Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Need to revive the SAARC to deal with the COVID-19 outbreak
Context
SAARC has become the ‘virtual’ platform through which leaders of the eight countries of our troubled region agreed to work together to combat unarguably the greatest immediate threat to the people: the COVID-19 health pandemic.
Success depends on India
- The success of the Modi-SAARC initiative will largely depend on India—the dominant power of the region, in every sense.
- Pakistan’s position may become marginal: Once New Delhi demonstrates that it has the capacity, the political willingness to institutionalise and to lead a mutually beneficial cooperative regime in the region, Pakistan’s “churlish” behaviour will become marginal to SAARC.
- Various international relations theorists view this as a function of “hegemonic stability”.
- Much needs to be done: Much more will need to be done by New Delhi to establish that the video conference was not a mere event, but the assertive expression of its new willingness to stabilise the region through cooperative mechanisms, for our common future.
- Rare opportunity: This is a moment thus of a rare opportunity for India to establish its firm imprimatur over the region, and to secure an abiding partnership for our shared destiny.
The genesis of SAARC
- SAARC was born at a moment of hope in the 1980s.
- An initiative by Zia Ur Rehman: The idea was initiated by one of the most inscrutable leaders of the region, General Zia Ur Rehman of Bangladesh, who, met many of the other leaders personally and dispatched special envoys to the capitals of the countries of the region.
- Dhaka’s persistence resulted in the first summit of the seven leaders of the region in 1985.
- Afghanistan joined in 2007.
- Not lived up to expectation: In the nearly 35 years of its existence, even its champions will concede however that SAARC has, to put it euphemistically, not lived up to the promise of its founder.
How the SAARC has performed?
- The dismal performance in the trade: South Asia is the world’s least integrated region; less than 5% of the trade of SAARC countries is within. A South Asian Free Trade Zone agreed on, in 2006, remains, in reality, a chimera.
- Moribund state: The last SAARC summit, scheduled to be held in Islamabad in November 2016, was postponed after the terrorist attacks in Uri; none has been held since then, and until Mr. Modi’s initiative, no major meeting had been planned.
- Marginal in our collective consciousness: A quick look at some of the questions posed in the Lok Sabha and Rajya Sabha on SAARC, in the last years, suggest that Indian MPs seek answers on why India is still a member of SAARC and on the strength of other organisations such as the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) that India is engaged with.
- Thus SAARC had become almost marginal to our collective consciousness.
The fadeout and revival of SAARC
- India-Pakistan tension: Clearly, most of the smaller states and external players believe that the India-Pakistan conflict has undermined SAARC.
- How Pakistan derails the initiatives? Bilateral issues cannot be discussed in SAARC but since the organisation relies on the principle of unanimity for all major decisions, Pakistan has often undermined even the most laudable initiative lest it gives India an advantage.
- Relative gains by India are more important for Pakistan than the absolute gains it secures for itself.
- Pakistan’s use of terror: For India, Pakistan’s use of terror as an instrument of foreign policy has made normal business impossible.
- Need of the revival to deal with the COVID-19: There is no doubt that the impact of COVID-19 will be unprecedented, in terms of those it targets and the way we live. It is too early to judge the consequences , but it will take years for the world to return to the old and familiar.
- Strategies to cope with this new insidious, scheming and diabolic strain of the coronavirus have to be dynamic and ad hoc.
- Two principles to deal with the epidemic: Containment and the possible prevention of community transmission are the only two principles that are firmly tested.
- If community transmission occurs and cannot be contained, the consequences will be calamitous.
- Time to act together: This is indeed a time for SAARC and the experts of the region to think and act together and India can lead this effort.
Conclusion
It is evident that Mr Modi is an out-of-the-box lateral thinker, especially on foreign policy. More importantly, the tragedy of COVID-19 may provide an opportunity for India to demonstrate its compassionate face to secure a region at peace with itself. India cannot afford to not to harvest this opportunity, after having sowed the seeds of a New South Asia.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Role of agri-growth in inclusive growth and reforms in PDS.
Context
Last month, Montek Singh Ahluwalia’s book, Backstage: The Story Behind India’s High Growth Years, was released. Which tilt in favour of consumer in food policy reduces incentives for farmers, makes it difficult to unlock resources for growth.
What is covered in the book
- Besides some very interesting episodes pertaining to author’s personal and professional life, the book is full of useful insights into policy debates and their complexities.
- At many places, it provides evidence of the impact of these policies.
- This can be extremely useful as we try to rejuvenate the country’s sluggish economy and abolish poverty.
Inclusive growth and agriculture
- Growth in agriculture must for inclusive growth: During the UPA period, from 2004-05 to 2013-14, it was believed that inclusive growth is not feasible unless agriculture grows at about 4 per cent per year while the overall economy grows at about 8 per cent annually.
- The reason was simple: More than half of the working force at that time was engaged in agriculture and much of their income was derived from agriculture.
- But many political heavyweights, did not believe that agri-growth could reduce poverty fast enough.
- Main instrument of agricultural strategy: The main instrument of agricultural strategy was the Rashtriya Krishi Vikas Yojana (RKVY), which gave more leverage to states to allocate resources within agriculture-related schemes.
What was the impact of strategy?
- Agri-growth increased: The agricultural strategy, along with other infrastructure investments in rural areas, had a beneficial impact on agri-growth.
- Agri-growth increased from 2.9 per cent during the Vajpayee period (1998-99 to 2003-04) to 3.1 per cent during the UPA-1 period (2004-05 to 2008-09) and further to 4.3 per cent during UPA-2 (2009-10 to 2013-14).
- The agri-GDP growth during UPA-2 was driven not as much by RKVY as it was by high agri-prices in the wake of the global economic crisis of 2007-08.
- Impact on poverty reduction: Agri-GDP growth had a significant impact on poverty reduction, whichever way it was measured — the Lakdawala poverty line or Tendulkar poverty line, which is higher.
- At what rate poverty reduced? The rate of decline in poverty (headcount ratio), about 0.8 per cent per year during 1993-94 to 2004-05, accelerated to 2.1 per cent per year, and for the first time, the absolute number of the poor declined by a whopping 138 million during 2004-05 to 2013-14.
- Interestingly, this holds even on the basis of the international poverty line of $1.9 per capita per day (on 2011 purchasing power parity, PPP, also see graphs).
Right to food and debate around it
- Scepticism over the success of agriculture support to food subsidy: Instead of celebrating this success of the growth strategy in alleviation of poverty, several NGOs and even Congress stalwarts remained sceptical.
- They advocated food subsidy under the Right to Food Campaign.
- National Advisory Council (NAC) came up with a proposal to subsidise 90 per cent of people by giving them rice and wheat at Rs 3/kg and Rs 2/kg.
What were the arguments put forward by Montek Singh Ahluwalia?
- Burden on exchequer: He tried to convince them that this was likely to create an unsustainable burden on the exchequer.
- India could end up importing food: He also argued that India could end up importing grains to the tune of 13-15 million tonnes per year.
- Cap the population coverage at 40%: He favoured a cap at 40 per cent of the population to be covered under the Food Security Act as the poverty ratio (HCR) in 2011-12 was 22 per cent.
- Smart card to beneficiaries: He also favoured providing smart cards to the beneficiaries so that they could opt for buying more nutritious food rather than just relying on rice and wheat.
- Chance for diversification of agriculture: Smart card with beneficiaries would have also allowed diversification of agriculture and augmented farmers’ incomes.
- But he could not win over the NAC — although the coverage for food subsidy was reduced from the original proposal of 90 per cent to 67 per cent of the population.
- Against the ban on agri. export: Montek also argued against export bans on agricultural commodities as these impacted farmers’ incomes adversely.
- Government siding with consumers: But the government of the day often ended up taking the consumer’s side, as that was considered pro-poor.
- This reduced the incentives for farmers, who then had to be compensated by increasing input subsidies.
What are the result of this strategy adopted by the government?
- Negative PSE: No wonder, years later, when we estimated the producer support estimates (PSEs), as per the OECD methodology — used by countries that produce more than 70 per cent of the global agri-output — we found a deeply negative PSE.
- What negative PSE indicates? This indicates implicit taxation of agriculture through trade and marketing policies, even when one has accounted for large input subsidies going to farmers (see graph on PSE).
- Consumer bias in the system: Today, the food subsidy is the biggest item in the Union budget’s agri-food space. In the current budget, it is provisioned at Rs 1,15,570 crore.
- Borrowing by FCI not factored in: But this factor hides more than it reveals. Lately, the government has been asking the Food Corporation of India (FCI) to borrow from myriad sources, and not fully funding the food subsidy, which should logically be a budgetary item.
- The outstanding dues of the FCI are more than the provisioned subsidy, and if one adds these dues to the budgeted food subsidy, the effective amount of food subsidy comes to Rs 3,57,688 crore.
- This displays the consumer bias in the system.
Conclusion
- Restrict the population coverage of food subsidy: The Economic Survey of 2019-20 makes a case for restricting food subsidy to 20 per cent of the population — the headcount poverty in 2015 as per the World Bank’s $1.9/per capita per day (PPP) definition was only 13.4 per cent.
- For the others, the issue prices of rice and wheat need to be linked to at least 50 per cent of the procurement price or, even better, 50 per cent of the FCI’s economic cost.
- Unless we make progress on this front, it is difficult to unlock resources for the growth of agriculture, which slumped from 4.3 per cent during UPA-2 to 3.1 per cent during Modi 1.0.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Strategies to deal with the COVID-19 pandemic.
Context
Currently, India has entered Stage 2 of the COVID 19 epidemic, but can we do something urgently to halt it before Stages 3 and 4, and prevent it from becoming another China or Italy? Let’s look at what COVID 19 is doing globally and what it has already done in India.
Nature and characteristics of COVID-19
- It belongs to a simple family of cold viruses: Coronavirus 19, which emerged from China but has now spread globally, belongs to a simple family of common cold viruses which look innocent and harmless, unlike the sinister flu.
- Footprints of similar epidemics: It has footprints of two similar epidemics: SARS (2002) and MERS (2012) apart from Ebola, which were contained well globally in the last two decades.
- They are the group of viruses: Coronaviruses are large groups of viruses seen in humans as well as animals like camels, bats, cats, and even cattle, which India should take note of.
- The current COVID 19 appears to be a bat-originated beta variant of the coronavirus.
- Who is the most vulnerable? The human COVID disease is fatal predominantly in elderly or vulnerable groups, such as people with a chronic disease like hypertension, diabetes, cancer or people with suppressed immune systems.
- How it is spread? It is spread via airborne droplets (sneeze or cough) or contact with the surface. It is possible that a person can get COVID-19 by touching a surface or an object that has the virus on it and then touching their own nose, eyes or mouth.
Susceptibility and the measures needed to contain the spread
- Mode of spread: The way virus spreads creates vulnerability and susceptibility of the spread of the virus through airborne droplets and contact surfaces — which are now, therefore, targets of public hygiene for preventing the spread.
- Why India is more vulnerable? We are vulnerable due to the large population constantly travelling and working: This needs immediate containment to halt the virus spread. We are a ticking time bomb now with less than 30 days to explode in Stage 3, which will be the virus getting deeper into communities, and which will then be impossible to contain.
- Poor public hygiene in India: Public hygiene in India is poor despite the “Swachh Bharat (Clean India)” movements. We need to have legislation with a penalty to stop spitting in public as well as private spaces.
- Past performance: India has done very well to contain both SARS and the novel Nipah viral spread very well.
Should India shut down the cities?
- From China to global spread: The COVID 19 virus possibly came from the Wuhan epicentre of central China. Subsequent it assumed a large enough proportion to be called a pandemic. It rapidly transitioned across different geographies of the world including Korea, Japan, Iran, Italy and others for the WHO to declare it as a pandemic.
- Neighbouring countries shutting down the cities: neighbouring countries like Thailand and Singapore shut down their major cities and towns for a few weeks to stop it from moving onto the next stages.
- Should India shut down the cities? The big question today is, should the Indian government and the state governments stop the virus spread from Stage 2 to 3 by totally shutting down cities and towns when the economy is already fragile and on the brink?
- From cluster to community spread: India had its first case diagnosed on January 30, from a student who returned from China. Later, it had a very slow spread despite the global transit involved. Such individual cases will become small clusters.
- These clusters will then spread to communities.
- We must halt the community-wide spread: Currently, we have just moved from case to clusters, but we must halt the community-wide spread.
- Biphasic or dual-phase infection: COVID 19 usually follows what is known as a biphasic or dual-phase infection, which means the virus persists and causes a different set of symptoms than observed in the initial bout.
- Also, sometimes, the recovered person can relapse.
- The possibility of “super spreader”: Currently, the cases and clusters in India are simple spreaders which means an infected person with normal infectivity.
- What is it? But COVID 19 can also have a “super spreader”, which means an infected person with high infectivity who can infect hundreds in no time.
- This was reportedly seen in Wuhan where a fringe group spread the virus via a place of worship in Korea, infecting almost 51 cases.
- India saw a mini spurt of cases on March 4, and then again between March 10 and 13, when cases jumped from 23 to 35, yet no super spreader was present.
- We need to halt transition from stage 2 to stage 3: Now we have almost crossed a hundred cases and we must be vigilant.
- As we enter Stage 2, we will now see a geometric jump in the number of cases which will put us at risk of rapidly transitioning from Stage 2 to 3 like Italy, which we need to halt urgently.
Conclusion
The ICMR has rightly advised the government to go into partial shutdown but is it too little too late now? It’s time to halt COVID 19 by smartly locking the country at home so that we can have a better tomorrow. This needs a political will which we currently have.
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Note4Students
From UPSC perspective, the following things are important :
Mains level: Paper2- India has shown that it has political will, technical capacity and financial resource to control the infectious diseases it need to marshal these resou.rce to eradicate TB
Context
India needs to take TB at the same level of seriousness at which it is dealing with the Covid-19.
Contrast and between the response
- Tuberculosis in India: Indians will still have to contend with other deadly respiratory tract infections which spread via airborne transmission. We will still have to contend with one particular bug which kills millions of us and which has been around for millennia. Tuberculosis.
- But all comparisons between COVID-19 and TB end with the superficial observation that they are both deadly respiratory tract infections.
- Speedy tackling of COVID-19: COVID-19 began its march through humankind barely half a year ago and, in record time, scientists have identified the virus and hundreds of millions of dollars have been allocated to controlling its spread, developing vaccines (at last count, more than a dozen candidates) and testing medication regimens for those infected.
- Waning of the epidemic: While the virus has spread to over 100 countries, the epidemic already shows signs of waning in the Asian countries where it hit first and hardest.
Response to the TB
- How long has the TB infected us? On the other hand, TB is as old as humanity itself, infecting us for at least 5,000 years.
- The infecting agent, a bacterium, was identified way back in 1882, by Robert Koch, signalling one of the landmark discoveries which laid the foundation of modern medicine.
- How was the response to TB? The subsequent response to this disease, which was infamously called the White Plague and was a leading cause of death globally at the start of the 20th century, is similar to what we see today for COVID-19, but played out over decades rather than months.
- Measures taken: TB was made a notifiable disease, campaigns were launched to prohibit spitting and containment policies, including sequestering infected persons, were implemented.
- The first vaccine was produced over a hundred years ago, and the first curative treatments available by the 1950s.
- Divide between rich and poor in TB infections: TB was largely beaten in the rich world, not only because of these medical miracles but also thanks to the dramatic reduction in poverty and improvement in living standards.
- There is compelling evidence that addressing these social determinants was even more impactful than medical interventions in the war against TB.
- The disease of squalor: TB has always been, and this is even more true now than ever before, a disease of poverty and squalor. And no country is more affected than India.
- Every TB statistic is grim:
- We are home to 1 in 4 of the world’s TB patients.
- Over 2.5 million Indians are infected.
- In 2018, over 4,00,000 Indians died of the disease.
- To put this in stark perspective, more people died of TB in India last week than the entire global death toll of COVID-19 to date.
- Contrast with the response to COVID-19: Given our urgent, energetic and multifaceted response to the latter Covid-19, one is left wondering why we have failed so miserably for another bug, particularly one which has been around for so long, which has been exquisitely studied and characterised, which is preventable and treatable, and which most of the world has conquered.
Why TB has not been given such attention?
- It is because those who suffer from TB are not likely to be boarding international flights or passing through swanky airports to attend conferences.
- It is because TB infects people in slower tides, slow enough for industries to replace the sick with healthier recruits without endangering the bottom line.
- It is because TB does not threaten the turbines that keep the global economy throbbing.
- It is because TB no longer poses a threat to rich and powerful countries.
- It is because those who have TB live on the margins and have little political influence.
- It is because TB control requires society to address the squalid environments, which shroud the daily lives of hundreds of millions of Indians.
- It is because TB is a medieval scourge that reminds us of our shameful failure to realise a just, humane and dignified life for all our people.
Conclusion
If there is one lesson from COVID-19, it is that India, and the global community, has the political will, technical capacity and financial resources to act in a committed and concerted way to control infectious diseases. It needs to marshal these assets to eradicate TB, the most pernicious and pervasive infection of all, both through addressing its social determinants and scaling up effective biomedical interventions. But, for this to happen, we will have to be as concerned about the health needs of those who travel by foot and bicycle as we do for those who board cruise ships and international flights.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3-How IBC has fared so far?
Context
The IBC has started emerging stronger as it delivered on its promise, passed the constitutional muster, earned global recognition and became the preferred option for stakeholders in case of default.
Demystifying the myths surrounding IBC
Myths about recovery:
Most of the myths surround recovery. Consider the following example for quick appreciation.
- M/s. Synergies Dooray was the first company to be resolved under the IBC. It was with the Board of Industrial and Financial Reconstruction (BIFR) for over a decade.
- The realisable value of its assets was Rs 9 crore when it entered the IBC process. It, however, owed Rs 900 crore to the creditors.
- How much did IBC recover? The resolution plan yielded Rs 54 crore for them.
- Some condemned IBC because the resolution plan yielded a meagre 6 per cent of the claims of the creditors, disregarding the fact that they recovered 600 per cent of the realisable value of the company, which had been in the sick bed for over a decade.
- If the company was liquidated, assuming no transaction costs, the creditors would have got at best Rs 9 crore — 1 per cent of their claims.
The myth that recovery under IBC is dismal
- Let’s examine the myth that the recovery through resolution plans is dismal.
- Two hundred companies had been rescued till December 2019 through resolution plans.
- They owed Rs 4 lakh crore to creditors. However, the realisable value of the assets available with them, when they entered the IBC process, was only Rs 0.8 lakh crore.
- The IBC maximises the value of the existing assets, not of the assets which do not exist. Under the IBC, the creditors recovered Rs 1.6 lakh crore, about 200 per cent of the realisable value of these companies.
- Why creditors had to take a haircut? Despite the recovery of 200 per cent of the realisable value, the financial creditors had to take a haircut of 57 per cent as compared to their claims. This only reflects the extent of value erosion that had taken place when the companies entered the IBC process.
- What is the conclusion? As compared to other options, banks are recovering much better through IBC, as per RBI data.
The myth that IBC is sending companies for liquidation:
-
- What is the primary objective of IBC: Recovery is incidental under the IBC. Its primary objective is rescuing companies in distress.
- More number of companies sent for liquidation: There is a myth that although the IBC process has rescued 200 companies, it has sent 800 companies for liquidation. The number of companies getting into liquidation is thus four times that of the companies being rescued.
- The context for the numbers: Numbers, however, to be seen in context. The companies rescued had assets valued at Rs 0.8 lakh crore, while the companies referred for liquidation had assets valued at Rs 0.2 lakh crore when they entered the IBC process.
- Looking from the value term angle: In value terms, assets that have been rescued are four times those sent for liquidation. It is important to note that of the companies rescued, one-third were either defunct or under BIFR, and of the companies sent for liquidation, three-fourths were either defunct or under BIFR.
The myth that IBC is resulting in huge job losses
- The next myth is that the IBC is resulting in huge job losses through liquidation. It is misconstrued that 600 companies — for which data are available and which have proceeded for liquidation — have assets (and consequently employment) at least equal to the aggregate claim of the creditors — Rs 4.6 lakh crore.
- Unfortunately, they have assets on the ground valued only at Rs 0.2 lakh crore.
- Take the examples of Minerals Limited and Orchid Healthcare Private Limited, which have been completely liquidated. They owed Rs 8,163 crore, while they had absolutely no assets and employment.
- What matters in this context is the assets a company has or the employment it provides — not how much it owes to creditors.
- The IBC process would release the idle or under-utilised assets valued at Rs 0.2 lakh crore, which would have dissipated with time, for business and employment.
- One also needs to consider the jobs saved through the rescue of 80 per cent of the distressed assets, and the job being created by these companies, post-rescue.
What changes IBC has brought?
- Changed the behaviour of debtors: A distressed asset has a life cycle. Its value declines with time if the distress is not addressed.
- The credible threat of the IBC process, that a company may change hands, has changed the behaviour of debtors.
- Debtors are settling debt at an early stage: Thousands of debtors are settling defaults at the early stages of the life cycle of a distressed asset.
- They are settling when the default is imminent, on receipt of a notice for repayment but before filing an application, after filing the application but before its admission, and even after admission of the application.
- These stages are akin to preventive care, primary care, secondary care, and tertiary care with respect to sickness. Only a few companies, who fail to address the distress in any of these stages, reach the liquidation stage.
- Value erosion at the liquidation stage: The value of the company is substantially eroded, and hence some of them would be rescued, while others are liquidated.
- The recovery may be low at this stage, but in the early stages of distress, it is much higher — primarily because of the IBC.
- The percentage of companies or distressed assets getting into liquidation is insignificant.
- Stakeholders should increasingly address the distress in the early stages and the best use of the IBC would be not using it all.
Conclusion
Stakeholders who understand business and have the backing of sophisticated professionals are using IBC with open eyes after evaluating all options. There is no reason to doubt their commercial wisdom. The 25,000 applications filed so far under IBC indicate the value and trust that stakeholders place on the law — the ultimate test of its efficacy.
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Note4Students
From UPSC perspective, the following things are important :
Mains level: Paper 3- Performance of agriculture sector, is the worst over for it?
Context
Estimates of gross domestic product (GDP) released on 28 February confirmed that India’s economy is decelerating. The silver lining was growth in agriculture, which accelerated for the third quarter in a row to 3.5%.
How agriculture sector has performed in the last few years?
- Robust growth in the last 5 years: A look at the national accounts for a longer period shows robust agricultural growth during the first five years.
- With agriculture growing at 3.17% per annum between 2013-14 and 2019-20.
- This is remarkable, given that the broader economy is witnessing a slowdown.
- Rural economy seen from the other indicators: A variety of other indicators show that the rural economy has been going through possibly its worst phase, with declining wage growth and farmer incomes causing serious distress.
Crop sector growth rate at lowest
- A clue to this disconnect between the national accounts and other indicators lies in a breakdown of the national accounts.
- Crop sector growing at lowest in two decades: The GDP data for the agricultural sector shows that the crop sector, which accounts for 56% of total agricultural output and employs a majority of the farmers, has been growing at only 0.3%, the lowest in two decades.
- By comparison, the sector grew 3.3% per annum during the 10 years under United Progressive Alliance governments.
- Which sector of agri. is growing at a high rate? The agricultural sub-sectors that showed high growth between 2013-14 and 2018-19 were livestock (8.1%), forestry (3.1%) and fisheries (10.9%).
- It is a puzzle what drove the high growth of livestock at a time when the crop sector was experiencing negligible growth.
- The trend defies the logic: This defies past trends and is also difficult to believe, given contrasting trends in other indicators of livestock
- The declining income of farmers and a decline in wages: The poor performance of the crop sector confirms the declining income of farmers, the majority of whom depend on crops for subsistence. Not surprisingly, even real rural wages are declining.
- Inflationary pressure and hopes of growth in income of farmers: Hopes were kindled in the last three months as agricultural commodities showed signs of inflationary pressures, with food inflation hitting double-digit rates.
- Increase in rural demand not the cause of inflation: A careful analysis of the data rules out rising rural demand as the cause of that inflationary trend.
- Many price pressures were due to the mismanagement of cereal supplies by the government and supply shocks in vegetables.
- In such circumstances, farmer income could not have risen. Some of this was also a result of food prices rising internationally.
Trend pointing to the fall in agri. prices
- Softening of food prices: Recent trends in international markets suggest a softening of food prices led by an overproduction of cereals and easing edible oil inflation. Following 3 factors may contribute to its fall.
- Impact of fall in crude oil price: This trend will gain strength in the wake of the recent slide in crude oil prices.
- With the global economy displaying signs of a slowdown, prices of agricultural commodities are likely to fall sharply.
- Relation of food prices with oil prices: They tend to follow movements in crude oil prices, as was seen during the latter’s collapse in August 2014. In all likelihood, a similar decline in agricultural prices is upon us.
- Food-grain stock with FCI: A second factor that may exacerbate the income troubles in agriculture is the presence of massive food-grain stocks with the Food Corporation of India.
- This may slow the procurement of farm produce and lower price realizations, particularly cereals but also other crops.
- The coronavirus outbreak: Lastly, the global slowdown due to the coronavirus outbreak is likely to dampen demand in the economy, and in turn hurt the agricultural sector.
Conclusion
- Limited room to improve the situation: These factors are likely to worsen agricultural incomes, and domestic policy has limited room to manoeuvre.
- Opportunity to revive the demand: This situation is also an opportune time to revive rural demand The government could pass on some of the windfalls from the drop in oil prices to rural consumers. This could help lift rural incomes.
- The government could also increase spending in rural areas to help boost demand and prevent a collapse in agricultural prices.
- Worst for agriculture is not yet over: Whether the government uses the opportunity or fritters it away again will be known in the coming months. What appears certain for now, though, is that the worst of the rural slowdown is far from over.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- International cooperation on dealing with the epidemic.
Context
The Chinese government has mobilised the whole nation with confidence, unity, a science-based approach and targeted response.
Aspects that were focused by China to deal with COVID-19
- Formulated timely strategies for epidemic prevention and control.
- Strengthened a unified command and response in Wuhan and Hubei.
- Coordinated the prevention and control work in other regions.
- Strengthened scientific research, emergency medical and daily necessity supplies.
- Effectively maintained social stability.
- Strengthened public education.
- Actively engaged in international cooperation.
Mutual support between India and China
- China and India have maintained close communication and cooperation on epidemic prevention and control. In a letter to President Xi, India’s Prime Minister has expressed support for China.
- China appreciates the medical supplies provided by India and have helped facilitate the safe return of Indian nationals in Hubei.
- The global footprint of COVID-19: China has been closely following the global footprint of COVID-19.
Cooperation on a global level for disease control:
- Chines govt. will stay in close communication with WHO.
- Share its epidemic control experience with other countries.
- Seek closer international cooperation on medicine and vaccine development.
- Provide assistance to the best of its capabilities to countries and regions that are affected by the spread of the virus in keeping with its role as a responsible major
- The Chinese reach-out: China has provided various kinds of assistance including testing reagents, remote assistance and medical supplies to countries with a severe outbreak.
- Sharing of experience and protocol for treatment: China have shared diagnosis and treatment experience and protocols with many countries including India.
- China is ready to maintain communication with India, share experience in a timely manner, render assistance and make joint efforts to overcome the epidemic.
Impact and recovery of China
- Robust economy: The impact on the Chinese economy will be short-lived and generally manageable. China has a resilient economy with robust domestic demand and a strong industrial base. We will definitely sustain the good momentum of economic and social development and meet the goal of achieving moderate prosperity in our society and eradicating extreme poverty in China.
- Strengthen coordination and communication: China will also strengthen coordination and communication with economic and trading partners and give priority to the resumption of production and supply of leading enterprises and key sectors that have a major impact on the stability of global supply chains.
- The fundamentals of China’s economy will remain strong in the long run, and China will remain an important engine for global economic growth.
Conclusion
The history of civilisation is also one of a history of fighting diseases and a great journey of ceaseless global integration. To prevail over a disease that threatens all, unity and cooperation is the most powerful weapon.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- India-Afghanistan relations and return of Taliban after deal with the US.
Context
The recently negotiated peace deal between the United States and the Taliban is unlikely to bring peace to Afghanistan, is geopolitically disadvantageous for India, and has serious implications for our national security.
Power dynamics of the US-Taliban deal
- An honourable exit for India: The terms of the deal, the manner in which it was negotiated as well as the geopolitical context in which it was stitched up indicate that it was more about providing an honourable exit route for the U.S.
- Violence after concluding the deal: Within 24 hours of the much-publicised deal, violence and major disagreements about the deal began erupting in Afghanistan.
- Why there are the prospects of instability in Afghanistan: Given that the Taliban negotiated from a position of strength, the Trump administration from weakness and little political will, and that the Ashraf Ghani administration in Afghanistan was by and large a clueless bystander in all of this, means that the country is perhaps on the verge of yet another long-drawn-out and internecine battle.
The changed Taliban
- Taliban of the 1990s: When the Taliban came to power in the mid-1990s in Kabul, it had few backers in the world.
- Nor was it seen as a useful commodity by the great powers or the states in the region, except for Pakistan, Saudi Arabia, and the United Arab Emirates.
- United pushback from the rest of the world: The international community was almost united in offering a normative pushback against the violent outfit.
- As a result, the Taliban was at best reluctantly tolerated until it messed up towards the end of its regime in Kabul.
- The pressure of Northern Alliance: The Northern Alliance, supported by countries such as Russia and India, kept up its military pressure against the Taliban while it was in power.
- How today’s Taliban is different from the past: The situation today, at least for the moment, is perhaps the exact opposite of what was the case then.
- Lessons learned to deal with the international system: The Taliban today is also more worldly-wise and might have learned, during its exile, to deal with the international system and play the game of balance of power.
- Not necessarily the puppet: More so, it may not necessarily be a puppet of the Pakistani deep state once it returns to power.
International acceptance of the Taliban
- Lending the legitimacy to Taliban: Given the war fatigue and the geopolitical stakes in Afghanistan, most of the key players in the region and otherwise have been in negotiations with the Taliban one way or another, and for one reason or another, lending the terror group certain legitimacy in the process.
- Why countries want good relations with the Taliban: Anyone desirous of a stake in Afghanistan or does not want its domestic turmoil to spill over into their country would want to keep the Taliban in good humour.
- Suitable withdrawal of the US: There is another reason why the Taliban has many suitors — because of the U.S. withdrawal by and large suits everyone, be it China, Pakistan, Iran, or Russia.
- The US bigger challenge: Suddenly, the Taliban appears to have been forgiven for its sordid past and unforgivable sins because for most of these countries, the U.S. is the bigger challenge than the Taliban.
Why India’s strategy is diplomatically flawed?
- Only state at losing end: The only state that seems to be on the losing end, unfortunately, of this unfolding game of chess and patience in Afghanistan is India.
- Why the earlier Taliban was anti-India? The earlier Taliban regime was anti-India, it was also because India had militarily supported the Northern Alliance that kept up the military pressure against the Taliban.
- Today’s Taliban does not share the same animus for India.
- Need for Change in India’s approach: India, could have rejigged its approach to the Taliban this time around. However, it put all its eggs in the Ashraf Ghani basket, even on the eve of the signing of the peace deal in Doha.
- Not a diplomatic strategy by India: India also, for most intents and objectives, adopted a puritanical approach to the Taliban.
- There are 2 reason India is neither reaching out to the Taliban nor exploiting the fissures within it-
- Because it did not want to irk the elected government in Kabul and-
- It adopts a moralistic approach to dealing with extremist groups in general — not a smart diplomatic strategy.
- Self-defeating position: This moralistic attitude, also a diplomatically lazy one, I would say, that be it Pakistan or Afghanistan, India would only talk to the legitimate government in that country, is a self-defeating position.
- The world is not that perfect, nor state all that uniform, created in the shape and image of the Westphalian forefather.
- Smart statecraft, therefore, is dealing with what you have and making the best of it.
What would be the result of India’s strategy?
- Impact on relations with Afghanistan: India’s relations with Afghanistan will take a hit in the immediate aftermath of the deal.
- Limited ability to influence the outcomes: With China, India’s strategic adversary, deeply involved in the geopolitics and geo-economics of the region, including in Afghanistan, India’s traditional ability to influence the region’s political and security outcomes will be severely limited.
- This will be further exacerbated by the withdrawal of the U.S., India’s closest friend, from the region.
- India’s relation with the other players in the region: Other regional actors in Afghanistan are also less friendly towards India than ever before: Iran feels let down by India given how the latter has behaved towards it at the behest of the Americans.
- Relation with Russia: For Russia, India is only one of the many friends in the region — the exclusivity of Russia-India relations is a thing of the past — and Pakistan would consider targeting India a fair game.
- Counter Strategy: Unless New Delhi carefully envisages a counter-strategy, these factors will increasingly push India into a geopolitical tough spot in the region.
- Need to focus on the region: India should worry us that our political class is focused on domestic politics while the region is becoming ever more uncertain and evidently unfavourable to us.
Taliban and Kashmir Angle of the deal
- Negligible physical impact but the possibility of psychological impact: While the direct physical impact of the Taliban’s return to power in Afghanistan on Kashmir will be negligible, this will not be without serious implications for the unfolding situation in Kashmir’s restive regions.
- Psychological impact: The most important impact is going to be psychological.
- Interpretation of the event: Disenchanted Kashmiri youngsters, and there are a lot of them, will interpret the events in Afghanistan as follows: “If the mighty superpower USA could be defeated by the Taliban in Afghanistan with help from the Pakistan army, defeating Indian forces in Kashmir won’t be impossible after all.”
- This enthusiasm is completely misplaced, but that is not the point.
- That the Kashmiri youth might pick up guns drawing inspiration from the situation in Afghanistan is indeed the point.
- Increase in Pakistan’s utility: The U.S.-Taliban deal cannot survive without Pakistan’s assistance towards ensuring its success, and the U.S. and its allies recognise that. Such recognition of Pakistan’s utility provides the country with ability, as and when it wishes to, to up the ante in Kashmir.
- The geopolitical significance of Pok and Aksai Chin claim: India’s official statement which describes Afghanistan as a “contiguous neighbour” — meaning that India considers Pakistan-occupied Kashmir (PoK) a part of its sovereign territory — will make Pakistan and China sit up and take notice.
- Claim making reconciliation more difficult: India also made a similar claim about Aksai Chin in the wake of its August decision on Kashmir. Erstwhile rhetorical claims on PoK and Aksai Chin have suddenly assumed a lot more geopolitical significance today making conciliatory approaches to conflict resolution ever more difficult.
Conclusion
Given that a new Taliban-led dispensation in Afghanistan will be far more accepted by the international community than the last time around also means increased acceptability for such regimes in general, either out of necessity or as a function of geopolitical calculations. That the Taliban mass-murdered its opponents into statehood in the 21st century and that this might provide potential inspiration to other outfits in the region and outside should indeed worry us.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- How should India use the windfall from the fall in oil.
Context
Amid the gathering global crisis, its time India minds its own house.
Panic and dislocation in Global markets
- Panic at the level of the 2008 crisis: Global markets haven’t witnessed such panic and dislocation since the global financial crisis of 2008.
- Global equity markets have collapsed, the US’s 10-year bond is at its lowest level ever, and crude prices underwent their largest single-day fall in 30 years.
- Interaction of three global shocks: The market mayhem is the upshot of three global shocks interacting with each other.
What are the three global shocks?
- Negative demand shock due to Coronavirus: A negative demand shock around the world. As the coronavirus proliferates globally, households and businesses are understandably becoming risk-averse, and the consequent “social distancing” is expected to exert significant demand destruction around the world.
- Negative supply shock emanating from China: The widespread industrial closures in China on the back of the COVID-19 outbreak will impact imports and supply chains in other countries, and thereby constitute an adverse supply shock for the rest of the world.
- The magnitude of the shock: The 20-point drop in manufacturing output in the February PMI and the 17 per cent contraction in Chinese exports across January and February, suggests that the shock was large and immediate.
- Supply shock likely to fade: That said, with the virus, gradually being contained in China, this supply shock is likely to fade even as the demand shock in the rest of the world widens and deepens.
- Positive oil supply shock: The failure of oil producers to agree on production cuts has led to a price war with production increases on the anvil.
- Cumulatively, crude pieces are down almost 50 per cent — about $30/barrel — since January.
- A positive supply shock, which even adjusting for the concentrated stress in the oil sector, is growth-additive for the world and particularly for India.
- India specific shock: There is a fourth India-specific force at play. The resolution and reconstruction of YES Bank was inevitable, but, at least temporarily, it is likely to result in a “flight to quality” in India’s financial sector, with resources moving from the financial periphery to the core.
- Banks and NBFC may face difficulty in mobilising resources: To the extent that the periphery — smaller private banks and non-bank financial companies — will find it harder to mobilise resources, financial sector risk aversion could rise again.
Implications for India’s macroeconomic stability
- Significant negative impact due to export: India is a much more open economy than is widely believed with exports constituting almost 20 per cent of GDP. Therefore, the impact of the demand destruction around the world will not be trivial.
- 40 bps decrease in the growth: If global growth is marked down by 100 basis points in 2020, which increasingly appears to be the case, we estimate that this would shave off about 40 bps from India’s growth through the export channel alone.
- The cumulative drag to growth from exports and tourism would be a meaningful 60-70 bps.
- Positive impact due to oil price shock: The near $30/barrel decline since January constitutes a large positive terms of trade shock for India — equivalent to about 1.3 per cent of GDP even accounting for reduced remittances from the Middle East.
- Meaningful mitigant: If oil prices remain at this level for long, it would constitute a meaningful mitigant to India’s macro headwinds, boosting activity, dampening prices, creating fiscal space and reducing external imbalances.
- Offsetting the negative impact of trade and tourism: Every $10 reduction in crude prices, boosts growths by about 20-25 bps.
- Therefore, the $30 decline in crude, if it holds, should boost growth by about 60-70 bps, thereby largely offsetting the negative hit to growth from external trade and tourism.
- Space for monetary easing: Furthermore, crude at $35-40, along with the global demand destruction is expected to generate large disinflationary forces, opening up space for monetary easing.
- CAD would disappear: Finally, India’s current account deficit would virtually disappear, for the first time since 2003-04.
The growth offset conditioned on coronavirus spread
- The assumption in the offset: The above-mentioned growth offset, however, assumes that the coronavirus does not spread within India.
- If India witnessed a rapid domestic proliferation, heightened risk aversion by economic agents could meaningfully hurt domestic demand.
- A thought experiment on the impact on the economy: Discretionary services constitute about 35 per cent of GDP and have been growing at 8 per cent a year.
- If that growth rate were to halve, that alone would deduct 140 bps from growth, and swamp any growth tailwinds from lower oil prices.
- Furthermore, a “sudden stop” of demand to certain sectors may necessitate fiscal/liquidity support to ensure these don’t magnify into more disruptive credit events for the financial sector.
- The best antidote to prolonged growth hit: The best antidote would be to aggressively contain the virus domestically, as authorities appear to be doing.
- The experience from other countries suggests aggressive containment early in the process (isolation, quarantines, contract tracings, cancelled gatherings) reduces the growth rate of the virus from exponential to linear.
- Macroeconomic outlook: The key to India’s macro outlook is whether the crude price decline can sustain and whether India can avoid a sharp domestic proliferation of COVID-19.
Way forward
- Pass the oil windfall to the public: Given current fiscal pressures, it’s tempting to advocate that the public sector appropriate much of the windfall. But with consumption under such pressure, there’s a strong case to pass this on to households.
- A sharp cut in domestic fuel prices will boost household purchasing power and aggregate demand thereby creating contemporaneous counter-cyclical pressures.
- Stick to the asset sale plan: While the turbulence in equity markets could understandably delay the government’s asset sale programme, it should not be allowed to derail it, given the criticality of asset sales to this year’s fiscal math.
- Absorbing all the oil windfall through higher taxes as a substitute for asset sales would be a suboptimal mix.
- Continue with the reforms: The salutary effects of falling crude prices — which would boost India’s macros relative to other emerging markets — should not mask the imperative to continue with reforms, particularly recognising and resolving any further financial sector stress proactively.
Conclusion
Global markets are witnessing their most acute volatility since 2008. All we can do is mind our own house amidst the gathering global storm.
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Note4Students
From UPSC perspective, the following things are important :
Mains level: Paper 3-Measures to revive the Indian economoy.
Context
The root cause of the present malaise in our economy is the “death of demand”.
How demand matters for growth?
- The relation between demand and growth: Growth in any economy depends on the growth in demand, both for investment as well as consumer goods.
- How slackened demand leads to a vicious cycle: If demand slackens, then the installed capacity will not be fully utilised, the fresh investment will not take place, employment will slacken and the economy will get caught in a vicious cycle, as we are experiencing today.
What needs to be done to break the vicious cycle?
- What sequence to follow in reviving demand? The basic challenge, therefore, is to revive demand in the economy in a sequence where the revival takes place first in the investment goods sector, automatically followed by a boost in demand for consumer goods through enhanced employment opportunities.
- Past precedents: This is the prescription we had followed in the Atal Bihari Vajpayee government when we were faced with the East Asian crisis and the post-Pokhran global economic sanctions soon after the government assumed office in March 1998.
Demand in India
- No dearth of demand in India: In a developing country like India, there is no dearth of “good” demand.
- We still have to provide so many goods and services to our people in order to improve their “quality of life”.
- Need to create new infrastructure: Simultaneously, we have to create new infrastructure and improve the existing ones to reduce the transaction cost in our economy and make it more competitive.
- How infrastructure creation lead to the creation of demand: The emphasis on the construction of roads of all kinds — rural, state and national highways, the new telecom policy, the investment in railways, the emphasis on housing construction and development of the real estate, the improvement in rural infrastructure and reform in the agricultural sector were all meant to lead to the creation of demand in the economy.
- Creation of the virtuous cycle: The creation of demand should be in such a way that the demand for investment goods picks up first and faster, which creates the virtuous cycle of full capacity utilisation.
- Demand for consumer goods: Demand for investment goods is followed by fresh investment for new capacity creation, larger employment opportunities of various kinds — unskilled, skilled and highly skilled — which reached money into the pockets of people leading to a surge in demand for consumer goods.
How the government should deal with the situation
- Deal with the demand side instead of supply-side: All commentators are agreed now that instead of tackling the demand side government is dealing with the supply side.
- Tax relief to corporates: For instance, if, instead of wasting a precious amount of Rs 1,45,000 crore on tax relief to a limited number of corporates the government had spent that money on rural infrastructure and agriculture and a part of it on railways and highways, it would have led to the creation of demand both for investment goods as well as consumer goods.
- Issue of sticking to the fiscal deficit target: There is also the issue of resources. The government claims that it has stuck to the fiscal deficit targets.
- But the provisions of Fiscal Responsibility and Budget Management (FRBM) Act have been treated in a cavalier manner by all subsequent governments.
- What was the basic purpose of the act? The basic purpose of the act was to eliminate the revenue deficit completely within a short period of time and live with a limited fiscal deficit.
- The original FRBM Act, therefore, mandated that revenue deficit should be eliminated completely and the rest of the fiscal deficit should be limited to one per cent of GDP.
- In special circumstances like today, the fiscal deficit should be allowed to go up to even two per cent of the GDP, which will mean an amount of Rs four lakh crore.
Figures of the latest budget and need for the reforms
- Fiscal deficit figures: The government has taken credit in the Budget for the fact that it has successfully restricted total fiscal deficit for this fiscal to 3.8 per cent and for next fiscal at 3.5 per cent of the GDP.
- The issue involved in fiscal deficit figures: The revenue deficit for the current fiscal is 2.4 per cent of the GDP and for the next fiscal it is 2.7 per cent. In other words, minus the revenue deficit the fiscal deficit is only 1.4 per cent of GDP for this year and for the next year, it is 1.7 per se.
- Need for managing the expenditure: So, the real villain of the piece is revenue deficit and not fiscal deficit per se.
- Need for the reforms: It is clearly the government’s responsibility to manage its expenditure and carry out reforms in it, including austerity in expenditure.
- How will the reforms help? Controlled fiscal deficit will make more money available in the market for private sector investment and help RBI in reducing interest rates — things which will have an overall benign influence on the economy.
Conclusion
A lot of other things apart from austerity majors will have to be done, no doubt, like preventing companies, especially banks from failing, to further strengthen the growth impulses but in the present situation, the key is government spending and in the desired sequence.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Dominance of China in international trade and its implications for national security.
Context
Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.
Implications of the coronavirus disruption in China
- Global dependence on China in focus: As the coronavirus spreads far and wide, the global dependence on China for drugs and medical supplies has come into sharp focus.
- The argument for domestic production of medicine: In both the US and Europe, the shortage of essential drugs to treat the victims of the virus is strengthening the arguments for restoring some domestic production of pharmaceuticals.
- National security implications: Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.
China’s dominance in pharmaceutical production
- Two factors that contributed to China rise:
- Active state support from Beijing and-
- Western drug companies eager to shift production to cheaper destinations has facilitated China’s emergence as the most important global source for pharmaceutical products and medical devices.
- Global dependence on China for drugs: America and Europe are said to import nearly 80 per cent of their antibiotics from China.
- India’s dependence for API: India is also an important supplier of generic drugs to the Western world, but it is itself dependent on massive imports of active pharmaceutical ingredients (APIs) from China.
- Impact on India: The reduction in supplies from China after the virus breakout has been accentuated by the recent decision of Government of India to limit the export of common drugs like paracetamol.
- How the US is responding to dominance? Well before the current crisis, there had been warnings in the US about the national security risks from the massive reliance on external sources for basic medicines.
- Weaponising the dominance: Late last year, the US-China Security Review Commission, established by the US Congress, pointed to the prospects of China weaponising its dominance over pharmaceutical production and its massive consequences for healthcare in the US.
- Government support in China: The report also pointed out that the Chinese government promotes and protects the nation’s pharmaceutical companies to the disadvantage of foreign competitors and that leaves other nations little leverage with China.
- Need to limit the exposure to China in other sectors: While the current international focus is on the supply chains in the pharmaceutical sector, there has been growing recognition of the need to limit the expansive exposure to China in many different sectors.
National security argument of the dominance
- National security dimension of trade war: Trump’s case for bringing manufacturing back to America — by challenging the traditional framework of international trade — was not just economic.
- It also had a strong national security argument — that the US cannot rely on China for servicing its national security needs in a range of sectors from digital components and drugs.
- What supporters of the globalisation said? Supporters of economic globalisation had countered these arguments by saying that tight interdependence will reduce the incentives for taking unilateral advantage by nations.
- China using trade dominance into leverage: The critics have pointed to the fact that China was turning its role as the “world’s factory” into powerful leverage.
- Why did the West start regarding China as a challenge? The Chinese decision to stop rare earth exports to Japan during 2010 in relation to a minor political dispute had led many to put up red flags.
- Since then, China’s greater political assertiveness and challenge to Western dominance in critical areas have strengthened the case in the West to regard China as a challenge if not an outright threat.
- De-coupling gaining traction: As the bipartisan political consensus in the US and Europe in favour of a strong economic partnership with China began to break down in recent years, the case for de-coupling has gained much traction.
How using economic leverage for strategic gains undergone changes?
- Use of economic leverage and stockpiling: The history of statecraft suggests that it was quite common for states to use economic leverage for strategic gains.
- Use of strategy during the cold war: Through the Cold War, both America and Russia sought to corner strategic resources around the world. They also adopted policies for stockpiling special materials for use during conflicts. Sustaining a strategic petroleum reserve, for example, was a major priority for the US during the Cold War.
- Changes due to globalisation: The importance of hoarding resources at home and denying it to one’s adversaries seemed to diminish amidst great power harmony and economic globalisation that flourished after the Soviet Union collapsed.
- Recent challenges due to weakening of globalisation: The erosion of that moment in the last few years has set up new tensions between the competing imperatives on Western governments.
- Capital vs. Security issue: While the logic of security compels the state to limit strategic economic exposure, the logic of capital demands policies that reduce costs of production and increase the margins of profit.
- This tension has been at the heart of the recent Western debates on the China question.
Conclusion
While the world finds ways to deal with the Chinese dominance in the other sector, meanwhile, in the health sector, large continental entities like the US, Europe and India are likely to insure against over-reliance on a single source for life-saving drugs. They are likely to find ways to shorten the supply chains, expand domestic production and explore coordination among like-minded nations.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Significance of quarterly GDP estimates and revision.
Context
As the third-quarter GDP was marginally higher than the second-quarter figure of 4.5% many concluded that the economic slowdown witnessed during the last six quarters has “bottomed out”. Has it?
What closer examination of data reveal?
- Estimates revised upwards: A closer reading reveals that the latest data release has revised the estimates of the first two quarters of the current year (2019-2020) upwards to 5.6% and 5.1%, from the earlier figures of 5% and 4.5%, respectively.
- What the revision mean? The upward revisions have, perhaps unwittingly, changed the interpretation of the current year’s Q3 estimate: the slowdown has continued, not bottomed out; hence, there is no economic revival in sight as of now.
Competing views of the performance
- The question therefore is why did the current year’s Q1 and Q2 GDP estimates get revised upwards?
- The answer is this was simply because the corresponding figures for the previous year (2018-2019) got revised downwards.
- The question over the revision process: Many viewed the revision of last year’s estimates as evidence of lack of credibility of the NSO’s revision process.
- Questions over the veracity of data: Such doubts are well taken, given the long-standing debate and unresolved disputes on the veracity of GDP figures put out since 2015, when the statistical office released the new series of National Accounts with 2011-2012 as base year.
Why the GDP estimates undergo revisions?
- Lags in data: As there are lags and unanticipated delays in obtaining the primary data, the GDP estimates undergo several revisions everywhere (except in China).
- GDP is a statistical construct, prepared using many bits of quantitative information on an economy’s production, consumption and incomes.
- How frequently is data revised? GDP estimates are revised five times in India over nearly three years.
- The initial two rounds, the advanced estimates, are prepared mainly using high-frequency proxy indicators followed by three rounds based on data obtained from various sectors.
Quarterly GDP estimates and issues with it
- Since 1999, quarterly GDP estimates are being prepared, as per the International Monetary Fund (IMF)’s data dissemination standards.
- Subpar quality: Their quality is subpar as the primary data needed quarterly are mostly lacking.
- Why quality is subpar? Nearly one-half of India’s GDP originates in the unorganised sector (including agriculture), whose output is not easily amenable to direct estimation every quarter, given the informal nature of production and employment.
- Hence, the estimates are obtained as ratios, proportions and projections of the annual GDP estimates.
- Quarterly estimates are extrapolations: In general terms, quarterly estimates of GDP are extrapolations of annual series of GDP. The estimates of GVA by industry are compiled by extrapolating value of output or value-added with relevant indicators.
Way forward
- Little ground to question the present revisions: There were considerable variations at the sectoral estimates after the revision, which probably contained more noise than information. For now, there is little ground to question the revised estimates based on the publicly available information.
- Slowdown not bottomed out: If we accept the latest data, it is clear, though in an alarming way, that there has been an undeniable decline in the GDP growth rate over seven consecutive quarters, from 7.1% in Q1 of 2018-2019 to 4.7% in Q3 of 2019-2020.
- Considering that physical indicators of production, such as the official index of infrastructure output, or monthly automotive sales, continue to show an unambiguous deceleration, the economic slowdown has apparently not bottomed-out.
- More seriously, the quarterly GDP deceleration comes over and above the annual GDP growth slowdown for four years now: from 8.3% in 2016-17 to 5% in 2019-20 (as per the second advance estimate).
- Limited primary information: India’s quarterly GDP estimates have limited primary information in them. Their revisions are largely extrapolations and projections of the annual figures. Hence, one should be cautious in reading too much into the specific numbers.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Revision and estimates of GDP data.
Context
The latest GDP data witnessed significant revisions that have gone largely unnoticed.
The GDP data revision and its criticism
- Revisions an act of due diligence: In the last few years there has been a lot of noise regarding the data revisions.
- The need for closer examination: While part of revision requires closer examination, we must be fair to our statistical system as such revisions are, in large part, due diligence and happen globally.
- Schedule of NSO estimates
- First estimate: The NSO releases the first estimates of any fiscal year in January.
- Revises the January’s first estimates in February.
- And then again in May.
- Simultaneous revision in February: Simultaneously, it revises the previous year estimates in February, alongside the February data release.
- Suspicion of statistically protecting the 5% growth: The primary criticism, with the current year’s fiscal data, is that the revisions in February for 2019-20 and the 4th revision in 2018-19 are almost identical, implying that the sanctity of 5 per cent growth was statistically protected.
Examining the criticism purely on the data
- Precedence of 1st and 2nd quarter revision: There is precedence to the first and second quarter revisions for the current financial year that happen in February.
- For example, while in the current fiscal, the cumulative downward revision was close to Rs 30,000 crore.
- In FY19, there was even a greater upward revision of roughly Rs 86,000 crore in February.
- Is there precedence of such large first-time revisions? Yes, there has been since 2014-15. In 2018-19, the first-time data was revised by a sharp Rs 1.43 lakh crore, while in 2017-18, it was revised by an even larger Rs 1.69 lakh crore.
- Revision in the same direction: The simultaneous revisions are mostly in the same direction, though different in magnitude, and hence it is unfair to say that the 2018-19 data was revised downwards to protect the 2019-20 numbers.
What was the problem?
- Uncertainty: The problem has been that the global and domestic uncertainties in 2017-18 and 2018-19 have been so swift that it has been virtually impossible to predict the outcome initially.
- While in 2017-18, the final estimates were progressively higher.
- In 2018-19, while the interim estimates were higher, they were drastically scaled-down later as the impact of the NBFC crisis began to unfold.
- The US example: The US Fed had also missed the possibility of the US economy bouncing back in 2018 on the back of tax cuts when in 2015 it had projected the economy to expand by only 2 per cent, only to change it to 3 per cent in 2018 (almost at par with scale of revisions in India).
Why such unconditional biases arise?
- Asymmetric loss function: It is common for such unconditional bias to arise due to the fact that the statistical reporting agency produces releases according to an asymmetric loss function.
- For example, there may be a preference for an optimistic/pessimistic release in the first stage, followed by a more pessimistic/optimistic one in the later stage.
- Cost factor: Intuitively, one might argue that the cost of a downward readjustment of the preliminary data is higher than the cost of an upward adjustment.
- This asymmetric loss function is not so relevant at the reporting stage but at the forecasting stage.
- Interpreting the data revision: A statistical reporting agency like the NSO simply does not have all the data at hand and has to forecast the values of the yet to be collecting data.
- It is at that moment that the asymmetric loss function comes into play.
- So, we must be careful about interpreting data revisions by the NSO by attributing ulterior motives as we more often tend to do.
India lagging in the use of data analysis
- Unlike countries across the world, India is still significantly lagging in its use of data analysis.
- Methodologies based on thin surveys: Some of the current methodologies of data collection is based mostly on thin surveys.
- Not supported by the data in public domain: It is also not supported by data available in the public domain that are more comprehensive, less biased and real-time in nature, based on digital footprints.
- The end result is that we end up publishing survey results that are misleading.
Way forward
- Development of big data and AI bases ecosystem: We must develop an ecosystem that is high quality, timely and accessible.
- Big data and artificial intelligence are key elements in such a process.
- Big data helps acquire real-time information at a granular level and makes data more accessible, scalable and fine-tuned.
- Use of payment data: The use of payments data can also help track economic activity, as is being done in Italy.
- Different aggregates of the payment system in Italy, jointly with other indicators, are usually adopted in GDP forecasting and can provide additional information content.
Conclusion
To be fair to both the RBI and the NSO, the volatility of oil prices and structural changes in the economy make the forecasting of inflation and GDP a difficult job indeed. However, we should supplement our existing measurement practices with “big data” to make our statistical system more comprehensive and robust.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Changing India-Iran relations.
Context
The CAA and violence in Delhi have started to take its toll on India’s secular foreign policy.
The US and other’s reaction to the situation in India
- Trump visit to India: President Trump referred to India as a democracy which was peaceful and tolerant. He lauded freedom, rule of law, liberty and protection of human dignity, adding graphically that where India had the holy Ganges, it also had the Golden Temple and Jama Masjid.
- Assurance to the critics at home: He thereby cleverly reassured critics at home, especially in the US Congress, that he was not ignoring the values the two great democracies shared.
- However, as the situation in Delhi spun into violence the next day, in an untutored media interaction at the US ambassador’s residence, he ducked questions about the CAA or Delhi riots, nonchalantly remarking it was “up to India” to deal with it.
- This may have brought comfort to the Indian government but the world at large differed.
- Response from the other countries: Delhi had already exchanged angry words with Malaysia, Turkey and even Indonesia over their varied critique of India’s handling of its Muslim minority when Iran joined the issue.
Iran’s response to violence in India
- Condemnation by foreign ministers: Iranian Foreign Minister Javad Zarif condemned the “wave of organised violence against Indian Muslims”, adding that “Iran has been a friend of India”.
- India’s foreign ministry summoned the Iranian ambassador to protest the inappropriateness of the minister’s remark.
- The reaction by the Iranian Supreme Leader: Soon after, Supreme Leader Ali Khamenei found the time, in the middle of the COVID-19 outbreak, to excoriate the Indian government.
- Adding insult to injury, he appended #IndianMuslimsInDanger.
- No reaction on China problems: A facile response, can be that Iran is being hypocritical as it has not expressed remorse over the Chinese repression of Uyghurs.
- The difference in India’s importance to China: China is a veto-wielding member of the UN Security Council, which also sustains the Iranian economy despite US sanctions. On the other hand, India has a Shia population second only to that of Iran.
Relations with Iran
- Two consulates in India: There are two Iranian consulates in India in Hyderabad and Mumbai. Iran seeks the third one in Lucknow.
- Qom also hosts many Shia students, particularly from the Kargil region.
- Historic links between the two countries: After Humanyun’s exile in Iran (1530-40) before recovering the Indian throne, the Persian language and culture fired the cultural renaissance at the Mughal court.
- Religio-cultural heritage importance: India is important for Iran for its religio-cultural heritage, unlike China, which is needed for transactional and strategic reasons.
- Two interrelated questions flow from this reasoning:
- 1. What is Iran’s importance for India and the trajectory of India-Iran relations over the last two decades?
- 2. And why is Iran adopting this sharp tone over what the Indian government argues is an internal matter?
- Convergence in the relations: The closest India-Iran strategic convergence began in the 1990s, particularly after Kabul fell to the Taliban in 1996. These ties blossomed under reformist Iranian President Mohammad Khatami and Indian Prime Minister Atal Bihari Vajpayee.
- Tehran Declaration: In 2001, the two signed the Teheran Declaration. Khatami in his opening remarks said that Iran always admired India’s secular credentials and Vajpayee had maintained that tradition.
- In 2003, Khatami was the chief guest at India’s Republic Day and a New Delhi Declaration was issued.
- Deterioration in relations and impact of India-US relation: The relationship began to slip as Iran’s clandestine nuclear programme and assistance from Pakistan’s rogue scientist A Q Khan was uncovered in mid-2003.
- Impact of India-US closeness: Concomitantly, India was drawing closer to the US and negotiating a nuclear cooperation agreement.
- The US used the nuclear issue to cause a cleavage as Indian and Iranian interests began seriously diverging.
- Taliban factor: In any case, the Taliban had been ejected from Afghanistan and US troops literally surrounded Iran, having in 2003 overthrown Saddam Hussein. Geo-strategy trumped diplomacy.
The US-Iran relation cycle
- The nuclear deal with Iran: Iran-US relations also went through a cycle, with President Barack Obama recalibrating US policy towards the Gulf and West Asia.
- Countering ISIS: Calculating that without Iran, ISIS could not be countered, the US in 2015 endorsed the nuclear deal that P-5 and Germany negotiated to end the nuclear stand-off.
- Missing warmth of the 1990s: Although India-Iran relations after that returned to near normal as most US sanctions were lifted, the warmth of the 1990s was missing.
- Iran was now beginning to extend its influence and role across Iraq and West Asia.
- Maximum Pressure strategy of the US: President Donald Trump in 2016 reversed US policy and since then “maximum pressure” has been applied on Iran via tightened sanctions.
- India’s engagement with Saudi Arabia and UAE: PM Modi also moved more forthrightly to engage Saudi Arabia and the UAE.
- The fallout of the US strategy reversal: A fallout of the US policy reversal has been an exacerbation of not only the Shia-Sunni split but a Sunni-Sunni split as Qatar and Turkey are with Iran.
Changing polity and increasing influence in the neighbourhood
- Conservatives elected to power: In Iran’s parliamentary election on February 28, extremely conservative members have been elected, the moderates having been vetoed by the Guardians Council earlier.
- Turnout was a low 43 per cent, due partly to fear of the coronavirus.
- Increasing influence in the neighbourhood: Iran is even more isolated, though determined to resist US demands, due to communications being curtailed due to the virus.
- Relations with the Taliban: It has good working relations with the Taliban and converging interests to see that US troops exit the region.
- The friendly government in Baghdad: Iran is battling to ensure a friendly government in Baghdad, despite the killing of Major General Qasem Soleimani, by keeping militias aligned to it in play.
Conclusion
- Perception of India: Khamenei’s tweet reflects the perception that India is in the US-Saudi-Emirati corner and of little use as long as Trump is president.
- Growing closeness Abu Dhabi, Riyadh and Ahmedabad would have led Iran to this conclusion.
- Leveraging India’s dependence: In the Islamic world, Iran by publicly defending Indian Muslims embarrasses the silent Saudis.
- It also calculates that India needs access to Afghanistan through Chabahar to assist the Ghani government or influence developments there.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Is expansionary monetary policy enough to deal with the impact of COVID-19?
Context
Central banks the world over are devising the strategies to deal with the impact of COVID-19 on their economies.
How the Central banks are responding?
- US Fed’s response: The huge 50 basis points cut in rates by the U.S. Federal Reserve to lift economic sentiment hit by COVID-19 has disrupted central banking worldwide.
- Pressure on other Central banks to follow suits: Even as analysts debate whether a monetary policy response is a right strategy, central banks across the world are feeling the pressure to follow suit to the largest rate cut by the Fed since 2008.
- How banks are responding? Central banks of Australia and Malaysia have cut rates already while others such as the Bank of Japan, Bank of England and the European Central Bank are contemplating joining the caravan.
How the RBI is responding?
- First line of economic defence: With monetary policy turning out to be thede facto first line of economic defence against the ill-effects of the virus, the focus in India has turned to the Reserve Bank of India’s response.
- Hope of rate cut: Yields on 10-year government securities fell by as much as 0.12% in the hope of a rate cut by the RBI and they stayed soft.
- But what are the central bank’s options?
- No unilateral rate adjustment: Unlike other countries, the legal framework in India after the setting up of the Monetary Policy Committee (MPC) is such that the RBI cannot unilaterally adjust rates.
- The MPC will have to meet and deliberate on the situation before the call to cut rates is taken and such a call will have to be based on an assessment of inflation in the economy.
Is a rate cut the right response?
- Impact of the virus on the supply side: The first-order impact on the global economy of the spreading virus is a disruption to trade and to global supply chains.
- With China being the factory of the world, the clampdown in that country has already disrupted supplies of products ranging from cell phone components to bulk drugs and auto components.
- Factory lines across the world could freeze as supply chains get disrupted.
- Limits of Monetary policy to deal with the supply-side problem: Monetary policy is excellent to address demand shocks but is a blunt tool when it comes to addressing supply-side issues.
- Where to spend? People may be encouraged to spend more due to a rate cut but what will they spend on if products go scarce, travel convulses and public spaces such as movie theatres and malls become no-go areas?
- The rate cut will boost the sentiments only: A rate cut can, at best, help to boost sentiment but that again will be transient as the market’s reaction after the Fed rate cut proves.
- Expansionary monetary policy cannot improve the situation: The Swedish central bank’s deputy governor Anna Breman has rightly questioned the logic of a rate cut as a response to the coronavirus impact pointing out that an expansionary monetary policy cannot improve the situation.
- How the RBI might respond? The sentiment being what it is, the RBI may find itself under increasing pressure to act. Given the MPC constraint, it may well choose to do what it did in the February monetary policy– unleash other weapons in its armoury to give the same effect as a rate cut.
- Thus, we may well see the central bank announcing another tranche of long-term repo operation, akin to the ₹1 lakh crore that it announced in February.
- That will mean that banks will gain access to three-year funds at the repo rate of 5.15%, much lower than the market rate.
- And then, there’s Operation Twist which the RBI employed to good effect in December, softening rates at the long end of the yield curve.
Would any of these measures yield any response?
- Doubtful results: It’s doubtful if any of these measures can address the hit to economic growth. The virus has undoubtedly surfaced at a very wrong time for the Indian economy which is showing hesitant signs of a return to growth.
- Which sectors will be impacted the most? The impact will be felt on more than one front. Industries such as pharmaceuticals, electronics and automobiles could be headed for trouble given their high dependence on Chinese inputs.
- Government’s response: While the government is said to be formulating a response, including the possibility of airlifting supplies, the practicality of this solution needs to be watched as also its impact on costs for the industries concerned.
Impact on exports and offsetting factor of oil import
- The biggest problem: The bigger problem could be from a fall in exports, which accounts for 20% of the GDP.
- Which exporters would feel the heat? If the developed world tips into recession due to the virus, exporters of products ranging from petroleum and textiles to leather and gems and jewellery will feel the heat.
- Oil offset due to fall in oil prices: The offsetting factor, of course, will be a lower oil import bill due to the sharp fall in oil prices. This may also have a benevolent effect on inflation.
- But there will be other headaches for the central bank if the developed world embarks on monetary expansion. The RBI will be faced with the challenge of staunching inflows of hot money coming in search of the higher returns available in India.
Conclusion
- Hot money concern for RBI: There will be other headaches for the central bank if the developed world embarks on monetary expansion. The RBI will be faced with the challenge of staunching inflows of hot money coming in search of the higher returns available in India.
- Opportunity in the crisis: As with every crisis, there’s also an opportunity here. Economic growth is bound to suffer in the short-term but there could be long-term spin-offs if domestic industry and government get their acts right.
- Supply chains can be localised through fresh investments and India can bid to be an alternative to China in the global value chain.
- India can be an option to China for global supply chain: The COVID-19 crisis has only underlined in red the lesson that global corporations learnt when trade war broke out between the U.S. and China- the global supply chain needs alternative options to China. India is eminently qualified to assume that role. If only our policymakers and industrialists rise up to the challenge.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Dealing with the trinity of social disharmony, economic slowdown and and global health epidemic.
Context
India faces imminent danger from the trinity of social disharmony, economic slowdown and a global health epidemic.
Social disharmony
- Violence in Capital: Delhi has been subjected to extreme violence over the past few weeks. We have lost nearly 50 of our fellow Indians for no reason. Several hundred people have suffered injuries.
- Communal tensions have been stoked and flames of religious intolerance fanned by unruly sections of our society, including the political class.
- University campuses, public places and private homes are bearing the brunt of communal outbursts of violence.
- Institutions of law and order have abandoned their dharma to protect citizens. Institutions of justice and the fourth pillar of democracy, the media, have also failed us.
Impact of social disharmony on the economy
- Exacerbating the economy: At a time when our economy is floundering, the impact of such social unrest will only exacerbate the economic slowdown.
- Lack of investment by the private sector: It is now well accepted that the scourge of India’s economy currently is the lack of new investment by the private sector.
- Investors, industrialists and entrepreneurs are unwilling to undertake new projects and have lost their risk appetite.
- Increase in fears and risk aversion: Social disruptions and communal tensions only compound investors’ fears and risk aversion.
- Social harmony, the bedrock of economic development, is now under peril.
- When policy tweaks stop to matter: No amount of tweaking of tax rates, showering of corporate incentives or goading will propel Indian or foreign businesses to invest, when the risk of eruption of sudden violence in one’s neighbourhood looms large.
- How the vicious cycle works: Lack of investment means a lack of jobs and incomes, which, in turn, means a lack of consumption and demand in the economy.
- A lack of demand will only further suppress private investments. This is the vicious cycle that our economy is stuck in.
Impact of COVID-19 on the economy
- Global reactions: Nations across the world have sprung into action to contain the impact of this epidemic. China is walling off major cities and public places. Italy is shutting down schools. America has embarked aggressively both to quarantine people as well as hasten research efforts to find a cure.
- Many other nations have announced various measures to address this issue.
- What India can learn? India too must act swiftly and announce a mission-critical team that will be tasked with addressing the issue. There could be some best practices we can adopt from other nations.
Bringing in reforms to address the problems
- The government must quickly embark on a three-point plan.
- First, it should focus all energies and efforts on containing the COVID-19 threat and prepare adequately.
- Two, it should withdraw or amend the Citizenship Act, end the toxic social climate and foster national unity.
- Three, it should put together a detailed and meticulous fiscal stimulus plan to boost consumption demand and revive the economy.
Turning a moment of deep crisis into a moment of great opportunity
- The past instance of turning crisis into an opportunity: In 1991, India and the world faced a similar grave economic crisis, with a balance of payments crisis in India and a global recession caused by rising oil prices due to the Gulf War.
- But India was able to successfully turn this into an opportunity to reinvigorate the economy through drastic reforms.
- Turning the present crisis into an opportunity: Similarly, the virus contagion and the slowing down of China can potentially open up an opportunity for India to unleash second-generation reforms to become a larger player in the global economy and vastly improve prosperity levels for hundreds of millions of Indians.
- To achieve that, we must first rise above divisive ideology, petty politics and respect institutional salience.
Conclusion
The India that we know and cherish is slipping away fast. Wilfully stoked communal tensions, gross economic mismanagement and an external health shock are threatening to derail India’s progress and standing. It is time to confront the harsh reality of the grave risks we face as a nation and address them squarely and sufficiently.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3-Ensuring fair competition and dealing with the problem of predatory pricing.
Context
Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise.
Duopolies and scrutiny by the CCI
- Duopolies in the most segment: The online marketplace or the platform/intermediation service market is now largely characterised by duopolies in most segments:
- Amazon and Flipkart in e-commerce, Uber and Ola in transport, Zomato and Swiggy in food service, MakeMyTrip and Yatra in travel bookings.
- Some niche players do exist in these segments, but by and large, the market has been carved up by large players.
- Why CCI is scrutinising these companies? Several of these companies have come under the scrutiny of the Competition Commission of India (CCI).
- What are the issues involved? The issues involved here have far-reaching ramifications for both online and offline market places. Some of the more contentious issues are:
- Do such market structures restrict online competition?
- Are the players engaging in predatory pricing?
- If so, is it driving out both online and offline competition and does this adversely impact consumer welfare?
- Is there a need for policy intervention, and, if so, what should be the underlying framework?
Lower barrier to entry not translating into greater competition
- Market not working as per theory: In theory, the online market structure should facilitate greater competition given the lower barriers to entry. But this may not be the case.
- Take-over: Most other firms in the segments mentioned above have either been taken over or have folded up.
- What is the reason for the emergence of such marker structures
- Positive feedback loop: One explanation for the emergence of these market structures is that as companies grow, with more users coming on board these platforms, they benefit from what CCI calls positive feedback loop.
- This leads to market concentration.
- Difficulties for new players: Given the network effects, which are common in digital spaces, it becomes difficult for new players to enter these spaces, and gain market share as there isn’t much space for many such networks.
- Capital intensive market: Another possible explanation is that, contrary to perception, the online space is highly capital intensive.
- Deep pockets are required to fund the discounts to get customers on board initially.
- Such market structures are more likely in capital deficit countries like India.
- Incumbents restricting new entrant: Incumbents, as in other sectors, may also engage in various strategies to restrict entry and thus competition.
- Even small actions by these platforms coupled with the network effects can adversely impact competition.
Predatory pricing-issues involved in it
- Allegations of predatory pricing driving out the competition: Many allege that these two-sided online platforms engage in predatory pricing or below-cost pricing either by funding it themselves (deep pockets) or by squeezing producers.
- This drives out the competition — both online as well as offline.
- Predatory pricing is anti-competition, to begin with.
- How it is harmful to the customers? While consumers do benefit in the short run, once the competition is driven out, the platform starts raising prices to recoup previous losses.
- But is it that straightforward?
- What are the issues involved in predatory pricing?
- First- Assessing whether a platform is engaged in predatory pricing.
- In India, it is defined as price falling below average variable cost — may not be a straightforward exercise.
- Why it is not a straight forward exercise? The dynamics of online pricing (prices change over time), their unique cost structures — in such two-sided platforms, prices/costs on both sides should be seen in conjunction — as well as the impact of economies of scale and organisational efficiency in lowering costs, all need to be factored in.
- Discount for clearing inventories: Besides, one would also have to take into account that even offline firms engage in deep discounting to clear inventories.
- As do both online and offline firms to acquire customers in the early stages of their business.
- Second-The impact of such pricing strategies on competition and on consumer welfare must be carefully assessed.
- Driving out competitors is not equal to driving out the competition: It is quite likely that once the competition is eliminated and the platform starts to raise prices, new players will enter the market, attracted by higher prices.
- Driving out competitors may not be the same as driving out the competition — though the extent to which new firms are able to enter the market will depend on the degree to which barriers to entry exist.
- Concerns of recovering the losses: Platforms will be mindful that losses will be hard to recover, and may not engage in below-cost pricing to drive out competitors for extended periods.
- Consumers are unlikely to lose out as prices are likely to remain low.
- Third- Possibility of collusion
- There is also an argument for closer examination of such market structures because of the possibility of collusion.
- Customers moving towards cheaper options: In most such markets, as the consumer has little to differentiate between the two platforms, it is the price that sets them apart.
- Consumers tend to gravitate towards the cheaper option. This ensures continuous competition between the major players to offer low prices.
- Possibility of customer left with no option: It is possible that at some point, the players will find it in their interest to venture into some sort of agreement that allows both of them to survive, rather than be engaged in a race to the bottom — as has seemingly happened in the telecom sector.
- Fourth- Linking predatory pricing with abuse of dominant market position must be reexamined.
- The dominant position is not always linked with predatory pricing: As the experience of the telecom sector shows, a dominant position may not be a prerequisite for predatory pricing.
- Accepting this argument would imply that if regulatory intervention is required to check predatory pricing, it could kick in before market power or dominance is established.
- Taking into account deep pockets: Alternatively, the definition of market dominance could be expanded to take into account deep pockets.
Conclusion
- Set of guidelines instead of the fixed framework: Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise. Having a fixed predetermined framework is unlikely to be helpful. Instead, it would be more useful to have a set of guiding principles based on which regulatory intervention, if required, can be undertaken.
- Safeguarding competition not competitors: Competition policy should be driven by safeguarding competition, not competitors. It should seek to bring about greater transparency in pricing and reduce information asymmetry.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 2- Aligning national curriculum with the needs of the market and society.
Context
The gap between jobs, needs and knowledge, and the absence of role models, could be turning India’s demographic dividend into a nightmare.
National curriculum and problems with it
- What is in our national curriculum? It is a fixed set of topics prescribed in all subjects — from physics to geography, and engineering to planning.
- And it is taught in English at our elite MHRD institutions.
- Designed by professionals: It has not been designed by politicians but by our elite professors and bureaucrats: It is what they believe the nation really needs to know.
- Issue of imposition: It is imposed on ordinary students and parents through competitive exams and on colleges and universities through various central regulatory agencies, most egregiously, through the UGC-NET, an objective-type multiple-choice (!) exam that decides who is fit to be a college teacher.
Issues with the engineering curriculum
- Doesn’t address the regional needs: We already know that the national engineering curriculum fails miserably in meeting regional needs.
- No regional variation accounted for: Engineering for Himachal Pradesh needs to be different from that in Maharashtra or Kerala.
- Not in sync with the demands of the industry: It must address the needs of core industries, local enterprises, the provisioning of basic amenities such as water and energy.
- None of this is in our national curricula or practised at the IITs.
- Moreover, there is no mechanism for engineering colleges to work with their communities.
Issue with the social science curriculum
- No interdisciplinary courses: Let us look at the UGC-NET curricula, which is largely what is taught in our elite institutions.
- At the BA level, it is divided into several disciplines — for instance, political science, sociology and economics.
- This is unfortunate since much of life in India is interdisciplinary.
- As a result, many activities such as preparing the balance sheet for a farmer, or analysing public transport needs, and development concerns such as drinking water or even city governance, are given a miss.
- Example of economics curriculum: The UGC-NET curricula in economics has 10 units, the very last unit is Indian Economics. Unit 8 is on Growth and Development Economics, where the student must know Keynes, Marx, Kaldor, and others.
- There are various mathematical models, for example, the IS-LM macroeconomic model, whose validity in the Indian scenario is questionable.
- Absence of important sectors: The study of sectors such as small enterprises or basic economic services such as transportation is absent. The District Economic Survey, an important document prepared regularly by every state for each district, is not even mentioned.
Sociology curriculum and issues involved
- Absence of certain important items: There is no preamble nor a list of textbooks or case studies.
- Under “Social Institutions”, we have a list of timeless words such as culture, marriage, family and kinship.
- Peasant occurs two times, but there is no farmer. Here is a sample question: “Who uses the phrase ‘fetishism of commodities’ while analysing social conditions?” followed by four names.
- No mention of important data: There is also no mention of important data sets such as the census or developmental programmes including MGNREGA in either curriculum.
Conclusion
- National curricula divorced from the community: The training at our elite institutions, and consequently, in the national curricula, is not to empower ordinary students to probe their lived reality. Or to contribute professionally and constructively to the development problems around us. Rather, it is to perpetuate a peculiar intellectualism which is divorced from the community in which these institutions are embedded.
- Need to rethink the one-nation-one curriculum: One-nation-one-curriculum certainly has some advantages in enabling mobility of some jobs, especially in the national bureaucracy and a multinational economy.
- Cost to the developmental needs: But one-nation-one-curriculum comes at the cost of the developmental needs of the states and the emergence of good jobs there.
- Turning demographic dividend into a nightmare: The above-stated asymmetry is behind the aspirational dysfunction in higher education. It is this disconnect between jobs, needs and knowledge and the absence of role models, which is slowly turning our demographic dividend into a nightmare on the streets.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3-Focus on demand side of the Indian economy instead of focusing all attention on supply-constraints.
Context
Domestic demand must play a greater role in India’s growth story.
Recovery in the Indian economy
- Sub-5 per cent growth rate: India’s fourth-quarter GDP growth (the calendar year 2019) printed another sub-5 per cent growth rate.
- Favourable base effect: It would have been lower had it not been for the large downward revisions to previous years’ GDP that statistically boosted the last quarter’s growth rate because of favourable base effects.
- The decline in GDP stabilised: Policymakers and the market heaved a sigh of relief that the relentless decline over the last three years at least seems to have stabilised around 4-5 per cent.
- Why some countries prefer sequential growth rate: Because year-over growth rates are so strongly affected by what happened a year ago, most economies (including China) instead publish and conduct policy discussions based on sequential quarterly growth.
- Better sense of momentum: Sequential growth rates provide a much better sense of the momentum and turning points in activity, which are critical to deciding whether, how much, and when the economy needs policy support.
- The magnitude of recovery: The growth momentum rose, albeit modestly, from 3.8 per cent in the third quarter of 2019 to 4.1 per cent.
- Non-farm and non-governmental GDP recovery: More importantly, non-farm and non-government GDP (the closest approximation to non-farm private-sector GDP) bounced much more sharply from 1.6 per cent (and no this is not a misprint) to 4.4 per cent in the fourth quarter.
What is the dominant narrative of the slide in growth?
- The deceleration in sequential terms: With the revised data, we now know that annual growth over the last four years has slowed from 8.3 per cent to 7 per cent to 6.1 per cent to 4-5 per cent.
- The decline in non-farm private GDP: In sequential terms, the deceleration was far more dramatic, especially in non-farm private GDP, which after hitting a run rate of 13 per cent in the first quarter of 2016 fell to 1.6 per cent by the third quarter of 2019.
- The dominant narrative of the cause of slide: The dominant narrative is that India’s woes are just an unfortunate and unintended consequence of demonetisation, the shift to a national GST, and the credit squeeze caused by the bad debt in banks and non-banks.
- The dominant narrative on recovery: With a bit more fiscal support, some monetary easing, and extended regulatory forbearance to help banks work out their bad debts, these headwinds will fade and India will likely be back to its winning ways.
Why real cause of the slowdown lays somewhere else?
Following factors suggest that answer lies somewhere else.
- Disruptive but not the drivers of the slowdown: While it is undeniable that facts stated in the dominant narrative had been disruptive, they couldn’t be the drivers of the decline.
- Slide in growth started even before demonetisation: India’s growth had been sliding since the second quarter of 2016; nearly 6 months before demonetisation and a year before the GST was introduced.
- By the third quarter of 2016, non-farm private sector growth had already slid to 3.5 per cent.
- Bad debt problem predates slowdown: Although bad debt hit the headlines in 2016, the overleverage had already begun to tighten bank lending since 2014.
- Fall in corporate investment- inexplicable cause: More inexplicable is the argument that falling corporate investment is the main culprit for the slowdown.
- It is true that corporate investment is no longer running at the heady 17 per cent of GDP of the pre-global financial crisis (GFC) days but at a much more sombre 11-12 per cent.
- However, this outsized adjustment had already taken place by 2010 and since then, corporate investment has flatlined at current levels.
The answer lies in globalisation
It is obvious once one eschews India’s exceptionalism and accepts that it is just another emerging market economy that grew on the coattails of globalisation with the minimal reforms. Globalisation has largely determined India’s fate.
- Growth in corporate investment and exports: Contrary to a widely held misperception, India is and has been for a long time far more open to the global economy than believed.
- Rise in corporate investment from 5 to 17%: The limited liberalisation of 1991-92, coupled with the corporate restructuring in the late 1990s, spurred corporate investment to rise from 5-6 per cent of GDP in the early 2000s to 17 per cent of GDP by 2008.
- Increase in exports: Almost all of this expansion in investment was geared to produce for exports, which grew at an astonishing pace of 18 per cent per year-over-year in this period as global trade expanded at breakneck speed with the entry of China into the WTO in 2001.
- 12% of GDP to 26% of GDP: Exports as a share of GDP more than doubled from 12 per cent in the early 2000s to over 26 per cent by 2008.
- Slow growth in private consumption: In contrast, private domestic consumption, which is considered to be India’s great strength, grew only at 6 per cent annually, less than the growth rate of the economy, such that its share in GDP fell from 63 per cent to 56 per cent.
- The engine of the Indian economy- Export: Since 2012, global trade has floundered and with that so has India’s economy.
- Indeed, the entire rise and fall of investment, including the quarter-to-quarter twists and turns in it, can be almost fully explained by changes in exports.
- The Indian economy has long been flying on one engine – exports — and that is now spluttering.
What are the prospects of taking the economy back to its high growth path
- Unlikely: So will the nascent recovery strengthen and take the economy back to its high growth path? Unlikely on current policies.
- COVID-19 factor: In the near term, as in now widely feared, the COVID-19 outbreak could turn into a pandemic, sharply reducing global demand and trade.
- With that, even expectations of a modest 2019-20 recovery to 5.25 per cent growth are under threat.
- Backlash against globalisation: Over the longer term, it is unlikely that global trade will return to its pre-Global financial crisis growth rates not only because supply chains have stopped expanding in the absence of any material technology breakthrough, but there is also a growing political backlash against globalisation in the developed market that has led to increased trade barriers.
Way forward
- Search for new sources of growth: India too, like other emerging market economies, needs to face up to the reality that it can no longer depend on global trade to be the only growth driver. Instead, it needs to search and find new sources of growth and that starts with recognising and accepting reality.
- Let domestic demand play a greater role in the economy: Policymakers need to stop thinking about India as a perennially supply-constrained economy focusing almost all policies and reforms to easing these constraints. Instead, it is time to let domestic demand play a greater role in India’s growth story.
- Policy changes: The above factors mean that India Inc. needs to shift from producing what foreigners want to produce what residents can afford, it also means that policymakers have to reverse policies that have so far forced households to keep increasing savings (for retirement income, children’s education, healthcare, and housing) through a web of financial repression, regulatory distortions, and public spending choices.
- It means redesigning India’s infrastructure to look more inward and less outward.
- Reduce out of pocket expenses: Increasing public provisioning of healthcare and education, reforming insurance regulations to reduce out-of-pocket expenses and eliminating financial repression to raise returns on retirement savings.
- Merely tinkering with macroeconomic policies will not be enough.
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Note4Students
From UPSC perspective, the following things are important :
Prelims level: Constitutional provision for the reservation in the government jobs.
Mains level: Paper 2- Reservation in the government jobs is not the fundamental right.
Context
The recent verdict of a two-judge Supreme Court Bench on reservations and Scheduled Caste and Scheduled Tribes promotions — has mainly raised four constitutional questions.
The first question-Whether reservation in promotions is a fundamental right or not.
- Scope for the reservation: Addressing the first question, the scope for reservation for the Backward Classes is promised in Part III of the Constitution under Fundamental Rights.
- Articles 16(4) and 16(4A) which empowers the state to provide reservation for SCs and STs are a part of the section, “Equality of opportunity in matters of public employment”.
- The right to equality is also enshrined in the Preamble of the Constitution. Many construe that the reservation is against Article 16 (Right to equality).
- The basis for the reservation: One should understand that the absence of equal opportunities for the Backward Classes due to historic injustice by virtue of birth entails them reservation.
- In other words, the right to equality is the basis of reservation as there is no level-playing field among castes.
- Articles 16 (2) and 16(4) are neither contradictory nor mutually exclusive in nature. In fact, they are complementary to each other; even Article 16(4) is not a special provision.
- Whether reservation should be applied in promotions?
- The answer is yes because, in India, where there is a peculiar hierarchical arrangement of caste, it is conspicuous that SCs and STs are poorly represented in higher posts.
- Confined to lower cadre jobs: Denying application of reservation in promotions has kept SCs and STs largely confined to lower cadre jobs. This is even seen in the higher judiciary.
- Hence, providing reservation for promotions is even more justified and appropriate to attain equality.
- Need of the reservation at every level: The question of law is not about enabling reservations in promotions or not, but this judgment destabilises the very basis of reservation; when there is no direct recruitment in higher posts, the implementation of the reservation is justified at every level to get a reasonable representation.
- Subdivision of reservation not correct: It is not correct to subdivide the scope of reservation at the entry-level and in promotions; this delineation will only lead to confusion in the implementation of reservation.
- Now, by declaring that reservation cannot be claimed as a fundamental right is a dangerous precedent in the history of social justice.
The second question- Can a court issue a mandamus to the state for providing reservation?
- Will it be appropriate for the courts to issue a mandamus in this regard?
- This is inappropriate because when the court is empowered to pass orders to create extra seats every year for forward-caste students who claim to be affected by reservation, why cannot it direct the state to provide reservation in promotions?
- Use of powers under Article 142: The Supreme Court has extraordinary powers under Article 142, which empowers the Court to pass any order necessary for doing “complete justice in any cause or matter pending before it”.
Third question-Necessity of quantifiable data
- Data to prove inadequate representation: The next question is about the necessity of quantifiable data to show an inadequate representation of reserved category people.
- Article 16 addresses the question: This question has been addressed in the Constitution. Article 16(4) reads: “Nothing in this article shall prevent the State from making any provision for the reservation of appointments or posts in favour of any backward class of citizens which, in the opinion of the State, is not adequately represented in the services under the State.”
- How “opinion of the State” should be construes: Here, “in the opinion of State” should not be construed as the discretion of the state to give the reservation or not; on the contrary, if the state feels that SCs and STs are under-represented, then it is in the domain of the state to provide reservation.
- Quantifiable data for exceeding the 50% limit: In the Indra Sawhney vs Union of India case (Mandal Commission) the idea of quantifiable data on inadequate representation was applied for exceeding the 50% cap for reservation; within 50% where the existing quotas for SCs and STs are accommodated were not affected.
- Responsibility to collect data on the State: The responsibility of collecting data on representation by the Backward Classes lies with the state.
- Pathetically, the last caste-based census was in 1935, and in the pre-Independence era, by the British government.
- No caste-based census in India: After Independence, no government has had the inclination to conduct a caste-based census due to political reasons.
- Even if a caste-based census is collected, the population and proportionate representation of SCs and STs will be low. For this reason alone, a proper caste-based census has not been conducted in independent India.
- No mention of quantifiable data: Moreover, Article 16(4) clearly mentions that if the state, in its opinion, feels that SCs and STs are not adequately represented, then it can provide reservation for them. There is no mention of “quantifiable data” in the Constitution. Even after 70 years of SC/ST reservation, their representation is as low as 3%.
Fourth question-Whether it is the obligation of the state to give reservation?
- Obligatory on the government: Finally, if the argument is that it is not binding on the state to give reservation, it must be noted that when reservation rights are in Part III as Fundamental Rights, it is the obligation of the state to ensure reservation to the underprivileged.
- Interpretation as obligatory provisions: This judgment has interpreted Articles 16 (4) and 16(4A) only as enabling provisions.
- Enabling provisions mean that these provisions empower the state to intervene; it does not mean the state is not bound to provide it.
- Interpreting the Constitution by paraphrasing and selective reading is dangerous.
Administrative efficiency
- Reservation should not affect the efficiency of administration: More importantly, this judgment has raised a new point — that the decision of the State government to provide reservation for SC/STs should not affect the efficiency of administration.
- This implies that the entry of SC/STs in the job market can reduce the quality of administration; this by itself is discriminatory.
- No evidence to support the claim: There is no evidence that performance in administration is affected on account of caste.
- There have been many attempts to dilute reservation in the past. But, this judgment appears to be debatable in the larger context and should be challenged in a constitutional bench.
Conclusion
In a country of parliamentary democracy, even the Constitution of India can be amended. If the government at the Centre has a genuine concern for SC/STs, it can amend the Constitution using its political majority.
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