to GDP ratio from 50 per cent to 100 per cent.
Urban reform-having 100 cities with more than a million people rather than 52.
Education reform-our current regulator confuses university buildings with building universities.
Skill reform-our apprentice regulations are holding back employers and universities.
Labour reform-our capital is handicapped without labour and labour is handicapped without capital.
Welfare state and free economies
A modern state is a welfare state with formal private jobs.
The idealisation of Scandinavian social democracies forgets that their dense social security nets are underwritten by remarkably free economies.
The World Bank Ease of Doing Business scale ranks Denmark third, Norway seventh, and Sweden 12th of 190 countries.
Despite — or thanks to — America’s capitalism, its central government spends 37 per cent of GDP while India’s spends 14 per cent.
And its ferocious fiscal pandemic response involves $3 trillion government borrowing in the next three months.
People suggest the US can sustain its welfare state because it has the world’s reserve currency.
But America can afford its welfare state because of the productivity of its cities, companies and citizens. Consider the following-
New York’s GDP equals Russia with 6 per cent of the people and 0.00005 per cent of the land.
The $4.5 trillion revenue of its 25 largest companies is more than Germany’s GDP.
Its per capita income is $55,000.
India’s welfare state does not lack intentions but lacks resources.
No amount of CSR, philanthropy, or government borrowing can provide the resources for the care of our weak, vulnerable, and unlucky that will flow from more productive cities, firms, and citizens.
This is what ANBA hopes to achieve.
Consider the question “Far from being an isolationist, Atmanirbhar Bharat Abhiyan seeks to make India a welfare state with more productive cities, firms and citizens. Comment.”
Conclusion
India missed the manufacturing export train that China boarded but another may be coming. Policy reform is not the solving of a sum but the painting of a picture — 90 days after the lockdown ends, we need ANBA 2.0 to finish the job.
Back2Basics: Just in time inventory
The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.
Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs.
This method requires producers to forecast demand accurately.
Just in case inventory
Just in case (JIC) is an inventory strategy in which companies keep large inventories on hand.
This type of inventory management strategy aims to minimize the probability that a product will sell out of stock.
The company that utilizes this strategy likely has a hard time predicting consumer demand or experiences large surges in demand at unpredictable times.
A company practicing this strategy essentially incurs higher inventory holding costs in return for a reduction in the number of sales lost due to sold-out inventory.
