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  • Foreign Policy Watch: India-China

    China and WHO a new story

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 2- China's growing influence at UN agencies and how it matters for Indian and the world.

    Context

    The WHO leadership, especially its Director-General, has been accused of serving China’s interests rather than preparing the world against the spread of the virus.

    What is the basis of accusations?

    • The first basis for these charges is the WHO’s endorsement of the Chinese claim in mid-January that there was no evidence of human-to-human transmission of the virus.
    • Second, consistent support for Beijing’s handling of the crisis.
    • Third, WHO’s criticism of other nations for imposing travel restrictions to and from China.
    • Critics also believe the WHO lulled the world into complacence by delaying the decision on calling it a global emergency.

    The new geopolitics of multilateralism

    • Whatever the merits of the above arguments, they point to the new geopolitics of multilateralism,
    • It also disproves the assumptions in both the West and India on China’s role in the UN.
    • It also underlines Beijing’s success in the leveraging of international organisations for its national advantage.
    • Nations working together against the trans-national threat: On the face of it, the sentiment that nations must work together against common trans-national threats is an eminently sensible one. But it does not easily translate into concrete actions.
    • Example of failure to act against a common threat: Take climate change. Attempts at developing collective solutions to the problem over the last three decades have foundered.
    • Most leaders agree on the problem and the solutions but are not willing to accept the framework — either the domestic or international — for distributing the costs associated with the solutions.
    • The US-China rivalry angle to the coronavirus outbreak: The problem of the cost-benefit distribution is compounded by great power rivalries. The coronavirus has shown up at a moment of deepening tensions between the US and China.
    • The grave collective challenge that the virus constitutes has only sharpened the conflict.
    • The blame game between the two: The US blames Beijing for letting this virus become a global monster and Beijing is doing all it can to deny that the virus came out of China.

    How the relationship between China and WHO has transformed over the years?

    • WHO’s actions in the past: Nearly two decades ago, during the SARS crisis, WHO was at the front and centre of pressing China to come clean on the unfolding pandemic.
    • In 2003, it had issued the organisation’s first travel advisory ever on travel to and from the epicentre of the pandemic in southern China.
    • As the SARS crisis escalated, Beijing’s traditional arguments about the centrality of state sovereignty yielded place to a new policy of working with the WHO and taking proactive steps to reassure neighbours in South East Asia.
    • Reasons for change in WHO’s stance: Some attribute the turnaround in the relationship between Beijing and WHO to China’s growing financial contributions.
    • China’s efforts to expand clout: Observers of the UN point to something more fundamental — a conscious and consequential Chinese effort to expand its clout in the multilateral system.
    • China, which was admitted to the UN system in the 1970s, was focused on finding its way in the 1980s, cautiously raised its profile in the 1990s, took on some political initiatives at the turn of the millennium and seized the leadership in the last few years.

    How India and the West are reacting to China’s rise?

    • Unprepared to deal with China’s rise at UN: Neither the West nor India have been prepared to deal with the impact of China’s rise on the UN system.
    • The US and its allies bet that China will be a “responsible stakeholder”. Put another way, they hoped that China will play by the rules set by the West.
    • China’s ambitions: China, of course, wants to set its own rules. Only the political innocents will be shocked by China’s natural ambition.
    • India’s past alignment with China: India, which considered US dominance over the international institutions in the 1990s as a major threat, chose to align with China in promoting a “multipolar world”.
    • Delhi convinced itself that despite differences over the boundary, Pakistan and other issues, there is huge room for cooperation with China.
    • Replacing the US as the dominant force: To their chagrin, the West and India are being compelled to respond to a very different environment at the UN. China wants to replace America as the dominant force in the UN.
    • The US is now fighting back. Last month, Washington went all out to defeat the Chinese candidate for the leadership of an obscure UN agency called the World Intellectual Property Organisation.

    Implications of China’s rise for India

    • Chinese hegemony vs. American primacy: Delhi discovered that Chinese global hegemony could be a lot more problematic than American primacy.
    • After all, it is China that complicates India’s plans for membership of the Nuclear Suppliers Group, protects Pakistan against international pressures on cross-border terrorism, and relentlessly pushes the UN Security Council to take up the Kashmir question.
    • India now turns to the US and its allies to pursue some of its interests in the UN.
    • Multilateralism not an end in itself: Political ironies apart, if there is one lesson that India could learn from China’s experience with WHO and the UN, it is that multilateralism is not an end in itself for major powers.
    • It is an important means to secure one’s national interest and shape the international environment.
    • As a nation battered by the Cultural Revolution, China used international cooperation and global institutions to rebuild itself in the last decades of the 20th century.
    • Ready to reorder global governance: Having developed its economy and advanced its scientific and technological base, China is now ready to reorder global governance and become a rule-maker.
    • The effects are visible in the arena of global health.
    • China’s expanding global engagement with the WHO, its substantive international health assistance programmes, and an impressive domestic health technology sector are poised to boost China’s ambition to build a “Global Silk Road for Health’.

    Conclusion

    On its part, Delhi needs to intensify the recalibration of India’s multilateralism, rewrite its diplomatic lexicon at the UN, and build new political coalitions that will simultaneously contribute to India’s internal modernisation and enhance its international influence. The corona crisis is a good moment to start writing a new script for India’s own health diplomacy.

  • Issues related to Economic growth

    How policy can bridge the gap

    Note4Students

    From UPSC perspective, the following things are important:

    Mains level: Paper 3- Economic policy changes to mitigate the impact of slowdown on the vulnerable.

    Context

    India must use the windfall from oil to provide assistance to the most vulnerable to mitigate the impact due to COIVD-19 outbreak.

    Estimates of impact

    • Impact on major economies: Minus 40 per cent, -30 per cent, -22 per cent, and -14 per cent. These are the estimated impacts (at an annualised rate) on the quarterly growth rates of China, the UK, Eurozone, and the US because of the Covid-19 virus.
    • Even excluding China and those that are closely tied to its supply chain — Korea and Taiwan — emerging markets (EM) are expected to go into recession in the first half of 2020, with the second quarter taking the biggest hit at over an 8 per cent quarterly decline.
    • Impact on India: India will not be spared this growth shock. In fact, the economic impact could be deeper and longer in emerging markets where the capacity of public health systems is limited at the best of times.

    Prospects of recovery

    • Sudden stop to economic activity: We also know from the experiences of the countries already infected that the way to control the spread of the virus is through aggressive containment and social distancing that inevitably brings economic activity to a sudden stop.
    • There doesn’t seem to be a middle path. We also know that unlike natural catastrophes like earthquakes, capital stock is not destroyed by the virus.
    • Sharp recovery and conditions: Once the containment period is over and social interaction normalises, there is every reason to believe that activity can recover very sharply.
    • Unless the containment period is long because of capacity constraints in the healthcare system which could turn supply chain disruptions into a long-term problem, or the credit stress created by the lack of earning by households and firms during the sudden stop stymies the recovery.

    India needs to brace itself

    • Unfortunately, India, where the virus still appears to be in the early stage, needs to brace for such a sudden stop.
    • The lockdown could be for an extended period given the already stretched public health system.
    • Impact on urban economy: The swathe of the economy that depends on social interaction — retail sales, entertainment, restaurants, and importantly construction and manufacturing — is very large.
    • Even if one believes that rural areas with relatively low population densities will not be affected much, the impact on urban economic activity could be very large.

    Role of economic policy

    • What is the role of economic policy in such circumstances? It needs to “bridge the gap” between the brutal downturn and the eventual recovery.
    • While public health policies force a sudden stop in the economy to save lives, economic policies need to ensure that the impact from the shutdown is cushioned, incomes of households and firms supported, credit stress is contained, and the recovery is not hamstrung by policy headwinds.
    • This requires policy support to be operated on various fronts.
    • Role of the Central bank: Central banks not only need to cut rates but also need to provide adequate liquidity and extend regulatory forbearance to prevent credit stress and non-performing loans from clogging up the already strained financial system when the economy starts to recover.
    • Role of fiscal policy: The role of fiscal policy is even larger, from direct and indirect tax cuts or postponement to targeted credit support for sectors that are likely to be most affected such as airlines and retail trade.
    • Support to the vulnerable: The key is income support to the most vulnerable: From daily wage earners to SMEs (small and medium enterprises).
    • Using JAM trinity for cash transfer: It is here that the government’s efforts over the last five years make India one of the best-placed economies to deliver such cash transfers.
    • Since 2015, substantial time, effort, and resources have been expended to establish Jan Dhan (bank accounts), Aadhaar and mobile banking (JAM), and Mudra, the programme that dispenses loans to SMEs.
    • The objective of JAM and Mudra is to use Aadhaar as a way of accurately identifying beneficiaries and use mobile banking to digitally and seamlessly transfer cash/subsidies directly to households’ bank accounts and provide loans to SMEs without any leakages.
    • According to government reports, the total number of Jan Dhan accounts stand at around 380 million and 59 million MUDRA loans were sanctioned last year.
    • For a country with a population of 1.3 billion and about 63 million SMEs, even if there are duplicate accounts, JAM and Mudra should be able to cover almost all households and SMEs.
    • With Aadhaar accurately targeting beneficiaries, leakages should be minimised. If there ever was a time that India needed JAM and Mudra it is now.

    Issue of fiscal space and solution

    • Some will argue that India doesn’t have the fiscal space. But it does.
    • Use oil windfall: In the last month or so, the crude oil price has dropped from around $60/bbl to around $30 and is likely to stay at this level given the breakdown in agreement among oil-producing countries and the massive collapse in global demand.
    • If the government simply taxed the oil windfall by raising excise duties, as it did during the 2014-15 oil price collapse, it could potentially raise almost 1 per cent of GDP or a staggering Rs 2.25 trillion.
    • If 50 million households have to be provided assistance because of the shutdown, it comes to about Rs 14,000 per month for three months or about Rs 24,000 a month to half of the 63 million SMEs.
    • And this without even having to increase this year’s budgeted deficit.

    Conclusion

    The government might have other uses for the oil windfall. But if India is forced into lockdown, the economic costs will be very large and the recovery will crucially depend on whether the pilot-light of the economy is kept lit through this period. This critically requires income transfers to vulnerable households and SMEs. India cannot complain that it does not have the fiscal space or the infrastructure to provide it.

  • Innovations in Sciences, IT, Computers, Robotics and Nanotechnology

    Picking up the quantum technology baton

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: NM-QTA

    Mains level: Paper 3- Research on Quantum technology and its applications in India.

    Context

    With the Budget announcement providing direction for the development in quantum technology, the stakeholders need to roll-out the national mission quickly.

    Pushing India into second quantum revolution

    • Budgetary allocation for NM-QTA: In the Budget 2020 speech, Finance Minister Nirmala Sitharaman made a welcome announcement for Indian science — over the next five years she proposed spending ₹8,000 crores (~ $1.2 billion) on a National Mission on Quantum Technologies and Applications.
    • This promises to catapult India into the midst of the second quantum revolution, a major scientific effort that is being pursued by the United States, Europe, China and others.

    Timeline of the development of Quantum Mechanics

    • Science to describe nature on atomic-scale: Quantum mechanics was developed in the early 20th century to describe nature in the small — at the scale of atoms and elementary particles.
    • Foundation for understanding: For over a century it has provided the foundations of our understanding of the physical world, including the interaction of light and matter.
      • It also led to ubiquitous inventions such as lasers and semiconductor transistors.
      • Despite a century of research, the quantum world still remains mysterious and far removed from our experiences based on everyday life.
    • Second revolution: A second revolution is currently underway with the goal of putting our growing understanding of these mysteries to use by actually controlling nature and harnessing the benefits of the weird and wondrous properties of quantum mechanics.
    • Challenge of experimental realisation: One of the most striking of these is the tremendous computing power of quantum computers, whose actual experimental realisation is one of the great challenges of our times.
    • Quantum supremacy: The announcement by Google, in October 2019, where they claimed to have demonstrated the so-called “quantum supremacy”, is one of the first steps towards this goal.

    Applications and challenges

    • Applications: Besides computing, exploring the quantum world promises other dramatic applications including the creation of novel materials, enhanced metrology, secure communication, to name just a few.
      • Some of these are already around the corner.
      • Application in communication: China recently demonstrated secure quantum communication links between terrestrial stations and satellites.
      • Applications in cryptography: Computer scientists are working towards deploying schemes for post-quantum cryptography — clever schemes by which existing computers can keep communication secure even against quantum computers of the future.
      • Exploring fundamental questions: Beyond these applications, some of the deepest foundational questions in physics and computer science are being driven by quantum information science. This includes subjects such as quantum gravity and black holes.
    • The need for collaboration: Pursuing these challenges will require unprecedented collaboration between physicists (both experimentalists and theorists), computer scientists, material scientists and engineers.
    • Challenges on the experimental front: On the experimental front, the challenge lies in harnessing the weird and wonderful properties of quantum superposition and entanglement in a highly controlled manner by building a system composed of carefully designed building blocks called quantum bits or qubits.
      • These qubits tend to be very fragile and lose their “quantumness” if not controlled properly, and a careful choice of materials, design and engineering is required to get them to work.
    • Challenges on the theoretical front: On the theoretical front lies the challenge of creating the algorithms and applications for quantum computers.
      • These projects will also place new demands on classical control hardware as well as software platforms.

    Where India stands

    • India late in starting work on technology: Globally, research in this area is about two decades old, but in India, serious experimental work has been underway for only about five years, and in a handful of locations.
    • What are the constraints on Indian progress in this field? So far we have been plagued by a lack of sufficient resources, high-quality manpower, timeliness and flexibility.
      • Resource and quality manpower problem: The new announcement in the Budget would greatly help fix the resource problem but high-quality manpower is in global demand.
      • In a fast-moving field like this, timeliness is everything — delayed funding by even one year is an enormous hit.
    • A previous programme called Quantum Enabled Science and Technology has just been fully rolled out, more than two years after the call for proposals.
    • Laudable announcement: One has to laud the government’s announcement of this new mission on a massive scale and on a par with similar programmes announced recently by the United States and Europe.

    Limits and way forward

    • But there are some limits that come from how the government must do business with public funds.
    • Role of the private sector: Here, private funding, both via industry and philanthropy, can play an outsized role even with much smaller amounts.
    • For example, unrestricted funds that can be used to attract and retain high-quality manpower and to build international networks — all at short notice — can and will make an enormous difference to the success of this enterprise.
    • Private participation is the effective way: This is the most effective way (as China and Singapore discovered) to catch up scientifically with the international community, while quickly creating a vibrant intellectual environment to help attract top researchers.
    • Connection with industry: Further, connections with the Indian industry from the start would also help quantum technologies become commercialised successfully, allowing the Indian industry to benefit from the quantum revolution.
    • We must encourage industrial houses and strategic philanthropists to take an interest and reach out to Indian institutions with an existing presence in this emerging field.
    • For example, the Tata Institute of Fundamental Research (TIFR), home to India’s first superconducting quantum computing lab, would be delighted to engage.
  • Foreign Policy Watch: India-SAARC Nations

    Test of regional solidarity lies ahead

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 2- Prospects of revival of SAARC and India's leadership in the aftermath of COVID-19.

    Context

    If PM Modi’s gesture to SAARC is to go some way towards a solution for the region, India, which will be picking up the pieces itself, must have something to offer to its neighbours.

    Background

    • Not a viable option: Since 2014, when the last SAARC summit was held in Kathmandu, India had made it more than clear that it no longer considers the South Asia grouping viable.
      • It was Islamabad’s turn to host the next summit in 2016, but the Uri attack intervened, and India refused to attend.
    • SAARC in limbo: Under the SAARC charter, the summit cannot be held even if a single nation stays away, and the grouping has remained in limbo since.
    • India’s increased engagement with other groups: In the last five years, India has actively sought to isolate Pakistan in the region.
      • India hyped up its engagement with other regional groupings such as-
      • BBIN (Bangladesh-Bhutan-India-Nepal), and
      • BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation), which includes Bangladesh, India, Myanmar, Sri Lanka, Thailand, Nepal and Bhutan.

    How to read the sudden resurrection of SAARC?

    • Officials denied revival speculation: Despite hopes that this might be a SAARC revival, officials have discounted such speculation. That would require India to climb down from its position that Pakistan has taken verifiable steps to address India’s concerns on terrorism. There is no evidence at all that Delhi is about to do that.
    • No hope of move from Pakistan: It would need Pakistan to turn over a new leaf, stop playing with free radicals to use against India, in Kashmir or elsewhere when the time is ripe. Neither is about to happen.

    No cooperative response in the works

    • First to call the neighbours: At a time when leaders across the globe appeared to be engrossed in the COVID-19 calamity of their own nations, Modi was the first to think of calling the neighbours.
    • Why cooperation among neighbours matter? Almost all South Asian countries are bound to each other by land borders and frequent inter-travel, and it is important that the region liaises to stop the disease from spreading across the Subcontinent.
    • Countries not willing to learn from each other: It was a trifle disappointing, therefore, that beyond the experience of witnessing a unique video summit, there is not much to suggest that a cooperative response is in the works.
      • There is no evidence that each country is willing to learn from the other’s experiences, or public health systems, or that we are tracking each other’s data and responses.
    • What were the proposals made in the summit? Two proposals were made:
      • One by India for a regional fund that Modi has generously offered to put aside $10 million for.
      • Pakistan proposed the setting up of a diseases surveillance centre for sharing real-time data. India has said it would prepare emergency response task forces to help out the member countries in need.
      • Delhi is said to be in the process of sending medical supplies worth $1 million to Nepal, Afghanistan, Sri Lanka, Bhutan and Maldives, which sounds like a fraction of what they may eventually require.
      • Pakistan has said China will give it testing kits, protective gear and portable ventilators, as well as a cash grant for a state-of-the-art isolation centre.
      • Beijing, eager to live down its image as the point of origin for this global mayhem, will make the same offer to other South Asian countries soon.

    What were the lessons India need to learn from video-summit?

    • Indian need to go beyond Big Brother events: If the intention was to try and restore the aura Prime Minister Modi enjoyed in the region at the beginning of NDA-1, as some have not improbably suggested, it has to go beyond this Big Boss event.
      • The video summit saw polite attendance by all SAARC leaders, with the exception of Pakistan which sent its health minister.
      • But going by the scant media coverage that the summit, the first after six years, received in the neighbourhood, no one is holding their breath.
    • India has lost heft it once held: For many countries in the region now, India has lost the heft it used to have in the last century.
      • A proximate reason is that it is no longer an economic powerhouse nor holds the promise of being one in the near future.
      • The other reason is that it no longer offers itself as a model nation, pulling together its complex diversities, pluralism and political ideologies in a broad-minded vision.
    • CAA factor and changing the perception of India: The real damage to India’s standing was, of course, done by the badmouthing of the Muslim countries in the neighbourhood to justify the Citizenship (Amendment) Act 2019.
      • Larger image of themselves: Seen from the eyes of other countries in South Asia today, India is now just a larger version of themselves and their political and economic dysfunctions.
      • While additionally possessing and wielding the instruments to be vengeful and punitive in its foreign policy — including arm-twisting them now and then in its constant quest to isolate Pakistan.

    Conclusion

    • The real test for India lies ahead: The real test of Modi’s leadership of South Asia, and by extension of India’s, will come after the pandemic subsides, when each country has to deal with what remains of its economy.
      • The tourism economy of Bhutan, Maldives, Nepal and Sri Lanka would have been crushed by then. Pakistan will be worse off than it is now.
      • There will be more unemployment and hardship everywhere in the region.
      • Some of these countries will inevitably turn to China.
    • India must have something to offer as a solution: If Modi’s gesture is to go some way as part of the solution for the region, India, which will be picking up the pieces itself, must have something to offer to its South Asian neighbours six months to a year down the line.
      • Is there such a plan? Can India put aside the prejudices of its domestic communalism, and its own economic woes, demonstrate large-heartedness to all the countries of the region, irrespective of what religion its people follow, irrespective of its historical hostilities with at least one?
      • There may be more economic refugees knocking on India’s doors, apart from a host of other inter-regional problems.
  • Coronavirus – Health and Governance Issues

    Get a step ahead of the virus

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 2- What are the attitudinal problems in India's healthcare system and how India should deal with the outbreak of COVID-19?

    Context

    The COVID-19 pandemic has repercussions beyond the biomedical sector — it impinges on industry, transport, finance, banking and education sectors. All of them must act in unison.

    Virus different from its nearest relative

    • Comparison with SARS and MERS: The rapid spread of the zoonotic (transmitted from animal-to-human) coronavirus infection in Wuhan in China — several hundreds every day — in December 2019 and January 2020 was a clear signal that COVID-19 is drastically different from its nearest relative viz.-
      • the Severe Acute Respiratory Syndrome (SARS) coronavirus,
      • and its distant relative, the Middle-East Respiratory Syndrome (MERS) coronavirus.
      • The former spread slowly among humans in 2002-2003. It was checked globally within nine months by screening passengers and quarantining travellers from infected countries.
      • There have been no cases since July 2003. MERS coronavirus is, by and large, an inefficient spreader — it has been confined to the Middle-East.
    • How COVID-19 is different? COVID-19 has assumed a pandemic form.
      • In less than three months, it has reached more than 180 countries and claimed more than 10,000 lives.
      • The disease has claimed more people in Italy than in the country of its origin.
      • Travel bans, screening travellers and quarantines are necessary to slow the spread of COVID-19.
      • However, there is a limit to the utility of these measures.
    • Community transmission: When the infection becomes widespread, screening procedures will become inefficient — the virus will spread stealthily.
      • Indigenous transmission — the virus spreading within communities — has begun in many countries.
      • This is typical of viruses that spread from human to human through the respiratory system.

    How India’s health management systems deals with the disease burden?

    • Medicine consists of three components —
      • universal healthcare,
      • public health, and
      • research to constantly contextualise solutions to local problems.
    • Reaction after falling ill: Many of us in India believe that disease is a matter of fate or karma and disease prevention is not always in human hands — we only react after falling ill.
    • No focus on prevention and control: Therapeutics and surgeries — healthcare interventions — are valued much, but not disease prevention and control.
    • Cultural beliefs matter: Attitudes and cultural beliefs do matter. If victims are somehow regarded as responsible for their maladies, universal healthcare is perceived as an optional service — not mandatory.

    Good reasons to change the attitude

    • There are good reasons for such thinking to change.
    • Every person who contracts a communicable disease stands the risk of spreading it to others.
    • Prevention of disease is states’ duty: At the same time, the state, too, is responsible for the spread of diseases by not mitigating the environmental and social risk factors or determinants. Prevention of disease is the state’s duty.
    • Investment in health and its implications: Healthy people create wealth. For example, every year, uncontrolled tuberculosis drains India’s economy of the equivalent of the GDP of roughly 2 million people.
      • Investment in health, therefore, can have implications for the country’s economy.
      • But Indians have never really demanded an effective public health system.
      • Healthcare has never become a political slogan. That’s one reason for the sorry state of India’s public health system.
    • Absence of effective public health system: The country does have international obligations to control TB, malaria and leprosy, and eliminate polio.
      • Ad hoc measures: In the absence of an effective public health system, the country has depended on fulfilling these obligations through ad hoc measures that are targeted towards one disease.
      • Need for robust health system: Robust public health systems are needed to prevent typhoid, cholera, dysentery, leptospirosis, brucellosis, water-born hepatitis and influenza.
    • Overburdened healthcare system with communicable disease: The absence of an effective preventive element means that healthcare services in the public sector are over-burdened with uncontrolled communicable diseases.
      • The entry of the private sector: This encourages private sector healthcare providers to step in, which brings in problems related to unregulated profits.
      • Questions are often raised over the quality of service.
      • COVID-19 could compound the systems problems: Moreover, uncontrolled communicable diseases vie with the non-communicable ones for the healthcare provider’s attention. The COVID-19 outbreak could compound the system’s problems.

    One step ahead of the virus

    • SARS and Nipah in Kerala: The SARS and Nipah virus outbreak in Kerala in 2018 were crises that required short bursts of professional activity. Our healthcare systems coped with them.
      • But endemic diseases, even influenza, that has a vaccine, require sustained interventions.
    • Test for the country’s healthcare system: Herein lies the test for the country’s healthcare system.
      • It has often been seen that the system is not able to sustain its initial momentum.
      • There is a possibility that COVID-19 could follow the path taken by the HINI influenza – after the epidemic died down, the disease became endemic.
      • The country’s healthcare system has to prepare for that. In other words, it has to be one step ahead of the virus.

    Way forward

    • Equipping district hospitals: Every district hospital must be equipped to diagnose infections caused by serious communicable diseases — these affect the lungs, brain, liver and kidneys.
      • The system should also ensure that healthcare personnel do not get infected.
    • Allocate 5% of GDP to health budget: The country needs to allocate 5 per cent of the GDP to the health budget to have a health management system that can take care of public health emergencies such as the COVID-19 outbreak — and its aftermath.
    • Unified control machinery: A unified command and control machinery, under the prime minister’s guidance, to control the spread of COVID-19 is overdue by at least six weeks in the country.
    • Define the tasks of various authorities: The tasks of the Directorate-General of Health Services, National Centre for Disease Control, Indian Council of Medical Research, National Health Mission and state health ministries must be clearly defined.
    • The mechanism for coordination: Most importantly, a mechanism for coordination between these agencies should be set up to deal with the COVID-19 threat.

    Conclusion

    The COVID-19 pandemic has repercussions beyond the biomedical sector — it impinges on industry, transport, finance, banking and education sectors. All of them must act in unison.

  • Foreign Policy Watch: India-SAARC Nations

    Going regional

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: SAARC and BIMSTEC

    Mains level: Paper 2- Why should India revive the SAARC?

    Context

    Prime Minister Narendra Modi signalled a change in India’s rejection of SAARC as a platform for regional cooperation by inviting all heads of state and government of SAARC countries to a video summit to promote a region-wide response to the Covid-19 pandemic.

    SAARC in virtual deep freeze

    • Who attended the video conference? The video summit was attended by all SAARC leaders, except for Prime Minister Imran Khan of Pakistan, who deputed his special assistant for health to represent him.
    • Status of SAARC: SAARC has been in a virtual deep freeze since India conveyed it would not attend the 19th SAARC summit, to be hosted by Pakistan in 2017, in the wake of the cross-border terrorist incidents at Pathankot and Uri.
      • Other SAARC leaders also declined to attend.
      • The summit was indefinitely postponed.
    • Focus on BIMSTEC: Since then India has downgraded SAARC as an instrument of its “Neighbourhood First” policy and shifted the focus to the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) instead.

    Backdrop of SAARC revival

    • For his swearing-in ceremony in 2014, PM Modi had invited leaders of all SAARC countries including Pakistan.
    • For the swearing-in ceremony in 2019, it is BIMSTEC leaders who were the invited guests.
    • Soon after taking over as external affairs minister, S Jaishankar referred to SAARC having “certain problems” while BIMSTEC was described as having both energy and possibility and “a mindset which fits in with that very optimistic vision of economic cooperation that we want.”
    • Deliberate political message: Against this backdrop, Modi’s initiative in convening a SAARC video summit, instead of a BIMSTEC video summit, conveys a deliberate political message.

    Proposal of SAARC Covid-19 Fund and Health Ministers’ Conference

    • At the conference, Modi gave a call for the countries of SAARC “coming together and not going apart.”
    • A SAARC Covid-19 Fund has been proposed with India committing US$10 million.
    • Modi referred to the role which could be played by an existing SAARC institution, the Disaster Management Centre, in enabling a coordinated response to Covid-19.
    • Suggestions were made by several leaders, including the Pakistani representative, for a SAARC Health Ministers’ Conference to follow up on the summit. This is likely to be convened soon.

    Pakistan on defensive

    • India seen as undermining SAARC: Modi’s initiative has put Pakistan on the defensive. So far, it was India which was seen as undermining SAARC in which other South Asian countries have a keen interest.
    • BIMSTEC no alternative to SAARC: While there has been readiness on their part to participate in BIMSTEC, they do not consider the latter as an alternative to SAARC. In taking this initiative, Modi may be responding to these sentiments.
    • Onus on Pakistan: If Pakistan now drags its feet, then the onus will be on her for weakening the Association.
      • There is a new situation as a result of the abrogation of Article 370 relating to Kashmir, which has been denounced by Pakistan.
    • Difficulty for Pakistan: It would be difficult for Pakistan to accept cooperation with India under SAARC because this would compromise its stand on Kashmir.

    BIMSTEC not delivered expected results

    • Not yielded the expected result: It is also a fact that the focus on BIMSTEC has not yielded the results India may have expected.
    • Trade below the set target: Current trade among its members is US$40 billion, though the potential was set at $250 billion.
    • Act East policy stalled: India’s Act East policy, which involved a key role for India’s Northeast, has stalled.
    • RCEP factor: The Northeast is in political turmoil while India has opted out of the Regional Comprehensive Economic Partnership (RCEP), which would have added substance to BIMSTEC.

    Why India should revive SAARC

    1.BIMSTEC not a credible option to SAARC

    • Today it is difficult to see BIMSTEC as a credible and preferred alternative to SAARC.
    • Cooperation both through SAARC and BIMSTEC: In any case, it makes better sense for India to pursue regional economic cooperation both through SAARC as well as BIMSTEC rather than project them as competing entities.
    • SCO membership a contradictory position: If the argument is that regional cooperation involving Pakistan is a non-starter due to its ingrained hostility towards India, then being part of Shanghai Cooperation Organisation (SCO), where both are members, becomes a somewhat contradictory position.

    2.The China factor

    • China making inroad into the neighbourhood: In determining its position towards SAARC, India must also take into account the significant inroads that China has been making in its sub-continental neighbourhood.
    • BRI initiative: With the exception of Bhutan, every South Asian country has signed on to China’s ambitious Belt and Road Initiative (BRI).
      • A number of Chinese infrastructure projects are already in place or are being planned in each of our neighbours.
    • China likely to become a key player: With SAARC becoming inoperative and BIMSTEC not living up to its promise, China is likely to become a key economic partner for South Asia and India’s hitherto pre-eminent role will be further eroded.
      • On this count, too, it is advisable for India to advance regional cooperation both under SAARC as well as BIMSTEC. Both are necessary.

    3.Pakistan factor

    • Should not give up on Pakistan: Despite the frustration in dealing with Pakistan, India should not give up on its western neighbour.
    • Relation needs to be managed: Relations with Islamabad will remain adversarial for the foreseeable future but still need to be managed with two ends in mind.
      • One, to ensure that tensions do not escalate into open hostilities and,
      • two, to reduce leverage which third countries may exercise over both countries on the pretext of reducing tensions between them.
    • No compromise in position on terrorism: This does not in any way compromise our firm stand against cross-border terrorism emanating from Pakistan. The revival of SAARC could be an added constraint on Pakistan’s recourse to terrorism as an instrument of state policy.

    4.Afghanistan factor

    • Finally, the revival of SAARC would also support the Ashraf Ghani government in Kabul in navigating through a difficult and complex peace process involving a Pakistan-sponsored Taliban.

    Conclusion

    While these are essentially tactical considerations, there is a compelling reality which we ignore at our peril. Whether it is a health crisis like the Covid-19 or climate change, the melting of Himalayan glaciers or rising sea levels, all such challenges are better and more efficiently dealt with through regional cooperation. The Indian Subcontinent is an ecologically integrated entity and only regionally structured and collaborative responses can work.

  • Human Rights Issues

    Giving Human Rights Commissions more teeth

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 2- Need to entrust the Human Right Commissions with more powers.

    Context

    The Madras High Court is to decide on whether the recommendations made by such panels are binding upon the state.

    A fourth branch institution

    • Enactment of the Act and its purpose: In 1993, the Indian Parliament enacted the Protection of Human Rights Act.
      • Purpose: The purpose of the Act was to establish an institutional framework that could effectively protect, promote and fulfil the fundamental rights guaranteed by the Indian Constitution.
      • To this end, the Act created a National Human Rights Commission, and also, Human Rights Commissions at the levels of the various States.
    • What is fourth branch institution: The National and State Human Rights Commissions are examples of what we now call “fourth branch institutions.”
      • According to the classical account, democracy is sustained through a distribution of power between three “branches” — the legislature, the executive, and the judiciary, with each branch acting as a check and a balance upon the others.
      • The necessity of independent bodies: The complexity of governance and administration in the modern world has necessitated the existence of a set of independent bodies, which are charged with performing vital functions of oversight.
      • Some of these bodies are constitutional bodies — established by the Constitution itself. These include, for instance, the Election Commission and the Office of the Comptroller and Auditor General.
      • Others have been established under law: for example, the Information Commission under the Right to Information Act, and Human Rights Commissions under the Protection of Human Rights Act.
    • HRC under scrutiny and criticism: In the two-and-a-half decades of their existence, however, the functioning of the Human Rights Commissions have come under scrutiny and criticism.
      • There have been the usual critiques of the politicization of autonomous bodies, and selectiveness.
      • Toothless: Even more than that, however, it has been alleged that for all intents and purposes, the Human Rights Commissions are toothless: at the highest, they play an advisory role, with the government left free to disobey or even disregard their findings.

    Limitations of NHRC

    • NHRC’s recommendations are not binding
    • NHRC cannot penalize authorities who do not implement its orders
    • JK is out of its jurisdiction
    • NHRC jurisdiction does not cover human right violations by private parties
    • 3/5 are judges, leading to more judicial touch to its functioning
    • 2/5 are also not Human rights experts. Political appointments.
    • Time limit is set to 1 year i.e. NHRC cannot entertain ca case older than 1 year
    • Limited jurisdiction over violation by armed forces
    • The act does not extend to J&K
    • Vacancies are not filled on time. Most human rights commissions are functioning with less than the prescribed Members
    • Fund crunch
    • Overload and backlog. Too many complaints. Hence, in recent days, NHRC is finding it difficult to address the increasing number of complaints
    • Bureaucratic style of functioning
     

    What the case before Madras High Court will decide?

    • Whether recommendations are mandatory or not: A Full Bench of the High Court will be deciding upon whether “recommendations” made by the Human Rights Commissions are binding upon their respective State (or Central) governments, or whether the government is entitled to reject or take no action upon them.
    • What are the power of HRC under the act? Under the Protection of Human Rights Act, the Human Rights Commissions are empowered to inquire into the violations of human rights committed by state authorities, either upon petitions presented to them, or upon their own initiative.
      • Powers of civil courts: While conducting these inquiries, the Commissions are granted identical powers to that of civil courts, such as the examining witnesses, ordering for documents, receiving evidence, and so on.
      • These proceedings are deemed to be judicial proceedings, and they require that any person, who may be prejudicially affected by their outcome, has a right to be heard.
    • Issue over the meaning of recommend: The controversy before the Madras High Court stems from the issue of what is to be done after the Human Rights Commission completes its enquiry, and reaches a conclusion that human rights have been violated.
      • Section 18 of the Protection of Human Rights Act empowers the Human Rights Commission to “recommend” to the concerned government to grant compensation to the victim, to initiate prosecution against the erring state authorities, to grant interim relief, and to take various other steps.
      • The key question revolves around the meaning of the word “recommend.”
    • Opposite conclusion by different benches: The Full Bench of the Madras High Court is hearing the case because different, smaller benches, have come to opposite conclusions about how to understand the word “recommend” in the context of the Protection of Human Rights Act.
      • According to one set of judgments, this word needs to be taken in its ordinary sense. To “recommend” means to “put forward” or to “suggest” something or someone as being suitable for some purpose.
      • Ordinarily, a mere “suggestion” is not binding. Furthermore, Section 18 of the Human Rights Act also obligates the concerned government to “forward its comments on the report, including the action taken or proposed to be taken thereon, to the Commission”, within a period of one month.
      • The argument, therefore, is that this is the only obligation upon the government.
      • If indeed the Act intended to make the recommendations of the Commission binding upon the government, it would have said so: it would not simply have required the government to communicate what action it intended to take to the Commission (presumably, a category that includes “no action” as well).

    Why ordinary meaning of recommend needs to be rejected?

    • Argument against the ordinary meaning of “recommend”
      • Ordinary meaning and meaning within the legal framework: The first is that there is often a gap between the ordinary meanings of words and the meanings that they have within legal frameworks.
      • Legal meaning: Legal meaning is a function of context, and often, the purpose of the statute within which a word occurs has a strong influence on how it is to be understood.
      • For example, the Supreme Court has held, in the past, that the overriding imperative of maintaining judicial independence mandates that “consultation” with the Chief Justice for judicial appointments (as set out under the Constitution) be read as “concurrence” of the Chief Justice (this is the basis for the collegium system).
      • Recently, while interpreting the Land Acquisition Act, the apex court held that the word “and” in a provision had to be construed as “or”.
      • Of course, there needs to be a good reason for interpretations of this kind.
    • Constitutional commitment: This brings us to the purpose of the Human Rights Act, and the importance of fourth branch institutions.
    • Ensure adequate realisation of constitutional commitment: As indicated above, the Human Rights Act exists to ensure the protection and promotion of human rights.
      • To fulfil this purpose, the Act creates an institutional infrastructure, via the Human Rights Commissions.
      • The Human Rights Commissions, thus, are bodies that stand between the individual and the state, and whose task is to ensure the adequate realisation of constitutional commitment to protecting human rights.
    • Leaving decision with the state would defeat the purpose of the act: It stands to reason that if the state was left free to obey or disobey the findings of the Commission, this constitutional role would be effectively pointless, as whatever the Human Rights Commission did, the final judgment call on whether or not to comply with its commitments under the Constitution would be left to the state authorities.
      • This, it is clear, would defeat the entire purpose of the Act.
    • Past precedents: Indeed, in the past, courts have invoked constitutional purpose to determine the powers of various fourth branch institutions in cases of ambiguity.
      • For example, the Supreme Court laid down detailed guidelines to ensure the independence of the Central Bureau of Investigation; various judgments have endorsed and strengthened the powers of the Election Commission to compulsorily obtain relevant details of candidates, despite having no express power to do so.
      • It is therefore clear that in determining the powers of autonomous bodies such as the Human Rights Commission, the role those fourth branch institutions are expected to play in the constitutional scheme is significant.
    • Powers of civil courts: And lastly, as pointed out above, the Human Rights Commission has the powers of a civil court, and proceedings before it are deemed to be judicial proceedings. This provides strong reasons for its findings to be treated — at the very least — as quasi-judicial, and binding upon the state (unless challenged).
      • Indeed, very recently, the Supreme Court held as much in the context of “opinions” rendered by the Foreigners Tribunals, using very similar logic to say that these “opinions” were binding.

    Conclusion

    The crucial role played by a Human Rights Commission — and the requirement of state accountability in a democracy committed to a ‘culture of justification’ — strongly indicates that the Commission’s recommendations should be binding upon the state. Which way the Madras High Court holds will have a crucial impact upon the future of human rights protection in India.

  • Promoting Science and Technology – Missions,Policies & Schemes

    A different fight-back

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 3- Using technology to deal with epidemics.

    Context

    Coronavirus crisis is an opportunity for India to build on domestic technological capabilities in artificial intelligence, big data analytics, life sciences and health technology in the private sector.

    How a small tech company flagged Covid-19 outbreak?

    • What does it do? A small tech company in Canada — BlueDot — was among first outside China to spot a new epidemic spreading out from Wuhan last December.
      • BlueDot, founded in Canada by a medical scientist of South Asian origin, Kamran Khan, tracks the origin and transmission of infectious diseases around the world.
    • How could they detect the outbreak in China?  BlueDot did this by sifting through massive volumes of news reports and blogs by individuals, including health professionals flowing out of China.
      • Data analytics and medical expertise combined: BlueDot combines “public health and medical expertise with advanced data analytics to build solutions that track, contextualise, and anticipate infectious disease risks”.
      • Use of AI: BlueDot is one of the many technology firms leveraging artificial intelligence for business and policy purposes.
      • Many governments are reaching out to tech companies to cope with the corona crisis.
      • The state government of California has just hired BlueDot to help it deal with the challenge.

    The growing role of technology in dealing with coronavirus

    • Across the world, policymakers see a growing role for technology in identification, tracking, and treating the coronavirus.
    • Alibaba and Tencent’s help in China: In China, the Communist Party roped in big tech companies like Alibaba and Tencent in the battle against the virus.
    • Silicon valley’s help in the US: In the US, President Donald Trump has set aside his well-known distaste for Democrat-leaning Silicon Valley to tackle what he now calls a war-like emergency.
    • India will need all the science and technology it can get hold of in overcoming the crisis that is bound to escalate by the day.
    • An opportunity to do good: For the small tech startups in related areas, this is a moment to shine. For the large tech companies, this is a huge opportunity to deploy their immense capabilities to resolve the specific problems posed by the spread of the coronavirus.
      • In rising to the occasion, they could fend off a lot of the recent negative criticism of their business practices and demonstrate that their commitment to “doing good” is not just empty rhetoric.
    • A good business proposition: “Doing good” is also a sensible business proposition at this time.
      • As governments desperately seek solutions to the crisis, the tech startups and established companies leverage the moment to scale up many technologies, develop new uses and markets.

    How countries used technology to deal with the outbreak

    • How China used technology? In China, as the government moved decisively after the delayed initial response, it turned to-
      • the well-established mass surveillance system based on facial recognition technologies,
      • sensing technologies to identify those with fever in public places and
      • data from mobile phone companies to trace the people who might be infected, and limit the spread of the disease.
    • China also developed a Health Code that uses data analytics to-
      • identify and assess the risk of every individual in a targeted zone based on travel history and time spent in infected places.
      • The individuals are assigned a colour code (red, yellow, or green) which they can access via popular apps to know if they ought to be quarantined or allowed in public.
    • How Korea used technology? Many Asian democracies like South Korea have also turned to AI tools to contain the spread of the disease.
    • How the US used technology? As it copes with the rapid spread of the coronavirus, the US had no option but to use surveillance to contain it.
      • Partners in dealing with outbreak: Unsurprisingly, the big tech companies in the US, based on collecting and monetising massive amounts of data from individuals, have inevitably become partners for Washington.
      • But the relationship between the government, corporations and individual citizens in the US is governed by a welter of laws.
      • There is mounting pressure now to tweak these laws to manage the corona crisis.
      • The US is also liberalising the regulations on the access to, and use of, patients’ health records.

    Growing collaboration between science and the state

    • The race between China and the US: Overarching these arguments is a race between the US and China to find new vaccines for the coronavirus.
      • And, more broadly, for the mastery of new scientific capabilities — from artificial intelligence to health technologies.
      • The competition, in turn, is promoting a more intensive alliance between science and the state in both nations.
    • Collaboration could accelerate the technological capabilities: The collaboration between science and the state during past crises led to a dramatic acceleration of technological capabilities.
      • World War precedents: During the Second World War, science and the state got together to move nuclear physics from the lab to the battlefield.
      • Cold War precedent: The Cold War between America and Russia promoted the development of space technology, microelectronics, communications and computing.
    • Role of private entities: What marks out the current technological race between the US and China is the role of private and non-governmental entities.
      • That might well be the missing link in India’s effort to beat the coronavirus.

    Conclusion

    • Opportunity for India: The current crisis, however, is also an opportunity for India to build on the existing domestic technological capabilities in the areas of artificial intelligence, big data analytics, life sciences, health technology in the private sector.
    • India needs stronger private sector in science: In India, the state has dominated the development of science and its organisation. That was of great value in the early decades after Independence.
      • Today, what Delhi needs is a stronger private sector in science and greater synergy with it in dealing with challenges like the corona crisis.
  • Zoonotic Diseases: Medical Sciences Involved & Preventive Measures

    Time for a powerful display of humanity

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: Not much.

    Mains level: Paper 2- India is unprepared for dealing with pandemics.

    Context

    India is unprepared for dealing with the outbreak of coronavirus.

    Is India really faring better than the other countries?

    • 45 days for first 100,000: Globally, it took roughly 45 days for the first 100,000 cases. It is likely to take nine days for the next 100,000.
    • Death count: The global death count is now doubling every nine days and stands at 8,248, with 207,518 confirmed cases.
    • That is how epidemics work — they gather steam as infected individuals go on to infect even more people. Confirmed cases in India, as of today stand at 169.
      • It is much lower than in small countries such as Iceland (around 250). Could this really be the case that we have fared better than everyone else?
    • Probably India is not performing better: Testing in India remains abysmally low. Only about 10 in a million people in India have been tested, compared to say nearly 120 in a million in Thailand or 40 per million in Vietnam.
    • Why testing in not being done in India? The stated explanation is that the limited number of test kits are being conserved for when they are truly needed but when is the need greater than right now?
      • There are probably shortages even in being able to procure adequate supplies given that many countries are seeking to buy the limited stocks.
    • Importance of testing: Testing is the most important thing we could be doing right now.
      • As the Director-General of the World Health Organization, said recently about the need for more testing, “You cannot fight a fire blindfolded.”

    Avoiding undercounting

    • Timely identification is essential to prevent secondary infection: We need to identify coronavirus-infected patients in a timely manner in order to increase our chances of preventing secondary infections.
      • There is no shame in saying that we have far more cases than what we have detected so far.
    • K.’s admitted undercounting: Even the United Kingdom, which has a far better health system than India, has admitted that it is probably undercounting its true infections by a factor of 12, and is likely have about 10,000 cases.
      • Is it possible that India with 20 times their population has only 169 cases?
    • Preparedness to deal with a higher number of cases: If widespread testing were to commence in India, the number of confirmed cases would likely climb to the thousands very quickly. This is something we have to be prepared for without panic or fear-mongering.
    • Positive action: This is how epidemics move and the real numbers should spur us into positive action.
    • Strict measures by the government: At some stage, it is possible that the government may have to put in place very strict measures on quarantining and closures, much like what China had to do to control the epidemic in Wuhan.

    How prepared is India?

    • There is not an easy answer to how worst things could go.
    • Mutation or sensitivity of virus: If we escape the worst, either because this virus mutates to a less virulent form or because there is something about its temperature or geographical sensitivity that we know nothing about, then we should count our blessings.
      • Viruses do mutate and generally to be less lethal.
    • Projection from Europe: If the projections from Europe are applicable in India, our ‘namastes’ and clean hands notwithstanding, the prevalence in India would be upwards of 20%.
    • In other words, we should expect to see about 200-300 million cases of COVID-19 infections and about four and eight million severe cases of the kind that are flooding hospitals in Italy and Spain at the moment.
    • More importantly, these cases are projected to appear in just a two to the four-month window.
      • In the current scenario, we are not ready.
    • India has somewhere between 70,000 and 100,000 intensive care unit beds and probably a smaller number of ventilators.
      • That is simply inadequate.
    • What should be done? The next two weeks should be spent on planning for large, temporary hospitals that can accommodate such numbers. If we are lucky, we will not need them.

    Unprepared for pandemics

    • Catastrophic event with highest probability-Pandemic: This all sounds doomsday-like. But we have known for decades now that of all catastrophic events to befall humanity, between an asteroid hit and a nuclear war, a disease pandemic has always been the highest on our list of impact and probability.
    • Not enough changes in preparedness: There were some changes after the Severe Acute Respiratory Syndrome (SARS) but not nearly enough.
      • Pandemic preparedness always took a backseat to the crisis of the moment.
      • And in fairness, there is truly no amount of preparation that can fully mitigate such an occurrence.

    Conclusion

    Things are about to get a lot worse. Let us hope that this brings out the best in us, and not the worst. Whether we know this or not, these events are just a dress rehearsal for the more challenging events such as climate change that are likely to be with us this century. And if we take care of each other, we will survive both these challenges with our humanity intact.

     

  • Banking Sector Reforms

    Let clear principles prevail in the bailout of Yes Bank

    Note4Students

    From UPSC perspective, the following things are important:

    Prelims level: AT-1 bonds.

    Mains level: Paper 3- Issues involved in banking system and resolution process in case of failures.

    Context

    Resolving bank failure is tough but following a set of principles could achieve a fair and efficient outcome.

    Key issues involved in the resolution

    • Challenge in courts: Resolving Yes Bank’s failure is no easy task. Some bondholders are already challenging the restructuring plan of the Reserve Bank of India in court, and seem ready for a long-drawn battle.
    • How much dilution is fair for existing shareholders to take?
    • AT-1 Bonds issue: Should the value of the Additional Tier 1 (AT-1) bonds be written off entirely?
      • As such issues become matters of policy discussion and address, we must not lose sight of some fundamental principles of resolving bank failures.
    • Three of them should be on the top of the list: honour contracts, address market failure and protect systemic stability.

    How honouring contracts matter for economy?

    • For efficient outcomes: Honouring contracts is vital for achieving efficient outcomes between contracting parties such as lenders and borrowers, managers and shareholders, and insiders and outsiders.
    • Shying away from entering a contract: If there is uncertainty over this fundamental principle, contracting parties will shy away from entering contracts in the first place.
      • Lenders will be less willing to lend.
      • Prospective minority shareholders will be less keen to buy shares in a company.
    • Impact on allocative efficiency: This will ultimately compromise the economy’s allocative efficiency, or the market’s ability to deploy capital to its best use.

    AT-1 bond issue

    • Honouring contract in Yes banks resolution: There are several issues in the application of this principle in Yes Bank’s resolution.
      • The most visible one concerns the decision of writing off its perpetual contingent, or AT-1, bonds.
    • Write off: According to the original agreement, these additional tier-1 (AT-1) bonds are indeed supposed to be written off at a time like this.
      • And this write-off need not happen before the common equity value goes down to zero.
      • The entire idea behind these perpetual contingent bonds is to improve a bank’s capitalization if its common equity value falls below a certain threshold, but does not hit zero.
    • Counter argument: These bondholders and some commentators are arguing that writing off those bonds will be a big blow to India’s bond market.
      • Moral hazard problem: This is just the opposite of the truth. Not writing them off in accordance with the original contract will create a severe moral hazard problem.
      • What incentive would any bondholder have to correctly price and monitor these banks in the future?
      • Market discipline would die a quick death, and the bond market will suffer in the long run.
    • What the resolution process should do? Therefore, the resolution process should honour the contract and write off the entire value of Yes Bank’s AT-1 bonds.

    Dealing with critical market failures

    • Second core principle: The second core principle in this resolution should be to tackle some critical market failures that led here.
      • Several observers have pointed out the failure of board oversight, promoter negligence and reckless lending at the bank.
    • Vital market failure in the purchase of AT-1 bonds by retail investors: Indeed, these issues must be addressed. But there seems to be another vital market failure hidden in this crisis: the purchase of AT-1 bonds by retail investors.
    • Why AT-1 bonds are complex? AT-1 bonds are “information-sensitive” instruments, which means that the value of these instruments is extremely sensitive to information on the firm’s fundamentals.
      • Complex financial security: They are very complex financial securities. Understanding the risk and reward associated with these securities and valuing them properly is not an easy task even for the best of market professionals.
      • Retail investors are certainly not suited to buy this product. Still, several of them ended up holding Yes Bank AT-1 bonds in their asset portfolios.
    • Demand deposits and market failure: Banking theory relies on the idea that demand deposits are information-insensitive instruments.
      • Hence, a retail investor can place deposits in a bank without worrying about understanding the real risks borne by it. Government-backed deposit insurance makes deposits even more liquid and riskless.
      • Hence, retail investors should hold regular deposits in a bank, and not complex securities like AT-1 bonds.
      • Where is the market failure involved? If such bonds are sold to them without proper disclosure of the associated risks, then it amounts to a serious market failure.
    • Way forward: This market failure must be corrected.
      • Holding investment advisors to higher standards of fiduciary responsibility is one way of doing so.
      • Prohibiting retail investors from investing in such securities is another critical step to prevent such a market failure.

    Way forward to carry out the resolution process

    • Restitution of value to retail investors: Meanwhile, the resolution process could consider partial or full restitution of value to retail investors in Yes Bank’s AT-1 bonds, if these products were indeed mis-sold to them.
    • Large professional investors should be treated differently: But such a rescue must not extend to large professional investors who willingly bought these bonds for higher returns.
      • One mechanism to do this could be to create a separate fund for retail investors with investments capped at a certain point.
      • Or, their AT-1 investments up to a specific limit could be converted into a simple deposit contract. The legal hurdles may be insurmountable.
      • However, in principle, those who mis-sold these products to retail investors should be required to compensate them.
    • Conflict in two principles: Sometimes, these principles can come into direct conflict with each other.
      • If the resolution allows retail investors in those AT-1 bonds to recover their investments, it would go against the “honour the contract” principle, but it would address the “market failure” issue.
    • Ensuring systemic stability: How should we reconcile this conflict? That’s where the third principle comes in: ensuring systemic stability.
      • After all, the regulator’s main objective is to restore the market’s faith in the country’s financial system.
      • While this is not an easy task, protecting the capital and confidence of small investors can go a long way in restoring their faith in the banking system.

    Conclusion

    Resolving bank distress is never an easy job. But honouring contracts, addressing market failure and ensuring systemic stability can together go a long way in achieving a fair and efficient outcome.