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  • Nuclear Diplomacy and Disarmament

    With partners, India and Japan can form credible deterrence

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: AUKUS

    Mains level: Paper 2- Rethinking the nuclear policy

    Context

    Last week’s report on Asian nuclear transitions by Ashley Tellis of the Carnegie Endowment for International Peace and Japan’s debate on its atomic options underline the shared security challenges for Delhi and Tokyo.

    Common nuclear challenge for India and Japan and need for rethink

    • At the root of that common nuclear challenge is the continuing growth in Chinese military power and the rapid modernisation of Beijing’s nuclear arsenal.
    • 1] Modernising and expansion by China: China is modernising and expanding its nuclear arsenal as part of the general military transformation. Some estimates say China’s arsenal could grow to 1,000 warheads by 2030 from about 350 now.
    • 2] Muscular approach of China:  Xi Jinping’s China has taken a more muscular approach to its territorial disputes, including with India and Japan.
    • 3] Reluctance of the world to confront nuclear power: The Ukraine crisis has revealed that if a nuclear weapon power invades and seizes the territory of a neighbour, the rest of the world is reluctant to directly confront the aggression for fear of an escalation to the nuclear level.
    • Russia made this amply clear with its threat to use nuclear weapons if the US and NATO decide to join the war.

    Nuclear disarmament challenge

    • Indian and Japanese capacity to deter China is eroding steadily thanks to the problems with India’s minimum deterrence posture and the US nuclear umbrella over Japan.
    • India and Japan have long presented themselves as champions of nuclear disarmament.
    • Despite its call for total nuclear disarmament, India never agreed to give up its own nuclear weapons.
    •  Japan, as the world’s victim of nuclear bombing, had even a higher moral claim than India as the champion for the global abolition of nuclear weapons.
    • But Japan’s narrative is shaded by one reality—Tokyo’s reliance on the US nuclear umbrella.
    • Today neither Delhi nor Tokyo is ready to sign the 2017 Treaty on the prohibition of nuclear weapons.
    • It is the problem presented by the expanding Chinese nuclear arsenal and its growing sophistication.
    • Locked in a confrontation with the US, China is determined to raise its nuclear profile.
    • As China closes the economic and military gap with the US, there is a darkening shadow over the credibility of the US-extended deterrence for Japan.
    • This uncertainty is transforming the Japanese security debate.
    • For India, the question is whether its nuclear restraint and policy of minimum deterrence are enough to prevent China’s bullying.

    How Japan is responding to the challenge?

    • In Japan, former prime minister Shinzo Abe had called for a fresh look at Japan’s nuclear policy.
    • He was suggesting that Tokyo must consider “nuclear weapon sharing” with the US.
    • The model is Europe, where several countries including Belgium, Italy, Germany, Italy and the Netherlands have arrangements to participate in the US nuclear weapon deployment and use.
    • This proposal was rejected by the current prime minister.
    • While rejecting nuclear solutions to the problem of deterring China, Japan’s focus has been on raising the defence expenditure, developing sophisticated conventional weapons, beefing up the alliance with the US and widening the circle of Asian as well as European military partners,

    Suggestions in the report

    • Unlike Japan, India has no constraints on its nuclear weapons programme except the ones it has imposed on itself.
    • In the wake of the nuclear tests of 1998, India quickly announced a policy of minimum deterrence and a doctrine of no-first-use of nuclear weapons.
    • The big question is whether this conservatism in India’s nuclear posture can or should be sustained in the face of China’s military modernisation, nuclear expansion and strategic assertiveness.
    • Fresh debate on nuclear policies: The Tellis report, detailed and technical, should provide a basis for a fresh Indian debate about its nuclear weapons policies.
    • Revising US attitude to India’s nuclear weapons: Tellis also calls on the US to revise its attitudes to India’s nuclear weapons programme.
    • In the past, the US insisted on constraining India’s nuclear weapon programme.
    • Today a strong Indian nuclear deterrent against China is critical for the geopolitical stability of Asia and the Indo-Pacific and in the US interest.
    • Facilitating more sophisticated nuclear warheads: Tellis suggests that the US should be prepared to facilitate India’s development of more sophisticated nuclear warheads as well as improve the survivability of the Indian deterrent against the expanding Chinese nuclear arsenal.
    • The US should midwife an agreement under which France would help India accelerate the development of an Indian underwater deterrent based on ballistic missile carrying submarines (SSBN) as well as nuclear attack submarines (SSN),

    Conclusion

    Tellis is calling both Delhi and Washington to reconsider entrenched nuclear assumptions in the two capitals. While the resistance to his ideas will be strong, Delhi and Washington will have to respond, sooner than later, to the dramatic changes in the global environment triggered by the rise and assertion of China.

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    Back2Basics: Nuclear umbrella

    • At the dawn of the nuclear age, to encourage friendly countries to refrain from building nuclear weapons, the United States promised to protect them with U.S. nuclear weapons.
    • This arrangement came to be called the nuclear umbrella. The experts call it extended nuclear deterrence.
    • The umbrella covers the countries in the North Atlantic Treaty Organization (NATO), Japan, South Korea, and Australia.
    • It is not a binding legal arrangement included in their security treaties with the United States.
    • It is an informal assurance reinforced by dialogue and, in the case of NATO, cooperative arrangements to deliver U.S. nuclear weapons if authorized by a U.S. president.
  • Anti Defection Law

    Important role of vigilant Opposition in democracy

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: 10th Schedule

    Mains level: Paper 2- Role of Opposition in democracy

    Context

    Role of Opposition in indispensable in the democracy.

    Reasons for adopting parliamentary democracy

    • The Indian Constitution adopted the parliamentary system and not the presidential system.
    • B.R. Ambedkar provided the rationale for this: “A democratic executive must satisfy two conditions –
    • (1) It must be a stable executive and
    • (2) it must be a responsible executive.
    • Unfortunately it has not been possible so far to devise a system which can ensure both in equal degree.
    • Assessment of executive: In England, where the parliamentary system prevails, the assessment of responsibility of the executive is both daily and periodic.
    • Daily assessment: The daily assessment is done by members of Parliament, through questions, resolutions, no-confidence motions, adjournment motions and debates on addresses.
    • Periodic assessment: Periodic assessment is done by the electorate at the time of the election.
    • The daily assessment of responsibility which is not available under the American system it is felt far more effective than the periodic assessment and far more necessary in India.

    Role of Opposition in democracy

    • Democracy is the basic feature of the Constitution.
    • The presence of a vigilant Opposition is necessary not just for a vibrant democracy but for its very survival.
    • When the Opposition criticises the government or carries on an agitation to arouse public opinion against a party’s misdeeds, it is performing a duty that is assigned by the Constitution.
    • Without an effective Opposition, democracy will become dull and legislature will become submissive.

    Significance of anti-defection law

    • Encouraging defections from the parties in power in States will sound the death knell for democracy.
    • The Tenth Schedule has failed to serve its purpose.
    • The Supreme Court, in Kihoto Hollohan v. Zachillhu (1992), while upholding the 52nd Amendment said that: “On the one hand there is the real and imminent threat to the very fabric of Indian democracy posed by certain levels of political behaviour conspicuous by their utter and total disregard of well recognised political proprieties and morality… On the other hand, there are… certain side-effects which might affect and hurt even honest dissenters and conscientious objectors.”
    • In upholding the law, the court held: “But a political party functions on the strength of shared beliefs… Any freedom of its members to vote as they please independently of the political party’s declared policies will not only embarrass its public image and popularity but also undermine public confidence in it.”
    • What is whip? The whip system is part of the established machinery of political organisation in the House and does not infringe on a member’s rights or privilege in any way.
    • Some political thinkers have recognised as an additional device the ‘theory of recall,’ so that a member whose personal behaviour falls below standards expected of his constituents goes back and seek their approval.
    • This power is particularly apt when a member shows disloyalty to his party but declines to resign from his seat and to fight an immediate by-election.
    • The anti-defection law was supposed to be the justification underlying the power of recall.

    Way forward

    • Political parties, the judiciary and civil society must take steps to ensure that democracy does not fail.
    • The Opposition must be tolerated because if it is left for the party in power to decide what is healthy and unhealthy criticism, then every criticism of the latter will be treated as unhealthy.
    • while the Opposition must be credible and strong, it is for the Opposition to make itself credible and strong. It must feel the pulse of the people.
    • Unless it makes itself respectable, it cannot demand any respect. This is the biggest challenge facing the nation today.

    Conclusion

    The Opposition must also work constructively. Our constitutional goal was to establish a sovereign, democratic republic.

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

    Weighing in on India’s investment-led revival

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: GFCF

    Mains level: Paper 3- Long term growth through public capital expenditure

    Context

    The Finance Minister, Nirmala Sitharaman, said recently that India’s long-term growth prospects are embedded in public capital expenditure programmes. She added that an increase in public investment would crowd in (or pull in) private investment, thus reviving the economy.

    Significance of public investment-led economic growth

    • Public investment-led economic growth forms a credible strand of explanation for India’s post-Independence economic growth. 
    • Revival after Asian financial crisis: When it was faced with a slow-down after the Asian financial crisis of 1997, the  government initiated public road building projects.
    • In the form of the Golden Quadrilateral and the Pradhan Mantri Gram Sadak Yojana, these initiatives sowed the seeds of economic revival, culminating in an investment and export-led boom in the 2000s; GDP grew at 8%-9% annually.
    • In comparison, the investment record during the 2010s has been dismal.
    • However, a recent uptick is evident in the real gross fixed capital formation (GFCF) rate — the fixed investment to GDP ratio (net of inflation).
    • The ratio recovered to 32.5% in 2019-20 from a low of 30.7% in 2015-16.

    Analysing the Investment distribution

    • As in the June edition of the Ministry of Finance’s Monthly Economic Review, the fixed investment to GDP ratio was 32% in 2021-22.
    • However, there is need for caution in reading the most recent data, as they are subject to revision.
    • Moreover, the budgetary definition of investment refers to financial investments (which include purchase of existing financial assets, or loans offered to States) and not just capital formation representing an expansion of the productive potential.
    • The National Accounts Statistics provides disaggregation of gross capital formation (GCF) by sectors, type of assets and modes of financing; over 90% of GCF consists of fixed investments.
    • No change in investment distribution: The investment distribution has hardly changed over the last decade, with the public sector’s share remaining 20%.
    • Fall in share of agriculture and industry: Between 2014-15 and 2019-20, the shares of agriculture and industry in fixed capital formation/GDP fell from 7.7% and 33.7% to 6.4% and 32.5%, respectively.
    • Services’ share rose to 52.3% in 2019-20 compared to 49% in 2014-15.
    • The rise in the services sector is almost entirely on transport and communications.
    • The share of transport has doubled from 6.1% to 12.9% during the same period.
    • Within transportation, it is mostly roads.
    • Decline in the share of investment: Its share in the investment ratio (column 2.1) fell from 19.2% in 2011-12 to 16.5% in 2019-20.
    • This indicates that ‘Make in India’ failed to take off, import dependence went up, and India became deindustrialised.
    • Import dependence on China is alarming for critical materials such as fertilizers, bulk drugs (active pharmaceutical ingredients or APIs) and capital goods.
    • Instead of boosting investment and domestic technological capabilities, the ‘Make in India’ campaign frittered away time and resources to raise India’s rank in the World Bank’s Ease of Doing Business Index.
    • Decline in foreign capital in GFC: The contribution of foreign capital to financing GCF fell to 2.5% in 2019-20 from 3.8% in 2014-15 (or 11.1% in 2011-12).
    • With declining investment share, industrial output growth rate fell from 13.1% in 2015-16 to a negative 2.4% in 2019-20, as per the National Accounts Statistics.

    Way forward

    • Need for balance: As roads and communications are classic public goods, investment in them is welcome.
    • However, for healthy domestic output growth, there is a need for balance between “directly productive investments” (in farms and factories) and infrastructure investments.
    • And this balance was missed.
    • The recent upturn in the aggregate fixed capital formation to GDP ratio is positive, though the rate is still lower than its mark in the early 2010s.

    Conclusion

    The claim that the investment revival is public sector driven is not borne out by facts. The budgetary figures refer to financial investment, not estimates of capital formation, indicating expansion of the economy’s productive capacity.

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    Back2Basics: Gross fixes capital formation

    • Gross fixed capital formation (GFCF), also called “investment”, is defined as the acquisition of produced assets (including purchases of second-hand assets), including the production of such assets by producers for their own use, minus disposals.
    • The relevant assets relate to assets that are intended for use in the production of other goods and services for a period of more than a year.
    • The term “produced assets” means that only those assets that come into existence as a result of a production process are included.
    • It therefore does not include, for example, the purchase of land and natural resources.
    • This indicator is available in different measures: GFCF at current prices and current PPPs in US dollars, and annual growth rates of GFCF at constant prices, as well as quarterly data for percentage change over previous period and percentage change over same period last year.
    • The indicator at current prices and current PPPs is less suited for comparisons over time, as developments are not only caused by real growth, but also by changes in prices and PPPs.
  • Foreign Policy Watch: India-United States

    Defence and technology cooperation is key to US-India partnership

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much

    Mains level: Paper 2- India-US relations

    Context

    The possibility of India’s continuing rise over this century seems to be on a stronger wicket today than it did a decade ago, marred as the early 2010s were by political instability and economic turmoil.

    Historical background of dominance of world economy by the East

    • Prior to the era of colonial exploitation followed by self-inflicted stagnation due to communist economic policies adopted across the region, the ancient civilisations of India and China dominated the world economy
    • There existed a deep history of scientific innovation and technological prowess, which spread by osmosis and intercourse from the East to the West.
    • The West, led principally by Great Britain, then stole a march over Asia with the advent of the Industrial Revolution.
    • Emergence of the US: A pyrrhic victory for Britain in the Second World War marked the formal transfer of the Western bloc’s leadership to the US.

    Geopolitics in 2020s

    • Emergence of China: China is now home to a manufacturing-led and technology-driven economy, competing head-on with the US in areas like biotech, robotics, artificial intelligence, and advanced materials.
    • India, which faced an economic setback when the liberalisation process largely came to a halt between 2004-2014, is back on its feet, with consistent commitment and concerted policy action focused on building domestic capabilities in critical technologies as well as in key manufacturing industries and pursuing important structural economic reforms.
    • Common threat of China: From seeing non-democratic China as a benign partner, the US now sees it as a threat, the present preoccupations in Europe notwithstanding.
    • India, which for a time welcomed Chinese involvement in its economy, has also recalibrated after the 2020 Galwan face-off.
    • Unlike India and the US, which are both well-established republics with deep democratic cultures, China is “a party with a state attached to it”.
    • Concerns for India:  Being inextricably linked by geography, Beijing’s ambition to dominate its periphery and proximate region is of particular concern to India.

    What this mean for India-US relations?

    • Natural allies: Given this background, India and the US are natural allies to confront the challenges posed by an expansionist and aggressive China in the Indo-Pacific and beyond.
    • New areas of cooperation: There are clear signals of unprecedented cooperation between the two countries in areas like national security, defence production and most prominently, new-age information technology and internet industries where American financial firms and blue-chip corporates are contributing growth capital as well as know-how.
    • Closer cooperation in scientific research and critical emerging technologies is imperative.
    • Reducing India’s dependence for defence equipment: In particular, as some American lawmakers highlighted when providing India with exemption under CAATSA that the American defence industry should contribute to reducing India’s dependence on Russian armaments and equipment.
    • Technology cooperation: Connected to the expansion of defence-industrial ties is the broadening of technology collaboration in areas like artificial intelligence, drones, advanced materials, space technology, semiconductors, and biotech in India, beyond the consumer tech and software sectors.

    Conclusion

    Demographic and economic trends firmly position India as a global force that will have the weight to stride alongside America and China, who would constitute the other two geopolitical — and ideological — poles over the 21st century.

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  • A new global standard for AI ethics

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much

    Mains level: Paper 3- AI governance

    Context

    Artificial intelligence (AI) is more present in our lives than ever. From predicting what we want to see as we scroll through social media to helping us understand weather patterns to manage agriculture, AI is ubiquitous.

    Issues with AI  and it why it matters to India

    • Bias and discrimination: The data used to feed into AI often aren’t representative of the diversity of our societies, producing outcomes that can be said to be biased or discriminatory.
    • Errors in facial recognition: There are problems emerging in facial recognition technologies, which are used to access our phones, bank accounts and apartments, and are increasingly employed by law-enforcement authorities, in identifying women and darker-skinned people.
    • For three such programs released by major technology companies, the error rate was 1% for light-skinned men, but 19% for dark-skinned men, and up to 35% for dark-skinned women.
    • Biases in facial recognition technologies have led to wrongful arrests.
    •  Indeed, if the business model of how these technologies are developed does not change to place human interests first, inequalities will grow to a magnitude never before experienced in history; access to the raw material that is data is key.
    • These issues are of particular importance to India, which is one of the world’s largest markets for AI-related technologies, valued at over $7.8 billion in 2021.
    •  The National Strategy on Artificial Intelligence released by NITI Aayog in 2018 highlights the massive potential of AI in solving complex social challenges faced by Indian citizens across areas such as agriculture, health, and education, in addition to the significant economic returns that AI-related technologies are already creating.

    UNESCO agreement

    • To ensure that the full potential of these technologies is reached, the right incentives for ethical AI governance need to be established in national and sub-national policy.
    • India has made great strides in the development of responsible and ethical AI governance, starting with NITI Aayog’s #AIForAll campaign to the many corporate strategies that have been adopted to ensure that AI is developed with common, humanistic values at its core.
    • UNESCO’s recommendations: Last November 193 countries reached a groundbreaking agreement at UNESCO on how AI should be designed and used by governments and tech companies.
    • UNESCO’s Recommendation on the Ethics of Artificial Intelligence took two years to put together and involved thousands of online consultations with people from a diverse range of social groups.
    •  It aims to fundamentally shift the balance of power between people, and the businesses and governments developing AI.
    • Countries which are members of UNESCO have agreed to implement this recommendation by enacting actions to regulate the entire AI system life cycle, ranging from research, design and development to deployment and use.
    • This means they must use affirmative action to make sure that women and minority groups are fairly represented on AI design teams.
    • The Recommendation also underscores the importance of the proper management of data, privacy and access to information.
    •  It establishes the need to keep control over data in the hands of users, allowing them to access and delete information as needed.
    • It also calls on member states to ensure that appropriate safeguards schemes are devised for the processing of sensitive data and effective accountability, and redress mechanisms are provided in the event of harm.
    • Socio-cultural impact: The broader socio-cultural impacts of AI-related technologies are also addressed, with the Recommendation taking a strong stance that-
    • 1] AI systems should not be used for social scoring or mass surveillance purposes;
    • 2] That particular attention must be paid to the psychological and cognitive impact that these systems can have on children and young people;
    • 3] Member states should invest in and promote not only digital, media and information literacy skills, but also socio-emotional and AI ethics skills to strengthen critical thinking and competencies in the digital era.
    • In a number of countries, the principles of the Recommendation are already being used in AI regulation and policy.
    • Finland provides an example of good practice of this regard, with its 2017 AI Strategy.

    Conclusion

    The new agreement is broad and ambitious. It is a recognition that AI-related technologies cannot continue to operate without a common rulebook. Over the coming months and years, the Recommendation will serve as a compass to guide governments and companies, to voluntarily develop and deploy AI technologies that conform with the commonly agreed principles it establishes.

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

    Despite pressures, the Indian rupee’s remarkable resilience

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Dollar Index

    Mains level: Paper 3- Depreciation of Indian rupee

    Context

    The Indian rupee has depreciated by around 7% against the U.S. dollar, since the start of the year, in response to various domestic and global factors.

    What are the factors responsible for decline?

    • A widening current account deficit, persistent risk-off sentiment as a result of geopolitical tensions, ‘a strengthening dollar index, and continuous sell-off by foreign portfolio investors have all put pressure on the rupee’.
    • Reversal of monetary policy in the US: The runaway inflation levels since last year, which have seen consumer price index (CPI) inflation in the United States reaching a multi-decade high of 9.1% in June 2022, have prompted the reversal in the monetary policy stance of the US Federal Reserve.
    • With inflation rising unabated, the Fed is widely expected to continue raising interest rates.
    • Higher risk-free return in the US: As a result of higher risk-free returns being available in the U.S., there have been persistent outflows of foreign portfolio capital since October 2021, which, on a cumulative basis, stands at $30 billion this year.

    Comparison with the depreciation in the past

    • Even as the rupee has fallen sharply against the dollar, the depreciation has been relatively lower compared with past crises.
    • During the global financial crisis of 2008, the rupee had weakened by over 20% between December 2007-June 2009 and during the Taper Tantrum of 2013 for seven months from the start of the crisis in May 2013, the rupee had depreciated by over 11%.
    • Reduced external vulnerability: The relative lower depreciation this time is attributed to the lowering of India’s external vulnerability measured in terms of a relatively high import cover and low short-term external debt.
    • During the Taper Tantrum, India’s import cover stood at over seven months as compared to around 12 months in the current period.

    Decline in foreign exchange reserves

    • The Reserve Bank of India (RBI) has stepped in to arrest a large depreciation in the currency, with interventions in the spot and forward foreign exchange markets.
    • Consequently, India’s foreign exchange reserves have moderated by almost $55 billion from a high of $635 billion seen this year.
    • Elevated global crude oil prices have impinged on India’s oil import bill, in turn widening the trade deficit, thus increasing the demand for U.S. dollars, and affecting forex reserves further.

    Effects of weak rupee

    • Export to become competitive: Among the benefits is the premise that the rupee’s weakening should aid exporters in becoming more competitive.
    • However, the concomitant depreciation of currencies of some of India’s competitors such as South Korea, Malaysia and Bangladesh against the dollar, alongwith a high import intensity of some of its key export segments (petroleum, gems and jewellery and electronics), is likely to have blunted the ameliorative impact on India’s exports.
    • Increase in the price of imported commodities: a weaker rupee is driving up prices of key import commodities such as coal, oil, edible oil, gold, thus impacting the imported component of inflation.
    • Impact on the borrowers: The unhedged component of corporate debt denominated in dollars is also likely to bear the brunt of a weaker rupee.
    • Impact on investment: Most importantly, a continuously sliding exchange rate discourages foreign investors from making fresh investments, which keep losing value in dollar terms.
    • For this reason, it is ideal to provide confidence to investors by arresting a continuous slide in the exchange rate.

    Measure by the RBI to arrest the weakening of rupee

    • Apart from intervening in the forex market to arrest the fall in the rupee’s value, the RBI announced a slew of measures recently to liberalise foreign inflows into the country and make them more attractive.
    • Measures such include:
    • Promoting trade settlements between India and other countries in rupee terms.
    • Offering higher interest rates on fresh Foreign Currency Non-Resident (Bank) and Non-Resident External deposits.
    • A widening of investible universe of government and corporate debt, a relaxation of the interest rate.
    • Amount ceiling for External Commercial Borrowing loans, among others, have contributed to arresting the rupee’s slide against the greenback.

    Way forward

    • Inclusion of companies in glabal indices: The Government could encourage some of the large market cap companies (private and public sectors) to be included in the major global indices such as MSCI and FTSE.
    • This will help increase the weight of Indian equities in these indices, compensating for foreign portfolio outflows to some extent as investors are unlikely to be underweight on India.
    • India’s entry into bond indices: The Government could also expedite India’s entry into bond indices such as J.P. Morgan’s Emerging-Market Bond Index and Barclays Global Bond Index.
    • This will not only lead to forex inflows but also have a benign impact on interest rates.
    • Such measures will keep the forex war chest of the RBI at a comfortable level, providing the central bank the requisite ammunition in case there is further weakness.
    • The maintenance of the U.S.-India interest rate differential along with timely forex market interventions by the central bank to manage volatility will prove to be salutary in preserving the rupee value against the greenback.

    Conclusion

    Even as the rupee is expected to remain under pressure in the near term because of global uncertainty, high commodity prices and rising U.S. interest rates, mitigating measures have to be taken to partly arrest the slide.

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    Back2Basics: What is taper tantrum?

    • Taper tantrum refers to the 2013 collective reactionary panic that triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing (QE) program.
    • The Fed announced that it would be reducing the pace of its purchases of Treasury bonds, to reduce the amount of money it was feeding into the economy.
    • The ensuing rise in bond yields in reaction to the announcement was referred to as a taper tantrum in financial media.
  • Foreign Policy Watch: India-Sri Lanka

    ‘Advantage New Delhi’ in Sri Lanka’s India lifeline

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much

    Mains level: Paper 2- India-Sri Lanka relations

    Context

    Ranil Wickremesinghe’s election as the President of Sri Lanka in a crucial Parliament vote on July 20, 2022, gives India an opportunity to take the lead in the foreign aid game in its neighbourhood.

    Background of the crisis in Sri Lanka

    • Sri Lanka has been facing economic turbulence since its pre-emptive default on its foreign debt obligations in mid-April this year.
    • Following the debt default and a shortage of dollars, the Sri Lankan economy is experiencing stagflation.
    •  Inflation has spiralled to over 50%, translating into higher food and fuel prices.
    •  Sri Lanka’s worst economic crisis since its independence in 1948 is due to a tepid recovery from the COVID-19 pandemic, the Russia-Ukraine conflict shock and economic mismanagement under the administration of the Rajapaksas.
    • Sri Lanka is also facing challenges in getting foreign aid, as 60% of the world’s poorest countries are also experiencing debt distress.

    Opportunities for India

    •  In the first six months of 2022, Indian aid worth $3.8 billion has flowed to Sri Lanka through loans, swaps and grants.
    • This is India’s largest bilateral aid programme in recent times.
    •  Stabilising Sri Lanka’s economy could prove to be a major win for Indian’s ‘neighbourhood-first’ policy.
    • Moreover, once the Sri Lankan economy stabilises, India can deepen its trade and investment linkages with Sri Lanka, transcending the current humanitarian aid relationship.
    • On the other hand, an unstable Sri Lankan economy could pose security risks to India and lead to a flood of refugees across the Palk Strait.
    • This is an opportunity for India to strengthen bilateral and regional partnerships.
    • Countering Chinese influence: In recent years, China has emerged as a major partner for Sri Lanka, especially for infrastructure projects, many of which are under scrutiny now.
    • This provides an opportunity for India to upscale its aid and cement its first mover advantage over China by leading an aid consortium for Sri Lanka, working closely with other friendly countries such as the United States, Japan and the European Union as well as the International Monetary Fund (IMF).

    Why China is reluctant to help?

    • China worries that unilaterally restructuring Sri Lanka’s debt or giving it moratoria would set a new precedent in its lending practices, leading to a queue of similarly distressed countries seeking debt relief from Beijing.
    • Furthermore, China, which is a G2 economy, and wanting to challenge the U.S., does not want its reputation to be tarnished by bailing out a floundering economy.

    Steps Sri Lanka needs to take

    • Concluding the talks with Sri Lanka: The government must show that it is serious about stabilising the economy by concluding talks on an IMF programme which will increase taxes and utility prices to raise revenue and increase interest rates to control inflation.
    • Economic reforms: It has to implement structural reforms to make the economy more open to trade and investment and allow market forces to determine resource allocation.
    • National consensus on IMF program: It has to build national consensus on implementing the IMF programme and reforms by explaining that this is the only solution to the crisis.
    • Anti-corruption policies: It has to restore the rule of law and enforce strong anti-corruption policies (including asset declarations for all parliamentarians and a strong anti-corruption office supported by the United Nations).
    • Reset foreign policy: It has to reset foreign policy towards a more neutral direction.

    Conclusion

    With political will and the right set of policies, Sri Lanka stands a sporting chance of achieving some economic normalcy within the next three years. India stands to gain by supporting Sri Lanka in its hour of need. A friend in need is a friend indeed.

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  • Need for a debate on freebies

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: PM-Kisan

    Mains level: Paper 2- Phasing out the unwarranted subsidies

    Context

    Many in India have been lamenting for quite some time the culture of political populism and “freebies”

    Fiscal stress due to subsidies

    • Technically, a subsidy is the unrecovered cost of any service (or good) provided by the government.
    • Freebies such as distribution of televisions, free cycles or laptops are the most highly visible and discussed freebies, but they are fiscally insignificant compared to the much larger subsidies on food, fertiliser and petroleum.
    • Though curbed in recent years, these “visible” subsidies in government budgets remain a major source of fiscal stress.
    • Then there is a range of “invisible” subsidies, especially in state government budgets, not always recognised as such, but which are also very large.
    • The deficit between the receipts and expenditure of a government department in providing a service is the unrecovered cost of providing that service, that is, a subsidy, even if not recognised as such in the budget.
    • Examples include the unrecovered cost of providing public education, healthcare, irrigation, power, water supply and sanitation.

    Some facts about the subsidies

    • Relation with per capita income: The volume of subsidies as a proportion of GDP comes down with rising per capita incomes, but very gradually.
    • The total volume of subsidies came down from 13 per cent of GDP way back in 1987-88 to a little over 10 per cent by 2015-16, almost 30 years later.
    • Contribution of central government: The central government accounts for less than 30 per cent of total subsidies, provided mainly for economic services including food.
    • Merit subsidies: From the total volume there is a very small number of “merit subsidies” which might be warranted in public interest.
    • All governments have provided a food subsidy for poor households by bi-partisan consensus for decades.
    • Then there is basic education and health services which have large benefits for society beyond the benefit accruing to the immediate recipient of the service, what economists call “externalities”.
    • Also in case of expenditure on water supply and sanitation, where again the benefit to society is much larger than that accruing to the immediate recipient of the service — for example, prevention of infectious diseases.
    • These four “merit” subsidies account for only a third of total subsidies.
    • Unwarranted freebies: Thus, two-thirds of total subsidies, about 6 per cent of GDP, are unwarranted freebies which should be eliminated.

    Way forward

    • Phasing out the unwarranted freebies: If central and state governments could step beyond their business as usual budgets and take bold measures to phase out these unwarranted freebies, along with much of the tax exemptions and concessions, which amount to about 5 per cent of GDP, that would free up huge fiscal space.
    • Universal basic income: There is a growing demand in many advanced countries, which already have large social security schemes, to provide a minimum “Universal Basic Income” for all.
    •  Providing a small safety net for the poor in countries like India, which have no social security system, is the least that any caring government can do.
    • MGNREGA is the largest and longest-standing income support programme in India for the unemployed in rural areas.
    • But it is often not regarded as such as it entails payment against performance of work.
    • The usual complaint against such schemes is that they artificially raise rural wages, reduce the incentive to search for work, and that the poor blow up these freebees on liquor etc.
    • Since MGNREGA and similar schemes in the states pay much less than the minimum wage, they obviously cannot raise rural wages beyond what is the legal minimum wage anyway.

    Conclusion

    Phasing out the unwarranted subsidies will enable a massive reduction in the combined fiscal deficit of the Centre and the states, while at the same time stepping up required expenditure on education, health and infrastructure.

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

    The cost of misrepresenting inflation

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much

    Mains level: Paper 3- Food inflation in India

    Context

    Globally, inflation is now the prime concern of governments, even as there is a speculation that a recession may not be far behind.

    Is inflation in India driven by the global factors?

    • The Governor of the Reserve Bank of India (RBI) has been reported as saying that there was a “need to recognise global factors in inflation”.
    • However, the current inflation in India is, even largely, due to global factors is wrong, and harmful.
    • While the price of edible oils and the world price of crude may have risen following the Ukraine war, the impact of this development on overall inflation in India, measured by the rise in the consumer price index, would depend upon their share in the consumption basket of households, which is relatively low.
    • For the commodity groups ‘fuel and light’ and ‘fats and oils’, chosen as proxies for the price of imported fuel and edible oils, respectively, inflation has actually been lower in the first five months of 2022 than in the last five months of 2021.
    • On the other hand, for the commodity group ‘food and beverages’, it was exactly the reverse, i.e., inflation has been much higher in the more recent period.
    • Contribution of domestic factors: The estimated direct contribution of this group to the current inflation dwarfs that of all other groups, establishing conclusively that the inflation is driven by domestic factors.

    Inadequacy of monetary policy to address the food-price driven inflation

    • Issues with the monetary policy: Starting in May, the repo rate has been raised.
    • Raising the interest rate in an attempt to control inflation, implicitly assumes that it reflects economy-wide excess demand.
    • Such a diagnosis of the current inflation is belied by the fact that the price of food is rising faster than that of other goods i.e., its relative price has risen.
    • So, the excess demand is in the market for foodstuff, and it is this that needs to be eliminated.
    • The inadequacy of monetary policy to address food-price-driven inflation has been flagged by economists internationally.
    • at the World Economic Forum’s annual meet held at Davos, Switzerland in June, Nobel Laureate Joseph Stiglitz observed that raising interest rates is not going to solve the problem of inflation. It is not going to create more food.
    • Jerome Powell is reported stating that even though the Fed’s resolve to fight inflation is unconditional, “a big part of inflation won’t be affected by our tools”.
    • This is an acknowledgement that there is only so much a central bank can do when battling inflation driven by the rise in energy and food prices.

    Way forward

    • Need for supply side interventions:  To hold on to the view that inflation in India is due to excess aggregate demand curable by raising interest rates ensures that attention is not paid to the necessary supply-side interventions.

    Conclusion

    India is suffering from undercurrent of a food price inflation, which, by exacerbating poverty, stands in the way of a more rapid expansion of the economy.

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  • India-Vietnam ties, from strong to stronger

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Indo-Pacific Ocean Initiative

    Mains level: Paper 2- India-Vietnam relations

    Context

    India and Vietnam are celebrating the 50th anniversary of their diplomatic relations.

    India-Vietnam relations background

    • Commonalities: India’s relations with Vietnam — some of which is based on a set of historical commonalities — predate any conflict between India and China as well as that between China and Vietnam.
    • Political and security engagement: As India pursues its ‘Act East Policy’, Vietnam has become a valuable partner in India’s political and security engagements in the Indo-Pacific region.

    Growing convergence between India and Vietnam

    • Convergence of strategic and economic interests: Bolstering friendship between the two countries is a natural outcome of a growing convergence of their strategic and economic interests, and also their common vision for peace, prosperity and their people.
    • Shared strategic concerns: The two countries are working to address shared strategic concerns (such as energy security and open and secure sea lines of communication), and make policy choices without undue external interference.
    • Given India’s broadening economic and strategic interests in the region and Vietnam’s desire for strategic autonomy, both countries will benefit from a stronger bilateral relationship.
    • Shared apprehension about China: India and Vietnam face territorial disputes with and shared apprehensions about their common neighbour, China.
    • Vietnam is of great strategic importance because its position enables it to control ‘the South China Sea — a true Mediterranean of the Pacific’.
    • The maritime domain, therefore, has become an essential element of India and Vietnam cooperation.
    • More importantly, India sees an open and stable maritime commons being essential to international trade and prosperity; therefore, it has an interest in protecting the sea lanes.
    • There are some other potential areas for New Delhi and Hanoi to further deepen collaboration, such as meaningful academic and cultural collaborations, shipbuilding, maritime connectivity, maritime education and research, coastal engineering, the blue economy, marine habitat conservation, and advance collaboration between maritime security agencies.

    Four factors responsible for growing maritime engagement with Vietnam

    • 1] Countering China: India’s aspiration to counter an assertive China by strengthening Vietnam’s military power.
    • 2] Security sea lines: With India’s increasing trade with East and Southeast Asia, India has begun to recognise the importance of its sea lines of communication beyond its geographical proximity; the South China Sea occupies a significant geostrategic and geo-economic position, resulting in India’s renewed interests in the South China Sea.
    • 3] Development in maritime domain: India desires to intensify its presence to track potential developments in the maritime domain that could affect its national interests.
    • 4] Naval partnership: The Indian Navy underlines the importance of a forward maritime presence and naval partnership that would be critical to deter potential adversaries.
    • India’s maritime strategic interests in the region are well established, including the fact that almost 55% of India’s trade with the Indo-Pacific region passes through the South China Sea.

    Strategic and defence cooperation

    • Ever since the formal declaration of a strategic partnership in 2007 and Comprehensive Strategic Partnership in 2016, the scope and scale of the India-Vietnam strategic and defence cooperation, particularly in the maritime domain, is deepening with a clear vision, institutional mechanisms.
    • The signing of ‘Joint Vision for Defence Cooperation’ and a memorandum of understanding on mutual logistics support in June 2022 has further strengthened mutual defence cooperation.
    • Enhancing Vietnam’s defence capabilities: While a U.S.$100 million Defence Line of Credit has been implemented, India has also announced early finalisation of another U.S.$500 million Defence Line of Credit to enhance Vietnam’s defence capability.
    • New Delhi has also agreed to expand military training and assist the Vietnam Navy’s strike capabilities.

    Cooperation in Indo-Pacific region

    •  India is willing to take a principled stand on territorial disputes in the hope that it contributes to the stabilisation of the Indo-Pacific.
    • Such positions align closely with Vietnam’s stance on the management of the South China Sea disputes.
    • The two countries are also engaging in wide-ranging practical cooperation in the maritime domain through a maritime security dialogue, naval exercises, ship visits, Coast Guard cooperation, and training and capacity building.
    • Working in various frameworks: Both countries have found mutual convergences on cooperation in the Indo-Pacific region and are synergising their efforts to work in bilateral as well as other sub-regional and multilateral frameworks, such as the Indian Ocean Rim Association (IORA), the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), the Mekong-Ganga Cooperation, ADMM-Plus or the ASEAN Defence Ministers Meeting-Plus.
    • Both countries are also looking at collaboration around the seven pillars of the Indo-Pacific Oceans Initiative (IPOI).

    Conclusion

    The road map agreed upon by the leaders will be helpful in addressing common challenges and decisively navigating towards making an India-Vietnam partnership that helps in stability in the Indo-Pacific.

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