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

    A time for extraordinary action

    op-ed snap | Economics | Mains Paper 3: Indian Economy

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 3- Stimulus package on the lines of package declared by developed countries is necessary for Indian economy to deal with the pandemic.

    Context

    The lockdown and other movement restrictions, backed by scientific and political consensus on their inevitability, have directly led to a dramatic slowdown in economic activity across the board. What is its impact on the Indian economy? This question calls for an urgent answer.

    The methodology used to estimate the impact

    • We provide an initial, quantitative response, using a methodology that is based on the technique of input-output (IO) models, first elaborated by the economist Wassily Leontief.
    • How the model works: Such models provide detailed sector-wise information of output and consumption in different sectors of the economy and their inter-linkages, along with the sum total of wages, profits, savings, and expenditures in each sector and by each section of final consumers (households, government, etc.).
    • Crucially, it pays attention to intermediate consumption, namely consumption by some sectors of the output of other sectors (as well as consumption within their own sector).
    • Advantage of the model: The key advantage of such a model is that it allows the calculation of the impact of any change in any sector in both direct and indirect terms, which has made this model somewhat ubiquitous in the computation of the economic impact of disasters.
    • This also renders it well-suited to estimating the economic consequences of COVID-19.
    • Regrettably, the last officially published IO table for India was for the year 2007-2008.
    • In our estimates, we use the IO tables for India published by the World Input-Output Database for the year 2014 that updates the IO tables for individual countries using time series of national income statistics.
    • To calculate the impact of the lockdown, there are four different scenarios of the number of workdays lost in different sectors.
    • How daily output loss is calculated? Assuming that the estimated annual output is distributed uniformly across the year, it is possible to calculate the daily output and therefore the daily output loss.
    • The direct and indirect impacts of the lockdown are then estimated using IO multipliers which are assumed to be constant.
    • We then calculate the percentage decline in the national gross domestic product (GDP) of 2019-2020 that this impact amounts to.

    What is the impact on various sectors?

    • Loss at 7% to 33% of GDP: Model (see table) shows that the loss of GDP ranges from ₹17 lakh crore (7% of GDP) in the most conservative scenario, where the average number of output days lost is only 13, to ₹73 lakh crore (33% of GDP) in the most impactful scenario, where the number of days of lost output averages 67.
    • In intermediate scenarios of 27 and 47 days of lost output, the GDP decline is ₹29 lakh crore (13% of GDP) and ₹51 lakh crore (23% of GDP), respectively.
    • OECD estimate: These estimates also accord well with other estimates, such as those of the OECD that suggest a 20% loss to GDP for India.
    • Impact of varying lockdown period: Even assuming that sectors will have varying lockdown periods, all sectors face serious losses due to their
    • If we take the scenario where a prolonged lockdown happens, averaging about 47 days across sectors, we find that the mining sector faces the largest drop of 42% in value-added despite that sector itself being shut down for, say, 35 days.
    • The electricity sector sees a 29% fall in value-added, even though it faces no shut down per se.
    • Losses are expected across all sectors in terms of both wage compensation and the availability of working capital.

    Incorporation of feedback effect in estimates

    • The linear character of our estimates, intrinsic to IO analysis, does not allow incorporation of feedback effects and assumes that output commences where it left off without further constraints.
    • An attempt has been made to correct for this by using a varying number of days of output loss across sectors, but this is quite possibly inadequate to capture the continuing economic impact.
    • We are faced today with a unique situation where both supply and demand have collapsed in several sectors.
    • Impact on agriculture: In some sectors such as agriculture, the impact may manifest in the delayed fashion, if the anti-COVID-19 measures, or the pandemic itself, affects agricultural operations in the next the kharif season, even if, as reports suggest, much of this year’s rabi has been successfully harvested.
    • The shortfall in export not accounted for: Given the database, we are using and the initial character of our analyses we have also not explicitly accounted for possible shortfalls in exports due to lack of demand elsewhere in the world, as well as the unavailability of intermediate imported goods that are crucial for the Indian economy.
    • Nor are we able to adequately separate the impact on the informal sector, that is partially aggregated with the formal sector in the database that we are using and partially unaccounted for due to lack of data.

    Need for the huge stimulus package

    • The most striking feature of even this simple calculation is the all-round pervasive impact on the economy of the anti-COVID-19 measures that we are currently undertaking and that are likely to continue in modified form for a short period.
    • Measures such as debt relief, postponement of revenue and tax collections, immediate relief in cash and kind to the poor, and revamping and scaling up public distribution are all undoubtedly necessary but far from sufficient.
    • Our numbers suggest that the resort to huge stimulus packages that developed countries have already started putting in place is by no means mistaken.

    Way forward

    • Package for all the sectors of the economy: We need to compensate and pump cash into the hands of not only wage workers in the formal and informal sectors, and also into the livelihood activities of the informal sector.
    • But businesses too need to be primed with handouts in the case of small and medium enterprises, and with a variety of concessions even in the case of larger businesses.
    • It is critical to preserve the productive capacities of the Indian economy across the board. The annual budget of the current year, already passed, clearly cannot cope with such a massive effort and needs to be revisited by suitable parliamentary measures.
    • Caring too much about fiscal deficit will not be helpful: Redistributing expenditure, seeking to keep the fiscal deficit “under control” as it were, through measures such as cutting back on government salaries, are unlikely to be helpful.
    • Apart from sending the wrong signal to private sector employers, who have so far been exhorted to maintain salaries and wages during the lockdown, it is quite likely to lead to further reduction in demand since the government is the biggest employer in the country.
    • Ensure the key role of the state: Finally, one must note that the current crisis is not a transformatory moment for the Indian economy, even if the scale of the impact and recovery process will undoubtedly push the economy in new directions.
    • But “greening” the economy or more radical transformative measures are not particularly relevant in its current state.
    • What is needed is ensuring the key role of the state to lift up an economy that is in danger of being brought to its knees, and to restore some semblance of its normal rhythm, by an unprecedented scale of state investment.

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  • Communicable and Non-communicable diseases – HIV, Malaria, Cancer, Mental Health, etc.

    The law cannot fall silent

    op-ed snap | International Relations | Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 2-In fight against covid-19 epidemic we must follow the principles of international laws and treaty obligations.

    Context

    Amid the many developments in the wake of Covid-19 pandemic one of the facets that is also discussed is-How to read international law in the context of the pointers to the future?

    Constitutional duty regarding international laws

    • Respect for the norms and standards of international law is among the paramount constitutional duties of the state under Article 51 of the Constitution.
    • The duty is regardless of the quibbles on whether the language here refers only to treaty/obligations or also to customary international law.
    • International norms remain relevant: Despite US President Donald Trump’s recent threat of actions against the WHO, international norms, standards, and doctrines remain relevant to making national policy and law.

    Possibility of discussion over pandemic at UNSC

    • The difference between the United Nations as a site of normative discursivity and as a site of doing global power politics is sadly manifest even now in the accelerated pace of the pandemic.
    • Discussion extremely unlikely: President Trump’s insistence on calling it a “Chinese virus” renders it extremely unlikely that the pandemic will be discussed during the current monthly presidency of the UN Security Council by China.
    • Possibility of veto: The threat of veto by China and Russia will always loom large whenever the matter is placed for discussion.

    Role of the UN in the codification of law

    • The UN is also a site of systems of norm enunciation.
    • Along with the International Law Commission, it is responsible for the progressive codification of law.
    • The UN system has developed lawmaking and framework treaties as well as provided auspices for systems of “soft” law that may eventually become the binding law.
    • There are three types of international laws which are described below.

    1. The fundamental overriding principle of international laws

    • Jus cogens: Some of the norms of international law are robust and deeply relevant. For example, the peremptory jus cogens — a few fundamental, overriding principles of international law such as crimes against humanity, genocide, and human trafficking apply to all states.
    • And Article 53 of the Vienna Convention on the Law of Treaties goes so far as to declare that a “treaty is void if, at the time of its conclusion, it conflicts with a peremptory norm of general international law”.
    • And even when ingredients of genocide remain difficult to prove, the International Court of Justice (ICJ) has held, in 2007, that states have a duty to prevent and punish acts and omissions that eventually furnish elements for the commission of crime of genocide.
    • Erga omnes: There also exist erga omnes rules prescribing specifically-determined obligations which states owe to the international community as a whole.
    • This was enunciated by the ICJ in 1970 for four situations — the outlawing of acts of aggression; the outlawing of genocide; protection from slavery; and protection from racial discrimination.
    • A great significance of this judicial dictum is that it lays down obligations which transcend consensual relations among states.
    • In addition, there are three other sets of international law obligations.
    • These are primarily derived from the no-harm principles crystallised in the International Law Commission’s 2001 Draft Articles on the Prevention of Transboundary Harm (DAPTH) and the Paris Framework Agreement on Climate Change, 2015.
    • The DAPTH has carefully developed norms of due diligence, stressing all the way that these may be adapted to contextual exigencies.
    • But due diligence obligations certainly extend beyond local and national boundaries, especially because the environmental problems have a transboundary impact.
    • Each state is obliged to observe these standards in the fight against COVID-19 as a matter of international law.

    2. International laws dealing with core human right measures

    • No law or policy to combat epidemics or pandemic can go against the rights of migrant workers, internally displaced peoples, and refugees and asylum seekers.
    • Respect for the inherent dignity of individuals in combating COVID-19 and for the rights of equal health for all, non-discrimination, and the norms of human dignity further reinforce accountability and the transparency of state and other social actors.
    • Panicky and sadist policing, including shoot-a- sight orders in collective exodus situations, and militaristic responses to food riots de-justify health lockouts and curfews.

    3. International humanitarian law

    • The third set of obligations arises out of international humanitarian law. The Biological and Toxin Weapons Convention (BTWC) is pertinent here.
    • India did not subscribe to any conspiracy or racist theory about the origins of COVID-19 — in fact, India’s foreign minister rightly affirmed the BTWC obligations on March 26 (on the 40th anniversary of that Convention).
    • Surely, this global and non-discriminatory disarmament convention deserves applause because it outlaws a whole range of weapons of mass destruction.
    • India has, and rightly so, called for “high priority” to “full and effective implementation by all states parties”.

    Conclusion

    The starting point of a determined fight against COVID-19 has to be a full-throated repudiation of an ancient Latin maxim, inter arma enim silent leges (in times of war, the law falls silent). Combating this fearsome pandemic calls for re-dedication to nested international law obligations and frameworks.

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  • Government Budgets

    Financing the pandemic rescue package

    op-ed snap | Economics | Mains Paper 3: Government Budgeting

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 3-Options that government explore to finance the package announced in the wake of corona epidemic.

    Context

    The priority for India is to ensure that it overcomes the COVID-19 pandemic and kick-starts GDP growth.

    Financing strategy for the 1.7 lakh crores package

    • Rather than fix the weaknesses in the macroeconomy: a high fiscal deficit of 7.49% and government indebtedness that was 69% of GDP in 2019, the government wants to overcome the pandemic.
    • When COVID-19 cases began to increase, the Government of India (GoI) swung into action by announcing a 21-day national lockdown and a ₹1.7-lakh crore (approximately $22.59 billion) rescue package.
    • Financing strategy: Available in the state disaster relief fund is ₹60,000 crore, comprising ₹30,000 crore of the outstanding balance and the Central government’s allocation of a similar amount for FY2021.
    • Hence, the GoI needs to raise an additional ₹1.1-lakh crore,e., 65% of the rescue package outlay.
    • Its financing strategy should be to raise long-term funds at cost-effective rates, with flexible repayment terms that allow it to take tactical advantage of market movements.
    • Following are some of the options that the government can explore to raise the required amount.

    1. GDP-linked bonds

    • The GoI may issue listed, Indian rupee-denominated, 25-year GDP-linked bonds that are callable from, say, the fifth year.
    • What GDP-linked means? The coupon (interest) on a GDP-linked bond is correlated to the GDP growth rate and is subject to a cap.
    • The issuer, the GoI, is liable to pay a lower coupon during years of slower growth and vice-versa.
    • The callable feature from the fifth year till maturity allows the GoI to effect partial repayments during high growth years and when it earns non-recurring revenues such as proceeds from disinvestment of public sector enterprises (PSEs).
    • The listing of bonds provides investors with an exit option.
    • Examples from the world: Costa Rica, Bulgaria and Bosnia-Herzegovina issued the first pure GDP-linked bonds in the 1990s.
    • Argentina and Greece issued warrant-like instruments similar to GDP-linked bonds in 2005 and 2012 respectively. India could learn from their experience.
    • Timely GDP data is a prerequisite: Publishing reliable and timely GDP data is a prerequisite for the successful issue of GDP-linked bonds, which the GoI may use to part-finance the COVID-19 rescue package and to diversify its borrowing sources.

    2. Streamlining PSEs

    • The 15 largest non-financial central PSEs (CPSEs) in the S&P BSE CPSE index contributed approximately 75% of the GoI’s ₹48,256.41 crore dividend income from PSEs in FY2020.
    • The Union Budget projected PSE dividends to increase by 25% to ₹65,746.96 crore in FY2021.
    • This milestone is unlikely to be achieved in the current environment.
    • The 15 CPSEs have accumulated sizeable non-core assets including financial investments, loans, cash and bank deposits in excess of their operating requirements, and real estate.
    • The return on these assets (excluding real estate) is around 200 basis points lower than the returns on their core businesses.
    • These CPSEs owe the government ₹25,904 crore as of end-March 2019.
    • These non-core assets must be monetised to repay statutory dues and upstream dividends to GoI.
    • Formation of HOLDCO: While loans and excess cash and bank deposits may be monetised within three months, streamlining investments and selling real estate is a time-consuming process.
    • It is imperative for the GoI to form a PSE and public sector bank holding company (‘Holdco’) along the lines of Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional Berhad.
    • The Holdco will enable PSEs to monetise their non-core assets at remunerative prices, maximise their enterprise value and focus on their core businesses.
    • The ₹30,168 crore loans that CPSEs have extended to employees, vendors and associates may be securitised or refinanced, with CPSEs guaranteeing loans extended to weak counterparties.
    • Excess liquidity with PSEs: It is essential that businesses maintain liquidity, especially during a downturn. However, the outstanding cash and bank deposits of the 15 CPSEs (₹64,253 crore) is in excess of their operating requirements.
    • CPSEs must determine the cash they require to meet, say, six months of operating expenses and use the excess cash to repay statutory dues and upstream dividends to the GoI.
    • Banks must extend to CPSEs committed lines of credit that the latter may draw down during exigencies.
    • Financial investments of PSEs be transferred to HOLDCO: The 15 CPSEs have accumulated ₹93,562 crore financial investments comprising listed and unlisted debt, equity and mutual fund units.
    • These exclude investments in associates and joint ventures.
    • The CPSEs ought to transfer these investments to Holdco, which can manage the portfolio and transfer the returns to the original investors.
    • Real estate holdings of PSEs: One important non-core asset, whose value is likely to exceed the combined value of other non-core assets, is the real estate holdings of PSEs.
    • In September 2018, the GoI identified properties of nine PSEs (Air India, Pawan Hans, Hindustan Fluorocarbons, Hindustan Newsprint, Bharat Pumps & Compressors, Scooters India, Bridge and Roof Co, Hindustan Prefab, and Projects & Development India) to be divested.
    • The GoI must mandate all PSEs and government departments to transfer their non-core properties to Holdco, which can opportunistically sell these properties and transfer the proceeds to the owners.

    Refrain from asking RBI to pay more dividend

    • The Reserve Bank of India (RBI) has allocated ₹1 lakh crore to carry out long-term repo operations in tranches and has reduced the repo rates by 75 basis points to 4.4% to help banks augment their liquidity in the wake of the pandemic.
    • Recognising the RBI’s liquidity requirements, the GoI must refrain from asking the RBI to pay more dividends that it can viably pay.
    • During the five years ending on June 30, 2019, the RBI paid the GoI 100% of its net disposable income, with its FY2019 dividends more than trebling to ₹1.76 lakh crore from ₹50,000 crore in FY2018.
    • The Bimal Jalan panel constituted in 2019 to review the RBI’s economic capital framework opined that the RBI may pay interim dividends only under exceptional circumstances and that unrealised gains in the valuation of RBI’s assets ought to be used as risk buffers against market risks and may not be paid as dividends.

    Conclusion

    The Bimal Jalan panel recommendation must be adhered to in letter and spirit. The GoI may finance the COVID-19 rescue package by issuing GDP-linked bonds, tapping PSEs’ excess liquidity and monetising non-core assets.

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  • Finance Commission – Issues related to devolution of resources

    Needed, greater decentralisation of power

    op-ed snap | Polity | Mains Paper 2: Federalism

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Federal system.

    Mains level: Paper 2-Why it is said that there is a paradox in the federal system of India? Covid-19 has highlighted the need for decentralisation in India.

    Context

    Even as States have taken up positions of leadership in the pandemic response, federal limitations are becoming hurdles.

    State governments at the position of leadership

    • In the fight against the pandemic, one of the striking features of governance has been the signal role played by State Chief Ministers across India.
    • Proactive measures: Even before the Union government invoked the Disaster Management Act, 2005, many State governments triggered the Epidemic Diseases Act, 1897, and installed a series of measures to combat what was then an oncoming onslaught of COVID-19.
    • These actions have not always been perfect. Some of them have even disproportionately trenched upon basic civil liberties.
    • But, by and large, they have been tailored to the reality faced on the ground by the respective governments.
    • Policies to address local concerns: States such as Maharashtra, Kerala, Tamil Nadu, Rajasthan, and Karnataka have shaped their policies to address their direct, local concerns.
    • They have communicated these decisions to the public with clarity and consideration, helping, in the process, to lay out a broad framework for the nation.
    • Not just the laboratories of democracy: In doing so, they have acted not merely as “laboratories of democracy”, to paraphrase the former U.S. Supreme Court Justice Louis Brandeis, but also as founts of reasoned authority.

    Federal arrangements placing limitations on the states

    • Equally, though, as much as State governments have taken up positions of leadership, they have repeatedly found themselves throttled by the limitations of the extant federal arrangement.
    • The Centre for Policy Research has pointed out at least three specific limitations.
    • Funds and structuring own package: The inability of States to access funds and thereby structure their own welfare packages.
    • Curbs imposed by PFMS: The curbs imposed by a public finance management system (PFMS) that is mired in officialdom.
    • This has prevented States from easily and swiftly making payments for the purchase of health-care apparatus such as ventilators and personal protective equipment.
    • Disruption of supply chains: Three, the colossal disruption of supply chains not only of essential goods and services but also of other systems of production and distribution, which has placed States in a position of grave economic uncertainty.
    • Need to decentralise: As these limitations demonstrate an urgent need to decentralise administration, where States — and local bodies acting through such governments — are allowed greater managerial freedom.
    • Under such a model, the Union government will command less but coordinate more.

    Indian federalism-two distinct levels

    • There are varying accounts of what Indian federalism truly demands.
    • Two levels: What is manifest from a reading of the Constitution is that it creates two distinct levels of government: one at the Centre and the other at each of the States.
    • The Seventh Schedule to the Constitution divides responsibilities between these two layers.
    • The Union government is tasked with matters of national importance, such as foreign affairs, defence, and airways.
    • But the responsibilities vested with the States are no less important. Issues concerning public health and sanitation, agriculture, public order, and police, among other things, have each been assigned to State governments.
    • In these domains, the States’ power is plenary.
    • This federal architecture is fortified by a bicameral Parliament.
    • Significantly, this bicameralism is not achieved through a simple demarcation of two separate houses, but through a creation of two distinct chambers that choose their members differently-
    • A House of the People [Lok Sabha] comprising directly elected representatives and a Council of States [Rajya Sabha] comprising members elected by the legislatures of the States.

    Financial autonomy of the states

    • Ensuring financial autonomy: In formulating this scheme of equal partnership, the framers were also conscious of a need to make States financially autonomous.
    • No overlap: To that end, when they divided the power to tax between the two layers of government they took care to ensure that the authority of the Union and the States did not overlap.
    • Therefore, while the Centre, for example, was accorded the power to tax all income other than agricultural income and to levy indirect taxes in the form of customs and excise duties, the sole power to tax the sale of goods and the entry of goods into a State was vested in the State governments.
    • The underlying rationale was simple: States had to be guaranteed fiscal dominion to enable them to mould their policies according to the needs of their people.

    History of paradox in federal system of India

    • Despite this plainly drawn arrangement, the history of our constitutional practice has been something of a paradox.
    • It is invariably at the level of the States that real development has fructified.
    • But the Union has repeatedly displayed a desire to treat States, as the Supreme Court said in R. Bommai v. Union of India, as mere “appendages of the Centre”.
    • Time and again, efforts have been made to centralise financial and administrative power, to take away from the States their ability to act independently and freely.
    • Following five examples demonstrated that the point made here.

    1 Matters of finance-what was expected in theory did not realise

    • Consider the widely hailed decision to accept the 14th Finance Commission’s recommendation for an increase in the share of the States in total tax revenues from 32% to 42%.
    • While, in theory, this ought to have enabled the States to significantly increase their own spending, in reality, as a paper authored by Amar Nath H.K. and Alka Singh of the National Institute of Public Finance and Policy suggests, this has not happened.
    • What went wrong? Gains made by the States, as the paper underlines, have been entirely offset by a simultaneous decline in share of grants and by a concomitant increase in the States’ own contribution towards expenditures on centrally sponsored schemes.

    2. Goods and Service Tax

    • The decline in the sovereignty of the states: Notably, the creation of a Goods and Services Tax regime, which far from achieving its core purpose of uniformity has rendered nugatory the internal sovereignty vested in the States.
    • By striking at the Constitution’s federal edifice, it has made the very survival of the States dependent on the grace of the Union.
    • The tension today is so palpable that a number of the States are reported to have written to the Union Finance Ministry.
    • More than four months’ worth of Goods and Services Tax compensation to the States — reportedly totalling about a sum of ₹40,000 crore — remains unreleased.

    3. Passing a bill as a money bill

    • The Union government’s centralising instinct, though, has not been restricted to matters of finance.
    • It has also introduced a slew of legislation as money bills, in a bid to bypass the Rajya Sabha’s sanction, even though these laws scarcely fit the constitutional definition.

    4. Role of the Governors

    • Similarly, the role of the Governors has been weaponised to consolidate political power.

    5. Article 370

    • But perhaps most egregious among the moves made is the gutting of Article 370 and the division of Jammu and Kashmir into two Union Territories.
    • It was done without securing consent from the State Legislative Assembly.

    Conclusion

    Perhaps a crisis of the kind that COVID-19 has wrought will show us that India needs greater decentralisation of power; that administration through a single central executive unit is unsuited to its diverse and heterogeneous polity. We cannot continue to regard the intricate niceties of our federal structure as a nettlesome trifle. In seeing it thus, we are reducing the promise of Article 1 of the Constitution, of an India that is a Union of States, to an illusory dream.

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  • Foreign Policy Watch: India-Japan

    The wilting Sakura

    op-ed snap | International Relations | Mains Paper 2: Effect Of Policies & Politics Of World On India’S Interests

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 2- New avenues for cooperation between India and Japan.

    Context

    A resilient nation, Japan has risen from the ashes, phoenix-like, each time. It is now confronting COVID-19, which has wreaked havoc on global financial and economic systems and disrupted production, supply chains and markets.

    The cruise ship incident and no reprieve to the Japanese from Covid-19

    • COVID-19 received a high-rating televised start in Japan with the cruise ship, Diamond Princess, steaming into Tokyo Bay with 3,711 passengers on board and quickly being quarantined.
    • Over the next month, with more than 700 cases of infection on-board, it remained the single-largest cluster outside China.
    • Gradually, as numbers swelled exponentially elsewhere and the incidence of new cases remained low locally, the Japanese went back to their ways, with holiday crowds celebrating the annual Hanami (sakura viewing) season in idyllic spots
    • It seemed as if the Japanese had dodged the bullet even as it delayed until April 3 the blocking of tourists from 70-odd countries, including China, which accounted for nearly 9.6 million tourists in 2019, one-third of the total.
    • With new infections mounting in recent days, the reprieve, it seems, was as ephemeral as the bloom of the sakura.

    Postponing the Olympics

    • The biggest collateral damage of the fresh wave of COVID-19 infections in Japan is the belated decision to postpone the Tokyo Olympics to 2021.
    • It reminded the nation of the jinxed Olympics of 1940, which Japan was to host but fell victim to the Second Sino-Japanese War.
    • If the 1940 Olympics were intended to showcase Japan’s industrial and economic resurrection after the devastation of the 1923 Great Kanto earthquake, the 1964 Tokyo Olympics had symbolised the economic miracle in Japan after the ravages of the Second World War.
    • The 2020 Olympics, dubbed by Prime Minister Shinzo Abe as the “Recovery and Reconstruction Games”, were to demonstrate Japan’s mojo in the aftermath of the 2011 Triple Disaster.
    • Reports indicate that Japan has already spent $12.6 billion on the preparations for the Olympics.
    • Nikkei and Goldman Sachs estimate that the postponement of the games would easily set Japan back by another $5-6 billion.

    Impact on economy

    • Recession in the world: The pandemic could not have come at a worse time. The IMF has confirmed that COVID-19 has pushed the global economy into a recession, potentially much worse than the one in 2009.
    • The Japanese economy now faces the daunting prospect of a sharp contraction, with the OECD Report for March 2020 forecasting its GDP growth at 0.2 per cent in 2020.
    • Even before the global pandemic struck, Japan was dealing with the adverse effects on consumer spending of the hike in consumption tax from 8 per cent to 10 per cent.
    • Dwindling demand from China, where Japan has huge economic stakes, can only worsen the regional economic outlook already strained by US-China trade friction.
    • Abe’s decision this week to declare a month-long state of emergency in Tokyo and six other prefectures, alongside the release of a gargantuan stimulus package worth nearly $1 trillion, including cash doles and financial support to households and businesses, may help turn the tide.
    • However, providing healthcare to a rapidly ageing population in the face of an abrupt disruption in the sizeable inward flow of foreign care-givers will prove a daunting challenge.
    • Meanwhile, several prefectures that depend heavily on tourism from China and the Republic of Korea have suffered deep losses.

    Impact on Japan’s international commitments and initiatives

    • As one of the world’s richest countries, Japan can perhaps hope to cushion itself from such blows.
    • Whether the economic distress unleashed by COVID-19 also adversely impacts some of Japan’s commitments to its Official Development Assistance (ODA) or outlays for regional infrastructure and connectivity under flagship programmes such as the Expanded Partnership for Quality Infrastructure (EPQI), the Tokyo International Conference on African Development (TICAD) and the Indo-Pacific Business Forum, including the Blue Dot Network and LNG projects, remains to be seen.
    • This could well be true of the US too, in the context of the International Development Finance Corporation under the BUILD Act, aimed at countering China’s expanding writ across the region.

    Implications for Indo-Pacific region

    • The pandemic could have broader implications for military postures in the Indo-Pacific.
    • As it was seen in the outbreak of the COVID-19 virus onboard the US Navy’s Theodore Roosevelt, which had sailed from San Diego in January for a scheduled Indo-Pacific deployment.
    • It is at the centre of a controversy involving the sacking of its captain and the vessel’s ill-advised port visit to Da Nang in Vietnam earlier in March despite the high risk of contagion.
    • Of course, China’s PLA Navy (PLAN) could well be grappling with similar problems out at sea but, unlike in the democratic world, these facts will be treated as “state secrets”.
    • Opportunity for China to further its influence: As China gradually recovers from the pandemic, relatively earlier and faster than the West, Beijing’s “charm offensive” and leveraging of its deep pockets may help it to further its geopolitical influence.
    • Its assistance to developing countries in mitigating the impact of COVID-19 will create new scope to proselytise its governance and development models.

    India-Japan relations

    • Japan-China relations: A high-profile casualty of the pandemic is Chinese President Xi Jinping’s long-pending visit to Tokyo.
    • But Japan’s “mask diplomacy” and generous assistance to China at the start of the pandemic augur well for Sino-Japanese ties, which have improved in recent years, their inveterate differences notwithstanding.
    • India visit by Japan: Abe’s postponed visit to India, earlier scheduled to take place at the end of 2019, will be hard to resurrect before the pandemic is completely under control.
    • Nevertheless, the fundamental convergence of interests and the extraordinary political capital invested in the relationship by both PM Modi and Abe in recent years ensures that the Special Strategic and Global Partnership between India and Japan will remain robust.
    • New vistas for India-Japan cooperation: The pandemic opens up new vistas for cooperation in healthcare, non-traditional security and global governance, including reform of the UN and affiliated bodies such as the WHO whose contributions in the battle against COVID-19 are moot.

    How Japan tackled the pandemic so far?

    • So far, Japan had relied on its customary discipline and prevention methods, with an exhortation to the public to avoid the “three Cs” — closed spaces, crowded places and conversations at close proximity.
    • No lockdown: Japan has shied away from taking the bold approach that Modi took in announcing a 21-day nationwide lockdown.
    • The declaration of a state of emergency covering the megacities of Tokyo and Osaka and some prefectures would give local governors in the hardest-hit areas greater legal authority to impose curbs, albeit without the power to impose penalties.
    • Japan’s case-by-case approach to the reopening of schools by regional authorities has been criticised.
    • There have been calls for a strict lockdown before it is too late to avert the same fate as Italy, Spain and the US.
    • In a race to develop vaccine: With formidable scientific prowess at its disposal, Japan remains at the forefront in the race to develop a vaccine against COVID-19.

    Conclusion

    Prime Minister Abe is viewed by voters as a leader capable of taking bold decisions. If Abe’s administration overcomes the COVID-19 crisis despite the odds and succeeds in staving off a recession, there is every chance that the LDP might again amend its rules to grant him a fourth term. After all, it is not easy for any of his political rivals to step into his shoes in the middle of such a crisis.

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  • Government Budgets

    A different economic approach

    op-ed snap | Economics | Mains Paper 3: Government Budgeting,Indian Economy

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 3- How to balance the trade-off between the health of economy and public health.

    Context

    The Covid-19 pandemic and subsequent 21-day lockdown by India has forced us to resolve the public health versus economic health trade-off.

    The debate over lockdown

    • No clear idea on number of lives saved: As it fights COVID-19 with its meagre healthcare resources, India has chosen to bring the economy to a near halt with no clear idea of how many lives can be saved in this manner.
    • What is going to be the cost of this decision? The 21-day lockdown will reduce the gross value added (GVA) during this period to near zero.
    • More than half the GVA is contributed by the unorganised sector.
    • A disproportionate burden of the economic cost has fallen on this large segment.
    • Debate: The suffering of the stranded migrant labourers has set off a debate: is the disruption and the economic pain justified?
    • Is it worth sacrificing the economy to save lives?
    • And at the core of such questions is a policy dilemma: should public health matter more than economic health?

    So, what should be the policy objectives?

    • In time, a vaccine will become available. But the economy cannot remain shut until that happens.
    • A prolonged lockdown will extract a huge economic cost.
    • Therefore, the policy objective must be to find ways of ensuring that the lockdown ends early without compromising on public health.
    • Following are the policies that could ensure the twin objective of not ending lockdown without compromising on public health.

    1 The policy of aggressive testing and isolation

    • The economic cost of combating COVID-19 can be reduced by combining aggressive testing and isolation, a strategy proposed by economist Paul Romer for the U.S.
    • For it to work, people must be tested in large numbers.
    • Those who test positive must be isolated. This will make it unnecessary for the rest of the population to stay home and it will allow the economy to restart.
    • After ending the lockdown too, testing of randomly selected people must go on in large numbers, so that those found infected can be isolated.
    • Eliminating the fear of isolation: The success of this will depend on eliminating the fears associated with isolation. Such fears can be reduced only if isolation facilities are good.

    2 Ramp up the manufacturing capacity

    • The second precondition is the substantial ramping up of manufacturing capacities for medical-grade masks, gloves, gowns, ventilators, testing labs, etc.
    • This ought to be on a scale large enough for domestic use and, if possible, for exports for costs to be low.
    • The strategy calls for fully operational hospitals to be constructed in every district of the country in a matter of weeks.
    • Problem-solving of an unprecedented order will be required.
    • Recently, garment manufacturers in Coimbatore were asked to explore the possibility of re-purposing production lines to make masks.
    • There’s been no progress on this front, as the special-grade fabric required is difficult to source.
    • What about the funding? In normal times, governments wrestle with dilemmas such as whether to allocate the limited available tax money to education, health, public transport or a sop that could change the outcome of the next election in their favour.
    • But during a public health crisis, all resources must be used to ramp up healthcare capacities.

    Way forward

    • Investment in healthcare can resolve trade-off: Since the state of the lockdown is not a normal condition, the usual policy levers become ineffective.
    • Loan moratoriums and cash transfers can fend off bankruptcy and defaults for a few months and buy time on non-performing assets in banks.
    • But they cannot make good the GDP lost due to the economic shutdown because liquidity and cash released by monetary and fiscal policies cannot get transmitted to the real sector during an economic shutdown unless they are funnelled into the sector that is still active, which is healthcare.
    • If the public health sector can be the economy’s main engine for six months, the public health versus economic health trade-off can be resolved. The spread of COVID-19 will slow down.
    • The economic pain of combating the virus will reduce.
    • There will be jobs, including for low-skilled construction labourers. If planned and executed smartly, the severe health infrastructure deficit will get addressed.
    • Remove the price controls: Sadly, India’s economic policies for fighting COVID-19 are the opposite of what’s needed.
    • In a crisis, the first instinct of policymakers is to slap controls. Just about everything from masks to kits has been placed under price controls.
    • This has removed the incentive for private labs to ramp up capacities.
    • The government should fully subsidise testing: At zero MRP, more people with symptoms will come forward to get tested. Private labs will quickly ramp up capacities if they don’t have to worry about losses. The number of suppliers will increase. Costs will reduce. Private enterprise and technological innovations will come up with cheaper tests that produce results quicker.

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  • Foreign Policy Watch: India-SAARC Nations

    Preparing for SAARC 2.0

    op-ed snap | International Relations | Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 2- Revival of SAARC is the need of the hour amid corona crisis.

    Context

    A tweet by Prime Minister Narendra Modi resulted in the first-ever virtual summit of SAARC leaders on March 15. What has happened to this innovative exercise in health diplomacy since then?

    The follow-up after the video-conference of SAARC members

    • Considering that SAARC has been dormant for several years due to regional tensions, it is worth stressing that the fight against COVID-19 has been taken up in right earnest through a series of tangible measures.
    • First, all the eight member-states were represented at the video conference — all at the level of head of state or government, except Pakistan.
    • The Secretary-General of SAARC participated. They readily agreed to work together to contain the virus and shared their experiences and perspectives.
    • Second, India’s proposal to launch a COVID-19 Emergency Fund was given positive reception.
    • Within days, all the countries, except Pakistan, contributed to it voluntarily, bringing the total contributions to $18.8 million. Although it is a modest amount, the spirit of readily expressed solidarity behind it matters.
    • Third, the fund has already been operationalised. It is controlled neither by India nor by the Secretariat.
    • It is learnt that each contributing member-state is responsible for approval and disbursement of funds in response to requests received from others.
    • Fourth, in the domain of implementation, India is in the lead, with its initial contribution of $10 million.
    • It has received requests for medical equipment, medicines and other supplies from Bhutan, Nepal, Afghanistan, Maldives, Bangladesh and Sri Lanka.
    • Many requests have already been accepted and action has been taken, whereas others are under implementation.
    • Fifth, a follow-up video-conference of senior health officials was arranged on March 26.
    • The agenda included issues ranging from specific protocols dealing with the screening at entry points and contact tracing to online training capsules for emergency response teams.
    • Technical cooperation: Steps are now underway to nurture technical cooperation through a shared electronic platform as also to arrange an exchange of all useful information among health professionals through more informal means.

    Is the fund sufficient to deal with the grave threat?

    • So far, South Asia has not exactly borne the brunt of the pandemic.
    • Of the total confirmed cases in the world that stood at 12,89,380 on April 6 (according to the Johns Hopkins Coronavirus Resources Center), SAARC countries reported only 8,292 cases, representing 0.64%.
    • Reasons of lower spread not known: Whether the low share is due to limited testing, a peculiarity of the strain of the virus, people’s unique immunity, South Asia’s climate, decisive measures by governments, or just good fortune is difficult to say.
    • But it is evident that India’s imaginative diplomacy has leveraged the crisis to create a new mechanism for workable cooperation.
    • It will become stronger if the crisis deepens and if member-states see advantages in working together. Seven of the eight members already do.

    Is it the sign of revival of SAARC?

    • To conclude that SAARC is now returning to an active phase on a broad front may, however, be
    • In the backdrop of political capital invested by New Delhi in strengthening BIMSTEC and the urgings it received recently from Nepal and Sri Lanka to resuscitate SAARC, India’s foreign minister said that India had no preference for a specific platform.
    • But India was fully committed to the cause of regional cooperation and connectivity.
    • The challenge facing the region is how to relate to a country which claims to favour regional cooperation, while working against it.
    • Clearly, India has little difficulty in cooperating with like-minded neighbours, as it showed by forging unity in the war against COVID-19.
    • This is diplomatic resilience and leadership at its best.

    Conclusion

    Given the grave threat posed by the pandemic and other benefits that the multilateral platforms such as SAARC offers Both New Delhi and its friendly neighbours need to start preparing themselves for SAARC 2.0.

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  • WTO and India

    Between nationalism and globalism

    op-ed snap | International Relations | Mains Paper 2: Bilateral, Regional and Global Groupings and agreements involving India

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 3- Is the globalisation past its peak? what will be the impact of corona crisis on the globalisation?

    Context

    Although all world leaders have acknowledged the global imperative in dealing with the virus, they have put the nation first without much consideration to the collective action.

    The middle path between extreme globalisation and hyper-nationalism

    • ‘Nation first’ approach: Although all world leaders have acknowledged the global imperative in dealing with the virus, they have put the nation first. Are all nations now for themselves? Not so fast.
    • Sovereignty is certainly back. Solidarity is under stress, but not dead. The drift is towards a middle path between extreme globalism and hyper-nationalism.
    • The last few decades have seen the growing awareness of “global problems” like climate change and the need for “global solutions”.
    • Lack of collective action: The corona pandemic certainly adds to that consciousness. But as in the case of climate change, collective action is not easy to come by.

    Closing of the borders and the idea of a “borderless world”

    • One of the first steps most governments took during the current crisis was to shut down their borders.
    • The idea of a “borderless world” had gained much acceptance in recent years but is now under serious questioning.
    • For example, how the US, Canada and Europe are outbidding each other in buying medical material from China.
    • They are ready to pay a hefty premium if Chinese suppliers break from an earlier commitment.
    • Nations banning medicines: Meanwhile, many nations, including India, have banned the export of much-needed medicines and equipment to combat the virus.
    • Washington, which initially criticised other countries for limiting exports of essential drugs, has had no option but to go down that path as the toll from coronavirus rose rapidly.
    • Donald Trump is angry with 3M, one of the leading American producers of masks, for exporting to other nations at a time of huge domestic shortfall.
    • The US ban on exports of medical supplies came just days after the G-20 affirmed that its member states “will work to ensure the flow of vital medical supplies, critical agricultural products, and other goods and services across borders”.

    Globalisation and related ideas under stress

    • A testing time for two ideas: The problem is not that governments are being hypocritical. They are simply trapped in a crisis that is testing two important assumptions that guided the world in the last three decades.
    • One is that globalisation, with its long and transborder supply chains, generates prosperity through economic efficiency.
    • The second was that economic globalisation based on the dispersal of production will serve the interests of all nations.

    Opposition to globalisation in the West

    • The new objections to economic globalisation are not coming from the traditional champions of sovereignty in the East and the South, but the West.
    • It was North America and Europe that had preached the virtues of unhindered economic
    • They also championed the idea of globalism that will transcend national sovereignty in terms of both institutions and values.
    • New converts to nationalism and sovereignty began to appear in the West well before corona crisis.
    • Brexit to take control own borders: Britain walked out of the European Union claiming the need to “take back control” of its borders.
    • Storming the White House against all predictions in 2016, Trump has sought to push Washington away from the trinity of America’s post-war political commitments-to open borders, free trade, and multilateralism.
    • Globalisation and corona crisis: For Trump and his team, the corona crisis is confirmation of the dangers of excessive globalisation.
    • This argument is finding some resonance in Europe.
    • Addressing workers at a factory that makes masks in France, President Emmanuel Macron echoed the same feelings.

    Arguments against globalisation

    • An argument against efficiency: The efficiency argument of the globalists has been countered in the West by many who say societies are not merely economic units; they are also political and social communities.
    • The disadvantage to working people: While expansive globalisation has helped generate super-profits for the capital, it has put the working people at an increasing disadvantage.
    • Uneven distribution of benefits: The uneven distribution of the benefits from the dispersal of production and free movement of labour has undermined political support for economic globalisation in the West.
    • Role of China: Reinforcing this downward trend is the belief that China is misusing global economic interdependence for unilateral political advantage.
    • There were indeed strategic consequences to China’s emergence as the world’s factory.
    • After all, China is not a passive territory; it is an ancient civilisation with ambitions of its own.

    Future of globalisation and the role of China

    • The peak of expansive globalisation is over: While economic interdependence among nations can’t be eliminated, we might be past the peak of expansive globalisation and hyper-connectivity.
    • Many countries are likely to move to the diversification of external production, short supply chains and stockpiles of essential materials to limit vulnerability during times of crises.
    • China-West relations may change: The palpable anger against China in the US and beyond, for keeping the world in the dark about the spread of the coronavirus, has been magnified by Beijing’s “mask diplomacy” and political triumphalism after it got in control of the situation in Wuhan.
    • This anger is bound to translate into long-term changes in the relations between China and the West and some rearrangement of multilateral mechanisms.

    Conclusion

    Out of this restructuring new international coalitions are likely to emerge. Even as world leaders put their own respective nations first, they will also explore new forms of solidarity. Like the instinct for self-preservation, solidarity too is part of human nature.

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  • Hunger and Nutrition Issues – GHI, GNI, etc.

    Let no one go hungry

    op-ed snap | Governance | Mains Paper 2: Governance, Transparency & Accountability, Citizens Charters,NGO, SHG & Civil Society,Panchayats & Local Bodies,Poverty & Hunger

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 2-How steps government must take to ensure that the stranded labour are not left without food.

    Context

    The impact of the lockdown, effected from midnight of March 24, has been particularly severe on migrant workers. The state must utilise FCI stock for those who have ration cards and those who don’t.

    India’s labour force and impact of lockdown on it

    • Nearly one-fifth of India’s labour force consists of internal migrants.
    • As per the 2011 census, a quarter of the urban population consists of migrants.
    • These tend to be predominantly male, from the less developed northern states, in the lower-income strata, and dependent on daily wages or precarious livelihoods.
    • The impact of the lockdown has been particularly severe on migrant workers.
    • Uncertainty and reverse migration: Due to uncertainty over the duration of the lockdown, and about their own livelihoods and food security, the lockdown has led to massive reverse migration from cities back to villages.
    • Further, due to the absence of train and bus services, many of these workers took to simply walking back.
    • The ground reality of inadequate preparation or insufficient provision means that neither their anxiety nor plight is assuaged.
    • Migrant workers tend to depend on public eating places or community arrangements for food.
    • Under a lockdown, there is simply no choice for them, except to depend on the government’s efforts or charitable organisations.

    Utilising the grain stocks with the FCI

    • The government has a large stock of wheat and rice procured over the last three years.
    • Stock in excess of buffer norm: The buffer norm for April 1 is 21.4 million tonnes, against which the country had about 7 million tonnes on March 1: This comprises 27.5 million tonnes of wheat and 50.2 million tonnes of rice.
    • In most districts of India, the Food Corporation of India and state agencies have a storage capacity of more than the three months requirement of the public distribution system.
    • The warehouses are spread across all the districts in every state.
    • The government has already announced that an additional quantity of five kg of foodgrains will be provided, free of cost, to all ration card holders for the next three months.
    • Most of the unorganised labour and families migrating back from their place of work will probably have their ration cards in the villages itself.
    • So, it should not be much of a problem for them to find food during the period of lockdown.

    What should the state do to feed those who do not have ration cards

    • For those who do not have ration cards in the villages, it is the right time to use this extra stock of foodgrains.
    • Using school and Anganwadi infrastructure: In villages, primary schools have facilities for cooking mid-day meals for children. Some Anganwadi also have this facility. This infrastructure can be used to provide cooked meals to those who do not have ration cards in the villages.
    • The government can easily offer to meet their requirement of wheat and rice over the next three weeks and panchayats can be asked to meet a part of the expenditure required to purchase vegetables, spices and cooking oil.
    • The village panchayats which take up such a feeding programme must be provided Rs 20 per person per day from State Disaster Relief Fund for the expenditure on vegetables, cooking oil, spices, which are not covered by the PDS.
    • In some villages, the local community may also be willing to help the panchayats to feed such people.
    • Efforts must also be made by the panchayats to raise donations in kind from the local community for rabi pulses like chana (chickpea), masoor (lentil), matar (field pea) which are available in plenty in pulse-growing states.

    How to feed those who are stuck in the cities

    • A number of labourers and self-employed: In urban areas, as per the Periodic Labour Force Survey, there were about 6 crore casual labourers and four crore self-employed persons in 2017-18.
    • Even after the reverse migration to villages, there would still be millions of them who are stuck in cities at their place of work.
    • These are people who do not have any savings or source of income which can sustain them during the period of the lockdown. These people living in slums, in the poorer areas of cities, are in need of urgent assistance for food, at least for the next three weeks.
    • The most distressed at present are those stuck in the cities, or who have been walking hundreds of kilometres to reach their homes in small towns and villages.
    • Allocating funds form relief funds: The district collectors should be allocated funds from the State Disaster Relief Fund to provide them with food and open all community buildings en route for them.
    • Engaging various players: The states must engage NGOs, factories and charities including religious organisations to raise funds for meeting the expenditure on milk, eggs, cooking oil and vegetables, and even soaps and sanitisers.
    • More than 67,000 NGOs are registered with the Niti Aayog on their NGO Darpan platform — which was created to bring about a greater partnership between the government and the voluntary sector and to foster transparency, efficiency and accountability.
    • This is the time to use such a platform.
    • The Centre can easily provide free rice and wheat to the NGOs from its stock and the NGOs can provide cooked meals in urban areas for the next three weeks.
    • For one crore individuals, for three weeks, the government needs to provide just about 75,000 tonnes of rice. Since the milling of wheat would be difficult due to the closure of flour mills, only rice can be provided at this stage.

    Conclusion

    The rabi harvest is expected to be a bumper one. The utilisation of the FCI stock — for not only the ration card holders but also the non-ration cardholders, and for providing food to the poor stuck in urban areas — is the most appropriate use of the foodgrain stock with the government. This is urgent and must be done.

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

    Oil in a post-Covid world

    op-ed snap | Economics | Mains Paper 3: Infrastructure: Energy, Ports, Roads, Airports, Railways Etc.

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 3- Oil war in international oil market and implications for India.

    Context

    In the post-COVID world, India will, once again, confront the challenge of oil and gas supply security. We should, therefore, ask: What will be the landscape of the petroleum sector, post-COVID? And what should India do now to prepare for an uncertain and contingent energy future?

    Oil war and the death knell of OPEC

    • The concept of MAD (Mutually Assured Destruction) deterred the nuclear powers during the Cold War. It has had no such effect on the oil powers.
    • Implications of the decision of Saudi Arabia and Russia: At a time when the virus had pushed the global economy into recession, Russia and Saudi Arabia took a set of decisions last month that knocked the economic props from under the oil market.
    • What were the reasons behind the decisions: The Saudis decided to flood the market to hold onto market share and the Russians accepted the consequent decline in prices to push the US shale industry to the wall.
    • Future of OPEC: Both may achieve their objectives but they have sounded the death knell of OPEC and possibly that of the oil industry as well.

    Two reasons for the decline in the oil prices

    • Today, the price of oil, at just above $30/bbl , is at its lowest in a decade, and volatile downwards. The average price in 2019 was $64/bbl.
    • The reason is two-fold.
    • One, the Saudis have ramped up production from 9.8mbd (before the March meeting) to in excess of 12 mbd today.
    • Two, there has been an unprecedented COVID-induced crash in demand. This is because of the lockdown of the two main drivers of oil consumption — transportation and industry.
    • It is estimated that oil consumption in the current quarter will fall by approximately 25 mbd.
    • This is almost as much as OPEC’s production.
    • The Saudis and Russia may still come to an understanding that rallies the price.
    • There will be three major implications for the oil-producing countries.

    1. Budgetary crisis

    • Every major oil-exporting country will face a budgetary crisis.
    • Qatar has the most robust balance sheet of all OPEC members. But it still needs an oil price of around $40/bbl to balance its books.
    • Algeria has the weakest. It needs an excess of $100/bbl.
    • Saudi Arabia is at the Algerian end of the spectrum requiring a price of around $80/bbl.
    • Abundant foreign reserves: This does not mean these countries are about to go financially belly up. Most of them, the Gulf producers, in particular, have abundant sovereign reserves.
    • But what it does mean is they will be hard-pressed to sustain their social and economic commitments.
    • They will have to cut back on subsidies, raise taxes and the citizens will be required to tighten their belts.
    • What India should do? India should build into its oil supply plans with the likelihood of civil strife in these countries.

    2. Reconfiguration of the oil industry will take place

    • Already, at current prices, a large number of companies are finding it difficult to cover their cash costs and have been forced to cut production and shutter operations.
    • At even lower prices, they will become bankrupt.
    • Whatever the final outcome, one fact is clear. Those that survive the carnage will have substantially slimmed balance sheets and reduced valuations.
    • Exxon’s market capitalisation has, for instance, halved over the past month.
    • Implication for India: Against this backdrop, we should drop the expectation of international interest in BPCL. Or for that matter ME investment into India.
    • Ratnagiri refinery: The $40-billion Ratnagiri refinery project by Saudi Aramco and UAE will certainly not see the light of day.
    • We should also expect a drop in the intensity of domestic exploration.

    3. Behavioural changes and uncertainties

    • The world, post-COVID will be different from the world pre-COVID. Behaviours will shift and these will deepen uncertainties.
    • “Social distancing” may change the dynamics of “shared mobility”.
    • Teleporting may reduce business travel.
    • Heightened awareness of the porosity of national boundaries may accelerate the push towards decarbonisation? These uncertainties will push the petroleum market deeper into no man’s land.

    Way forward for India

    • Whatever be the shape of the post- COVID international petroleum market, India will be dependent on it to secure its domestic energy requirement. The question should, therefore, be asked. What should the decision-makers do today to respond to such a contingent and uncertain future?
    • 1. Increase the strategic reserves: It should fill the oil caverns with strategic reserves. Prices may fall further but rather than bottom fish, it should leverage the availability of capacity to secure discounted supplies.
    • The world has run out of storage capacity and producers may pay premium dollar to find space for their unsold cargoes.
    • 2. Reduce the dependency and risk: India should increase its imports of gas (LNG ) from Australia, Africa and the US.
    • This will reduce the political risks of dependency on oil supplies from the Middle East.
    • Gas is also now economically competitive. The landed price of LNG is low enough to kick-start some of the stranded gas-based power plants.
    • 3. Increase operational efficiency of oil companies: It should unthread the “patchwork quilt of authority” exercised by bureaucrats, regulators and politicians, which today stifles management and operational efficiency of the petroleum companies.
    • 4. Integrated energy policy: India should create an institutional basis for an integrated energy policy. If there is one message we must internalise from COVID, it is the importance of collaboration and coordination.

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