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Type: Op-ed

  • Power Subsidies in Agriculture and Related issues

    tSometimes solutions that are meant to solve one problem results in the creation of another problem. Nowhere is this more evident than in the subsidies given on urea and electricity to the farmers. This article deals with the perils of the subsidy on electricity bills of farmers. However, there is an equally substantive argument in favour of the subsidies as well. So, what is the way out? Read to know…

    Replacing free power supply scheme with DBT

    • The Centre has prescribed that the free power supply scheme should be replaced with the direct benefits transfer (DBT) as a condition to allow States to increase their borrowing limit.
    • It is not the first time that the Union government has recommended DBT with regard to electricity.
    • But what is new is setting the time frame for implementing it.
    • By December this year, the DBT should be introduced at least in one district of a State and from the next financial year, a full roll-out should be made.

    Resistance from the states

    • Tamil Nadu, which was the first State to introduce free power in September 1984, is strongly resisting the Centre’s stipulation.
    • Tamil Nadu Chief Minister has taken a categorical stand against the proposal.
    • Though Chief Ministers of Andhra Pradesh, Telangana and Punjab, where free power scheme is in vogue, are yet to express their views.
    • But it is not difficult to predict their response.
    • After all, Punjab Chief Minister who had abolished the scheme during his first innings is now a strong votary of the scheme.

    Let’s get the overview of the power subsidy bill

    • In the last 15 years, Maharashtra has been the only State that scrapped the scheme within a year of introducing it.
    • Karnataka, which has been implementing it since 2008, may become the first southern State to have DBT in power supply if the hint dropped by Chief Minister in early March is any indication.
    • The power subsidy bills in the four southern States and Punjab are at least ₹33,000 crore, an amount the State governments will struggle to meet due to resource crunch in the light of the COVID-19 pandemic.

    But, why the Central government want to scrap the scheme?

    It is because of the following issues-

    1. Wastage of water and electricity

    • The financial stress apart, the universal application of the scheme has had deleterious consequences.
    • Primarily, the scheme has led to widespread wastage of water and electricity.
    • It is inherently against incentivising even a conscientious farmer to conserve the two precious resources.
    • It may be pertinent to point out that India is the largest user of groundwater at 251 billion cubic meters, exceeding the combined withdrawal by China and the U.S., as pointed out by Bharat Ramaswami of the Indian Statistical Institute last year.

    2. Worrying rate of the groundwater table depletion

    • Be it parts of the Cauvery delta in Tamil Nadu or Sangrur district of Punjab, the story about the groundwater table is the same — a worrying rate of depletion.
    • There is one more attendant problem.
    • To sustain their activity, farmers need to go for submersible or high-capacity pumpsets. [Consider the fact that to draw same quantity of water you have to use more power if your water table is low]

    3. It encourages the installation of more pump sets

    • Third, the extension of the scheme to different States over the years has only encouraged the installation of more pumpsets. Karnataka is a classic example, The number of irrigation pumpsets, which was around 17 lakh 12 years ago, is now around 30 lakh.

    4. Misuse of scheme

    • There is misuse of the scheme for which not just a section of farmers but also field officials have to be blamed.

    5. AT & C losses clubbed as consumption by farmers

    • In the absence of meters for these connections or segregation of feeders or metering of distribution transformers, accurate measurement of consumption becomes tricky.
    • Those in charge of power distribution companies find it convenient to reduce their aggregate technical and commercial (AT&C) losses by clubbing a portion of the losses with energy consumption by the farm sector.

    What is the argument of the supporter of the scheme?

    • Proponents of the free power scheme have a couple of valid points in their support.
    • Apart from ensuring food security, free power provides livelihood opportunities to landless workers.
    • When farmers dependent on supplies through canals get water almost free of cost, it is but fair that those not covered by canal irrigation should be given free electricity.
    • Though there is substance in the argument, it is not difficult to arrive at a fair pricing mechanism.
    • Small and marginal farmers and those who are outside the canal supply deserve free power, albeit with restrictions.
    • But there is no justification for continuing with the scheme perpetually to other farmers.
    • However, those enjoying free power need to be told about the need for judicious use of groundwater and how to conserve it.

    Consider the question-“Subsidies given to farmers on electricity has become an albatross around the States neck. However, such subsidies could also be termed as a necessary evil. Critically examine.”

    Conclusion

    Making use of the situation created by the COVID-19 pandemic, the Centre is trying to make lasting changes in areas where such measures are long overdue. At least in the area of power sector, its attempt can yield meaningful results only if there is a change in the mindset of agriculturists and political parties towards the concept of free power.

     

     

  • Multilateralism in the new cold war

    The world is going through turmoil. The new world that will emerge will be different from what we have known. This provides India with some unique opportunities. This article explains the changes that are taking place and gives the outline of the changing order. So, how can India set and shape the global response? And what should be the principles on which the new multilateralism should be based? Read to know…

    Opportunity for India to set the global response

    • As chair of the Executive Board of the World Health Assembly – India can set the global response in terms of multilateralism, not just medical issues.
    • How can India set a global response in terms of multilateralism? Consider the following- a rare alignment of stars for agenda-setting.
    • 1) In September, the United Nations General Assembly will discuss the theme, “The Future We Want”.
    • 2) In 2021, India joins the UN Security Council (non-permanent seat).
    • 3) And chairs the BRICS Summit in 2021.
    • 4) Also hosts the G-20 in 2022.
    • New principles for international system: At the online summit of the Non-Aligned Movement, in May, Prime Minister Modi called for new principles for the international system.
    • His new globalisation model based on humanity, fairness and equality has wide support in a more equal world as, for the first time since 1950, everyone is experiencing the same (virus) threat.

    Changing global context

    • China is losing influence and the dynamics in its relations with the United States.
    • And Asia again is emerging as the centre of global prosperity.
    • The global governance, economy, scientific research and society are all in need of being re-invented.
    • India should use this opportunity to recover our global thought leadership.

    The US-China powerplay and its consequences for multilateralism

    • The clash between China and the U.S. at the just concluded World Health Assembly in May marks the end of the multilateralism of the past 70 years.
    • The donor-recipient relationship between developed and developing countries has ended with China’s pledge of $2-billion.
    • The agenda-setting role of the G7 over UN institutions and global rules has also been effectively challenged by WHO ignoring the reform diktat of the U.S. leading to its withdrawal, and characterisation of the G7 as “outdated”.
    • The U.S. has also implicitly rejected the G20 and UN Security Council, for an expanded G7 “to discuss the future of China”.
    • Important shift in the UN: After World War II, the newly independent states were not consulted when the U.S. imposed global institutions fostering trade, capital and technology dependence.
    • This was done ignoring the socio-economic development of these countries.
    • But social and economic rights have emerged to be as important as political and procedural rights.
    • Against this backdrop, China’s President Xi Jinping deftly endorsed the UN Resolution on equitable access to any new vaccine.

    Emergence of Asia and China: Challenges for the US and the West

    • The U.S. faces an uphill task in seeking to lead a new multidimensional institution in the face of China’s re-emergence.
    • The re-emergence of China is based on technology, innovation and trade balancing U.S. military superiority.
    • At the same time, there is a clear trend of declining global trust in free-market liberalism, central to western civilisation.
    • With the West experiencing a shock comparable to the one experienced by Asia, 200 years ago, the superiority of western civilisation is also under question.
    • The novel coronavirus pandemic has accelerated the shift of global wealth to Asia suggesting an inclusive global order based on principles drawn from ancient Asian civilisations.
    • Colonised Asia played no role in shaping the Industrial Revolution.
    • But, the Digital Revolution will be shaped by different values.
    • It is really this clash that multilateralism has now to resolve.

    World is questioning both U.S. and China’s exceptionalism

    • China has come out with alternative governance mechanisms to the U.S.-dominated International Monetary Fund, World Bank and World Trade Organization with its all-encompassing Belt and Road Initiative.
    • The U.S., European Union and Japan are re-evaluating globalisation as it pertains to China and the U.S. is unabashedly “America First”.
    • The world is questioning both U.S. and China’s exceptionalism.
    • For India, the strategic issue is neither adjustment to China’s power nor deference to U.S. leadership.

    Opportune moment for India to propose new multilateralism

    • The global vacuum, shift in relative power and its own potential, provides India the capacity to articulate a benign multilateralism.
    • It should include in its fold NAM-Plus that resonates with large parts of the world and brings both BRICS and the G7 into the tent.
    • This new multilateralism should rely on outcomes, not rules, ‘security’ downplayed for ‘comparable levels of wellbeing’ and a new P-5 that is not based on the G7.

    India in a important role

    • China, through an opinion piece by its Ambassador in India, has suggested writing “together a new chapter” with “a shared future for mankind”.
    • The U.S. wants a security partnership to contain China.
    • And the Association of Southeast Asian Nations trade bloc — with the U.S. walking out of the negotiations — is keen India joins to balance China.
    • With a new template. India does not have to choose.

    Three principles the new system should be based on-

    1. Peaceful coexistence

      • First, the Asian Century should be defined in terms of peaceful co-existence, freezing post-colonial sovereignty.
      • Non-interference in the internal affairs of others is a key lesson from the decline of the U.S. and the rise of China.
      • National security now relies on technological superiority in artificial intelligence (AI), cyber and space, and not expensive capital equipment, as India’s military has acknowledged.
      • Instead of massive arms imports, we should use the savings to enhance endogenous capacity.
      • And mould the global digital economy between state-centric (China), firm-centric (the U.S.) and public-centric (India) systems.

    2. New principles of trade

    • A global community at comparable levels of well-being requires new principles for trade, for example, rejecting the 25-year-old trade rule creating intellectual property monopolies.
    • Global public goods should include public health, crop research, renewable energy and batteries, even AI as its value comes from shared data.
    • We have the scientific capacity to support these platforms as part of foreign policy.

    3.  Civilisational values

    • Ancient civilisational values provide the conceptual underpinning, restructuring both the economic order and societal behaviour for equitable sustainable development.
    • Which is what a climate change impacted world, especially Africa, is seeking.

    Consider the question-“The global order is going through serious churn, and it provides India with an opportunity to shape the new multilateralism based on humanity, fairness and equality. Comment.”

    Conclusion

    In the new cold war, defined by technology and trade not territory, non-alignment is an uncertain option; India should craft a global triumvirate.

  • Seizing the moment at the WHO

    India has been tasked with helming the  WHO executive board at the turbulent times. The world is facing the health crisis. It is against this backdrop, India has to lead the executive board. This article suggests 5 elements that should form the part of India’s policy approach.

    Challenges for India as it heads WHO executive board

    • Minister of Health and Family Welfare is elected as the Chair of the World Health Organization’s (WHO) executive board.
    • The 34-member body is tasked with implementing the decisions of the recently concluded World Health Assembly (WHA).
    • The elevation affords India an important platform to steer the global public health response to COVID-19.
    • It also comes at a time when the WHO is being rocked politically as never before.

    WHO: caught between the US-China crossfire

    • Recently, U.S. President Donald Trump wrote a letter to the WHO Director-General.
    • In the letter, he threatened to make permanent his temporary funding freeze as well as reconsider the U.S’s membership in the organisation if the latter did not commit to major substantive reforms within 30 days.
    • By contrast, at the WHA plenary, Chinese President Xi Jinping pledged $2 billion to fight the virus.
    • He also promised to pair up 30 African hospitals with domestic counterparts, accelerate the building of the Africa Centers for Disease Control headquarters, and ensure that vaccine development in China, when available, would be made a global public good.

    So, as WHO executive body chair, India will have to navigate this treacherous power landscape with candour and tact. Following 5 elements should inform its policy approach.

    1. Set epidemic prevention and control as a priority

    • India must insist that epidemic prevention and control remain the international community’s foremost priority.
    • As the virus’ chain of transmission is broken, the focus should shift to identifying the animal-to-human transmission origins of SARS-CoV-2.
    • China shares an important interest in facilitating international access to investigate COVID-19’s zoonotic origins.
    • Why China shares interest? Because Wuhan and other previously infected zones could yet be susceptible to the risk of viral reintroduction.

    2. Review the early response of China and WHO to outbreak

    • India should lean on the WHO secretariat to fast-track the “impartial, independent, and comprehensive review” of the WHO’s – and China’s – early response to the outbreak.
    • The review’s findings should illuminate best practice and highlight areas for improvement, both in the WHO’s leadership and capacity as well as member states’ implementation of the International Health Regulations.
    • For those in New Delhi inclined to relish the prospect of Beijing’s comeuppance, the review’s findings may yet sorely disappoint.
    • The WHO-China Joint Mission featuring renowned global epidemiologists had termed China’s early COVID-19 response as the “most ambitious, agile and aggressive disease containment effort in history”.

    3. Ensure equitable access to COVID-19 vaccines for all

    • For ensuring equitable access to COVID-19 therapeutics and vaccines for all countries, India must promote the establishment of an appropriate multilateral governance mechanism.
    • The envisaged voluntary pooling mechanism to collect patent rights and regulatory test data should be suitably tailored to the needs of crisis.
    • And the World Trade Organization’s intellectual property rights provisions should be overridden as is allowed during a public health emergency to assure affordable vaccine availability.

    4. Taiwan issue at WHA: India should stay aloof

    •  India must stay aloof from the West’s campaign to re-seat Taiwan as an observer at the WHA.
    • When Taipei last attended in 2016, it did so under the explicit aegis of UN General Assembly Resolution 2758, whereby the UN considers Taiwan to be an integral part of the People’s Republic of China.
    • That the independence-minded Tsai government is unwilling to concede this basis for attendance has more to do with domestic political manoeuvring than Chinese or international ostracism.

    5.Global ban on consumption of wild animals

    •  India must lead the call for a permanent global ban on the consumption and trade of wild animals.
    • This ban should be with limited exceptions built-in for scientific research, species protection and traditional livelihood interests.
    • With two-thirds of emerging infections and diseases now arising from wildlife, the destruction of natural habitats and biodiversity loss must be taken much more seriously.

    Consider the question “The WHO has been facing the credibility crisis for its response to the Covid-19. In such a difficult time for the agency, India has to lead the executive board of WHA. In light of this, suggest the policy approach that India should adopt at WHA.”

    Conclusion

    India has its work cut out. The government should seize the moment to steer the global response in addressing the shortcomings in various areas exposed by the Covid-19 pandemic.

  • Problem of interest rate differential in India

    Do you remember Operation Twist by the RBI? what was being twisted there? It was the yield curve that was sought to be twisted. It had been aimed at reducing the gap between long term interest rates and short term policy rates. This article explains the impact such gap could have on the economy.

    Why long term loans come with a higher interest rate?

    • Long term loans equate to long repayment periods.
    • More uncertainty during these long periods can translate to higher risks.
    • And to compensate for the high risks involved, banks quote higher interest rates when corporates borrow from them to build and operate stuff.
    • However, when banks borrow from the RBI they are borrowing over short intervals.
    • And so they get charged lower interest rates.

    So, why banks are keeping interest rates high despite borrowing at low rates from the RBI?

    • Ever so often, the RBI cuts rates in the hopes of making loans more accessible to banks.
    • They are hoping banks will also extend this benevolence to their customers by cutting long term interest rates.
    • But right now, banks are scared.
    • They don’t think the corporates can pay back.
    • So they are keeping long term rates at elevated levels despite borrowing at consistently low rates from the RBI.

    What happens when gap between long-term and short term interest rates widen?

    •  Capital wasn’t cheap to begin with for corporate borrowers, and it’s getting more expensive.
    • This comes just as migrant rural workers have been driven out of urban production centers because of shuttered factories.
    • Even if this labor is safely put back on, say, road construction, concessionaires [think private road contractors] might still go bankrupt before completing any projects.
    • That’s because their annuity payments from the government are linked to falling short-term policy rates, whereas their long-term borrowing costs are both high and sticky

    To understand the issue of annuity payment and its relation with interest rates, let’s dig deeper into 3 types of models-

    1. Build-Operate-Transfer (BOT) Model

    • So, NHAI is the National Highways Authority of India and is largely responsible for building and maintaining roads.
    • Its preferred method to get the job done is to deploy what is called the BOT model.
    • The Build-Operate-Transfer (BOT) model, as the name suggests is a way for NHAI to offload its responsibilities of road building to private contractors.
    • Under BOT model, private contractors build the road, operate it, make money off of collecting toll, and after about 10–15 years, they hand over the road back to NHAI.
    • There aren’t enough private contractors willing to bid for such projects because — hey, maintaining and operating a road is a pain.
    • Why pain?  You have to wait 15 years to recoup all the money you had to pour in to build the damn thing. That’s the pain.

    2. Engineering, procurement and Construction (EPC) model

    • Under the EPC (Engineering, Procurement & Construction) model, NHAI pays private contractors first, so that they can help NHAI build the road.
    • The contractor does not operate or collect tolls here.
    • Instead, it can walk away scot-free with money in its coffers once it’s done building the road.
    • But it’s hard for the government to shore up all the resources required upfront.

    3. Hybrid Annuity Model (HAM)- The middle path

    •  It’s a nice little mix of both EPC and BOT.
    • Under it, NHAI pays some money upfront in fixed installments usually, 40% of the project cost.
    • And the private contractor does his bit by putting up the rest and finishing the project.
    • However, once the construction is complete, the contractor does not make money off of collecting toll.
    • Instead, he transfers the assets over to NHAI.
    • So its incumbent on the government to pay the rest of the money once the project takes off.
    • And the payments are dependent on the asset created, the performance of the developer, and a few other things.
    • However, since the payouts usually last 15–20 years we need to find a way to determine what kind of money the government pays the contractor every 6 months.
    • And here’s the best way to think about this — So when the government pays the 40% upfront, it’s promising to pay the 60% sometime in the future.
    • It’s money they owe the contractor.

    And, here is the crux of the matter

    • So when the repayments, are made, they’ll have to pay the principal and the interest.
    • The interest involves a fixed component (3%) and a variable component.
    • What is varible component? The variable component is effectively the short term policy rates.
    • So if the RBI keeps cutting these short term rates, private contractors get less money per instalment even if their roads are all nice and shiny.
    • And this can’t bode well for them because they probably put up the 60% back in the day by borrowing from another bank.
    • A bank that’s charging them long term interest rates that refuse to come down.

    Conclusion

    The widening gap between the short term policy rates and long term interest could easily spell the disaster for the entrepreneurs and in turn for the economy as a whole. The government should consider a special package for such entities given the unprecedented situations we found ourselves in.

  • Time to revisit the special relationship with Nepal

    A new map released by Nepal delivered a blow to the India-Nepal relations. But this is hardly the first time this has happened. The article clears some cobwebs about Nepal’s foreign policy. First, it throws light on the past trend set by Nepal. And drawing on the past experience, it suggests the changes India should adopt in new framework to deal with Nepal.

    Nepal’s new map: Yet another knock on India-Nepal relations

    • As the parliament in Nepal gets ready to approve a new map that will include parts of Indian territory in Uttarakhand, Delhi is bracing for yet another knock to a bilateral relationship.
    • Many in the Indian strategic community believe that the train wreck was avoidable.
    • But others view the collision between Delhi and Kathmandu as both inevitable and imminent.
    • Even if the territorial issue had been finessed, something else would have triggered the breakdown.

    Bigger fissures in relation

    • A closer look suggests that the territorial dispute is merely a symptom of the structural changes.
    • These structural changes are unfolding in the external and internal context of the bilateral relationship.
    • The question, then, is not what Delhi could have done to prevent the current crisis.
    • It should be about looking ahead to build more sustainable ties with Kathmandu.

    2 factors India must consider and depart from

    • Any new framework for engaging Kathmandu must involve two important departures from the past in Delhi.
    • 1) First is coming to terms with Nepal’s natural politics of balance.
    • 2) The other is the recognition that Delhi’s much-vaunted “special relationship” with Kathmandu is part of the problem.

    Let’s look at the history of Nepal’s geopolitics

    • The founder of the modern Nepali state, Prithvi Narayan Shah, described Nepal as a “yam between two rocks”.
    • He was pointing to the essence of Nepal’s geographic condition between the dominant power in the Gangetic plains on the one hand and Tibet and the Qing empire on the other.
    • Contrary to the conventional wisdom in India, China has long been part of Kathmandu’s international relations.
    • As the East India Company gained ground at the turn of the 19th century, Nepal’s rulers made continuous offers to Beijing to act as China’s frontline against Calcutta’s expansion into the Himalayas.
    • Kathmandu also sought to build a coalition of Indian princes to counter the Company.
    • Even after it lost the first Anglo-Nepal war in 1816, Kathmandu kept up a continuous play between Calcutta and Beijing.
    • As the scales tilted in the Company’s favour after the First Opium War (1839-42), Nepal’s rulers warmed up to Calcutta.
    • When the 1857 Mutiny shook the Company, Kathmandu backed it and regained some of the territories it lost when the Raj replaced the Company.
    • As the fortunes of the Raj rose, Kathmandu rulers enjoyed the benefits of being Calcutta’s protectorate.
    • India inherited this framework but has found it impossible to sustain.

    Why the Treaty of Peace and Friendship (1950) lost its appeal?

    • The 1950 Treaty of Peace and Friendship gave the illusion of continuity in Nepal’s protectorate relationship with the Raj and its successor, independent India.
    • That illusion was continuously chipped away amid the rise of mass politics in Nepal, growing Nepali nationalism, and Kathmandu’s acquisition of an international personality.
    • The 1950 Treaty, which proclaims an “everlasting friendship” between the two nations, has become the symbol of Indian hegemony in Nepal.
    • In a paradox, its security value for India has long been hollowed out.
    • It is a political millstone around India’s neck that Delhi is unwilling to shed for the fear of losing the “special relationship”.
    • Delhi has been trapped into a perennial political play among Kathmandu’s different factions and responding to Nepal’s China card.

    Weakening of “special relationship”: Essence of Nepal’s foreign policy

    • Once the Chinese Communist Party consolidated its power in Tibet and offered assurances to Nepal, Kathmandu’s balancing impulses were back in play.
    • At the risk of oversimplification, Nepal’s foreign policy since the 1950s has, in essence, been about weakening the “special relationship” with India and building more cooperation with China.
    • Kathmandu has used different labels to package its desire for greater room for manoeuvre between its two giant neighbours — non-alignment, diversification, “zone of peace”, equidistance, and a Himalayan bridge between India and China.
    • The stronger China has become, the wider have Kathmandu’s options with India become.

    Way forward

    • It makes no sense for Delhi to hanker after a “special relationship” that a large section of Kathmandu does not want.
    • If Delhi wants a normal and good neighbourly relationship with Kathmandu, it should put all major bilateral issues on the table for renegotiation.
    • Such issues should include the 1950 treaty, national treatment to Nepali citizens in India, trade and transit arrangements, the open border and visa-free travel.
    • Delhi should make it a priority to begin talks with Nepal on revising, replacing, or simply discarding the 1950 treaty.
    • It should negotiate a new set of mutually satisfactory arrangements.
    • India had conducted a similar exercise with Bhutan to replace the 1949 treaty during 2006-07.
    • The issues and political context are certainly more complicated in the case of Nepal.
    • It is better that Delhi bites the bullet and makes a fresh beginning with Kathmandu rather than let the relationship deteriorate.
    • No bilateral relationship between nations can be built on sentiment — whether it is based on faith, ideology or inheritance.
    • Only those rooted in shared interests will endure.
    • Rather than object to Kathmandu’s China ties, Delhi must focus on how to advance India’s relations with Nepal.
    • It should bet that the logic of Nepal’s economic geography, its pursuit of enlightened self-interest, and Kathmandu’s natural balancing politics, will continue to provide a strong framework for India’s future engagement with Nepal.

    Conclusion

    Discarding the appearances of the “special relationship” might, in fact, make it easier for Delhi to construct a more durable and interest-based partnership with Kathmandu that is rooted in realism and has strong popular support on both sides.

  • Is India prepared for crude oil eventualities?

    The era we are living in is reigned by the uncertainties. And the oil market is not immune to these uncertainties. Against this background, India’s energy security is discussed in this article. Switching to the “just in case” needs with respect to crude oil is suggested by the author. But, that would require capital. So, how could the problem of capital be solved? Read the article to know…

    Switching from just in time to just in case

    • The post-COVID “world (will be) switching from just in time to just in case”  said economist Alan Kirman.
    • This is more so for the Indian petroleum sector.
    • The decision-makers of this sector should switch to a “just in case” policy mode.

    Oil market: Land full of uncertainties

    • The oil market is in no man’s land. Few speak with conviction about its future trajectory.
    • Last month, it dropped into negative territory for a day in the USA.
    • But today the price of the same crude quality is above $30/barrel.
    • If one reads the commentary of experts, some predict that prices will soon cross $50/barrel while some predict price-crash to below $20/barrel.
    • The fine print of these reports is always caveated with the disclaimer, “it all depends” on one or more of the comparably uncertain variables.
    • These variables include economic growth, geopolitics — US-China relations, the timing of the development of an anti-COVID vaccine or a combination of all these variables.
    • The fact is no one really knows how the petroleum sector will fare in the “new normal” of the post-COVID world.

    The problems policy-makers face: some known, some unknown

    • Policy-makers know that irrespective of the twists and turns in the petroleum market, India will need fossil fuels (coal, oil and gas) to drive its economic growth for at least the next decade, if not longer.
    • And that a sizeable percentage of these requirements will have to be imported.
    • The country does not have the geology to expect gushers especially in an environment of volatile (and relatively low) oil prices.
    • What must also be discomforting is the “known unknown” of the post-COVID stress.
    • They know that COVID has knocked the props from under the Indian economy.
    • They also know that every petroleum company, irrespective of whether it is in the private or public sector, will face an increasingly uncertain and challenging future business environment.
    • What they do not know is the nature of these challenges, and therefore, the conditions, sine qua non, for managing them.

    Let’s look at some facts and figures of India’s crude oil requirements

    • India consumes around 50,00,000 barrels of crude oil every day.
    • Of that, it imports approximately 45,00,000 barrels/day making the country the third-largest crude market in the world.
    • Every month, on average, 70 loaded VLCC (very large crude carriers ) — accounting for 10 per cent of the global tanker market — bring crude oil to India.
    • Approximately 60 per cent of this oil is discharged in and around the Jamnagar area and then carried by pipelines to refineries in Jamnagar, Mathura, Panipat, Bina and Bhatinda.
    • And 50 per cent or so is sourced from Saudi Arabia, Kuwait, Abu Dhabi, Iran and Iraq.
    • It is against this background of post-COVID uncertainties and above facts India should consider switching to “just in case” policy mode.

    Why should India consider switching to “just in case” policy mode?

    We should analyse this by considering two scenarios

    • ONGC/OIL are strategically important PSUs.
    • Few have questioned the support to these two companies and the importance of harnessing our indigenous oil and gas reserves.
    • Until now, this support has been premised on the view that oil supplies are relatively scarce and that prices will trend upwards.

    1) Low oil prices scenario

    • 1) We now need to ask: What if, “just in case” the oil market is structurally oversupplied and prices fall to such low levels that it makes no commercial sense for ONGC/OIL to expend public resources on “ high risk, high cost” exploration?
    • Oil and gas are, after all, tradables and can be purchased on the high seas.
    • Should they not, given this possibility, contemplate redefining their core purpose and perhaps pivot away from oil and gas towards clean energy?

    2) Choking of supply lines scenario

    • Looked at through a different lens but with a “just in case” mindset, the preponderance of crude supplies sourced from countries facing deep political, economic and social tensions raises the question:
    • What if these domestic problems choked our access?
    • How would we manage the disruption?
    • Our decision-makers have worried about supply security for decades.
    • But the circumstances created by COVID are new.
    • The issue of strategic reserves could, for instance, acquire a different hue.
    • We have currently 11 days of reserve cover (5.33 million tonnes) with plans to increase it to 24 days (11.83 million tonnes).
    • Were we to decide to build up these reserves to levels comparable to other countries of between 70 to 100 days of import cover, the issue would be capital.
    • Given the slowdown of the economy and the pressures on the exchequer, the government would not have the financial resources to invest in the creation of additional facilities.
    • The only way this financial hurdle could be overcome is if the government and the private sector invest jointly.
    • This collaborative option would have to be considered to counter the “just in case” contingency of prolonged and major disruption.
    • And if indeed such an option were acceptable, it could be extended to cover trading, crude purchases, co-freighting, subject of course to anti-trust and competition rules.

    Consider the example to understand the importance of “just in case” thinking

    • An example to embed the importance of “just in case” thinking can be drawn from the geopolitics of our neighbourhood.
    • What if the relations between India/Pakistan/China took an ugly turn?
    • What security measures should we contemplate to protect the petroleum assets located in Mumbai and Jamnagar?

    Consider the question “Over the decades, India has been grappling with the issue of energy security. With the rising uncertainties around the world, the issue has gained more prominence. In light of this, suggest the ways to tide over the disruption in oil supplies.”

    Conclusion

    In the backdrop of COVID, when all hands on decks are needed to tackle the “urgent” task of reviving the economy, the government must not, in the process, lose sight of the “importance” of creating, if nothing else, the mindset of preparedness to respond to “just in case outcomes”.

  • Using COVID crisis to reorient India towards reforms

    Following the announcement of relief and stimulus package, the debate began over its various aspects. This article assesses the various aspects of the package and draws comparison with the package announced by the other countries. So, how does India fare compared with other countries?

    Fiscal component of  stimulus package

    • According to the IMF-PT (policy tracker), the fiscal component of the Indian package is estimated to be at least 3.5 per cent of GDP as expenditure for poor households, migrant workers and agriculture.
    • There is an additional 0.5 per cent of GDP for states to spend unconditionally, bringing the fiscal package excluding loans to businesses to at least 4 per cent of GDP.
    • The support for businesses (MSMEs) is estimated to be 2.7 per cent of GDP.
    • Of this, at least 2 per cent of GDP is in the form of 100 per cent credit guarantees and equity infusion.

    Comparison with major emerging economies

    • Among major developing economies, only Brazil -8 per cent of GDP– and Peru -7 per cent of GDP– have a fiscal stimulus higher than the 5 per cent level for India.
    • The Brazil estimate includes about 3 per cent of GDP as working capital loans to businesses and households.
    • The fiscal support level for some important emerging economies is — China 2.5 per cent of GDP and Indonesia 3.5 per cent.

    Why it is difficult to segregate the stimulus package?

    • While comparing the fiscal stimulus packages across countries, it is important to understand that such packages are in the nature of additional spending and tax reliefs.
    • Which can work directly through aggregate demand or indirectly by mitigating risk and enhancing access to fund.
    • Access to fund is ensured in the nature of credit guarantees to financial institutions and non-financial enterprises
    • A large number of fiscal stimulus packages announced by different countries contain credit guarantees to financial institutions, SMEs, and agriculture.
    • Hence, it is difficult to segregate fiscal stimulus into its pure and impure components.
    • Most economists, and international organisations, recognise that fiscal stimulus consists of both the pure and impure.
    • And includes three broad items — a direct “above-the-line” component, a “below-the-line” component and guarantees of various forms primarily credit.
    • The choice of using only one component of the fiscal stimulus is selective and highly inappropriate.

    India as a positive fiscal stimulus outlier

    • To put the packages into perspective, the average of all fiscal measures in the G24 developing economies is equal to 3.6 per cent.
    • No matter how the calculation is done, India is a positive fiscal stimulus outlier; by IMF-PT calculations.
    • The stimulus is close to the largest among major emerging market economies.

    So, how much rich countries are spending?

    • The rich nations are spending more — they can afford to. Japan announced what may be the upper limit to the expansion — 21.1 per cent of GDP.
    • However, this does include large elements of loans and credit guarantees.
    • Through a combination of several fiscal measures (tax deferrals, credit guarantees, etc.) the US has pledged close to 13 per cent of GDP.
    • The European Union, on average, has pledged 4 per cent of GDP.
    • The average for advanced countries is around 6 per cent of GDP.

    Significance of monetary policy change made by RBI

    • The monetary policy change in India is quite significant.
    • The change paves the way for internationally competitive monetary policy.
    •  That is, real interest rates comparable to those prevalent in competitor economies.
    • The repo rate now stands at 4 per cent, with inflation well contained.
    • This is substantially a much different, and much-improved RBI response than that what occurred in 2008-09.
    • At that time, as a monetary counter to the financial crisis, the RBI reduced the repo rate by 425 basis points to 4.75 per cent.
    • This was done over seven months and the prevailing CPI inflation rate was 10 per cent.

    Economic reforms as a part of stimulus package

    • India has announced several economic reforms as a part of the stimulus package.
    • These are long-awaited — freeing up of the labour market, allowing farmers to sell their produce and land to who they choose, removal of archaic laws like the Essential Commodities Act, with the promise of more to come.
    • This is not an empty promise — the Centre will advance another 1.5 per cent of GDP to states to expand spending.
    • This advance will be conditional on them for undertaking long-pending reforms.
    • The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures.

    Conclusion

    The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures. We should use the crisis to re-orient India towards its long-awaited destiny.

  • China and the Rhineland moment in Hong Kong

    While the world is busy battling pandemic, China has embarked upon completing its pet project: stripping Hong Kong off its special status. This article explains the significance of China’s actions. And the options the U.S. could explore as a response to China’s move.

    Tipping points in History

    • In 1911 Germany sparked an international crisis when it sent a gunboat into the Moroccan port of Agadir.
    • Winston Churchill wrote in his history of the First World War, “all the alarm bells throughout Europe began immediately to quiver.”
    • In 1936 Germany provoked another crisis when it marched troops into the Rhineland, in flagrant breach of its treaty obligations.
    • In 1946, the Soviet Union made it obvious it had no intention of honoring democratic principles in Central Europe, and Churchill was left to warn that “an iron curtain has descended across the Continent.”

    Analogies: Not perfect, but not inapt, either.

    • Analogies between these past episodes and China’s decision this week to draft a new national security law on Hong Kong aren’t perfect.
    • First, Hong Kong is a Chinese port, not a faraway foreign one.
    • Second, Hong Kong’s people have ferociously resisted Beijing’s efforts to impose control, unlike the Rhineland Germans who welcomed Berlin’s.
    • And lastly, the curtailment of freedom that awaits Hong Kong is nothing like the totalitarian tyranny that Joseph Stalin imposed on Warsaw, Budapest and other cities.
    • But the analogies aren’t inapt, either.
    • Beijing has spent the better part of 20 years subverting its promises to preserve Hong Kong’s democratic institutions.
    • Now it is moving to quash what remains of the city’s civic freedoms through a forthcoming law that allows the government to punish speech as subversion and protest as sedition.
    • The concept of “one country, two systems,” was supposed to last at least until 2047 under the terms of the 1984 Sino-British Joint Declaration.
    • Now China’s rulers have been openly violating that treaty, much as Germany openly violated the treaties of Locarno and Versailles.

    Rethink of the U.S. strategic approach to China

    • US administration has undertaken a sober rethink of it’s strategic approach to China.
    • The outlines of which are described in a new inter-agency document quietly released by the White House last week.
    • Gone from this new vision are the platitudes about encouraging China’s “peaceful rise” as a “responsible stakeholder” in a “rules-based order.”
    • Instead, Beijing is described, accurately, as a habitual and aggressive violator of that order.
    • It also describes China as a domestic tyrant, international bully and economic bandit that systematically robs companies of their intellectual property, countries of their sovereign authorities, and its own people of their natural rights.
    • A critic might note that this description of China’s behavior sounds a lot like Trump’s.
    • Sort of, except that the comparison trivializes the scale of China’s abuses and neglects the breadth and longevity of its challenge.

    Why Now and what is the US response?

    • Beijing almost certainly chose this moment to strike because it calculated that a world straining under the weight of a pandemic and a depression lacked the will and attention to react.
    • On Friday, Trump said he would strip Hong Kong of its privileged commercial and legal ties to the U.S.
    • Issue with the move: That punishes the people of Hong Kong at least as much as it does their rulers in Beijing.

    What’s a better course for the U.S.? A few ideas:

    • Sanction Chinese officials engaged in human-rights abuses in Hong Kong under the Global Magnitsky Act.
    • Upgrade relations with Taiwan and increase arms sales, including top-shelf weapons’ systems such as the F-35 and the Navy’s future frigate.
    • Re-enter the Trans-Pacific Partnership (TPP)agreement as a counter to China’s economic influence.
    • Publicly press all G-7 countries to stop doing business with telecom-giant Huawei as a meaningful response to the Hong Kong law.
    • Give every Hong Kong person an opportunity to easily obtain a U.S. residency card, even a passport.

    Conclusion

    If all this and more were announced now, it might persuade Beijing to pull back from the brink. In the meantime, think of this as  Rhineland moment with China — and remember what happened the last time the free world looked aggression in the eye, and blinked

  • Three thresholds in Industrial Disputes Act that need revision

    Sometimes the measures we come up with end up doing exactly the opposite of what they were supposed to do. This might be the case with some provisions in the Industrial Dispute Act. This article deals with 3 such provisions in the IDA. So, what are these provisions? How the issues caused by these provisions could be resolved? Read to know more…

    How provisions of IDA could be detrimental?

    • What made so many migrants suddenly long for their village after lockdown?
    • The answer lies in our Industrial Disputes Act (IDA), the motherboard of our labour laws.
    • IDA has encouraged short-term employment, low skills and zero security.
    • It did this by setting up thresholds which disincentivised long-term commitment of workers to entrepreneurs and vice versa.
    • It also kept firms informal and unwilling to invest in human capital.
    • This is why when the lockdown happened, it turned into a migrant crisis.

    Let’s look at  3 thresholds in IDA that are causing harm

    • 1) Hire more than 99 workers, and you will have to notify the government before you can fire any one of them.
    • 2) Hire more than 20 and you open yourself up to provident fund commitments and bonus payments.
    • 3) If you want to deny workers severance pay, never keep them continuously employed for more than 240 days.

    So, how IDA ends up discouraging formalisation?

    • Given these provisions in the IDA, entrepreneurs are reluctant to hire more than 99 workers for over 240 days.
    • The employers are naturally tempted to observe these thresholds and duck under the radar.
    • This is made easier by the fact that these thresholds mesh well with the fear that the middle-class — and upwards — have of a working-class takeover.
    • As a result, these thresholds have only encouraged the informal sector, where both unregistered labour and unregistered entrepreneurs dominate.
    • It has led to the proliferation of informal enterprises and low-skill workers.
    • In the first 15 years of this century itself, over half the increase in total employment has been that of contract workers.
    • This has also led to a phenomenal rise in MSMEs as the IDA has discouraged entrepreneurs from harbouring any ambitions to grow big and formal.
    • The MSMEs have, consequently, increased in number from 3.6 crore units in 2012 to about 6 crore today.
    • Since there are constraints on both the workforce size and duration of employment, upskilling and R&D naturally become early casualties.
    • India spends only 0.7 per cent of its GDP in R&D, one of the lowest in the world, while South Korea spends 4.2 per cent.

    Contribution of MSME in GDP is not increasing

    • Over 94 per cent of MSMEs are in the Micro sector and their contribution to GDP is just not measuring up.
    • In 2012, MSMEs produced 37.54 per cent of our GDP.
    • But this number fell to 30.7 per cent in 2015, and in 2019 it decreased further to 29.7 per cent, though they are still working full throttle.
    • Yet, the lure to stay on the good side of the IDA thresholds is so compelling that even formal units are today outsourcing from the informal ones.
    • Over time, the IDA has succeeded in converting a large number of organised sector companies into strange, hybrid economic creatures, both fishy and foul.

    But, how removal of the 3 thresholds will change the situation?

    • If the 3 mentioned thresholds are removed, every worker — regardless of factory size — is entitled to the same rights.
    • Likewise, every employer, regardless of factory size, can hire and fire workers.
    • There is greater freedom on both sides, but this freedom comes with a price that does not discourage either size or skills in an enterprise.
    • The worker can now be fired without notifying the government, but must be compensated with severance wages, regardless of the size of the firm.
    • Also, unlike the IDA, all the firms must have a formal dispute resolution board.
    • Now that the enterprises have been freed of the size threshold, entrepreneurs get no advantage in dwarfing their firms.
    • Other reforms can soon follow, such as allowing for workers’ representation in a firm’s supervisory board, as it happens in Germany.
    • Measures such as these create trust between employees and employers, and also remove the threatening spectre of a working-class strike.

    Consider the question “Various provision of the Industrial Disputes Act which were enacted but with a different purpose now seems to place both the workers and employers in a disadvantageous position. In light of this statement, examine the issues with the threshold limits of the number of employees and number of employment days in the Industrial Disputes Act.”

    Conclusion

    In the ultimate analysis, the IDA does not produce winners, only losers. The workers remain skill-stunted and insecure, and the entrepreneurs, too, pull back from releasing their much-vaunted “animal spirits”. So, the IDA thresholds must go and not be merely fiddled with, as some states have done.

    Back2Basics: Industrial Disputes Act 1947

    • The main purpose of the Industrial Disputes Act, 1947 is to ensure fair terms between employers and employees, workmen and workmen as well as workmen and employers.T
    • The objective of the Industrial Disputes Act is to secure industrial peace and harmony by providing machinery and procedure for the investigation and settlement of industrial disputes by negotiations.

  • Deepening India’s engagement with Africa amid pandemic

    Long thought to be the backwater of the world, Africa has been successful in shading its past image and emerge on the global stage as region hard to ignore. And countries across the world are vying to increase their engagement with the region. This article examines the scope for increasing the ties with the region amid the pandemic.

    India’s association with African Union

    • Africa Day is observed every year on May 25 to commemorate the founding of the Organisation of African Unity, now known as the African Union.
    • India has been closely associated with it on account of its shared colonial past and rich contemporary ties.
    • The Manohar Parrikar Institute for Defence Studies and Analyses has hosted an Africa Day Round Table annually for the last four years in order to commemorate this epochal event.

    Economy and pandemic

    • The World Bank in its April report, assessed that the COVID-19 outbreak has sparked off the Sub-Saharan Africa (SSA) region’s first recession in 25 years.
    • Growth is expected to plummet to between -2.1 and -5.1 per cent in 2020, from a modest 2.4 per cent in 2019.
    • With high rates of HIV, malaria, diabetes, hypertension and malnourishment prevalent, a large number of Africans were already faced with a health and economic crisis.
    • The steep decline in commodity prices has spelt disaster for the economies of Nigeria, Zambia and Angola.

    Need for financial support

    • Precarious fiscal positions have ruled out any major governmental stimulus.
    • Public debt has mounted.
    • According to the World Bank, the SSA region paid $35.8 billion in total debt service in 2018.
    • Which is 2.1 per cent of regional gross domestic product (GDP).
    • Together, African countries have sought a $100 billion rescue package.
    • This rescue package includes a $44 billion waiver of interest payment by the world’s 20 largest economies.
    • The IMF’s debt service relief of $500 million is meant for 25 countries of which 19 are in Africa, but that is a drop in the bucket.
    • It is clear that without outside support, Africa will find it very difficult to meet the challenge.

    Why the increased interest in engagement with Africa?

    • Africa’s rich natural resources, long-term economic potential, youthful demography and influence as a bloc of 54 countries in multi-lateral organisations is apparent.
    • Many have an eye for economic opportunities, including in energy, mining, infrastructure and connectivity. 
    • Japan hosted the 7th Tokyo International Conference for African Development (TICAD) in August 2019.
    • Russia hosted the first-ever Russia-Africa Summit last year.
    • Brazil, home to the largest population of people of African descent outside of Africa, has also sought to develop closer ties.
    • Cuba has sent medical teams to help Africa.

    Chinese Bonhomie with the region

    • China’s engagement of Africa, as elsewhere, is huge but increasingly regarded as predatory and exploitative.
    • Its annual trade with Africa in 2019 stood at $208 billion, in addition to investments and loans worth $200 billion.
    • Traditionally, China’s participation in infrastructure projects has been astonishing.
    • Having famously built the 1,860 km Tanzania-Zambia railway line in 1975, and the Addis Ababa-Djibouti and Mombasa-Nairobi lines more recently, China is now eyeing to develop the vast East Africa Master Railway Plan.
    • It is also developing the Trans-Maghreb Highway, the Mambilla Hydropower Plant in Nigeria, the Walvis Bay Container Terminal in Windhoek and the Caculo Cabaca Hydropower project in Angola.
    • At the Forum for China-Africa Cooperation (COCAC) in 2018, China set aside $60 billion in developmental assistance.
    • And it was followed by a whopping $1 billion Belt and Road (BRI) Infrastructure Fund for Africa.
    • China has followed up with robust health sector diplomacy in the wake of the pandemic.
    • But its image has been tarnished by defective supplies of PPE gear and discriminatory behaviour against Africans in Guangzhou.
    • This also led to an embarrassing diplomatic row.

    India’s relations with Africa

    • In the last few years, India’s relations with Africa saw a revival.
    • India-Africa trade reached $62 billion in 2018 compared to $39 billion during 2009-10.
    • After South Asia, Africa is the second-largest recipient of Indian overseas assistance with Lines of Credit (LOC) worth nearly $10 billion (42 per cent of the total) spread over 100 projects in 41 countries.
    • Ties were boosted at the India Africa Forum Summit (IAFS) in 2015.
    • 40 per cent of all training and capacity building slots under the ITEC programme have traditionally been reserved for Africa.
    • Approximately 6,000 Indian soldiers are deployed in UN peace-keeping missions in five conflict zones in Africa.
    • Bilateral cooperation includes solar energy development, information technology, cyber security, maritime security, disaster relief, counter-terrorism and military training.
    • India has also launched several initiatives to develop closer relations, including the first-ever India Africa Defence Ministers conclave in February this year on the margins of the Defence Expo 2020.
    • India provides about 50,000 scholarships to African students each year.
    • The huge Indian diaspora is a major asset.
    • India had planned to host the Fourth India Africa Forum Summit in September this year.
    • However, the COVID-19 pandemic may cause it to be delayed.

    India’s support amid covid pandemic

    • India has already despatched medical assistance to 25 African countries.
    • PM Modi has had a telephonic talk with President Cyril Ramaphosa of South Africa who is the current chairperson of the African Union, and separately others such as the presidents of Uganda and Ethiopia.
    • India could consider structuring a series of virtual summits in zonal groups with African leaders across the continent over the next few months.
    • That could both provide a platform for a cooperative response to the pandemic and also serve as a precursor to the actual summit in the future.
    • The Ministry of External Affairs has already extended the e-ITEC course on “COVID-19 Pandemic: Prevention and Management Guidelines for Healthcare Professionals” to healthcare workers in Africa.
    • The Aarogya Setu App and the E-Gram Swaraj App for rural areas for mapping COVID-19 are technological achievements that could be shared with Africa.
    • Since the movement of African students to India for higher education has been disrupted, India may expand the e-VidyaBharti (tele education) project to establish an India-Africa Virtual University. Agriculture and food security can also be a fulcrum for deepening ties.
    • With the locust scourge devastating the Horn of Africa and the pandemic worsening the food crisis, India could ramp up its collaboration in this sector.
    • India could also create a new fund for Africa and adapt its grant-in-aid assistance to reflect the current priorities.
    • This could include support for new investment projects by Indian entrepreneurs especially in the pharmaceutical and healthcare sectors in Africa.

    Time for Quad Plus to propose cooperation with African countries

    • Both India and Japan share a common interest in forging a partnership for Africa’s development.
    • It is time for the Quad Plus, in which the US, India, Japan and Australia have recently engaged other countries such as the ROK, Vietnam, New Zealand, Israel and Brazil, to exchange views and propose cooperation with select African countries abutting the Indian Ocean.
    • After all, the Indo-Pacific straddles the entire maritime space of the Indian Ocean.

    Consider the 2015 question asked by the UPSC “Increasing interest of India in Africa has its pros and cons. Critically examine”

    Conclusion

    The pandemic is a colossal challenge but it may create fresh opportunities to bring India and Africa closer together.